Dec'17 quarter preview: watch out for CY18 commentary
* We expect a modest 1-2% qoq revenue growth in constant currency (CC) terms for Tier I companies in a seasonally weak quarter, with no major cross-currency impact. HCL Tech will lead qoq revenue growth.
* Mid-Tier players are expected to report relatively better growth (1.5-3.7% qoq), but Hexaware would be affected by client ramp-downs. Persistent is expected to deliver strong qoq revenue growth, supported by seasonal strength in the IBM business.
* While we expect the operational efficiencies to limit the impact of seasonal weakness on operating margins, we highlight that all (11) IT Services companies under our coverage would report lower EBIT margins on yoy basis.
* Key monitorables across results/commentary - (1) Early indications on CY18 client spending trends (especially in Financial Services in North America), (2) Infosys new CEO’s first address and roadmap both, on strategy as well as outlook (expect Infosys to retain guidance) and (3) Commentary on Digital engagements. We prefer TCS and Mphasis in our coverage universe.
Usual seasonal weakness to impact Q3FY18 growth; watch out for management commentary on initial trends in CY18 client spending
We expect a modest revenue performance, led by the usual seasonal weakness, with negligible impact of cross-currency movements. We expect Tier I companies to report a 1- 2% qoq revenue growth in CC terms and a higher growth band of 1.5-3.7% qoq by Tier II names (barring Hexaware). We believe that investors need to focus on the following elements of the ensuing results – (1) Initial trends in CY18 budgeting cycle (and more so in Financial Services in North America given the mixed commentary from different players in past), and (2) Commentary on Digital engagements (commentary has now moved towards scale deals in the Digital space). Besides, we also look forward to Infosys’s new CEO Mr. Salil Parekh’s maiden commentary on strategic direction to navigate through the current challenging times for the IT Services industry. We expect Infosys to retain its revenue guidance of 5.5-6.5% CC growth for FY18.
Prefer TCS and Mphasis as we stay selective amid ongoing transition
We expect earnings to be volatile in the near term and may give mixed direction owing to: declining growth rates, select client ramp-downs, weakening operating leverage, automation, investments in ‘Glocal’ hiring, differential hedging strategy, acquisitions and sharp currency movements. Therefore, we recommend investors to employ a long-term qualitative approach for stock selection, as quantitative analysis would hamper the process to assess and differentiate companies. Kindly read our recent report titled ‘Changed Executive Officer (click link) for a detailed analysis on the same. We maintain TCS as our preferred pick among the Tier I names while Mphasis is our pick in the Mid-tier IT Services segment.
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