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For 4QFY2011, we expect growth momentum for tier-I IT
companies to continue and remain broad-based, with the BFSI
and retail segments leading the growth path and the
manufacturing segment following their footsteps.
Moreover, the aggregate US macro data for February 2011
points towards a robust macro picture with sustained recovery
going ahead. The positive cues for February 2011 include
1) capacity utilisation firming up to 76.3% vs. 76.2% in
December 2010; 2) manufacturing index expanding to 61.4
vs. 60.8 in January 2011; 3) industrial production sustaining
the momentum of 5.6% yoy growth; 4) retail sales growth at
1.0% vs. 0.3% mom in January 2011; 5) unemployment rate
declining to two-year low at 8.9%; and 6) personal income
growth at 5.1% vs. 4.9% yoy in January 2011. In fact, even
Europe's macro data strengthened with higher PMI, shooting to
59.0 in February 2011 from 57.3 in January 2011.
The change in the perception about recovery being sustainable
from the earlier perception of it being just a fad (in 2QFY2011)
and continued spending on IT by global corporates led to the
outperformance of IT stocks over the BSE Sensex during
4QFY2011, although clients continue to go in for short-term
spending commitment rather than long-term commitment
Moreover, Indian IT companies are working on cloud
computing, which is gaining attention, to acquire incremental
market share. TCS's cloud offering iON for SMEs was a step in
this direction. For CY2011, managements of tier-I IT companies
see client budgets to remain flat to positive with a higher element
of offshoring.
Broad-based growth
The recent increase in IT spending in the BFSI segment (the
major revenue contributor having a 45-50% share in industry
exports) is driven by persistent business needs related to
1) regulatory compliance and risk, 2) rationalisation and
consolidation and 3) post-merger integration. The next wave
of strategic investment by BFSI clients is expected in areas of
1) fraud prevention, 2) risk and compliance and 3) anti-money
laundering. For the retail segment, IT spend continues to grow
to tap the digital consumer's behaviour, social media,
multi-channel commerce and digital consumer engagements
The manufacturing segment is also back to its secular growth
phase, especially with industries such as hi-tech and
semiconductor looking at immediate go-to-market strategies
and spending on product engineering, supply-chain
management and consulting to drive cost efficiencies and
targeting to go global. In the manufacturing segment,
automotive and aerospace have now started spending on dealer
management network, CRM applications, global launch and
product engineering.
Spending in the telecom segment continues to be laggard.
IT spends in this segment are expected to pick up in the next
couple of quarters, driven by new initiatives such as cloud
computing and adoption of new technologies. Geographically,
US is ahead, riding on the wave of technological investments to
drive growth apart from harvesting cost efficiencies, whereas
European clients, especially in continental Europe, are opening
up to outsourcing-offshoring to drive cost efficiencies. This is
resulting in the rise of transformational deals with a higher
component of discretionary services such as EAS and ERD from
the manufacturing, utilities and retail segments.
In case of EAS, incremental growth is emerging out of
implementation work rather than sale of new licenses. In fact,
the need for standardisation of enterprise platforms, i.e.
conversion of multi-version implementation into single-version
or limited-version as well as global-level rollout of the same is
pacing up. Even engineering and R&D services are witnessing
a spurt in demand, with product companies getting aggressive
and trying to launch a series of new products by shortening the
go-to-market cycle. Thus, the surge in discretionary spending
witnessed in the last few quarters continues its traction as more
and more clients are looking at change-the-business initiatives
through IT spending to drive growth and optimise cost.
Cross-currency movement continues to favour
revenue growth
The cross-currency movement, which had proved to be a bane
over 4QFY2010-1QFY2011 impacting USD revenue by
0.8-1.5% (qoq), has turned into a boon since 2QFY2011.
During 4QFY2011, the USD depreciated by 1.3%, 0.6% and
1.8% against the GBP, Euro and AUD, respectively. This will aid
USD revenue for Infosys, TCS, Wipro and HCL Tech by 0.20%,
0.19%, 0.20% and 0.22%, respectively. The INR also depreciated
by 1.0% against the USD, which will result in higher INR revenue
growth and aid operating margins by 35-40bp for 4QFY2011.
