Information technology companies are expected to post continued growth in the third quarter of 2020-21, thereby signalling the continuing optimism of corporations to spend on technology.
In the pre-Covid-19 world, Q3 used to be one that had lesser working days and companies would spend less on outsourcing. However, with Covid-19, this logic has been turned on its head as companies continue to find ways of using technology to manage, grow or survive in their business areas. This, in turn, is expected to reflect in the Q3 numbers of software services companies. On an average, top exporters in the industry are expected to post robust sequential growth of 2-3 per cent, in a seasonally weak quarter.
TCS is set to kick off earnings on January 8 and analysts expect the company to post 2-3 per cent revenue growth (in constant currency) on sequential basis. “This will be led by continuing investments of clients in operational resiliency, cloud shift and ramp-up of certain large deals,” said Kawaljeet Saluja, Analyst at Kotak Institutional Equities. However, on a year-on-year basis, analysts expect a marginal revenue decline, indicating that the impact of Covid-19 is still in play. For TCS, profitability in Q3 is also expected to decline by 1-1.2 per cent on a yearly basis, primarily due to wage revisions from October 2020. “Besides wage revision, there are no other meaningful pressure points on margins,” said Saluja. Additionally, companies are expected to post strong Total Contract Value (TCV) of deals on the back of recent large deals. TCS bagged deals from Deutsche Bank (€460 million) and Prudential ($300 million). In Q2, TCS had TCV of deals worth $8.6 billion and Infosys bagged $3.15 billion.
Infosys, which will announce its results on January 13, is also expected to post a strong set of numbers. Analysts expect Infosys to report sequential revenue growth of 3 per cent. “This will be aided in part by acquisitions of Kaleidoscope, Guidevision and BlueAcorn to the extent of 50-70 basis points,” said an analyst from a brokerage house. Analysts also expect a marginal increase in revenue guidance for 2020-21. “We expect marginal revision in revenue guidance and unchanged EBIT margin band,” said Saluja. Like TCS, EBIT margin of Infosys is expected to decline around 0.6 per cent, due to loss from an outsourcing deal and cost reversals, accrued in Q2.
For Wipro, the sequential growth is expected at about 3 per cent, driven by ramping up of large deals such as E.ON, Marelli and John Lewis won in the earlier quarters. “The Q3 results of big service providers should be good and most importantly will show optimism going forward on the back of some of the large deal momentum they had in the last few months,” said Pareekh Jain, Founder and Lead Analyst, EIIRTrend and Pareekh Consulting. Jain also added that he is expecting the companies are slowly moving to pre-Covid levels of growth, as some had indicated in Q2. For HCL Tech, sequential revenue growth is expected to be 2.7 per cent, ahead of the 1.5-2.5 per cent growth guidance given by the company.