Tuesday, November 30, 2021

Indian IT Revenue Growth Accelerates, Supply-Side Challenges Persist

 * IT companies reported strong revenue acceleration in Q2FY22, driven by cloud adoption, digital transformation, cyber security and analytics. We believe that robust broad-based demand and a healthy deal intake/pipeline provide good near-term revenue visibility.

* Except for HCLT, Tier-1 companies' margins remained largely flat QoQ. HCLT's margin was down 60bps QoQ due to the weakness in the Products business. Despite supply-side challenges, Tier-II firms' margin performance remained resilient.

* Tier-II companies outperformed Tier-I peers in sequential revenue growth as well as margin expansion. Margin expansion was aided by revenue growth-led operating leverage, offshore shift, and productivity improvement which offset salary inflation and supply-side challenges.

* We roll forward target prices to Dec'23 and align our expectations of higher growth longevity for coverage companies. We upgrade TCS (TP: Rs4,100) and MPHL (TP: Rs3,730) to Buy, considering the recent stock underperformance. Our pecking order is INFO, TECHM, HCLT and TCS among Tier-1 names, and PSYS, FSOL, MPHL and BSOFT in mid-caps.

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