Hiring spree to continue
IT players got into the hiring mode from 3QFY2010, with high
lateral hiring in 2HFY2010 to tap the sudden pent-up demand.
With a strengthening demand landscape, Infosys and TCS have
robust hiring targets for FY2012. Infosys has already made
26,000 campus offers and plans to hire ~25,000 laterals
for FY2012. Companies are now looking at planned
hiring to address the strengthening demand pipeline.
We expect the hiring trend to remain upbeat, with Infosys and
TCS expected to have hired ~2,796 and ~8,643 employees in
4QFY2011, respectively.
Utilisation to be a mixed bag
Utilisation levels for Infosys and TCS peaked in 2QFY2011 but
dipped in 3QFY2011, owing to lesser number of working days
vis-à-vis other quarters and robust fresher hiring done to map
the surge in demand. In 3QFY2011, for Wipro, utilisation level
(offshore incl. trainees) slipped to 68.6%, the lowest level since
the last seven quarters, while HCL Tech sustained its utilisation
level qoq.
For 4QFY2011, we expect utilisation levels for TCS, HCL Tech
and Wipro to inch up, as trainees hired in 9MFY2011 will start
getting billed. However, for Infosys, we expect utilisation to come
off a little due to lack of budget flush as well as ongoing training
of freshers.
Attrition blues behind
Attrition levels had shot up in the last few quarters to the
pre-recessionary levels of FY2008, as companies were flocking
for people everywhere to map the sudden surge in demand.
However, going forward, we expect these rates to normalise as
strong campus hiring carried out simultaneously by these
companies will create a stable bench, map any surge in demand
and abate poaching of laterals. Thus, we do not expect attrition
to be a spoilsport anymore, causing any lapse in the billable
position of companies.
Outlook and valuationOver the last four quarters, there has been an uptick in
discretionary spending as clients are looking forward to gain
competitive advantage by remaining ahead of the curve. This
trend, though led by the BFSI and retail segments, with
manufacturing coming in a big way and largely driven by the
US market, is expected to be more broad-based with broader
economies tracking recovery in the true sense, thereby instilling
confidence in the IT sector. Thus, we expect 4QFY2011 to be
yet again a modest quarter with 3.8-6.6% qoq growth in USD
revenue for tier-I IT companies, aided by buoyant demand
driving volumes, favourable cross-currency movement and stable
pricing environment. We expect Infosys to guide for 18-20% yoy
growth in USD revenue for FY2012. We remain positive on the IT
sector with TCS, Infosys and HCL Tech as our preferred picks.
Cyclically a muted quarter but with modest volume growth
Traditionally, 4Q is a soft quarter for IT companies as budgets
get closed from January to March and decisions are taken
between February and March on the kind of discretionary,
operational and capital spending; the spend happens heavily
in the next couple of quarters. For 4QFY2011, we expect volume
growth to remain modest at 4.1-5.2% qoq for tier-I companies
due to ongoing IT spend by clients
Revenue continues to surge
In 4QFY2011, we expect USD revenue to surge by 3.8-6.6%
qoq for tier-I IT companies on the back of modest volume growth,
stable pricing and favourable cross-currency movement. In INR
terms, revenue growth is expected to be higher at 4.6-7.6%
qoq on the back of weaker INR in 4QFY2011, at 45.28 vs.
44.85 (in 3QFY2011).
Margins to inch up
For 4QFY2011, we expect tier-I IT companies to report decent
performance on the EBIT margin front. We expect Infosys to
record EBIT margin expansion of 20bp qoq to 30.4% on the
back of 1.0% INR depreciation against the USD. In case of TCS,
increased utilisation levels and INR depreciation are expected
to aid its EBIT margin by 33bp qoq to 28.4%.
Wipro is expected to record a 50bp qoq expansion in the EBIT
margin of its IT services segment on the back of better utilisation
levels qoq. On a consolidated level, Wipro is expected to record
a 100bp qoq expansion in EBIT margin to 19.3% due to good
growth in the consumer care and lightening business segments,
adding to the IT services segment's growth. HCL Tech is expected
to record a 247bp qoq expansion in its EBIT margin on the
back of strong cross-currency benefit, better utilisation levels
and productivity gains.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Software
For 4QFY2011, we expect growth momentum for tier-I IT
companies to continue and remain broad-based, with the BFSI
and retail segments leading the growth path and the
manufacturing segment following their footsteps.
