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• The March-11 quarter is likely to be relatively weak in line with seasonal
trends. We expect TCS to once again lead revenue growth (Q/Q) in a
seasonally weak March quarter (Mar-11) in which revenue growth (Q/Q) is
likely to be 4-6%. On the margin front, with the exception of HCL
Technologies (HCLT), margins for the larger-cap companies could soften in
this quarter – a reflection of hiring in preparation of FY12. Notably, for TCS,
the Q/Q EBIT margin decline is on account of robust hiring (reflecting in lower
utilization Q/Q). We expect HCLT to show modest margin improvement from
Dec-10 quarter levels of 12.5% (including ESOP costs). HCLT is also likely to
reiterate its intent to take its June-11 EBIT margins (4QFYFY11) to the levels
in June-10 (4QFY10), which implies a 220 bps improvement from current
levels. EBIT margins for Infosys could be broadly flattish Q/Q.
• Focus more on FY12 and on how well Indian IT companies can capitalize
on the solid demand environment. In this context, Infosys’ FY12 revenue
growth guidance assumes importance – we expect 18-20% revenue growth
guidance from Infosys. Infosys’ guidance could be about Rs 139-141 adjusted
for the stronger rupee as of March 31, 2011 (as against our earlier expectation of
Rs 140-142 in the note dated 22nd March, 2011 titled, ‘FY12 guidance likely a
non-event; Expect FY12 US$ revenue growth guidance of 18%-20%; interest
income likely to significantly contribute to Rs EPS guidance’). Infosys FY12
guidance on margins could be for 100-150 bps y/y decline (at 4QFY11 pricing
assumption for FY12). The company will likely do better on margins with
improved pricing and growth over FY12. Positive commentary on pricing likely.
• Commentary on wage hikes should indicate same wage inflation in FY12 as
in FY11. We expect wage inflation (offshore) in FY12 for the large-caps to be
around 10-13% offshore and 3-4% onsite. This is likely to impact margins of
top-tiers such as TCS/Infosys by 300-350 bps, which gets offset by other factors
(improved pricing, pyramid, leverage of growth, non-linearity). As we have
written before, the squeeze on the IT mid-cap on account of wage inflation is
likely to be much more severe for the same quantum of pay hike (it has to do
with the cost structure and margin profile of mid-caps).
• The commentary of Wipro will be notable. We await updates from the new
management at the time of their first quarterly call on (a) the revamped
management structure and (b) the company’s altered go-to-market strategy.
Management’s articulation of how this will deliver going forward is of interest.
• One-offs in costs due to management change (Wipro) and the Japan
tragedy. Firms have incurred a little over USD 1 mn in dealing with the Japan
tragedy towards evacuation. This should not impact margins for the larger
companies given their base. Wipro has incurred expenses associated with the
separation fees of its ex-co-CEOs (about USD 3.5-4 mn) with the possibility of
other expenses towards restructuring. This could mildly impact Wipro’s margins
• Investment view. Stay OW on Indian IT. As FY13 gets factored towards the
end of CY11, we believe that front-line stocks can still return about 10-15%
over the next 9-12 months. We retain our OW ratings on TCS, Wipro and HCLT
with TCS and Wipro being our key picks. Our preference for large caps remains.
Highlighting some of our expectations for/from companies at their Mar-11 earnings
Company Comments
TCS • Q/Q US$ revenue growth should be above 5 % in 4QFY11
• Margins might be slightly soft due to lower utilization and hiring
• Expect initial gross hiring guidance to be more than 50,000 (gross)
• Expect very positive commentary regarding the demand environment
• Expect salary hike of about 10%-13% offshore and 2%-3% onsite
Infosys • Q/Q US$ revenue growth should be around 4.5% for 4QFY11
• Expect the company to guide for 18%-20% US$ revenue growth in FY12
• EPS guidance expected to be around Rs.139-141
• Initial hiring guidance should be around 35,000-40,000 (gross)
• Consensus already baking in 25% US$ revenue growth, and guidance expected
to be a non-event
• Expect salary hike of about 10%-13% offshore and 2%-3% onsite
Wipro • Expect IT services US$ revenues to grow about 4.5% Q/Q in 4QFY11
• Update on the management team and the restructured face to clients and
employees
• New management must be given 2-3 quarters to lift growth trajectory
• Expect commentary regarding the broad strategy of the company going forward
• Wage hikes in Wipro should be in line with peers
HCL Technologies • US$ revenues should continue to grow impressively with 6% Q/Q growth
• BPO revenues should be light due to sale of telecom expense management
accounts to Tangoe
• Forex and Japan disaster should further hurt revenues
• Margins would be the key, and markets would be disappointed in absence of
meaningful margin expansion
Source: J.P. Morgan
Points to watch for
Insights into CY11 IT spending. On 3QFY11 conference calls, company
managements suggested that CY11 budgets are still in the process of getting
finalized. We believe Indian IT companies should be able to provide further color on
the spending environment this quarter as there should be increased visibility. We
expect them to report very positive spending outlook, most of which is already baked
in the current stock prices in our view. In our recent conversations with the
managements we have gathered that FY12 should be a better year than FY11.
