Information Technology...

March 31, 2021 Topline, Profitability (Coverage Universe) Topline continues to accelerate… 110000 30 100000 Acceleration in digital technologies, improved demand post Covid-19, ramp 90000 25 80000 up of previous deal wins and migration to cloud are driving revenues of IT 70000 20

companies. Hence, we expect IT companies to report healthy Q4FY21E 60000 15

124617 (%)

50000 120476

115249 114829 revenues. We believe improved traction in BFSI, retail, manufacturing, hi 40000 111179

| Crore | 10 tech and life-science will drive revenues in the quarter. This, coupled with 30000 20000 5 cross currency tailwind, will further boost revenue growth in the quarter. 10000 Further, IT companies are also seeing a demand tailwind in terms of cost 0 0 takeout by clients (led by higher offshoring & automation), vendor

Result Preview Result

Q1FY21 Q2FY21 Q3FY21 consolidation opportunities, lift & shift deals and traction in small & medium Q4FY20 deals, which could further propel demand in coming quarters. In terms of Q4FY21E Revenue EBITDA Margin PAT Margin margins, we expect wage hikes to impact Q4FY21E margins except for Tata Consultancy Services (TCS) & . TCS had taken a wage hike in Dollar growth, QoQ October. Hence, we expect the company to register healthy margin IT Growth Q4FY21E Q3FY21 expansion in the quarter. Services (%) TCS 5,987.1 5,702.0 5.0 We expect Tier-1 IT companies to see revenue growth in the range of ~3- 3,702.3 3,516.0 5.3 4.5% in constant currency terms. This, coupled with cross currency ^ 2,151.8 2,071.0 3.9 tailwind of ~80-90 bps will further positively impact dollar revenue growth HCL Tech 2,721.7 2,617.0 4.0 (in the range of ~4-5%). Among tier 1, TCS & Infosys are expected to see dollar revenue growth of 5.0% & 5.3%, respectively. HCL Technologies Tech M 1,348.0 1,308.7 3.0 (HCL Tech) & Wipro are expected to witness dollar revenue growth of 4.0% LTI 449.2 427.8 5.0 & 3.9%, respectively. Among tier 2, LTI & are expected to see a Mindtree 287.8 274.1 5.0 sharp rise in dollar revenues of 5.0% QoQ followed by , which is Coforge 166.6 160.8 3.6 expected to witness revenue growth of 3.6% QoQ. We prefer TCS in tier-1 Internet & Staffing (in |) and Tech Mahindra & Teamlease in midcaps.

Info Edge 299.2 272.3 9.9 Research l Equity Teamlease 1,339.6 1,275.4 5.0

Wage hikes, lower utilisation to impact margins ^ IT services

Retai

Infosys & Wipro are expected to register ~130-150 bps decline in EBIT – Top Picks margins due to wage hike, lower utilisation, higher travel & facility cost. HCL Technologies is expected to report 375 bps decline due to partial wage hike TCS, Tech Mahindra & Teamlease and one-time bonus of | 700 crore. However, TCS is expected to report 186 bps higher margins due to absence of wage hikes. Research Analysts In midcap also margins to be impacted by wage hikes Devang Bhatt

[email protected] Securities ICICI In midcap companies, LTI & MindTree are expected to report 172 bps & 263 bps decline in margins led by wage hike, lower utilisation & reskilling, [email protected] respectively. However, Tech Mahindra is expected to register 35 bps improvement in margins. Cheragh Sidhwa Exhibit 1: Estimate for Q4FY21E (| crore) [email protected] Revenue Change (%) EBITDA Change (%) PAT Change (%) Company Q4FY21E YoY QoQ Q4FY21E YoY QoQ Q4FY21E YoY QoQ HCL Tech 19,838.3 6.7 2.8 4,822.0 2.2 -11.4 3,058.8 -3.0 -23.2 Infosys 26,986.4 16.0 4.1 7,327.4 29.1 -1.2 5,270.6 22.0 1.4 InfoEdge * 299.2 -7.3 9.9 88.5 -8.3 29.8 78.2 -0.8 11.8 L&T Infotech 3,274.6 8.7 3.9 704.0 21.8 -3.8 498.5 16.6 -4.0 Mindtree 2,098.1 2.3 3.7 429.9 32.8 -8.1 300.3 45.7 -8.0 Coforge 1,214.3 9.5 2.0 204.9 4.0 2.0 123.8 9.0 1.4 TCS 43,640.0 9.2 3.9 13,450.5 22.5 10.2 9,625.2 19.6 10.3 Teamlease 1,339.6 0.7 5.0 26.8 34.3 8.0 23.1 NA 1.1 Tech Mahindra 9,825.3 3.5 1.8 1,965.1 45.8 3.7 1,346.4 31.8 2.8 Wipro 16,101.3 2.5 2.8 4,037.2 25.4 -3.3 2,861.9 23.0 -3.5 Total 1,24,617.0 8.5 3.4 33,056.2 21.7 1.3 23,186.9 17.9 -0.2

