They will, at the same time, also report higher attrition rates due to a battle for talent among peers, global corporations and startups, the analysts said.
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Acceleration in digital technologies, improved demand following the pandemic, ramp-up in previous deal wins and migration to the cloud are driving revenues of IT services companies. The sector is, therefore, likely to report best fourth-quarter sequential performance in recent years with companies seeing broad-based momentum and positive cross-currency impact, analysts have written in preview reports.
“Over the 5% QoQ posted in 3QFY21 and 6% in 2Q, we expect the sector to deliver 3.9% QoQ growth during the January-March quarter,” Apurva Prasad, IT analyst at HDFC Securities, said in a report. The “pandemic has evidently accelerated the digital transformation agenda and key lead indicators remain positive”.
Ltd. (TCS), the country’s largest technology services firm by revenue, will kick off the Q4 results season on April 12. Infosys’ on April 14 and Wipro will follow on April 15.
Indian IT firms, which began FY21 on a negative note amid the Covid-19 lockdown in India as well as in Europe and the United States, recovered quickly with its nearly 4.5-million strong workforce helping clients manage their businesses, working remotely.
Global corporations, which had invested early in digital technologies, gained during the shift to remote working but the laggards realised the need for investing in digital and awarded large deals to companies such as TCS, Infosys, HCL Technologies and Wipro to help with the transition.
The top IT services companies such as TCS, Infosys, HCL Technologies and Wipro will witness the strongest fourth quarter in the past five years, predicts Mukul Garg, research analyst at brokerage firm Motilal Oswal.
“We expect Tier-I IT companies to report growth between 2.5% and 3.4% QoQ in constant currency terms (barring Tech Mahindra), their strongest 4QFY21 performance in the last five years. Tier II IT should deliver 3.3-5.2% QoQ CC growth (except Mphasis and Zensar),” Garg wrote in a preview report.
Strong deal bookings during the past four to five months are likely to lead to substantially higher growth in the fourth quarter as well as upcoming quarters.
“Early indicators like fresh high order bookings from industry peer Accenture in its Feb’21 earnings also point to an unprecedented demand for tech services, which we expect to reflect in the deal momentum in Q4FY21,” Garg said.
Analysts, however, remain wary of the impact of wage hikes on margins of these companies as they struggle to retain talent amid competition from peers, global rivals and startups.
“Except for a few (TCS, HCL Tech), wage hikes will be the major margin headwind leading to EBIT margin contraction up to 220 basis points,” Sudheer Guntupalli of ICICI Securities said in a report. Guntupalli has also forecast a tactical currency-related effect due to the second wave of Covid-19 in the domestic market.
“The ongoing second wave of Covid-19 in India, relatively higher uncertainty in domestic sectors and expectations around a weaker INR (rupee) may translate into a tactical capital rotation into IT. TCS, HCL Tech, Mindtree, Cyient should be key beneficiaries of this trade, in our view,” he wrote.