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IT Sector Expected To Be Hit Badly; Slowest Growth In 13 Quarters

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IT Sector Expected To Be Hit Badly; Slowest Growth In 13 Quarters
Himali Patel - 08 April 2020

Mumbai: The novel COVID 19 pandemic and the resultant economic dislocation is all set to take its toll on India’s software services. The Information Technology (IT) sector is expected to post quarter fourth (Q4) revenue growth in the range of -3 per cent to +2.9 per cent quarter-on-quarter (Q-O-Q) with the sector (coverage universe) aggregate growth at +0.3/5.6 per cent QoQ/YoY—its slowest sequential pace in 13 quarters states HDFC Securities in its latest report on IT Sector. The brokerage firm believes that the impact of economic dislocation accentuating in March due to major supply-side transition for the sector has impacted billings to a considerable extent.
The report also mentioned that, further the demand-side factors and the second-order impact (disruptions in clients) would mark a bigger dent in the coming quarters. “We expect 4Q margins to be somewhat flat (-12 basis points QoQ) with the impact of utilisations and negative cross-currency mitigated by Rs depreciation. COVID-19 situation has aggravated at a fast clip and we cut Earning Per Share (EPS) estimates further by ~9/15 per cent for tier-1/tier-2 IT, following 4/7 per cent cut on March 18. Our estimates now factor a deeper impact in June-quarter and a gradual recovery over the course of September-quarter,” says Apurva Prasad, an analyst at HDFC Securities.
The report adds that Indian IT (tier-1) growth has been at a 500/900 basis points (bps) premium to US GDP growth over 5/10 years (800 bps premium in CY09 recession). On the basis of this empirical growth premium, the brokerage estimates growth for the sector triangulates to an annual GDP decline scenario of ~ 3 per cent. Having said that the shape of growth recovery will be the biggest key factor, as growth premium can dissipate in a protracted recovery.
“Maintain constructive stance on the sector, despite increased uncertainty. Upgrade Mindtree to ADD (REDUCE earlier), Downgrade Persistent Systems to Reduce (ADD earlier). Maintain BUY recommendation on Infosys, HCL Technology and Tech Mahindra and ADD recommendation on Larsen & Toubro Infotech, Mphasis, L&T Technology Services and Hexaware,” says Prasad with a subtle hint of caution.

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