Information Technology...

January 5, 2022
Topline, Profitability (Coverage Universe)

Strong revenue momentum to continue despite 110000

100000
30
90000 25
seasonality 80000

142519
137119
130418
20

123614
70000

120204
60000
Normally, this quarter is seasonally weak due to furloughs. However, last

Result Preview
15

| Crore

(%)
50000
year (Q3FY21), we saw an aberration to this trend. Q3FY22 is expected to 40000 10
30000
be another strong quarter for IT companies after strong performance 20000 5
10000
witnessed in Q2FY22. Growth momentum is expected to continue further 0 0
with mid-caps outperforming Tier I companies. We expect companies to

Q3FY22E
Q3FY21

Q4FY21

Q1FY22

Q2FY22
report healthy revenue growth in this quarter led by lower furloughs, ramp
up of deals won in the previous quarters. There would be some cross Revenue EBITDA Margin PAT Margin
currency headwinds, which will dampen dollar revenues to some extent in
the quarter. The companies are also seeing a demand tailwind in terms of Dollar growth, QoQ
investment in newer technologies like cloud transformation, AI/ML, block IT
Q3FY22E Q2FY22
Growth
chain, which further propel demand in coming quarters. In terms of Services (%)
margins, we expect them to remain stable (barring Coforge that is expected TCS 6,459.7 6,333.0 2.0

to post strong QoQ margin expansion) since supply side pressure would Infosys 4,137.9 3,998.0 3.5

restrict margin expansion in proportion to revenue growth. Wipro ^ 2,665.1 2,580.0 3.3
HCL Tech 2,874.0 2,790.7 3.0
We expect Tier-1 IT companies to see revenue growth in the range of ~2.5-
4% QoQ (on an organic basis) in constant currency terms. However, there

ICICI Securities – Retail Equity Research

Tech M 1,516.8 1,472.6 3.0
would be cross currency headwinds in the range of 50-70 bps, which would LTI 534.5 509.0 5.0
impact dollar revenue growth negatively. Among tier 1, TCS, Infosys & Mindtree 365.9 350.1 4.5
Wipro are expected to see dollar revenue growth of 2-3.5% QoQ, Coforge 223.4 212.8 5.0
respectively. HCL Technologies (HCLT) is expected to witness dollar Staffing (in |)
revenue growth of 3.0%. Among Tier 2, LTI & Mindtree are expected to see Teamlease 1,598.5 1,523.6 4.9
dollar revenue growth of 5.0% and 4.5% QoQ while Coforge is expected to ^ IT services
witness organic revenue growth of 3% QoQ (5% including acquisition). We
prefer Infosys, LTI in tier-1 and Coforge in midcap. Top Picks

Margins expansion to be restricted due to supply side pressure Infosys, LTI & Coforge

HCL Tech’s margins in the last quarter were impacted by weak

Research Analysts
performance from P&P business, however for Q3FY22, we expect margins
Sameer Pardikar
to improve sequentially despite wage hike (to selected set of employees)
[email protected]
impact. For TCS, we expect margins to improve sequentially due to
pyramid optimisations and higher offshoring. For Wipro, margins are
[email protected]
anticipated to be marginally lower QoQ due to higher employee costs. For
Infosys, we expect margins to improve sequentially.
Cheragh Sidhwa
Exhibit 1: Estimate for Q3FY22E (| crore) [email protected]
Revenue Change (%) EBITDA Change (%) PAT Change (%)
Company
Q3FY22E YoY QoQ Q3FY22E YoY QoQ Q3FY22E YoY QoQ
HCL Tech 21,529.4 11.5 4.2 5,124.0 -5.9 5.9 3,362.4 -15.5 3.0
Infosys 30,993.1 19.5 4.7 8,169.8 10.2 4.3 5,737.1 10.4 5.8
L&T Infotech 4,003.0 27.0 6.3 784.6 7.2 7.0 585.3 12.7 6.1
Mindtree 2,740.3 35.4 6.0 572.7 22.4 7.9 425.2 30.2 6.6
Coforge 1,673.6 40.6 6.6 307.9 53.3 12.5 172.4 41.3 17.4
TCS 48,382.9 15.2 3.2 13,644.0 11.8 4.0 9,941.2 14.3 3.3
Teamlease 1,598.5 21.1 2.7 34.0 20.0 13.0 24.6 52.9 42.3
Tech Mahindra 11,360.7 17.8 4.4 2,101.7 10.9 5.3 1,405.7 7.3 5.0
Wipro 20,237.8 29.2 2.9 4,362.7 4.5 2.3 2,952.6 -0.5 0.7
Total 142,519.3 18.6 3.9 35,101.3 7.8 4.4 24,606.5 6.3 4.1
Source: Company, ICICI Direct Research,
 Result Preview | Q3FY22E ICICI Direct Research

