IGI Logo

Key Q3 trends: Revenue growth momentum strong; supply-side challenges persist

* Revenue growth momentum was strong in a seasonally soft quarter, driven by a broad-based secular demand environment. We believe that robust broad-based demand and a healthy deal intake/pipeline provide good near-term revenue visibility.

* Tier-1 companies’ margins were flat to lower sequentially and lower on a YoY basis due to supply-side challenges. Barring PSYS, Tier-II IT Services companies reported expansion in their EBITM sequentially amid tight labor markets.

* Tier-II companies outperformed Tier-I peers in sequential revenue growth and margin. Margin expansion was aided by revenue growth-led operating leverage, offshore shift, and productivity improvement, which offset cost inflation due to tight labor markets.

* We roll forward our target prices to Mar’24 and raise CoE assumptions, considering an uptick in interest rates. We upgrade WPRO to BUY. Our pecking order is INFO, WPRO, TECHM, HCLT and TCS among Tier-1 names, and PSYS, MPHL, ROUTE, BSOFT, ECLX and FSOL in mid-caps.

Revenues beat expectations: Revenue growth of IT companies under our coverage remained strong, with overall revenue performance beating our estimates by 1.7% due to a more than 3% beat by INFO and HCLT. Despite revenue outperformance, net profit was largely in line with estimates due to a margin miss by most of the companies. TCS, WPRO and TECHM missed profit expectations, while HCLT delivered in-line results and INFO delivered a better-than-expected performance. Among mid-cap companies, MTCL, COFORGE and PSYS exceeded estimates, while others reported broadly in-line results.

Strong revenue performance; growth momentum likely to stay intact: Revenue growth remained strong in a seasonally soft quarter on the back of a broad-based secular demand environment, healthy deal intake and strong demand for digital, cloud, data analytics, 5G, IoT, cybersecurity and AI. Tier-1 companies posted 3%-6.7% QoQ USD revenue growth, while Tier-II companies reported 4.3%-9.2% growth. We expect the revenue momentum to continue in Q4. INFO has raised its revenue growth guidance for FY22 to 19.5-20% CC from earlier 16.5-17.5%, while HCLT has retained its double-digit growth guidance for FY22. Wipro has guided for 2-4% QoQ growth in Q4FY22, translating to double-digit organic revenue growth in FY22. COFORGE has raised its FY22 organic revenue growth guidance to ~24% CC (earlier at least 22%). FSOL has lowered its FY22 organic revenue growth guidance to 10-10.5% from 13.9-14.8%. The overall commentary suggests that the robust demand environment is expected to continue in CY22. Higher attrition and shortage of skilled resources remain the key challenges in the short term.

Margins under pressure due to supply-side challenges: Tier-1 IT companies, except for HCLT, reported a sequential decline in margins. HCLT’s reported margin performance was resilient due to a sharp rebound in the Products business; however, Services business margin remained under pressure. Tier-II companies, except for PSYS, reported healthy sequential margin expansion despite supply-side challenges. We believe that margins are likely to remain stable in FY23 on a full-year basis, considering strong revenue growth-led operating leverage, flattening employee pyramid, higher offshoring and a better pricing environment that should negate wage inflation and return of travel and other discretionary costs.

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer