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India Equity Research Reports, IPO and Stock News
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Certainty to hope?
We believe that the below expectation performance from Indian Techs
(especially Infosys) in Mar-11 quarter, has masked a growing divergence
of both revenue growth range and visibility among techs. Commentary
on FY12 growth achievement has also gradually shifted from the
confident certainty in Dec-10 to hopes of a 2H pick-up. Amid this overall
moderating sentiment, we believe select stocks have a strengthening
case for outperformance, moreso as the performance differential will only
increase through FY12. TCS and Accenture remain our favoured picks.
Expanding differentials in financial performance
q While the demand environment remains solid, a divergence is visible on the
revenue growth front between companies like TCS/HCL which have stable
managements and Wipro/Infosys where internal restructuring is ongoing.
q Despite well known and analyzed parameters of productivity, margin performance
has also varied materially across vendors and growth divergence in FY12 will likely
further accelerate the differential in profitability metrics.
q Getting the revenue/growth trade-off right is proving to be a tougher challenge for
most vendors and TCS/Accenture seem to be the best placed to manage this.
Back-ended growth expectations need a re-test
q Contrary to FY11, achievement of FY12 growth expectations at most vendors
(Infosys/Wipro) now depend on a strong second half. Past trends indicate that
expectations of back-ended growth have only occasionally borne fruit.
q Historically, back-ended growth expectations have been de-railed due to a range of
unanticipated causes, ranging from Lehman bankruptcy to internal instability.
q Moreover, Dec quarter suffers from lower working days whereas pickup in new
business ramp-ups remains uncertain for at least a fortnight into the Mar quarter.
q Outperformance of FY12 growth estimates, therefore, essentially hinges on a solid
performance in Sep-11 which could reduce implied 2H expectations.
Prefer stocks with front-loaded growth and stable management
q TCS (Top pick): Arithmetic is in its favour with a solid FY11 exit rate and also
starting out strong in FY12. Stable top management and improving operations
provide an additional buffer. Should expand performance differential c.f. peers.
q Infosys: Re-structuring will limit financial performance in Jun-11 putting the onus
of outperformance on Sep-11 quarter. Drive to hire more locals coupled with wage
hikes in India will limit the usual margin outperformance at Infosys.
q Wipro: Remains a FY13 story and given the past underperformance, we are
disinclined to give it the benefit of doubt just yet.
q HCL Tech: Revenue growth should lead peers but earnings and valuation upsides
critically hinge on margin performance in FY12, on which confidence is on hold.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Certainty to hope?
We believe that the below expectation performance from Indian Techs
(especially Infosys) in Mar-11 quarter, has masked a growing divergence
of both revenue growth range and visibility among techs. Commentary
on FY12 growth achievement has also gradually shifted from the
confident certainty in Dec-10 to hopes of a 2H pick-up. Amid this overall
moderating sentiment, we believe select stocks have a strengthening
case for outperformance, moreso as the performance differential will only
increase through FY12. TCS and Accenture remain our favoured picks.
Expanding differentials in financial performance
q While the demand environment remains solid, a divergence is visible on the
revenue growth front between companies like TCS/HCL which have stable
managements and Wipro/Infosys where internal restructuring is ongoing.
q Despite well known and analyzed parameters of productivity, margin performance
has also varied materially across vendors and growth divergence in FY12 will likely
further accelerate the differential in profitability metrics.
q Getting the revenue/growth trade-off right is proving to be a tougher challenge for
most vendors and TCS/Accenture seem to be the best placed to manage this.
Back-ended growth expectations need a re-test
q Contrary to FY11, achievement of FY12 growth expectations at most vendors
(Infosys/Wipro) now depend on a strong second half. Past trends indicate that
expectations of back-ended growth have only occasionally borne fruit.
q Historically, back-ended growth expectations have been de-railed due to a range of
unanticipated causes, ranging from Lehman bankruptcy to internal instability.
q Moreover, Dec quarter suffers from lower working days whereas pickup in new
business ramp-ups remains uncertain for at least a fortnight into the Mar quarter.
q Outperformance of FY12 growth estimates, therefore, essentially hinges on a solid
performance in Sep-11 which could reduce implied 2H expectations.
Prefer stocks with front-loaded growth and stable management
q TCS (Top pick): Arithmetic is in its favour with a solid FY11 exit rate and also
starting out strong in FY12. Stable top management and improving operations
provide an additional buffer. Should expand performance differential c.f. peers.
q Infosys: Re-structuring will limit financial performance in Jun-11 putting the onus
of outperformance on Sep-11 quarter. Drive to hire more locals coupled with wage
hikes in India will limit the usual margin outperformance at Infosys.
q Wipro: Remains a FY13 story and given the past underperformance, we are
disinclined to give it the benefit of doubt just yet.
q HCL Tech: Revenue growth should lead peers but earnings and valuation upsides
critically hinge on margin performance in FY12, on which confidence is on hold.
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