IT firms are in for robust Q1 profits

AS domestic IT services firms are all set to announce the first quarter earnings, uptick in revenue growth with strong deal pipeline are likely to be the key features for most of these companies.

Improvement in performance of key verticals including BFSI (banking, financial services & insurance), retail, manufacturing, hi-tech and life sciences will be the key drivers of the top line growth. However, operating margin is expected to be under pressure for large IT services firms due to recent wage hikes.

"IT companies have not seen any impact of the second Covid wave on topline. Further, this being a seasonally strong quarter coupled with acceleration in digital technologies and improved deal pipeline are further expected to drive IT companies' revenues," wrote Devang Bhatt, research analyst of ICICI Securities on a note.

The tier-I IT services firms are likely to clock a revenue growth of 2-4 per cent quarter-on-quarter in constant currency terms. Tata Consultancy Services (TCS), Infosys and Wipro are likely to see a revenue growth of 4-4.2 per cent (in dollar term) of sequential growth for the first quarter (April-June period) of ongoing financial year. If the inorganic growth is taken into account, Wipro is expected to clock around 10 per cent sequential growth in Q1 of FY22.

During the first quarter of FY22, Wipro completed the acquisition of financial services consultancy firm Capco for $1.45 billion. Revenue flow from this acquired entity will add to the top line of Wipro in the first quarter of FY22, the brokerage firm said.

Among mid-tier IT companies, L&T Infotech and Mindtree are expected to see a sharp rise in their dollar revenues.

Meanwhile, operating margins are likely to be remain muted for the first quarter for most IT services firms.

"TCS and Wipro's margins are expected to be impacted by wage hikes. TCS will have a second wage hike for all employees while Wipro will have a wage hike for 20 per cent of employees and dilution in margins due to Capco acquisition," the report said.

For country's second largest IT firm Infosys' operating margin is likely to remain flat during this period. However, HCL Technologies is expected to post a fall in operating margin due to one-time bonus pay out and investment in expansion of geographical and sales reach.

Not only large IT firms, but also mid-tier companies are also expected to see a margin dip in the first quarter of this financial year. Operating margins are likely to dip in the range of 40-300 basis points in the Q1 of FY22.

As far as deal pipeline is concerned, cost takeout deals and higher offshoring will reflect on the pipeline.

While the overall earnings of most IT services firms are likely to be on sound footing, management commentary on large deals, revenue and operating margin guidance and rising attrition levels will be the key factors to watch out for in the earnings calls.

Currently, share prices of most large and mid-tier IT services companies are ruling at record high levels as investors take comfort in rising digitisation among enterprises. Therefore, Q1 earnings will be a key pointer for the sustainability of these price levels.

TCS will announce its Q1 earnings for FY22 on July 8, while Infosys will do so on June 14, 2021.