Monday, April 4, 2022

Information Technology: Q4FY22 Preview: Seasonal Moderation In Growth Momentum; Margins To Remain Under Pressure

* We expect healthy revenue growth momentum to continue on the back of a broad-based demand environment, albeit seasonal factors should weigh on QoQ growth. We expect USD revenue growth of 0.9-4.9% QoQ (1.2-5.2% CC) for Tier-1 IT services companies. Tier-2 IT services companies are expected to grow in the range of 3.6-7.6% CC QoQ.

*  Except for COFORGE, MPHL and ECLX, EBITM is expected to remain flat- to lower sequentially due to higher backfilling costs amid a tight labor market, increase in travel and other discretionary costs with the easing of travel restrictions, and back-to-office trends.

*  We expect INFO to guide 12-15% CC YoY revenue growth with 22-24% EBITM for FY23. HCLT is likely to guide for double-digit revenue growth while lowering EBITM guidance range to 18-20%. Wipro should guide for 2-4% CC QoQ revenue growth for Q1FY23.

* After significant outperformance in H1FY22, the Nifty IT index return came in line with the broader markets in H2FY22. We believe continued revenue growth momentum with stable margins is required to sustain current valuations. Our pecking order is INFO, WPRO, HCLT, TECHM, and TCS among Tier-1 names, and MPHL, ROUTE, BSOFT, ECLX, FSOL and PSYS in mid-caps.

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