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Indian IT’s Q2 results to reflect growing digital transformation demand

The second quarter of the fiscal year is a seasonally strong quarter for the Indian IT services sector. Additionally the Q2 of FY22 will have the added impetus of demand being driven by digital transformation accelerated due to the pandemic. Though this quarter too will see a robust top-line growth, if one goes by Accenture’s performance, the numbers to watch out will be the total contract value (TCVs) and the attrition number.

Accenture numbers are generally a reflection of the broader trends in the IT services industry. Accenture guided for a 12-15 per cent growth for FY22 as it sees demand for cloud and digital transformation driving double-digit growth. Importantly new bookings for the quarter were at $15 billion and for the year it touched $59.3 billion.

But the outsourcing revenues for Accenture came in at $7.1 billion, which the street thought was low compared to its past performance. “Outsourcing bookings of Accenture were weak at $7.1 billion, representing decline of 5.6 per cent YoY and 2.6 per cent compared to average of last four quarters. This may cause some concern. We do expect muted TCV numbers from lndia-listed IT services companies. We expect growth for our coverage universe to be driven by increased velocity of short-cycle programs. The underlying demand dynamics are however strong; hence a muted TCV for a quarter is not a concern,” said the Kotak report.

A similar themed note was also published by Sudheer Guntupalli and Heenal Gada of ICICI Securities. They pointed to the Accenture management’s comment, which said outsourcing revenue growth will be in high single digit to low double digit.

“This hints at deceleration in outsourcing segment vs current year (13 per cent YoY, CC) notwithstanding the ‘likely’ higher inorganic contribution and the residual base normalization. In this backdrop, as the post Covid equilibrium reaches, outsourcing growth for the industry should more or less revert to pre-covid level (8 per cent-10 per cent, YoY),” they added.

The street will be keenly watching the TCV numbers that the top rung players report for this quarter to understand the demand environment. Analysts expect that growth for the quarter will be broad-based, and driven by sectors like BFSI, retail, manufacturing, hi-tech and life sciences. Analysts across brokerage houses are pegging revenue growth in the range of 3.5 per cent to 7 per cent for the top tier companies.

Among the top tier players Infosys is expected to lead organic revenue growth and Wipro will lead due to the Capco deal. Infosys’ performance in Q2 will have a contribution from the Daimler deal that kicks-in from this quarter. Followed by TCS and HCL Technologies. Wipro will see the highest top-line growth as contribution from Metro deal starts, and also the integration of Capco and Ampion.

Tata Consultancy Services (TCS) that will come out with its numbers first on October 8, is expected to report one of its best second quarter in a decade, said an IIFL Securities report. “We expect margins to increase by 70bps QoQ, given the lack of wage hikes and operating leverage from strong top line growth. Key comments to watch for: 1) colour on the demand environment and its sustainability; 2) size and pace of deal conversions for the quarter; 3) outlook on the supply side and attrition trends in the industry,” said IIFL Securities Q2 preview of the IT sector.

Other than the TCVs to watch for, the street will keep an eye on attrition and the retention measures companies are taking to control supply-side constraints. This will impact margins for the quarter. “Among Tier I IT, TCS should be the exception with a margin expansion, while Wipro will have the highest erosion (180bp) on account of a wage hike, absence of one-time tailwind and Capco impact,” said Mukul Garg and Akshay Ramnani, of Motilal Oswal Institutional Equities in their report.

With the demand environment at an all-time high and companies managing growth well many expect an earning upgrade. “We raise EPS for our IT universe by up to 10% and TPs up to 53% on higher growth, multiples and roll-forward. We prefer stocks with better growth-adjusted valuations in large-caps (INFO/HCL) and mid-caps (PSYS/COFO/MPHL),” said the IIFL Securities report. Business Standard

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