Moreover, the aggregate US macro data for February 2011
points towards a robust macro picture with sustained recovery
going ahead. The positive cues for February 2011 include
1) capacity utilisation firming up to 76.3% vs. 76.2% in
December 2010; 2) manufacturing index expanding to 61.4
vs. 60.8 in January 2011; 3) industrial production sustaining
the momentum of 5.6% yoy growth; 4) retail sales growth at
1.0% vs. 0.3% mom in January 2011; 5) unemployment rate
declining to two-year low at 8.9%; and 6) personal income
growth at 5.1% vs. 4.9% yoy in January 2011. In fact, even
Europe's macro data strengthened with higher PMI, shooting to
59.0 in February 2011 from 57.3 in January 2011.
The change in the perception about recovery being sustainable
from the earlier perception of it being just a fad (in 2QFY2011)
and continued spending on IT by global corporates led to the
outperformance of IT stocks over the BSE Sensex during
4QFY2011, although clients continue to go in for short-term
spending commitment rather than long-term commitment
Moreover, Indian IT companies are working on cloud
computing, which is gaining attention, to acquire incremental
market share. TCS's cloud offering iON for SMEs was a step in
this direction. For CY2011, managements of tier-I IT companies
see client budgets to remain flat to positive with a higher element
of offshoring.
Broad-based growth
The recent increase in IT spending in the BFSI segment (the
major revenue contributor having a 45-50% share in industry
exports) is driven by persistent business needs related to
1) regulatory compliance and risk, 2) rationalisation and
consolidation and 3) post-merger integration. The next wave
of strategic investment by BFSI clients is expected in areas of
1) fraud prevention, 2) risk and compliance and 3) anti-money
laundering. For the retail segment, IT spend continues to grow
to tap the digital consumer's behaviour, social media,
multi-channel commerce and digital consumer engagements
The manufacturing segment is also back to its secular growth
phase, especially with industries such as hi-tech and
semiconductor looking at immediate go-to-market strategies
and spending on product engineering, supply-chain
management and consulting to drive cost efficiencies and
targeting to go global. In the manufacturing segment,
automotive and aerospace have now started spending on dealer
management network, CRM applications, global launch and
product engineering.
Spending in the telecom segment continues to be laggard.
IT spends in this segment are expected to pick up in the next
couple of quarters, driven by new initiatives such as cloud
computing and adoption of new technologies. Geographically,
US is ahead, riding on the wave of technological investments to
drive growth apart from harvesting cost efficiencies, whereas
European clients, especially in continental Europe, are opening
up to outsourcing-offshoring to drive cost efficiencies. This is
resulting in the rise of transformational deals with a higher
component of discretionary services such as EAS and ERD from
the manufacturing, utilities and retail segments.
In case of EAS, incremental growth is emerging out of
implementation work rather than sale of new licenses. In fact,
the need for standardisation of enterprise platforms, i.e.
conversion of multi-version implementation into single-version
or limited-version as well as global-level rollout of the same is
pacing up. Even engineering and R&D services are witnessing
a spurt in demand, with product companies getting aggressive
and trying to launch a series of new products by shortening the
go-to-market cycle. Thus, the surge in discretionary spending
witnessed in the last few quarters continues its traction as more
and more clients are looking at change-the-business initiatives
through IT spending to drive growth and optimise cost.
Cross-currency movement continues to favour
revenue growth
The cross-currency movement, which had proved to be a bane
over 4QFY2010-1QFY2011 impacting USD revenue by
0.8-1.5% (qoq), has turned into a boon since 2QFY2011.
During 4QFY2011, the USD depreciated by 1.3%, 0.6% and
1.8% against the GBP, Euro and AUD, respectively. This will aid
USD revenue for Infosys, TCS, Wipro and HCL Tech by 0.20%,
0.19%, 0.20% and 0.22%, respectively. The INR also depreciated
by 1.0% against the USD, which will result in higher INR revenue
growth and aid operating margins by 35-40bp for 4QFY2011.
