Record breaking quarter for Indian IT services is a given ⁠— all eyes are now on guidance

• After a blockbuster third quarter, analysts are bullish on the performance Indian IT companies between January to March as well.
• Tata Consultancy Services (TCS), HCL Technologies, Infosys and others are expected to report the best fourth quarter in the last five years.
• After Accenture’s increase in guidance, analysts are watching Indian players to see how they change their revenue outlook for the future.

As 2021 unfolded, India’s information technology (IT) services majors including Tata Consultancy Services (TCS), HCL Technologies, Infosys, Wipro and Tech Mahindra — the top five players in the software and services industry — reported the best quarter in a decade.

It turns out that the market expects the following three months, January to March 2021, to be as exciting, if not better. This would be the best fourth quarter for the top-tier IT giants in the last five years, the analysts at Motilal Oswal said in a report dated April 4.

Broking firm	Jan-March growth estimate for tier-I IT companies
Motilal Oswal	2.5% to 3.4%
ICICI Direct	3% to 4.5%
HDFC Securities	3.9%
Edelweiss	2% to 6%

Growth estimates are in comparison to the earnings for the quarter ended December 2020

The consensus among IT analysts is that the previous record will be broken. After Accenture raised its full year guidance from 4-6% to 6.5-8.5% in US dollar terms, all eyes are now on how good the outlook is for others.

“The upward guidance revision by IT companies three quarters ago would be followed by upgrades in consensus forecasts for quarters to come,” said financial services firm Edelweiss in its April 1 report.

Company	Annual revenue guidance for FY21
TCS	Does not give guidance
HCL Tech	2-3%
Wipro	1.5-3.5%
Infosys	4.5-5%
Tech Mahindra	Has not shared guidance

Not only are these companies continuing to rake in new deals, but a strong dollar⁠ — 2.99% rise in the value of the greenback in the last one year ⁠— means they will be pulling in higher revenue in rupee terms.

Company	New deals from January to March 2021
TCS	Vodafone, ThreeUK, Skanska
Infosys	Siemens, Toyota, Newmont, Google
HCL Tech	Airbus, Tenneco
Wipro	Capco, Ampion, Telefonica, Estee Lauder
Tech Mahindra	Telefonica, Perigord

Source: Media reports

The impact of wages hikes
TCS, HCL Tech, Infosys and Wipro are likely to register a decline in margins due to the wage hikes announced between January and March.

Margins may also bear the impact of employees slowly returning to offices as the hybrid work model comes in play. This includes higher offshoring, lower subcontractor costs and structurally lower travel and marketing costs.

Company	Wage hike	Time of roll out
TCS	6-8%	March 2021
HCL tech	₹700 crore bonus	February 2021
Infosys	100% variable pay, salary increments and promotions	January 2021
Wipro	Wage hikes for junior employees	January 2021
Tech Mahindra	Salary hike	January 2021

Meanwhile, the pandemic and the demand for contact-less solutions, both on the employee and customer front, are continuing to move up timelines of digital transformation. “Strong need for digital transformation, not only to structurally cut costs but also to deliver contact-less consumer and employee experiences,” said Nirmal Bang in its report dated March 19.

The stocks of TCS, HCL Tech, Infosys and others have already clocked in a greater quarter between January and March on the back of digital transformation and deal wins. Going forward, guidance may be the differentiating factor for where the share prices will be heading next.



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