Will IT sector have a smooth March quarter? Here are analysts’ views on it
A collation of brokerages’ take on the earnings performance of major IT companies and their outlook on the stocks going forward.
As the earnings season kicked off with Infosys reporting subdued numbers for Q4 on Thursday, analysts also remain wary of the expected results. They see some headwinds for the sector on the back of a muted activity as well as currency impact.
“We can see some earnings visibility in case of pharma, while for IT, the growth visibility is lower,” Pramod Gubbi, Head, Equities, Ambit Capital, had told CNBC-TV18 in an interview. He prefers pharma over IT space as growth uncertainty and currency movement are a concern for IT.
Moneycontrol takes a look at what are analysts’ views on the companies in this sector.
The brokerage remains positive on
- Infosys (due to improving execution across the board, excluding BPO).
- Tech Mahindra (benign valuation despite peer matching earnings growth)
- HCL Tech (higher defensibility of estimates given highest exposure to macro agnostic IMS). It believes that the company may post fastest growth of 5.6 percent quarter on quarter
Among midcaps, here’s what it likes.
- Mindtree (worst to be behind in growth and margins in Q4FY17)
- L&T Infotech (best broad based digital story amongst peers of a similar size)
- Persistent Systems (consistent execution on digital platforms; margin defensibility through IBM IoT/CLM).
The brokerage house feels that the bullish thesis on Indian IT services is hinged on these factors
1) Likelihood of an improving demand backdrop in the BFSI vertical through the course of FY18
2) Downstream digital integration work where the market share of India heritage vendors is higher is finally coming through in a meaningful manner
Watch out for…
1) Revenue growth guidance for Q1FY18 for Wipro as it expects 0 percent to 2 percent QoQ growth guidance in CONSTANT CURRENCY terms
2) FY18 revenue and margin guidance for HCL Tech and it expects revenue growth guidance of 12-14 percent for USD revenues (7 percent-9 percent on an organic basis) and 18.5 percent-19.5 percent for EBIT margin (vs. 19.5 percent-20.5 percent range given for FY17)
3) Magnitude and duration of the revenue impact from LCC rationalisation and network services deal ramp-down for Tech Mahindra.
4) Whether TCS will be able to defend its current EBIT margin target band of 26 percent-28 percent despite the recent appreciation in the rupee.
IDBI Capital maintained a cautious view on the sector and recommended remaining stock-specific. It maintained that HCL Technologies and Infosys are its top picks.
For Q4 of FY17, it is forecasting constant currency organic growth to remain soft as is the case generally in Q4.
1) Outlook on FY18; Expect Wipro to guide for IT services revenue growth of 0-2 percent QoQ (in CONSTANT CURRENCY) for Q1FY18;
2) Strategies to mitigate risks of adverse visa policy in the US
3) Large deal wins and growth in large clients, client/vertical specific issues
4) Commentary on deal-pipeline and win-rates
5) Outlook on verticals like BFSI, Energy, Telecom and Retail
6) Outlook on EBIT margin given the recent appreciation in the rupee
7) Growth in digital services, deal pipeline – scope of work and deal size/tenure
CLSA believes that the March quarter may feature some of the seasonal softness, but supported by 50-70 bps in forex on revenues that result in a stronger exit to FY18.
“We expect constant currency QoQ growth on average of 1.4 percent led by HCL (3.6 percent), followed by TCS (1.3 percent) and lagged by Wipro/Infosys (0.8/0.7 percent),” the research firm said in its report.
HCL Technologies and Tata Consultancy Services are its key buy calls.Expectations
- TCS: The research firm foresees TCS to report 1.8 percent QoQ USD revenue growth (1.3 percent constant currency) supported by normalised BFSI and Retail, with EBIT margin rising 12 bps QoQ.
2. Wipro: Wipro could report +1.5 percent QoQ USD revenue growth (0.8 percent constant currency) supported by M&A, with EBIT margin declining 61 bps QoQ.
3. HCL Tech: The IT major could report 4.1 percent QoQ USD revenue growth (3.6 percent constant currency) boosted by Geometric/IBM/Butler, with EBIT margin down 57 bps QoQ from M&A dilution.
4. Tech Mahindra: Its QoQ USD revenue growth should be 1.5 percent QoQ (0.9 percent constant currency) crimped by telecom weakness, with EBIT margin declining 25bps.Edelweiss
The brokerage house estimates top five players to clock 1.4-5 percent QoQ constant currency revenue growth in the March quarter. It has maintained its buy on HCL Technologies, Tech Mahindra and Wipro, while it has a hold call on TCS.
HCL Technologies is expected to lead the pack with 4.7 percent revenue growth, while TCS, Wipro and Tech Mahindra are likely to grow 1.2 percent, 1.5 percent and 1.7 percent, respectively.
Watch out for…
1) Revenue growth guidance for HCL Tech in FY18
2) Management commentaries on clients’ budgets
3) Commentaries on implications of changes in visa regime
4) Demand in healthcare sector post uncertainty in Obamacare
5) Pace of commoditisation of legacy businesses and its impact on demand outlook.
KR Choksey Institutional
The research firm sees a relatively stable quarter for IT services and the results to be largely in line with estimates. A depreciation of US dollar against British Pound and Euro and appreciation against Australian dollar will result in positive cross-currency impact in the range of 10-40 bps in Q4 of FY17.
However, it also expects the sector to continue facing pricing pressure in traditional services and transition towards digital, internet of things, automation and AI (artificial intelligence) to continue over the next few quarters.
It prefers midcaps like Persistent Systems and Zensar Tech and HCL Tech and TCS in the large cap space as they are highly capable on delivering performance in the digital space.
What is in store in March quarter?
Analysts at the firm see USD revenue growth to be in the range of 1.1 percent - 4.5 percent with benefits from cross-currency tailwinds in the range of 10-40 bps.
Key performance indicators
1. Tech Mahindra: Performance of Network Services, LCC and Comviva business
2. Consummation of various acquisitions by Wipro and HCL Tech.
3. Commentary on launch of Concept and Sentinent
4. Performance of digital and alliance segments under Persistent Systems.
Going forwardOn a longer time frame, it sees consolidation, especially in midcaps as vendor consolidation and pricing pressure increase competition and impact profitability over the next 2-3 fiscal years.