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Indian IT services
1Q FY12 Preview: Focus on the FY12/13 outlook, as macro
concerns emerge
Focus of this earnings season likely to remain the FY12 outlook
Concerns emerging over the sustainability of a macro recovery.
IT buyers for BFSI and the HSBC IT demand index suggest no
weakness so far
We continue to expect a strong FY12 and stock returns in line
with earnings growth. We are OW on TCS, Infosys and HCLT
The HSBC IT demand index, notwithstanding the recent macro concerns, is at all-time
high: Software license sales, employment in the IT sector in the US and strength in upstream
services (such as consulting) are supporting the index. Among its constituents, the US ISM
index and the US consumer confidence index have come off from recent highs only of late
(driving macro concerns), but it still not enough to impact the overall index (chart 1).
Furthermore, while macro concerns are building, IT buyers are not warning of any slowdown
in demand. In particular in the banking and financial services industry (BFSI), the extensive
burden of regulations and the pressure on cost-income ratios represent an increasing incentive
to outsource and offshore.
1Q is likely to be largely focused on volume growth and outlook for FY12: We expect 4-
7% growth in the quarter (USD terms q-o-q, except for Wipro) and no change in the annual
guidance. Revenues (USD) are likely to benefit by nearly 80bp due to cross-currency benefits.
EBITDA margins are likely to decline in the range of 10-250bp for the top three companies,
due to salary increases and promotions. Mid-cap companies, in our view, may face stronger
margin headwinds, but there is a continued hope of margin recovery in 2H FY12.
Company-specific previews: We expect Infosys to report revenues at the higher end of the
guidance, but it should still result in a modest cut in the consensus FY12 estimates. TCS is
likely to continue to report a robust 6% volume growth. The restructuring commentaries
from Wipro and the overall demand environment from the rest of the companies will likely
remain the focus. We expect margin pressure to remain high for the mid-tier companies.
Our FY12 EPS estimate for PSYS and is nearly 8% below consensus. We are not changing
any estimates in this report.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian IT services
1Q FY12 Preview: Focus on the FY12/13 outlook, as macro
concerns emerge
Focus of this earnings season likely to remain the FY12 outlook
Concerns emerging over the sustainability of a macro recovery.
IT buyers for BFSI and the HSBC IT demand index suggest no
weakness so far
We continue to expect a strong FY12 and stock returns in line
with earnings growth. We are OW on TCS, Infosys and HCLT
The HSBC IT demand index, notwithstanding the recent macro concerns, is at all-time
high: Software license sales, employment in the IT sector in the US and strength in upstream
services (such as consulting) are supporting the index. Among its constituents, the US ISM
index and the US consumer confidence index have come off from recent highs only of late
(driving macro concerns), but it still not enough to impact the overall index (chart 1).
Furthermore, while macro concerns are building, IT buyers are not warning of any slowdown
in demand. In particular in the banking and financial services industry (BFSI), the extensive
burden of regulations and the pressure on cost-income ratios represent an increasing incentive
to outsource and offshore.
1Q is likely to be largely focused on volume growth and outlook for FY12: We expect 4-
7% growth in the quarter (USD terms q-o-q, except for Wipro) and no change in the annual
guidance. Revenues (USD) are likely to benefit by nearly 80bp due to cross-currency benefits.
EBITDA margins are likely to decline in the range of 10-250bp for the top three companies,
due to salary increases and promotions. Mid-cap companies, in our view, may face stronger
margin headwinds, but there is a continued hope of margin recovery in 2H FY12.
Company-specific previews: We expect Infosys to report revenues at the higher end of the
guidance, but it should still result in a modest cut in the consensus FY12 estimates. TCS is
likely to continue to report a robust 6% volume growth. The restructuring commentaries
from Wipro and the overall demand environment from the rest of the companies will likely
remain the focus. We expect margin pressure to remain high for the mid-tier companies.
Our FY12 EPS estimate for PSYS and is nearly 8% below consensus. We are not changing
any estimates in this report.
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