Tata Consultancy Services (TCS) and Infosys will kick off the March-quarter earnings season on April 12 and most brokerages expect the IT sector to deliver a steady growth of 10-16 percent on a year-on-year (YoY) basis.
"We remain optimistic about growth accelerating in the sector and prefer large-caps due to their large-scale execution capabilities, ability to cope with supply shortage in key geography (US) and better valuations. While mid-caps may log stronger growth than larger peers, we expect the gap to narrow," Edelweiss said in a report.
Meanwhile, Reliance Securities expects margins for the IT sector to be flat or lower on a sequential basis as the rupee has appreciated.
"The key focus area for the quarter will be the margin outlook for FY20 as margins have come under pressure in the recent quarters" Reliance Securities said in a report.
According to analysts, key monitorable for the sector remains margin outlook, deal sizes in digital, client budgets, guidance for FY20, demand commentary by industry, particularly for BFSI and retail, and commentary on wage hikes.
Here's what top brokerages expect from the IT sector on Q4 results:
Deal wins in FY19 and healthy digital growth is expected to drive IT service revenues in the fourth quarter. Tier-1 IT companies are expected to report revenue growth of 1.5-2.4 percent on a quarter-on-quarter (QoQ) basis in constant currency terms while mid-tier companies like NIIT Tech and Larsen & Turbo Infotech would lead the growth on the back of momentum in specific revenue segments.
In terms of margins, Tier-1 IT companies are likely to report a decline of 20-40 basis points (bps) on quarter in the EBIT margins on account of net currency negative impact of 30-40 bps coupled with variable pay, higher subcontracting cost, and investment in sales and marketing.
Commentary on how companies manage margins amid increasing cost pressures and rupee appreciation would be key areas to watch out for.
IT companies are likely to report moderate results (16 percent YoY growth in topline and 13.5 percent YoY growth in earnings). On a QoQ basis, the brokerage expects constant currency organic revenue growth of 0.5-2.5 percent and margin decline of 10-70 bps. At the same time, strong deal flow will continue, providing a bright outlook.
Positive on TCS, Wipro, NIIT Tech and negative on Tech Mahindra, Cyient and Persistent Systems.
The technology sector is expected to post another healthy set of numbers, with sales, EBITDA and PAT growth of 17.7 percent, 18.1 percent, and 12.6 percent, respectively. This will be the fifth consecutive quarter of double-digit PAT growth for the sector.
There is significant revenue acceleration amid strong momentum in deal activity, however, rupee appreciation can act as a headwind, according to the brokerage. TCS is expected to account for 43 percent of incremental PAT of our technology universe.
The brokerage estimate the top five IT players – Tata Consultancy Services, Infosys, Wipro, HCL Technologies and Tech Mahindra – would sustain revenue momentum clocking 2–3.1 percent QoQ growth in constant currency terms.
Appreciation of major global currencies against the dollar is likely to lift revenue growth by 10–35 bps QoQ. At the same time, the rupee's appreciation against the dollar would impact margins by 10–50 bps QoQ.
As seen in the previous quarters, robust growth in digital and large transformational deal-wins should accelerate revenue and underpin positive management commentary.
Maintain 'buy' on Infosys, Tech Mahindra and HCL Tech and hold on TCS and Wipro.
The brokerage expects a steady quarter with strong growth from TCS, HCLT, Infosys and muted growth for Wipro and Tech Mahindra for Q4 in Tier-1 IT services pack. In Tier-II, Prabhudas Lilladher expects steady growth from NIIT Tech, MindTree, Hexaware and weak growth from Cyient, Persistent and Zensar.
Reiterates TCS as its top pick in tier-1 IT sector since it’s likely to gain more market share using its specific core strengths on lowest cost/attrition, large agile workforce, early investments in building digital capabilities and strong execution.
Q4 is not a strong quarter seasonally but Reliance Securities estimate the dollar growth to be 2.2 percent QoQ and constant currency growth to be similar. The top-5 IT firms are likely to post 2-3 percent QoQ dollar and constant currency revenue growth with HCL Technologies leading the pack.
Among mid-sized firms, Sonata Software should outperform with 7 percent QoQ dollar revenue growth led by acquisitions of Scalable and Sopris, while Cyient will underperform owing to delays in a large order. Reliance Securities' top result plays are HCL Tech and Sonata Software.
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