Published on 2/12/2020 10:15:40 AM | Source: ICICI Direct

IT Sector Update - Project ramp up, digital traction to drive revenue growth - ICICI Direct

Posted in Broking Firm Views - Sector Report| #IT Sector #Sector Report #ICICI Direct

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Project ramp up, digital traction to drive revenue growth

In the current quarter, IT companies are expected to witness a healthy improvement in revenues on a QoQ basis mainly led by ramp up of past deal wins, traction in digital technologies and easing of supply side pressure. The companies are seeing a demand tailwind in terms of cost takeout by clients (led by higher offshoring & automation), vendor consolidation opportunities and traction in cloud & customer experience. In terms of verticals, life-science & healthcare, telecom & media and financial services are witnessing healthy traction partly offset by pockets of weakness in travel & hospitality, oil & gas and manufacturing. Further, an improvement in utilisation (led by improving demand & easing of supply side pressure) is expected to positively impact revenues of IT companies. Also, cost rationalisation by IT companies, lower travel cost, cross currency benefits and utilisation are expected to drive margins in the quarter.

We expect Tier-1 IT companies to see revenue growth in the range of 1- 3.5% in constant currency terms. This, coupled with cross currency tailwind of ~100-140 bps will further positively impact dollar revenue growth. Among tier 1 HCL Tech, Infosys are expected to see dollar revenue growth of 4.8%, 4.7%, respectively. Tata Consultancy Services (TCS), Wipro are expected to witness dollar revenue growth of 3.8%, 2.4%, respectively. Among Tier 2, Coforge is expected to see a sharp rise in dollar revenues of 7.4% QoQ followed by Mindtree, which is expected to witness revenue growth of 4.0% QoQ. We prefer HCL Tech & Infosys in tier-1 and Coforge in midcap. In addition, healthy revenue & margin growth coupled with reasonable valuation prompt us to be positive on Tech Mahindra.


Operating leverage, cost rationalisation to drive margins

Margins of Tier 1 companies are expected to improve ~20-130 bps. Among tier 2 companies, Coforge and Tech M are expected to post margin improvement of ~150-160 bps. This is mainly due to lower travel cost and lower general administrative cost improvement in utilisation, cross currency tailwind partially offset by rupee appreciation.


In midcap, Coforge, Tech Mahindra to report healthy margins

Tech Mahindra is expected to post a 152 bps QoQ improvement in EBITDA margins, mainly led by lower sub-contracting cost, easing of supply side pressure and cost rationalisation. Coforge is expected to report a 161 bps QoQ improvement in margins led by absence of Esop charges (~113 bps) and higher utilisation. On a YoY basis, Mindtree, LTI are expected to report improvement of 523 bps, 238 bps, respectively, due to a low base.


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