Mid-tier IT cos to fare better than larger ones in Q4

Our Bureau Bengaluru | Updated on April 12, 2021

Indian IT companies are likely to benefit from potential captive monetisation efforts and vendor consolidation efforts, say analysts

Analysts expect a 4.1 per cent quarter-on-quarter median growth for Q4 for domestic IT services companies in India most of whom will announce their quarterly results in the following week.

“The growth will be largely driven by cross-currency tailwinds and appreciation in the $/Rs,” Anand Rathi’s Mohit Jain said in his research report.

What is more significant is that tier two companies such as L&T Infotech and Mphasis are expected to fare much better and are likely to be growth leaders, the note said.

Earnings preview

Anand Rathi said among smaller companies, Mastek accelerated the most due to business from the UK government. Most positive growth surprises, however, have come from Persistent and Firstsource.

The former has seen a renewed acceleration in its OPD (offshore product development services)/ISV (independent software vendor service lines) and is turning incrementally positive regarding its top client.

Suyog Kulkarni, a research analyst with Reliance Securities, said the pandemic has reshaped enterprises’ priority to adopt a new agile business model. He said the top-4 Indian IT firms (TCS, Infosys, Wipro and HCLT) are expected to witness strong revenue acceleration driven by higher demand and pay-off from investments in new-age technologies and talent base (reskilling of workforce, innovation centres, digital labs and capability-focused acquisitions).

Additionally, Indian IT companies are likely to benefit from potential captive monetisation efforts and vendor consolidation efforts by the global enterprises in the medium term. “While the Biden administration has a dovish tone on immigration, we expect the localisation trend to continue,” Kulkarni said in his note to investors.

Infosys buyback

Meanwhile, Infosys in an announcement to the stock exchanges said that its board will consider a proposal for buyback of fully paid-up equity shares of the company at its meeting to be held on April 14, 2021. The IT bellwether completed its last buyback on August 26, 2019.

Aniket Pande and Aditi Patil of Prabhudas Lildhar said Infosys can do a buyback of ₹14,400 crore (20 per cent of net-worth), which would be higher than its past buybacks. (13 per cent/18 per cent of net worth in January 2019/August 2017). The maximum permissible size of the buyback is 25 per cent of net worth.

They said the reasons for Infosys going ahead with the buyback is its strong cash balance and lower payout ratio. “IT services companies have shown tremendous rigour over cash flow management in the backdrop of the Covid pandemic in FY21. Conversion of PAT to FCF (free cash flow) has substantially improved in FY21 for Tier-I IT companies with an average of 140 per cent FCF/PAT in the first nine months of FY21 vs 90 per cent in FY20,” Pande and Patil said. The onset of the pandemic in the fourth quarter of FY20 led to a drop in the payout of most of the IT companies in FY20 as compared to their historical average payout, they said.

Published on April 11, 2021

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