Source: Company, ICICI Direct Research Result Preview | Q4FY21E ICICI Direct Research

FY22E guidance, commentary on budget to be of key interest EBIT/EBITDA margin impact In the current quarter, clients of many IT companies finalise their IT budgets. EBIT Change Q4FY21E Q3FY21 Hence, commentary on client’s budget and FY22E guidance will be key margins (bps) monitorables. In addition, with IT company’s focus on Europe, commentary TCS 28.5 26.6 186 in this geography will be a key thing to watch. Further, trends in US Infosys 24.1 25.4 (132) geography post vaccination, talent management, trends in digital Wipro ^ 20.2 21.7 (148) technologies, deal pipelines vertical specific commentary, offshoring, HCL Tech 19.1 22.9 (375) margin trajectory, second wage hike and long-term IT trends become EBITDA margins important from an investor’s perspective. Tech M 20.0 19.6 35 Exhibit 2: Company Specific view LTI 21.5 23.2 (172) Company Remarks Mindtree 20.5 23.1 (263) TCS Migration to cloud, recovery in demand (impacted due to Covid 19) and cross currency Coforge 16.9 16.9 0 benefits are expected to positively impact Q4FY21E revenues. TCS is expected to Internet & Staffing (in %) register 4.2% QoQ growth in constant currency led by anticipated improvement in Info Edge 29.6 25.0 453 demand from BFSI, healthcare and retail, acceleration in digital technologies and ramp Teamlease 2.0 1.9 5 up of deals. Further, cross currency tailwind would lead to revenue growth of 5.0% QoQ ^ IT services in dollar terms. In rupee terms, revenue is expected to increase 3.9% QoQ (lower than

dollar growth due to rupee appreciation). EBIT margins are expected to improve 186 bps led by absence of wage hike and operational efficiencies. PAT is expected to increase $/| by 19.6% YoY due to low base in Q4FY20 (as the quarter was impacted by Covid-19 80 shocks). Investor interest: Trends in client budget, vertical wise trends, growth in digital technologies, margin trajectory, talent management, offshoring trends, deal pipeline and 75 long term trends in IT 70

Infosys We expect Infosys to report 4.5% QoQ increase in revenues in constant currency terms 65| mainly led by traction in cloud migration, ramp up of deal wins and Vanguard deal. The 60 company is also witnessing a healthy deal pipeline led by lift & shift deals, acceleration in digital technologies and cost take out deals. With cross currency tailwind, we expect 55 dollar revenues to increase 5.3% QoQ. However, we expect margins to decline 132 bps 50 QoQ due to wage hikes, higher travel & facility cost partially offset by automation and

offshoring. PAT is expected to increase 22% YoY due to low base and savings in travel

Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20

Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 & facility cost. Investor interest: FY22E revenue & margin guidance, commentary on |/$ client budgets, second wage hike, ramp up of Daimler deal, traction in digital

technologies, vertical wise commentary and pricing environment $ vs. global currencies

Wipro Wipro is expected to report 3.0% QoQ growth (in CC terms) in revenues mainly led by 2.6 healthy volumes in small & medium deals and ramp up of deals. Further, with cross 2.2 currency tailwind, we expect dollar revenues to increase 3.9% QoQ. EBIT margins in global IT services are expected to decline 148 bps QoQ mainly due to wage hike and 1.8 lower utilisation. In rupee terms, overall revenues are expected to increase 2.8% QoQ. 1.4 Overall EBIT margins are expected to decline 143 bps QoQ to 20.2%. Investor interest: progress on Capco acquisition, second wage hike, deal pipeline, vertical commentary, 1.0 commentary of client’s IT Budget, ramp up of large deals won (like Metro & Telefonica) 0.6

