Indian IT services companies are likely to continue their growth rally in October-December despite it being a seasonally weak quarter due to furloughs and lower working days in key markets of the US and Europe.
Analysts at brokerage firms believe IT Companies will buck the trend of seasonally weak third-quarter earnings and report robust growth on the back of strong demand. “Attrition and supply-side pressure would start to ease off from this quarter and would continue to decline for the next two-three quarters,” Edelweiss Securities said in a pre-earnings note.
Most brokerages agree that the strong demand environment is expected to continue in Q3 FY22, with tier-2 players outgrowing tier-1 companies.
“Mid-cap companies are likely to maintain growth outperformance over tier-1 companies due to consistent execution, better level playing field with shrinking deal sizes, client mining, and steady deal wins and pipeline,” according to Emkay Global. “Higher attrition and shortage of skilled resources remain the key challenges in the short term.”
Analysts expect tier-1 companies to deliver a sequential revenue growth in the range of 2.7-4.8% in constant currency while tier-2 players are likely to have a wider band of 1.1-10.5%.
The outlook for the next fiscal and the quarters ahead is expected to remain strong. “We expect a strong initial outlook for FY23, with companies maintaining their view of multi-year growth tailwinds on the back of cloud migration. Guidance for Q4 FY22 is also expected to be positive on the back of continuing deal wins,” Motilal Oswal said.
Emkay Global expects Infosys Ltd to revise its FY22 revenue growth guidance to 17.5-18.0% in constant currency from 16.5-17.5% currently. HCL Technologies Ltd is likely to retain its double-digit revenue growth guidance for FY22 while Wipro Ltd is expected to guide for a 2-4% sequential growth in constant currency for Q4 FY22.
According to analysts, the key factors to monitor are FY22 outlook, deals intake, and attrition rates. Investors will also watch out for management commentary on IT budget for this calendar year, steps taken to manage supply-side challenges along with levers to defend margins, demand environment in key verticals, pricing environment, and deals pipeline and closure momentum.
Accenture recently reported better-than-expected first-quarter earnings which is likely to pave the way for a positive earnings season for Indian IT companies. Accenture has revised its full-year revenue growth guidance to 19-22% from the earlier forecast of 12-15% which is seen as a positive cue for the sector.
“Accenture’s November-ending quarterly results provide a glimpse into the strong industry momentum. Not just attrition cooled off from 19% to 17% (annualized), it even reported the highest headcount addition of 50,000 in the November quarter,” Edelweiss Securities noted.