IT Sector: Q4FY21 preview- A robust fourth quarter in offing

The Q4FY21 results of Indian IT services companies are likely to reinforce our “Bottom of tech upcycle” thesis expounded in the Techolution series. Not only that, we expect the results to surprise again all over — higher guidance, better-than-expected margins and upbeat outlook. Meanwhile, Street would have to catch up with estimates revisions.

We argue Indian IT companies are poised to turn in a robust Q4 driven by: (i) highest-ever order books; (ii) substantial revenue acceleration; (iii) robust margins; and (iv) strong outlook. We like all IT stocks in our coverage.

Cloud and Digital overarching themes: We believe a substantial shift from offline to online activities has accelerated the adoption of Cloud and Digital. Our analyses based on interactions and inputs from global technology experts suggest structural demand acceleration from 9–10% pre-pandemic to 13–14% in FY22 and even further pick-up thereafter through FY27.

13–15%/12–13% guidance by Infosys and HCL Tech for FY22: We estimate 1.5–5.2% q-o-q constant currency revenue growth with cross-currency benefits ranging from 10–70bps q-o-q. TCS would lead the pack with q-o-q growth (+4.8%), followed by Infosys (+4.1%), HCLT (+3.5%), Wipro (+3.1%) and TECHM (+1.5%) in constant currency. We expect q-o-q margins to dip for most companies (ex-TCS) led by wage hikes and special bonuses. We expect Infosys and HCL Tech to guide for 13–15% and 12–13% revenue growth, respectively, for FY22.

Tech Up-Cycle: Robust revenue, margins and guidance: In our view, Q4FY21 results will surprise again with robust revenue growth of 2–6% (in $) by large-caps aided by 10–70bps cross-currency tailwinds. All in all, we expect robust commentaries, record deal-wins and upbeat outlook. We prefer Infosys, HCLT, TCS, TECHM, Mindtree, LTI, LTTS, eClerx, Persistent, and Cyient, and dislike none.