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India IT Services
Jun-11 Quarter Preview
Maintain In-Line industry view with Infosys and
HCLT as the key Overweight-rated stocks going into
Jun-11 quarter results.
Quick Comment: We believe Infosys’ qoq improvement
in the Jun-11 quarter will ease skepticism about its
revenue and margin outlook. With low forecasts, Street
expectations for Infosys’ full year should start to inch up
from F1Q, in our view. For Wipro, in the event of an in-
line F1Q and muted F2Q outlook, we believe consensus
EPS estimates for could move down. We expect TCS to
deliver another strong quarter, but full-year estimates
have little room for upside, thereby limiting any further
re-rating for TCS, in our view. Of the other stocks, we
prefer HCLT and remain cautious on Mphasis and Patni
due to company-specific margin concerns.
Will Infosys revisit its F2012 guidance? We believe
Infosys’ cautious view of the macro-economic outlook in
its key markets could overshadow underlying business
trends, leading to a muted guidance revision. We expect
Infosys to guide for 20-22% yoy USD revenue growth
margin guidance to -200bp yoy (from -300bp yoy earlier)
and EPS of Rs131-133 for F2012.
Overall for the coverage universe, we expect F1Q
USD revenue growth of 25% yoy, margin decline of
90bp yoy, and net income growth of 16% yoy due one-
time steep increase in effective tax rates from the Jun-11
quarter. Compared to the last quarter, we expect larger
vendors to deliver strong revenue growth of 5-6% qoq.
Cross currency to benefit revenues; wage hikes and
rupee would drag margins: Cross currency (depreciat-
ion of USD vs. GBP of 1%, EUR/AUD vs. USD of 4%),
would help revenues by 0.5-0.7% qoq. However, rupee
appreciation of -1% qoq vs. USD would affect margins
by 30-50bp. Further, wage hikes could drag margins
further in F1Q for Infosys and TCS. Wipro will have one
month of wage hikes in F1Q, leading to a lower margin
hit. We expect lower margins and higher tax rates
(effective from Jun-11 quarter onward) to lead to lower
net income qoq in F1Q for our companies.
Infosys: We believe Infosys could surprise positively on
revenues in the Jun-11 quarter. Consensus expects Infosys to
meet its USD revenue guidance for F1Q excluding cross-
currency benefits. We forecast USD revenue growth of 5.2%
qoq for Infosys, and would not be surprised if it delivers growth
higher than our expectations. Infosys’ guidance assumes F4Q
pricing. Higher-than-expected price realizations could surprise
positively, helping its outlook.
TCS could deliver yet another strong quarter, and is well
placed to achieve ~25%+ revenue growth in F2012, in our view.
We forecast TCS to deliver revenue growth of 5.6 % qoq with
margins declining by 160bp qoq due to wage hikes. So far,
TCS has delivered on high margin expectations. Consensus
estimates for F1Q of 27.3% (-70bp qoq) and F2012 margins of
27.8% (flat yoy) appear stretched to us and could come down
in the coming quarters. The effective tax rates could increase
for TCS from the current quarter onward, leading to net income
declining by 4% qoq.
HCLT: We expect HCLT to grow Jun-11 quarter revenue by
5.5% qoq and end F2011 with revenue growth of 31% yoy.
Management indicated that it would improve margins in the
June quarter by ~100bp qoq. We forecast EBIT margin of
14.8% (+90bp qoq). HCLT will likely be the only company
within our IT services coverage to report net income growth
qoq. We expect all the other companies to show a decline in
net profit qoq due to lower margins owing to wage hikes and an
increase in effective tax rates.
Wipro: Wipro is likely to deliver organic revenues in line with its
guidance (US$1,394-1,420mn), in our view. The SAIC
acquisition would add another US$8-10m for two weeks in 1Q.
The full impact of the acquisition should come in 2Q (additional
US$48-50mn in SAIC revenues), as Wipro could guide for
revenue growth of 5-6% qoq. The organic revenue growth
guidance would be ~2-3% qoq below that of Infosys, in our
view. We expect Wipro’s IT services margins to decline by
60bs qoq in the Jun-11 quarter due to rupee appreciation
against USD of 1% and the impact of wage hikes effective from
June 1 for one month.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India IT Services
Jun-11 Quarter Preview
Maintain In-Line industry view with Infosys and
HCLT as the key Overweight-rated stocks going into
Jun-11 quarter results.