Hiring spree to continue
IT players got into the hiring mode from 3QFY2010, with high
lateral hiring in 2HFY2010 to tap the sudden pent-up demand.
With a strengthening demand landscape, Infosys and TCS have
robust hiring targets for FY2012. Infosys has already made
26,000 campus offers and plans to hire ~25,000 laterals
for FY2012. Companies are now looking at planned
hiring to address the strengthening demand pipeline.
We expect the hiring trend to remain upbeat, with Infosys and
TCS expected to have hired ~2,796 and ~8,643 employees in
4QFY2011, respectively.
Utilisation to be a mixed bag
Utilisation levels for Infosys and TCS peaked in 2QFY2011 but
dipped in 3QFY2011, owing to lesser number of working days
vis-à-vis other quarters and robust fresher hiring done to map
the surge in demand. In 3QFY2011, for Wipro, utilisation level
(offshore incl. trainees) slipped to 68.6%, the lowest level since
the last seven quarters, while HCL Tech sustained its utilisation
level qoq.
For 4QFY2011, we expect utilisation levels for TCS, HCL Tech
and Wipro to inch up, as trainees hired in 9MFY2011 will start
getting billed. However, for Infosys, we expect utilisation to come
off a little due to lack of budget flush as well as ongoing training
of freshers.
Attrition blues behind
Attrition levels had shot up in the last few quarters to the
pre-recessionary levels of FY2008, as companies were flocking
for people everywhere to map the sudden surge in demand.
However, going forward, we expect these rates to normalise as
strong campus hiring carried out simultaneously by these
companies will create a stable bench, map any surge in demand
and abate poaching of laterals. Thus, we do not expect attrition
to be a spoilsport anymore, causing any lapse in the billable
position of companies.
Outlook and valuationOver the last four quarters, there has been an uptick in
discretionary spending as clients are looking forward to gain
competitive advantage by remaining ahead of the curve. This
trend, though led by the BFSI and retail segments, with
manufacturing coming in a big way and largely driven by the
US market, is expected to be more broad-based with broader
economies tracking recovery in the true sense, thereby instilling
confidence in the IT sector. Thus, we expect 4QFY2011 to be
yet again a modest quarter with 3.8-6.6% qoq growth in USD
revenue for tier-I IT companies, aided by buoyant demand
driving volumes, favourable cross-currency movement and stable
pricing environment. We expect Infosys to guide for 18-20% yoy
growth in USD revenue for FY2012. We remain positive on the IT
sector with TCS, Infosys and HCL Tech as our preferred picks.
Cyclically a muted quarter but with modest volume growth
Traditionally, 4Q is a soft quarter for IT companies as budgets
get closed from January to March and decisions are taken
between February and March on the kind of discretionary,
operational and capital spending; the spend happens heavily
in the next couple of quarters. For 4QFY2011, we expect volume
growth to remain modest at 4.1-5.2% qoq for tier-I companies
due to ongoing IT spend by clients
Revenue continues to surge
In 4QFY2011, we expect USD revenue to surge by 3.8-6.6%
qoq for tier-I IT companies on the back of modest volume growth,
stable pricing and favourable cross-currency movement. In INR
terms, revenue growth is expected to be higher at 4.6-7.6%
qoq on the back of weaker INR in 4QFY2011, at 45.28 vs.
44.85 (in 3QFY2011).
Margins to inch up
For 4QFY2011, we expect tier-I IT companies to report decent
performance on the EBIT margin front. We expect Infosys to
record EBIT margin expansion of 20bp qoq to 30.4% on the
back of 1.0% INR depreciation against the USD. In case of TCS,
increased utilisation levels and INR depreciation are expected
to aid its EBIT margin by 33bp qoq to 28.4%.
Wipro is expected to record a 50bp qoq expansion in the EBIT
margin of its IT services segment on the back of better utilisation
levels qoq. On a consolidated level, Wipro is expected to record
a 100bp qoq expansion in EBIT margin to 19.3% due to good
growth in the consumer care and lightening business segments,
adding to the IT services segment's growth. HCL Tech is expected
to record a 247bp qoq expansion in its EBIT margin on the
back of strong cross-currency benefit, better utilisation levels
and productivity gains.
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