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IT Services: IIFL: Q3 FY11 Sector Preview
After our recent conversations with the Tier-1 IT companies we expect the demand momentum seen
in H1 FY11 to continue in Q3FY11 (adjusted for seasonality). Volume growth is expected to be in the
range of 5-6.5% for Tier-1 players with pricing being stable in constant currency terms. A relatively
slower revenue growth is expected from the mid-cap players.
Due to favorable cross currency movements (US$ depreciation v/s GBP and Euro) the reported US$
revenue growth numbers are expected to show an uptick of 80-90bps for most players.
Operating margin of Tier-1 companies is expected to take a hit from strong rupee appreciation (3.5%
qoq) and peak utilization in specific cases (TCS, Infosys). We estimate the margin picture to be a
mixed bag with that of Infosys being flat, TCS(-80bps) showing a decline and Wipro(+40bps) & HCL
Tech(+70bps) reporting improvements. Favorable cross currency, SG&A leverage and offshore shift
would act as key margin supports.
We expect Infosys to beat the top end of its revenue and earnings guidance by a healthy margin. This
out-performance and strong near-term demand visibility could prompt company to raise its FY11 US$
revenue growth guidance to 25-27% from 24-25% and EPS guidance to Rs118-120 from Rs115-117.
Also, for Q4 FY11 we expect Infosys & Wipro to guide for 3-5% sequential US$ growth.
Employee addition is expected to moderate a bit after the robust addition in H1 FY11 and attrition is
expected to stabilize as retention measures take effect.
Key points to watch out in Q3 results commentary would be CY11 budget outlook, pricing situation,
discretionary spend scenario and attrition.
Recent run-up have made valuations rich but with the discounting shifting to FY13, value still remains
at least in Tier-1 players.
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