Quick Comment: We believe Infosys’ qoq improvement
in the Jun-11 quarter will ease skepticism about its
revenue and margin outlook. With low forecasts, Street
expectations for Infosys’ full year should start to inch up
from F1Q, in our view. For Wipro, in the event of an in-
line F1Q and muted F2Q outlook, we believe consensus
EPS estimates for could move down. We expect TCS to
deliver another strong quarter, but full-year estimates
have little room for upside, thereby limiting any further
re-rating for TCS, in our view. Of the other stocks, we
prefer HCLT and remain cautious on Mphasis and Patni
due to company-specific margin concerns.
Will Infosys revisit its F2012 guidance? We believe
Infosys’ cautious view of the macro-economic outlook in
its key markets could overshadow underlying business
trends, leading to a muted guidance revision. We expect
Infosys to guide for 20-22% yoy USD revenue growth
margin guidance to -200bp yoy (from -300bp yoy earlier)
and EPS of Rs131-133 for F2012.
Overall for the coverage universe, we expect F1Q
USD revenue growth of 25% yoy, margin decline of
90bp yoy, and net income growth of 16% yoy due one-
time steep increase in effective tax rates from the Jun-11
quarter. Compared to the last quarter, we expect larger
vendors to deliver strong revenue growth of 5-6% qoq.
Cross currency to benefit revenues; wage hikes and
rupee would drag margins: Cross currency (depreciat-
ion of USD vs. GBP of 1%, EUR/AUD vs. USD of 4%),
would help revenues by 0.5-0.7% qoq. However, rupee
appreciation of -1% qoq vs. USD would affect margins
by 30-50bp. Further, wage hikes could drag margins
further in F1Q for Infosys and TCS. Wipro will have one
month of wage hikes in F1Q, leading to a lower margin
hit. We expect lower margins and higher tax rates
(effective from Jun-11 quarter onward) to lead to lower
net income qoq in F1Q for our companies.
Infosys: We believe Infosys could surprise positively on
revenues in the Jun-11 quarter. Consensus expects Infosys to
meet its USD revenue guidance for F1Q excluding cross-
currency benefits. We forecast USD revenue growth of 5.2%
qoq for Infosys, and would not be surprised if it delivers growth
higher than our expectations. Infosys’ guidance assumes F4Q
pricing. Higher-than-expected price realizations could surprise
positively, helping its outlook.
TCS could deliver yet another strong quarter, and is well
placed to achieve ~25%+ revenue growth in F2012, in our view.
We forecast TCS to deliver revenue growth of 5.6 % qoq with
margins declining by 160bp qoq due to wage hikes. So far,
TCS has delivered on high margin expectations. Consensus
estimates for F1Q of 27.3% (-70bp qoq) and F2012 margins of
27.8% (flat yoy) appear stretched to us and could come down
in the coming quarters. The effective tax rates could increase
for TCS from the current quarter onward, leading to net income
declining by 4% qoq.
HCLT: We expect HCLT to grow Jun-11 quarter revenue by
5.5% qoq and end F2011 with revenue growth of 31% yoy.
Management indicated that it would improve margins in the
June quarter by ~100bp qoq. We forecast EBIT margin of
14.8% (+90bp qoq). HCLT will likely be the only company
within our IT services coverage to report net income growth
qoq. We expect all the other companies to show a decline in
net profit qoq due to lower margins owing to wage hikes and an
increase in effective tax rates.
Wipro: Wipro is likely to deliver organic revenues in line with its
guidance (US$1,394-1,420mn), in our view. The SAIC
acquisition would add another US$8-10m for two weeks in 1Q.
The full impact of the acquisition should come in 2Q (additional
US$48-50mn in SAIC revenues), as Wipro could guide for
revenue growth of 5-6% qoq. The organic revenue growth
guidance would be ~2-3% qoq below that of Infosys, in our
view. We expect Wipro’s IT services margins to decline by
60bs qoq in the Jun-11 quarter due to rupee appreciation
against USD of 1% and the impact of wage hikes effective from
June 1 for one month.
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