Robust topline growth despite second COVID wave, ICICI Securities

IT companies have not seen any impact of the second Covid wave on topline. Further, this being a seasonally strong quarter coupled with acceleration in digital technologies & improved deal pipeline are further expected to drive IT companies’ revenues. We expect BFSI, retail, manufacturing, hi tech and life-science to drive revenues in the quarter. In addition, we expect a discount reversal in companies having exposure to travel verticals. We expect a marginal positive impact from cross currency. Further, IT companies are also seeing a demand tailwind in terms of cost takeout by clients (led by higher offshoring & automation), vendor consolidation opportunities and traction in small & medium deals, which could further propel demand in coming quarters. In terms of margins, we expect wage hikes (in some cases first or second), higher attrition, visa cost and increase in travel cost to act as a margin headwind.

We expect Tier-1 IT companies to see revenue growth in the range of ~2- 4% QoQ (on organic basis) in constant currency terms. This, coupled with cross currency tailwind of ~10-20 bps will further positively impact dollar revenue growth. Among tier 1, TCS, Infosys & Wipro are expected to see dollar revenue growth of 4-4.2% QoQ, respectively. If we add inorganic revenues Wipro will grow at 10.1% QoQ. HCL Technologies is expected to witness dollar revenue growth of 2.2%. Among Tier 2, LTI & Mindtree are expected to see a sharp rise in dollar revenues of 4.0% and 6.8% QoQ, followed by Coforge that is expected to witness organic revenue growth of 3% QoQ (10% including acquisition). We prefer Infosys in tier-1 and Mindtree & Coforge in midcap.

Margins to remain muted due to salary hikes
TCS and Wipro’s margins are expected to be impacted by wage hikes. TCS will have a second wage hike for all employees while Wipro will have a wage hike for 20% of employees & dilution in margins due to Capco acquisition. For Infosys, we expect flat margins due to absence of wage hikes. Adjusting for HCL Tech’s one-time bonus in Q4FY21 (which impacted margins by ~370 bps), the company’s margins are expected to decline 50 bps QoQ due to investment in geo & sales expansion.

Midcaps also expected to witness margin dip
Tier-2 IT companies’ margins are expected to be impacted in the range of 40-300 bps mainly led by wage hikes. LTI is expected to be impacted the most due to reversal of provisions in SG&A and wage hike impact.

Upgrades in guidance & margin outlook key monitorable
In the current quarter, key thing to watch will be improvement in deal pipeline, upgrades in double digit guidance, hiring & attrition trends, margin outlook, and revival in developed markets post vaccination. Further, outsourcing trend in Europe, trends in digital technologies, vertical specific commentary, offshoring and long-term IT trends become important from an investor’s perspective.

Exhibit 2: Company Specific view
Company Remarks
TCS   Due to low base last year YoY comparison is not fruitful. On a QoQ basis there is no impact of Covid on the company’s topline. This coupled with seasonally strong quarter, digital traction and ramp up deals will driver Q1FY22E revenues. TCS is expected to register 4.0% QoQ growth in constant currency led by anticipated improvement in demand from BFSI, healthcare and retail, acceleration in digital technologies and ramp up of deals. Further, cross currency tailwind would lead to revenue growth of 4.2% QoQ in dollar terms. In rupee terms, revenue is expected to increase 5.3% QoQ (higher than dollar growth due to rupee depreciation). EBIT margins are expected to decline 102 bps QoQ to 25.8% mainly led by wage hike and increase in travel cost. PAT is expected to improve 2.9% QoQ mainly led by higher other income. Investor Interest : Outlook on sustainability of double digit revenues, trends in digital, margin outlook, talent management, offshoring trends, deal pipeline and other long term trends

Infosys Ramp up of deals and traction in cloud is expected to drive Infosys topline (up 4.0% QoQ in dollar terms). The company is also witnessing a healthy deal pipeline led by cost take out deals. We expect rupee revenues to increase 5.4% QoQ mainly led by rupee depreciation. Further, due to absence of wage hikes and healthy improvement in revenues we expect Infosys margins to remain flat QoQ. PAT is expected to increase 8.1% QoQ. Investor interest: Upward revision in FY22E revenue & margin guidance, vertical wise commentary, second wage hike impact, ramp up of Daimler deal, traction in digital technologies, and pricing environment

Wipro  Wipro is expected to report 10.1% QoQ growth in revenues mainly led by organic growth of 4% QoQ and rest due to acquisition of Capco. EBIT margins in global IT services are expected to decrease 142 bps QoQ mainly due to wage hike to 20% of employees and dilution in margins due to Capco acquisition. In rupee terms, overall revenues are expected to increase 9.9% QoQ. Overall EBIT margins are expected to decline 180 bps QoQ to 19.2%. Consequently PAT is expected to decline 4.0% QoQ. Investor interest: Deal wins, second wage hike, vertical commentary, commentary of client’s IT Budget and revenue guidance

