IT Industry is poised for a fourth consecutive strong quarter of performance aided by strong demand and deal pipeline, despite higher attrition levels. Brokerages expect upward revision in guidance for growth for the IT sector’s major companies.
For the December quarter, Large-cap Indian IT companies like Infosys, TCS, HCL Tech, Wipro and Tech Mahindra are expected to report sequential revenue growth in the range of 3 to 5 per cent sequentially on a constant currency basis. This has been largely driven by an acceleration in the adoption of the public cloud model and broad-based growth across verticals. Upgrade in sales and EPS guidance by Accenture in the last week of December, has set the tone for Indian IT stocks.
Margin expansion is expected to range between 50 to 180 basis points despite the impact from the increased cost of hiring, furloughs and lower working days, which was offset by a depreciating rupee. Every 1 per cent depreciation in the rupee adds 2 per cent to the earnings for IT companies.
The current valuation of Indian IT companies builds in expectations of a strong order booking and deal pipeline, where valuations range between 24 to 31 times the one year-forward price to earnings multiple.
Key things to watch would be momentum around deal booking, outlook on client tech budget and update on supply-side pressure.
TCS, Infosys, Wipro to report quarterly results on January 12., while HCL Tech will showcase its quarterly earnings on January 14. Tech Mahindra is yet to declare the date.
Why is the IT industry in focus?
IT industry contributes almost 8 per cent to the GDP of the country. This year, it is expected that India will export more software this year than Saudi Arabia will do for oil. Estimated exports have been pegged at $150 billion. Employment generation is also expected to double from 50 lakh to 1 crore individuals in the software business over the next 10 years.
Short-term positive triggers include USA’s chairman of Federal Reserve Jerome Powell expectation’s of strong growth in the US and consumption augurs well for IT exports. The IT majors contribute between 48-63 per cent of their total business from the US.
Key risks include stricter H1-B norms and rising attrition levels in the industry.