Commentary regarding discretionary spending. We expect Tier 1 Indian IT
services companies to provide positive commentary regarding discretionary spending
across verticals such as manufacturing, retail and life sciences. In good years
discretionary spending tend to increase significantly, and we expect FY12 to be a
good year. We would want more color on the durability of the pipeline. We believe
the pent-up demand is behind Indian IT companies now, and managements should be
in a better position to provide insight into future discretionary spending.
Hiring indications should be conservative. We expect Big 3, particularly Infosys to
be conservative in their hiring guidance in the beginning of the year. TCS and
Infosys have exhibited their intent to hire about 50,000 and 35,000 employees in
FY12, respectively, which we believe is very conservative in order to achieve the
growth rate expected during the year in absence of steep increase in non-linearity.
We do not expect significant increase in this guidance, but we believe it would
increase through out the year.
March-11 preview - Company specific comments
TCS to lead with 5.4% Q/Q US$-based revenue growth. Growth in FY12 helped
by favorable exit-rate dynamics. We expect TCS to continue growing at an
impressive pace and exit the year with quarterly revenues of about $2.3 billion,
growing at a CQGR of 7.6% through FY11 primarily driven by volume growth. We
model TCS revenues to grow at 28% in FY12, implying a CQGR of ~6%, which we
believe is on the conservative side considering their last 4-quarter revenue growth
CQGR of 7.8%. The 4QFY11 exit rate itself would provide about 10% Y/Y revenue
growth. We believe considering good spending environment and the optimism
exhibited by management recently, the company is capable of growing at 30%+,
implying a CQGR of 6.5%+, which is achievable and above that expected by
consensus.
Infosys should deliver US$ revenue growth of ~4.5% Q/Q; expect conservative
growth guidance. We expect Infosys to guide for US$ revenue growth of about
18%-20% in FY12, implying a CQGR of 3.6%-4.0%, the upper range of which is
equal to the implied CQGR in Cognizant’s CY11 guidance. We expect Infosys to
guide for an EPS of Rs 139-141 (down from Rs 140-142 in our 22nd March, 2011
note ‘FY12 guidance likely a non-event; Expect FY12 US$ revenue growth guidance
of 18%-20%; interest income likely to significantly contribute to Rs EPS guidance’,
primarily due to stronger rupee at the end of the quarter). Infosys has history of
providing conservative guidance, consensus and we already bake in 25% US$
revenue growth and our FY12 EPS estimate is about Rs. 150. We expect Infosys
gross hiring guidance to be 35,000-40,000, which we believe would be again
conservative.
Wipro’s revenue growth should in line with guidance; expect EPS to grow 6%
Q/Q. We expect Wipro (Global IT) to deliver ~4.3% Q/Q US$ revenue growth in
Q4, meaningfully below TCS. We estimate EBIT margins to be slightly above 20%.
We believe that expecting the new management team led by T.K. Kurien to start
delivering from quarter one would be an unreasonable ask. However, we believe the
company has identified key weak points such as inability to mine clients to their
potential and better client management framework, and efforts are already in
progress to rectify these issues. The new management must be give 2-3 quarters to
start delivering.
