Is the worst over for IT? Q1 earnings of firms send out growth feelers

Pandemic impact bottomed out in Q1, second half likely to see better growth

The first-quarter (Q1) earnings of leading information technology (IT) services firms give a clear indication that the worst may be over for the industry, and that growth revival is already underway, albeit at a slower pace.
 

Despite revenue contraction on a sequential basis, Tata Consultancy Services (TCS), Infosys, and Wipro won many large deals in the April-June quarter — an indication that tier-I firms have benefited from vendor consolidation, said experts.
 

Also, management commentary of the three IT majors showed that the slowdown is more sector-specific in nature. Key business verticals, such as banking, financial services and insurance (BFSI) and high-tech, are expected to bounce back in the current quarter, fuelling hope that the second half of the financial year might be better than the April-September period.
 

“We can say the worst is over for the Indian IT players. Recovery is likely during the second half of FY21. Clearly, big IT players are getting the benefit of vendor consolidation. Large deal wins show enterprises are accelerating digital transformations,” said Pareekh Jain, IT outsourcing advisor and founder, Pareekh Consulting.
 

In Q1FY21, revenues of TCS declined 6.3 per cent in constant currency terms year-on-year (YoY), while it was a 4.4 per cent drop for Wipro. Infosys saw a rise of 1.5 per cent on a YoY basis. Despite a tepid show in top line growth, all three picked up a sizeable number of large deals (see chart). Though Wipro didn’t reveal the worth of large deal wins in Q1, the firm said the pipeline remains robust.
 

“Global digital tech are expected to witness robust growth (compound annual growth rate of 20 per cent over the next five years), mainly led by business going digital and increase in work from home scenario. TCS is expected to be a key beneficiary of this trend,” wrote ICICI Securities in a note. This trend is already clear in the case of Infosys, which reported 25.5 per cent growth in its digital revenue, constituting 44.5 per cent of total Q1 revenue.
 

Apart from large deal wins and growth in digital revenue, all three leading players said the key verticals — BFSI, health care, and high-tech — were showing signs of early recovery, though slowdown in manufacturing and retail may linger awhile.

 

“After initial softness in BFSI, it picked up towards the latter part of the quarter. We expect the momentum to continue in the US and most European nations. In manufacturing and retail, it can’t go down further and is likely to improve in the coming quarters,” said U B Pravin Rao, chief operating officer at Infosys. Similarly, TCS Chief Executive Officer (CEO) Rajesh Gopinathan had said the capital market and banking in the US were likely to recover from Q2. “In manufacturing and utilities, recovery is seen from the third quarter, while it may take more time for the travel segment,” Gopinathan had said.
 

Analysts also pointed out that expansion in the operating margins in Q1, despite revenue dip and slowdown in some verticals, showed that the Indian IT firms were firmly in control of cost. While Infosys expanded its operating margins by 160 basis points (bps), Wipro’s margins rose 140 bps over the previous quarter. For TCS, it was down 150 bps on a sequential basis. “Margin expansion was mostly due to lower expenses like visa, travel, and sales. Rupee fall also supported. However, the larger point is Indian IT firms have anticipated the extent of slowdown and taken up cost optimisation moves to mitigate that,” said Jain.
 

While the silver lining in margins, digital revenue, and deal wins have already been seen in Q1, Infosys’ move to resume guidance was reassuring. Even TCS CEO’s commentary that the impact of pandemic has bottomed out is a clear sign of growth revival in the near future.
 

Meanwhile, at a virtual conference, Debjani Ghosh, president, Nasscom, said: “I want India to be the hub for digital talent and innovation — two elements that are going to be critical in the hyper-digital economy.”