UBS: Indian IT Services - All eyes on Infosys guidance

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UBS Investment Research
Indian IT Services
All eyes on Infosys guidance
􀂄 Not unreasonable to expect revenue guidance of 19-21% from Infosys
We expect strong revenue guidance from Infosys Technologies (Infoysys) for
FY12, based on our view that demand recovery is likely to be more broad-based in
2011. The strong revenue numbers reported by Accenture in its recent earnings
announcement also point to a strong recovery in discretionary spending in 2011, in
our view. We expect dollar revenue guidance of 19-21% YoY from Infosys on 15
April 2011.
􀂄 Margin focus, wage outlook to be key points to watch out for
With revenue recovery stabilising, and most Indian vendors reporting significant
operating margin declines in FY11, we expect investor focus to shift to the margin
outlook in FY12. Wage hikes are the primary drag on margins and we expect
announcements from Infosys and Tata Consultancy Services (TCS) to set the base
for the rest of the industry.
􀂄 Q4 FY11 likely to be in line, no major surprise likely
We expect large cap vendors to report 5-6% revenue growth, with most vendors
reporting margin increases during the quarter. We expect net profit to grow faster
than revenue for most large vendors. We expect mid-sized vendors to continue to
report relatively weaker numbers.
􀂄 UBS view: Infosys remains top pick, with strong guidance expectations
We believe that strong revenue guidance from Infosys will overshadow a likely
conservative margin outlook and act as a strong catalyst for further share price
upside potential. We maintain our Buy rating on Infosys, which is our top pick in
the Indian IT services sector. We maintain our Neutral rating on TCS and our Sell
ratings on Wipro and HCL Technologies. We remain more cautious on mid-cap
stocks.