Investors should look past – what would likely be poor – first-quarter numbers put out by IT companies and focus on a few qualitative elements to gauge their future outlook, says a CLSA report.

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The brokerage said that it expects the top five IT services companies in India to witness a 5-8 percent dollar revenue decline (in constant currency terms) during the quarter. This would be thanks to the coronavirus pandemic, which impacted their operations as well as those of their clients.

What investors should focus on instead

According to the brokerage, investors should instead of focus on four things.

One, look at the order booking (not the pipeline). It reflects company's portfolio strength and sales engine effectiveness.

Two, evaluate the exposure to discretionary spending by checking revenue decline in 'non-troubled verticals'.

Three, margin management drivers, as cost-structure deflation would be a long-term positive.

Four, and the most important one, is management commentary for H2FY21.

Brokerage's (CLSA) prediction

"Despite indications of improved demand visibility, we expect Infosys/HCL/L&T (which gives annual guidance) to wait for Q2FY21 to evaluate reinstating formal guidance," said the brokerage.

It also stated that it remains on standby till Q2FY21 before giving out 'cautious' stance on the sector or the companies.

Furthermore, it added that the economic stimulus programs in key demand markets could have delayed potential consolidation, especially in ‘troubled’ verticals. This could manifest once the programs end during H2CY20.

CLSA's top picks

Infosys and HCL Technologies are our key picks, said the report.

Infosys has better growth visibility v/s peers and a 21 percent P/E discount to TCS, while risk reward ratio at about 12x FY22 EPS is attractive for HCL, added the report.

Meanwhile, it downgraded L&T InfoTech from 'buy' to 'outperform' after a 20 percent move since Q4FY20 earnings.