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IT Sector: Q3FY18 results preview -
IT Sector: Q3FY18 results preview
Reliance Securities | Published: 09 Jan, 2018  | Source :

Sector Preview

We expect the USD revenue of the IT firms under our coverage universe to post a combined 1.9% QoQ  rise in 3QFY18. Top-5 IT firms are expected to post 1.5-3% QoQ rise in USD revenue in reported terms (1.6-3.2% in CC terms) with HCL Technologies (HCLT) likely to lead. Mid-sized firms will see variation, with Cyient and Mindtree likely to lead (3% and 2.8% QoQ USD revenue growth, respectively). Crosscurrency movements were varied in 3QFY18, with the USD largely remaining flat against the EUR, appreciating against the AUD (2.7%) and depreciating against the GBP (1.5%).

The IT sector continues to face disruptive trends in terms of SMAC leading to cannibalisation of revenue, apart from pricing pressure in commoditised services, and automation. The IT industry body, NASSCOM projects 7-8% growth in IT-BPO exports in FY18 with the announcement coming as late as June 22, as against its traditional practice of providing industry growth guidance in February, owing to global uncertainty. We do not expect the industry to surpass this growth target and believe high single digit growth is realistic in the near-term.

On margin front, we expect a stable performance despite seasonal weakness owing partly to INR depreciation against key currencies including the USD (0.7%), EUR (0.9%) and GBP (2.1%), and partly due to operational efficiencies and automation. Among top-tier IT firms, we expect Tech Mahindra (TechM) to post 69bps QoQ margin expansion, followed by Infosys with 53bps expansion. TCS, Wipro and HCL Technologies are likely to see range-bound margins. Within our mid-cap coverage universe, we expect Mindtree and KPIT Technologies (KPIT) to post the maximum margin improvement of 224bps and 76bps QoQ, respectively aided by revenue growth and improved operational efficiency.

We expect continuous focus on levers like utilisation and cost efficiency. On YoY basis, margin performance is likely to improve, with 6 companies of our 13 IT coverage universe likely to post expansion to the tune of 44-172bps.

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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.