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We estimate the top-5 IT players — Tata Consultancy Services (TCS), Infosys, Wipro, HCL Technologies (HCLT) and Tech Mahindra (TECHM) — to clock -1.1-4.1% q-o-q constant currency revenue growth in Q1FY19. During the quarter, EUR, GBP and AUD depreciated versus USD q-o-q, which is likely to impact revenue growth by 90-140bps. We expect margins to fall marginally as wage hikes and visa costs are envisaged to be partially offset by INR depreciation and operational efficiencies.

Considering positive macros and rising digital proportion, we expect revenue growth to accelerate along with significant improvement in managements’ commentaries. TCS is expected to lead the pack with 3.1% q-o-q USD revenue growth, HCLT is estimated to grow 2.4% q-o-q (2.1% inorganic) and Infosys 2.3% .  Wipro and TECHM are estimated to dip 2.0% q-o-q each. We will monitor: (i) traction in digital business; (ii) commentary on demand in BFSI & retail; (iii) Europe revenue growth rates; (iv) clients’ spending in legacy businesses; and (v) deal wins & pipeline. Maintain ‘BUY’ on Infosys, TECHM & HCLT and ‘HOLD’ on TCS & Wipro.

Cross-currency headwinds; BFSI, retail on the radar

With USD appreciating 2.3%, 3.0% and 3.7% q-o-q against GBP, EUR and AUD, respectively (average rate), we perceive cross currency headwinds of 80-100bps for top-5 IT players. We expect revenue growth of almost all companies to pick up, barring a few company-specific issues, and optimistic commentaries. Rising outsourcing along with digital adoption will help Europe sustain outperformance over North America.

Wage hikes and visa costs likely to offset INR depreciation benefit

The INR has depreciated 3.9% against USD, which is estimated to aid 60-100bps margin expansion during the quarter. However, higher visa costs and wage hikes are likely to offset this, resulting in q-o-q margin dip. While We expect HCLT and Wipro to clock flattish margins.  those of TCS, Infosys and TECHM are estimated to decline 50bps, 70bps and 120bps, respectively.

Outlook: Expect significant improvement in demand commentaries

With digital services gaining scale, revenue acceleration looks certain for Indian IT companies. Improving economic outlook in the US and higher adoption of outsourcing in Europe are also driving growth.  Accenture’s robust Q3FY18 results along with persisting double digit growth in outsourcing revenues further bolsters confidence. In our view, mid caps will continue to outpace large peers. However, we perceive positive bias to large caps in the medium-to-long run as digital gains scale. In mid-cap space, we prefer Persistent and L&T Technology Services.

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