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Information Technology
Preview discussions generally encouraging
We expect Tier-I IT services companies to report US dollar revenue
growth of 1.6-5.4% led by average 3.4% volume growth and pricing
improvements. Reconciling our preview discussions suggests
continued demand momentum, reinforced by Accenture’s Q3FY11
earnings but what differs is the tone. While TCS’ FY12 commentary
continues to be enthusiastic, Infosys continues to maintain “normal”
vs. “accelerated” demand in FY11. Despite Wipro’s consistent tone,
expect lopsided quarterly revenue growth due to domestic issues
whereas HCL Tech’s revenue growth could likely be in the top
quartile.
What does this translate to Infosys’ FY12 guidance?
We expect Infosys to revise its FY12 US dollar revenue growth
guided range to 18.5-20.5% vs. 18-20% earlier to account for the
modest Q1FY12 beat relative to its guidance and the 1.4%, 1.2%
and 2.9% depreciation of the US$ vs. the euro, pound and
Australian dollar relative to what it had assumed in Q4FY11. That
said, Infosys could likely maintain its EPS guidance pending a likely
higher than anticipated impact on Q1FY12 operating margins.
Seasonal cost to pressurise operating margins in Q1
Depending on the operating model, topical Q1 headwinds include
wage inflation that could impact operating margins by 250-300 bps
and visa cost (80-100 bps). Although Wipro’s wage costs would be
spread 1/3 and 2/3 in Q1 and Q2, our channel checks suggest the
company awarded bonuses to a minority set of employees in Q1.
HCL Tech’s annual appraisals are effective July 1. We expect TCS,
Infosys and Wipro’s EBIT margins to decline 185 bps, 315 bps & 40
bps, respectively, while that of HCL Tech would improve by 69 bps.
Accenture (ACN) continues to surprise the Street
Earlier last week, Accenture raised its FY11 (August year end)
guidance, a third consecutive quarter, led by strength in BFSI (grew
19%, 20% & 21% in local currency in Q3, Q2 & Q1FY11,
respectively) and discretionary spending as reflected by consulting
bookings that continue to be strong. ACN now expects revenues to
grow 14-15% vs. 11-14% earlier. To summarise, ACN’s initial FY12
revenue growth guidance of 7-10% appears conservative and
anticipate a likely upward estimate revision, going forward.
Company specific view
Company Remarks
HCL Tech We expect US$ revenue growth of 4% QoQ primarily driven by core software (4.8%
QoQ growth) and Infrastructure structure services (3.7%). Japanese revenues,
though less than 5% of total, could be modestly impacted in Q4FY11 (June year
end). EBIT margins could improve by 69 bps QoQ.to 15.7%
Infosys We expect US$ revenue growth of 4% QoQ led by 3.7% volume growth and 0.3%
pricing improvements. Wage inflation could negatively impact EBIT (modelling
25.8% for Q1FY12) margins by 200 bps, visa costs (100 bps), offset by the
depreciation of the average US$ relative to guidance assumption
Mastek We expect revenues to decline 4.8% QoQ due to partial loss on capita account. The
EBITDA margin could be (-2%) as declining revenue could offset gains made by cost
rationalisation measures. Expect sluggish revenue performance as rampup at the
new UK based client would start in Q1FY12 (June year end)
NIIT Ltd We expect SLS and ILS business to be the growth driver with 7% & 6% YoY growth.
We are modelling EBITDA margins of 12.5% primarily impacted by wage hikes in Q1.
For FY12, expect ~18% revenue growth in ILS/CLS business respectively with
flat/150 bps improvement in operating margin
Patni
Computers
We expect a modest 1.8% rupee revenue growth QoQ led by volume growth. EBIT
margins would likely decline by 137 bps due to 9-10% offshore and 2-4% onsite
wage hikes. Mangement commentary on iGate-Patni integration, delisting of patni
should be of investor focus
Rolta We expect revenues to grow 4.2% QoQ . At 39.9%, EBITDA margins should be flat
QoQ and improve 104 bps YoY. Expect demand momemtum from EGDS and EITS
business to continue led by homeland security, utilities, mapping projects. Wage
inflation effective July 1 would impact margins in Q1FY12
Sasken We expect Sasken to report 4.5% QoQ decline in revenues as Nokia continues to
shift onsite work offshore. At 14%, EBITDA margins should improve by 0.7
percentage points QoQ. FY12 tax rates should rise to ~23-25% vs. 16.7% leading to
lower PATmargin of 10% vs. 13.4% in FY11
TCS We expect TCS to report 5.4% US$ & 5.2% rupee revenue growth on the back of
4.7% volume growth, 0.6% pricing and favourable cross currency. Further, we expect
salary revisions and visa cost to impact EBIT margins by 185 bps. We are modelling
EBIT margin of 26.2% vs. 28.0% in Q4FY11
Tech
Mahindra
We expect US$ revenues to grow 2.9% primarily driven by 5% QoQ growth in non-
BT accounts. The EBITDA margin are expected to decline 36 bps primarily led by
rising costs coupled with sluggish revenue growth while major impact would come
in Q2 as the company gives salary hikes effective July 1
Wipro We expect IT services revenues to grow 1.6% QoQ in US$ terms. Revenues from
SAIC oil & gas business could provide upside to our estimates. Consolidated
revenues are expected to grow 1.9% QoQ while EBIT margin should decline by 40
bps to 17.4%. FY12E tax rates could rise to 19-20% vs.16% in FY11
Source: Company, ICICIdirect.com Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Information Technology
Preview discussions generally encouraging
We expect Tier-I IT services companies to report US dollar revenue
growth of 1.6-5.4% led by average 3.4% volume growth and pricing
improvements. Reconciling our preview discussions suggests
continued demand momentum, reinforced by Accenture’s Q3FY11
earnings but what differs is the tone. While TCS’ FY12 commentary
continues to be enthusiastic, Infosys continues to maintain “normal”
vs. “accelerated” demand in FY11. Despite Wipro’s consistent tone,
expect lopsided quarterly revenue growth due to domestic issues
whereas HCL Tech’s revenue growth could likely be in the top
quartile.
