Information Technology...
October 1, 2020 Topline,Profitability (Coverage Universe) 110000 30 100000 Project ramp up, digital traction to drive revenue growth 90000 25 80000 20 In the current quarter, IT companies are expected to witness a healthy 70000 improvement in revenues on a QoQ basis mainly led by ramp up of past 60000 15
50000 (%)
114829
113728
113433 111179 deal wins, traction in digital technologies and easing of supply side 40000 110437 10 pressure. The companies are seeing a demand tailwind in terms of cost | Crore 30000 20000 5 takeout by clients (led by higher offshoring & automation), vendor 10000 0 0 consolidation opportunities and traction in cloud & customer experience. In terms of verticals, life-science & healthcare, telecom & media and financial
Result Preview Result
Q3FY20 Q1FY21 Q2FY20 Q4FY20
services are witnessing healthy traction partly offset by pockets of Q2FY21E weakness in travel & hospitality, oil & gas and manufacturing. Further, an Revenue EBITDA Margin PAT Margin improvement in utilisation (led by improving demand & easing of supply side pressure) is expected to positively impact revenues of IT companies. Dollar growth, QoQ IT G rowth Also, cost rationalisation by IT companies, lower travel cost, cross currency Q 2F Y21E Q 1F Y21 benefits and utilisation are expected to drive margins in the quarter. S e rvice s (%) We expect Tier-1 IT companies to see revenue growth in the range of 1- TCS 5,251.2 5,059.0 3.8 3.5% in constant currency terms. This, coupled with cross currency Infosys 3,267.7 3,121.0 4.7 tailwind of ~100-140 bps will further positively impact dollar revenue Wipro ^ 1,967.7 1,921.6 2.4
growth. Among tier 1 HCL Tech, Infosys are expected to see dollar revenue HC L Tech 2,467.9 2,356.0 4.8 growth of 4.8%, 4.7%, respectively. Tata Consultancy Services (TCS), rch Wipro are expected to witness dollar revenue growth of 3.8%, 2.4%, Tech M 1,237.7 1,207.5 2.5 respectively. Among Tier 2, Coforge is expected to see a sharp rise in dollar LTI 400.8 390.3 2.7 revenues of 7.4% QoQ followed by Mindtree, which is expected to witness Mindtree 263.3 253.2 4.0 revenue growth of 4.0% QoQ. We prefer HCL Tech & Infosys in tier-1 and C oforge 150.6 140.2 7.4 Coforge in midcap. In addition, healthy revenue & margin growth coupled Internet & Staffing (in |) with reasonable valuation prompt us to be positive on Tech Mahindra. Info E dge 280.2 280.1 0.0 Teamlease 1,138.3 1,136.4 0.2
Operating leverage, cost rationalisation to drive margins ^ IT services
Retail Equity Resea Equity Retail
– Margins of Tier 1 companies are expected to improve ~20-130 bps. Among Top Picks tier 2 companies, Coforge and Tech M are expected to post margin improvement of ~150-160 bps. This is mainly due to lower travel cost and Infosys, HCL Tech Coforge, Tech Mahindra lower general administrative cost improvement in utilisation, cross currency tailwind partially offset by rupee appreciation. Research Analysts Devang Bhatt In midcap, Coforge, Tech Mahindra to report healthy margins [email protected]
ICICI Securities ICICI
Tech Mahindra is expected to post a 152 bps QoQ improvement in EBITDA [email protected] margins, mainly led by lower sub-contracting cost, easing of supply side pressure and cost rationalisation. Coforge is expected to report a 161 bps Cheragh Sidhwa QoQ improvement in margins led by absence of Esop charges (~113 bps) [email protected] and higher utilisation. On a YoY basis, Mindtree, LTI are expected to report improvement of 523 bps, 238 bps, respectively, due to a low base.
