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India Equity Research Reports, IPO and Stock News
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Demand fundamentally intact from near-term perspective
Retaining positive view on sector; only marginal revisions in estimates
IT Services stocks have corrected sharply over the last week; however, we are reassured post our meetings
with TCS, Infosys and Wipro.
Overall demand environment remains strong - the industry can tackle a macro slowdown, but systemic
shocks could pose a real risk. Pricing environment looks "stable with an upward bias"; margins to be
"range-bound".
The significance of the visa rhetoric is more symbolic than operational.
We remain positive on the sector. Infosys remains our top pick.
Macro slowdown manageable; systemic shocks can
pose real risk
The overarching theme that emerged from our meetings is
that the overall demand environment from an industry
standpoint remains strong. The industry can tackle a global
macro-economic slowdown, especially given its value
proposition. However, systemic shocks like a sovereign
default in Europe can pose a real risk. Within this backdrop,
TCS appeared the most bullish and Wipro the least. Though
Wipro is in unison with the other players on strong industrywide
demand, it is grappling with internal issues with
respect to restructuring and organizational flux. Hence,
revenue momentum is likely to remain subdued for Wipro
at least over the next few quarters. We expect TCS to
post peer leading revenue growth of 6.2% in 1QFY12,
followed by 4% growth at Infosys and 1.1% growth at Wipro.
Pricing and margin commentary unchanged
Pricing and margin commentary was more consistent
across the players, with pricing environment looking "stable
with an upward bias" and margins to be "range-bound".
We expect margins to be impacted in 1QFY12 by 180bp
for TCS and 280bp for Infosys on account of 12-14% wage
inflation.
Visa issues - symbolic message more pertinent than
economic consequences
Visa issues are not impacting operations in any material
way for most Indian IT Services companies. We believe
that the significance of the visa rhetoric is more symbolic
than operational. The real issue is not so much the margin/
servicing impact that stringent visa procedures may have
but whether such strictures would be a precursor to more
protectionism and higher regulation. For context, visa costs
were just USD42m for Infosys in FY11 despite the increased
visa processing costs. Even if we assume 50% rejection
rates, necessitating local hiring to that extent, the
incremental margin impact would be limited to ~50bp,
assuming compensation of local hires to be 15% more than
internal deputes.
Retaining positive view on sector; only marginal
revisions in estimates
We maintain our positive view on the sector, post our
interactions. At the individual company level, we are
incrementally positive on TCS, but slightly disappointed
with Wipro. Accordingly, we have upgraded our FY12
revenue growth estimate for TCS from 26.6% to 27.5% and
have downgraded our EPS estimates by 5.3-5.5% for Wipro.
Our estimate for Infosys is largely unchanged.
Infosys continues to be our top pick in IT Services
Though TCS will continue to lead in terms of growth, we
believe this is already built in our estimates and the stock
price. We see Infosys as a better bet on two counts: (1)
higher probability of upside surprises on earnings, and (2)
higher valuation comfort (trading at 19.6x FY12E EPS v/s
20.7x for TCS). We maintain our Neutral rating on Wipro,
as it is too early to gauge the timing and magnitude of the
recovery in fundamentals driven by the restructuring, though
we agree that valuations (14.7x FY13E EPS) are starting
to look interesting even on lowered numbers.
Demand fundamentally intact from near-term perspective
Retaining positive view on sector; only marginal revisions in estimates
IT Services stocks have corrected sharply over the past week on account of
increased rhetoric around the visa issues and the macro slowdown in the
US, as also the general market correction.
However, we have come away reassured post our meetings with the senior
management teams of leading Indian IT companies (TCS, Infosys and Wipro).
Demand is fundamentally intact from a near-term perspective.
Deal pipelines in terms of volume and size remain strong and demand is
getting broad-based, as lagging verticals like manufacturing play catch up.
Infosys' 2Q guidance should assuage investor concerns to some extent; and
expect them to guide at USD revenue growth midpoint of atleast 5.5%
Macro slowdown manageable; systemic shocks can pose real risk
The overarching theme that emerged from our meetings is that the overall demand
environment from an industry standpoint remains strong. The industry can tackle a global
macro-economic slowdown, especially given its value proposition. However, systemic
shocks like a sovereign default in Europe can pose a real risk.
Within this backdrop, TCS appeared the most bullish and Wipro the least. Though Wipro is
in unison with the other players on strong industry-wide demand, it is grappling with internal
issues with respect to restructuring. Hence, revenue momentum is likely to remain subdued
for Wipro over the next few quarters. We expect TCS to post peer leading revenue
growth of 6.2% in 1QFY12, followed by 4% growth at Infosys and 1.1% growth at Wipro.
TCS - unabashedly bullish: TCS continues to be unabashedly bullish on the demand
environment. Except Telecom, most verticals are sustaining their momentum. Surprisingly,
trends are still looking most bullish within the BFSI vertical.
Infosys - cautiously optimistic: Demand at Infosys has picked up definitively post a
forgettable 4QFY11. We do not see any risk to our 1QFY12 or FY12 estimates. However,
Infosys' commentary was heavy with caution around the macro environment - it had
limited visibility on whether or not the budgets that have been allocated and look up 2-3%
for CY11 will eventually be spent.
