Motilal Oswal expects CY21 demand commentary to remain strong. Recent commentary from both large- and mid-cap IT Services companies during their annual investor meets (Infosys, Wipro, LTI, etc.) point to continued optimism on their CY21 growth outlook, even after adjusting for a low base YoY. Motilal Oswal expects this optimism to be echoed by other management during the Q3 FY21 earnings season.

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Healthy order pipeline, large deal signings, strong earnings from Accenture, and absence of headwinds like a repeat of the Covid-19 led lockdown in Q1 FY21 or uncertainty with regard to the outcome of the US Presidential election should drive the outperformance in Q3 v/s management guidance in 2QFY21. Multiple mega deal wins in Cloud and Captive (TCS – Postbank and Pramerica, Infosys – Rolls Royce and Daimler, and Wipro – METRO AG) should add incremental growth to an already buoyant organic growth momentum. Motilal Oswal expects their coverage universe to deliver adjusted sales (USD)/adjusted EBIT/PAT growth of 1%/12%/7% YoY in Q3 FY21.

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Infosys to lead sequential revenue growth across Tier I, PSYS in Tier II n In Tier I:

Motilal Oswal expects Infosys/ TCS/ HCL Tech to drive organic growth (4%/3%/3% QoQ, including cross-currency tailwind) despite a high base and season weakness. Accenture’s recent earnings showed a strong increase in its Outsourcing vertical, indicating demand normalization/recovery. Coupled with strong deal wins across the IT sector, we expect an increase in guidance/positive commentary. Among Tier II IT, we expect upbeat revenue traction, with the exception of ZENT. PSYS should lead the pack with mid-single digit sequential growth, led by a recovery in the Alliance business. Some of the positive movements in Tier II growth/guidance may not be surprising given the strong deal momentum.

While the sector trades at 40% premium to its 10-year average multiple, we remain positive as we expect the sector to sustain double-digit topline growth in the medium term, led by:

1)      larger deals on a full-scale Digital transformation
2)      tail of projects steered by increased focus on workplace management
3)      higher spend on Cloud migration by large corporates.

A strong QoQ growth (3% on an average) in a seasonally weak quarter should help sustain the rally in IT stocks despite their premium valuations.