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India: Technology: IT Services
Equity Research
Focus remains on FY2012 outlook; maintain Buy on Infosys, HCLT
Robust revenue growth, stronger currency lead to EPS revisions
We adjust our FY11E-FY13E EPS for the Indian IT services stocks under our
coverage by +1.4% to -2.5% to reflect stronger INR assumptions for the
4QFY11 (Rs45.3/US$ vs. Rs46 earlier), cross currency movements, robust
revenue growth trajectory and easing supply-side pressures in FY12.
Fundamental drivers to watch for this quarter
Outlook for FY2012 and management guidance: We look for guidance on
FY2012 tech spending outlook and company specific guidance. Among major
factors, we look for strength of revenue pipeline, budget finalization,
headcount plans, wage pressures and attrition, and outlook on currency.
Labor dynamics to ease off, hiring guidance to remain robust: We believe
concerns over wage hikes/attrition would continue to ease following the drop
in 3QFY11. We expect INFY/TCS to provide robust headcount guidance; TCS
has pointed towards making 37,000 offers to freshers. We expect companies to
focus more on fresh hiring in FY2012 in order to bottom out the pyramid.
Revenue growth to remain the key: We expect sequential revenue
growth to be the key differentiator among companies as the operating
leverage thesis has played out in FY2011. Also, the impact of higher taxes
in FY12 and higher visa fees in 1QFY12 will make it difficult to improve net
margins. Hence, we expect focus to be on robustness of pipeline in FY12.
BFSI/retail continue to grow, telecom may recover post slowdown in
3Q: While we expect BFSI along with the retail sector to continue to grow
strongly in 4QFY11, we would watch for the outlook in the telecom vertical
as it witnessed a sudden slowdown in 3QFY11 across the board.
Japan may be a one-time marginal impact: We do not view impact from
Japan to be material. However, a one-time marginal cost of evacuation of
employees and delivery disruption may be seen in this quarter (4QFY11).
Best stock ideas: Buy Infosys and HCL Tech, prefer large caps
We prefer HCL Tech and Infosys as our best Buy ideas. We expect HCL’s
22% revenue CAGR and 280 bp expansion in EBIT margin by FY13E to lead
to EPS CAGR of 27% over FY10-FY13E. On INFY, we expect industryleading
revenue/earnings growth (27%/30% in FY12E) on the back of a
robust revenue outlook and stable margins. INFY is trading at 20.8X on
FY12E P/E, at a 9% discount to TCS (only for the second time historically).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Technology: IT Services
Equity Research
Focus remains on FY2012 outlook; maintain Buy on Infosys, HCLT
Robust revenue growth, stronger currency lead to EPS revisions
We adjust our FY11E-FY13E EPS for the Indian IT services stocks under our
coverage by +1.4% to -2.5% to reflect stronger INR assumptions for the
4QFY11 (Rs45.3/US$ vs. Rs46 earlier), cross currency movements, robust
revenue growth trajectory and easing supply-side pressures in FY12.
Fundamental drivers to watch for this quarter
Outlook for FY2012 and management guidance: We look for guidance on
FY2012 tech spending outlook and company specific guidance. Among major
factors, we look for strength of revenue pipeline, budget finalization,
headcount plans, wage pressures and attrition, and outlook on currency.
Labor dynamics to ease off, hiring guidance to remain robust: We believe
concerns over wage hikes/attrition would continue to ease following the drop
in 3QFY11. We expect INFY/TCS to provide robust headcount guidance; TCS
has pointed towards making 37,000 offers to freshers. We expect companies to
focus more on fresh hiring in FY2012 in order to bottom out the pyramid.
Revenue growth to remain the key: We expect sequential revenue
growth to be the key differentiator among companies as the operating
leverage thesis has played out in FY2011. Also, the impact of higher taxes
in FY12 and higher visa fees in 1QFY12 will make it difficult to improve net
margins. Hence, we expect focus to be on robustness of pipeline in FY12.
BFSI/retail continue to grow, telecom may recover post slowdown in
3Q: While we expect BFSI along with the retail sector to continue to grow
strongly in 4QFY11, we would watch for the outlook in the telecom vertical
as it witnessed a sudden slowdown in 3QFY11 across the board.
Japan may be a one-time marginal impact: We do not view impact from
Japan to be material. However, a one-time marginal cost of evacuation of
employees and delivery disruption may be seen in this quarter (4QFY11).
Best stock ideas: Buy Infosys and HCL Tech, prefer large caps
We prefer HCL Tech and Infosys as our best Buy ideas. We expect HCL’s
22% revenue CAGR and 280 bp expansion in EBIT margin by FY13E to lead
to EPS CAGR of 27% over FY10-FY13E. On INFY, we expect industryleading
revenue/earnings growth (27%/30% in FY12E) on the back of a
robust revenue outlook and stable margins. INFY is trading at 20.8X on
FY12E P/E, at a 9% discount to TCS (only for the second time historically).
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