Five key themes to watch out for as IT firms kick off results season, starting with TCS today

India’s largest IT services provider Tata Consultancy Services (TCS) will announce its fourth quarter and FY21 results on April 12, kicking off the earnings season in the sector. Its Bengaluru-based peers Infosys and Wipro will announce their results this week.

Going by analysts and the industry commentary, the contrast is sharper this time, compared to last year.

During April 2020, Indian IT firms were taking a cautious stand. Companies withdrew guidance due to the uncertainty around the pandemic and there was a freeze on hiring.

A year later, here is a look at the key themes that will shape the Indian IT services industry in FY22.

According to analysts, Q4FY21 is likely to be one of the best quarters for Indian IT. Brokerage firm HDFC Securities has said that for the IT firms, it is likely to be the decade-best Q4 sequential performance as they are riding on a large deal momentum, increased demand for digital-like cloud adoption and higher spend on digital.

While TCS is expected to post a 4.8 percent sequential growth, Infosys, Wipro and HCL Tech are expected to grow 3.6 percent. Infosys is expected to post a 14 percent increase in YoY growth, according to CNBC-TV18 Poll estimates.

Leading IT firms signed record large deal wins amid the pandemic. Infosys won its largest-ever deal win of $7.13 billion in its history between October and December 2020. TCS took over the IT units of two of its clients -- Postbank Systems and Ireland-based Pramerica -- which is expected to add 2 percent in incremental revenue.

This momentum is likely to sustain. According to executives, this is sustainable. Tiger Tyagarajan, CEO, Genpact, said in a recent interaction with Moneycontrol: “All (digital transformation) trends that were happening have gotten accelerated. Now there is no option. Why would anyone reverse from the cloud down to on-premise? Now, why would anyone say you know, let's go back offline? If 20 percent of my business is online, they are going to try and make it 30 percent. So, these are clearly sustainable trends.”

According to brokerage firm Investec, between January and March, IT firms have signed multiple large deals. Infosys has signed seven large deals, including Pfizer and Google, according to the Investec report. TCS has signed three-year deals and Wipro, two. HCL Tech’s deal value with Airbus stood at $30-100 million, the report said.

“We expect strong Total Contract Value (TCV) … backed by a wide variety and combination of deals such as lift, shift and transform, consolidation, cloud shift and digital transformation deals. Infosys’ deal with TCV will decline due to the high base of the previous quarter but will be healthy nonetheless. Pipeline even after conversion into large deals will remain healthy,” a note from Kotak Institutional Equities (KIE) said.

Increased deal wins translate to increased demand for talented professionals across firms. This is where companies are likely to face a severe talent crunch. As Salil Parekh, CEO, Infosys, put it in a recent event, “There is war for talent.”

This is likely to increase attrition, which has been at one of the lowest. It will go up for skills in the areas of digital. According to the KIE note, “The industry may need to hire over 400,000 people in FY2022E to meet growth expectations. Digital talent supply is constrained. Acceleration in digital transformation programmes, and time-to-market pressure, along with pent-up hiring, will exacerbate supply shortage, leading to a significant wage inflation for talent in niche digital skills.”

With hundreds of positions open across firms, the sector is seeing an increase in wages, starting from 15 percent to 50 percent, depending on skills.

From TCS’ Rajesh Gopinathan to HCL Tech’s C Vijayakumar, the industry expects IT services to post double digit growth in FY22.

KIE expects Infosys to guide for 12-14 percent and HCL Tech in the range of 10-12 percent revenues in FY22. Though TCS does not provide guidance, TCS CEO Rajesh Gopinathan, during the January earnings call, said that the company expects double- digit growth this fiscal.

“While double-digit revenue growth appears evident in FY22, we need to keep an eye on execution risks. Indian IT is known for its delivery skills, but the ‘transformational’ deals may take Indian IT companies into uncharted territory as they incorporate employees and assets, and require a significant migration and modernisation work,” HSBC Securities said in a note.

Europe will continue to be the growth driver for the IT sector. According to data provided by the research and advisory firm ISG, IT firms signed deals worth about $16.7 billion in the UK over the last two quarters, followed by Germany ($14.7 billion), France ($6.7 billion) and Italy ($3.2 billion).

However, the second wave of the pandemic lends uncertainty in terms of growth in the region. Banking and financial services continue to be strong as they invest heavily in technology and are partnering with IT majors for the same.

“We continue to expect transformational deals from clients, leading to cloud adoption and transfer of end-to-end operations to IT companies,” HSBC said in the note.

A report from Ambit noted that manufacturing and telecom are likely to be resilient in FY22, with engineering and R&D showing signs of improvement, which was hit due to the pandemic.