Exhibit 1: Estimate for Q2FY21E (| crore) Revenue Change (%) EBITDA Change (%) PAT Change (%) Com pany Q 2F Y21E YoY Q oQ Q 2F Y21E YoY Q oQ Q 2F Y21E YoY Q oQ HC L Tech 18,361.3 4.8 2.9 4,819.8 17.5 5.6 3,150.8 18.9 7.8 Infosys 24,311.6 7.4 2.7 6,542.2 16.0 6.9 4,608.9 14.7 8.9 InfoE dge * 280.2 -11.5 0.0 99.2 -0.1 -5.1 87.7 4.1 5.3 L&T Infotech 2,982.2 16.0 1.1 611.4 31.2 3.3 420.4 16.7 1.0 Mindtree 1,959.2 2.3 2.6 356.6 43.7 10.7 235.8 74.6 10.7 C oforge 1,120.6 7.9 6.0 197.8 4.2 16.7 112.9 -5.5 41.3 TC S 39,069.2 0.2 1.9 10,705.0 4.7 6.8 7,586.5 -5.7 8.3 Teamlease 1,138.3 -10.2 0.2 23.9 -2.4 -2.8 16.7 -17.1 -5.2 Tech Mahindra 9,208.4 1.5 1.1 1,454.9 -3.1 11.9 1,072.3 -4.6 10.3 Wipro 15,002.2 -0.8 0.6 3,351.0 6.2 1.3 2,598.1 1.8 8.7 Total 1,13,433.1 2.7 2.0 28,161.7 9.8 6.1 19,890.0 4.1 8.5
Source: Company, ICICI Direct Research Result Preview | Q2FY21E ICICI Direct Research
Annual guidance revision, commentary to be of key interest EBIT/EBITDA margin impact A few companies like Infosys and HCL Tech have given guidance. Also, EBIT C ha ng e based on Q2FY21E numbers, if there is upward revision in guidance then it Q 1F Y21 m a rg ins Q 2F Y21E (b p s) will be key to watch. In addition, commentary on the external environment, vertical specific trajectory, deal wins, deal size, deal ramp ups and margin TC S 24.9 23.6 129 sustainability become utmost important. Apart from these aspects, pricing Infosys 23.8 22.7 113 pressure, change in delivery models (offshoring & work from home), dealing Wipro ^ 19.2 19.0 20 with H1 B visa related issues and long-term IT trends become important HC L Tech 21.3 20.5 80 from an investor’s perspective. EBITDA margins Tech M 15.8 14.3 152 Exhibit 2: Company Specific view LTI 20.5 20.1 43 C om pany Rem arks Mindtree 18.2 16.9 133 TCS The current quarter witnessed easing of lockdowns in many countries, ramp up of projects, easing of supply side pressure and traction in digital technologies. This C oforge 17.7 16.0 161 has positively impacted Q 2F Y 21E results. TCS is also expected to register 2.6% Internet & Staffing (in |) Q oQ growth in constant currency led by improved demand from B F S I, healthcare Info E dge 35.4 37.3 (192) and telecom & media, project ramp up, low base and easing of supply side pressure. F urther, cross currency tailwind would lead to revenue growth of 3.8% Teamlease 2.1 2.2 (6) Q oQ in dollar terms. In rupee terms, revenue is expected to increase 1.9% Q oQ ^ IT services (lower than dollar growth due to rupee appreciation). E B IT margins are expected to improve 129 bps led by cost rationalisation, cross currency tailwind and $/| increase in utilisation. Investor interest: R evival in IT spending, changes in delivery model, commentary in deal pipeline, trend across verticals and key long term 80 trends Infosys We expect Infosys to report 3.3% Q oQ increase in revenues in constant currency 75 terms mainly led by ramp up of V anguard deal (that we believe would 70 contribute~1% of revenues) and other large deal wins. The company is witnessing a healthy deal pipeline led by traction in cloud, customer experience and in large 65| deals, which involve cost takeout. With cross currency tailwind, we expect Infosys’ dollar revenues to increase 4.7% Q oQ . E B IT margins are expected to 60 improve 113 bps Q oQ led by lower travel cost, cross currency tailwind and higher 55 utilisation. Investor interest: Upward revision in revenue and margin guidance, commentary on external environment, wage hikes, deal decision making, vertical 50 wise commentary and pricing environment
Wipro We expect global IT services revenues to increase 1.1% Q oQ in constant
Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20
Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 currency mainly led by project ramp ups and lower base in previous quarter. Mar-15 F urther, with cross currency tailwind, we expect dollar revenues to increase 2.4% |/$ Q oQ . E B IT margins in global IT services are expected to increase 20 bps Q oQ to 19.2% mainly led by operating leverage benefit. In rupee terms, revenues are $ vs. global currencies expected to increase 0.6% Q oQ while E B IT margins are expected to increase 20 bps to 18.2% . Investor interest: Long term strategy of the new CEO, wage hikes 2.6 margin sustainability and revival timeline of impacted verticals 2.2 HC L Tech HCL Tech is expected to report 3.5% Q oQ growth in revenues in CC terms. 1.8 F urther, tailwind from cross currency revenues is expected to boost dollar revenues (up 4.8% Q oQ ). The growth in revenues is across geographies, verticals 1.4 and service lines. The company is witnessing healthy momentum in lifescience & healthcare, telecom & media and financial services. In rupee terms, revenues are 1.0 expected to grow 2.9% Q oQ . E B IT margins are expected to increase 80 bps Q oQ led by operating leverage and cost rationalisation. PAT is expected to increase 0.6 18.9% Y oY mainly led by healthy expansion in operating margins (up 136 bps
Y oY due to full impact of product margins). Investor interest: Upward revision in
Sep-15 Sep-14 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20
Mar-18 Mar-20 Mar-16 Mar-17 Mar-19 margin and revenue guidance, outlook on IMS revenues, product revenues, wage Mar-15 hikes, acquisition strategy and capital allocation policy $/Euro $/GBP $/AUD Tech Mahindra Tech Mahindra is expected to witness 2.5% Q oQ growth in revenues led by
improvement in BPS revenues, project ramp ups and absence of seasonality. However, due to rupee appreciation, rupee revenues are expected to grow 1.1% Q oQ . E B ITDA margins are expected to improve ~150 bps Q oQ led by improvement in utilisation and lower sub contracting cost. Investor interest: Deal pipeline in telecommunication & enterprise segment, opportunities in 5G , margin improvement in portfolio companies and long term growth opportunity Larsen & LTI is expected to report healthy Y oY growth due to low base last year (led by Toubro Infotech weakness in top client). On a Q oQ basis, revenue is expected to increase 2.7% mainly led by project ramp ups, cross currency tailwind and healthy growth in BFSI vertical. In rupee terms, revenue is expected to grow 1.1% Q oQ . E B ITDA margins are expected to improve 43 bps Q oQ led by operating leverage benefit. Investor interest: H2F Y 21E growth trajectory, dependence on H1 B visa, large deal pipeline and PAT margin range
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 2
Result Preview | Q2FY21E ICICI Direct Research
Exhibit 3: Company Specific views Company Remarks Info Edge Billings in Naukri declined 44% YoY in Q1FY21 and 71.1% YoY in 99acres. We believe, in the near term, revenues will be under pressure and expect a recovery in revenues from Q3FY21E onwards. In Q2FY21E, we expect revenues to decline 11.5% YoY mainly led by 13.0% YoY decline in Naukri revenues and 20.0% YoY dip in 99acres. However, EBITDA margins are expected to improve 404 bps YoY to 35.4% mainly led by rationalisation of advertising expenses. As a result, PAT is expected to increase 4.1% YoY to | 87.7 crore. Investor interest: Outlook on recovery of key verticals, acquisition via fund raising, update on Zomato & other new investments
MindTree MindTree is expected to report revenue growth of 4.0% QoQ in dollar terms due to lower base (as previous quarter was sharply hit by decline in travel vertical), growth in top client and cross currency tailwind. In rupee terms, the revenues is expected to increase 2.6% QoQ (lower than dollar growth due to rupee appreciation). EBITDA margin is expected to increase 133 bps QoQ mainly led by absence of visa cost (90 bps), cross currency tailwind, cost rationalisation partially offset by rupee appreciation. PAT is expected to increase 74.6% YoY mainly due to low base in the previous year. Investor interest: Multi year annuity deals, progress on rationalisation of tail accounts, mining of strategic accounts, margin outlook, travel vertical outlook, growth in top client and merger with LTI Coforge The company is expected to outperform midcap companies in terms of revenue growth. Revenues in dollar terms are expected to increase 7.4% QoQ mainly led by ramp up of deal wins in BFSI & travel vertical and lower base in previous quarter (as previous quarter was impacted by exposure to airlines ~13% of revenues). In terms of rupee revenues, the company is expected to grow 6.0% QoQ. EBITDA margins is expected to increase 160 bps QoQ due to absence of ESOP charges (~113 