Revenue, margin guidance outlook key monitorable

EBIT/EBITDA margin impact
In the current quarter, key thing to watch will be improvement in deal EBIT Change
pipeline, upgrades in revenue guidance (we expect Infosys to up their FY22 Q3FY22E Q2FY22
margins (bps)
revenue guidance further from 16.5-17.5% given in Q2), hiring & attrition TCS 25.8 25.6 20
trends, margin outlook and business impact due to sudden rises in Covid Infosys 23.7 23.6 16
cases globally. Further, outsourcing trend in Europe, trends in digital Wipro ^ 17.6 17.7 (10)
technologies, vertical specific commentary, offshoring and long-term IT HCL Tech 19.2 19.0 20
trends become important from an investor’s perspective.
EBITDA margins
Exhibit 2: Company Specific view Tech M 18.5 18.3 16
Company Remarks LTI 19.6 19.5 14
TCS The company expected to cotinue its revenue momentum, however supply side pressure would Mindtree 20.9 20.5 38
restrict margin expansion. TCS is expected to register 2.7% QoQ growth in constant currency
Coforge 18.4 17.4 96
led by continued improvement in demand from BFSI, healthcare and retail, acceleration in digital
technologies, ramp up of deals. Further, cross currency headwind would lead to revenue growth Staffing (in %)
of 2.0% QoQ in dollar terms. In rupee terms, revenue is expected to increase 3.2% QoQ. EBIT Teamlease 2.1 2.2 (12)
margins are expected expand by 20 bps QoQ to 25.2% led by flattening employee pyramid, ^ IT services
higher offshoring. PAT is expected to improve 3.3% QoQ mainly led by better operating
performance. Investor interest : i) supply-side challenges and attrition ii) margin outlook iii) deal
$/|
momentum iv) subcontracting costs v) CY22 IT budgets

Infosys We expect some ramp up in Dailmer deal as well as continued growth momentum, however
supply side pressure would restrict margin expansion. Infosys is expected to register 4% QoQ
growth in CC led by continued strong momentum from financial services, retail, communication,
energy and manufacturing. Cross currency headwinds are expected to lead to 3.5% QoQ growth
in dollar term. Rupee revenues are expected to increase 4.7% QoQ. EBIT margins are expected
to expand 20 bps QoQ. PAT is expected to improve ~5.8% QoQ. Investor interest: some colour
on demand environment in FY23E ( We expect the company to increase revenue
guidance for FY22), vertical wise commentary, ramp up of Daimler deal, traction in digital
technologies, and pricing environment

Wipro Wipro had guided for 2-4% CC growth in Q3 for IT services. We expect the company to report
4.0% QoQ CC growth in revenues in IT services. We expect dollar revenue growth of 3.3% QoQ,
factoring in 70 bps cross currency headwind. The company is expected to report 3% QoQ rupee $ vs. global currencies
growth. EBIT margins in global IT services are expected to decline 10 bps QoQ, due to impact
of salary hike for the lower pyramid amid higher attrition. Overall EBIT margins are expected to
decline 30 bps QoQ due to continued weak performance from ISRE. Consequently, PAT is
expected to flattish QoQ. Investor interest: Commentary on recent M&A and potential benefits,
deal wins, further wage hike, vertical commentary, commentary of client’s IT budget and
revenue guidance

HCL Tech HCL Technologies is expected to report 3.5% QoQ revenue growth in CC terms mainly led by
broad based growth across verticals and re-bound in product revenues ( which had seen sharp
decline QoQ in the last quarter). The revenues are expected to be partially offset by cross
currency impact of 50 bps for the quarter, dollar revenues are expected to up 3% QoQ. EBIT
margins for the quarter are expected to improve 20 bps QoQ, negating 80-90 bps impact due
to salary hikes, on operating leverage and rebound in P&P business. PAT is expected to improve
3% QoQ. Investor interest: FY23E revenue & margin guidance, commentary on deal pipeline
especially multi-year as well as pricing

Tech Mahindra Tech Mahindra is expected to witness 3.5% QoQ growth in CC revenues. However, dollar
revenue is expected to grow 3% QoQ due to 50 bps cross currency headwinds. Rupee revenues
are expected to grow 4.4% QoQ. We expect EBIT margin to improve 10 bps QoQ to 15.3% as
supply side challenges restrict margin expansion. PAT is expected to improve 5% QoQ due to
lower tax and higher other income. Investor interest: Outlook on margin, large deals and
incremental order flow from 5G services

Source: Company, ICICI Direct Research

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 Result Preview | Q3FY22E ICICI Direct Research

