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 Teamlease 2.1 2.2 (6) pressure. F urther, cross currency tailwind would lead to revenue growth of 3.8% 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.