Investors Eye

Sector Update

IT
Sector Update > Q1FY2017 earnings review
Mixed performance, macro issues create uncertainty
Q1FY2017 result review
Mixed performance: Top five Indian IT service companies have reported mixed results for Q1FY2017 on various parameters.
The reported revenue growth of 3.3% QoQ (versus our estimate of 3.6% QoQ) and 2.8% QoQ on a constant-currency (CC)
basis was lower than anticipated despite strong seasonality. HCL Tech is leading the pack in terms of topline growth, with
a CC revenue growth of 6.0% QoQ (3.3% QoQ organic), followed by TCS (3.1% QoQ), Wipro (2.0% QoQ, almost inorganic),
Infosys (1.7% QoQ) and Tech Mahindra (0.4% QoQ). While HCL Tech has delivered strong set of numbers on all fronts,
Infosys has disappointed with a CC revenue growth of 1.7% QoQ after four back-to-back quarters of solid performance.
Cognizant has registered a CC growth of 5.2% QoQ, in line with the companys guidance. On the Operating Profit Margin
(OPM) front, Infosys, TCS and HCL Tech have delivered better-than-anticipated performance on the back of improvement in
operational efficiencies, while Wipro and Tech Mahindra have lagged the estimates owing to wage hikes, margin headwinds
from acquisitions, etc.
Slow IT spends and Brexit will act as overhang for the sector: The managements of the most the IT companies have
acknowledged slowdown in demand for IT services in the financial sector and delay in business decision-making in the near
term in Europe in the wake of Brexit. Accordingly, Infosys and Cognizant have cut their FY2017 revenue growth guidance by
a significant margin on account of lower discretionary spending in some verticals and macro-economic headwinds relating
to Brexit. Wipro has also guided for muted revenue growth for Q2FY2017, factoring in the current challenging environment.
Interestingly, HCL Tech has given industry-leading revenue growth guidance for FY2017 on account of incremental revenues
through the inorganic route. Though managements of Infosys and TCS have noted that Brexit could have a material impact
in the near-to-medium term, they see business opportunities in the longer term in view of UKs exit from the EU.
Outlook:
Macro challenges cloud outlook, spending on digital gains traction: Given the macro-economic headwinds relating to
Brexit, lower discretionary spending (especially in the financial sector), weaker-than-expected Q1FY2017 revenue growth
and pricing pressure during project renewals, the near-to-medium term outlook for the Indian IT sector remains uncertain.
However, we believe that higher incremental spending in the digital space, coupled with strong traction in some industry
verticals would provide impetus for increasing IT budgets over the next 2-3 years. We continue to maintain our stance that
the IT sector is going through a transition phase, with growing IT spends in new-age technologies expected to drive long-term
growth trajectory.
Valuation:
Comfort on valuations, but near-term uncertainties will restrict outperformance: Stocks in the IT space have corrected
recently, owing to potential impact from macro headwinds (relating to Brexit), along with lower discretionary spends in
some pockets. Currently, IT sector stocks are attractively valued at PE ratio of 11-18x based on FY2018 earnings estimates.
However, macro uncertainty, US presidential election and pressure on legacy services are making us cautious on the sector.
Nevertheless, we believe that the ongoing digital transformation in the IT industry (spending moving away from legacy
spending) would create long-term business opportunities. We remain selective in our stock preference. In the order of
preference, we are positive on Infosys, TCS and HCL Tech while in the mid-cap space, we remain positive on Persistent
Systems.
Leaders: Infosys, TCS
Laggards: Wipro
Preferred picks: TCS, Infosys, HCL Tech (in large-cap space) and Persistent Systems (in mid-cap space).
Q1FY2017 results snapshot
Revenues
(Rs Cr)

QoQ
(%)

YoY
(%)

EBITDA
(Rs Cr)

EBITDA
Margin
(%)

QoQ
(BPS)

YoY
(BPS)

Net
profit
(Rs cr)

QoQ
(%)

YoY
(%)

