Equity analysts expect uptick in IT services Q3 earnings buoyed by Covid-19 tailwinds

Equity research analysts expect top  and second tier IT services companies from India to clock quarter-over-quarter (Q-Q) revenue growth between 2.6% and 3.4% in the third quarter of 2020-21 (FY21). 

Companies of Indian heritage will begin the December-ended earnings announcements over the coming fortnight, with the TCS earnings call listed later today.

“Deal pipelines have been healthy across the sector,” according to a Nomura Financial Advisory and Securities report dated 4 January 2021. It lists demand opportunities such as cost take-outs, digital transformation including infrastructure and apps modernisation, customer experience and cyber-security, as well as vendor consolidation. 

“However conversion is key especially in case of large deals,” Rishit Parikh of Nomura said in the report.

While the December-ended quarter is usually a seasonally weak quarter due to higher furloughs, the IT services industry has had a COVID-led acceleration in demand for technology solutions, according to a Credit Suisse report dated 6 January 2021. 

“We expect strong sequential revenue growth of 2.5-3% in constant currency (CC) terms for the top 4 Indian IT services firms,” the report added.

Companies such as Wipro are also expected to grow after two quarters of deal wins, such as Fortum, ThoughtSpot, Openess, Marelli, E.ON, and John Lewis. Wipro is expected to clock a strong revenue growth of 2.5% on a constant currency basis led by ramp-up of large deals. 

“We expect strong growth from Wipro’s cloud & infra business… (and)  a broad-based recovery with retail & BFSI (banking, financial services, insurance) outperforming,” stated a 4 January report from Prabhudas Lilladher. 

It expects an overall strong environment for deal wins with robust total contract value of wins, fuelled by mega and large deal wins, as well as momentum in the European market. The sector has entered a technology upcycle, according to the Prabhudas Lilladher report.

The Nomura report points to upfronting of tech spends, given client’s need to transform the enterprise and invest in digital, and captive buy-outs as clients look to optimise their cost structures. “This, in our view, will accelerate IT spending and drive higher push for outsourcing which is likely to drive revenue acceleration for Indian IT in FY22F,” the report added.

Brokerage Sharekhan estimates US dollar revenue growth of top tier-I IT companies at 2.2-3.5%. Mid-cap and small-cap IT companies are expected to report a strong quarter to 3.4-6.8% q-o-q. Among midcap companies, Sharekhan has picked L&T Infotech (LTI) to lead with revenue growth of 5.5% q-o-q, while Persistent Systems could clock 5% Q-Q growth.

On headwinds for the quarter, analysts expect operating margins to fall due to wage hikes or large deal transitions. However, companies will benefit from lower travel costs, and cutbacks in discretionary spending and SGA.