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Buoyant Q2 likely for IT companies

Though attrition remains an issue across the industry, clients became more amenable to price increases

Buoyant Q2 likely for IT companies

- Encouraging Q2 likely for top IT cos and mid-tier firms as well

- Global IT major Accenture's strong order book reflects a strong environment

- Accenture, which follows September-August fiscal year cycle, reported revenues crossing $50 bn mark for the fiscal

- Broad-based growth in outsourcing contracts to Indian IT cos

- H2 is expected to see strong growth and deal bookings

Bengaluru: Strong fourth quarter and annual performance of IT bellwether Accenture augurs well for the Indian IT services companies. Analysts expect that top four Indian IT firms including Tata Consultancy Services (TCS), Infosys, HCL Technologies, and Wipro along with most mid-tier IT firms to post strong revenue growth and robust order book for the second quarter (Q2-July-September) of FY22.

TCS will kickstart the Q2 earnings season for the Indian IT companies on October 8, 2021.

Global IT major Accenture, last week, posted strong performance with its revenues crossing $50 billion mark for the whole fiscal. The company, which follows September-August fiscal year cycle, reported its revenue for the fourth quarter at $13.4 billion. New bookings for the quarter were at $15 billion, and for the year, it touched $59.3 billion.

The company also guided for a 12-15 per cent growth in its revenues for FY22 as it sees demand for cloud and digital transformation driving a double-digit surge.

"A broad-based demand uptick and healthy order booking in the outsourcing business (high single-digit to low-double digit growth in FY22 on back of 13 per cent growth in FY21) augur well for Indian IT peers," brokerage firm Emkay Global said in a note.

"Though attrition remains an issue across the industry, clients have become more amenable to price increases, especially for digital projects as they recognize industry-wide supply-side constraints, which should support margins," the report noted.

Indian IT industry is facing high employee attrition in the last two quarters as robust demand for digital talent outstrips supply. Accenture's strong order book also reflects a strong environment, which is likely to be the case for Indian IT firms.

In the last few weeks, companies like TCS and Infosys have announced several large deal wins. For instance, TCS has bagged a 10-year long contract from 'Transport for London' and won contract from South American airline Avianca among others. Similarly, Infosys has won a 5-year long contract from US-based Frost Bank this month.

"Second quarter of FY2s is expected to see strong growth and deal bookings, with Tech Mahindra and HCL Technologies suggesting continued strength in deal wins. Commentaries from Mindtree and L&T Technology Services also hinted at strong growth momentum," Brokerage firm Motilal Oswal Research wrote in a note.

It, however, noted that operating margins would remain under pressure due to higher wage cost.

"Margins are expected to be soft, primarily due to supply-side challenges and continued additions to headcount (HCLT, Infosys, Mindtree, Zensar). On the other hand, attrition, wage inflation, and sub-contracting costs would remain elevated," the report said. Meanwhile, the strong revenue growth of Accenture indicates that companies like TCS and Infosys can sustain high revenue growth even on a larger base.

"The frequent argument of size hampering growth seems to be challenged by leaders such as Accenture and TCS. Of course, this is not to say that companies of such size can keep on growing indefinitely at double digit. However, it is also equally important to consider that the overall market share of Indian IT leaders such as TCS and Infosys are still a small portion of the overall outsourced IT spending and scale should also be paired with breadth of offerings," said Kotak Institutional Equities, in its report post-Accenture results.

Debasis Mohapatra
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