TCS

29,305.0

3.0

14.2

7,838.0

26.7

-105

-131

6,317.0

-0.4

10.7

Infosys

16,782.0

1.4

16.9

4,447.0

26.5

-153

30

3,436.0

-4.5

13.4

Wipro

13,599.2

-0.2

11.1

2,652.8

19.5

-107

-179

2,051.8

-8.2

-6.2

HCL Technologies*

11,336.0

6.0

15.9

2,521.0

22.2

76

2,047.0

6.3

14.8

Company

Tech Mahindra

6,920.9

0.5

10.0

1,029.1

14.9

-185

49

750.1

-16.4

10.9

Persistent Systems

701.8

3.6

40.2

105.8

15.1

-79

-430

73.3

-9.3

9.0

Firstsource Solutions

893.5

2.8

20.5

119.2

13.3

54

204

73.4

-3.7

38.7

* Changed its financial year ending from June-end to March-end during March 2016-ending
quarterly results; hence, FY2016 consisted only 9 months

Source: Company, Sharekhan Research

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Sector Update

Valuations
EPS (Rs)
FY17E
63.4

FY18E
71.5

FY16
17.4

P/E (x)
FY17E
16.2

FY18E
14.3

2,750.0
590.0
965.0
NA
790.0

2,636.7
524.8
785.5
469.4
665.0

122.9
36.2
40.3
36.3
37.2

135.4
37.5
57.5
37.0
38.6

150.9
42.0
66.0
41.5
45.8

21.5
14.5
19.5
12.9
17.9

19.5
14.0
13.7
12.7
17.2

17.5
12.5
11.9
11.3
14.5

52.0

44.7

3.9

4.7

5.7

11.3

9.5

7.8

Price target
(Rs)

CMP (Rs)

Buy

1,250.0

Buy
Hold
Buy
Neutral
Buy
Hold

Infosys
TCS
Wipro
HCL Technologies*
Tech Mahindra**
Persistent Systems

1,024.3

FY16
59.0

Reco

Company

Firstsource Solutions

* Changed its financial year ending from June-end to March-end during March
2016-ending quarterly results; hence, FY2016 consisted only 9 months
**EPS of Tech Mahindra excludes treasury shares

Source: Company, Sharekhan Research

The quarters snapshot

June 2016 quarters performance
Company

Margins

Net income

Upward/
Downward

Reason

Revenues

June 2016 quarter performance

Reco

Infosys

Below

In line

In line

Fine-tuned

We have tweaked our earnings estimates owing Buy

to weaker-than-anticipated revenue performance
in Q1FY2017, along with macro issues relating to
Brexit

TCS

In line

In line

Above

Maintained

Given the potential impact from Brexit-linked Buy

macro headwinds, we have broadly maintained
our earnings estimates for FY2017 and FY2018

Wipro

In line

Below

Below

Fine-tuned

We have tweaked our earnings estimates for Hold

FY2017 and FY2018 owing to weak guidance
for Q2FY2017, its exposure to certain troubled
verticals and business restructuring activities in
coming quarters

HCL Technologies

Above

Above

Above

Fine-tuned

We have tweaked our estimates for FY2017 and Buy

FY2018 on account of higher-than-expected
performance in Q1FY2017 and incremental
revenue from the strategic IP partnership

Tech Mahindra

In line

Below

Above

Fine-tuned

We have tweaked our earnings estimates owing Neutral

to lower profitability of its acquired entities
(especially LCC and Comviva)

Persistent Systems

Below

Below

Below

Fine-tuned

We have tweaked our estimates for FY2017 and Buy

FY2018 on account of miss on our Q1FY2017
estimates
and
incorporating
higher-thananticipated amortization expenses

Firstsource Solutions

Above

Above

In line

Fine-tuned

We have tweaked our revenue estimates for Hold

FY2017 and FY2018, driven by better-thanexpected performance of ISGN and incremental
revenues from Sky deal, while broadly maintaining
earnings estimates on account of higher effective
tax rate going ahead

Source: Sharekhan Research

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Highlights of the quarters performance