HCLT should grow revenue performance ahead of Infosys and Wipro; but
margin performance would be the key. While we expect revenue growth to be
robust (about 6% Q/Q), we would be watching for improvement on the margins
front. The company expects to increase EBIT margins (ex ESOP costs) to 15.3% in
4QFY11 from 13.1% in 2QFY11. A part of this margin expansion of greater than
200 bps should be achieved in this quarter, failing which it would be hard to grow
margins steeply in just one quarter. On the revenue side, sale of certain telecom
expense management accounts in BPO business to Tangoe, Japan disaster and forex
movement should hurt top-line by $3.6 million, ~1.8 million and $3.0 million,
respectively.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
• The March-11 quarter is likely to be relatively weak in line with seasonal
trends. We expect TCS to once again lead revenue growth (Q/Q) in a
seasonally weak March quarter (Mar-11) in which revenue growth (Q/Q) is
likely to be 4-6%. On the margin front, with the exception of HCL
Technologies (HCLT), margins for the larger-cap companies could soften in
this quarter – a reflection of hiring in preparation of FY12. Notably, for TCS,
the Q/Q EBIT margin decline is on account of robust hiring (reflecting in lower
utilization Q/Q). We expect HCLT to show modest margin improvement from
Dec-10 quarter levels of 12.5% (including ESOP costs). HCLT is also likely to
reiterate its intent to take its June-11 EBIT margins (4QFYFY11) to the levels
in June-10 (4QFY10), which implies a 220 bps improvement from current
levels. EBIT margins for Infosys could be broadly flattish Q/Q.
• Focus more on FY12 and on how well Indian IT companies can capitalize
on the solid demand environment. In this context, Infosys’ FY12 revenue
growth guidance assumes importance – we expect 18-20% revenue growth
guidance from Infosys. Infosys’ guidance could be about Rs 139-141 adjusted
for the stronger rupee as of March 31, 2011 (as against our earlier expectation of
Rs 140-142 in the note dated 22nd March, 2011 titled, ‘FY12 guidance likely a
non-event; Expect FY12 US$ revenue growth guidance of 18%-20%; interest
income likely to significantly contribute to Rs EPS guidance’). Infosys FY12
guidance on margins could be for 100-150 bps y/y decline (at 4QFY11 pricing
assumption for FY12). The company will likely do better on margins with
improved pricing and growth over FY12. Positive commentary on pricing likely.
• Commentary on wage hikes should indicate same wage inflation in FY12 as
in FY11. We expect wage inflation (offshore) in FY12 for the large-caps to be
around 10-13% offshore and 3-4% onsite. This is likely to impact margins of
top-tiers such as TCS/Infosys by 300-350 bps, which gets offset by other factors
(improved pricing, pyramid, leverage of growth, non-linearity). As we have
written before, the squeeze on the IT mid-cap on account of wage inflation is
likely to be much more severe for the same quantum of pay hike (it has to do
with the cost structure and margin profile of mid-caps).
• The commentary of Wipro will be notable. We await updates from the new
management at the time of their first quarterly call on (a) the revamped
management structure and (b) the company’s altered go-to-market strategy.
Management’s articulation of how this will deliver going forward is of interest.
• One-offs in costs due to management change (Wipro) and the Japan
tragedy. Firms have incurred a little over USD 1 mn in dealing with the Japan
tragedy towards evacuation. This should not impact margins for the larger
companies given their base. Wipro has incurred expenses associated with the
separation fees of its ex-co-CEOs (about USD 3.5-4 mn) with the possibility of
other expenses towards restructuring. This could mildly impact Wipro’s margins
• Investment view. Stay OW on Indian IT. As FY13 gets factored towards the
end of CY11, we believe that front-line stocks can still return about 10-15%
over the next 9-12 months. We retain our OW ratings on TCS, Wipro and HCLT
with TCS and Wipro being our key picks. Our preference for large caps remains.
Highlighting some of our expectations for/from companies at their Mar-11 earnings
Company Comments
TCS • Q/Q US$ revenue growth should be above 5 % in 4QFY11
• Margins might be slightly soft due to lower utilization and hiring
• Expect initial gross hiring guidance to be more than 50,000 (gross)
• Expect very positive commentary regarding the demand environment
• Expect salary hike of about 10%-13% offshore and 2%-3% onsite
Infosys • Q/Q US$ revenue growth should be around 4.5% for 4QFY11
• Expect the company to guide for 18%-20% US$ revenue growth in FY12
• EPS guidance expected to be around Rs.139-141
• Initial hiring guidance should be around 35,000-40,000 (gross)
• Consensus already baking in 25% US$ revenue growth, and guidance expected
to be a non-event
• Expect salary hike of about 10%-13% offshore and 2%-3% onsite
Wipro • Expect IT services US$ revenues to grow about 4.5% Q/Q in 4QFY11
• Update on the management team and the restructured face to clients and
employees
• New management must be given 2-3 quarters to lift growth trajectory
• Expect commentary regarding the broad strategy of the company going forward
• Wage hikes in Wipro should be in line with peers
HCL Technologies • US$ revenues should continue to grow impressively with 6% Q/Q growth
• BPO revenues should be light due to sale of telecom expense management
accounts to Tangoe
• Forex and Japan disaster should further hurt revenues
• Margins would be the key, and markets would be disappointed in absence of
meaningful margin expansion
Source: J.P. Morgan
Points to watch for
Insights into CY11 IT spending. On 3QFY11 conference calls, company
managements suggested that CY11 budgets are still in the process of getting
finalized. We believe Indian IT companies should be able to provide further color on
the spending environment this quarter as there should be increased visibility. We
expect them to report very positive spending outlook, most of which is already baked
in the current stock prices in our view. In our recent conversations with the
managements we have gathered that FY12 should be a better year than FY11.
