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Robust topline growth despite second Covid wave

IT companies have not seen any impact of the second Covid wave on topline. Further, this being a seasonally strong quarter coupled with acceleration in digital technologies & improved deal pipeline are further expected to drive IT companies’ revenues. We expect BFSI, retail, manufacturing, hi tech and life-science to drive revenues in the quarter. In addition, we expect a discount reversal in companies having exposure to travel verticals. We expect a marginal positive impact from cross currency. Further, IT companies are also seeing a demand tailwind in terms of cost takeout by clients (led by higher offshoring & automation), vendor consolidation opportunities and traction in small & medium deals, which could further propel demand in coming quarters. In terms of margins, we expect wage hikes (in some cases first or second), higher attrition, visa cost and increase in travel cost to act as a margin headwind.

We expect Tier-1 IT companies to see revenue growth in the range of ~2- 4% QoQ (on organic basis) in constant currency terms. This, coupled with cross currency tailwind of ~10-20 bps will further positively impact dollar revenue growth. Among tier 1, TCS, Infosys & Wipro are expected to see dollar revenue growth of 4-4.2% QoQ, respectively. If we add inorganic revenues Wipro will grow at 10.1% QoQ. HCL Technologies is expected to witness dollar revenue growth of 2.2%. Among Tier 2, LTI & Mindtree are expected to see a sharp rise in dollar revenues of 4.0% and 6.8% QoQ, followed by Coforge that is expected to witness organic revenue growth of 3% QoQ (10% including acquisition). We prefer Infosys in tier-1 and Mindtree & Coforge in midcap.

Margins to remain muted due to salary hikes

TCS and Wipro’s margins are expected to be impacted by wage hikes. TCS will have a second wage hike for all employees while Wipro will have a wage hike for 20% of employees & dilution in margins due to Capco acquisition. For Infosys, we expect flat margins due to absence of wage hikes. Adjusting for HCL Tech’s one-time bonus in Q4FY21 (which impacted margins by ~370 bps), the company’s margins are expected to decline 50 bps QoQ due to investment in geo & sales expansion.

Midcaps also expected to witness margin dip

Tier-2 IT companies’ margins are expected to be impacted in the range of 40-300 bps mainly led by wage hikes. LTI is expected to be impacted the most due to reversal of provisions in SG&A and wage hike impact.

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