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Q2FY21 earnings preview: IT firms to report strong deal traction; budget commentary eyed

The spurt in revenue growth is likely to be led by digital and cloud as the underlying catalysts along with pandemic-led beaten down segments such as retail, transportation and ER&D will bounce back on a low base

Rukmini Rao | October 7, 2020 | Updated 10:54 IST
Q2FY21 earnings preview: IT firms to report strong deal traction; budget commentary eyed
Edelweiss in its IT preview report estimates IT firms to post revenue growth in the range of 3-6 per cent sequentially with up to 200 basis points increase in the operating margin and an outlook upgrade

With the worst of COVID-19 impact behind them, analysts expect Indian IT services to make a strong comeback and post robust numbers in the September quarter of financial year 2020-21 (Q2FY21). Nomura in its latest IT services note expects Tier-1 IT firms to report a 2.8 per cent sequential revenue growth in constant currency (CC) terms in aggregate in Q2 compared to -5.9 per cent in the first quarter of FY21 and a -2.7 per cent year-on-year (YoY) decline in CC terms as against -2.8 per cent decline in Q1 of FY21.

"Revenue growth in 2QFY21F will be led, in our view, by 1) recouping lost revenues due to supply side issues in Q1, 2) stable to improving traction across verticals, and 3) a ramp-up in large deals," the note said. Edelweiss in its IT preview report estimates IT firms to post revenue growth in the range of 3-6 per cent sequentially with up to 200 basis points increase in the operating margin and an outlook upgrade. According to its analysts, the spurt in revenue growth is likely to be led by digital and cloud as the underlying catalysts along with pandemic-led beaten down segments such as retail, transportation and ER&D will bounce back on a low base. 

"HCL Tech will lead the pack with 4.5 per cent QoQ growth, followed by Infosys (3.9 per cent), TCS (3.2 per cent), TECHM (2.3 per cent) and Wipro (1.7 per cent) in constant currency. TCS and TECHM are likely to clock >200bps QoQ margin expansion and almost all companies will upgrade outlook with Infosys re-setting it at 2-4 per cent versus 0-2 per cent earlier," the report said.

Though Fitch rating cautions most customers to be guarded on their IT spend as they focus on digital transformation and minimise IT spend on legacy services, it still expects a high single-digit industry revenue growth in 2021-2022 on higher demand for digital transformation. "We expect the Indian IT services industry to continue to take advantage of its low-cost operations and maintain its strong foothold in the global IT sector," said Fitch Analyst Keith Poon.

The management commentary of companies on the near to long-term outlook on IT budgets, environment on large deals and the demand trends in large verticals such as banking and financial services, retail and manufacturing are few other things to watch out in Q2 earnings.

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