The pharma industry has clearly managed to break the glass ceiling throughout the COVID-19 pandemic in terms of revenue generation, profitability, and investor returns. Yet, there is another sector that was less impacted during the COVID-19 period. The IT Services and Software Industry. A close look at the results of big names like TCS, Infosys, WIPRO, L&T Infotech gives you a sense of optimism when it comes to the growth outlook of the sector as a whole. In this piece, we discuss the Q1 results of Financial Year 2021-22, how the pandemic shaped the industry and what lies ahead.
The Big Guns
- The company reported a 18.5% YoY revenue growth to Rs 45,411 crore. The QoQ revenue growth was 3.5%.
- It has a net profit growth of 28.5% YoY to Rs 9,001 crore. However, the company had a decline in profit of (-)2.8% as compared to last quarter.
- The company’s share price hasn’t seen consistent growth since the last quarter. The share price has grown ~42% over the past year.
- The operating expense of the company increased by 5% over the preceding quarter and by 15% as compared to last year.
- Infosys had revenue growth of ~6.2% QoQ. The revenue grew by 18.5% YoY to Rs 25,815 crore. Infosys’ North America business contributed 61.7% to total revenue.
- Net profit grew by 2.3% over last quarter and 22.73% since last year to Rs 5,195 crore
- Infosys’ share price has shot up by ~70% over one year and by ~14% in the last three months.
- Operating expense for Infosys has risen by 7.48% since last quarter and 16.6% since last year to Rs 20,464 crore
- The company’s revenue grew by 13.5% QoQ and 22.31% YoY. The company had one of the most outstanding quarters according to news reports, such that it beat its own estimates for the quarter.
- Wipro scored a net profit growth of 9.09% QoQ and a staggering 35.5% YoY to Rs 3,242 crore
- Wipro’s share price has zoomed 121.8% over one year. In the last three months, the stock has returned 23.5% on investment.
- HCL’s revenue grew by 2.2% QoQ and 12.05% YoY to Rs 20,323 crore. The company added 7,500+ employees during the quarter.
- The company saw a threefold increase in Net Profit over the last quarter from Rs 1,102 crore to Rs 3,205. The net profit increased by 9.35% YoY.
- The company’s share price hasn’t seen much momentum over the last 6 months. The share price has increased by 3.30% over the last three months and by ~53% over the last few months.
Apart from the big guns, the overall market scenario is such that even midcap IT stocks such as MindTree, Oracle, Coforge, Happiest minds have managed to perform better than last year. The midcap IT stocks saw a demand spike right after they announced their results. Yet there are some things common and some things different for the IT industry.
Bad Operating Margin, Outsourcing and Growth Potential
Almost all companies in the IT sector saw a decline in operating margin. The reason is the same for almost all companies, and that is wage hikes, higher attrition rates, and increase cost of hiring. The end of the year saw IT companies increasing salaries and incentives of employees which impacted the operating margin. The labor market was rather tight, with a loss of resignations and applications which might have increased the cost of recruitment.
Another trend was an increase in operating expenses of IT companies. The onset of the pandemic meant that companies needed to be restructured, attrition rate increase, and business took a temporary hit. Nevertheless, the increase in expense is justified by the increase in revenue, net profit, and sales altogether for the industry. The IT sector on average had double-digit growth numbers, with good results, even the second wave of the COVID-19 in India couldn’t deter the big guns of the IT industry from a good quarterly result.
What Lies Ahead
There are many things that hint at good growth for the IT sector this year. One of them is outsourcing. The cost of labor in India is way lower than in the UK, US, or Europe. Many companies have started outsourcing projects to Indian companies with a good amount of foreign remittances being a part of the revenue stream. Another reason is the return to normalcy in many countries that have high vaccination rates. In countries like the US or UK, employees are being called back to the office, mask mandates are being eased, and life is getting back to normal. Even though the condition in India might not be apt for a complete unlock till the end of the year, and countries opening up could mean good business for Indian IT companies.