Strong quarter seen for TCS, Infy & HCL

Bengaluru: Tech majors Tata Consultancy Services and Infosys Technologies will jointly open the fourth and final quarter of the financial year 2018-19 on April 12.

Analysts and market watchers expect a steady quarter for the IT sector, with strong growth from Infosys, TCS and HCL Technologies while Wipro and Tech Mahindra could post muted growth for the year-closing quarter.

“Benefit from strong deal flow and increasing digital deal sizes will be offset to some extent (for the IT sector) with slower spending growth in budgets in FY2020. We expect broadly similar industry growth in FY2020. Profitability will face the test of increasing cost onsite. We expect Infosys, HCLT and Tech Mahindra to grow faster in FY2020. Stock returns can be muted from here after a strong performance in the past 12 months,’’ said report released by Kotak Institutional Equities.

Kotak expects constant currency revenue growth rate at 1.8-2.5 per cent for Infosys, TCS and HCLT. On a year-on-year (YoY) comparison, revenue growth will be robust 10.8-13.8 per cent for the three companies. Growth will be led by ramp-up of large deals won by companies 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 per cent sequential revenue growth, said the brokerage firm.

A forecast by Aniket Pande and Rajath Gandhi, analysts at Prabhudas Lilladher, says the fourth quarter (Q4) will bring in strong growth from outsourcing for Indian IT.

They said Accenture Q2 earnings, which topped forecasts, and strong booking growth in the consulting segment reduced some concern of an imminent slowdown affecting IT-service providers. The US-based company’s outsourcing grew 9 per cent YoY on constant currency (CC) terms.

“This mirrors well for demand for Tier-1 Indian IT companies. Accenture had cited its expectation of improved BFSI (banking, financial services and insurance) growth in 2HFY19 (October-March). We can see improved performance over the last two-three quarters in TCS and Infosys in BFSI and we expect growth to continue in the BFSI segment. We reiterate TCS as our top pick in Tier-1 IT sector and we see three factors which give us confidence of double-digit growth in FY20E (estimate) and beyond for TCS,’’ they said.

According to the Prabhudas Lilladher report, TCS’ digital deal sizes are getting bigger, the company is expected to gain more market share in the space, as it has the ability to stitch multiple deals together. The brokerage is confident about TCS maintaining a 26-28 per cent Ebit (earnings before interest and taxes) margin band as the current visa and talent shortage in the US is not a structural headwind for the company.

Despite currency depreciation, as per the Kotak report, Ebit for three of the five Tier-1 companies will be flat or will decline on YoY comparison. Infosys, Tech Mahindra and Wipro will report marginal sequential declines in Ebit margin. On a sequential basis, Ebit margin will decline marginally due to 1.9 per cent appreciation of the rupee against the dollar and talent constraint-led increase in cost structure in the US.

Banking is the largest vertical for IT companies. At a broader level, spending growth in the vertical will be slower than in 2018. Most analysts believe that IT spending will be muted in the capital markets segments, especially in Europe. However, steady spending is expected in the traditional banking segment in North America though there may be spending caution from a couple of large clients.

Kotak also expects a healthy revenue growth guidance of 8-10 per cent for Infosys in FY2020E. This would imply revenue CQGR (compounded quarterly growth rate) of 1.7-2.4 per cent in four quarters of FY2020E. Strong revenue growth outlook will be courtesy large deal momentum, increase in win rates and investments in service management and gains in a few consolidation decisions.

An Elara Capital report says, “While we agree that TCS and Infosys have been and continue to be good firms, we believe they now operate in different orbits. TCS has pulled ahead significantly over Infosys with strong gains coming in for TCS over CY12-15 when Infosys’ execution wobbled. TCS Ebitda margin is almost back to where it was in FY05 while Infosys Ebitda margin has declined by 758 bp as on 3QFY19. We believe TCS has structural tailwinds that will widen the margin gap.’’