‘Infosys, Tech Mahindra top picks among IT companies’

Indian information technology companies like HCL Technologies, Tech Mahindra and Infosys could register a growth in single digit in the near-term as Brexit will have an impact on the earnings vis-a-vis UK growth rates, according to a brokerage house Kotak Institutional Equities.

The brokerage house believes that on the organisation level, Brexit will impact revenue growth by 40-90 bps in constant currency terms and revenue growth by 60-120 bps in dollar terms across IT companies, with the highest impact on TCS, HCL Technologies and Tech Mahindra. Brexit event will have the least impact on Infosys.

Infosys and Tech Mahindra will be the top picks among software companies as the brokerage slashes revenue growth rate by 0.6-1.2 per cent to build in the Brexit impact and raise risk premium to account for uncertainty in demand outlook in the aftermath of Brexit. After taking these factors into account, it cuts 1-4 per cent in earnings per share (EPS) estimates and 4-7 per cent cut in target prices.

For the first quarter of the ongoing financial year ended June 30, 2016, revenue growth will be strong for Infosys and TCS but margins will decline led by seasonal factors, it further added.

“The June quarter is seasonally strong for revenue growth but weak for margins due to wage revision and additional visa costs. We expect 4.2 per cent and 3.7 per cent sequential revenue growth in constant currency (c/c) terms for Infosys and TCS respectively. Wipro will report flat revenues in c/c terms. We expect 2 per cent organic c/c revenue growth for HCL Technologies and model 3.1 per cent growth (or $50 mn) from acquisition of Volvo IT services business. We have not built in any revenues from Volvo internal IT contract. Tech Mahindra will report 1 per cent organic c/c revenue decline due to seasonal decline in Comviva revenues. Appreciation of EUR, AUD, INR and JPY will provide10-40 bps cross-currency tailwind to revenues net of headwinds from GBP depreciation. EBIT margin to decline sequentially due to visa costs, rupee appreciation and wage revision”.

Infosys Technologies Limited