After a strong second quarter, analysts believe the third quarter for the IT companies might be the best one in a decade on the back of a strong deal pipeline, order book and improved guidance. TCS' better than expected December quarter result further lifted analyst sentiment on the sector.

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The IT major reported a 7.2 percent sequential rise in consolidated net profit at Rs 8,701 crore in the third quarter of fiscal 2021 backed by strong demand-led revenue growth. Consolidated revenue during the quarter increased 4.7 percent QoQ to Rs 42,015 crore. It rose 5.4 percent on a year-on-year basis.

The company's constant currency revenue growth was at 4.1 percent QoQ and 0.4 percent YoY. The growth was ahead of analysts' expectations as the CNBC-TV18 poll had an estimated 2.8-2.9 percent growth.

In an earnings preview note, Edelweiss Securities said it expects Q3 earnings of IT majors to surprise Street with guidance upgrades and estimate revisions by Street alike. The brokerage expects constant currency revenue growth to be in the 1–5 percent sequential range for IT majors with a cross-currency benefit of 20–80 basis points.

However, it added that margins could be impacted a bit due to wage hikes

Overall, the IT sector has been one of the best performing sectors in 2020, rising 50 percent in comparison to a 13 percent rise in the benchmarks.

"IT sector has moved up the valuation curve, they are trading at the higher end of the curve but at the same time on a relative scale they still seem to be reasonable,” Vinit Sambre, head of equities at DSP Investment Managers told CNBC-TV18. He expects the sector to show strong earnings momentum over the next two quarters.

Meanwhile, Sudin Apte, CEO and research director, Offshore Insights Research believes that IT is likely to grow by 8-10 percent in the upcoming fiscal. “We do expect double-digit growth by some of the leaders and slightly sluggish growth for mid-tier and some of the struggling providers,” he added.

Further supporting the sector, brokerage house Credit Suisse, in a recent report, said that it believes COVID-19 has accelerated the adoption of digital technologies and, hence, the sector has entered a technology upcycle with digital becoming the mainstream. The current pandemic has helped the margins of the top 4 firms with the reduction in travel and other overhead costs, it added.

CLSA also noted that a strong deal pipeline across segments, stable IT spending among large US banking and financial services (BFS) firms and on track 5G rollouts by global telecom services providers will prove beneficial for the sector.

(Edited by : Jomy)

First Published:Jan 12, 2021 3:46 PM IST