5 things to watch out for in Q3 earnings of TCS, Infosys and Wipro

The three Indian IT services companies – Tata Consultancy Services Ltd (TCS), Infosys Ltd and Wipro Ltd will be announcing their quarterly earnings on the same day for the first time. As they are set to declare their third quarter earnings tomorrow, investors will keenly watch out for management commentary on outlook, attrition rates and deal momentum.   

Though Q3 is a seasonally weak quarter due to furloughs and lower working days in key markets of the US and Europe, analysts expect companies to report to strong earnings on the back of robust demand.   

Mint highlights five things to watch out for in the Q3 results of TCS, Infosys, and Wipro that will be declared on 12 January, after market hours.  

Guidance   

Emkay Global expects Infosys to revise its FY22 revenue growth guidance to 17.5-18.0% in constant currency from 16.5-17.5% currently. HCL Technologies is likely to retain its double-digit revenue growth guidance for FY22 while Wipro is expected to guide for a 2-4% sequential growth in constant currency for Q4 FY22. TCS does not give a formal revenue growth guidance.   

Revenue growth    

Analysts expect TCS to report a dollar revenue growth of 3.5% sequentially in constant currency. “Being the market leader, TCS will be a key beneficiary of core transformation, accelerating cloud adoption, and digital adoption. Moreover, persistent market share loss of key players such as Capgemini and Cognizant would directly benefit TCS,” Edelweiss Securities said in a pre-earnings note. Infosys and Wipro are expected to report dollar revenue growth of 3% and 3.3% sequentially in constant currency respectively.   

EBIT margins   

EBIT margin trend should start improving with most IT services firms beginning to report improvement in margins. Edelweiss Securities expects Infosys to post margin improvement of 60 basis points sequentially due to supply side challenges cooling off, price increase, and operating leverage. “We expect Wipro to also post an improvement in margins of about 20 basis points q-o-q as supply-side pressure cools off,” the brokerage firm said.   

Large deals momentum    

Investors will monitor how the top IT companies are able to ramp up large deals in the coming quarters. For Infosys, Edelweiss Securities said it would like to hear from the company on deal momentum in the hi-tech vertical.  

Analysts expect deal intake to remain healthy across companies in Q3. “However, TCV (total contract value) of deal intake may remain steady in Q3 as deal tenures have become shorter due to clients’ urgency to execute digital transformation projects in a short span than to signing large, longer-tenure deals, which follow lengthy due diligence and legal processes. The deal pipeline is robust across the industry, driven by an uptick in deals related to cloud adoption, digital transformation and customer experience transformation,” Emkay Research said.    

Management commentary on outlook   

Management commentary on the demand environment in the coming quarters will be closely monitored. According to analysts, the key factors to monitor are FY22 outlook, deals intake, and attrition rates. Investors will also watch out for management commentary on IT budget for this calendar year, steps taken to manage supply-side challenges along with levers to defend margins, demand environment in key verticals, pricing environment, and deals pipeline and closure momentum.