Infosys, Wipro, TCS, other tech majors’ Q3 results: Muted revenue growth expected

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New Delhi | Updated: January 9, 2017 2:03:39 PM

DECEMBER 2016 quarter revenue growth will be muted due to twin combination of usual end-of-the-year furloughs and continuing weak spending environment.

Tech Mahindra and HCLT will report strong quarter, while the rest will have a weak print.Tech Mahindra and HCLT will report strong quarter, while the rest will have a weak print.

DECEMBER 2016 quarter revenue growth will be muted due to twin combination of usual end-of-the-year furloughs and continuing weak spending environment. Tech Mahindra and HCLT will report strong quarter, while the rest will have a weak print. The set-up for 2017 is promising with early indications of stronger financial services spending and initial signs of integrated digital contracts but is counterbalanced by possible delays in budgeting in select verticals. Likely changes to visa rules will be the key element to focus on in FY2018.

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Dec 2017 quarter—weak on revenue growth

We expect weak revenue growth for Tier 1 players due to – (i) usual end-of-the-year furloughs and (ii) multiple factors that have dragged growth in H1FY17 will continue to persist, especially weak financial services spending and captive shift and insourcing. In addition, contract specific factors will also have a bearing. We expect Infosys to report 0.3% c/c revenue decline and TCS to report 1.3% c/c revenue growth. Acquisitions/inorganic activity will aid numbers for HCLT, Wipro and Tech Mahindra. On reported c/c basis, we expect Wipro, HCLT and Tech Mahindra to report growth of 1.2%, 2.9% and 3.8% respectively, while on organic c/c basis our growth forecast stands at 0.4%, 1.7% and 3.2%. On y-o-y comparison, organic revenue growth across companies has drifted down to single digits, but will steady out or improve moving into FY2018.

Crosses impact offsets rupee depreciation. Expect moderate margin decline

Rupee depreciated by modest 0.8%. However, the benefit of Rupee depreciation will be offset by its appreciation against GBP, EUR and Yen. Cross-currency headwind for the quarter varies from 100 bps (Infosys) to 150 bps (TCS). This, combined with furloughs, will have moderate adverse impact on margins; expect stable to modest decline in Ebit margins on sequential basis. On y-o-y basis most companies will report decline in margins due to—(i) appreciation of Rupee and (ii) continued pricing pressure in core business. We believe companies that have invested in digital in early stages can protect profitability.

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CY2017— balanced set-up

CY2017 set-up is promising with—(i) initial indications of higher spending in financial services vertical, (ii) announcements of integrated digital deals, and (iii) no acceleration in intensity of captive shift. These factors indicate that CY2017 holds promise for Indian IT. However, these positives are partly negated by possible delays in budgeting in select verticals in US. Indian IT will likely grow 8-9% in FY2017e and could grow at same pace or accelerate in FY2018.

Key areas of focus: H-1B dependence, budgeting cycle and pricing pressure

The broad stance of Trump on immigration increases the risk of implementation of visa restrictions. Expect investor focus on exposure to H-1B visas and risk mitigation measures in case minimum H-1B wages were to be hiked. We also expect focus on – (i) budgeting cycle given that some verticals may delay in view of new President in US and (ii) magnitude of pricing pressure and offsets available.

Infosys remains our top pick

We back Infosys given it is gaining share in large deals and wallets of large clients, and is positioned well to capture discretionary spends. Near-term volatility and risks pertaining to H-1B rules aside, Infosys is making right investments in automation and digital for sustained profitable growth over the next few years. We also like Tech Mahindra due to inexpensive valuations with the stock trading at 12X FY2018e earnings. We like TCS’ impressive execution engine and strong margin defence; we find the stock trading at 16.6X FY2018e earnings fully valued leaving little elbow room to be constructive.

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