Commentary to remain encouraging: Most vendors should announce strong revenue growth guidance and should remain cautiously optimistic on FY20 outlook (cautious on Brexit). Commentary/guidance by Accenture has been encouraging (revised guidance in its Q2 earnings), which along with strong macros in the US, bodes well for our positive stance and sector Overweight view. The players that should guide for strong double-digit growth for FY20E includes HCL Tech, TCS, Mphasis, LTI, and Hexaware.
Profitability to see downtick: We expect downward pressure on profitability for the quarter given adverse currency realizations and sustained supply-side challenges that could restrict operating leverage gains. In FY19, most vendors (except Infosys) witnessed an improvement in profitability and thus the commentary should be watched out for plans toward business investments, skilling, sub-contracting, and localization.
Actionables: Given current valuations and our expected earnings, key results that could see some action are HCL Tech, which could see a further re-rating as it announces sector-leading revenue growth guidance of 13-15% for FY20E.
On the flip side, Infosys may witness pressure to sustain current valuations of over 18x on TMF basis given modest revenue and margin guidance (we expect 7-9% growth and a stable margin outlook). Performing mid-caps such as Mphasis/LTI may get some fillip on sustained performance. Positive order book, strong outlook and attractive valuations (both trading at about 1.2-1.3x on PEG basis). Among small-cap stocks, we expect names such as Firstsource and Intellect Design to see some positive rub-off on strong outlook and performance.
The authors are analysts tracking the IT sector at Emkay Global. Views expressed are their own.