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TREND: Profitability guidance key for tech cos post robust Jan-Mar

Informist, Wednesday, Apr 7, 2021

 

By Nikita Periwal

 

MUMBAI – Indian technology companies have gone from a demand shock at the beginning of last financial year to green shoots of recovery, which later fructified into strong, sustainable demand.

 

The COVID-19 pandemic has pushed businesses globally into digitalisation at a swifter pace, and deal wins of Indian information technology service providers have risen to an all-time high, with double-digit sales growth of companies almost a certainty in the current fiscal year.

 

The Nifty IT index has more than doubled compared to the 71% rise in the Nifty 50 in 2020-21.

 

With strong demand over the medium term firmly established, the focus will now shift to the profitability of these technology service providers, even as they are set to post their best performance for the March quarter in a decade, analysts said.

 

Operating margins are seen contracting from the levels in 2020-21 as some costs normalise, the currency remains volatile and companies spend a lot more on hiring and retaining talent. This is expected even after a pickup in growth rates.

 

While digital technologies have been a key revenue driver for the industry, the lack of enough digitally skilled talent will see costs of the industry inch higher. The acceleration in digital transformation programmes, time-to-market pressure and some pent-up hiring will exacerbate the shortage of talent in niche digital skills, Kotak Institutional Equities said in a pre-earnings note.

 

Most technology companies have already announced wage hikes from January, while Tata Consultancy Services announced its second hike in six months, with effect from April. The fact that wage hikes from January will impact operating margins has already been factored in.

 

"While our view of growth normalising post-FY22E could take a few quarters to fructify, our caution on margins driven by supply-side pressure and partial reversal of one-off savings could see first signs in 4Q results/outlook," Ambit Capital said.

 

Profitability is likely to have peaked out in the December quarter, and is likely to moderate hereon, falling around 130 basis points for the top four technology companies, the brokerage house said.

 

Sub-contracting, some discretionary spending, normalisation of some other costs, and appreciation of the rupee against the dollar are also seen weighing on profitability. Some companies have announced bonuses, which will also eat into margins.

 

The outlook for margins could, perhaps, be a bigger driver than that for revenue growth, with the possibility of some disappointments, brokerage house ICICI Securities said.

 

Infosys, Wipro, and HCL Technologies are among those that provide a quantitative guidance. TCS has an aspirational margin range of 26-28%. The operating margins of these companies were in the range of 21-27% in the December quarter, with that of TCS at a five-year high.

 

A better-than-expected outlook for margins will ensure that technology companies continue to see upgrades at the same pace at which they have in the past two-three quarters.

 

TCS will announce its earnings for the March quarter and 2020-21 on Monday, followed by Infosys, Wipro and Mindtree during the week.

 

Infosys and HCL Technologies are seen guiding for double-digit growth in sales in the current year, while Wipro is seen guiding for 1-3% growth in sales sequentially in the June quarter.

 

The sales of nine companies — TCS, Infosys, Wipro, HCL Technologies, Tech Mahindra, Mindtree, Persistent Systems, Larsen & Toubro Infotech and L&T Technology Services — are seen rising 3% sequentially, the average of the estimates of 13 brokerage firms showed. The bottomline of these companies is seen falling 2% on an average, largely on account of pressure on operating margins, analysts said.  

 

Following are the estimates for Jan-Mar earnings based on reports compiled from 13 brokerage houses:

 

Company name  Sales       PAT  Sales    PAT  Sales    PAT    EBITDA  Result
 ——Average——-—–(Y-o-Y)—–—–(Q-o-Q)—–Mln Rupees    date
 —–Mln Rupees—–————–% Change————–  
         
HCL Tech +1,97,82731,760602(20)51,382     —
Infosys +2,66,95551,70915203(1)75,170Apr 14
L&T Technology Services +14,5041,9550(5)452,877     —
Larsen & Toubro Infotech +32,5864,9568163(4)7,120     —
Mindtree +21,0813,1103514(5)4,470Apr 15
Persistent Systems +11,0451,2191945311,842     —
TCS +4,36,12592,726915471,28,254Apr 12
Tech Mahindra +97,85213,0393621(0)19,039Apr 26
Wipro +1,59,66128,3301222(5)40,515Apr 15
Total12,37,6362,28,8028173(2)  

 

Note: 
+ Consolidated 
Y-o-Y: Year-on-Year
Q-o-Q: Quarter-on-Quarter
N.A.: Not Available 
Rs: Rupees 
  
Estimates from: 

 

Ambit Capital Pvt Ltd, Antique Stock Broking Ltd, Axis Securities, BOBCAPS Research, BofA Securities, Dolat Capital Market Pvt Ltd, Edelweiss Securities Ltd, Emkay Global Financial Services Ltd,  HDFC Securities Ltd, ICICI direct.com Research, JM Financial Institutional Securities Pvt Ltd, Kotak Institutional Equities, KR Choksey Research and Prabhudas Lilladher Pvt Ltd.  End

 

Compiled by Shivaji Jagtap

Edited by Avishek Dutta

 

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