Infosys may show faster growth than TCS in the Dec quarter, say analysts

• The IT sector outperformed the broader markets in 2021 and many continue to do so this year as well backed by pent up demand for digital transformation.
• Order book, deal pipeline and hiring trend indicate that the demand momentum could sustain in 2022, say analysts.
• Earnings season begins with the results of major IT companies — Infosys, TCS and Wipro — on January 12.

Infosys, TCS and Wipro are among India’s top five technology services giants that will declare their quarterly earnings on Wednesday (January 12). For the last three months ending December 2020, consensus on the street seems to be that the earnings, for all the companies, are likely to strong growth. Remarkably, Infosys is likely to outpace TCS.

The tech party is likely to continue

The last three months of any year is usually not the best time for India’s software exporters but the street is excited. This space has been one of the biggest gainers of the pandemic and that trend is likely to continue. In fact, foreign portfolio investors (FPIs) seem to be betting big on this space given their weightage in technology stocks has risen to a multi-year high.

Optimists hark back to the improved guidance from Accenture last month, where the Nasdaq-listed information technology (IT) giant, which increased its growth estimate for the current financial year. And Infosys may beat TCS in revenue growth, according to at least two analysts.
Although TCS bagged 13 deals, the highest number of orders, Infosys may show better revenue growth compared to the Tata Group company, according to analysts at two broking firms, India Infoline and Motilal Oswal. Infosys shareholders have the ramp up in the Daimler contract to thank for this.

The top IT companies are expected to post a revenue growth around 3-4.5%. Analysts at JM Financial expect IT major Infosys to raise its revenue guidance for the financial year 2022 to 18-19% from current 16.5 - 17.5%.
Source: India Infoline *Revenue growth in constant currency on a sequential basis

The demand for IT services has been stronger than ever since the start of the pandemic, and that’s likely to continue.

However, the biggest challenge of the last few months for the entire sector, the high levels of attrition, may have peaked, according to Motilal Oswal, another Mumbai-based broking firm. But the easing may not be enough to improve margins yet. “Among Tier I players, EBIT [earnings before interest and taxes] margin will be in a tight (-20 basis points to +40 basis points compared to three months ago) range, although they will see a steep decline v/s 3QFY21 profitability,” a Motilal Oswal report dated January 3 said.

Here, if Accenture’s numbers are any sign, its attrition rate declined to 17%, which is still very high compared to other IT players, from 19% just three months earlier.

Another factor that may play a significant role in the earnings of these software exporters is the nearly 3% weakening of the rupee during the three months between September and December.

A weaker rupee magnifies the numbers for these companies who primarily earn in dollars and other foreign currencies.

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