2QFY19: Hits, Misses and Key Trends
* In the quarter gone by, organic constant currency revenue growth accelerated for the fourth consecutive quarter, on expected lines. While TCS drove the growth, material contributions also came in from INFO and WPRO.
* Against expectations of a strong 2QFY19, backed by the combination of seasonality and cyclical impetus, there were instances of revenue miss across a few companies outside the large cap IT (TECM, MTCL, HEXW, PSYS) stocks; while only NITEC surprised positively.
* Currency's support to margins was reflected in beat at WPRO, TECHM, KPIT, NITEC and PSYS, while only MPHL's margins missed estimates by more than 50bp.
* Uptick in retail across the larger companies, secular strength in E&U and Europe were key positive trends. On the flip side, growth rates in Telecom softened a bit (INFO and TECHM expect this to pick up based on order book visibility).
* Tier-I restored its margin delta during the quarter, which had hit its lowest level in eight years in 1QFY19.
* Given the order book across the board, we expect a partial offset to weak 3Q seasonality and continued acceleration in revenue growth on an aggregate level. On the other hand, we will keep a close eye on the margins given the appetite for Digital investments and sporadic comments of tight market for local labor in the US.
* We prefer INFO and TECHM in tier-I; and MTCL, ZENT, PSYS and KPIT in tier-II IT.
Across-the-board acceleration on expected lines
* For the top-5 IT services companies (TCS, CTSH, INFO, WPRO and HCLT), organic constant currency revenue growth continued its upward march for the fourth consecutive quarter, up to 8.3% YoY, 310bp higher than 5.2% in 2QFY18.
* As we had highlighted in the previous notes, TCS has been a key contributor towards this uptick, where growth has improved from 6.1% in 2QFY18 to 11.5% YoY CC in 2QFY19.
* Excluding TCS too, growth has inched up 230bp over the period, from 4.4% to 6.7%.
* The magnitude of acceleration at TCS is matched by WPRO (470bp), which grew 5% YoY CC followed by INFO (~350bp) to 8.1% YoY CC. Organic growth at CTSH has remained in a range and that at HCLT was 4.8% YoY CC.
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