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As IT companies get ready to announce the results of the fourth quarter of 2021-22, analysts forecast a “healthy revenue growth momentum” to continue. They forecast growth of 0.9 per cent to 4.9 per cent in dollar revenues of tier-1 IT firms quarter-on-quarter.
They attribute the growth to the continuation of a broad-based demand environment and a robust deal pipeline. The growth momentum is backed by strong demand for digital, cloud, data analytics, 5G, IoT, cybersecurity and artificial intelligence.
“Seasonal factors, however, should weigh on the growth momentum in the quarter over the previous quarter,” Emkay Global Financial Services Ltd said in its preview of the fourth quarter results of top IT companies. It pointed out that tight labour markets would have an impact on the companies’ earnings before interest and tax (EBIT).
“EBIT is expected to remain flat to lower sequentially due to higher backfilling costs amid a tight labour market, increase in travel and other discretionary costs with the easing of travel restrictions and back to office trends,” Emkay Global said.
Deal pipelines
The company said that smaller deals would drive the deal intake. The annual contract value of deals signed is expected to remain strong in the quarter. It is due to the clients’ urgency to execute digital transformation projects in a short span of time rather than signing larger, longer-tenure deals which follow lengthy due diligence and legal processes.
A case for the price increase
Analysts at Emkay Global feel that IT companies are seeing a conducive environment for price increases. However, near-term margins are expected to remain under pressure as pricing improvements are lagging the impact of salary inflation.
“IT companies have substantially increased their fresher intake to expand the talent pool of skilled employees, which should hopefully address the shortage of skilled employees and reduce the cost of delivery,” they said.
Stating that the demand outlook is positive, Emkay Global said that sustained revenue growth momentum, flattening employee pyramid, offshore shift and gradual increase in realisations would support margins and help in negating the pressure from salary inflation, and the likely increase in travel and other discretionary costs with ‘back to office’ trends.
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