IT Sector: Q4FY21 Preview – A robust fourth quarter in sight
The results of the fourth quarter of the fiscal year 21 of Indian IT service companies will likely confirm our thesis “Bottom of Tech Upcycle” presented in the Techolution series. In addition, we expect the results to surprise again – higher forecasts, better-than-expected margins and optimistic outlook. In the meantime, Street would have to make revisions to the estimates.
We believe Indian IT companies are poised to embark on a robust fourth quarter driven by: (i) the highest backlog ever; (ii) significant sales acceleration; (iii) robust margins; and (iv) strong prospects. We all like IT stocks in our coverage.
Overarching Cloud and Digital Issues: We believe that a significant shift from offline to online activity has accelerated the adoption of cloud and digital. Our analyzes, based on interactions and inputs from global technology experts, suggest an acceleration in structural demand from 9-10% before the pandemic to 13-14% in FY22 and a further recovery afterwards in FY27.
Forecast of 13–15% / 12–13% by Infosys and HCL Tech for FY 22: We estimate constant sales growth of 1.5–5.2% compared to the previous quarter with cross-currency advantages of between 10 and 70 basis points compared to the previous quarter. TCS would lead the pack with Qoq growth (+ 4.8%), followed by Infosys (+ 4.1%), HCLT (+ 3.5%), Wipro (+ 3.1%) and TECHM (+ 1.5%) in constant exchange rates. We expect Qoq margins to decline for most companies (ex-TCS), led by salary increases and bonuses. We expect Infosys and HCL Tech to expect revenue growth of 13-15% and 12-13%, respectively, in FY22.
Tech Up-Cycle: Robust sales, margins and forecasts: In our view, the results for the fourth quarter of 21 will again surprise with robust sales growth of 2 to 6% (in US dollars) from large caps with a cross-currency tailwind of 10 to 70 basis points . All in all, we expect robust comments, record deal wins and bullish outlook. We prefer Infosys, HCLT, TCS, TECHM, Mindtree, LTI, LTTS, eClerx, Persistent and Cyient and we don’t like any.
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