IT Sector Update - Topline continues to accelerate By ICICI Direct
Topline continues to accelerate…
Acceleration in digital technologies, improved demand post Covid-19, ramp up of previous deal wins and migration to cloud are driving revenues of IT companies. Hence, we expect IT companies to report healthy Q4FY21E revenues. We believe improved traction in BFSI, retail, manufacturing, hi tech and life-science will drive revenues in the quarter. This, coupled with cross currency tailwind, will further boost revenue growth in the quarter. Further, IT companies are also seeing a demand tailwind in terms of cost takeout by clients (led by higher offshoring & automation), vendor consolidation opportunities, lift & shift deals and traction in small & medium deals, which could further propel demand in coming quarters. In terms of margins, we expect wage hikes to impact Q4FY21E margins except for Tata Consultancy Services (TCS) & Tech Mahindra. TCS had taken a wage hike in October. Hence, we expect the company to register healthy margin expansion in the quarter.
We expect Tier-1 IT companies to see revenue growth in the range of ~3- 4.5% in constant currency terms. This, coupled with cross currency tailwind of ~80-90 bps will further positively impact dollar revenue growth (in the range of ~4-5%). Among tier 1, TCS & Infosys are expected to see dollar revenue growth of 5.0% & 5.3%, respectively. HCL Technologies (HCL Tech) & Wipro are expected to witness dollar revenue growth of 4.0% & 3.9%, respectively. Among tier 2, LTI & Mindtree are expected to see a sharp rise in dollar revenues of 5.0% QoQ followed by Coforge, which is expected to witness revenue growth of 3.6% QoQ. We prefer TCS in tier-1 and Tech Mahindra & Teamlease in midcaps.
Wage hikes, lower utilisation to impact margins
Infosys & Wipro are expected to register ~130-150 bps decline in EBIT margins due to wage hike, lower utilisation, higher travel & facility cost. HCL Technologies is expected to report 375 bps decline due to partial wage hike and one-time bonus of | 700 crore. However, TCS is expected to report 186 bps higher margins due to absence of wage hikes.
In midcap also margins to be impacted by wage hikes
In midcap companies, LTI & MindTree are expected to report 172 bps & 263 bps decline in margins led by wage hike, lower utilisation & reskilling, respectively. However, Tech Mahindra is expected to register 35 bps improvement in margins.
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