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Q1FY20 preview: commentary and performance key in determining FY20 prospects
* Q1 is seasonally strong for the IT services sector in terms of revenue growth due to lower number of holidays/furloughs and deal ramp-ups after the finalization of IT budgets by Q4. In Q1, however, margins may see headwinds such as wage hikes and visa cost.
* We expect 0.0%-3.0% QoQ CC growth for our Tier-I universe and 2.2%-4.5% CC growth for Tier-II. We note that currency headwinds will be in the range of 20-60bps QoQ due to the depreciation in all major currencies against the USD (refer to Exhibit 3).
* We expect TCS to report growth at the top end and Wipro (IT services) at the lower end for our Tier-I universe. Among Tier-II companies, Hexaware (ex-Mobiquity contribution) is expected to lead the growth while LTI is expected to report at the lower end.
* Street should be focused on demand trends in Financial Services, commentary relating to the ramp-up of deals won in FY19 and outlook on Europe. FY20 should be a relatively difficult year for Indian IT services. Prefer Tier-I names over Tier-II.
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