IT Services preview by Ambit for F2Q 2011 (September quarter)

IT Services
 Our Tier-1 IT Services coverage universe is expected to report US$ revenue
growth of 5.9-8.3% QoQ led primarily by volume growth and stable pricing.
We expect mid-cap companies in our coverage universe to report US$ revenue
growth of 2.9-7.0% QoQ. 2Q is typically the strongest quarter for IT services
and 2QFY11 results would add to our conviction of a strong demand
environment for FY11E.
 We expect margin performance to vary across the pack given that some
companies have wage hikes/ promotions taking effect in 2QFY11E. Amongst
the Tier-1s, we expect strongest EBITDA margin improvement in Infosys
(+220bps) driven by strong volume growth and wage hike absorption in the
last quarter.
 We expect Infosys to revise its US$ revenue growth guidance upward to 22-
24% YoY for FY11E (v/s 19-21% YoY). We expect Infosys to guide for Rs116-
120 EPS based on the quarter end US$/INR rate of Rs44.95 (v/s Rs112-117
earlier).
 Impact of currency movements: For 2QFY11, US$/INR has depreciated for the
quarter (on an average basis) and would have a positive impact on EBITDA
margins. We expect cross currency tailwinds to boost US$ revenue growth by
0.2% to 0.7% QoQ% for our coverage universe.
 Our top picks in this sector are Infosys in the Tier-1 space and eClerx in the
mid-cap space.