01-01-1970 12:00 AM | Source: Emkay Global Financial Services Ltd
IT Sector Update - Key Q1FY22 trends: Strong revenue growth; supply-side challenges weighed on margins By Emkay Global
News By Tags | #2259 #409 #3062

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Key Q1FY22 trends: Strong revenue growth; supply-side challenges weighed on margins

* IT companies reported strong revenue growth in Q1FY22, led by cloud adoption, digital transformation, cyber security and analytics. Robust broad-based demand and strong deal intake/pipeline should help sustain revenue growth, in our view.

* Margins were under pressure in Q1 due to wage hikes, supply-side challenges and higher visa costs. EBITM declined by 80-320bps QoQ for Tier-I firms and by 20-290bps for TierII firms, barring PSYS, which reported a 100bps gain in EBITM.

* Tier-II companies outperformed Tier-I peers in sequential revenue growth but their margins faced high supply-side pressure compared to Tier-I peers. We expect supply-side pressure to persist for the next 2-4 quarters and ease out gradually with strong fresher hiring.

* We expect aggregate USD revenue/profit growth for our coverage companies to rise to ~14/15% during FY21-24E from ~6%/10% during FY18-21, which should support higher valuations. We upgraded PSYS to Buy. We prefer INFO, HCLT, TECHM, PSYS and BSOFT.

 

Q1FY22 played out broadly in line with expectations: The overall performance of IT companies under our coverage was largely in line with estimates in Q1FY22, with a 0.2%/0.6% variation in revenue/net profit. TCS and HCLT missed expectations, while WPRO, TECHM, and INFO delivered a better-than-expected performance. Among mid-cap firms, COFORGE, MHPL, MTCL and PSYS beat estimates.

 

Strong revenue performance; expect growth momentum to sustain: Revenue growth momentum improved for Tier-I and Tier-II companies in Q1FY22, driven by a consistent surge in demand for emerging technologies such as cloud, data analytics, digital transformation, cybersecurity and AI. Tier-1 firms posted 0.9%-12.2% QoQ growth, while Tier-II services companies reported 0.7%-15.6% QoQ growth. We expect the revenue momentum seen in Q1 to continue throughout FY22, led by secular broad-based demand trends and an anticipated recovery in the travel, tourism and hospitality verticals. INFO raised its revenue growth guidance for FY22 to 14-16% CC from earlier 12-14%, while HCLT retained its double-digit growth guidance for FY22. Wipro guided for 5-7% QoQ growth in Q2FY22 and remained confident of delivering double-digit organic revenue growth in FY22. The overall commentary suggests that FY22 is expected to be a solid year in terms of revenue growth. The shortage of skilled resources remains a key challenge in the short term.

 

Margins dip in Q1 due to wage hikes and visa costs: Tier-I IT companies posted an 80- 320bps sequential decline in adjusted EBITM due to wage hikes and visa costs. Among TierII firms, PSYS reported a 100bps sequential gain in EBITM, aided by revenue acceleration and lower D&A expenses. Other Tier-II services companies reported a 20-290bps fall in EBITM. We believe that margins are likely to remain under pressure in FY22 due to wage hikes, normalization of travel and other costs, increased hiring costs, and expenses related to retaining talent amid pent-up demand.

 

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