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Q4FY21 preview: Revenue growth to remain strong

* We expect Tier-I techs to report qoq growth of 2.2-3.9% in Q4FY21 and 2.5-4.5% for TierII techs in CC terms, maintaining strong revenue growth momentum from Q3FY21. Cloud, digital transformation, automation, AI and cybersecurity continue to see healthy demand.

* Barring Coforge and Firstsource, all other companies are expected to report EBITM decline on a sequential basis due to salary hikes, promotions, bonuses and stronger rupee, partly negated by offshoring, revenue momentum and continued WFH savings.

* Deal wins remain healthy across the companies. We expect Infosys and HCLT to guide for 12-15% and 11-13% YoY CC revenue growth and 22-24% and 20-21% EBITM for FY22, respectively. Wipro is expected to give 1-3% revenue growth guidance for Q1FY22.

* We tweaked our earnings estimates after factoring in revised currency assumptions. We prefer Tier-I stocks over Tier-II stocks on a relative basis. In Tier-I stocks, our pecking order is Infosys>HCLT>TECHM (all rated Buy)>TCS>WPRO (both Hold). In Tier-II stocks, we prefer PSYS and FSOL (all rated Buy).

Revenue growth acceleration to continue in Mar’21 quarter: We expect companies in our coverage universe to further accelerate YoY revenue growth momentum on broad-based demand, strong deal wins, continued traction in digital and cloud, ramp-up of large deals and demand recovery in highly impacted verticals (like travel, hospitality, etc.). Revenues of the Tier-I IT companies are likely to grow by 2.2-3.9% qoq in CC terms. Cross currency movement is likely to aid reported USD revenue by 80-110bps in Q4 for Tier-II companies. We expect Infosys and HCL Tech to provide double-digit revenue growth guidance of 12-15% and 11- 13% YoY in CC terms, respectively. Wipro is likely to reap the benefits of the simplified operating model, strengthening country/geographical leadership and Metro deal ramp-ups, and is expected to guide for 1-3% revenue growth for Q1FY22. Tier-II companies are likely to report slightly better sequential growth numbers of 2.5-4.5% qoq in CC terms on the back of healthy deal wins and pipeline, client mining, and consistent execution

Margins likely to expand yoy but decline qoq due to wage hike: Margins are likely to take a hit sequentially on account of salary hikes, promotions, bonuses and strong rupee. EBITM may expand on a YoY basis for most of the companies, driven by low travel costs, tight cost control and operating efficiencies. We expect Infosys and HCL Tech to defend their FY21 margins and expect them to guide for FY22 EBITM in the range of 22-24% and 20-21%, respectively.

Key monitorables: 1) FY22 revenue growth and margin guidance from Infosys and HCLT; 2) Digital business outlook; 3) Management commentary on: (i) demand environment in BFSI, Retail, Manufacturing, and Communications, (ii) pricing environment, (iii) update on recent deals/acquisitions, (iv) implication of US government’s plan to increase corporate tax rates, and (v) financial impact from implementation of the Code on Social Security, 2020.

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