Computer Services & IT Consulting Q4 preview: Covid-19 effect on results to be limited

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April 13, 2020 12:15 AM

It will dominate discussions though; sharply lower and wider range guidance for FY21/Q1 is expected.

We expect sharply lower & wider range for FY21e/Q1 growth guidance.

Covid-19 is likely to dominate discussions in result season, though its impact on Q4 performance and bookings is likely to be limited in most cases. We expect a sharply lower & wider range for FY21e/Q1 growth guidance; cut in margin guidance is possible for Infosys. Impact on the execution of extended lockdown, demand across verticals, client-specific issues, margin guidance, pricing & DSOs will be key to look out for. Infosys & TCS remain our preferred picks.

Covid-19 to dominate discussions

Key aspects that are likely to interest investors are: (i) execution challenges, WFH situation & sustainability; (ii) demand scenario across verticals, revenue growth guidance especially implications for 1H; (iii) client specific issues; (iv) margin/pricing impact & mitigation levers, margin guidance; (v) DSOs.

TCS (TCS IN, Buy) — Bringing to close a tepid FY20: We estimate TCS to grow 0.5% q-o-q cc (-0.1% q-o-q $) in Q4FY20e as we build in 100bps impact on q-o-q growth due to last 2 weeks of March. This would mean 5% y-o-y cc growth in Q4 and sub-8% y-o-y cc growth in FY20e, a sharp fall vs. 11.4% in FY19. We expect margin to remain largely stable q-o-q at 24.9% as benefit of INR-USD depreciation, lower travel costs, greater cost controls is offset by lower utilisation, lower growth & cross ccy movements. Deal TCV should be supported by Walgreen & Phoenix deals.

Infosys (INFO IN, Buy) – the if & what of FY21e guidance: We expect Infosys’ revenue to grow at 0.5% q-o-q cc (0% q-o-q $) and Ebit margin to be largely stable. We do not expect Infosys to suspend its revenue growth guidance altogether but the range is likely to be wider than the usual 200bps as it was in FY10 & FY14. We expect margin guidance to be cut by 100bps to 20-22% given weaker revenue growth and more conservative ccy assumptions.

HCL Tech (HCLT IN, Hold) – organic FY21E revenue guidance key: HCL Tech has indicated it does not expect significant impact of Covid-19 on Q4 and bookings have also been largely on track. We expect 0.9% q-o-q cc revenue growth and slight margin decline to 19.8% vs. 20.2% in Q3. Post double digit growth in FY20e, organic revenue growth guidance for FY21e will be key to look out for along with margin guidance and impact on products.

Tech Mahindra (TECHM IN, Buy) – weak quarter despite large deal win, inorganic: We expect Tech Mahindra’s revenue to decline by 0.6% q-o-q cc, despite ramp-up of Prudential deal won last quarter and inorganic contribution from BORN due to weakness in China, Pininfarina & lower AT&T revenue; we expect Ebit margin to decline by 40bps q-o-q to 11.8%. Commentary on impact of Covid-19 on communication vertical incl. 5G and FY21e Ebit margin target will be key.

Wipro (WPRO IN, Hold) – growth underperformance to continue: We expect Wipro to report at the lower end of its 0-2% q-o-q cc growth guidance range along with stable margin q-o-q . On growth guidance for Q1, we expect the lower end to be -4% q-o-q and update on search for new CEO will be key to look out for.

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