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Information Technology
ƒ CY11 IT budget commentary remains the key
Tier I IT companies, led by TCS and Infosys, could report an average
~4-6.5% US$ revenue growth helped in part by volumes and ~2-
9% QoQ depreciation of the US$ against the Euro, British Pound and
Australian dollar. However, at 3.5%, sequential rupee revenue
growth could be muted due to 3.5% appreciation of the currency
against the US$. Although companies are likely to report strong
volume growth of (~4-6%), despite fewer working days, we believe
management tone on CY11 budgets, discretionary spend trends,
Europe, fresher hiring and wage inflation could dictate near term
share price volatility. While structural demand outlook remains
intact, unwarranted expectations led rally in tech stocks leaves
modest room for disappointments. That said, our estimates are
conservative relative to consensus and upgrades post earnings are
likely
ƒ Rupee appreciation may overwhelm operating performance
We expect IT vendors to report flat Q3FY11 EBITDA margins with
negative bias lead by ~3.5% sequential appreciation of the average
rupee vs. the dollar. Noticeably, Infosys operating margins could
positively surprise the Street. Further, utilisation should continue to
pressure operating margins as companies continue to hire freshers.
Finally, were the exchange rates to remain at current levels for the
remainder of the year, average |/$ for FY11 could be 45.5 or would
have appreciated 3.8% compared to the average |/$ rate of 47.3 for
FY10. As a reminder, every 100 bps appreciation in the rupee rate
impacts the operating margin by 20-50 bps depending on the
operating model.
ƒ Operating metric highlights
Europe and telecom, the laggards, saw demand uptick in Q2FY11
while BFSI, manufacturing, retail, and healthcare should continue to
do well in Q3FY11. Further, from services perspective,
transformational projects, application development led maintenance
and package implementation may lead sequential growth as
companies invest in standardizing enterprise platforms. Absolute
attrition should be lower sequentially despite being higher on LTM
basis
HCL Tech We expect overall revenue growth of 4.9% QoQ in rupee terms led by core software
services at 6.2%. We expect volume growth of 3.8%, IMS to grow by 3.8% and BPO
to post modest growth of 1.8%. EBITDA margins are expected to remain flat at
16.4% with mixed performance among the verticals
TCS We expect TCS to post 6.3% QoQ dollar revenue growth but 3.02% QoQ rupee
growth. Rupee appreciation and higher rentals could weigh on margins but with
better cost management EBITDA margins will decline by 55 bps PAT margin is
expected at 22.36%, down 33 bps, clocking 1.51% QoQ and 19% YoY growth
Infosys We expect Infosys to post 4.9% QoQ volume growth with 4.8% QoQ US$ revenue
growth and marginal uptick in pricing. EBITDA margins are expected at 33.26%,
marginally down 30 bps QoQ on rupee appreciation partly nullified by cross currency
benefits. Net profit is expected to remain flat at 0.4% QoQ growth
Mastek We expect another dismal quarter with revenues de-growing at 2.02% QoQ due to
sluggishness in the government & insurance business. We expect EBITDA margins
to remain negative and turn positive by the end of the year. Mastek is increasingly
looking at rationalising costs
NIIT Ltd We expect NIIT to fire on all cylinders with 8.5% YoY growth on the back of a pickup in all lines of business. We expect EBITDA margins to expand by 130 bps. New
business continues to grow and will break even by H1FY12. Enhanced demand for
its e-learning products will drive growth
Patni
Computers
Patni is expected to post dollar revenue growth of 1.5% QoQ. Pricing continues to
remain flat. EBITDA margins are expected to decline to 17.2%. Utilisation of cash
and promoter exit are key points to watch out for
Rolta Rolta is expected to post 2.2% dollar revenue growth. EGIS will augment revenue
growth. We have assumed a marginal uptick in billing rates for the EGIS vertical.
EDOS and EICT vertical will remain stable with flat billing. EBITDA margins could
decline 30 bps QoQ to 39.3% as staff costs weigh in
Tech
Mahindra
We expect US$ revenues to grow by 4.6% on the back of slightly better utilisation.
Pricing will remain flat for the quarter. BT’s revenues are expected to remain flat
while non-BT growth will kick in. EBITDA margins are expected to decline by 180
bps to 19.9% on account of higher SGA costs. PAT margins are seen at 12.18% with
10% QoQ growth
Wipro We expect 4.2% QoQ volume growth for IT services with flat billing leading to
revenue growth of 4.3% QoQ. At a consolidated level, revenues are expected to
grow 3.9% QoQ. Consolidated EBITDA margins are expected to be marginally up at
20.8%. Pipeline getting refilled and better Europe performance will be key growth
drivers, moving forward
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