Commentary regarding discretionary spending. We expect Tier 1 Indian IT
services companies to provide positive commentary regarding discretionary spending
across verticals such as manufacturing, retail and life sciences. In good years
discretionary spending tend to increase significantly, and we expect FY12 to be a
good year. We would want more color on the durability of the pipeline. We believe
the pent-up demand is behind Indian IT companies now, and managements should be
in a better position to provide insight into future discretionary spending.
Hiring indications should be conservative. We expect Big 3, particularly Infosys to
be conservative in their hiring guidance in the beginning of the year. TCS and
Infosys have exhibited their intent to hire about 50,000 and 35,000 employees in
FY12, respectively, which we believe is very conservative in order to achieve the
growth rate expected during the year in absence of steep increase in non-linearity.
We do not expect significant increase in this guidance, but we believe it would
increase through out the year.
March-11 preview - Company specific comments
TCS to lead with 5.4% Q/Q US$-based revenue growth. Growth in FY12 helped
by favorable exit-rate dynamics. We expect TCS to continue growing at an
impressive pace and exit the year with quarterly revenues of about $2.3 billion,
growing at a CQGR of 7.6% through FY11 primarily driven by volume growth. We
model TCS revenues to grow at 28% in FY12, implying a CQGR of ~6%, which we
believe is on the conservative side considering their last 4-quarter revenue growth
CQGR of 7.8%. The 4QFY11 exit rate itself would provide about 10% Y/Y revenue
growth. We believe considering good spending environment and the optimism
exhibited by management recently, the company is capable of growing at 30%+,
implying a CQGR of 6.5%+, which is achievable and above that expected by
consensus.
Infosys should deliver US$ revenue growth of ~4.5% Q/Q; expect conservative
growth guidance. We expect Infosys to guide for US$ revenue growth of about
18%-20% in FY12, implying a CQGR of 3.6%-4.0%, the upper range of which is
equal to the implied CQGR in Cognizant’s CY11 guidance. We expect Infosys to
guide for an EPS of Rs 139-141 (down from Rs 140-142 in our 22nd March, 2011
note ‘FY12 guidance likely a non-event; Expect FY12 US$ revenue growth guidance
of 18%-20%; interest income likely to significantly contribute to Rs EPS guidance’,
primarily due to stronger rupee at the end of the quarter). Infosys has history of
providing conservative guidance, consensus and we already bake in 25% US$
revenue growth and our FY12 EPS estimate is about Rs. 150. We expect Infosys
gross hiring guidance to be 35,000-40,000, which we believe would be again
conservative.
Wipro’s revenue growth should in line with guidance; expect EPS to grow 6%
Q/Q. We expect Wipro (Global IT) to deliver ~4.3% Q/Q US$ revenue growth in
Q4, meaningfully below TCS. We estimate EBIT margins to be slightly above 20%.
We believe that expecting the new management team led by T.K. Kurien to start
delivering from quarter one would be an unreasonable ask. However, we believe the
company has identified key weak points such as inability to mine clients to their
potential and better client management framework, and efforts are already in
progress to rectify these issues. The new management must be give 2-3 quarters to
start delivering.
HCLT should grow revenue performance ahead of Infosys and Wipro; but
margin performance would be the key. While we expect revenue growth to be
robust (about 6% Q/Q), we would be watching for improvement on the margins
front. The company expects to increase EBIT margins (ex ESOP costs) to 15.3% in
4QFY11 from 13.1% in 2QFY11. A part of this margin expansion of greater than
200 bps should be achieved in this quarter, failing which it would be hard to grow
margins steeply in just one quarter. On the revenue side, sale of certain telecom
expense management accounts in BPO business to Tangoe, Japan disaster and forex
movement should hurt top-line by $3.6 million, ~1.8 million and $3.0 million,
respectively.
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