Mid-tier companies are expected to report 2-3% constant currency revenue growth sequentially despite seasonal weakness
The March 2018 quarter will be certainly better than the March 2017 quarter, suggest experts but future guidance and management commentary will play a crucial role in stock selection.
Depreciation of USD against other currencies will provide cross-currency tailwinds of 60-130 bps and 20-50 bps for margins to technology stocks, suggest experts.
Mid-tier companies will report 2-3 percent constant currency (CC) revenue growth sequentially despite seasonal weakness. Growth will be buoyed with share gains in existing large clients and benefits of large deals signed in the past 6-9 months.
“We expect stable margins on a sequential basis for our coverage midcap universe and increase on a year-on-year (YoY) comparison for MindTree and Mphasis. We like Mindtree and L&T Infotech’s positioning in digital services,” Kotak Institutional Equities said in a note.
“We expect companies to start off on a conservative note for FY2019E revenue growth guidance. Expect 6-8 percent constant currency revenue growth guidance from Infosys and 8-10 percent from HCL Tech with no change in operating margin guidance band. We maintain our constructive view on Infosys and Tech Mahindra,” it said.
Most analysts expect Infosys to guide on a conservative note at 6-8 percent revenue growth on a constant currency basis. Even as the macro environment is positive, translation of the same into pipeline and deals will materialise gradually.
“Infosys and HCL Tech may guide for 6.5-8.5% and 7.5-9.5% revenue growth (constant currency) for FY19, respectively, above the FY18 organic growth but in line with current estimates. Favorable currency can also aid sector earnings,” Credit Suisse said in a report.
Here is a list of top 10 stocks from different brokerage firms which are likely to be in focus in Q4:
Kotak expects c/c revenue growth of 0.5 percent and cross-currency tailwind of 100 bps in 4QFY18. Infosys’ guidance for FY2018 implied revenue range of 0.6 percent decline to 3.5 percent growth for 4QFY18.
The domestic brokerage firms expect flat EBIT margin as a benefit of INR depreciation will be offset by weak revenue growth. It expects Infosys to guide for constant-currency revenue growth of 6-8% and maintain EBIT margin guidance band of 23-25%.
Kotak Institutional Equities expect investors to focus on the strategy of the new CEO, especially on the following fronts—(1) focus on development/promotion of proprietary software versus adoption of third-party products/platforms, (2) M&A strategy, and (3) focus and strategy for revival of consulting practice.
Tata Consultancy Services (TCS):
Kotak Institutional Equities expects constant-currency (c/c) revenue growth of 1.3 percent and cross-currency tailwind of 130 bps. The growth will be aided by the ramp-up of some of the deals won in 2HFY18.
The domestic brokerage firm expects EBIT margin to recover 25 bps driven by operational efficiency and benefits of INR depreciation against non-USD currencies. The net profit growth is muted on YoY comparison due to completion of buyback that has impacted other income.
Kotak expects investor focus on (1) demand outlook, especially in BFS vertical (2) ramp-up timeframe of recently won large deals, (3) EBIT margin outlook in light of ramp-up of recently won large deals and (4) impact of US tax code.
Kotak Institutional Equities expects constant-currency revenue growth of 1.5 percent and cross-currency tailwind of 100 bps resulting in 2.5 percent growth in USD terms.
Previous quarter EBIT margin was impacted to the extent of 240 bps due to a client insolvency. Expect adjusted EBIT margin to increase largely due to the depreciation of INR against non-USD currencies.
It expects June quarter hiccups to show up again this year. Investor focus should now turn to (1) convergence of growth with industry, (2) state of demand from utilities, healthcare and communications vertical, (3) measures taken to defend share in core areas of competence, i.e. IMS, ERD and BPO, and (4) drivers of margin expansion.
HCL Technologies Ltd:
Kotak Institutional Equities expects 3 percent sequential growth in USD revenues; decomposition of revenue growth is as follows—(1) organic constant-currency revenue growth rate of 1%, (2) incremental contribution from IP deals of 0.7% or US$15 mn and (3) cross-currency tailwind of 1.3%.
EBIT margin will be largely stable. The benefit of INR depreciation against non-USD currencies will be offset by seasonally weak quarter for IP business. Expect the company to guide for 9.5-11.5% USD revenue growth. Constant currency revenue growth to be lower and includes inorganic component.
Tech Mahindra Ltd:
Kotak Institutional Equities (KIE) expects c/c revenue growth of 1% and cross-currency tailwind of 120 bps. The growth will be largely driven by the enterprise vertical. The telecom vertical will continue to be weak.
The EBIT margin will improve by 70 bps driven by Comviva and contribution from IP partnership. It forecasts forex gain of US$7 mn, down from US$16 mn in 3QFY18.
4QFY17 had one-off items to the extent of US$20 mn at the EBIT level resulting from the termination of unprofitable contracts of LCC.
Persistent Systems Ltd:
The 4Q is likely to be a soft quarter, reflecting greater-than-normal seasonal weakness in the IP revenue. Credit Suisse expects 5 percent QoQ decline in revenue in USD terms and 390 bp QoQ decline in EBIT margins.
Cyient may report 8.2 percent QoQ growth in USD terms (DLM should be up over 70 percent on a QoQ basis and services business should be up 2.4 percent or 1 percent in constant currency – this would include some contribution from B&F as well, said the Credit Suisse report. Margins may slightly contract due to a higher mix of DLM in revenue.
NIIT Tech may report 2.5% QoQ (cc, reported growth of 2.9%) revenue growth in 4Q FY18 (before forex hedging gains), even after accounting for US$1.5 mn of reduced revenue from Morris, and moderate traction in the GIS business said the Credit Suisse report. Margins may expand by 70 bps QoQ.
Credit Suisse has modelled 3 percent QoQ revenue growth (cc, 3.9% in USD terms) for 4Q FY18, despite the usual seasonality in the business, helped by the strong deal ramp-up. It expects a small margin expansion.