TCS, Infosys, Wipro and HCL Tech expected to announce more deals in the second quarter

• TCS, Infosys, HCL Tech, and other Indian IT services companies are in for a lush quarter ahead.
  
• Analysts expect a stream of new deals to come in as supply bottlenecks open up, and more companies increase tech spend with a bigger focus on digital adoption.
  
• With employees continuing to work from home and discretionary spending muted, margins are likely to remain cushioned in the second quarter.
  

Expectations from the India IT services sector are high in the upcoming earnings season. It is expected to be among the first to recover from the coronavirus pandemic’s backlash. And the stellar rally across IT stocks stands testament to this optimism.

“We expect robust commentaries, record deal wins and guidance upgrades by all companies,” Edelweiss Research said in its preview. If not setting a new record, most analysts expect deal win numbers to revert to the pre-COVID levels with supply-side issues now resolved.

I.T. Sector: Q2 earnings expectations

Drive to be digital
The main driving force behind the optimism for IT companies is the boost that the coronavirus pandemic gave to digital adoption. The timelines to transform core IT systems were now suddenly compressed.

From cloud to the Internet of Things (IoT) to cybersecurity, more companies are now looking at digitisation as a necessity rather than a luxury, as many a CTO have reiterated over the past couple of months.

“We reiterate our positive stance on IT services given we expect an acceleration in IT spending driven by the shift to digital,” noted Japanese brokerage firm, Nomura.

The other two industry tailwinds driving acceleration are bigger tech spends and vendor consolidation, in addition to an outsourcing wave on the horizon for Indian IT companies to reap the benefits.


More money in the bank
In addition to strong demand commentary, savings will continue to cushion margins as employees work from home, and discretionary spending continues to stay low. Cross currency benefit will likely remain between 0.2% to 1.85%.

Profitability is also expected to rise, as operating margins improve with better utilisation.

It will be important to watch out for any details on hiring or wage hikes in the near future from management commentary. Rupee appreciation may lead to a slight negative impact on rupee revenue.

What next?
Analysts expect Indian IT services companies to improve their outlook following HCL Tech’s mid-quarter review that issued a revenue growth guidance of 3.5% for the second quarter.

Revenue growth will be led by a strong spurt across all industries, verticals and geographies, according to Edelweiss Research — much of it to recuperate the losses that were hit due to supply side issues.

“Moreover, pandemic-led beaten down segments like retail, transportation and ER&D will make a strong bounce back on low base,” the report said.

However, others advise exercising a little caution. “With the US presidential elections approaching and valuation bordering on expensive, we believe the sector could remain sideways in the medium-term. We remain cautiously optimistic on the sector,” said Philip Capital.


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