Quarterly revenue run rate of tier-1 IT companies (reported basis)
Quarter ended

Q2FY14

Infosys

Q3FY14 Q4FY14

2,066.0

QoQ Growth
TCS

Q3FY15

Q4FY15

Q1FY16

Q2FY16

Q3FY16

Q4FY16

Q1FY17

2,201.0

2,218.0

2,159.0

2,256.0

2,392.0

2,407.0

2,446.0

2,501.0

1.6

(0.4)

2.0

3.2

0.8

(2.7)

4.5

6.0

0.6

1.6

2.2

3,438.0

3,503.0

3,694.0

3,929.0

3,930.6

3,900.0

4,036.4

4,156.0

4,145.4

4,207.0

4,362.0

5.4

3.0

1.9

5.5

6.4

0.0

(0.8)

3.5

3.0

(0.3)

1.5

3.7

1,631.1

1,678.4

1,720.2

1,740.0

1,771.5

1,795.4

1,774.5

1,794.1

1,831.3

1,838.3

1,882.1

1,931.0

2.7

2.9

2.5

1.2

1.8

1.3

(1.2)

1.1

2.1

0.4

2.4

2.6

1,270.3

1,321.3

1,361.2

1,406.9

1,433.5

1,490.8

1,490.8

1,537.5

1,544.5

1,566.1

1,587.2

1,690.7

3.5

4.0

3.0

3.4

1.9

4.0

0.0

3.1

0.5

1.4

1.3

6.5

758.0

791.0

825.0

855.0

900.5

924.3

984.1

989.1

1,011.0

1,014.7

1,022.6

1,031.5

4.4

4.3

3.6

5.3

2.6

6.5

0.5

2.2

0.4

0.8

0.9

QoQ Growth
Tech M
QoQ Growth

4.7

Total

Q2FY15

2,133.0

3.8

QoQ Growth
HCL Tech

Q1FY15

2,092.0

3,337.0

QoQ Growth
Wipro

2,100.0

9,062.4

QoQ Growth

9,328.7 9,501.4

4.2

2.9

9,828.9 10,235.5 10,359.1 10,308.4 10,613.1 10,934.8 10,971.5 11,144.9 11,516.2

1.9

3.4

4.1

1.2

(0.5)

3.0

3.0

0.3

1.6

3.3

Source: Company, Sharekhan Research

EBIT margins (%): Better than anticipated performance

Particulars

Q2FY14

Infosys

Change in BPS (QoQ)

Wipro (IT)
Change in BPS (QoQ)

Q3FY15

Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17

23.6

25.0

25.5

25.1

26.1

26.7

25.7

24.0

25.5

24.9

25.5

24.1

140

50

-40

101

59

-100

-169

149

-60

60

-138

30.2

29.7

29.1

26.3

26.8

27.0

27.2

26.3

27.1

26.6

26.1

25.1

320

-50

-60

-280

55

15

20

-91

81

-50

-55

-98

22.5

23

24.5

22.8

22.0

21.8

22.0

21.0

20.7

20.2

20.1

17.8

Change in BPS (QoQ)

TCS

Q3FY14 Q4FY14 Q1FY15 Q2FY15

250

50

150

-170

-84

-16

23

-107

-27

-50

-14

-230

23.8

23.7

24.7

24.2

23.9

23.8

21.3

20.2

20.6

20.0

20.8

20.6

280

-10

100

-50

-30

-10

-246

-113

39

-60

77

-19

Tech Mahindra

21.5

19.4

16.7

15.2

17.4

17.8

12.4

11.6

13.7

14.4

13.6

12.0

Change in BPS (QoQ)

-174

-211

-276

-144

218

40

-543

-73

206

70

-84

-161

HCL Technologies
Change in BPS (QoQ)

Source: Company, Sharekhan Research

Revenue growth (%) for the quarter

IT Employees trend: Gross addition, net additions & attrition

7.0
6.0

6.0

19200

6.5

3.1
2.2

7200

2.0

TCS

Constant Currency growth

Wipro

-800

HCL
Tech Mahindra
Technologies

Infosys

TCS

Gross Addition (LHS)