bps) and higher utilisation. Healthy improvement in operating margins is expected to result in 41.3% QoQ increase in PAT. Investor interest: Outlook on travel vertical, large deal pipeline in BFSI, insurance & healthcare and margin outlook Teamlease Teamlease is expected to report a 10.2% YoY decline in revenues mainly led by 10% YoY Services dip in general staffing and sharp fall in HR services (down 56.8% YoY) . General staffing is expected to witness volume and pricing pressure due to slowdown in economy. However, cost rationalisation is expected to result in flat EBIT margins YoY. The fall in revenues coupled with higher depreciation expenses is expected to negatively impact PAT (down 17.1% YoY). Investor interest: Outlook on general staffing, outlook on HR profitability and long term margin trajectory
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 3
Result Preview | Q2FY21E ICICI Direct Research
Exhibit 4: ICICI Direct Coverage universe IT EP S (|) P /E (x) RoCE (%) RoE (%)
Com pany Cm p (|) TP (|) Rating Mcap (| Cr) F Y20 F Y21E F Y22E F Y21 F Y22 F Y20 F Y20 F Y21 F Y22 F Y20 F Y21E F Y22E E E E E HCL Tech (HCLTEC) 817 885 Hold 2,19,368 40.8 46.3 52.5 20 18 16 23.0 23.0 23.2 21.6 20.5 19.8 Infosys (INFTE C) 1,015 1,000 B uy 4,38,701 38.9 43.3 50.3 26 23 20 30.8 31.6 33.4 25.2 25.7 27.0 TC S (TC S ) 2,507 2,400 Hold 9,34,125 86.2 84.3 94.4 29 30 27 43.5 42.7 49.1 37.5 37.0 42.8 Tech M (TECMAH) 815 765 B uy 76,338 45.9 44.0 51.0 18 19 16 19.1 16.4 17.4 18.5 16.0 16.7 Wipro (WIPRO) 316 300 B uy 1,89,100 16.6 17.5 19.3 19 18 16 19.3 18.2 18.7 17.4 16.3 16.7 Mindtree (MINCON) 1,343 1,160 B uy 21,985 38.3 51.8 60.3 35 26 22 23.0 26.6 27.4 20.0 22.9 23.3 LTI (LTINFC) 2,550 2,320 Hold 44,095 86.6 97.1 113.6 29 26 22 30.7 29.2 29.2 28.1 26.4 26.2 Coforge (NIITE C) 2,339 2,200 B uy 13,759 71.4 75.3 94.4 33 31 25 23.0 24.7 26.0 18.5 19.4 21.2 Infoedge (INFE DG) 3,655 3,555 Hold 46,774 26.8 27.8 33.4 136 131 110 18.0 10.6 12.0 13.5 7.9 8.9 Teamlease (TEASER) 2,229 2,205 B uy 3,769 20.5 48.2 62.8 109 46 35 15.0 12.7 14.1 6.5 12.9 14.5
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 4
Result Preview | Q2FY21E 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]
ICICI Securities | Retail Research 5
Result Preview | Q2FY21E ICICI Direct Research
ANALYST CERTIFICATION
I/We, Devang Bhatt, PGDBM, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.
Disclaimer in retail research report:
ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a SEBI registered Research Analyst with SEBI Registration Number – INH000000990. ICICI Securities Limited SEBI Registration is INZ000183631 for stock broker. ICICI Securities is a subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com
ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.
Recommendation in reports based on technical and derivative analysis centre on studying charts of a stock's price movement, outstanding positions, trading volume etc as opposed to focusing on a company's fundamentals and, as such, may not match with the recommendation in fundamental reports. Investors may visit icicidirect.com to view the Fundamental and Technical Research Reports.
Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.
ICICI Securities Limited has two independent equity research groups: Institutional Research and Retail Research. This report has been prepared by the Retail Research. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Research.
The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances.
This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.
ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months.
ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co- managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction.
ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this report.
Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.
ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report.
Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report.
ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.
Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report.
We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.
This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.
ICICI Securities | Retail Research 6