Published on 9/07/2020 9:44:02 AM | Source: Emkay Global Financial Services Ltd.

IT Sector Update By Emkay Global

Posted in Broking Firm Views - Sector Report| #IT Sector #Emkay Global Financial Services Ltd. #Sector Report

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Order booking trends strong, aided by better digital mix

* We continue to see a limited read-through from Accenture’s Q3FY20 results as always.The company reported a 1.3% YoY local currency growth in Q3FY20(within the guided range of -2% to +2%),while narrowed its full-year outlook for FY20 now to 3.5-4.5% YoY local currency growth (vs.3-6% earlier).

* Growth was largely led by Healthand Public Services verticals(+12% YoY local currency, an area with limited exposure for Indian techs) as growth moderated across other business segments. The positive surprise was around order bookings (+6% YoY local currency) with the company expectingstrong traction here in Q4FY20

* Accenture’s higher exposure to Digital stands out, with 70% of revenues vs.35-40% for offshore Tier I techs. We see limited read-through for Indian techs even though Accenture is reacting positively to results/commentary in trade today.

* We continue to see downside risks to growth for Indian techs in the near term,with preference for Tier I techs over Tier II. Order of preference within Tier I techs is HCLT> TechM(both Buy)> INFO>Wipro(Both Hold) > TCS(Sell). Sellrating on NITEC, MTCL and LTI. Our relative preference stays with BSOFT(Buy) and PSYS(Buy).

Accenture reports within guided range; growth led by Public Services/Health: Accenture reported its Q3FY20(quarter ending in May 2020) results on June 25. The company reported revenues at US$11bn (+1.3% YoY local currency, -1% YoY in US$ terms, company guidancewas-2% to +2% YoY local currency growth). The company’s overall revenue growth has moderated sharply due to the macro-economic impact as compared to 8% YoY local currency growth reported in H1FY20.Consulting revenues sawa sharper hit, falling 2% YoY local currency in Q3 vs.8% YoY local currency growth inthe prior quarter.Outsourcing revenue growth moderated from 8% YoY local currency growth in the prior quarter to 5%.Among verticals, growth was led by Health and Public Services (12% YoY local currency growth).Growth moderated across all verticals including Communications and Financial Services(both the verticals were flat YoY in local currency).

Cutsits full-year revenue outlook; bookings/pipeline remain decent: After curtailing its full-year revenue growth outlook sharply in Mar’20 to 3-6% YoY localcurrency growth (from6-8%) and further moderated to the upper end of the guidance to 4.5%from 6%,while raising the lower end of the range to 3.5%.We note that Accenture’s revenue growth through the past several quarters has been closer to the top end of the guidance range.Itreported a 6% YoY local currency growth in Order bookings in the quarter to US$11bn and suggested that the pipeline remains strong and expects reasonable performance on order bookings in Q4FY20(quarter ending Aug’20). Further,the company highlighted that the demand in cloud migration and security (given significant remote working) was accelerating.

* Mixed read-through as always; order booking trends positive: We continue to see alimitedread-through for Indian techs in general from Accenture’s results. A further cut in Accenture’s business outlook to 3.5-4.5% YoY local currency now for FY20 (with -3% to +1% YoY local currency outlook for Q4FY20)is balanced by Accenture’s strong order bookings still holding fort (+6% YoY local currency) along with associated commentary on a likely strength even in Q4FY20. Further,it is worth highlighting that Accenture’s Digital mix is ~70% of the overall revenues as compared to the 35-40% range for Tier I offshore techs. We continue to see near-term risks to revenue growth prospects of Indian techs,with our preference for Tier I techs over Tier II techs in general. Order of preference within Tier I techs is HCLT> TechM(both rated Buy)> INFO>Wipro (both rated Hold)> TCS (Sell). We have a Sellratingon NITEC, MTCL and LTI. Our relative preference stays with BSOFT(Buy) and PSYS(Buy).


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