Despite being a seasonally weak period, the Indian IT services industry reported its strongest third quarter in the last five years. Increased technology spends across all key industries, pick up in deal sizes, and faster conversion from pipeline to orders helped the software companies deliver USD revenue growth of 4.9 percent sequentially, during the quarter ended December 2020.
With an increase in deal Total contract value (TCV) and pipeline across companies, the outlook for CY21 continues to improve. The management of IT companies further highlighted that clients are rolling out multi-year Digital and Cloud transformation projects. This has further improved longterm visibility in this space, brokerage firm Motilal Oswal said in a report.
The COVID-19 lockdown continued to act as a tailwind on margin in the December quarter, with higher offshore mix and lower travel expense aiding operating margin. Largecap IT companies also saw around 150 bps YoY drop in sub-contracting expense, partially helped by a higher share of offshore effort.
Tier I margin for Q3FY21, on the back of high utilization and offshore mix, stood at 24.1 percent, an increase of 90 bps QoQ and 270 bps YoY.
Attrition for Q3FY21 was the lowest ever at 11.3 percent versus 16.2 percent in Q3FY20. This is expected to rise over the next few quarters despite wage hikes in 4QFY21/1QFY22. This remains a key worry for margin performance as a rapid rise in attrition may require intervention, the brokerage noted.
Total headcount addition for Q3FY21 stood at around 39,000 as against a net decline of 3,000 employees in the past nine months. This came in on the back of the highest ever utilization reported by IT Services companies.
Going ahead, cloud migration, digital transformation, and user experience are expected to be multi-year opportunities for Indian IT companies. These will be complimented by cost takeout deals as clients normalize their budgets to increase spending on digital transformation.
Margins are expected to be range-bound as some cost pertaining to travel, normalization of utilizations, and wage hikes will now gradually return. However, this impact should be mostly offset by operating leverage due to higher growth and on-going pyramid rationalization.
“The outlook for CY21 continues to improve, with an increase in deal TCV and pipeline across companies. Despite valuations running at the upper end of the historical range, MOFSL retains their attractive stance on the sector. Led by robust order book and decent deal conversion, mid-teens growth is expected for the sector in FY22E,” Motilal Oswal said.
The brokerage prefers Infosys and HCL Technologies among Tier I and Persistent Systems, L&T Technology Services, and Mphasis among Tier-II IT companies.
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First Published: Feb 19, 2021 1:51 PM IST
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