Software exporters expected to see strong revenue growth in Q3: Report

In a report released on Monday, Kotak Institutional Equities has forecast a strong 2.6 to 6 per cent sequential revenue growth in the seasonally weak quarter for a three-month period ending December 2021.

But, the picture is not rosy on EPS (earnings per share) growth with a decline of 15 per cent for some and to a growth of 11 per cent for others annualised, it added.

According to the report, HCL, and will lead the growth chart among large-caps and LT Infotech (LTI) among mid-caps of the industry that has seen strong headcount addition with higher fresher intake, amid high attrition on one hand and muted total new contracts on the other but strong actual deal-making.

December is a seasonally lean period due to furloughs. Despite the impact of furloughs, the report sees strong revenue growth led by high discretionary and continuing transformation spending.

While Wipro, Tech Mahindra and HCL will likely deliver 4.5 per cent growth in constant currency terms, Infosys is likely to login in a 3.7 per cent topline (revenue) growth and industry leader TCS a modest 2.6 per cent on-quarter growth, the brokerage said.

Mid-tier companies are likely to deliver revenue growth of 5-6 per cent in constant currency terms, and healthy overall growth of 20-34 per cent annualised, it added.

The export-dependent industry will have a cross-currency headwind of 20-90 bps due to a rise in the dollar against the pound, euro and the Australian dollar.

However, EPS growth will be weak on-year with Wipro’s login in muted number, HCL reporting decline, while Infosys offering 6 per cent, and TCS and Tech Mahindra delivering in low-teens.

December 2020 had multiple benefits such as deferment of wage revision (except for TCS), negligible travel costs and a pull-back in discretionary spending.

Companies have rolled out wage increases twice since the December 2020 quarter. It reflects in margin fall annualised but steady on a sequential basis with primary headwinds emanating from backfilling of attrition with lateral recruitment which cost 25-30 per cent more; decline in utilisation levels as companies load up on fresher hiring; and creep up in discretionary costs.

Overall, all companies will report a decline in EBIT (earnings before interest and tax) margins on an annualised rate, the report said.

The report expects Infosys to tighten its guidance band to 17-17.5 per cent from 16.5-17.5 per cent earlier. Infosys had started the year with a revenue growth guidance of 12-14 per cent. Though HCL had guided for double-digit revenue growth for the full year, it is likely to deliver only 12 per cent revenue growth.

The industry is also likely to report fewer large deals as clients shun large consolidation deals leading to weak TCV numbers, which though need not translate into weak revenue growth.

The report expects a 22-25 per cent voluntary attrition for Bengaluru-based companies and marginally lower for others. On a quarterly basis, attrition will be 5-7 per cent.

Backfilling of attrition will typically cost more and will be either through sub-contractors that cost at least 30 per cent more than own employees or lateral hires that cost at least 30 per cent higher.

Either way, the report expects margin headwinds on a quarterly basis even if companies do not have a pending wage revision. A few companies such as Infosys and Wipro might end with 24-25 per cent attrition.

Companies are running at record utilisation rates that is unlikely to sustain. Companies need a higher bench to meet demand and create a cushion against the backdrop of high employee churn. We expect strong hiring numbers that will be weighed towards freshers, according to the report.