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IT Q4FY22 Preview: Seasonal Moderation In Growth Momentum

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Emkay Global Financial Services expect healthy revenue growth momentum to continue on the back of a broad-based demand environment, albeit seasonal factors should weigh on QoQ growth.

 
IT Q4FY22 Preview: Seasonal Moderation In Growth Momentum

The USD revenue growth is expected in the range 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.

Emkay Global expects Infosys to guide 12-15% CC YoY revenue growth with 22-24% EBITM for FY23. HCL Tech 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. Emkay Global believes continued revenue growth momentum with stable margins is required to sustain current valuations. The pecking order is Infosys, Wipro, HCL Tech, Tech Mahindra, and TCS among Tier-1 names, and Mphasis, Route, Birla Soft, Eclerx, FirstSource Solutions and Persistent Systems in mid-caps.

Tight labor markets to weigh on margins: Except for Coforge, Mphasis, and Eclerx, 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.

HCL Tech, Tech Mahindra, Mindtree, Persistent Systems and Firstsource Solutions are expected to report relatively higher sequential declines in margins, with the rest reporting largely flat margins. Coforge is expected to report a 140bps expansion in EBITM sequentially and remain an outlier on the back of revenue growth momentum, higher offshoring, higher utilization, flattening employee pyramid, and higher license revenue.

 

The key monitorables for the quarter will be 1) FY23 revenue growth and margin guidance, 2) CY22 IT budget, 3) management commentary on any impact on tech spending from higher energy prices, inflation and potential economic slowdown, 4) demand trends in key verticals such as BFSI, Retail, Manufacturing and Communications, 5) deal intake/pipeline in Q4, 6) pricing environment considering high inflation and tight labor markets, 7) margin outlook, and 8) supply-side challenges and attrition.

Smaller deals to drive deal intake

ACV of deals signed to remain strong: Emkay expects the deal intake to remain healthy across companies in Q4, driven by an uptick in smaller deals as deal tenures have become shorter due to clients' urgency to execute digital transformation projects in a short span rather than signing large, longer-tenure deals which follow lengthy due diligence and legal processes. Management commentary on large deals pipeline and deal closures would be important to gauge confidence on growth continuity and better predictability.

Earnings revision and valuation:

Emkay expects IT companies to sustain the growth momentum on healthy broad-based demand and a robust deal intake/pipeline. IT companies are seeing a conducive environment for price increases; however, near-term margins are expected to remain under pressure as pricing improvements is lagging the impact of salary inflation. IT companies have substantially increased their fresher intake to expand the talent pool of skilled employees, which should hopefully address the shortage of skilled employees and reduce the cost of delivery. Emkay remains positive on the demand outlook and expect healthy revenue growth momentum. Sustained revenue growth momentum, flattening employee pyramid, offshore shift and gradual increase in realizations should support margins and help in negating the pressure from salary inflation and the likely increase in travel and other discretionary costs with back to office trends.

Read more about: infosys it
Story first published: Tuesday, April 5, 2022, 14:25 [IST]
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