Q1: IT revenue fall of over 5% likely

Companies may skip guidance again

Hit by Covid-led lockdown in developed markets and demand destruction in key verticals, Indian IT companies are likely to report 58.5 per cent quarter-onquarter (QoQ) revenue decline in the first quarter of FY21.

Analysts fear that the limited visibility on Covid19 recovery, coupled with the risk of a potential second wave, will make it highly challenging for companies to provide guidance on revenue growth.

Deal signings in the past quarter and commentary around the pipeline are likely to be the key focus areas for investors as this, according to experts, is the latest proxy for demand.

In the fourth quarter of FY20, despite the impact of Covid, deal bookings of Indian companies remained resilient, with net new signings showing a strong increase.

Moreover, as this would be the first full quarter where the majority of associates would be working from home, operational metrics (e.g., utilisations and general & administrative expenses) in the new normal would also be keenly watched, analysts said.

In fact, PE multiples of IT companies will be largely dictated by growth in global IT services spending, which has ranged from 2-6 per cent from 2010-2019.

It is expected that after a sharp decline in CY2020, industry analysts forecast global IT services spending to accelerate to 6-8 per cent.

The underlying assumption for growth seems to be based on pull-forward of digital and technology transformation by clients. IT companies’ growth prospects will brighten up if this assumption does play out.

Part of the optimism is based on commentary of clients across verticals that intend to accelerate technology transformation. For example Inditex has outlined $1 billion digital spending over the next three years to increase online sales to 25 per cent from 14 per cent currently. A recent survey of Fortune 500 companies indicated nearly 75 per cent of the CEOs intend to accelerate technology transformation.

“Companies may increase technology budgets post-Covid to facilitate accelerated adoption of digital transformation programmes funded by a cut in other expenses. Filtering of higher technology spends to IT services can lead to mediumterm growth above longterm average of 4-5 per cent for global IT services and drive a re-rating for the sector,” says Kotak Securities in a report.

Acceleration in digital transformation spends offers upside potential to growth estimates as firms across verticals are adapting business and operating models to the new normal leading to increased adoption of WFH technologies, online platforms, collaboration tools and digital technologies.

According to analysts, margin disruption should not be as severe as feared. “Our recent interactions with companies suggest that pricing pressure was not to the extent that was anticipated earlier,” said Motilal Oswal Financial in a report. “Street appears to be focusing on recovery path which is also visible in strong rally in the sector. P/E multiples of select stocks have expanded even above pre-covid levels. We see limited absolute returns in the sector for most stocks” said Centrum in a report.