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Awaiting more enduring commentary

Indian offshore techs will continue the revenue growth momentum in an otherwise seasonally weak Dec quarter. Tier I techs are expected to report a 3.8-5.2% QoQ c/c revenue growth with TCS at the lower end and TECHM at the upper end. Tier II techs are likely to outperform Tier I techs on sequential revenue growth yet again with a 5.5-10.3% QoQ c/c revenue growth. Reported USD revenue growth will look lower due to cross currency headwinds. Operating margins will decline on a YoY basis across the entire coverage universe with the exception of PSYS and Coforge amongst the Tier II techs. Companies are likely to continue the hiring momentum (with a greater share of freshers) though attrition will settle down only over the next 6 months. We expect the investor focus to be on on the margin performance and outlook ahead given that certain sections still remain worried about the supply side pressures. We keep faith with HCLT,INFO and TECHM amongst the Tier I techs. PSYS and MPHL are our BUY’s amongst the Tier II techs.

* Solid revenue performance despite the December seasonality: Despite the weak December seasonality, Indian techs are likely to see a strong revenue performance as clients continue their accelerated ‘Digital transformation’ journey. Tier I techs will see a 3.8-5.2% QoQ c/c revenue growth in 3QFY22. Tier II techs will outgrow Tier I techs yet again with a 5.5-10.3% QoQ c/c revenue growth. Cross currency headwinds will drag reported USD revenue growth by 30-90 bps across the IT Services coverage universe.

* EBIT margins may be down on a YoY basis across all Tier I techs; PSYS and Coforge to buck the trend amongst the Tier II techs: EBIT margins are likely to be down on a YoY basis across most of the IT Services coverage with the exception of PSYS and Coforge amongst the Tier II techs. We note that margin performance is likely to be steady on a sequential basis as growth leverage and some likely pricing improvement is able to offset the supply side pressures. The street will focus on the margin performance as well as the qualitative outlook on this front given that certain sections of the street remain concerned about increasing headwinds on this count.

* INFO will raise it’s revenue growth outlook yet again; will watch out for qualitative commentary on growth momentum sustaining through CY22/FY23: While Infosys is likely to raise it’s revenue growth outlook to 17.5-18.5% YoY c/c growth for FY22, we believe that the investors will be looking for qualitative commentary on sustenance of growth momentum into CY22/FY23. Recent commentary from Accenture as well as other global peers has been quite comforting on this front.

* Slight upgrades, roll over to Mar’23 and higher multiples for a few drive increase in TP’s : Our target prices across the IT Service coverage see changes driven by a mix of (1) slight increase in revenue/margin estimates, (2) roll over to Mar’23( V/s Dec’22 earlier) and(3) ascribing higher P/E multiples (most notably for TechM amongst the Tier I techs; higher multiples for PSYS and LTI amongst the Tier II techs). We continue to see the sector enjoying a repeat of the ‘2004-08’ phenomenon driven by both volume and pricing leverage. We reckon that the 3QFY22 margin performance will likely lay to rest supply side related concerns in certain sections. That said, the recent price action leaves limited stock upsides and thereby we do not rule out near term pause. HCLT, INFO and TECHM are top picks amongst Tier I techs; PSYS and MPHL amongst the Tier II techs

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