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Auto –December 2010 volume update
Tata Motors – JLR retail sales update for December 2010
n Land Rover continues to outperform the industry
n Jaguar drags down the total performance
n Total sales grew by 0.7% YoY to 4875 units as compared to industry growth of 1.1%
IT Services Dec'10 quarter: 'More of the same' demand momentum
Expect demand momentum to continue
We expect solid revenue momentum to continue for Indian techs in an otherwise ‘seasonally weak’ Dec quarter aided by the robust demand strength. We believe that Dec’10 quarter will be another reflection of secular demand for Indian offshore techs as they gain out of (1) demand pick up spreading to other verticals other than financial services, (2) mega deal renewal cycle with larger deals getting broken into smaller sizes of US$ 200-300 mn, the sweet spot for offshore techs and (3) resumption of the offshore IT spend trend after the pause in late CY08/early CY09.
We expect Tier1 companies to meet/beat ‘stiff’ market/consensus expectations driven by 6-7% sequential growth aided by ~80-100 bps QoQ cross currency gains, nearly stable margins ( despite supply side headwinds, helped by a more stable currency during the quarter) . While we expect both Infosys and TCS to report a 7% sequential growth in revenues following up on the stellar Sep’10 quarter performance, we expect Wipro to beat upper end of it’s Dec’10 quarter revenue with a 6.2% QoQ growth in revenues for the 1st time after 3 quarters. We expect seqential revenue growth to pick up for our Tier II coverage universe as well as we build in a 2.2-8% sequential revenue growth in US$ terms (Hexaware and eClerx expected to post highest sequential growth at the upper end and Mahindra Satyam at the lower end)
Margins to trend in a narrow range for Tier I coverage universe
We expect operating margins to trend in a narrow range as we build in marginal improvement in operating margins for Infosys(up 20 bps QoQ to 33.5%), Wipro ( IT Svcs EBIT margins expected to improve by ~50 bps QoQ to 22.7%) while EBITDA mgns expected to decline by ~20 bps sequentially to 29.8% for TCS. Within our Tier II universe, we expect 200 bps+ sequential improvements in margins for Mahindra Satyam and Hexaware as they derive the benefits of revenue growth leverage coupled with stable currency and impact of wage increments behind them.
Expect Infosys and Wipro to guide for 4-5% sequential revenue growth for March’10 quarter
We expect Infosys and Wipro to guide for a 4-5% sequential growth in US$ revenues for March’10 quarter. For FY11, we expect Infosys to raise it annual revenue guidance to US$ 6.05-6.1 bn (+26-27% YoY growth) V/s 24-25% YoY growth earlier translating into an increase in EPS outlook to Rs 119-121 (V/s 115-117 earlier).
Key things to monitor – Campus hiring numbers, attrition trends, CY11 IT budgets outlook( interactions with companies in the recent past have indicated a 2-3% Increase in IT budgets and pricing commentary.
Given the strong demand momentum in the sector, we would back a 5-6% upgrade in our earnings estimates for our Tier I coverage backed by revenue upgrades (akin to our upgrade for TCS. With ~15%+ run up in stock prices ahead of the results, we would not rule out a correction in the stock prices as stocks nearly price in a perfect show. We continue to retain ACCUMULATE on Infosys and TCS within our Tier 1 coverage universe. Within our mid cap tech universe, we maintain BUY on Infinite Solns and ACCUMULATE on eClerx.
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