IT firms may beat weak Q3 trend with strong numbers

IT bellwether Tata Consultancy Service (TCS), analysts said, is expected to indicate traction from major deal wins in the quarter, while

is expected to upgrade its guidance for the fiscal year. is expected to demonstrate gains from its products business during the October-December period.

The strong outlook would come on the back of digital transformation and cloud initiatives during the quarter, said analysts.

The fact that three IT services leaders are announcing their quarterly results on January 12 is also an indicator of their confident performance in the quarter. Tier-II companies are expected to outperform tier-I IT majors, they added.

“Despite companies highlighting the normal impact of furloughs, Tier-I IT revenue growth should be strong, with Infosys leading revenue growth at about 4.8% QoQ (quarter on quarter) constant currency rate,” brokerage Motilal Oswal said in a note. “HCL Technologies will benefit from P&P (products and platforms) seasonality growing about 4.5% QoQ (CC), followed by

, and TCS.”

Tier-I providers are expected to deliver profit growth of around 11% year on year (YoY) and 6% QoQ, according to the brokerage.

TCS and Infosys are expected to report a profit growth of 17% and 13% YoY, respectively.

HCL Technologies is expected to report a slight decline in profit, while Wipro is expected to report flat growth, it said.

Analysts also expect companies to report some stability in attrition numbers after a few quarters of high attrition even as the sector expects talent supply constraints to continue till the first quarter of the next fiscal year. However, with many freshers joining companies during the third quarter, some stability is expected.

“The margin during the quarter is expected to remain stable on a sequential basis. However, there will be a YoY margin decline as companies rolled out two cycles of wage hikes since December 2020 to counter attrition,” noted HDFC Securities. “Primary margin headwinds that remain are higher cost of talent replacement, a decline in utilisation rate due to fresher hiring, and a rise in discretionary cost.”

The demand environment remains broad-based, driven by strong traction for digital, cloud, data analytics, 5G, IoT, cybersecurity and AI, and analysts expect commentary on how recent deal wins are transitioning for the companies.

Despite lower total contract value (TCV) and more small and mid-sized deals, the relative share for India’s tier I has been improving, said Elara Capital.

Emkay Global Financial Services expects the healthy revenue growth momentum to continue in the quarter on the back of a broad-based secular demand environment, with revenue growth of 1.9-3.3% QoQ (2.7-4.0% CC) for tier-I IT services companies.

The best performance order is expected to be Infosys, TCS, HCL Tech and Tech Mahindra among tier-I names. “While the December quarter is a seasonally soft one (due to furloughs and lower working days), we expect companies in our coverage universe to report steady sequential revenue growth on the back of secular broad-based demand trends, healthy deal wins and active M&A activities,” according to a note by Emkay Global.