Infosys & TCS remain our preferred picks as we expect better earnings & multiple defence given high quality franchise.
With Covid-19 situation escalating globally, we now expect much weaker FY21e revenue across IT services cos. This will also impact margins despite weaker rupee (vs. USD). We cut FY21e revenue growth by 550-750bps across our coverage universe leading to 7-17% EPS cut for FY21/22e. Infosys & TCS remain our preferred picks as we expect better earnings & multiple defence given high quality franchise. We upgrade Wipro to Hold given limited downside.
Demand & supply impact of Covid-19: Covid-19 will impact Indian IT cos in multiple ways: (i) Global economic slowdown particularly one which impacts US & Europe would impact growth from a demand perspective; (ii) travel curbs will lead to delays in terms of new deal signings/closures and execution of projects, impacting growth & margins; (iii) India wide lockdown will lead to closure of offices, which would impact productivity & execution, impacting growth & margins.
INR fall a mitigating factor: Depreciating INR against USD is a mitigating factor for Indian IT cos earnings though we note that cross ccy headwinds are likely to rise. INR has depreciated 6.6% YTD and 5.4% in March itself – every 1% INR depreciation vs. USD leads to 0.8% to 1% higher EPS for top 5 Indian IT cos.
Surplus cash on balance sheet a positive: Indian IT cos are well capitalised with all of them having surplus cash on balance sheet. In fact, possibility of buy-backs exist for TCS, Infosys & Wipro given the steep stock price corrections.
We expect sequential decline in Q1FY21e, muted Q2: Accenture’s recent guidance for 2H20 (March to August 2020) implies flat to 3.5% q-o-q decline in Q3 and stabilisation in Q420. For our coverage, we model a similar trajectory for 1HFY21e followed by slightly better than usual sequential growth in 2HFY21e given low base and pent-up demand/deferred projects.
Cutting EPS by 7-17%: We cut FY21e revenue estimates for our coverage universe by 5.5 to 7.5% and margin estimates by 100-200bps. We raise INR-USD estimate to 76/76 for FY21/22e vs. 72.5/73.5 earlier. We cut PTs across the board to reflect lower earnings & lower multiples given greater uncertainty.