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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
INFORMATION TECHNOLOGY
We expect companies under our coverage to report a sequential revenue
growth of 5.6%, largely driven by volumes. Volumes for the Top 4
companies are expected to rise between 4% - 5%, which is impressive in the
backdrop of a seasonally soft quarter. Average realizations are expected to
remain stable. Currency volatility should help revenues marginally - about
1% for the top companies.
EBIDTA margins are expected to be marginally higher due to currency
impact, cost efficiencies and scale benefits. We expect lower 'other income'
largely due to currency fluctuations and some one-offs.
Consequently, PAT is expected to rise by 3.7% QoQ for companies under our
coverage. Among the Top 4, HCLT is expected to report the highest QoQ PAT
growth of about 12%. We have given quarterly expectations of Mahindra
Satyam but understand that, the numbers can be materially different from
our expectations.
The guidance from Infosys will be important, with markets already
discounting high growth rates for FY12. We expect Infosys to remain
conservative while guiding for FY12 revenue and earnings growth. We note
that, Infosys has always preferred to adopt a conservative view while
guiding at the start of the fiscal. The accompanying commentary will allow
us to gauge the confidence of the management on expected medium - term
growth rates.
Among other things, we will also watch out for :
a) Salary increments (most companies give increments WEF 1Q),
b) Comments on opening up of new opportunities like Cloud Computing,
etc,
c) Further insights into sustainability of discretionary spends,
d) Pricing improvements and expectations about the same
While we maintain our optimistic view on the medium-to-long term
prospects of the sector, the recent run-up in stock prices and a potentially
stronger rupee may limit upsides in the near term. Over the medium term,
we expect large caps to out-perform as they are better equipped to counter
the impact of appreciating rupee and capitalize on the strong demand
scenario. Infosys and TCS remain our preferred large-cap picks. In mid-caps,
we prefer NIIT Technologies and KPIT Cummins. Mphasis is not covered here
because quarter ends in April.
4% - 5% sequential volume growth expected for top tier companies
We expect top-tier companies to report sustained volume growth of about 4% - 5%
QoQ. When seen in the backdrop of a seasonally soft quarter, it is encouraging. The
Jan - Mar quarter is normally soft as budgets are finalized and allocated during the
quarter while spending picks up in the following quarter. The expected growth is on
the back of consistently improving demand and higher market share. We understand
that, Indian companies have been witnessing continuous business flows as customers
look for better value and reduced costs. In this process, they are likely gaining additional
market share.
Over the past few quarters, M&A activity in the global BFSI vertical had resulted in
increased business flows. This is now being substituted by more long term and annuity
type of businesses, we believe. Moreover, verticals like manufacturing, which
were slower to start spending, are now seeing increased deal flows, we understand.
While the order flows from US are expected to have grown, we will closely hear
management comments on the potential order flows from Europe and Asia. We do
not expect any major impact of the events in Japan and MENA.
While volumes are expected to rise QoQ, we expect realizations to be largely stable.
However, we will closely watch out for potential price improvements and management
comments regarding these will be of importance to us.
Impact of cross currency movements
The Indian rupee has depreciated v/s USD, Euro and GBP. The USD has also depreciated
v/s GBP and Euro. To that extent, USD-based revenues as well as INR-based
revenues for the quarter are expected to be positively impacted. We expect a positive
impact of about 1% QoQ in revenues for the top companies.
For the Top 4 companies, we expect revenues to be about 4.9% higher in INR
terms. For the coverage universe, we expect the INR revenues to be at about 5.6%
higher QoQ.
Margins expected to be slightly higher
We expect margins to be slightly higher sequentially. Currency volatility, cost efficiencies
and scale benefits are expected to help. Within the Top 4, we expect TCS
to report a marginal decline in margins largely because of normalization of provisions
for receivables.
Impact on Other Income to keep PAT growth subdued
We expect the other income component to be lower QoQ due to losses on currency
fluctuations and one-off items. Consequently, PAT growth is expected to grow by
about 3.7% over the previous quarter.
