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India Computer Services — Infy should
outperform TCS post results
Country Overview
Results season: Buy INFO & HCLT; Cautious on WPRO
Infy has been the worst performing large cap IT stock in the last 3 months. This
could reverse after results on Apr 15th given a) a possible muted guidance likely
to be outperformed, as per history b) post TCSs stock outperformance, Infy is
now at 10% PE discount to TCS with similar FY12 EBITDA growth & higher EPS
growth forecast. HCLT should continue to benefit from operating leverage. TCS
could correct on lack of beat. Wipro could disappoint. Among mid caps, likely
strong results from Hexaware. Persistent could beat ests. Infotech could miss
margins.
INFO: Buy on muted guidance; Watch for mgmt transition
Would Buy Infy particularly on any weakness post results given a) Infy’s FY12
USD rev & INR EPS guidance should not be below 17-19% & 14-16%, factoring
in 3-3.7% rev CQGR and 50-100bps margin decline. With Infy’s history of revising
up its USD rev & INR EPS guidance by a median of 9% & 11% over last 8 years,
consensus estimates of 25-26% USD rev growth should not be at risk b) We
expect Infy to bridge the PE discount to TCS, given similar EBITDA growth
forecast, after 2 years & higher EPS growth forecast, helped by tax hit being
behind. We would watch for any announcements on management transition. In
our view, this would be largely a natural progression, would put an end to the
uncertainty & could bring new energy. Buy at 22x FY12e PE for 23% 2yr EPSg.
TCS: Lack of beat may disappoint; Story partly priced in
While long term story looks intact after 3 quarters of USD rev beat at 6.5-11% qoq
growth and 7 qrts of margin beat, a seasonally weak 5% USD terms rev growth &
100bps qoq EBIT margin decline on hiring cost, ‘in line’ with guidance, may
disappoint. At 24xFY12e PE & 2yr EPSg of 20%, may consolidate. Retain Buy.
4Q: Operating leverage should help HCLT beat peers
Mar quarter is seasonally weak and we expect modest 4-5% qoq USD terms rev
growth across the top 4 vendors with HCLT at upper end. EBIT margins could
decline ~40bps qoq for Infy/Wipro (ex 1-time items) & 100bps for TCS on hiring
costs/utilization. However, we expect 30-40bps margin expansion at HCLT on
leverage of H1 investments in employees & sales. At 16xFY12 PE for 36% 2 yr
EPS CAGR, retain as top pick.
WPRO: Likely weak Mar qrt & Q1 organic revenue guidance
At Wipro IT services, employee churn post CEO & org structure change in Jan
and less favorable revenue mix given lower exposure to banking, higher exposure
to tech & lower exposure to discretionary spending we see downside risk to our
Mar qrt rev estimate & expect a weak Q1FY12 organic rev guidance (ex SAIC). At
19x FY12e PE, ~13% discount to Infy, we see limited upside. Neutral.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Computer Services — Infy should
outperform TCS post results
Country Overview
Results season: Buy INFO & HCLT; Cautious on WPRO
Infy has been the worst performing large cap IT stock in the last 3 months. This
could reverse after results on Apr 15th given a) a possible muted guidance likely
to be outperformed, as per history b) post TCSs stock outperformance, Infy is
now at 10% PE discount to TCS with similar FY12 EBITDA growth & higher EPS
growth forecast. HCLT should continue to benefit from operating leverage. TCS
could correct on lack of beat. Wipro could disappoint. Among mid caps, likely
strong results from Hexaware. Persistent could beat ests. Infotech could miss
margins.
INFO: Buy on muted guidance; Watch for mgmt transition
Would Buy Infy particularly on any weakness post results given a) Infy’s FY12
USD rev & INR EPS guidance should not be below 17-19% & 14-16%, factoring
in 3-3.7% rev CQGR and 50-100bps margin decline. With Infy’s history of revising
up its USD rev & INR EPS guidance by a median of 9% & 11% over last 8 years,
consensus estimates of 25-26% USD rev growth should not be at risk b) We
expect Infy to bridge the PE discount to TCS, given similar EBITDA growth
forecast, after 2 years & higher EPS growth forecast, helped by tax hit being
behind. We would watch for any announcements on management transition. In
our view, this would be largely a natural progression, would put an end to the
uncertainty & could bring new energy. Buy at 22x FY12e PE for 23% 2yr EPSg.
TCS: Lack of beat may disappoint; Story partly priced in
While long term story looks intact after 3 quarters of USD rev beat at 6.5-11% qoq
growth and 7 qrts of margin beat, a seasonally weak 5% USD terms rev growth &
100bps qoq EBIT margin decline on hiring cost, ‘in line’ with guidance, may
disappoint. At 24xFY12e PE & 2yr EPSg of 20%, may consolidate. Retain Buy.
4Q: Operating leverage should help HCLT beat peers
Mar quarter is seasonally weak and we expect modest 4-5% qoq USD terms rev
growth across the top 4 vendors with HCLT at upper end. EBIT margins could
decline ~40bps qoq for Infy/Wipro (ex 1-time items) & 100bps for TCS on hiring
costs/utilization. However, we expect 30-40bps margin expansion at HCLT on
leverage of H1 investments in employees & sales. At 16xFY12 PE for 36% 2 yr
EPS CAGR, retain as top pick.
WPRO: Likely weak Mar qrt & Q1 organic revenue guidance
At Wipro IT services, employee churn post CEO & org structure change in Jan
and less favorable revenue mix given lower exposure to banking, higher exposure
to tech & lower exposure to discretionary spending we see downside risk to our
Mar qrt rev estimate & expect a weak Q1FY12 organic rev guidance (ex SAIC). At
19x FY12e PE, ~13% discount to Infy, we see limited upside. Neutral.
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