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IT services firms see better Q2 as deal flow picks up

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Mumbai: India’s IT services firms are expected to report better numbers in the quarter to September, demonstrating the optimism they shared earlier of increased technology spending by global clients to deal with the Covid-19 pandemic induced economic crisis.

The virus outbreak hampered profit and revenue growth at the software services exporters in the previous quarter, but improvement in demand for technology services and a strong order book will be reflected in the results for companies including Infosys, TCS, HCL Technologies, Wipro and Mphasis, analysts said.

IT-graph

“The IT sector is expected to bounce back to over 3.2% quarter-on-quarter (revenue growth) in the second quarter following a 6% decline in the first quarter…Growth is backed by strong deal flow, improvement in execution,” said Apruva Prasad and Amit Chandra, technology analysts at HDFC Securities, in a note.

Tata Consultancy Services, India’s largest IT services firm, will be the first to declare results on October 7, followed by Wipro on October 12 and Infosys on October 14.

Indian firms are witnessing clients signing up deals to modernise their applications and shift them to the cloud, or the internet, to ensure business continuity. They are also investing in technology to reinvent their businesses and be responsive to rapid business changes.

There are a few tailwinds for Indian IT, according to Prasad and Chandra, including increased priority by companies for technology budgets over other budgets, and shortening of timelines to transform core IT systems. A number of companies have shifted their operations to the cloud from on-premise systems since the beginning of the pandemic and this has led to more deals for large Indian technology service providers like Infosys and TCS.

Another tailwind that analysts have observed is vendor consolidation.

“The companies are seeing a demand tailwind in terms of cost takeout by clients, led by higher offshoring and automation, vendor consolidation opportunities and traction in cloud and customer experience,” said Devang Bhatt, analyst at ICICI Direct.

Further cost rationalisation, lower travel costs, cross currency benefits and utilisation are also expected to drive margins.

The results season will kick off on Wednesday with India’s largest software exporter, TCS expected to report a 1.9% rise in quarter-on-quarter revenue growth in rupee terms.

Revival in technology spending, changes in the company’s delivery model and commentary on deal pipeline will be key monitorable trends to watch out for, according to Bhatt.

TCS reported a 6.3% fall in revenue in dollar terms to $5.06 billion in the first quarter owing to disruption caused by the pandemic across its major markets — the United States and Europe.

In September, shares of IT services companies rose after HCL Technologies’ pre-quarter earnings update, where it said revenue was expected to grow by over 3.5% in the second quarter, higher than the 1.5-2.5% growth it projected in July.

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