Q4 preview: IT companies may beat Ukraine crisis, inflation worries

Analysts believe top-line growth will be driven by broad-based demand

The results of Indian IT services players in the just-concluded fourth quarter of 2021-22 are expected to reveal continuing growth momentum as demand surges on the back of digital transformations and the cloud shift, but analysts anticipate margins to be under pressure due to supply challenges.

Analysts covering the sector expect revenue commentary should be strong despite the Russia-Ukraine conflict and inflation.

Top-line growth will be driven by broad-based demand with a strong uptick for cloud, digital, cybersecurity, data analytics, and artificial intelligence, among other services.
 

Analysts across brokerages are estimating Q4 revenue growth rates in the range 1.5-5.3 per cent (constant currency quarter-on-quarter) for top-tier players, and 2.2-8 per cent (constant currency quarter-on-quarter) for mid-cap companies.

Infosys is expected to lead with organic growth, whereas Wipro will see the impact of its acquisitions playing out.

HCL Technologies, said analysts, will see growth pressure due to the seasonality impact of its products and platform business.

However, despite growth momentum, analysts are expecting IT services across the segment to see margin pressure due to a tight labour market, rising retention costs, and pricing increase not keeping up pace with salary hikes. The street is expecting margins to be affected by 50-100 basis points in tier 1 companies and above 150 basis points in the case of mid-cap firms.

“IT companies are seeing a conducive environment for price increases; however, near-term margins are expected to remain under pressure as pricing improvements are lagging the impact of salary inflation. IT companies have substantially increased their fresher intake to expand the talent pool of skilled employees, which should hopefully address the shortage of skilled employees and reduce the cost of delivery,” said an Emkay Research note on the IT sector.

Analysts will look for commentary on the pricing environment, with Accenture stating it has seen some price increase with newer contracts coming in at better rates.

“The commentary on margins, the impact of an upward price revision, and the medium-term growth outlook will be key monitorables for 4QFY22E,” said research analysts Mukul Garg and Raj Prakash Bhanushali of Motilal Oswal Research in their report.

They added: “We see pricing flow through as a key monitorable over the next two quarters as commentary from across the universe is indicating increased price comfort on deals. This should start reflecting in FY23 revenue and will help companies to offset some of the margin headwinds.”

The results season will kick off with Tata Consultancy Services, the largest player in the industry, announcing the numbers on April 11, followed by Infosys on April 13.
 

The street will be keenly awaiting commentary on the demand outlook for CY22 and some peek into growth drivers for FY23. Hence, Infosys’ guidance will be keenly awaited. Analysts are expecting the company to give its guidance in the low-teen range. Similarly, HCL Technologies is expected to give a double-digit revenue guidance, and that for Wipro for Q1FY23 could be in the range of 2.4 per cent, said analysts.