IT Sector Update - IT Services sector is expected to report strong growth in Q1FY22 By Axis Securities
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IT AND TELECOM Q1FY22 RESULT PREVIEW - ROBUST DEMAND, SUPERIOR VISIBILITY
IT Services sector is expected to report strong growth in Q1FY22 primarily on account of the large deal wins as well as the ramp-up of deal wins of the previous quarter. IT spending from North America and Europe has gained momentum and demand for the digital transformation has increased exponentially. These improved macro-economic opportunities will enable the IT sector to showcase its business resilience even amidst the challenging economic environment.
We expect IT services to report revenue growth in the range of 3%-7% QoQ in US$ terms. In rupee terms, however, we expect QoQ revenue growth of 3% to 9%. Margins for the majority of companies are likely to be slightly impacted to the tune of 20bps – 260bps, largely due to wage hikes. ER&D Services providing companies (such as Cyient and LTTS) are likely to get hit harder owing to their discretionary nature of business.
Key Things to watch: Management commentary on visibility going ahead on various issues viz. 1) Ramp-up of new deal wins 2) Suspension of H1B visas in North America 3) Rising subcontractor cost, and 4) Pricing pressure on realization.
Sector and companies’ Expectations in Q1FY22:
We expect Large Cap IT companies to report strong recovery with 3%-9% revenue growth on a QoQ basis. The Mid Cap IT companies are likely to deliver a mixed bag performance depending on the nature of the business. We expect Infosys and HCL tech to revise their revenue guidance upwards. TCS: We expect TCS to report revenue growth of 4% QoQ, while operating margins are likely to decline by 107 bps. Key things to watch out for are a) Deal TCV/pipeline, b) Pricing scenario and c) Outlook on growth/margins/DSO days.
Infosys: We expect revenue to grow by 5.3% and margins to contact by 65 bps QoQ due to wage hikes. We expect Infosys management to revise the revenue growth guidance for full-year FY22E. Watch out for a) Deal TCVs and pipeline, b) Pricing scenario, c) Attrition, and d) Outlook on growth/margins/DSO day.
HCL Tech: We are expecting HCL Tech to report revenue growth of 3.6% QoQ in rupee terms. We are expecting operating margins to improve by 13 bps. Key things to watch out for are a) Deal TCV/ deal pipeline, b) Pricing scenario, and c) Outlook on growth/operating margins and P&P business.
Wipro Ltd: We expect Wipro to report revenue growth of 9.5% QoQ in rupee terms and operating margins to decline by 79 bps. Key things to watch out for are a) Deal TCV/pipeline, b) Pricing scenario, and c) Outlook on new deals.
Tech Mahindra: We expect revenue growth of 3.5% on a QoQ while margins are expected to stable during the quarter. Watch out for deal TCVs and pipeline from communication vertical, pricing scenario, attrition, and outlook on growth/margins/DSO day, commentary on 5G rollout.
L&T Infotech: We expect LTI to report strong revenue growth of 4.7% on a QoQ basis and in rupee terms. Operating margins are expected to decline by 387bps. And the key things to watch out for are a vertical commentary on E&U and Manufacturing verticals.
LTTS: We expect LTTS to report revenue de-growth of 1.7% QoQ mainly led by the delayed ramp-up of large deals. However, we expect operating margins to improve on account of lower on-site expenses and cost control initiatives undertaken by the company. Key things to watch are verticals commentary and allied business.
Coforge: We expect Coforge to report robust revenue growth of 7.9% QoQ primarily owing to a rampup of large deals. But operating margins are likely to decline marginally by 79 bps because of wage hikes. Key things to watch out for are verticals commentary on Transportation and Insurance.
Mindtree: Mindtree is likely to report robust revenue growth of 6.6% QoQ mainly because of ramp-up on large deals. Operating margins, however, are likely to decline due to higher onsite expenses and wage hikes. Key things to watch are verticals commentary on Hi-tech and Media.
Persistent Systems: We expect Persistent Systems to report robust revenue growth of 8.0% QoQ mainly because of ramp-up on large deals. However, we foresee operating margins declining by 175 bps due to rising onsite expenses offset. But these will also be offset to some extent due to cost control initiatives undertaken by the company. Key things to watch are verticals commentary and allied business.
Cyient: We expect revenues to stabilize post-resolution of some client-specific issues and expect the company to report revenue de-growth of 0.5% QoQ. Margins are expected to see a strong recovery at 10.1%. Key things to watch out for are a commentary on verticals such as Aerospace, Defense, and DLM business.
Affle Ltd: We estimate Affle to report robust revenue growth of 6.6% on a QoQ basis in rupee terms. Operating margins are also likely to improve by 120bps. Key things to watch out for are a) Mobile ad spends from clients across geographies.
Zensar Technologies: We are expecting Zensar to report a revenue decline of 2.5% QoQ in rupee terms due to certain client-specific issues in the Hi-tech vertical which will be partly offset by the BFSI vertical. We also expect operating margins to decline by 28 bps QoQ. Watch out for a) Deal TCVs and pipeline, b) Pricing scenario, c) Attrition and d) Outlook on growth/margins/DSO day.
Bharti Airtel: We expect Bharti Airtel to post a healthy recovery in terms of curtailing losses and reporting a profit. Revenues are likely to grow by 2.4% QoQ, led by higher wireless revenues in India as well as in Africa. Operating margins are likely to witness marginal expansion due to lower commission costs and S&M expenses.
Security Intelligence Systems (SIS): We expect SIS to report revenue growth of 4.7% QoQ mainly because of pick-up in Security Guard vertical. We also expect operating margins to improve, thanks to of lower onsite expenses and cost control initiatives. Key things to watch are security business in India and abroad.
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