As Indian IT companies gear to announce their third quarter earnings of the current fiscal, industry experts believe that the October-December results will be best in a decade. According to a recent report by Edelweiss Research, Indian IT companies are poised to report their best Q3 in a decade on the back of highest-ever order books, marked revenue acceleration, margin expansion, and ongoing outlook upgrades.
IT bellwether Tata Consultancy Services (TCS), the country's largest software exporter, will kick off the December quarter (Q3 FY21) earnings season with results on January 8. It will be followed by Infosys, which is scheduled to release Q3 results on January 13.
"We expect Q3FY21 to continue to surprise, driving guidance upgrades by IT companies and estimate revisions by Street alike," Edelweiss said in its research report on IT sector.
As per the report, Infosys and TCS will lead the pack with 5-6% QoQ growth, followed by HCL Tech and Wipro (3-4%), and Tech Mahindra (1.8%) in US dollar terms. It expects margin expansion of 20-80bps, and most companies are likely to upgrade the outlook. The agency believes that Infosys would further raise its guidance, while it expects Mindtree, L&T Technology Services and Larsen & Toubro Infotech to post robust growth and margins.
Analysts at Edelweiss believe that Q3 FY21 will continue to surprise with robust revenue growth of 2-6% (in USD) for large-caps aided by 20-80bps of cross-currency tailwinds. The agency forecasts that TCS, Infosys, HCL Tech, Wipro and Tech Mahindra would report QoQ growth of 4.5%, 5.4%, 4%, 3.5% and 1.8%, respectively, in USD terms. It estimated EBIT margin expansion of 50bps for Infosys, 80bps for Tech Mahindra, 40bps for Wipro, 60bps for HCL Tech respectively, QoQ. Besides, it expects robust commentaries, record deal-wins and guidance upgrades by all these companies.
Edelweiss said that upward guidance revisions by Indian IT companies, which set in two quarters ago, will be followed by upgrades in consensus forecasts for quarters to come.
As per the report, structural demand uptick will drive industry-wide acceleration in revenue growth from 9-10% pre-pandemic to 12-13% in FY22 and 14-16% thereafter through FY27. Based on inputs from experts and commentaries of global companies, Edelweiss estimates industry margins over the next five years to be at least 300 basis points (bps) higher than pre-pandemic led by WFA (work from anywhere) savings and lower non-business travel costs. The gap between EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortisation) and EBIT will reduce for good owing to lower facility spends, it said.
"High online activity is galvanising 'transformation of core' across industries with cloud and digital becoming mainstream," it said.
The agency pegged constant currency revenue growth at 1-5% QoQ with a cross-currency benefit of 20-80bps. This would be led by a spurt across industries and geographies with digital and cloud as underlying catalysts. The agency expects beaten-down segments such as retail, transportation and engineering and research & development (ER&D) to bounce back strongly off a low base.