Will the IT sector deliver a stellar show in Q4?

A seasonally weak quarter could prove to be an overhang for the Indian IT sector’s performance during the January-March period. While demand is likely to see decent growth on the back of digital transformations and the cloud shift, analysts anticipate margins to be under pressure due to supply challenges. Moreover, companies may bake in potential impact on demand from the Russia-Ukraine war and elevated inflation in the US Ashis Dash, research analyst at Sharekhan by BNP Paribas, for instance, expects the sector’s revenues to moderate sequentially given the high base of Q3 and weak seasonality. On an aggregate basis, analysts are estimating Q4 revenue growth rates in the range of 1.5 to 5.3 per cent (constant currency quarter-on-quarter) for top-tier players, and 2.2 to 8 per cent (constant currency quarter-on-quarter) for mid-cap companies. That apart, margin contraction may also extend during this quarter as employee costs have continued to sting. According to ICICI Securities margins of IT majors could contract on a quarter-on-quarter basis despite the industry continuing to add record number of freshers.

The attrition would continue to be high. Hence, costs to backfill attrition and those related to retention etc are likely to put pressure on margins. Those at Prabhudas Lilladher, meanwhile, expect aggregate margins to decline by 40-80 bps quarter-on-quarter and 150 bps YoY due to headwinds from aggressive hiring, lateral recruits at higher costs, and roll out of wage hikes. From a long-term perspective, Gaurang Shah sees the IT sector as a relatively safer bet as it remains insulated from higher crude and commodity prices. Against this backdrop, TCS, which will announce its result later today, will remain on investor radar. March quarter results of small-cap firms like Birla Tyres, Kesoram Industries and gaming and hospitality company Delta Corp would also hog the limelight. On the global front, investors will continue to monitor geo-political developments around the Russia-Ukraine conflict and key commodity prices.

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