HCL Tech  HCL Technologies is expected to report 2.0% QoQ revenue growth in CC terms mainly led by broad based growth across verticals, improvement in product revenues and easing of stress in ER & D segment. Further, tailwind from cross currency revenues is expected to boost dollar revenues (up 2.2% QoQ). Although optically it shows huge jump in EBIT margins, adjusting for HCL Tech’s one-time bonus in previous quarter (which impacted margins by ~370 bps), margins are expected to decline 50 bps QoQ due to investment in geo & sales expansion. Hence. PAT is not comparable QoQ. Investor interest: FY22E revenue & margin guidance, outlook on IMS revenues, product revenues, vertical wise commentary and acquisition & capital allocation strategy.

Tech Mahindra   Tech Mahindra is expected to witness 2.6% QoQ growth in dollar revenues of which ~1% is led by acquisition and rest is organic. In addition, due to rupee depreciation, rupee revenues are expected to grow 3.4% QoQ. We expect EBIT margin to decline ~150 bps QoQ to 14.5% due to wage hike. PAT is expected to increase 5.9% QoQ due to lower tax and higher other income. Investor interest: Deal pipeline in telecommunication & enterprise segment, ramp up of large deals, opportunities in 5G, margin improvement in portfolio companies and long term growth opportunity

 Exhibit 3: Company Specific views
Company Remarks
Larsen & Toubro Infotech The company’s Q1 has been weaker compared to its other quarters. However, we expect it to register 4.0% QoQ growth in revenues (one of its best performance). The growth is expected to be broad based and led by ramp up of deals & improvement in discretionary spend. In rupee terms we expect revenues to increase 5.0% QoQ. However, we expect EBITDA margin to decline 308 bps QoQ to 18.8% mainly led by wage hikes and reversal of provision in previous quarter. Hence, PAT is expected to decline 14.1% QoQ due to lower operating margins. Investor Interest: Revenue growth trajectory, digital technology outlook, margin trajectory, deal conversion, new logo addition, trend in top client and PAT margin range

Info Edge   We expect Info Edge’s revenues to be impacted due to second Covid wave. We expect revenues to decline 1.3% QoQ to | 286 crore mainly led by 2% QoQ decline in recruitment revenues and 4% decline in 99 Acres partially offset by 5% QoQ increase in other revenues (mainly led by Jeevansathi). We expect margins to be flat QoQ. PAT is expected to decline 14.1% QoQ due to higher tax rate. Investor interest: recovery of key verticals post second wave, acquisition via fund raising, update on venture fund and update on Zomato, Policybazaar & other new investments

MindTree  Mindtree is expected to report top quartile performance in revenue growth among midcap and large cap companies. The company is expected to register 6.8% QoQ growth in dollar revenues mainly led by ramp up of deals in BFSI, improvement in travel vertical and healthy growth in top client. In rupee terms revenues are expected to increase 7.7% QoQ. However, EBITDA margins are expected to decline 143 bps QoQ mainly led by wage hike to senior management, visa cost, impact of transformational deal and higher attrition. Investor interest: traction in Europe, multi-year annuity deals, progress of health vertical, mining of strategic accounts, revenue & margin outlook for FY22E, travel vertical outlook, growth in top client and merger with LTI

Coforge Coforge is expected to register 10.1% QoQ growth in revenues of which 3% is organic and rest is led by acquisition of SKS Global. In terms of rupee revenues, the company is expected to grow 11.0% QoQ (higher than dollar growth due to rupee depreciation). EBIT margins are expected to decline 117 bps QoQ due to wage hike and higher depreciation partially offset by reversal in discount in travel vertical. PAT is expected to decline 13.7% QoQ due to lower other income. Investor interest: Outlook on travel vertical, large deal pipeline in BFSI, insurance & healthcare, margin and demand outlook

Teamlease Services We expect revenues to be impacted by second Covid wave. Hence, we expect overall revenues to decline 4.2% QoQ mainly led by 5% QoQ decline in general staffing partially offset by increase in specialised staffing (mainly led by traction in IT staffing). We expect margins to improve 35 bps QoQ to 2.3% mainly led by break even in other HR services. Hence, we expect PAT to increase 17.1% QoQ. Investor interest: Post second wave demand outlook on general staffing, outlook on other HR services profitability and long term margin trajectory
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