Nasscom guides for 7-8% growth, lower than 8.6% in c/c of FY2017 - Kotak

Nasscom guided for 7-8% growth in industry exports for FY2018E, down from 8.6% reported in FY2017. The industry body normally lays out guidance in February of every year but deferred the decision this year. Nasscom's guidance is based on broad feedback loop from companies and captives. It cut FY2017 guidance to 8-10% in Nov 2016, from 10-12% at the beginning of the previous year. The growth in industry exports has been at the mid-point or lower end of Nasscom's guidance for five years prior to FY2017. Note that Nasscom's growth assessment could also include some inorganic elements. From an absolute revenue standpoint, the Indian IT has been adding US$10-11 bn of revenues every year on constant currency basis, something which will moderate in FY2018.

Most Tier 1 companies have grown at rates lower than the industry in FY2017

Except HCLT, all Tier 1 companies grew at rates lower than the industry growth rate in FY2018. It is clear that the days for Big 4's (Infosys, Wipro, TCS and HCLT) combined growth outperformance as compared to industry exports growth will get difficult. We attribute this to a few factors-(1) client captives are growing faster with several big names in financial services and retail expanding captive centers aggressively, (2) India operations of global vendors have been growing faster. Accenture had power packed growth in India operations and (3) smaller digital focused players and startups are also contributing on the margin.

Growth pangs continue for the industry

Indian IT's growth pangs continues spurred by a combination of slow pace of deal closures, continuing captive shift, lack of the much anticipated kicker to financial services spending and share gain by consulting firms in digital spending. These factors will impact FY2018E industry growth. Growth is likely to remain modest till such time contribution from digital increases to reasonable portion of overall revenues. Nasscom indicates that digital revenues will be between 15-20% of industry export revenues. Recovery in any case will be uneven, with companies which invested in digital services the only ones that will have revival in growth rates in future. We forecast organic constant currency revenue growth rate between 4-8.5% for Tier 1 companies in our coverage universe.

Headcount growth is lower than industry's revenue growth rate

Nasscom indicates that the industry will add net employment of 130-150K, a growth of ~4% and lower than industry exports growth of 7-8%. The gap captures the following elements-(1) increasing overseas acquisitions that typically have higher revenue productivity, (2) continued delivery efficiencies and benefits of automation and (3) increasing contribution from digital that has higher productivity. Muted headcount addition against the backdrop of 1.5 mn+ supply of engineers annually will continue to keep entry level wages under pressure.

Source : Equity Bulls

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