We expect companies under our coverage to post a 5.5-7% QoQ revenue growth in USD terms in 2QFY11 (2Q is seasonally the strongest quarter). Infosys is expected to beat its guidance posting a 7% sequential growth in USD terms and increase its full year EPS guidance to `118-120 (from the current `112-116).Expect increasing contribution to growth from discretionary spends
Companies are expected to see a decline in pent-up demand (M&A-related integration spends) though service lines such as enterprise application services (EAS), infrastructure management services (IMS) and business process outsourcing (BPO) are likely to make up for the decline in pent-up driven growth.
Watch out for:
1) EBIDTA margin expansion for Infosys and TCS
We expect companies to benefit from the 1.7% depreciation in INR and a 50bps benefit on revenue growth due to cross-currency movements. Infosys and TCS are expected to see a 170bps and 13bps increase in EBIDTA margins respectively while Wipro and HCL are likely to show declines of 85bps and 214bps respectively (Wipro has to bear the impact of promotion costs and RSUs, while HCL is likely to see an impact from salary hikes during the quarter).
2) Cautious commentary on FY12 visibility
Companies are likely to adopt a cautious commentary on longer term visibility while near-term visibility remains high. We expect Infosys to guide to a 4% QoQ growth in USD terms for 3QFY11.
3) Attrition to ease, however will remain high optically
We believe attrition has eased in 2QFY11; however attrition rates reported on an LTM basis are likely to remain high on a higher base.
Recent run-up leaves limited upside – prefer HCL Tech
We see limited upside at current valuations with Infosys, TCS and Wipro trading at 21.5x, 21x and 18.5x FY12E EPS respectively. We prefer HCL Tech within our universe (trading at 13.5x FY12E) as we believe the company could surprise on growth and margins over a period. Reiterate Neutral on Infosys, TCS and Wipro, and Outperform on HCL Tech.
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