Improved demand, healthy outsourcing business revenue to help Indian IT companies in Q2

Cognizant plans to hire more than 23,000 STEM graduates and post-graduates from technical institutions in India | Reuters (File) Representational image | Reuters

An improved demand environment, sustained healthy momentum in outsourcing business revenue and booking by overseas clients are expected to help Indian IT companies have an improved performance in the Q2 results i.e the quarter ending September for FY 21.

It has been observed that sustained demand may come from health services and life sciences verticals for the Indian IT services firms, and the companies are geared up to deal with an improved demand environment. Besides, analyst reports have pointed out that communication and banking, financial services and insurance (BFSI) have been largely stable segments which is a positive sign for Indian IT companies.

Among different verticals, IT services companies who have clients in the health and the public services segment will witness healthy traction due to the segments seeing strong growth in demand due to the ongoing pandemic. The drivers could be the sharp increase in projects such as COVID-19 contact-tracing apps. It has been observed that IT may do well as far as Q2 earnings are concerned as while the rest of the sectors posted a decline of 20-30 per cent in earnings in Q1, the IT sector looked relatively resilient with 5-10 per cent earnings growth. The momentum is expected to continue in Q2 as well, especially after good guidance given by few large and mid-cap IT companies.

Positive moves in the present Q2 quarter by many Indian IT services companies augurs well for the sector. For instance, recently, HCL Technologies acquired an Australian IT firm, DWS Limited. The company, which has more than 700 employees and offices in Melbourne, Sydney, Adelaide, Brisbane, and Canberra, delivers business and technology innovation to a large number of clients across a spectrum of verticals.

Infosys announced that it had been selected by Essential Utilities, one of the largest publicly traded water, wastewater and natural gas providers in the US, as a strategic partner to drive its digital transformation. Besides, in an interesting move, EdgeVerve Systems, a wholly owned subsidiary of Infosys and Prabhu Bank Limited, a banking and financial services group in Nepal, announced the successful implementation of the Finacle Core Banking Solution. Infosys had also acquired the product design and development firm, Kaleidoscope Innovation. This acquisition will help it expand its engineering services portfolio by strengthening Infosys presence in medical devices, consumer and industrial markets across the US.

Some interesting deals were also witnessed by Indian IT major Tata Consultancy Services (TCS). Maurices, a women’s fashion apparel retail chain in the US and Canada, selected the company as its digital transformation partner to help build its greenfield IT ecosystem to optimise more than 200 existing applications and software components in the next 17 months. TCS also expanded its partnership with Morrisons, a leading supermarket chain in the UK, through a five-year contract for application management services, data services and cyber security services. The partnership is expected to help Morrisons to simplify and modernise its technology to improve the shopping trip, eliminate wasted effort and become more popular and accessible to its customers.

A recent report by Motilal Oswal points out that the demand from clients is on the path to normalisation and recovery, with the worst is already behind us. The report says companies such as Infosys, HCL among Tier I and Mindtree among Tier II, are expected to do well as they have robust business models, high return ratios, strong management teams, and reasonable valuations. At the same time, companies also have the legacy of having overcome multiple business challenges and technology change cycles in the past.

Meanwhile, a report from Emkay Global Financial Services, however, cautions that uncertainties around the outcome of US elections, healthcare crisis and slowing global growth will keep optimism in check and may weigh on the stocks of Indian IT companies.

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