Jefferies Downgrades Tech Mahindra, TCS On Margin Woes; Hikes Infosys, HCL Tech Price Targets

Indian software services exporters are well-positioned to deliver strong revenue growth in the ongoing financial year but wage pressure and post-Covid cost normalisation may drive margins lower and drag earnings, according to Jefferies.

The growth outlook for Indian IT services remains strong driven by three tailwinds, the research firm said in a note.

“While our bottom-up analysis suggests 14-16% aggregate U.S. dollar revenue growth in FY22, we project 17% dollar revenue growth in FY22 followed by 10% in FY23-24,” Jefferies said.

The research firm, however, expects aggregate EBIT margin for the top five Indian IT firms to fall to 22% in FY23-FY24 from 23.4% in Q4 FY21.

“Our sensitivity analysis suggests that our margin assumptions could be lower by 200-300 basis points if all operating metrics were to revert to pre-Covid levels,” it said. “We cut our earnings forecasts by up to 10% on lower margin assumptions and expect IT firms to deliver 12% earnings CAGR versus 13% INR revenue growth in FY21-24. Our EPS estimates are 3-7% below consensus.”

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