Indian IT to catch strong headwinds from cross-currency movements

“Aggregate revenue growth in US$ terms for our covered companies is expected to lag constant currency growth by 150bps - the biggest lag in four years - due to strong cross-currency headwinds,” the Jefferies report said.

Both brokerages said that revenue growth to remain healthy for the first quarter. 

“In the upcoming results season (starting on 8 July 2022), we expect revenue growth trends to remain strong for the sector. We estimate q-q constant currency (cc) organic revenue growth of 1.8-4.9% for large-caps, and 2.9-6.0% for mid-caps. We expect the highest organic revenue growth from TCS and Infosys (in large-caps) and Persistent (in mid-caps) among our covered names,” the Nomura report stated.

Jefferies expects an aggregate revenue growth for IT companies under their coverage to pick up to 3.3 percent QoQcc. “The acceleration in growth will be driven by Infosys and HCL Tech partly due to the low base of the previous quarter. We expect moderation in growth for LTI and TechM given that 1Q is usually a weak quarter for them. While Infosys will lead on revenue growth (+4.5% QoQcc) among the large sized IT firms, Mindtree (+5.3% QoQcc) will be the growth leader among mid-sized IT firms,” its report stated.

Both brokerages expect the companies’ margins to come under pressure from employee costs and cross-currency movements.

Nomura expects the EBIT margins to decline by about 20-200bps q-q for large-caps and a fall of the same range for midcaps. “Continued supply-side challenges around high attrition, higher-than-usual hikes for both onshore and offshore employees and some resumption of discretionary spends like travel would potentially weigh on margins in 1QFY23F, in our view. Cross-currency movements (significant weakening of European currencies against USD) would likely negate the positive impact from the fall of INR against USD,” said its report. Among the large caps, the least compression would be seen by Wipro at 30 bps and the highest by TechM at 190 bps; and among mid-caps, the least decline to be for MPhasis at 20 bps and the highest to be for LTI at 200 bps.

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Jefferies expects the aggregate margins to contract by 105bps QoQ “impacted by scheduled and out of turn wage hikes for employee retention, higher travel/Visa costs and cross currency headwinds”. They expect LTI, TechM and Coforge to see the sharpest decline and HCL Tech/Wipro and Infosys to be relatively better placed with 30-60bps QoQ margin decline.