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Strong revenue momentum to continue despite seasonality, ICICI Securities

Normally, this quarter is seasonally weak due to furloughs. However, last year (Q3FY21), we saw an aberration to this trend. Q3FY22 is expected to be another strong quarter for IT companies after strong performance witnessed in Q2FY22. Growth momentum is expected to continue further with mid-caps outperforming Tier I companies. We expect companies to report healthy revenue growth in this quarter led by lower furloughs, ramp up of deals won in the previous quarters. There would be some cross currency headwinds, which will dampen dollar revenues to some extent in the quarter. The companies are also seeing a demand tailwind in terms of investment in newer technologies like cloud transformation, AI/ML, block chain, which further propel demand in coming quarters. In terms of margins, we expect them to remain stable (barring Coforge that is expected to post strong QoQ margin expansion) since supply side pressure would restrict margin expansion in proportion to revenue growth.

We expect Tier-1 IT companies to see revenue growth in the range of ~2.5- 4% QoQ (on an organic basis) in constant currency terms. However, there would be cross currency headwinds in the range of 50-70 bps, which would impact dollar revenue growth negatively. Among tier 1, TCS, Infosys & Wipro are expected to see dollar revenue growth of 2-3.5% QoQ, respectively. HCL Technologies (HCLT) is expected to witness dollar revenue growth of 3.0%. Among Tier 2, LTI & Mindtree are expected to see dollar revenue growth of 5.0% and 4.5% QoQ while Coforge is expected to witness organic revenue growth of 3% QoQ (5% including acquisition). We prefer Infosys, LTI in tier-1 and Coforge in midcap.

Margins expansion to be restricted due to supply side pressure
HCL Tech’s margins in the last quarter were impacted by weak performance from P&P business, however for Q3FY22, we expect margins to improve sequentially despite wage hike (to selected set of employees) impact. For TCS, we expect margins to improve sequentially due to pyramid optimisations and higher offshoring. For Wipro, margins are anticipated to be marginally lower QoQ due to higher employee costs. For Infosys, we expect margins to improve sequentially.

Revenue, margin guidance outlook key monitorable
In the current quarter, key thing to watch will be improvement in deal pipeline, upgrades in revenue guidance (we expect Infosys to up their FY22 revenue guidance further from 16.5-17.5% given in Q2), hiring & attrition trends, margin outlook and business impact due to sudden rises in Covid cases globally. Further, outsourcing trend in Europe, trends in digital technologies, vertical specific commentary, offshoring and long-term IT trends become important from an investor’s perspective

CT Bureau

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