The association of Indian IT companies are expecting a strong growth in the fiscal year 2019 as most of the companies are able to adapt to the new age digital technologies and are also strengthening in the automation segments which could make the space as one of the strong sectors for the year 2018.
India IT sector has emerged as an outperforming sector in the recent correction. The S&P BSE IT index rose nearly 10 percent compared to 1 percent fall seen in the S&P BSE Sensex so far in the year 2018.
Most experts are turning favourable towards the India IT sector in the near-term as they see the pain in the sector is priced in and with expectations of some more rupee depreciations, the sector is likely to hog some limelight.
The association of Indian IT companies are expecting a strong growth in the fiscal year 2019 as most of the companies are able to adapt to the new age digital technologies and are also strengthening in the automation segments which could make the space as one of the strong sectors for the year 2018.
"Even the tailwind of weakness in rupee against the dollar over last few weeks is also likely to add to their top line numbers. Hence select largecap and midcap IT stocks have much more potential to outperform in the coming quarters.
The calendar year 2018 is likely to be better than 2017 which could drive re-rating. However, the magnitude of acceleration will determine stock returns from here, suggest experts.
A 2-3 percent higher growth in FY2019 is already baked into the stock prices. The path to the higher acceleration of 4-5 percent can lead to further upsides, Kotak Institutional Equities said in a note.
“It is easier to predict the direction of growth than the magnitude of acceleration in our view. We prefer Infosys and Tech Mahindra as expectations embedded in the current valuations are low,” it said.
Kotak Institutional Equities has an ADD rating on Infosys, L&T Infotech, Mindtree and Tech Mahindra.
Indian IT companies expressed hopes of a better FY2019 led by – (1) a better macro environment across key goes, especially North America, (2) better deal flow for some, (3) pipeline of projects and deals and (4) increasing digital deal sizes, companies said on the sidelines of a conference organised by Kotak.
Companies did not quantify the magnitude of improvement although they were optimistic across verticals except in banking and retail where commentary differed.
Nearly all IT companies indicated that simplification and digital transformation of the core will drive up digital deal sizes. “Companies expressed confidence of maintaining margins in a guided band (TCS and Infosys) or improving it (Wipro in the medium term and Tech Mahindra in FY2019),” said the Kotak note.
The note further added that confidence in margin performance emanates from the pricing environment that has not thrown any unexpected surprises, benefits of automation and deriving leverage from investments already made in digital services.
Key takeaways from individual companies from Kotak Institutional Equities annual conference:
Infosys:
Infosys believes that increase in interest rates in the US, tax cuts that can potentially prop spending and a strong macro environment bode well for growth in FY2019. A positive macro can translate into better growth in FY2019 although the company believes it is too early to quantify the magnitude.
Traditional levers such as utilization are maxed out. The onsite mix can reduce and help margins. In addition, L1 and L2 automation can be adopted across a wider range of offerings.
Finally, the share of new services (10 percent of overall revenues) that are in an investment phase, can start contributing to margins after they achieve a particular scale. KIE view is that margins will move in a narrow band in the foreseeable future.
Tech Mahindra:
FY2018 has seen the rationalization of clients and unprofitable portfolio of business leading to impact on growth rates; communication practice will see negligible growth or even decline. Without this rationalization, FY2018 telecom revenue growth would have ranged 5-6 percent.
None of the large clients had a renegotiation in rates/pricing setting the platform for a return to growth in FY2019. Without factoring upside from 5G, mid-single digit revenue growth is possible in communications in FY2019.
Tech Mahindra believes that capex cycle and investments in IT are closely linked. Investments in 5G capex would spur IT spending, per the management.
L&T Infotech:
L&T Infotech’s management has guided for mid-teen growth in FY2018E and is optimistic about continued momentum in FY2019E led by (1) market share gains in top accounts, (2) solid deal wins in the recent past (one USD 100 million+, four USD30-100 million and five USD10-30 million deals), (3) an improving deal pipeline, and (4) addition of new logos—82 new logos added in the past 12 months and 3 of the top 10 deal wins are from new logos.
Growth in FY2019 will be powered by top-20 accounts as well as new logos. From a vertical standpoint, BFS, media and hi-tech and retail CPG verticals will growth faster than the company.
On the services front, analytics, enterprise integration, and mobility, ES and IMS will drive growth. The management expects the growth momentum to continue in CBDT project.
Mindtree:
Mindtree is seeing healthy demand across RTB (run-the-business) and digital portfolios. On RTB front, TCV growth is healthy, pricing is stable and large projects have stabilised after ramp-up.
On the digital front, Mindtree is witnessing benefits of an increase in average deal sizes. The management indicated the deal pipeline is improving and Mindtree’s deal win rate has improved to 34 percent from 22 percent (deals won out of the total deals tracked by Mindtree internally).
It is winning more deals through the advisory channel. Improving deal wins rate should reflect on TCVs in the coming quarters.
Mindtree has retained its sequential revenue growth guidance in dollar terms in Q4FY18 to be broadly similar to Q2 (3 percent) and Q3 (3.9 percent). The management expects EBITDA margin to be flat sequentially at about 15.1 percent.
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