Despite unfavorable seasonality, Indian IT services revenue growth will remain high in Q3 FY22: Motilal Oswal
India’s IT services industry is expected to experience median revenue growth of 4.2% quarter-on-quarter (QoQ) with earnings before interest and taxes (EBIT) growing 5.8% as well as profit after tax (PAT). ) by 6.2%. percent growth in the third quarter of fiscal 22, according to a sector report from Motilal Oswal.
This despite seasonal adversity for India’s IT services industry where the third quarter of the fiscal year is generally weak due to fewer billable days caused by higher holidays around Christmas and New Years.
The report states that Tier 2 companies are expected to overtake Tier 1 companies in the coming season, with Tier 1 companies expected to generate revenue growth in the range of 3.2-4.8% QoQ, while level 2 players will have a wider band of 3.6 to 7.1 percent.
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“Despite companies highlighting the normal impact of time off, IT revenue growth for Tier 1 is expected to be strong, with Infosys leading the revenue growth. Companies like Infosys, HCL Technologies, Tech Mahindra and Wipro and TCS are among the Tier 1 companies expected to achieve revenue growth of over 3%, ”said Mukul Garg and Raj Prakash Bhanushali, research analysts at Motilal Oswal .
Among level 2 players, a good revenue pull is also expected. Persistent Systems leads the pack with 8.1% growth in QoQ. Larsen & Tourbro Infotech is expected to grow by around 7% in QoQ and L&T Technology Services (LTTS) is expected to grow by more than 5% in the third quarter of fiscal 22..
Most companies’ profit before interest and tax (EBIT) margins are expected to be tighter due to supply pressure. Level 1 companies are expected to experience a sharp decline from profitability in the third quarter of fiscal 21. EBIT margins for most level 2 companies are expected to be stable.
Hiring across the IT industry is believed to remain high as companies attempt to meet demand and address growing attrition, which will be a key area for investors. Another risk on the supply side is the resurgence of COVID-19 cases.
However, PAT is expected to experience growth of around 11% year-on-year (YoY) and around 6% QoQ.
TCS and Infosys are expected to post PAT growth of 17% and 13% year-on-year respectively.
HCL Technologies could see a slight decrease in PAT while Wipro will be impacted by declining year-over-year margins. Tech Mahindra is expected to show growth of around 14% year-on-year and PAT.
Tier 2 players are expected to experience robust PAT growth of around 23% yoy and 6% qoq, driven by strong revenue growth, which would be partially offset by lower EBIT margins.
Coforge, LTTS, Persistent Systems are expected to lead Tier 2 group in terms of YY PAT growth, while the same for Zensar Technologies could be down double digits due to unfavorable margin base as well as higher investments.
While equity valuations remain elevated, the report indicates a good demand environment and sustainable double-digit revenue growth over the medium term.
“Demand is expected to remain strong, mainly due to increased agreements on large-scale digital transformation, upward price revisions and higher spending on cloud migration by large companies,” added the analysts.
The report analyzes the continued strong sequential growth momentum and waiting for a qualitative commentary on growth beyond FY22 should help support the recovery in IT stocks, despite their premium valuations.