Wipro - on a wing and a prayer: Wipro seems to be clearly struggling from near-term
prospective though believe that the structure and strategy that the new leadership has put
in place should bear fruit and drive industry leading growth by 4QFY12.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Demand fundamentally intact from near-term perspective
Retaining positive view on sector; only marginal revisions in estimates
IT Services stocks have corrected sharply over the last week; however, we are reassured post our meetings
with TCS, Infosys and Wipro.
Overall demand environment remains strong - the industry can tackle a macro slowdown, but systemic
shocks could pose a real risk. Pricing environment looks "stable with an upward bias"; margins to be
"range-bound".
The significance of the visa rhetoric is more symbolic than operational.
We remain positive on the sector. Infosys remains our top pick.
Macro slowdown manageable; systemic shocks can
pose real risk
The overarching theme that emerged from our meetings is
that the overall demand environment from an industry
standpoint remains strong. The industry can tackle a global
macro-economic slowdown, especially given its value
proposition. However, systemic shocks like a sovereign
default in Europe can pose a real risk. Within this backdrop,
TCS appeared the most bullish and Wipro the least. Though
Wipro is in unison with the other players on strong industrywide
demand, it is grappling with internal issues with
respect to restructuring and organizational flux. Hence,
revenue momentum is likely to remain subdued for Wipro
at least over the next few quarters. We expect TCS to
post peer leading revenue growth of 6.2% in 1QFY12,
followed by 4% growth at Infosys and 1.1% growth at Wipro.
Pricing and margin commentary unchanged
Pricing and margin commentary was more consistent
across the players, with pricing environment looking "stable
with an upward bias" and margins to be "range-bound".
We expect margins to be impacted in 1QFY12 by 180bp
for TCS and 280bp for Infosys on account of 12-14% wage
inflation.
Visa issues - symbolic message more pertinent than
economic consequences
Visa issues are not impacting operations in any material
way for most Indian IT Services companies. We believe
that the significance of the visa rhetoric is more symbolic
than operational. The real issue is not so much the margin/
servicing impact that stringent visa procedures may have
but whether such strictures would be a precursor to more
protectionism and higher regulation. For context, visa costs
were just USD42m for Infosys in FY11 despite the increased
visa processing costs. Even if we assume 50% rejection
rates, necessitating local hiring to that extent, the
incremental margin impact would be limited to ~50bp,
assuming compensation of local hires to be 15% more than
internal deputes.
Retaining positive view on sector; only marginal
revisions in estimates
We maintain our positive view on the sector, post our
interactions. At the individual company level, we are
incrementally positive on TCS, but slightly disappointed
with Wipro. Accordingly, we have upgraded our FY12
revenue growth estimate for TCS from 26.6% to 27.5% and
have downgraded our EPS estimates by 5.3-5.5% for Wipro.
Our estimate for Infosys is largely unchanged.
Infosys continues to be our top pick in IT Services
Though TCS will continue to lead in terms of growth, we
believe this is already built in our estimates and the stock
price. We see Infosys as a better bet on two counts: (1)
higher probability of upside surprises on earnings, and (2)
higher valuation comfort (trading at 19.6x FY12E EPS v/s
20.7x for TCS). We maintain our Neutral rating on Wipro,
as it is too early to gauge the timing and magnitude of the
recovery in fundamentals driven by the restructuring, though
we agree that valuations (14.7x FY13E EPS) are starting
to look interesting even on lowered numbers.
Demand fundamentally intact from near-term perspective
Retaining positive view on sector; only marginal revisions in estimates
IT Services stocks have corrected sharply over the past week on account of
increased rhetoric around the visa issues and the macro slowdown in the
US, as also the general market correction.
However, we have come away reassured post our meetings with the senior
management teams of leading Indian IT companies (TCS, Infosys and Wipro).
Demand is fundamentally intact from a near-term perspective.
Deal pipelines in terms of volume and size remain strong and demand is
getting broad-based, as lagging verticals like manufacturing play catch up.
Infosys' 2Q guidance should assuage investor concerns to some extent; and
expect them to guide at USD revenue growth midpoint of atleast 5.5%
Macro slowdown manageable; systemic shocks can pose real risk
The overarching theme that emerged from our meetings is that the overall demand
environment from an industry standpoint remains strong. The industry can tackle a global
macro-economic slowdown, especially given its value proposition. However, systemic
shocks like a sovereign default in Europe can pose a real risk.
Within this backdrop, TCS appeared the most bullish and Wipro the least. Though Wipro is
in unison with the other players on strong industry-wide demand, it is grappling with internal
issues with respect to restructuring. Hence, revenue momentum is likely to remain subdued
for Wipro over the next few quarters. We expect TCS to post peer leading revenue
growth of 6.2% in 1QFY12, followed by 4% growth at Infosys and 1.1% growth at Wipro.
TCS - unabashedly bullish: TCS continues to be unabashedly bullish on the demand
environment. Except Telecom, most verticals are sustaining their momentum. Surprisingly,
trends are still looking most bullish within the BFSI vertical.
Infosys - cautiously optimistic: Demand at Infosys has picked up definitively post a
forgettable 4QFY11. We do not see any risk to our 1QFY12 or FY12 estimates. However,
Infosys' commentary was heavy with caution around the macro environment - it had
limited visibility on whether or not the budgets that have been allocated and look up 2-3%
for CY11 will eventually be spent.
Wipro - on a wing and a prayer: Wipro seems to be clearly struggling from near-term
prospective though believe that the structure and strategy that the new leadership has put
in place should bear fruit and drive industry leading growth by 4QFY12.
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