What does this translate to Infosys’ FY12 guidance?
We expect Infosys to revise its FY12 US dollar revenue growth
guided range to 18.5-20.5% vs. 18-20% earlier to account for the
modest Q1FY12 beat relative to its guidance and the 1.4%, 1.2%
and 2.9% depreciation of the US$ vs. the euro, pound and
Australian dollar relative to what it had assumed in Q4FY11. That
said, Infosys could likely maintain its EPS guidance pending a likely
higher than anticipated impact on Q1FY12 operating margins.
Seasonal cost to pressurise operating margins in Q1
Depending on the operating model, topical Q1 headwinds include
wage inflation that could impact operating margins by 250-300 bps
and visa cost (80-100 bps). Although Wipro’s wage costs would be
spread 1/3 and 2/3 in Q1 and Q2, our channel checks suggest the
company awarded bonuses to a minority set of employees in Q1.
HCL Tech’s annual appraisals are effective July 1. We expect TCS,
Infosys and Wipro’s EBIT margins to decline 185 bps, 315 bps & 40
bps, respectively, while that of HCL Tech would improve by 69 bps.
Accenture (ACN) continues to surprise the Street
Earlier last week, Accenture raised its FY11 (August year end)
guidance, a third consecutive quarter, led by strength in BFSI (grew
19%, 20% & 21% in local currency in Q3, Q2 & Q1FY11,
respectively) and discretionary spending as reflected by consulting
bookings that continue to be strong. ACN now expects revenues to
grow 14-15% vs. 11-14% earlier. To summarise, ACN’s initial FY12
revenue growth guidance of 7-10% appears conservative and
anticipate a likely upward estimate revision, going forward.
Company specific view
Company Remarks
HCL Tech We expect US$ revenue growth of 4% QoQ primarily driven by core software (4.8%
QoQ growth) and Infrastructure structure services (3.7%). Japanese revenues,
though less than 5% of total, could be modestly impacted in Q4FY11 (June year
end). EBIT margins could improve by 69 bps QoQ.to 15.7%
Infosys We expect US$ revenue growth of 4% QoQ led by 3.7% volume growth and 0.3%
pricing improvements. Wage inflation could negatively impact EBIT (modelling
25.8% for Q1FY12) margins by 200 bps, visa costs (100 bps), offset by the
depreciation of the average US$ relative to guidance assumption
Mastek We expect revenues to decline 4.8% QoQ due to partial loss on capita account. The
EBITDA margin could be (-2%) as declining revenue could offset gains made by cost
rationalisation measures. Expect sluggish revenue performance as rampup at the
new UK based client would start in Q1FY12 (June year end)
NIIT Ltd We expect SLS and ILS business to be the growth driver with 7% & 6% YoY growth.
We are modelling EBITDA margins of 12.5% primarily impacted by wage hikes in Q1.
For FY12, expect ~18% revenue growth in ILS/CLS business respectively with
flat/150 bps improvement in operating margin
Patni
Computers
We expect a modest 1.8% rupee revenue growth QoQ led by volume growth. EBIT
margins would likely decline by 137 bps due to 9-10% offshore and 2-4% onsite
wage hikes. Mangement commentary on iGate-Patni integration, delisting of patni
should be of investor focus
Rolta We expect revenues to grow 4.2% QoQ . At 39.9%, EBITDA margins should be flat
QoQ and improve 104 bps YoY. Expect demand momemtum from EGDS and EITS
business to continue led by homeland security, utilities, mapping projects. Wage
inflation effective July 1 would impact margins in Q1FY12
Sasken We expect Sasken to report 4.5% QoQ decline in revenues as Nokia continues to
shift onsite work offshore. At 14%, EBITDA margins should improve by 0.7
percentage points QoQ. FY12 tax rates should rise to ~23-25% vs. 16.7% leading to
lower PATmargin of 10% vs. 13.4% in FY11
TCS We expect TCS to report 5.4% US$ & 5.2% rupee revenue growth on the back of
4.7% volume growth, 0.6% pricing and favourable cross currency. Further, we expect
salary revisions and visa cost to impact EBIT margins by 185 bps. We are modelling
EBIT margin of 26.2% vs. 28.0% in Q4FY11
Tech
Mahindra
We expect US$ revenues to grow 2.9% primarily driven by 5% QoQ growth in non-
BT accounts. The EBITDA margin are expected to decline 36 bps primarily led by
rising costs coupled with sluggish revenue growth while major impact would come
in Q2 as the company gives salary hikes effective July 1
Wipro We expect IT services revenues to grow 1.6% QoQ in US$ terms. Revenues from
SAIC oil & gas business could provide upside to our estimates. Consolidated
revenues are expected to grow 1.9% QoQ while EBIT margin should decline by 40
bps to 17.4%. FY12E tax rates could rise to 19-20% vs.16% in FY11
Source: Company, ICICIdirect.com Research
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