Factors to watch
Apart from Infosys' guidance, we will closely track a) Salary increments (most companies
give increments WEF 1Q), b) Comments on opening up of new opportunities
like Cloud Computing, etc, c) Further insights into sustainability of discretionary
spends, d) Pricing improvements and expectations about the same
We expect Infosys' management to remain conservative while giving guidance for
FY12. We note that, this has been the case at the start of every fiscal with upward
revisions being made during the course of the year. However, management commentary
will be important for understanding the reason for conservatism and also for
gauging the confidence of the management on the medium-term demand scenario.
We will closely watch the progress made by and expectations of the various companies
in new areas of opportunities. Cloud Computing provides a big potential and
order flows in this business will be of interest to us.
Companies are also now increasingly looking at moving to newer types of pricing
models like outcome-based pricing, transaction-based pricing, etc. Trends in these
will be of interest to us from the point-of-view of margin protection and improvement.
Most Indian IT companies give salary increments WEF April every year. FY11 had
witnessed higher-than-normal salary increments because of the high attrition levels.
Attrition levels had risen significantly in line with the turnaround in the sector. Attrition
rates have now moderated. Thus, we expect normalized increments of about
11% - 12% in off-shore salaries and 1% - 3% in on-site salaries for FY12.
Pricing is expected to have largely stabilized during the quarter and we will watch
out for comments on any potential pricing uptick from clients.
Remain positive on medium-to-long term prospects, but cautious
on near term valuations
We maintain our positive bias on sector fundamentals over the medium-to-long
term. A slow recovery in the global economy should reflect in increased business for
Indian IT vendors. Indian companies have likely been able to increase their market
share in the global outsourcing pie.
However, the recent run up in prices and potential strength in the rupee may limit
the upsides in the near term. If the rupee strengthens over an extended period of
time, it may impact earnings estimates for most companies. Larger companies are
better-equipped to handle the appreciating rupee, we admit.
We prefer Infosys and TCS in the large caps. NIIT Technologies and KPIT Cummins
are the preferred mid cap stocks. We have not covered the estimates for Mphasis
because its quarter ending will be in April.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
INFORMATION TECHNOLOGY
We expect companies under our coverage to report a sequential revenue
growth of 5.6%, largely driven by volumes. Volumes for the Top 4
companies are expected to rise between 4% - 5%, which is impressive in the
backdrop of a seasonally soft quarter. Average realizations are expected to
remain stable. Currency volatility should help revenues marginally - about
1% for the top companies.
EBIDTA margins are expected to be marginally higher due to currency
impact, cost efficiencies and scale benefits. We expect lower 'other income'
largely due to currency fluctuations and some one-offs.
Consequently, PAT is expected to rise by 3.7% QoQ for companies under our
coverage. Among the Top 4, HCLT is expected to report the highest QoQ PAT
growth of about 12%. We have given quarterly expectations of Mahindra
Satyam but understand that, the numbers can be materially different from
our expectations.
The guidance from Infosys will be important, with markets already
discounting high growth rates for FY12. We expect Infosys to remain
conservative while guiding for FY12 revenue and earnings growth. We note
that, Infosys has always preferred to adopt a conservative view while
guiding at the start of the fiscal. The accompanying commentary will allow
us to gauge the confidence of the management on expected medium - term
growth rates.
Among other things, we will also watch out for :
a) Salary increments (most companies give increments WEF 1Q),
b) Comments on opening up of new opportunities like Cloud Computing,
etc,
c) Further insights into sustainability of discretionary spends,
d) Pricing improvements and expectations about the same
While we maintain our optimistic view on the medium-to-long term
prospects of the sector, the recent run-up in stock prices and a potentially
stronger rupee may limit upsides in the near term. Over the medium term,
we expect large caps to out-perform as they are better equipped to counter
the impact of appreciating rupee and capitalize on the strong demand
scenario. Infosys and TCS remain our preferred large-cap picks. In mid-caps,
we prefer NIIT Technologies and KPIT Cummins. Mphasis is not covered here
because quarter ends in April.
