India IT Services: Sep ’10 preview – Recovery still to be volume-led
n Sep ’10 quarter preview. We expect the top-6 IT Services companies to register 7.5% qoq rise in revenue (4-8% in US dollar terms) and 6.7% rise in net profit. Margins would be flattish sequentially, with a 10-bps dip (mixed trend for our top-6 coverage universe), primarily owing to wage hikes for HCL Tech and Wipro as well as promotions for TCS. For the Sep-ending quarter, the average rupee/US dollar conversion rate stood at 46.5 versus 45.7 in Jun-ending quarter. Tech Mahindra would gain the most owing to its greater billing in the GBP and Euro.
n Key trends for Sep-ending quarter. We believe pricing stability would sustain, with upward bias due to favourable cross-currency movements. Volumes for the quarter would be robust, with 4-7% sequential volume increase for the top-6 IT Services companies. We expect Infosys’ FY11 (US dollar) revenue guidance to be upgraded to 21-23%; it is likely to raise its FY11 EPS guidance to `116-120/share.
n Expect optimistic outlook. We expect IT Services companies to be optimistic as regards macro environment. Focus would be on IT discretionary spending trends and supply-side management (hiring, laterals and attrition).
n Factors to watch. Increased focus on fixed-price contracts, pricing pressure, client additions, client mining, revenues from IMS and BPO and cost-curtailment measures, besides other P&L items.
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