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.
AdvertisementAs 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.
Growth estimates are in comparison to the earnings for the quarter ended December 2020
|Broking firm||Jan-March growth estimate for tier-I IT companies|
|Motilal Oswal||2.5% to 3.4%|
|ICICI Direct||3% to 4.5%|
|Edelweiss||2% to 6%|
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|
|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.
Source: Media reports
|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|
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|
|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|
AdvertisementMeanwhile, 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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