4% - 5% sequential volume growth expected for top tier companies
We expect top-tier companies to report sustained volume growth of about 4% - 5%
QoQ. When seen in the backdrop of a seasonally soft quarter, it is encouraging. The
Jan - Mar quarter is normally soft as budgets are finalized and allocated during the
quarter while spending picks up in the following quarter. The expected growth is on
the back of consistently improving demand and higher market share. We understand
that, Indian companies have been witnessing continuous business flows as customers
look for better value and reduced costs. In this process, they are likely gaining additional
market share.
Over the past few quarters, M&A activity in the global BFSI vertical had resulted in
increased business flows. This is now being substituted by more long term and annuity
type of businesses, we believe. Moreover, verticals like manufacturing, which
were slower to start spending, are now seeing increased deal flows, we understand.
While the order flows from US are expected to have grown, we will closely hear
management comments on the potential order flows from Europe and Asia. We do
not expect any major impact of the events in Japan and MENA.
While volumes are expected to rise QoQ, we expect realizations to be largely stable.
However, we will closely watch out for potential price improvements and management
comments regarding these will be of importance to us.
Impact of cross currency movements
The Indian rupee has depreciated v/s USD, Euro and GBP. The USD has also depreciated
v/s GBP and Euro. To that extent, USD-based revenues as well as INR-based
revenues for the quarter are expected to be positively impacted. We expect a positive
impact of about 1% QoQ in revenues for the top companies.
For the Top 4 companies, we expect revenues to be about 4.9% higher in INR
terms. For the coverage universe, we expect the INR revenues to be at about 5.6%
higher QoQ.
Margins expected to be slightly higher
We expect margins to be slightly higher sequentially. Currency volatility, cost efficiencies
and scale benefits are expected to help. Within the Top 4, we expect TCS
to report a marginal decline in margins largely because of normalization of provisions
for receivables.
Impact on Other Income to keep PAT growth subdued
We expect the other income component to be lower QoQ due to losses on currency
fluctuations and one-off items. Consequently, PAT growth is expected to grow by
about 3.7% over the previous quarter.
Factors to watch
Apart from Infosys' guidance, we will closely track a) Salary increments (most companies
give increments WEF 1Q), b) Comments on opening up of new opportunities
like Cloud Computing, etc, c) Further insights into sustainability of discretionary
spends, d) Pricing improvements and expectations about the same
We expect Infosys' management to remain conservative while giving guidance for
FY12. We note that, this has been the case at the start of every fiscal with upward
revisions being made during the course of the year. However, management commentary
will be important for understanding the reason for conservatism and also for
gauging the confidence of the management on the medium-term demand scenario.
We will closely watch the progress made by and expectations of the various companies
in new areas of opportunities. Cloud Computing provides a big potential and
order flows in this business will be of interest to us.
Companies are also now increasingly looking at moving to newer types of pricing
models like outcome-based pricing, transaction-based pricing, etc. Trends in these
will be of interest to us from the point-of-view of margin protection and improvement.
Most Indian IT companies give salary increments WEF April every year. FY11 had
witnessed higher-than-normal salary increments because of the high attrition levels.
Attrition levels had risen significantly in line with the turnaround in the sector. Attrition
rates have now moderated. Thus, we expect normalized increments of about
11% - 12% in off-shore salaries and 1% - 3% in on-site salaries for FY12.
Pricing is expected to have largely stabilized during the quarter and we will watch
out for comments on any potential pricing uptick from clients.
Remain positive on medium-to-long term prospects, but cautious
on near term valuations
We maintain our positive bias on sector fundamentals over the medium-to-long
term. A slow recovery in the global economy should reflect in increased business for
Indian IT vendors. Indian companies have likely been able to increase their market
share in the global outsourcing pie.
However, the recent run up in prices and potential strength in the rupee may limit
the upsides in the near term. If the rupee strengthens over an extended period of
time, it may impact earnings estimates for most companies. Larger companies are
better-equipped to handle the appreciating rupee, we admit.
We prefer Infosys and TCS in the large caps. NIIT Technologies and KPIT Cummins
are the preferred mid cap stocks. We have not covered the estimates for Mphasis
because its quarter ending will be in April.
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