Remain pinned on H2 recovery
* The Mar’20 quarter continued the trend of moderation in YoY revenue growth in the sector that has been in play through FY20 in general. 3% YoY revenue growth for TCS was the lowest since the GFC levels. Order bookings were strong, aided by strength in the 1st half of the quarter, but may weaken as weak macro slowed down the decision making and curtailed discretionary spending.
* Companies abstained from providing guidance along expected lines. Most companies expect the June’20 quarter to reflect the severe impact of Covid-19 and expect recovery from the Sep’20 quarter onward. US-listed peers expect sharper hits in the June’20 quarter in comparison to India-listed peers.
* Companies took swift cost-saving actions - freezing lateral hiring, deferring annual hikes/ promotions - as they prepare to address challenges arising from revenue pressure/lower utilization and likely price cuts (as of now in most troubled verticals like Travel/Hospitality and Retail).
* The June’20 quarter will be a litmus test and we expect much sharper pressure for Tier II techs. HCL Tech and TechM remain our Buy-rated stocks among Tier I techs. PSYS (Hold) offers a margin of safety in valuations and appears interesting, given improving services profile, though near-term financials remain at risk (similar to peers).
Growth continues to moderate as order booking holds
Tier I Indian techs missed modest revenue growth expectations for the quarter (sole exception of HCL Tech). In contrast, most Tier II players reported broadly in-line revenue performance for the quarter albeit we fear that near-term revenue pressure could amplify for them in June’20 and Sep’20 quarters. The weak revenue performance in the Mar’20 quarter continued the trend of moderation in growth that has been at play over the last several quarters (‘TWITCH’ group saw growth moderate in each quarter of FY20). Order booking was solid in the quarter albeit may see weakness ahead as clients reprioritize their spending with possible cuts on ‘long-range ROI projects’. We note that US-listed peers have suggested sharper declines in the June’20 quarter as compared to mid-single digit declines suggested by Indian peers.
We note that in the recent past, global techs have predicted better near-term performance (e.g. pick-up in demand in early CY17 and pick up or moderation in demand in CY19).
See more pressure for Tier II techs; June’20 quarter to be the litmus test
We continue to find more comfort in Tier I techs over Tier II, with recent up moves in case of LTI, NITEC and MTCL, making valuations all the more punchy notwithstanding their Mar’20 quarter performance. TechM and HCL Tech are our Buy-rated stocks in the Tier I coverage universe. Our order of preference within Tier I techs is HCL Tech > Tech M (both rated Buy) > Infosys > Wipro (both rated Hold) > TCS (Sell). Persistent (Hold) offers relative margin of safety and is interesting given the improving performance of the Services business even though near-term prospects remain clouded (akin to industry peers).
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