Q2 IT preview: Growth momentum strong, but margin pressure likely

Overall, management commentaries should remain strong, with better-than-usual seasonality in the December quarter.

Among the IT players, Infosys is likely to revise its revenue guidance upward from the current 14-16 per cent. HCL Technologies, on the other hand, is expected to hold on to its double-digit revenue growth guidance, with EBIT margin of 19-21 per cent.

Foreign brokerage CLSA has projected 2.1-6 per cent growth for top IT firms. Order booking is likely to improve sequentially, it said, adding that margins may show pressure from higher input cost.

Kotak Institutional Equities said this quarter would be the first one without any benefit of a low base. “Yet, organic revenue growth on a year-on-year basis will range from 10.3 to 18.5 per cent for Tier-1 players and 16.1 to 29.7 per cent for mid-caps, indicating a strong uptick in spending by clients, ramp-of-large deals and release of pent-up demand.”

“We forecast exceptionally strong revenue growth in the September quarter with the ‘slowest’ growing company clocking 4.7 per cent QoQ growth. EBIT margins would decline marginally QoQ as well as YoY for most players. We expect modest business mix shift-driven increase in pricing and strong headcount additions led by fresher intake and muted TCV wins, while annualised contract value should remain strong,” Kotak said.

Motilal Oswal Securities expects a median revenue growth of 5.4 per cent sequentially for top IT firms in constant currency (CC) terms. Infosys should lead the organic growth within the Tier I players, it said, adding that Mindtree would lead Tier II growth, it said.

“Among the top players, Infosys is seen clocking 5.7 per cent sequential CC revenue growth on an organic basis. Wipro is seen delivering 6.9 per cent QoQ growth, followed by TCS (4.2 per cent growth), TechM (4.2 per cent), and HCL Tech (3.9 per cent),” Motilal Oswal Securities said.

Emkay believes EBIT margin will remain under pressure on a sequential basis for Infosys, Wipro Persistent System, Mindtree and Birlasoft due to salary hikes and higher subcontracting and recruitment costs. TCS, HCL Tech and Mphasis are expected to report margin expansion on the back of normalisation of wage hikes and revenue growth-led operating leverage, it said.

The strong expectations from the IT stocks resulted in 800 basis points outperformance of Nifty IT over the Nifty50 index in the September quarter. Morgan Stanley said revenue upgrades for FY22 are likely to continue in the September quarter. Analysts mostly believe IT stocks may sustain rich valuations going ahead.