IT Services - Jan-Mar'22 Earnings Preview - Strong demand environment; margins under pressure

Mrs. Aditi Patil, Research Associate at Prabhudas Lilladher

Quick Pointers:

- ~150bps moderation in revenue growth QoQ in Q4 on a high base

- Margins to decline ~40-80bps QoQ in Q4 led by higher manpower cost.

- Key things to monitor for Q4FY22E - 1) impact of current macro/ geopolitical uncertainties on tech spending and 2) commentary on attrition

We expect revenue growth to moderate by 150bps QoQ in Q4 given strong sequential growth in last two quarters and currency headwinds of ~30-60bps. Management commentary suggests continued healthy deal momentum with no impact of ongoing macro uncertainties on decision making as yet. We anticipate margins to decline by 40-80bps QoQ in Q4 led by supply side pressures and decline in utilization due to ramp up in fresher hiring since last few quarters. We believe margins will remain under pressure in FY23 as well given persisting supply side constraints and gradual return of travel and facility costs. We expect strong demand commentary from IT majors led by Infy with revenue growth guidance of 11-13% YoY CC for FY23.

We prefer INFY & TCS among Tier 1 given strong growth momentum on a high base and best in class operating metrics. Among Tier-2, we prefer Mindtree and Coforge. Affle remains our high conviction buy idea in internet space.

Source : Equity Bulls

Keywords

ITServices EarningsPreview Q4FY22 PrabhudasLilladher