Mega deal wins? Margin squeeze? What to expect in Q4 IT earnings

Mega deal wins? Margin squeeze? What to expect in Q4 IT earnings

NEW DELHI: Buoyed by large deals and digital growth, information technology (IT) companies are expected to deliver another superb quarter for the January-March period, project analysts. However, margins could come under pressure due to increased employee cost.

IT companies are usually the first to report quarterly numbers. TCS will come out with its March quarter numbers on April 12, followed by Infosys on April 14, and Wipro and Mindtree on April 15.

“We expect another robust quarter of growth for IT services companies in a seasonally weak period, backed by large deal rampups and continued spend on digital programs. Deal signings will be robust, and the pipeline will stay healthy,” said Kawaljeet Saluja and Sathishkumar S of Kotak Securities.

They expect Infosys to give a guidance of 12-14 per cent revenue growth for FY22 and HCL Tech 10-12 per cent.

Analysts expect tier-I IT companies to report 2.2-3.9 per cent sequential growth in Q4 earnings while the tier-II companies could do 2.5-4.5 per cent in constant currency terms.

Rishit Parikh of Nomura said the deal pipeline of IT companies has been robust, though the ticket size could reflect some signs of moderation. Deal pipeline has remained healthy across companies and is led by the demand in areas of cost takeouts and digital transformation including infra/apps modernisation, customer experience, cyber-security, and vendor consolidation.

For TCS, Q4 revenue growth will be driven by a rampup in deals won in Q3 i.e. Postbank and Prudential – both combined will add 2 per cent incremental growth. For Infosys, it would be RollsRoyce and multiple $50-100 million deals won during the third quarter, and for Wipro Verifone.

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Apart from those, continuing traction in the BFSI/healthcare vertical and a recovery in retail/manufacturing verticals will help HCL Tech besides a 100 bps contribution from DWS acquisitions and Cognizant’s buyout of Magenic and Linium, said Nomura.

One cause of concern could be the expected sequential drop in margins due to a rise in expenses. However, they are likely to expand year on year. Large companies are better positioned to weather the decline in margins, said analysts.

“Barring Coforge and Firstsource, all other companies are expected to report a decline in Ebit margins on a sequential basis due to salary hikes, promotions, bonuses and a stronger rupee, partly negated by offshoring, revenue momentum and continued WFH savings,” said Dipesh Mehta and Monit Vyas of Emkay Global.

Commentators at Ambit Capital said they are cautious on margins due to supply-side pressure. Besides, Q4 results could show a partial reversal of one-off savings.

“We remain below consensus on margins and see 130 bps erosion for tier-1 IT over FY21-23. With valuations at 26 times one-year forward (32 per cent premium to 3-year average), we remain selective and prefer stocks offering higher margin of safety on growth/margins/valuations,” said Ashwin Mehta and Vamshi Utterker of Ambit Capital.

Shares of IT companies have been in the spotlight in the last one year, as dependency on technology has increased amid the Covid pandemic. The Nifty IT index has surged 125 per cent since last March. With that, stocks have also become expensive.

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