As Indian IT services companies are getting ready to come out with their Q4 results for the FY 2021, there are strong indications that the results will have positive revenue growth that is better than Q3FY21. Market analysts indicate that Tier-1 IT services companies are expected to report quarter on quarter (QOQ) growth of 2.2 to 3.9 per cent in Q4 FY21, while the growth is expected to be 2.5-4.5 per cent for Tier-II IT services companies in constant currency terms. Cloud, digital transformation, automation, AI and cybersecurity are the domains that are expected to see healthy demand and will be among the major revenue drivers. As per the latest report by the Emkay Global Financial Services, revenue growth acceleration will continue for IT services companies in the March 21 quarter.
As per the report, there are estimates that there could be broad-based demand, strong deal wins, continued traction in digital and cloud, ramp-up of large deals and demand recovery in highly impacted verticals (like travel, hospitality, etc.) in Q4 for the IT services firms. Experts from Emkay Global expect that Infosys and HCL Technologies will provide double-digit revenue growth guidance of 12-15 per cent and 11-13 per cent YoY in constant currency terms, for the Q1 of FY 22 respectively. It is also expected that Wipro will reap the benefits of a simplified operating model and is expected to provide a guidance of 1-3 per cent revenue growth for the Q1 FY22. It is also expected that tier-II IT services companies are likely to report slightly better sequential growth numbers of 2.5-4.5 percent QOQ in CC terms on the back of healthy deal wins and pipeline, client mining, and consistent execution.
Experts from Emkay point out that margins for IT services are likely to expand on a year on year basis but decline QOQ due to wage hike. It is expected that margins are likely to take a hit sequentially on account of salary hikes, promotions, bonuses and strong rupee. However, it is expected that Infosys and HCL Tech will be able to maintain their FY21 margins.
Deal wins for the next quarter are expected to remain robust for the Indian IT services companies and it is expected that the deal win TCV (Total Contract Value) numbers will be strong in Q4 on the back of steady deal closures. Deal wins have been healthy across Indian IT services companies and were largely driven by digital deals, core transformation deals and vendor consolidation opportunities. Experts at Emkay say the absence of mega deals would lead to lower deal wins sequentially in companies like Infosys and Wipro while ramp-up of large deals is progressing on expected lines and deal closures are also returning to a normal levels as customers are becoming more comfortable with virtual mode of discussions and negotiations. The deal pipeline remains strong and broad-based.
A report by HDFC Securities observes that the current pandemic has accelerated the digital transformation agenda and key lead indicators remain positive. It is expected that the IT sector will deliver 3.9 per cent QOQ growth for Q4 of FY 21. Experts from HDFC Securities point out that ramp-up of large deals, broad based momentum and positive cross currency will support growth in the Q4. The HDFC Securities report finds that growth is expected to be homogeneously positive.
Another interesting trend going forward is that the Indian IT services companies may also think of further leveraging the Indian domestic market. As per the firm Gartner Inc, IT spending in India will reach $93 billion in 2021, an increase of 7.3 per cent from 2020. Though the growth in India will be lower than the global average, as worldwide IT spending is projected to total $4.1 trillion in 2021, an increase of 8.4 per cent from 2020, but this is a positive sign as not only the international markets Indian domestic market can also be a revenue generator for the Indian IT services firms.
According to Gartner, cloud is expected to drive the majority of the expected software growth in India during 2021. “The government relaxation of foreign investment in certain sectors such as insurance, infrastructure, telecommunications will provide additional funds for business and IT leaders to accelerate their digital transformation journey,” remarked Naveen Mishra, senior research director at Gartner.