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Published on 10/02/2020 2:05:03 PM | Source: Emkay Global Financial Services Ltd

IT Sector - Q3 Review: Growth moderation continues; fresher hiring in focus By Emkay Global

Posted in Broking Firm Views - Sector Report| #IT Sector #Emkay Global Financial Services Ltd. #Sector Report #

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Q3 Review: Growth moderation continues; fresher hiring in focus

* Tier-I techs continued to see a moderation in revenue growth in Dec’19 quarter. The sole exception was TechM which benefitted from a strong uplift in the Communications vertical (double-digit growth yoy for the first time since Dec’15 quarter).

* EBIT margins were broadly in line across Tier-I companies. TechM was the only exception as it surprised negatively on the margins front (fell 60bps qoq), affected adversely by transition costs related to large deals. It is expected to undershoot its FY20 margin outlook.

* Order intake was weak, although companies remain confident about a pick-up in bookings in Mar’20 quarter, aided by pipeline. Companies continue to indicate increased targets of fresher hiring for FY21, providing further evidence around our sector thesis.

* We continue to expect a further moderation in growth for the IT Services sector as a whole. Our order of preference in Tier-I techs - HCL Tech (Buy)> Infosys> TechM (both Hold)> TCS (Sell)> Wipro (Sell).

 

Revenue growth moderation stays; increased fresher hiring in CY20/FY21 Tier-I Indian IT companies continued to see a moderation in revenue growth in CC terms yoy at a composite level. Revenue growth for Tier-Is moderated to 8.5% yoy in Dec’19 quarter (vs. 10.5% yoy CC growth seen in Dec’18 quarter and 10.2% yoy CC in Sep’19 quarter). This marks the fourth successive quarter of growth moderation. The yoy growth rates have moderated across each of the Tier-I techs individually as well over the last 12 months, with TechM being the only exception, where yoy growth rates have improved, helped by a strong pick up in the Communications vertical (yoy growth in double digits for the first time since Dec’15 quarter). Companies also continue to indicate a greater focus on fresher hiring in CY20/FY21, building on the pick- up seen here in CY19/FY20. We believe that this trend is driven by the need to focus on broadening of employee pyramid as companies see increased offshore shift in delivery. TCS and CTSH plan to step up fresher salary by ~30%, and HCL Tech to nearly double its fresher intake in FY21. In addition, the fresher level wages are going to see a steep jump after several years.

 

HCL Tech - the only Buy in Tier-I techs for Emkay We continue to see a moderation in revenue growth for the IT Services sector and believe that the ongoing shift toward higher offshore delivery will favor Tier-I techs over Tier-II techs on a relative basis. HCL Tech is the only Buy for Emkay with our order of preference within Tier-I techs as follows: HCL Tech( Buy)> Infosys>TechM (both Hold)> TCS(Sell)> Wipro( Sell).

 

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