In my last blog “Robust Demand – Washing the Traditional 1Q Blues” we saw that the top Indian IT companies reported strong first-quarter results for FY22 and continue to maintain double-digit growth momentum for FY22.
These expectations seem to have strengthened further after the recent quarter results released by Accenture yesterday, which reported a 21% cc revenue growth YoY which was at the upper end of its guided range of 17-21%. Further, the company highlighted that the industry is at a very early stage of a technology upcycle and they expect a strong multi-year cycle of strong growth. This positive sentiment sets the basis for the company’s expectation of organic growth of 7-10% (vs 8.5% for FY21) and overall growth of 10-15% for FY22 and 18-22% for 1Q22.
This trend sets a very positive tone for the 2QFY22 as well as FY22 results of the Indian IT companies which are expected to start releasing their results next month. With this growth trend the industry seems to be aping the last bull run post the 2008 financial crisis which was followed by a CAGR of 15.5% in revenues for the top for IT companies over FY10-FY15, however with the large revenue base how long will this growth be maintained is yet to be seen.
Expectations for strong revenue growth
We expect revenues for 2QFY22 to witness growth ~4% q-o-q basis the strong demand environment which is also reflected in the optimistic deal pipeline numbers reported last quarter:
- Indian IT companies together reported a strong deal pipeline of over US$15 billion during 1QFY21.
This expectation is further supported by the fact that Accenture reported overall strong bookings at US$15 bn led by continued strength in both outsourcing and consulting bookings 4QFY21. This is reflective of the fact that the demand environment is strong led by digital transformation, and this seems to be beginning with a multi-year growth journey ahead.
Operating margins will be under pressure
Margins will see a downtrend considering wage hikes which have reached very high levels considering the talent shortage that the companies are witnessing.
Moreover, considering the strong demand for talent in new-age skills, an uptrend in attrition is expected to be maintained this quarter as well, despite high utilization levels and increased hiring.
Growth expectations will support profitability
However, sustained growth rates expected from the positive demand environment over the coming quarters, will help in maintaining profitability. Overall, we maintain a positive outlook for large as well as mid-tier companies in the sector as growth resumes across geographies as well as verticals.
Read more details on how the operating matrix shifted across the Indian IT companies in our latest Quarterly Industry Review for 1QFY2. Stay tuned for more updates on Industry Performance at NASSCOM Community.