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Q2FY22 preview: Revenue growth momentum to sustain

* Amid strong secular demand and seasonal strength, we expect healthy growth momentum to continue in Q2, with USD revenue growth of 4.2-6.5% QoQ (4.7-7.1% CC) for Tier-1 companies. Tier-2 companies are expected to grow in the range of 1.0-9.2% QoQ.

* EBITM is likely to remain under pressure QoQ for INFY, WPRO, PSYS, MTCL and BSOFT due to the salary hike cycle, uptick in attrition, and higher subcontracting and recruitment costs. COFORGE, LTI, TCS, HCLT and MPHL are expected to report margin expansion on the back of normalization of wage hikes and revenue growth-led operating leverage.

* We expect Infosys to raise its FY22 revenue growth guidance to 15-17% CC YoY (current 14-16%). HCLT is likely to retain its double-digit revenue growth guidance for FY22. Wipro is expected to guide for 2-4% CC QoQ revenue growth for Q3FY22.

* We prefer Tier-I stocks over mid-caps. In Tier-I stocks, our pecking order is: INFO>HCLT>TECHM (all rated Buy)>TCS>WPRO (both Hold). We prefer BSOFT and PSYS (both rated Buy) among Tier-II stocks.

Revenue growth momentum to continue in Sep’21 quarter:

We expect healthy growth momentum to continue in Q2 on the back of a broad-based secular demand environment, healthy demand for cloud, data analytics, digital transformation and cybersecurity services. We expect USD revenue growth of 4.2-6.5% QoQ (4.7-7.1% CC) for Tier-1 companies. Midcap firms will continue to outperform, with growth in the range of 1.0-9.2% for our coverage universe. Revenue growth momentum should be sustained by broad-based demand, strong deal wins, continued traction in digital and cloud, and ramp-up of large deals.

We expect Infosys to raise its FY22 revenue growth guidance to 15-17% CC YoY (current 14-16%) while retaining its EBITM guidance of 22-24%. HCLT is likely to retain its double-digit CC revenue growth and 19-21% EBTIM guidance for FY22. Wipro is expected to guide for 2-4% revenue growth for Q3FY22. Tier-2 companies are likely to maintain growth outperformance over Tier1 companies on the back of healthy deal wins and pipeline, client mining, and consistent execution. The shortage of skilled resources remains a key challenge in the short term.

Margins a mixed bag in our coverage:

EBITM is likely to remain under pressure for some companies (INFY, WPRO, PSYS, MTCL and BSOFT) due to the salary hike cycle, higher subcontracting costs, uptick in attrition, and higher recruitment costs. For the remaining companies, EBITM is likely to be flat or expand, thanks to the normalization of wage hikes and revenue growth led operating leverage.

Key monitorables:

1) deals intake, 2) FY22 outlook, 3) digital business outlook, 4) attrition, and 5) management commentary on: a) steps taken to manage supply-side challenges and available levers to defend margins, b) demand environment in BFSI, Manufacturing, Retail, and Communications, c) pricing environment and d) deals pipeline, any change in deal tenure, ACV/TCV dynamics and deal closure momentum.

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