Quarterly results from major Indian IT services players like TCS, Infosys and Wipro bode well for the sector at large, which is expected to see positive growth over the next few quarters.
The beginning of the Q1 result season was made by Tata Consultancy Services which reported a 29 per cent year-on-year rise in consolidated profits in the Q1 of the FY 2021-22. This was followed by Infosys whose revenues grew 4.7 per cent Quarter on Quarter (QoQ) to $3.78 billion in the Q1 which was also the decade's best Q1 growth for the IT major. Wipro also reported a 35.6 per cent jump in its consolidated net profit to Rs 3,242.6 crore for the Q1 quarter.
The results were on expected lines based on an earlier analysis done by THE WEEK before the Q1 results of the Indian IT services companies. The analysis had estimated that post the Q1 results Indian IT services companies would exude a positive momentum and will see growth in customer demand.
As far as TCS is concerned the revenue growth of 4.1 per cent QoQ in constant currency in core verticals remained strong. For TCS deal wins stood at US$ 8.2 billion in Q1 FY22 versus $9.2 billion in Q 4 FY21 with the book to bill ratio remaining healthy. The net income of TCS stood at Rs 90.8 billion while the adjusted margin came in at 19.8. The company also declared a dividend of Rs 7 per share.
“The company has highlighted stabilization in regional markets including India since June 21. Deal bookings have also remained strong which provides medium-term growth visibility. The revenue growth underperformance during 1Q FY22 is one-off. TCS is likely to be one of the key beneficiaries of a medium-term uptrend in technology spending. We expect TCS to gain market share on the back of vendor consolidation and captive monetisation efforts,” remarked Suyog Kulkarni, Senior Research Analyst at Reliance Securities.
For IT major Infosys that had the best Q1 growth in the last decade the revenue growth guidance for the FY 22 E was increased to 14-16 per cent in constant currency terms than the earlier guidance of 12-14 per cent. The growth trajectory for the company remains strong, supported by a strong deal pipeline, release in pent up demand to restart the delayed projects, and sustainable improvement in large deals. There has also been momentum across verticals BFSI (nine large deals in Q1 vs six in Q4), retail, manufacturing, life-science and utilities etc. There is also an uptick in hiring plans for freshers by Infosys of around 35,000 in FY22 versus the 25,000 planned earlier and 21,000 in FY 2021.
“The growth for Infosys was broad-based across verticals, with digital revenue growing at more than 9.7 per cent QoQ in US $ terms while core revenue remained flat QoQ. The company will also give a wage hike effective from Jul’21. Out of the 22 large deal wins in the Q1, nine were in BFSI, four each were in retail and Energy and Utilities, two were in manufacturing and one each in communication and life sciences and hi-tech verticals. By region, fourteen deals were in the US, five in Europe, two in the rest of the world and one in India. The large deal TCV (Total Contract Value) was at $ 2.5 billion of which 30 per cent of the deals were net new. The company also added 8,334 people in Q1 and plans to add 35,000 freshers in FY22,” observed Amit Chandra, Institutional Research Analyst, HDFC Securities.
IT major Wipro had a robust organic growth with the Capco acquisition. However, the margins have come under pressure due to wage hikes and higher attrition. It is expected that the company will be able to manage margin pressure through an improved employee pyramid and other productivity measures, but the risks to margin remain.
A report by Yes Securities points out that for Wipro organic revenue growth for FY22 would be in the double-digits, led by robust deal wins. The report observes that the revenue growth at 12.2 per cent QoQ in US $ terms for IT services was slightly above its estimate even after considering the completion of the Capco acquisition in the quarter. The report points out that the growth for Wipro was broad-based as all the verticals such as BFSI, Consumer and Energy and utilities grew for the company though there was some softness in the manufacturing vertical. The margin for the company was down due to wage hikes, more hiring and the adverse margin impact of the Capco acquisition. Wipro has provided strong revenue guidance of 5‐7 per cent sequential growth in IT services in Q2 FY 22. Interestingly the Last Twelve Month Attrition (LTM) attrition increased by 340 bps QoQ to 15.5 per cent. The company added 12,000 employees during the quarter and added 129 customers in the quarter compared to 52 additions in Q4 FY21.
The Yes Securities report further points out that growth remains a priority for the company and it has been investing in talent to capture most of this opportunity. At the same time, the revenue model of the company will remain linear driven primarily by headcount addition. There will be another wage hike for junior staff in September, which is a margin headwind. The Wipro management expects to maintain a sustainable margin in the range of 19‐19.5 per cent through the use of automation and a better employee pyramid. The total deal TCV for the quarter was $715 million which includes 8 large deals.
