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1Q FY12 preview – Focus on pricing gains
We expect 1.7-6.3% qoq US$ revenue growth in 1Q12 across our coverage universe.
Cross currency could give 1.0-1.3% revenue uplift.
TCS and HCLT will likely continue revenue out-performance (6.3%/5.5%); restructuring
could restrict guidance out-performance at Infosys and Wipro.
Annual wage revision cycle and INR appreciation (1% qoq versus USD) pose margin
headwinds. We expect 5-31% qoq PAT decline; HCLT (+14% qoq) to be an exception.
Realization movement key to mid-range demand outlook/EPS surprises. 2Q guidance
to be the measure of restructuring progress at Wipro and Infosys.
Expensive valuations/heightened expectations restrict upside in Tier-1; HCLT and
Satyam are our preferred risk-reward plays.
1QFY12E: Volume rebound and cross-currency to mitigate margin pressures. We
expect a volume growth rebound (2.7-5.1%) with strong currency tailwinds (1.1-1.2% ex-Wipro)
for the Top4 players. However, EBITDA margins could decline (130-240bps) for Top3 players
on wage revisions; HCLT should see continued margin expansion (126bps), in our view. Also,
staffing rationalization could drive margin expansion at Satyam. We expect sequential PAT
declines across our coverage universe post expiry of STPI tax benefits in 4Q11; HCLT will be
an exception (16% qoq EBIT growth due to late wage hike cycle).
Pricing growth key to earnings upside. We believe current consensus estimates factor a
strong volume growth outlook; upside will thus be primarily from realization expansion, in our
view, over and above the likely COLA-adjustments/discounts reversals. Improvement in rackrates and/or increased share of discretionary-spend centric services could also allay any midterm demand concerns from macro factors.
What to focus on in the results? 1) Additions to the active client base and US$50m+ deal
wins/pipeline, critical to potential volume out performance; 2) attrition – we expect qoq decline
as fresher pipeline resumes; 3) Volume trends in telecom and Europe; and 4) 2Q guidance for
Infosys and Wipro – critical to gauge the progress on restructuring.
HCLT and Satyam are our picks on the quarter; Infosys for mid-range horizon. Satyam
(continued volume/deal traction + stable margin) and HCLT (strong deal momentum + margin
expansion) are preferred plays ahead of the results. Infosys is our pick among Tier-1; though
near-term upside may be restricted by expectation/guidance mismatch (we see only a modest
1.5% increase to FY12 EPS guidance to Rs128-130 vs. consensus’ Rs140). We see limited
downside in Wipro; look into client additions/volume growth/bucket moves for upside triggers.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
1Q FY12 preview – Focus on pricing gains
We expect 1.7-6.3% qoq US$ revenue growth in 1Q12 across our coverage universe.
Cross currency could give 1.0-1.3% revenue uplift.
TCS and HCLT will likely continue revenue out-performance (6.3%/5.5%); restructuring
could restrict guidance out-performance at Infosys and Wipro.
Annual wage revision cycle and INR appreciation (1% qoq versus USD) pose margin
headwinds. We expect 5-31% qoq PAT decline; HCLT (+14% qoq) to be an exception.
Realization movement key to mid-range demand outlook/EPS surprises. 2Q guidance
to be the measure of restructuring progress at Wipro and Infosys.
Expensive valuations/heightened expectations restrict upside in Tier-1; HCLT and
Satyam are our preferred risk-reward plays.
1QFY12E: Volume rebound and cross-currency to mitigate margin pressures. We
expect a volume growth rebound (2.7-5.1%) with strong currency tailwinds (1.1-1.2% ex-Wipro)
for the Top4 players. However, EBITDA margins could decline (130-240bps) for Top3 players
on wage revisions; HCLT should see continued margin expansion (126bps), in our view. Also,
staffing rationalization could drive margin expansion at Satyam. We expect sequential PAT
declines across our coverage universe post expiry of STPI tax benefits in 4Q11; HCLT will be
an exception (16% qoq EBIT growth due to late wage hike cycle).
Pricing growth key to earnings upside. We believe current consensus estimates factor a
strong volume growth outlook; upside will thus be primarily from realization expansion, in our
view, over and above the likely COLA-adjustments/discounts reversals. Improvement in rackrates and/or increased share of discretionary-spend centric services could also allay any midterm demand concerns from macro factors.
What to focus on in the results? 1) Additions to the active client base and US$50m+ deal
wins/pipeline, critical to potential volume out performance; 2) attrition – we expect qoq decline
as fresher pipeline resumes; 3) Volume trends in telecom and Europe; and 4) 2Q guidance for
Infosys and Wipro – critical to gauge the progress on restructuring.
HCLT and Satyam are our picks on the quarter; Infosys for mid-range horizon. Satyam
(continued volume/deal traction + stable margin) and HCLT (strong deal momentum + margin
expansion) are preferred plays ahead of the results. Infosys is our pick among Tier-1; though
near-term upside may be restricted by expectation/guidance mismatch (we see only a modest
1.5% increase to FY12 EPS guidance to Rs128-130 vs. consensus’ Rs140). We see limited
downside in Wipro; look into client additions/volume growth/bucket moves for upside triggers.
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