TCS Beats Peers In Q2 On Easing Supply Constraints, Deal Wins

India’s four biggest information technology companies witnessed an improvement in margin and revenue in the quarter ended September as new deals and digital infrastructure offset the disruptions caused by the coronavirus pandemic.

Tata Consultancy Services Ltd., the nation’s largest software services exporter, stayed ahead of peers on most parameters.

Here’s how TCS, Infosys Ltd., HCL Technologies Ltd. and Wipro Ltd. fared in the July-September period:

Operating Margin

The Indian IT firms saw their margin expand in the second quarter on better absorption of fixed costs, increase in utilisation rates and lower travel expenses as most employees worked from home. That offset the headwinds from the rupee appreciation during the period. Among all, TCS stood out.

Revenue

Revenue of the software services exporters rebounded from the pandemic-marred quarter ended June as supply-side constraints eased and on ramp up of large deals. The revenue beat estimates in constant currency terms as well. And TCS surpassed peers yet again.

IT companies have posted a strong beat on revenue growth, operating margin and robust cash conversion on the back of more contracts getting completed and cost optimisation, said Rishit Parikh, analyst at Nomura, in a note. The deal pipeline, Parikh said, was driven by demand in cloud migration and app modernisation.

Deal Wins

TCS reported the highest deal wins among peers at $8.6 billion during the three months ended September. Infosys reported total contract value at $3.15 billion. HCL Tech reported 15 deals but didn’t report the value. Wipro, too, said it has witnessed “strong momentum” without disclosing any details.

Performance In North America

Easing supply constraints and low base aided revenue of the IT companies in North America—their biggest market. HCL Tech outpaced peers in this market.

Financial Services

The biggest vertical for IT companies saw deals pick up pace as lockdown curbs were eased and focus shifted on digital transformation. TCS topped the pack, while Wipro, Infosys and HCL Tech continue to see buoyancy in the vertical.

Risks

Madhu Babu, analyst at Centrum Broking, said if work from home becomes a steady state in fiscal 2022 for a portion of employees, say 25-40% of headcount, then pricing will gradually fall as clients will demand lower rates. Trend of more offshore projects, if they become more prevalent, will weigh on revenue growth, but boost operating margin, Babu said in a note.

Key things, according to Babu, will be to look out for:

• Second wave of Covid-19 cases in the U.S. and Europe
• If democrats win in the U.S.—Joe Biden has promised a corporate tax rate hike to 28% from current 21%. An increase in taxes will have an impact on enterprise clients spend in the U.S.

Employee Outlook

• TCS, HCL Tech and Wipro will offer salary hikes and promotions effective Oct.1, while it’s Jan. 1, 2021 for Infosys.
• Fresh hiring across campuses will be happen at an aggressive pace, as suggested by the managements.
• The firms don’t expecting any significant impact from the results in the U.S. elections. They, according to exchange filings, have 60-75% of local work forces working in the U.S.

Indian IT companies are much better prepared in handling visa issues in the U.S., Amit Chandra, analyst at HDFC Securities, told BloombergQuint over phone. That, he said, is because they have been focussing on local hiring over the last five years as rejection rate for continuous (staying) visa applications increased from 3% to 14%, while that for fresh applications rose from 25% to 70% during the period. Besides, post Covid-19, the companies may hire more from eastern Europe and Indian cities like Bengaluru and Hyderabad instead of the U.S., according to Chandra.

Guidance

• Wipro resumed its quarterly guidance, and expects IT services revenue growth of 1.5-3.5% on a sequential basis for the quarter ended December.
• Infosys raised its revenue growth guidance in constant currency for fiscal ending March 2021 to 2-3% from 0-2% earlier, and that of operating margin to 23-24% from 21-23%.
• HCL Tech maintained its revenue guidance for the next two quarters and 2020-21 at 1.5-2.5% in constant currency, but hiked its operating margin guidance to 20-21% for the same period from 19.5%-20.5% forecast earlier.
• TCS doesn’t traditionally provide guidance.

Mohit Sharma, analyst at Motilal Oswal Securties, said despite potential wage hikes expected in the second half of 2020-21, Indian IT companies have increased their revenue and margin guidance. That, Sharma said in a note, indicates their ability to sustain some margin improvement spurred by demand for digital services, especially in the cloud.