Brokerages See Marginal Growth In IT Sector Amid Bullish Nasscom Outlook

Nasscom’s macro outlook for the information technology industry will not materially translate into better macro conditions, according to brokerages.

Any improvement in the sector will come about only in the second half of the next financial year, Japanese brokerage Nomura said in a report.

The guidance by the IT sector’s apex body hints at marginal improvements in the industry, Macquarie said in a report, adding that higher spending arising out of the tax rate reduction in U.S. remains a tailwind for the IT space.

Indian IT industry’s export revenues will grow to $135-137 billion from the $126 billion estimated for the current year, Nasscom said in a Twitter post yesterday. The industry body had forecast 7-8 percent growth for the financial year 2017-18.

Also Read: Nasscom Expects Indian IT Sector Growth To Remain Steady In FY19

Nifty IT Index was up 1.53 percent today’s session led by Mindtree Ltd. with gains of 4 percent, followed by Tech Mahindra Ltd. ( up 2.6 percent) and Tata Consultancy Services ltd. (2.3 percent).

Here’s what the brokerages had to say on Nasscom’s guidance:

JPMorgan

• Unsure about the level and quality of the company participation in Nasscom's macro outlook as the apex body's methodology includes taking member company feedback and companies are known to change their revenue outlook as the days pass.
• Nasscom industry growth guidance is an increasingly irrelevant benchmark for Tier-1 players.
• “It’s like comparing apples with oranges” because of the heterogeneous combination of the companies that comprise it.

Also Read: Persistent Systems Confident Of Beating Nasscom’s FY19 Guidance

Macquarie

• Excluding Wipro Ltd. (5.8 percent) and HCL Technologies Ltd. (12 percent), Macquarie expects other large cap Indian IT companies to broadly grow in the guided band of NASSCOM.
• Expects some tailwinds in revenue growth to emerge from higher IT spending arising out of the tax rate reduction in the U.S.
• In mid-cap companies like Larsen and Tourbro Infotech Ltd. and Hexaware Technologies Ltd., Macquarie expects strong deal momentum to aid in strong dollar revenue growth in the next financial year.
• Expects the non-linear trend in revenue growth and headcount growth to continue in the near to medium term, driven by 1) productivity gains arising from automation, 2) higher localisation of workforce by Indian IT companies, keeping in view stricter immigration norms globally and, 3) a rising share of digital revenues, which reflect higher productivity/employee.
• Expect the revenue growth to be marginally better in the next fiscal than the ongoing financial year for large cap Indian IT companies.
• Top picks amid large caps: HCL Technologies and Infosys Ltd.
• Top picks amid mid caps: Larsen and Tourbro Infotech and Hexaware

Nomura

• Nomura believes there are uncertainties and expects a lag in terms of translation of better macro conditions into demand and sees improvements only in the second half of the next fiscal.
• While Nasscom guidance does suggest some improvement in growth for the industry, Nomura is less convinced on whether that means materially better growth for tier 1 IT in light of better growth in global in-house centres (GIC captives), tier 2 IT companies and multi-national companies (MNCs like Accenture/CapGemini).
• Over the past six years, Tier-1 (including Cognizant) has not outperformed the top end of NASSCOM guidance, and actually in three of the six years has grown below the bottom end of the range.
• Retains cautious stance on the IT sector and do not see material acceleration in the next fiscal.

Risks

• Drag from higher exposure to slower growing legacy hurts
• Digital growth, while remaining healthy, could come off in percentage terms as the base grows
• Increased competition from MNCs (Accenture/Deloitte/CAP), new Challengers (EPAM Systems, Luxoft, Virtusa), tier 2 IT companies and in-sourcing hurts growth for tier 1 IT
• Margin pressure from exhaustion of traditional levers, pricing pressure in legacy and need to pre-emptively change onsite staffing in light of immigration tightening remain.

Calls:

• Buy: HCL Technologies
• Neutral: Cognizant
• Reduce: Infosys, TCS and Wipro