On margin front, we expect a flat-to-upward trend with rupee depreciation the key tailwind to offset lower revenue growth in a seasonally weak quarter. Among top-tier IT firms, we expect Wipro to post 200 bps EBIT margin expansion in its combined IT services business led by the absence of one-time items and rupee depreciation. Other top-tier firms are expected to post largely range-bound margins with some margin gains likely to be reinvested to sustain revenue growth, going forward. Within our mid-cap coverage universe, we expect Persistent (+105bps QoQ) to report the strongest margin performance aided by an uptick in IP business and rupee depreciation.
We would watch out for CY19 IT budget outlook, outliers for FY20E revenue growth in the form of BFSI and Retail growth and outlook, apart from telecommunications vertical outlook, digital growth and deal sizes in context of Accenture’s impressive growth, apart from deal flows. Return of cash to shareholders is a theme that continues to play out with TCS, Infosys, Wipro, HCLT, Hexaware, Mindtree and eClerx all resorting to share buybacks to make better usage of their cash balances.
Seasonally weak quarter, outlook more important to gauge FY20E
We expect 1-7 per cent QoQ CC revenue growth for IT firms under our coverage universe in 3QFY19E. USD revenue is likely to grow at 0-6.6 per cent QoQ, with a likely adverse cross-currency impact of 25-70 bps. Digital revenue should continue to drive growth. USD revenue growth on year-on-year (YoY) basis is likely to come in at 7.6 per cent at an aggregate level. Individually, just four of the 14 stocks under our coverage will report double-digit YoY growth on adverse cross-currency movement. TCS will lead growth among top-tier IT firms, while Mindtree should lead mid-tier players.
Our top picks in the sector are: Tech Mahindra among the large-caps, Sonata Software among the mid-caps.
The author is a Research Analyst at Reliance Securities. Views expressed are his own.