Outperformance is likely to continue

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New Delhi | Published: April 3, 2018 1:46:23 AM

Modest acceleration in FY19 and benign valuations are positives; cross currency to help reported revenues in Q4.

tata consultancy, tcs, hcltValuation for large caps in general remains benign, being in the range of 14.5-16x FY19e EPS, excluding TCS.

We expect FY19 to only see a modest acceleration in revenue growth over FY18 with the top-5 companies within our coverage likely to post USD revenue growth of 8% in FY19 as against an expected organic growth of ~6.5% in FY18. We expect external environment to have modest bearing on growth with improvements to be driven more on account of reskilling driven market share gains on digital and client spends moving back to the core where the market share of India heritage vendors is higher. Q4FY18 should see revenue growth in the range of 1.8-2.5% q-o-q with cross currency likely to be a tailwind of 100bps. Ebit margins should improve across the board with lower variable payouts, cross currency benefit and productivity likely to be the key levers.

We expect Infosys to guide FY19 revenues in the range of 5.5-7.5% in CC terms, only modestly higher than the revised guidance of 5.5-6.5% for FY18. Incremental client specific issues in the utilities and communications vertical will drag down growth for Wipro relative to prior expectations in FY19. Valuation for large caps in general remains benign, being in the range of 14.5-16x FY19e EPS, excluding TCS. We maintain BUY rating on TechM and Infosys.

Cross currency to help reported revenues in Q4FY18

Cross currency is likely to be a tailwind of 100bps q-o-q in Q4FY18 given 4.7%, 4.3% and 2.4% appreciation of the GBP, EUR and AUD against the USD. We expect growth in CC terms to be broadly similar across companies and in the range of
1-1.5% q-o-q. More than the quarterly numbers, investor focus will be on commentary on the following segments for various companies: (i) BFS for TCS and Infosys, (ii) IMS for HCLT, (iii) Core communications for TechM, and (iv) impact of client specific issues on Wipro.

FY19 commentary likely to be a modestly positive catalyst for TCS and HCLT and modestly negative for Wipro Even as BFS is expected to see acceleration for Infosys in FY19, we see it unlikely for Infosys to guide FY19 revenue growth better than our expected range of 5.5-7.5% in CC terms. Acceleration in BFS may be offset through some moderation of growth in Insurance, Telecom and E&U verticals. All these verticals will likely continue to lead growth for the company in FY19 but the magnitude of growth may be lower than the 18.7%, 19.6% and 21.4% that these verticals have reported in 9MFY18. Barring the BFS segment, revenue growth is likely to be broad based and in double digits for TCS in FY19. We expect HCLT to guide FY19 revenue growth in the range of 8 to10% in CC terms with organic CC growth to be about 6 to 8%. We expect Wipro to guide Q1FY19 revenues in the range of 0-2% q-o-q in CC terms with client specific issues in the utilities and communications vertical likely to be a gradual drag. Revenue visibility is best for TCS followed by TechM enabled by recent large deal wins and a strong backlog.

—ICICI Securities

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