TCS, Infosys and HCL Tech will show a good quarter but Wipro’s earnings will outshine them all ⁠— here’s why

TCS, Infosys and HCL Tech will show a good quarter but Wipro’s earnings will outshine them all ⁠— here’s why
  • Analysts expect the growth momentum in the IT services sector to continue on account of large deal wins and demand for digital transformation.
  • Infosys, TCS, Tech Mahindra and HCL Tech are expected to report a revenue growth anywhere between 3.5% to 5.5% for the period of April-June 2021.
  • However, Wipro’s topline is likely to stand out among the top-tier software exporters from India, thanks to the Capco acquisition
India’s top software exporters like TCS, Infosys and HCL Technologies are likely to see their dream run continue in the first quarter of the financial year 2022. However, Wipro, one of the top five players in the sector may have had it better than the rest.

CompanyGrowth estimate*Share price change since Feb end 2021 to June 2021
Infosys5.3%26%
TCS4%16%
Wipro9.5%33%
HCL Tech3.60%8%
Tech Mahindra3.50%19%
*Source: Axis securities

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A big reason for Wipro’s outperformance may be the $1.45 billion acquisition of Capco, the largest ever buyout by the Bengaluru-based company.

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The shares of Wipro have led the IT pack ever since the new chief executive officer (CEO) Thierry Delaporte took charge in June last year. The company made about $2 billion last year from IT services and if Capco delivers the same amount of revenue as it did last year, it could add another $700 million to Wipro’s topline. That’s a 35% bump up a year straight away.

Expectations are built up in the stock that has gained about 30% since the Capco deal was announced in early March, and closed in April.

TCS, Infosys and HCL Tech will show a good quarter but Wipro’s earnings will outshine them all ⁠— here’s why

There is also a lot of apprehension. “The execution risk is further aggravated by a weak growth performance from Capco over the last two years – even after adjusting for the drag due to COVID-19,” said Motilal Oswal in its report dated March 4.
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“We’re guiding revenue growth of 2% to 4% in the first quarter, outside of Capco and Ampion,” Delaporte had said during the earnings call in April. Wipro has acquired Ampion, an Australia-based provider of cyber security, devops and quality engineering services. The move will strengthen its commitment towards clients and stakeholders in Australia and New Zealand (ANZ). The acquisition will close in the quarter ending June 30, 2021.

It’s boom time for all tech companies

For the rest of the top five IT services majors, the growth is likely to continue on the same trend seen since the pandemic broke out. “IT spending from North America and Europe has gained momentum and demand for digital transformation has increased exponentially,” Axis Securities said in a report dated July 6.
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CompanyNew deals from April to June 2021
TCSProximus, Ericsson, Virgin Atlantic, Alcatel-Lucent, Commercial Bank of Kuwait
InfosysArcelorMittal Europe, Britvic, Archrock
HCLTUD Trucks Corporation, Hitachi ABB Power Grids, McLaren Health Care
WiproBristol Water, Transcell Oncologics, Levi Strauss & Co
Tech MahindraPret A Manger

However, wage hike and rising attrition since the start of the year may dent operating margins of IT companies. Several IT companies have given second salary hikes to eligible employees in a calendar year 2020 as initially promotions had been deferred on account of the pandemic and business downturn.

In the last one year, Nifty IT (the index of tech stocks) showed gains of 81% as compared to the benchmark Nifty50’s 46%.

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These are the estimates for topline growth for the sector.
Broking firmApr-June average growth estimate for tier-I IT companies
Prabhudas Lilladher4.10%
Institutional Research4%
Maybank Kim Eng5.30%
BOB Capital Markets4.20%
Axis Securities3%-7%
Growth estimates are in comparison to the earnings for the quarter ended June 2020.

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