HCL Tech HCL Technologies is expected to report 3.1% QoQ revenue growth in CC terms mainly

Sep-15 Sep-16 Sep-17 Sep-19 Sep-20 Sep-18

Mar-15 Mar-16 Mar-18 Mar-21 Mar-19 Mar-20 led by acquisition of DWS, easing of stress in ER&D segment, traction in financial Mar-17 services, healthcare and utilities. Further, tailwind from cross currency revenues is $/Euro $/GBP $/AUD expected to boost dollar revenues (up 4.0% QoQ). However, EBIT margins are expected to decline 375 bps QoQ mainly led by partial wage hikes, one-time bonus of | 700 crore and seasonality in product business. Consequently, PAT is expected to decline 23.2% QoQ. Investor interest: FY22E revenue & margin guidance, outlook on IMS revenues, product revenues, vertical wise commentary and acquisition & capital allocation strategy Tech Mahindra Tech Mahindra is expected to witness 3.0% QoQ growth in dollar revenues led by healthy traction in communication & enterprise segment and cross currency tailwind. However, due to rupee appreciation, rupee revenues are expected to grow 1.8% QoQ. We expect EBIT margin to increase 35 bps QoQ due to synergies in portfolio companies, automation, reduction of sub-contracting cost, higher offshoring and pruning of low return geographies. PAT is expected to increase 2.8% QoQ. Investor interest: Deal pipeline in telecommunication & enterprise segment, quantum of wage hikes, ramp up of Telefonica deal, opportunities in 5G, margin improvement in portfolio companies and long term growth opportunity

Source: Company, ICICI Direct Research

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Result Preview | Q4FY21E ICICI Direct Research

Exhibit 3: Company Specific views Company Remarks Larsen & The company is expected to report healthy Q4FY21E revenue growth despite higher Toubro Infotech base on QoQ & YoY basis. LTI is expected to report 5.0% QoQ & 9.6% YoY growth in dollar revenues mainly led by healthy traction in banking, insurance, top client and ramp of deals won in previous quarters. In terms of rupee revenues, revenues are expected to increase 3.9% QoQ. Margins are expected to decline 172 bps QoQ mainly led by wage hike and lower utilisation. PAT is expected to increase 16.6% YoY mainly due to higher operating margins (led by savings of travel & facility cost). Investor Interest: Progress of large deal won in UAE & E&U segment, second wage hike, digital technology outlook, revenues & margin trajectory, deal conversion, new logo addition, trend in top client and PAT margin range

Info Edge Billings in Naukri and 99 Acres declined 4.1% YoY and 3.5% YoY, respectively. Considering this, we expect revenues to be under pressure in the near term. Hence, we expect revenues to decline 7.3% YoY in Q4FY21E. In addition, we expect margins on a YoY basis to decline 30 bps YoY to 29.6%. However, on a QoQ basis, we expect revenues to increase 9.9% QoQ mainly led by opening of economy and improving trend in IT. Further, margins on a QoQ basis are expected to improve from 25.0% to 29.6% due to operating leverage benefits. As a result, PAT is expected to increase 11.8% QoQ. Investor interest: Outlook on recovery of key verticals, acquisition via fund raising, update on venture fund and update on Zomato, PolicyBazaar & other new investments