Exhibit 3: Company Specific views

Company Remarks
Larsen & Toubro The company is expected to continue revenue momentum but supply side pressures are
Infotech expected to restrict margin expansion. The company is expected to report 5.5% QoQ CC
growth. Growth would be broad based and led by ramp up of deals & improvement in
discretionary spend. In dollar term, the growth is expected to be 5% QoQ due to 50 bps cross
currency headwinds. In rupee terms we expect revenues to increase 6.3% QoQ. However, we
expect LTI's EBIT margin to expand 20 bps QoQ at 17.4% due to supply side pressure and
lower utilisation. PAT is expected to grow 5% QoQ. Investor Interest: Outlook on 14-15% net
profit margin for FY23, deal pipeline

MindTree The company is expected to register 5.0% QoQ growth in CC terms mainly led by ramp up of
deals in BFSI, improvement in travel vertical and healthy growth in top client. In dollar terms,
revenues are expected to grow 4.5% QoQ due to 50 bps cross currency headwinds. Rupee
terms revenues are expected to increase 6.0% QoQ. EBIT margins are expected to improve by
only 20 bps QoQ despite strong growth, due to elevated employee expenses amid talent
crunch. Investor interest: Traction in Europe, multi-year annuity deals, progress of health
vertical, mining of strategic accounts, revenue & margin outlook for FY23E, travel vertical
outlook, growth in top client and merger with LTI

Coforge Coforge is expected to register 5.5% QoQ growth in revenues of in CC terms, out of which 3% is
organic and rest is led by acquisition of SKS global. In dollar terms, we expect 5% QoQ growth
due to 50 bps QoQ impact on cross currency headwinds. In terms of rupee, we expect the
company to post 6.6% QoQ growth. EBIT margins are expected to expand 120 bps QoQ on
strong revenue growth and defered license revenue from Q2. PAT is expected to grow 17%
QoQ. Investor interest: commentry on revenue guidance, outlook on travel vertical, large deal
pipeline in BFSI, insurance & healthcare, margin and demand outlook

Teamlease We expect the company's overall revenues to improve 4.9% QoQ mainly led by 5% QoQ in
Services general staffing while specialised staffing (mainly led by traction in IT staffing) is expected to
witness a muted performance due to some impact of furlough. We expect margins to decline
10 bps QoQ to 2.1% mainly led by investments in manpower (especially at the top level) and
some impact of weakness in other HR services. Hence, we expect PAT to decline 4% QoQ.
Investor interest: PF trust related commentary

Source: Company, ICICI Direct Research

Exhibit 4: ICICI Direct Coverage universe (IT)

EPS (|) P/E RoCE (x) RoE(x)
Company Name CMP TP (|) Rating Mcap (|) FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E
HCL Tech (HCLTEC) 1,335 1,475 BUY 362,274 45.8 50.6 60.9 29.1 26.4 21.9 23.5 24.1 27.6 20.8 20.5 23.2
Infosys (INFTEC) 1,901 2,060 BUY 808,134 45.5 54.8 64.3 41.8 34.7 29.6 31.7 34.0 37.0 25.2 27.8 30.3
TCS (TCS) 3,878 4,530 BUY 1,434,860 87.6 110.9 133.0 44.2 35.0 29.2 45.9 51.9 55.8 37.5 43.8 46.8
Tech M (TECMAH) 1,783 2,150 BUY 172,291 50.2 64.7 76.8 35.5 27.5 23.2 19.8 22.8 24.4 17.8 20.4 21.4
Wipro (WIPRO) 722 815 BUY 395,439 19.1 21.9 27.8 37.9 33.0 26.0 21.3 22.5 28.3 19.5 21.7 27.5
LTI (LTINFC) 7,560 7,650 BUY 132,721 111.0 137.3 169.9 68.1 55.1 44.5 31.9 33.0 34.0 26.5 27.6 28.5
Mindtree (MINCON) 4,777 4,915 HOLD 78,676 67.4 89.8 109.2 70.9 53.2 43.7 32.5 36.0 36.3 25.7 28.2 28.2
Coforge (NIITEC) 6,112 5,870 BUY 37,995 73.3 115.2 146.7 83.4 53.0 41.7 23.3 28.6 30.9 18.5 25.0 27.1
TeamLease (TEASER) 4,191 4,220 HOLD 7,192 46.5 66.7 101.0 90.2 62.8 41.5 14.2 16.3 19.9 11.6 15.7 18.7
Source: Company, ICICI Direct Research

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 Result Preview | Q3FY22E ICICI Direct Research

RATING RATIONALE
ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
stocks according to their notional target price vs. current market price and then categorizes them as Buy,
Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is
defined as the analysts' valuation for a stock
Buy: >15%
Hold: -5% to 15%;
Reduce: -15% to -5%;
Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
[email protected]

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 Result Preview | Q3FY22E ICICI Direct Research

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ICICI Securities | Retail Research 5