After underperformance in February, the BSE IT index outperformed Sensex in March by a big margin. BSE IT index saw an increase of 8.7% MoM versus a 0.8% MoM gain in case of Sensex. Most of the companies have maintained their outlook for improvement in growth in FY22 on the back of accelerated demand for digital transformation solutions. While all the large-caps saw a MoM uptick, Tata Consultancy Services (TCS) and Infosys (INFO) outperformed the BSE IT index.

"Investor focus would now be on Q4FY21 results and outlook/guidance for FY22," said IDBI Capital in its sector reports. "Q4FY21 has been another quarter with currency volatility, cross-currency movement (positive for reported USD revenue growth) and INR appreciation (negative on EBIT margin). Further, Q4FY21 is generally has the impact of lower working days. However, given the growth momentum in digital solutions and ramp-up of large deals we forecast a relatively better QoQ growth vs. previous years."

Following are the investment rationale for IT sector:

Q4FY21 revenue - Expect QoQ revenue growth of 1.7%-3% in CC for large-caps: We forecast both TCS and Wipro (WPRO) to outperform with QoQ growth of 3% and forecast a 1.7% QoQ growth for TECHM. We forecast cross-currency tailwind of 55bps to 75bps. While we expect TCV of large deals to moderate vs. Q3FY21, which had select large deals, we expect it to be at a healthy level.

Q4FY21 EBIT margin - forecast QoQ change of -370bps to +70bps QoQ: We forecast only TCS to report a QoQ improvement in EBIT margin. Salary increases and/or promotions/variable payout is expected to weigh on EBIT margin of other companies. We expect HCLT to report a QoQ decline of 370bps largely due to the one-time payout of Rs7 bn for the company reaching the USD 10 billion revenue mark.

FY22 outlook/guidance: Expect companies maintain their positive commentary

INFO - Revenue growth of 11-13% in CC and EBIT margin of 23-25% for FY22

HCLT- Revenue growth of 9%-11% and EBIT margin of 20- 22% for FY22

WPRO- expect revenue growth guidance of 0% to 2% for Q1FY22

Large deal wins, their ramp-up and growth in large clients

Commentary on initial assessment of client budgets of 2021

IDBI Capital maintains positive outlook on the IT sector with HCL Technologies (HCLT) and Tech Mahindra (TECHM) being top-picks amongst large-caps and Cyient (CYL) amongst the mid-caps.

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