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IT Q4FY22 Preview: Steady quarter, EBIT margins to be lower QoQ

ICICI Securities 07 Apr 2022

What’s buzzing:

IT companies are expected to be see moderate revenue growth in Q4. Margins are anticipated to decline on a QoQ basis (except Coforge) due to continued elevated employee costs.

Context:

IT companies are expected to post CC growth of 2-5% for the quarter while EBIT margins are expected to decline 20-80 bps QoQ. We expect TCS, Infosys, Wipro to post constant currency (CC) revenue growth in the range of ~3.0-3.5% QoQ while HCL Tech is expected to post weakest growth of 2.0% QoQ. TechM, LTI, Mindtree are expected to report 5% CC growth. We expect ~30 bps margin decline for TCS, Infosys, Wipro for the quarter while margin decline would be higher at 80 bps QoQ for HCL Tech on account of a weak P&P performance. TechM, Mindtree, LTI are expected to post a margin decline of 50-80 bps QoQ.

Our Perspective:

Sequential growth in IT companies is expected to moderate in Q4 and is in line with the historical trend and implied Q4 numbers in a few companies where they have given annual revenue guidance. Underlying drivers remain robust as enterprises have seen increased IT spending, especially on the cloud transformation side. Growth is expected to be broad based across verticals while BFSI, retail, insurance continue to lead the growth. The companies are facing a talent crunch in the market. Hence, employee costs continue to be elevated in terms of higher backfilling costs and retention costs, which will impact margins for the quarter. Few tailwinds could be available, going forward, in terms of price hike, pyramid optimisation and lower subs costs, which are expected to support margins in the medium to long term.

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