Reported Revenue Growth

Source: Company, Sharekhan Research

Wipro

1784

3072

1200

0.0

12%

10515

3200

951

0.4

0.9

8236

1.0

Infosys

14%

0.13

5200

17792

1.8

16%

9200

2.6

3006

3.0

18%

0.18

0.17

11200

13268

in %

13200
3.7

4.0

22%
20%

15200

5.0

2.0

0.21

0.21

17200

HCL
Technologies

Net Addition (LHS)

Tech
Mahindra

10%
8%

Attrition (RHS)

Source: Company, Sharekhan Research

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Vertical-wise revenue growth (% QoQ)

Service-wise revenue growth (% QoQ)

20.0

28

15.8

16.0

5.9
4.3

3.4
2.42.2
0.6

QoQ (%)

QoQ (%)

8.5

7.5

8.0
4.0

21

12.6

11.8

12.0

6.8

5.8

1.3

2.2
3.8
1.2

7.3

5.9
3.8

5.5

Telecom & Media

Infosys

Retail &
transp/CPG

Wipro

0
-0.9

-1.1
-8.9

-15.2
Application Dev.
& Maintainance

Manufacturing &
Hi-tech

HCL

Consulting &
Package
Implementations

TCS

Tech M

Engineering
Soln.

Infosys

Source: Company, Sharekhan Research

IMS

Wipro

BPO

HCL

Source: Company, Sharekhan Research

Geography-wise revenue growth (% QoQ)

20

6.8
2.8

5.76.1
0.9

-21

-0.5

-1.2

-2.1
-2.1

TCS

-14

0.0

BFSI

17.2

14

-7

2.42.7

1.3

-4.0

24.9

Clients concentration

17.8

15

40

Q-o-Q (%)

10
5

2.8 2.4

5.6

4.6

5.4

4.5

2.1

0.5

1.8

4.3

22.2

1.8

0.2
-1.1

-5

TCS

Europe
Infosys

Wipro

Rest of the world

HCL

28.8

13.7
-6.9

-10
USA

21.8

17.6

3.6

10.3
2.5

13.9

Infosys

Wipro

HCL

Top Ten Clients

Tech M

Top Five Clients

Tech M
Top Client

Source: Company, Sharekhan Research

Source: Company, Sharekhan Research

Management commentary
Company

Demand commentary

Infosys

Infosys cut revenue growth guidance for FY2017 on account of lower-than-expected Reduced FY2017 revenue growth
Q1FY2017 results, delay in deal ramp-ups and headwinds in discretionary spending guidance to 10.5-12% on CC basis vs
in consulting projects and package implementations. Further, the company 11.5-13.5% earlier
acknowledged that the Brexit issue could have a material impact on business in the
near term, though it sees opportunities arising in the long term

Guidance

TCS

The management acknowledged that Brexit and change in visa regime in the US could NA
have a material impact in the near to medium term, although Brexit could throw up
business opportunities once things settle down

Wipro

Wipro provided weak revenue guidance for Q2FY2017 owing to restructuring of India
& Middle East business, coupled with softness in its troubled verticals and headwinds
in Semicon space. Also, it noted that Brexit could impact business decision-making in
the near term in Europe, more specifically in the Financial vertical

0.1-1% sequential revenue growth on

a CC basis for Q2FY2017, owing to
its business restructuring activities
along with lower discretionary spends
in certain verticals

HCL Tech

The management sees traction in some of its key verticals (Engineering, Retail,
Healthcare etc), while the financial services space will remain soft. Given the
healthy order book position, the management provided industry leading revenue
growth guidance for FY2017

12.0-14.0% (on CC basis) and 11.213.2% (on reported basis) revenue

growth guidance for FY2017, ahead
of NASSCOMs guidance

Tech
Mahindra

The management sees strong traction in enterprise segment and improvement in NA

deal flows in the core telecom business. Deal pipeline in Q1FY2017 remained flat at
$300 million of TCV QoQ. Note: manufacturing vertical remains muted on the back of
ongoing softness in Oil & Gas and Aerospace sectors
Source: Quarterly earnings conference call

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

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in no event shall SHAREKHAN, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind.

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