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Q4 revenue miss only a blip for IT industry, indicators point to a better future

Despite muted Q4 revenues, companies have seen strong net new wins and a good mix of small, medium and large deals.

May 12, 2021 / 07:56 AM IST
 
 
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Top Indian IT companies reported muted earnings for the fourth quarter. Infosys, HCL Technologies, and Tech Mahindra missed the topline estimates by 0.5-1.1 percent, while TCS performed marginally better with revenue growth of 4.2 percent.

The revenue miss during the quarter is largely seen as a moderation after strong sequential growth in the last few quarters. The reasons for the drop in revenues were company-specific.

Infosys' revenue was largely affected by the increase in offshoring activities. HCL Technologies was hurt by the slow recovery in engineering and research & revelopment. As for Tech Mahindra, delayed recovery in the telecom vertical affected its Q4 earnings.

Strong deal wins, order pipeline give comfort

Several indicators suggesting that the revenue miss was just a blip and the IT industry is poised for a good run in the upcoming quarters.

Close

Despite muted Q4 revenues, companies have seen strong net new wins and a good mix of small, medium, and large deals, increasing the total commercial value of new deals in Q4.

The overall deal pipeline has remained robust despite the strong conversion in Q4. It augurs well for revenue visibility beyond FY22. It is also reflected by the fact that Tier-1 IT companies have guided for double-digit revenue growth in FY22.

Robust hiring trends

Buoyed by the strong revenue visibility, hiring activities also picked up in Q4. It was for the second consecutive quarter that top five companies continued their hiring spree and it was at an all-time high in Q4FY21.

As per a Kotak Institutional report, Naukri JobSpeak Index for March 2021 has increased by 47 percent in the span of a couple of months for IT software/software services companies. Net additions of top five companies increased 29 percent QoQ to 46,087.

Robust hiring trend is likely to continue in FY22 as well. With strong demand for talent, wage hikes can be significantly higher in the coming quarters. It is likely to impact the margins of the company. In spite of this minor impact, record hiring indicates a low bench and strong optimism on demand. Companies ramped up the hiring of freshers while reducing the mid-management staff.

Winners and laggards

Financial services were one of the verticals resilient due to acceleration in digital transactions. It has been among the largest verticals for Tier-1 IT companies like Infosys and TCS.

The retail channel has recovered after being heavily impacted by COVID-19, while other verticals such as manufacturing and oil & gas continue to remain impacted. Growth momentum in financial services and retail is expected to sustain in the near term.

The communication vertical has been a laggard compared to other verticals. The year-on-year growth in Q4 is the lowest among all verticals for Infosys and TCS. It was second-lowest in the case of HCL Technologies. The industry is banking on the pick-up in digital transformation spending and 5G-related IT spends for sustained recovery.

Closing comments

The Tier-1 IT companies have guided for double-digit revenue growth in FY22 but it doesn't capture the full business strength as per a Kotak Institutional report. It foresees Infosys and TCS delivering 16.1 percent and 15.1 percent organic constant-currency growth in FY22, respectively. Wipro and HCL are likely to follow with 11.2 percent and 9.9 percent growth. The report estimates a 9.9 percent growth for Tech Mahindra in FY22.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Vaibhav Agrawal

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