IT sector (coverage universe) is expected to post an uptick in growth, mitigated by cross-currency impact (-50bps) for the quarter.
Revenue growth is expected at 2.1/7.9% QoQ/YoY with Tier-1 IT growth estimated at 1.9/6.7% QoQ/YoY.
Midcap IT growth is estimated at 3.4/15.6% QoQ/YoY. Divergent growth trends will continue within the sector with TCS and INFY expected to lead the growth.
Within midcaps, LTTS, Zensar, Cyient and Sonata are expected to lead the growth. Operating performance is expected to improve (+110bps QoQ) supported by INR depreciation and automation efficiencies.
Mindtree, Zensar and Sonata are expected to drive stronger margin expansion within midcaps and TCS is expected to lead among largecap.
Despite the sharp outperformance of the sector recently (18/34% outperformance of IT index over NIFTY in 3M/YTD), valuation premium of IT index is at its long-term average (~10% prem over NIFTY).
Revise earnings higher factoring USD-INR reset to 72 (67.5 earlier) and rolling-over valuations to Sep-20E. Upgrade KPIT to BUY (NEUTRAL earlier) based on stock underperformance. Prefer TCS from tier-1 IT and LTI/ LTTS/Zensar/Cyient from tier-2 IT.
Within New Age we prefer Teamlease (Structural growth story and attractive after recent correction) and CDSL. We like Majesco from the IT products space. Key Monitorables: (1) Outlook on BFSI and Retail & CPG verticals, (2) Commentary on-demand environment/ deal wins and performance of Digital segment, and (3) Operational performance with an increase in onsite investments, large accounts’ performance.