IT services Q2 numbers to reflect growing demand for digitisation
Key metrics to watch out for will be TCV wins and attrition figures
The second quarter of the financial year is a seasonally strong quarter for the Indian IT services sector. Additionally, the second quarter of FY22 will have the added impetus of demand being driven by digital transformation accelerated due to the pandemic.
Though this quarter too will see robust top line growth, if one goes by Accenture’s performance, the numbers to watch out are the total contract value (TCV) and the attrition figure.
Accenture’s numbers are generally a reflection of the broader trend the IT services industry witnesses. It guided for 12-15 per cent growth in FY22 as it sees demand for cloud and digital transformation driving double-digit growth.
Importantly new bookings for the quarter were at $15 billion and for the year they touched $59.3 billion.
But the outsourcing revenues for Accenture came in at $7.1 billion, which the street thought was low compared to its past performance. “Outsourcing bookings of Accenture were weak at $7.1 billion, representing a decline of 5.6 per cent yoy and 2.6 per cent compared to the average of the last four quarters.
This may cause some concern. We do expect muted TCV numbers from lndialisted IT services firms. We expect growth for our coverage universe to be driven by increased velocity of short-cycle programs. The underlying demand dynamics are however strong; hence a muted TCV for a quarter is not a concern,” said the Kotak report.
A similar themed note was also published by Sudheer Guntupalli and Heenal Gada of ICICI Securities. They also pointed to the Accenture management’s comment, which said outsourcing revenue growth will be in high single digits to low double digits.
“This hints at deceleration in outsourcing segment vs current year (13 per cent YOY, CC) notwithstanding the ‘likely’ higher inorganic contribution and the residual base normalisation. In this backdrop, as the post-covid equilibrium reaches, outsourcing growth for the industry should more or less revert to pre-covid level (8 per cent-10 per cent, YOY),” they added.
The Street will be keenly watching the TCV numbers that the top-rung players report for this quarter to understand the demand environment.
Analysts expect growth for the quarter will be broad-based, and driven by sectors like BFSI, retail, manufacturing, hi-tech, and life sciences.
Analysts across brokerages are pegging revenue growth in the range of 3.57 per cent for top-tier companies.
Among the top tier players, Infosys is expected to lead organic revenue growth and Wipro will lead due to the Capco deal. Infosys’ performance in Q2 will have a contribution from the Daimler deal, which kicks in this quarter. Followed by TCS and HCL Technologies, Wipro will see the highest top line growth as contribution from the Metro deal starts, and also the integration of Capco and Ampion.
Tata Consultancy Services (TCS), which will come out with its numbers on October 8, is expected to report one of its best second quarter in a decade, said an IIFL Securities report.
“We expect margins to increase by 70bps QOQ, given the lack of wage hikes and operating leverage from strong top line growth. Key comments to watch for: 1) colour on the demand environment and its sustainability; 2) size and pace of deal conversions for the quarter; 3) outlook on the supply side and attrition trends in the industry,” said IIFL Securities Q2 preview of the IT sector. Other than the TCVS to watch for, the street will keep an eye on attrition and the retention measures companies are taking to control supply-side constraints. This will impact margins for the quarter. “Among Tier I IT, TCS should be the exception with a margin expansion, while Wipro will have the highest erosion (180bp) on account of a wage hike, absence of one-time tailwind and Capco impact,” said Mukul Garg and Akshay Ramnani, of Motilal Oswal Institutional Equities in their report.
With the demand environment at an all-time high and companies managing growth well, many expect an earnings upgrade. “We raise EPS for our IT universe by up to 10 per cent and TPS up to 53 per cent on higher growth, multiples and roll-forward. We prefer stocks with better growth-adjusted valuations in large-caps (INFO/HCL) and mid-caps (PSYS/COFO/MPHL),” said the IIFL Securities report.