Information Technology 1QFY22E Results Preview Report - Strong momentum continues - HDFC Securities

Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities and Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities

Strong deal momentum (both pipeline and large deal bookings), broad-based industry-vertical trends towards digital transformation, positive cyclical indicators in product development/engineering services and consulting, accelerated hiring, and improving alignment with hyperscalers/SaaS indicate continuity of momentum for the sector (coverage universe). Tier-1 IT is expected to deliver 4% QoQ (3% organic) and 20% YoY (base impact) revenue growth. In comparison, mid-tier IT is expected to post 3.5% QoQ (range of -3.6% to +5.9% QoQ) with larger mid-tier averaging >4.5% QoQ. Margin will be impacted by wage increases, increase in sub-contracting/attrition, offset partly by operating leverage and FX/offshoring.

Deal wins (TCS-Proximus, Ericsson, Alcatel-Lucent, Virgin Atlantic; INFY-BP, Archrock, RXR, Britvic; HCLT-Hitachi ABB; WPRO-Levi Strauss, Bristol Water; LTI-Hoist Finance) remained strong in 1QFY22. Acquisition volumes continued in 1Q (WPRO-Ampion; TECHM-DigitalOnUs, Eventus; LTI-Cuelogic; PSYS-Sureline Systems select assets; MTCL-NxT Digital; ZENT-M3bi) to augment capabilities in cybersecurity, DevOps, product development and analytics. We believe that the elevated supply-side pressure is transient and will normalise over the next 1-2 quarters.

Revenue outperformance led by WPRO, TELX, PSYS and MTCL: In 1QFY22E, we expect WPRO to lead the growth at 9.4% QoQ in USD terms helped by Capco acquisition (630bps QoQ), followed by TCS with 3.6% QoQ growth supported by uptick in deals. INFY/HCLT/ TECHM are expected to post 3.5/2.2/2%. Within mid-tiers, TELX/PSYS/MTCL to report growth at 5.9/5.4/5.3% QoQ (USD terms). LTI, MPHL and LTTS are expected to post 3.9%, 3.5% and 3.5% QoQ growth, while CYL will lag at -3.6% QoQ due to decline in DLM business. In terms of margin, WPRO is expected to underperform operationally (Capco integration & partial wage increase impact) within tier-1s and TELX within mid tiers (one-time payout impact of -550bps). Margins during the quarter are impacted due to wage hike and promotion cycle for most companies.

Key monitorables: (1) Revenue guidance: INFY (expected to increase by 100bps)/HCLT (unchanged at >10% CC) for FY22, WPRO (2.5-3% for 2Q) and LTTS (100bps increase expected); (2) Progression/regression in large deal pipeline and bookings; (3) Attrition & sub-contracting and commentary on supply-side factors; (4) Pricing and delivery-mix outlook; (5) Core verticals' performance and outlook.

Maintain positive outlook: We roll over valuations to Jun-23E and raise target multiples for most of the companies in our coverage universe (except WPRO and CYL) to reflect greater visibility/longevity of growth. Our positive stance on the sector remains premised on the longevity of high growth (and strong balance sheet), supported by large deal wins. While mid-tier IT valuations have hit escape velocity (sustainable), driven by strong business momentum (both absolute and relative to tier-1), broadly risk-reward is favourable for tier-1s. Preferred picks are Infosys, HCL Tech, Mphasis and Sonata.

Source : Equity Bulls

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