Expect revenue growth in Q1FY18 to be softer relative to typical strong seasonality. We expect Q1FY18 to be another quarter where demand trends will be on the softer side of seasonality with each company witnessing near-term challenges in different sectors and verticals. TCS is seeing slower than expected pick-up in the BFSI vertical, Wipro is going through challenges in the healthcare, communication and India & ME markets, HCL will likely suffer rampdowns in the India business along with the revenue impact of slower deal closures in IMS in Q4FY17, and Tech Mahindra will need to grapple with the ramp-downs associated with Comviva and LCC.
Retail vertical is seeing universal weakness except for HCL Tech. BFSI is a source of strength across companies with the issues at TCS relative to seasonality seemingly more timing specific. We expect the top 5 companies within our coverage universe to post CC growth of just around 1.2% q-o-q on an organic basis in Q1FY18 — which would be the weakest Q1 since Q1FY13.
Cross currency to the rescue: Though constant currency growth is expected to be modest, EUR, GBP and Rupee have all appreciated against the Dollar by >3% on an average in Q1FY18. As such we expect cross currency to be a tailwind of ~50 bps for Infosys and Wipro and ~80-100 bps for TCS, HCL Tech and Tech Mahindra. Accordingly, we expect the top 5 companies to deliver Dollar revenue growth of 2.3% q-o-q in Q1FY18 in aggregate. Importantly, cross currency enables Infosys and HCL Tech to raise their FY18 Dollar revenue growth guidance even if they keep their CC guidance unchanged.
Margin preservation difficult in FY18 despite supply side flexibility: Irrespective of how margins pan out in Q1FY18, FY18 is likely going to be the 4th consecutive year of margin decline for the industry. We expect Ebitda margins to decline to 23.2% in FY18 as against 24% in FY17 and a high of 27% in FY14. We expect companies to spread their wage cycles over longer periods and be more discriminating in carrying out the hikes.
Driving zero growth in Ebitda despite revenue growth holding up reasonably well: We expect the Top 5 companies within our coverage to post growth of 7.5% in USD revenues in FY18 as against 7.1% and 7.2% in FY16 and FY17, respectively. Growth in FY18 would be lower by ~1% but for the acquisitions like Appirio, HPS, Geometric, Butler and acquisition of some of IBM’s IP assets by HCL.
We expect the pecking order for organic growth to be TCS (8.1%) followed by HCL Tech and Infosys (~7% and 6.7% respectively) with Wipro bringing up the rear at 2.7%. We expect absolute Ebitda to be flattish on a y-o-y basis for the top 5 in aggregate on account of INR appreciation (translation impact) and margin dilution. We expect absolute Ebitda to decline for Infosys, Wipro and Tech Mahindra in FY18.