TCS, Infosys, IT cos Q4 results preview: Strong revenue growth, hiring pick-up, lower margins

India’s largest IT company Tata Consultancy Services (TCS) will kick-off earnings season next week with its fourth-quarter FY21 results scheduled on Monday, April 12, 2021. TCS share price surged 11 per cent in Jan-Mar 2021, and 16 per cent so far this year (YTD). During the quarter ended March 31, 2021, the Nifty IT index jumped 6.61 per cent, as against a rise of 5 per cent in the Nifty 50 index. Analysts believe that growth in the fourth quarter of the last fiscal has continued to be driven by a supportive demand environment and large deal wins.

IT companies have been reporting better than expected corporate earnings for the past two quarters. Analysts expect companies to report strong corporate earnings yet again this quarter backed by large deal ramp-ups and continued spend on digital programs.

Revenue growth: “Barring Wipro and Mindtree, most companies are expected to end FY21 with flattish-to-low single-digit full-year growth despite a sharp decline in Q1FY21,” said Ruchi Burde and Seema Nayak, analysts at BOB Capital Markets. IT companies adopted a strong cash flow management during the onset of the COVID-19 pandemic given uncertainty about the demand environment and low visibility in revenue growth in the initial months of the pandemic.

Profit: Brokerage and research firm Prabhudas Lilladher has given ‘buy’ rating to all the IT company stocks under their coverage including Infosys, TCS, Wipro, HCL Technologies, and Mindtree. TCS has announced a regular FY22 salary increment cycle in the first quarter of FY22 on top of the recently conducted FY21 increment cycle in the third quarter of the previous fiscal. Analysts at Reliance Securities expect the companies to report a sequential decline in profitability driven by annual salary increment cycle; marginal step-up in investment in sales and capabilities; and currency headwind.

Large deal wins: Domestic brokerage Kotak Institutional Equities Research noted that deal signings in the last quarter of FY21 will be robust, and the pipeline will stay healthy. “We expect Infosys and HCL Technologies to guide for 12-14% and 10-12% revenue growth for FY2022E,” it added. TCS is expected to see sequential growth with revenue from two large deals with total contract value (TCV) of US 1.3bn-2.6 bn (Postbank Systems and Prudential Financial) ramp-up in multiple $50-100 million deals won in the preceding quarter, and strong demand in areas of cloud and customer experience.

FY22 guidance: Most analysts expect robust commentaries, record deal-wins and upbeat outlook. “We believe the upward guidance revision by IT companies three quarters ago would be followed by upgrades in consensus forecasts for quarters to come,” analysts at Edelweiss Research said. It may be noted that global demand for IT services remains robust as indicated by Accenture’s upgraded FY21 guidance by 2.5 per cent growth, strong outsourcing growth and robust double-digit YoY cloud growth in Q1 and Q2FY21. “We expect healthy double-digit YoY growth guidance for FY22 from Infosys, HCL Technologies, L&T Infotech, Wipro and Coforge,” BOBCAPS Equity Research said.

Buyback: IT majors Tata Consultancy Services (TCS) and Wipro have recently completed their buyback in January 2021. TCS repurchased shares worth Rs 16,000 crore, while Wipro’s offer size was Rs 9,500 crore. Wipro repurchased 32.3 crore equity shares, TCS, on the other hand, brought back 5.33 crore shares or 1.42% of the paid-up capital. Infosys completed its latest buyback on August 26, 2019. “Infosys is a probable candidate to announce buyback given its strong FCF/PAT conversion (105 per cent on 9MFY21), strong cash balance and lower payout ratio,” the brokerage firm said.

Margins: On the back of increased signs of pick up in hiring, investors would watch out for commentary on margins in FY 22. Barring Tech Mahindra, EBIT margins could decline for all tech companies except for Tech Mahindra, which desisted from providing wage hikes through FY21, due to wage hikes, pick up in hiring as well as slight appreciation in rupee against US dollar. “We expect margins to come off on a sequential basis for Tier II techs as well with players like Coforge and Persistent Systems expected to stand out relatively on margins this quarter due to company-specific factors,” said Manik Taneja and Vikas K G, analysts at JM Financial Services.

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