MindTree Mindtree is expected to report revenue growth of 5.0% QoQ in dollar terms led by improving growth in top client, healthy traction in retail, CPG & manufacturing & BFSI. In rupee terms, revenues are expected to increase 3.7% QoQ. However, EBITDA margins are expected to decline 263 bps QoQ to 20.5% mainly led by wage hike, reskilling of employees, increased investment in go to market and lower utilisation. Hence, PAT is expected to decline 8.0% QoQ. However, PAT is up 45.7% YoY due to low base and higher operating margins. Investor interest: Expansion in Europe, multi-year annuity deals, progress on rationalisation of tail accounts, mining of strategic accounts, revenue & margin outlook for FY22E, travel vertical outlook, growth in top client and merger with LTI Coforge Healthy growth in banking, insurance & healthcare is expected to drive topline (up 3.6% QoQ). In terms of rupee revenues, the company is expected to grow 2.0% QoQ (lower than dollar revenue growth due to rupee appreciation). EBITDA margins are expected to remain flat at 16.9%. PAT is expected to increase 1.4% QoQ. Investor interest: wage hike in FY22E, outlook on travel vertical, large deal pipeline in BFSI, insurance & healthcare, margin outlook and commentary on client’s IT budget

Teamlease We expect Teamlease’s revenues to increase 5.0% QoQ (at pre-Covid levels on a YoY Services basis) mainly led by opening of the economy. We expect general staffing to improve 5.1% QoQ mainly led by health headcount addition and NETAPP additions. In addition, we expect specialised staffing revenues to increase 5.0% QoQ due to healthy traction in IT staffing. We expect margins to remain flat QoQ while YoY we expect margins to improve 50 bps mainly led by rationalisation of core employee headcount, reduction in losses in other HR services and improvement in specialised staffing margins. Investor interest: Outlook on general staffing & specialised staffing, outlook on other HR services profitability and long term margin trajectory

Source: Company, ICICI Direct Research

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Result Preview | Q4FY21E ICICI Direct Research

Exhibit 4: ICICI Direct Coverage universe IT EPS (|) P/E (x) RoCE (%) RoE (%)

Company Cmp (|) TP (|) Rating Mcap (| Cr) FY20 FY21E FY22E FY23E FY21 FY22 FY23 FY20 FY21E FY22E FY23E FY20 FY20 FY21E FY22E FY23E E E E HCL Tech (HCLTEC) 983 1,150 Buy 2,66,661 40.8 48.3 54.1 62.6 24 20 18 16 23.0 23.6 24.4 24.8 21.6 21.5 20.8 20.6 Infosys (INFTEC) 1,367 1,610 Buy 5,82,285 38.9 45.9 54.5 63.4 35 30 25 22 30.8 34.5 36.4 38.5 25.2 27.2 29.3 31.0 TCS (TCS) 3,177 3,600 Buy 11,92,114 86.2 88.7 107.7 124.2 37 36 30 26 43.5 43.9 47.0 49.2 37.5 35.6 39.3 40.9 Tech M (TECMAH) 991 1,120 Buy 92,924 45.9 53.4 58.9 69.2 22 19 17 14 19.1 20.5 20.4 21.5 18.5 19.4 18.8 19.3 Wipro (WIPRO) 414 490 Hold 2,42,520 16.6 19.5 20.3 22.7 25 21 20 18 19.3 22.0 22.9 25.5 17.4 19.7 20.5 23.0 Mindtree (MINCON) 2,070 1,970 Buy 34,117 38.3 66.4 75.4 87.7 54 31 27 24 23.0 33.6 32.6 32.8 20.0 28.2 27.2 27.0 LTI (LTINFC) 4,057 4,580 Hold 70,884 86.6 107.7 125.5 149.1 47 38 32 27 30.7 32.4 31.7 31.6 28.1 28.7 28.0 27.9 Coforge (NIITEC) 2,898 2,875 Buy 17,445 71.4 72.6 95.3 111.7 41 40 30 26 23.0 23.5 26.6 27.4 18.5 19.4 22.4 22.9 Infoedge (INFEDG) 4,276 5,725 Hold 54,982 26.8 21.8 38.9 49.0 160 196 110 87 18.0 8.3 14.0 16.3 13.5 6.3 10.5 12.3 Teamlease (TEASER) 3,780 3,290 Buy 6,462 20.5 53.1 68.8 85.6 185 71 55 44 15.0 13.5 15.7 16.5 6.5 14.4 15.5 16.3

Source: Company, ICICI Direct Research

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Result Preview | Q4FY21E ICICI Direct Research

RATING RATIONALE ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock Buy: >15% Hold: -5% to 15%; Reduce: -15% to -5%; Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected]

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Result Preview | Q4FY21E ICICI Direct Research

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