India IT Services: Revenue Growth to Surprise in Sep10 Quarter - but Will Earnings Move Higher?
Quick Comment: We believe large Indian IT
companies are on track to deliver very strong revenue
growth in the Sep-10 quarter. Infosys is likely to have the
strongest revenue and margin performance, in our view.
We expect a further 5-7% rise in large-cap stocks over
the coming weeks in the run-up to the results.
Use the quarter to reduce exposure to the industry:
Despite the strong quarter, valuations remain stretched
and growth rates over the coming years are likely to
remain in the 20%-25% yoy range versus the 30-40%
yoy seen earlier. Valuations are in the expensive zone
and approaching peaks seen in 2004-08. Large-cap IT
stocks are likely to peak in the Oct-Dec period, in our
view; we believe it would be apt to use the current
strength to reduce exposure to the industry. 1HCY11 is
likely to offer more attractive entry points in our view.
TCS looks most vulnerable to a correction.
Expect uniformly strong revenue growth… We
expect large vendors to report US$ revenue growth of
7-8% qoq in 2Q. We believe reported revenue growth
could even be in the ~8-10% qoq range.
…and divergent margin performance: Even though
we expect companies to show strong revenue growth,
margin performance could diverge from investor
expectations. In our view, Infosys is the only company
likely to deliver a qoq margin improvement; TCS and
Wipro are likely to report a qoq margin decline. For the
quarter we expect revenue and profit growth of 7.6%
and 5.9% for our coverage universe.
Infosys guidance: We expect Infosys to raise its FY11e
US$ revenue guidance to 21-23% yoy and EPS
guidance to Rs120-122. Wipro is likely to give similar
guidance of 6-8% qoq for 3Q. We maintain an In-Line
industry view.
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