June 2019 Results Preview | July 2019
June 2019 Results Preview | Sector: Technology
Margin resilience put to test
Revenue momentum not thwarted yet
Demand traction remains intact
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For 1QFY20, we expect our coverage universe’s revenue /EBITDA / PAT to grow
11% / 9% / 4%.
The order book going into the quarter, the velocity of deal signings, the early
indicators from Accenture’s earnings report and the commentaries by our
coverage universe all indicate that there is no visible slowdown in demand just
There are pockets of portfolios – such as capital markets, regional small banks
and automotive – facing challenging demand conditions. However, these are
likely to drive only marginal and not material deceleration in 1Q or FY20
Expect INFO, TCS to lead sequential revenue growth across tier-I, MPHL in
In tier-I, we expect INFO and TCS to take charge of driving organic growth, as has
been the case in recent quarters.
HCLT’s purchases of IBM IPs are likely to contribute to revenue only from
2QFY20, as against the earlier expectation of a one-month contribution in the
first quarter. As a result, our revenue growth estimate is now down to 1.5% QoQ
CC (+14% YoY CC). Separately, we model flattish sequential revenue growth at
WPRO (in line with midpoint of the guidance) on the back of 1Q seasonality.
TECHM, too, appears to have had a seasonally soft start to the year, with
revenue estimated to decline by 0.5% QoQ in CC.
Among tier-II IT, we expect sanguine revenue traction: MPHL (3.5% QoQ CC) and
NITEC (2.6% QoQ CC) are expected to grow organically, while momentum at
HEXW (5% QoQ CC) is likely to be supported by its acquisition of Mobiquity.
Wage hikes seasonally drag margins in the first quarter of a fiscal. Having said
that, we also reminisce of some exceptions – currency had helped navigate the
pressures in 1QFY19, and weak demand in FY18 had led to altered/deferred
wage hike cycles in 1QFY18.
We expect the EBIT margin across the top-tier to shrink by 50-160bp, with the
contraction particularly pronounced (100bp+) at TCS, INFO and TECHM. TCS’
reported margin in 4QFY19 had ~70bp non-recurring charge.
The situation is no different for tier-II, where – barring MPHL, HEXW and ZENT –
we expect margins to contract by over 100bp for the remaining companies.
Margins seasonality compounded by supply pressures, rising attrition
Watch out for margin guidance, comments on demand traction
Considering the likelihood of a soft start to the year on the profitability front, we
believe INFO’s FY20 margin will likely be closer to the lower end of its 21-23%
TCS has been citing that currency depreciation is a factor embedded in its
business model and budgeting for margins. That absent, the company’s stance
– Research analyst
(Ashish.Chopra@MotilalOswal.com); +91 22
will be crucial.
on margins over the near term
Research Analyst: Anmol Garg
(Anmol.Garg@MotilalOswal.com); +91 22 7193 4271
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.