Indian IT likely to report strong Q3 numbers

As the Indian IT services firms get ready to announce their Q3 results of FY 21 experts feel that the results will be on a positive note and may be growth oriented. It is expected that demand from the clients will also look positive for most of the companies. The order pipeline is also expected to be healthy going forward. The recent deal wins for large Indian IT companies including Postbank and Pramerica deals for TCS, Rolls Royce and Daimler for Infosys and METRO AG for Wipro is expected to boost the overall growth sentiment of the Indian IT sector.

As per a recent report by Motilal Oswal that absence of headwinds like a repeat of the Covid-19 led lockdown in 1QFY21 or uncertainty with regard to the outcome of the US Presidential election should drive the outperformance in Q3 for the Indian IT services companies. The report points out that Infosys will lead sequential revenue growth across tier 1 IT services companies. Infosys along with TCS and HCL Technologies will drive organic growth in the range of 4 to 3 percent QoQ (Quarter on Quarter) including cross-currency tailwind despite a high base and seasonally weak quarter.

The Motilal report also observed that due to strong deal wins a positive guidance is expected from the major Indian IT services companies in their Q3 results. Even the mid level Indian IT services companies will see positive growth guidance due to the strong deal momentum. The report points out that despite resumption of wage hikes by some Indian IT services companies there would be a limited impact on their margins in the Q3 of FY21 due to higher returns from utilization and positive operating leverage. At the same time a higher negative impact is expected in the next quarter when more companies start seeing an impact from a wage hike.

The Motilal Oswal analysts remain positive about the Indian IT sector and expect that going forward in the medium term double-digit topline growth is possible for Indian IT services companies. This growth is expected to be led by large full scale digital transformation deals, tail of projects steered by increased focus on workplace management and higher spend by large corporates on cloud computing migration. A strong QoQ growth of 3 percent on an average in a seasonally weak quarter will help sustain the rally in IT stocks despite their premium valuations.

Experts have pointed out that many large deals by Indian IT companies have been full stack transformational deals that involve end to end work from front end to back end. They involve application maintenance and infrastructure management and also a complete transformation of the IT infrastructure of the customer. It has also been observed that though deal sizes are getting larger the offshoring component due to Work From Home (WFH) is growing bigger in such deals. Companies are also not sending their employees for onsite work due to the Covid-19 pandemic. Offshoring proposition is helping the Indian IT services maintain better margins in these large deals.

The pandemic had created disruptions in the initial days but now businesses have understood the need of expeditious digitisation and automation leveraging new technologies to enhance their existing business models. It is expected to be a positive move for the Indian IT services companies as they announce their Q3 FY21 results. The Week