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India Equity Research Reports, IPO and Stock News
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Technology
India
1QFY12 a mixed bag; time to look at mid-caps? June 2011 quarter was a mixed bag
for the Indian IT services players – even as the broad demand environment continued to
be robust, select companies (especially Infosys and Wipro) disappointed on growth.
Margin performance varied depending on various companies’ wage hike cycles. Most
importantly, the quarter saw strong performance on both revenues and margins from
most mid-sized names. It could be time to add some mid-cap spice to IT portfolios.
Demand indicators and commentary – debate on macro/micro dichotomy continues
June 2011 quarter saw strong revenue growth performance from Tier-I names like TCS and
Cognizant and a few mid-caps, steady showing from HCLT, while Infosys and Wipro disappointed.
Managements of most companies characterized demand environment as robust, even as doses of
caution (on macro uncertainty-led delays in decision-making across clients) came mixed with the
positive outlook. Not surprisingly, TCS and Cognizant appeared most bullish on demand outlook
for the industry; Cognizant also raised its CY2011E revenue growth guidance by 3% points.
Macro developments (increased uncertainty) in the Eurozone and the US continue to be at odds
with the sustained strong micro indicators coming from the offshore IT services players. Debate
could continue to linger, in our view – we are in the positive camp on demand outlook.
June 2011 quarter performance – mixed bag on both revenues and margins
Strong June quarter seasonality on volume growth for the industry showed up again across most
companies. TCS and Cognizant, among the Tier-I names, delivered positive surprise on sequential
revenue growth, while Infosys and Wipro failed to meet expectations. Revenue growth was broadbased
again across verticals and geographies – Telecom vertical continued to be the lone exception.
Importantly –(1) discretionary services lines grew at a strong clip, (2) European geography
witnessed strong growth, (3) companies reported reasonably robust sequential uptick in BFSI
revenues allaying concerns on post-M&A-integration slowdown, and (4) mid-caps reported a fairly
robust quarter of revenue growth.
Margin-wise too, the quarter was a mixed bag – Infosys missed Street expectations, TCS and HCLT
reported in-line OPM, while Wipro surprised on the back of hedging gains. Margin performance of
most mid-cap names (barring Patni, where integration pangs continue) surprised on the upside -
steady attrition levels in the industry and volume-growth led SG&A-leverage were the key drivers.
Time to look at mid-caps?
Mid-cap IT stocks have broadly underperformed their larger peers since the onset of the downturn
in 2008, even as a couple of them have outperformed in the past 6-9 months. Underperformance
has been driven by sustained inferior growth/margin profile in this period. However, things have
started improving for the mid-sized pack over the past couple of quarters and June 2011 quarter
performance does warrant a case of a look at the mid-cap IT basket, in our view. We would still
prefer to be selective and apply expectations, visibility (on revenue as well margins), and valuation
filters. Within our coverage universe, MindTree, Hexaware, and Patni pass the muster, at this
point.
Remain positive on the sector; TCS and Infosys are top picks
We retain our positive stance on the sector – we expect robust demand environment to sustain.
Valuations of Infosys/TCS at 16-17X FY13E EPS do not appear too stretched. We reiterate our BUY
on both and as discussed above, we are turning incrementally constructive on select mid-caps
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Technology
India
1QFY12 a mixed bag; time to look at mid-caps? June 2011 quarter was a mixed bag
for the Indian IT services players – even as the broad demand environment continued to
be robust, select companies (especially Infosys and Wipro) disappointed on growth.
Margin performance varied depending on various companies’ wage hike cycles. Most
importantly, the quarter saw strong performance on both revenues and margins from
most mid-sized names. It could be time to add some mid-cap spice to IT portfolios.
Demand indicators and commentary – debate on macro/micro dichotomy continues
June 2011 quarter saw strong revenue growth performance from Tier-I names like TCS and
Cognizant and a few mid-caps, steady showing from HCLT, while Infosys and Wipro disappointed.
Managements of most companies characterized demand environment as robust, even as doses of
caution (on macro uncertainty-led delays in decision-making across clients) came mixed with the
positive outlook. Not surprisingly, TCS and Cognizant appeared most bullish on demand outlook
for the industry; Cognizant also raised its CY2011E revenue growth guidance by 3% points.
Macro developments (increased uncertainty) in the Eurozone and the US continue to be at odds
with the sustained strong micro indicators coming from the offshore IT services players. Debate
could continue to linger, in our view – we are in the positive camp on demand outlook.
June 2011 quarter performance – mixed bag on both revenues and margins
Strong June quarter seasonality on volume growth for the industry showed up again across most
companies. TCS and Cognizant, among the Tier-I names, delivered positive surprise on sequential
revenue growth, while Infosys and Wipro failed to meet expectations. Revenue growth was broadbased
again across verticals and geographies – Telecom vertical continued to be the lone exception.
Importantly –(1) discretionary services lines grew at a strong clip, (2) European geography
witnessed strong growth, (3) companies reported reasonably robust sequential uptick in BFSI
revenues allaying concerns on post-M&A-integration slowdown, and (4) mid-caps reported a fairly
robust quarter of revenue growth.
Margin-wise too, the quarter was a mixed bag – Infosys missed Street expectations, TCS and HCLT
reported in-line OPM, while Wipro surprised on the back of hedging gains. Margin performance of
most mid-cap names (barring Patni, where integration pangs continue) surprised on the upside -
steady attrition levels in the industry and volume-growth led SG&A-leverage were the key drivers.
Time to look at mid-caps?
Mid-cap IT stocks have broadly underperformed their larger peers since the onset of the downturn
in 2008, even as a couple of them have outperformed in the past 6-9 months. Underperformance
has been driven by sustained inferior growth/margin profile in this period. However, things have
started improving for the mid-sized pack over the past couple of quarters and June 2011 quarter
performance does warrant a case of a look at the mid-cap IT basket, in our view. We would still
prefer to be selective and apply expectations, visibility (on revenue as well margins), and valuation
filters. Within our coverage universe, MindTree, Hexaware, and Patni pass the muster, at this
point.
Remain positive on the sector; TCS and Infosys are top picks
We retain our positive stance on the sector – we expect robust demand environment to sustain.
Valuations of Infosys/TCS at 16-17X FY13E EPS do not appear too stretched. We reiterate our BUY
on both and as discussed above, we are turning incrementally constructive on select mid-caps
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