Infosys, HCL Technologies, TCS hot favourites on D-Street; IT firms in for robust earnings

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October 01, 2020 1:10 PM

The July-September quarterly earnings of the Information Technology (IT) companies could surprise the street with robust growth aided by negligible supply-side impact.

US Stocks, Wall Street, sectors, energy, travel, financials, U.S. presidential election, oil, dollarStocks around the world scaled a record high as expectations of more monetary stimulus also lifted demand for risky assets.

The July-September quarterly earnings of the Information Technology (IT) companies could surprise the street with robust growth aided by negligible supply-side impact. Market participants are expecting stable margin growth for IT majors that have a strong deal pipeline. In the pandemic struck world, analysts have been expecting IT companies to be better placed owing to negligible impact on business activities and accelerated IT spends by firms across the globe. IT companies like Accenture and the Noida-based HCL Technologies have already spilled the beans highlighting strong demand, which is trimming the duration of IT transformation across sectors.

Analysts expect revenue growth to be led by — reasonable demand trends across key large verticals, like financial services, telecom and even insurance. “Revenues on yoy comparison for Tier-1 IT will range from a decline of 4.1% to growth of 1.7%. HCLT will lead the way with strong c/c revenue growth of 3.7% qoq, followed by TCS at 2.9%,” Kotak Securities said in a report. Apart from the large IT players, Mphasis and Midtree are also expected to post strong on-quarter results. 

Despite the pandemic wreaking havoc, analysts at Axis Capital find favourable trends emerging for the domestic IT space. Fragmentation of large transformational deals into tactical mid-sized deals is seen as a positive. To add to that, ramping-up of large deals with no major onsite presence and the acceleration towards digital with constraints on budget is also working in favour of the IT sector. “We expect improving commentaries from our coverage universe compared to previous quarter as deal pipeline, deal win and deal ramp-up start witnessing signs of improvement after challenges faced during the first three months of lockdown,” the brokerage and research firm said. Axis Capital expects its coverage universe to post 1% to 8% on-quarter revenue growth in CC terms. 

Revenues of IT firms could also get a boost from the currency appreciation across major global currencies when compared to the US Dollar, which could imply a cross-currency tailwind of 50-200 bps for the July-September quarter. Analysts at Kotak Securities expect sequential revenue growth of 1.8-3.7% in c/c and cross-currency tailwinds of 70- 170 bps. “We have assumed USD-INR rate of Rs 74.4 (-2% QoQ) for Q2FY21 and quarter-end rate of Rs 73.8 (-2.3% QoQ), implying hedge gain and translation losses. We see strong revenue growth across the board in USD term in Q2,” said Axis Capital

Top picks

After the pandemic, it is expected that outsourcing business will witness a boost with spends  accelerating from 4-5% pre-Covid level numbers. “We expect select companies to grow in double digits. We believe that Infosys is the best way to play the transformation and acceleration theme. We like TCS but are constrained by punchy valuations,” said Kotak Securities. HCL Technologies is also favoured for its consistency in winning mega deals while Tech Mahindra is termed as an excellent play on margin normalization, 5G and improvement in revenue growth. Axis Capital prefers Infosys, TechM, Wipro, TCS, and HCL Tech in the large cap space while Mindtree, Mphasis, and L&T Infotech are the top midcap picks.

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