The domestic IT firms may still not be out of the woods in terms of improvement in spending by clients across the globe as is evident from the muted numbers reported by at least three firms – TCS, Infosys, and Wipro – during the October-December quarter. Analysts are of the view that companies across the world are yet to revive their IT spending and budgets are not going to pick up going ahead.
Still, the shares of the IT firms, led by bellweather TCS and Infosys have been rallying since last Thursday when the earning season kicked off.
A key reason for the same according to analysts is the positive sentiment exhibited by the IT companies in pushing ahead with initiatives, which can lower costs and improve their efficiencies. Another factor leading to positive sentiment is that domestic IT firms are seen to be promoting their capabilities in artificial intelligence (AI) where demand is picking up. The outlook on the deal front is also seen to be improving, though execution may take a longer time.
For instance, large deal wins for Infosys during the quarter remained strong at $3.2 billion, with 71% of them being net new deals. According to Jefferies, Infosys net new order book stood at $2.2 billion, which provides comfort.
These developments are seen as encouraging, especially during the third quarter, which is generally a weak one for domestic IT companies due to the holiday season in the US and Europe, which are their major clients, on account of furloughs and fewer working days.
Similarly, the reported total contract value (TCV) of TCS during the quarter stood at $8.1 billion. Though this was down from $11.2 billion in the previous quarter, analysts expect the company’s strong deal wins of the last few quarters to gradually convert into revenue in the coming quarters.
Analysts maintained that TCS is well-positioned to benefit from the growing demand for offshore IT services.
“Given its greater experience than peers in implementing large, complex, and mission-critical projects, the company is a serious contender for large deals,” Nuvama said in its report. The company has a global presence, deep domain expertise in various industries and offerings in digital transformation services, cloud, cognitive business operations, etc, it added.
In the case of Infosys, Nuvama said that Q3 could be the bottom for the earnings downgrade cycle for the firm and its strong deal wins of the last few quarters would convert into revenue as the US macro environment becomes favourable.
Commenting on TCS, analysts at Motilal Oswal said that the overall demand environment remains positive, barring furlough impact, with strong deal-signing across the board. The deal ramp-ups and execution have been timely with few exceptions and the revenue conversion remains strong.
“Given its size, order book and exposure to long-duration orders and portfolio, TCS is well-positioned to withstand the weakening macro environment and ride on the anticipated industry growth,” the brokerage said.
On HCLTech, which bucked industry trend and posted impressive numbers, Nuvama said, “We were impressed by the strong beat on both services and P&P (products and platforms) from the company, despite various macro headwinds that have led to a decline in growth among key competitors”.
According to the brokerage, the implied Q4 guidance for the services vertical indicates that HCLTech will grow next quarter despite lower deal wins and a high base. “This is in contrast with peers who have indicated a tough quarter led by macro challenges. In our view, this should help HCLTech narrow the valuation gap with our coverage universe,” Nuvama added.
With regard to Wipro, analysts see the company’s performance as positive given that it struggled to deliver on expectation over the last few quarters due to macro headwinds. Further, the management commentary on higher deal wins in the consulting vertical indicates that the drag from that segment is now bottoming out, which should help improve overall growth.