IT: Q2FY22 preview – Growth likely to be strong, margins to dip

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October 05, 2021 3:10 AM

4.1-6.9% q-o-q cc growth estimated, with Wipro and Infosys leading way; 50-bps margin fall expected; HCL and Infosys are top picks

Images From The Wipro Ltd. Headquarters Ahead Of Fourth-Quarter EarningsInfosys and Wipro could see sharp margin decline of 100-150bps q-o-q due to wage hikes.

We expect IT firms to report 4.1-6.9% q-o-q cc growth in Q2 driven by large deal ramp-ups. Aggregate margins are likely to contract by 50bps q-o-q, driven by wage hikes at Infosys, Wipro and HCL Tech. We expect Wipro to lead on growth due to contribution from Capco, Ampion and Metro and strong growth at Infosys with Daimler deal ramp-up. Infosys and Wipro could see sharp margin decline of 100-150bps q-o-q due to wage hikes. Infosys and HCL Tech remain our top ideas.

Strong revenue growth; margin pressures: We expect aggregate revenue growth for Top-5 IT firms to pick up to 5.1% q-o-qcc, driven by strong demand and deal ramp-ups. Aggregate margins, however, are likely to decline by 50bps q-o-q to 21.5%, as a result of wage hikes at Infosys, HCL Tech and Wipro, Capco integration at Wipro, currency headwinds and supply side pressures. Deal TCVs are expected to be robust.

TCS – Growth pick-up with modest margin growth: We expect revenue growth to pick up to 4.3% q-o-qcc, driven by deal ramp-ups and recovery in India/APAC. Margins are expected to expand modestly by 20bps to 25.7% due to operating leverage. Deal TCV is likely to be very strong. The focus will be on demand trajectory, hiring/attrition and margin outlook.

Infosys – Strong growth with sharp margin decline: We expect revenue growth of 6.5% q-o-qcc, driven by deal ramp-ups. We estimate a ~2% q-o-qcc contribution from Daimler deal, leading to industry-leading organic growth. Margins are expected to decline sharply by 150bps to 22.2% due to wage hikes and deal transition costs. Deal TCV is likely to be robust, and we expect Infosys to raise revenue growth guidance. The focus will remain on demand outlook and supply-side pressures.

HCL Tech – Strong growth with flattish margins: We estimate HCL Tech to witness a sharp pick-up in growth to 4.1% q-o-qcc from Q1’s low base, driven by deal ramp-ups and easing of supply side delivery challenges. Margin is expected to be flattish at 19.4% (-20bps q-o-q) with firm partly recouping 90bps Covid related margin impact in Q1, offset by partial wage hikes and continued investments. New deal bookings are expected to be strong. The focus will be on FY22 revenue/margin guidance, outlook for ERS/Products business and supply side pressures.

Wipro – Growth momentum with sharp margin contraction: We expect Wipro to deliver 6.9% q-o-qcc (vs 5-7% q-o-qcc guidance). This includes 4% contribution from Metro deal and integration of Capco and Ampion. Margins are likely to decline by 100bps to 16.2% as a result of Capco integration and impact of wage hikes. The focus will be on Q3FY22 guidance, deal wins, commentary on Capco, hiring/attrition and execution of new strategy.

TechM – Strong growth with modest margin expansion: We expect firm to deliver 4.3% q-o-qcc revenue growth, driven by strong deal wins and seasonality at Comviva. This includes a ~90bps inorganic contribution from Brainscale, Eventus and DigitalOnUS. Margins are expected to improve slightly by 20bps due to operating leverage. The focus will be on the outlook for communication vertical and 5G, deal momentum and hiring/attrition.

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