Infosys vs Wipro vs TCS vs HCL Tech vs Tech Mahindra: In a big relief, Indian IT companies are expected to deliver strong sequential revenue growth in the seasonally weak October-December quarter, led by ramp-up of large deals, higher spending on digital technologies by enterprises, gradual recovery in affected verticals and lower than expected impact of furloughs. Sharekhan expects tier-I companies to report sequential revenue growth of 1.9-3.1% on a constant currency (CC) basis and benefit by 30-50 bps qoq on rupee tailwinds. Among the top five IT companies, Infosys and Wipro are expected to report strong CC revenue growth of 3.1% qoq, followed by TCS and HCL Tech which would clock 2.7%. Tech Mahindra (TechM) is expected to report CC revenue growth at the lower end of 1.9% q-o-q among tier-I companies.
Growth to accelerate as enterprises seek to ride the digital transformation: The COVID-19 pandemic has catalysed enterprises’ spending on Cloud and Cloud-related technologies and digital transformation.
Sharekhan expects Indian IT services sector’s growth to accelerate in the next few years led by:
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(1) emergence of new operating models
(2) building operational resiliency
(3) reimagining customer experience
(4) faster adoption of cloud and digital transformation at workplace
(5) acceleration in core modernisation
(6) captive takeout/carve-outs initiatives.
Accenture’s better than expected revenue performance, robust outsourcing order bookings (grew 46.5% yoy) and upward revision of its guidance validates soaring demand for technology transformation. Further, managements of Infosys, Wipro and LTI have indicated the rising demand for digital technologies on their respective annual investor days.
Further, stimulus packages by various governments and prudent measures by regulators helped enterprises to fund digital initiatives to enhance customer experience through online channels. On the margin front, wage revision, investment on people and capabilities and higher attrition could be the headwinds in the near-term, but work-from-home (WFH) efficiencies, higher digital revenue, continued lower administrative expenses, increasing offshoring, reversal of discounts to certain clients and operational efficiencies would partly mitigate impact on margins in near-to-medium term.
1) INR appreciation vis-à-vis USD would impact earnings estimates in FY2021E/FY2022E and stock performance
2) slowdown in tech spending by large enterprises
3) weaker macros including lower GDP growth in the US/Europe
4) Higher than expected business disruption owing to second wave of COVID-19 crisis
Leaders: Infosys, Wipro, HCL Tech, TCS, L&T Infotech, Persistent Systems and Tata Elxsi
Large-cap: Pecking order: Infosys, Tech Mahindra, HCL Tech, TCS, Wipro
Mid-cap: Pecking order: Persistent Systems, L&T Infotech, L&T Tech, Tata Elxsi, Birlasoft and Mastek