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  1. Expect divergent growth performance by top IT companies

Expect divergent growth performance by top IT companies

We expect divergent growth performance by top tier IT services cos in 1QFY19E with TCS leading at 3.8% QoQ constant ccy growth, Wipro & Tech Mahindra lagging at -1.0 to -1.2% decline and Infosys & HCL Tech in between.

By: | Published: July 12, 2018 3:08 AM
IT companies, TCS, Infosys, HCL Tech, EBIT margin, Tech Mahindra We expect TCS EBIT margin to improve 120bps YoY helped by rupee depreciation and strong revenue growth.

We expect divergent growth performance by top tier IT services cos in 1QFY19E with TCS leading at 3.8% QoQ constant ccy growth, Wipro & Tech Mahindra lagging at -1.0 to -1.2% decline and Infosys & HCL Tech in between. Cross currency impact should drag down reported QoQ dollar growth by another 90-150 bps. Seasonal weakness in margin due to wage hikes and visa related costs should be offset to some extent by 4% rupee depreciation QoQ. We expect divergent growth performance by top tier IT services cos in 1QFY19E with TCS leading at 3.8% QoQ constant currency growth and Wipro and Tech Mahindra lagging at -1.0 to -1.2%. Rupee has depreciated 4% both on QoQ and YoY basis and should support margins all across. Weakening of most other currencies vs dollar will mean 90-150bps headwind on QoQ dollar growth.

We expect TCS EBIT margin to improve 120bps YoY helped by rupee depreciation and strong revenue growth. Commentary on BFSI, particularly large US banks on which management outlook has been guarded so far, will be key. Infosys reports results on 13th July. We expect +2.5% QoQ constant ccy growth (+1.6% dollar growth) in 1QFY19E. Despite management cutting EBIT margin guidance for full year by 30 to 230bps relative to FY18, we expect EBIT margin to decline 30bps YoY (90bps QoQ) helped by rupee depreciation. We do not expect any change in FY19E revenue growth/EBIT margin guidance from 6-8% and 22-24% respectively.

We expect +3.0% QoQ constant ccy growth (+1.5% dollar growth) for HCL Tech helped by strong inorganic contribution of (C3i Solutions) 2.1%. The company also announced the acquisition of Actian and H&D International which are likely to be completed in 2Q.

We expect EBIT margin to be within the guided range at 19.8%. Commentary on infra services and changes in guidance (not our base case) will be key to look out for. Mahindra reports results on 31st July. 1Q tends to be seasonally weaker for Tech Mahindra due to Comviva; in addition continued pressure in communications vertical is likely to lead to -1.0% QoQ constant ccy growth.

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