A leading equity research firm said it is expecting a steady quarter with strong revenue growth for Indian IT services companies such as Infosys, TCS and HCLT and muted growth for Wipro and Tech Mahindra.
Benefit from strong deal flow and increasing digital deal sizes will offset slower spending growth in budgets in FY2020.
“We expect broadly similar industry growth in FY2020E. Profitability will face the test of increasing cost onsite. We expect Infosys, HCLT and Tech Mahindra to grow faster in FY2020E,” said Kotak Equity Research.
It expects constant currency revenue growth rate at 1.8-2.5 percent for Infosys, TCS and HCL Technologies. Revenue growth will be 10.8-13.8 percent for the three companies — led by large deals won over the past two quarters.
Tech Mahindra will likely report muted numbers due to seasonal weakness in retail and a slower manufacturing vertical.
Wipro will likely report modest 1.5 percent sequential revenue growth.
Revenue growth for mid-tier companies will be muted on sequential basis when compared to the trend same time last year.
Despite currency depreciation, EBIT margin for three of the five Tier-1 companies will be flat or decline.
Infosys, Tech Mahindra and Wipro will report marginal sequential decline in EBIT margin. On sequential basis, EBIT margin will decline marginally due to 1.9 percent appreciation of the INR against USD and talent constraint-led increase in cost structure in the US. Profitability performance will be a key focus area.
Revenue growth will be 8-10 percent for Infosys in FY2020E. This would imply revenue CQGR of 1.7-2.4 percent in four quarters of FY2020E. Strong revenue growth outlook will be courtesy large deal momentum, increase in win rates, investments in S&M and gains in a few consolidation decisions. Infosys’ EBIT margin will be closer to 22 percent in FY2020E.
HCLT’s organic revenue growth will be 7-9 percent, 8.5-10.5 percent including inorganic component but excluding IBM’s product acquisitions and 14-16 percent including IBM’s product business acquisition assuming it gets consolidated from July 2019. HCLT will retain 19.5-20.5 percent EBIT margin.
Banking is the largest vertical for IT companies. Spending growth in the banking vertical will be slower than CY2018. IT spending will be muted in the capital markets segments, especially in Europe. Spending in the traditional banking segment will be steady in North America.
Challenges in renewal of visas combined with tightening of conditions for new visas come at a time when the unemployment rates are at a record low. IT companies have stepped up local hiring. Talent is not easily available at the mid-level. This will lead to increase in cost structure in the US. The increase in cost structure was already visible in December 2018 quarter where subcontracting costs increased for Infosys and TCS.