1. Digital to be key driver for IT sector: Jefferies

Digital to be key driver for IT sector: Jefferies

Recent strength of the INR against USD and major currencies is a risk to forecasts. Our forecasts are based on INR/USD of 68, vs 65.5 currently.

By: | Published: March 21, 2017 4:48 AM

Recent strength of the INR against USD and major currencies is a risk to forecasts. Our forecasts are based on INR/USD of 68, vs 65.5 currently. Our sensitivity analysis of EPS to INR changes suggest a 2-3% impact on EPS for every 1% appreciation of INR across Top-5 and 7-11% impact at current levels of INR. Lower the margins higher the impact. Mitigants exist but hinge on execution even as currency risk is now incremental in light of potential visa reforms.

We believe that margin impact could range between 20-30bps for every 1% appreciation in the INR, all else being constant. Our analysis suggests a 6.6%-10.5% negative impact on our FY18E EPS across the Top-5 Indian IT companies, if INR/USD were to sustain at current levels.

Recent commentary from most companies especially TCS and Infosys’ consistency in pointing out strengths in the larger verticals has been constructive. Cognizant’s CY17 guidance of 8-10% y-o-y revenue growth underlines stable demand trends and alleviated concerns especially given growth expectations across the sector. Recent news on buybacks have been taken positively.

Digital will continue to be the key driver and differentiator, with Infosys (Buy) well positioned while Tech M (Buy) should continue to show improving revenue and margin trajectory. We like TCS (Buy), but the stock could take a breather after the recent run up post the buyback announcement.

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