MENU

Published on 8/04/2020 1:55:38 PM | Source: Motilal Oswal Financial Securities Ltd 

IT Sector - Expect COVID-19 uncertainty to overshadow 4Q results - Motilal Oswal

Posted in Broking Firm Views - Sector Report| #IT Sector #Motilal Oswal Financial Services Ltd

Follow us Now on Telegram ! Get daily 10 - 12 important updates on Business, Finance and Investment. Join our Telegram Channel  https://t.me/InvestmentGuruIndia 

Download Telegram App before Joining the Channel

Follow us Now on Telegram ! Get daily 10 - 12 important updates on Business, Finance and Investment. Join our Telegram Channel https://t.me/InvestmentGuruIndia 

Download Telegram App before Joining the Channel

Expect COVID-19 uncertainty to overshadow 4Q results

Low expectations due to partial disruption during the quarter

Growth/margins to be impacted across most companies

* We expect MOFSL coverage universe to post revenue (USD) / EBIT (INR) / PAT to grow 6%/4%/-2% YoY in 4Q.

* On a sequential basis, Tier I revenue should move in the range of (0.5)%-1.3% (CC) and (1.7)%-0.6% (USD) with HCLT/TechM leading/lagging the pack.

* Across Tier II, revenue should move in the range of (2.5)%-3% (CC) and (3.2)%- 2.5% (USD) with LTI/Cyient leading/lagging the group.

* While we expect EBIT margins of Tier I to contract to the tune of 20-40bp (QoQ), margins of our Tier II coverage should move in the range of (80)-420bp.

* Second half of 4QFY20 witnessed varying levels of COVID-19 disruption across most of the core markets of IT companies like the US, Europe and even India.

* Most of our coverage companies did a reasonable job in controlling the damage by resorting to options like ‘work from home’.

* However, it should be noted that not all service offerings are amenable to be delivered from home for a variety of reasons. In conjunction with lower productivity, both billing and utilizations in 4Q should witness an impact.

 

Expect guidance on FY21 growth/margins to be delayed

* Given the unprecedented level of uncertainty around the global macro and the multiple moving parts, visibility on near-term growth/profitability is challenged.

* Accordingly, we expect companies like Infosys/HCLT to delay their FY21 growth/margin guidance to the subsequent quarters.

* Even if they were to guide, these guidance bands will likely be wider than usual and subject to sharp revisions later on as clients relook at their IT budgets.

* In that context, deal signings during 4Q (especially in the second half) will likely be a key area of investor focus as it is the latest available proxy for demand.

*  In addition, qualitative cues around the adaptability of different companies to the new work paradigm will be the key thing to watch out for.

* This may include their ability for end-to-end digitization of key processes like deal signings, employee onboarding and deal ramp ups.

* Commentary around expected pressure on pricing, INR depreciation benefit and receivables will be another important area of investor focus.

 

Expect near-term uncertainty due to COVID-19; prefer INFO, HCLT and LTI

* Given the continuously evolving nature of COVID-19, demand, supply, pricing and receivable uncertainties should remain in the near term.

* Negative news flow around the sector may likely continue given the seriousness of COVID-19 situation in the core geographies like the US, UK and EU.

* In that backdrop, we expect the stocks to trade below their long-time cross cycle average P/E multiples until the time this uncertainty is behind.

* Despite the near-term uncertainty, we continue to prefer Infosys and HCLT among large caps, and LTI among Tier II. This is attributable to their historical track record in adapting to business challenges/technology change cycles.

* Besides, we find the P/E multiples of these stocks to be meaningfully lower than their historical averages, offering adequate margin of safety.

 

To Read Complete Report & Disclaimer Click Here

 

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

 

Above views are of the author and not of the website kindly read disclaimer