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2Q FY12 preview – Back to the future?
We see 2-6% qoq US$ revenue growth across our coverage universe, net of cross
currency headwinds (0.5-0.8%); -11% to 14% EPS growth net of FX gains/losses.
Initial impact of restructuring at major BFS clients could weigh on Infosys’ 2Q volume
growth (+4.6% qoq). TCS and HCLT to remain revenue growth leaders (5.8%/4.5%).
INR depreciation to help: 112bp/148bp EBIT margin gains for Infosys/TCS; lower
56bp/121bp drop for Wipro/HCLT from the scheduled wage hikes.
2H12 outlook: Focus on a) stickiness of service portfolio; b) restructuring risks in BFS
clients; and c) large deal pipeline visibility. Infosys’ FY12 US$ revenue growth guidance
may get lowered to 16-18%; though EPS could go up to Rs134-136 on INR uplift.
Tier1 valuations to remain under stress near-term; HCLT is our key risk-reward play.
2Q FY12E: INR tailwinds to the rescue. We see relatively muted 2.8-6.5% volume growth for
the Top4 players in a seasonally strong quarter. US$ growth could be restricted to 2-6% by the
strong cross-currency headwinds. However, concurrent INR weakness (2.3% qoq average) could
push EBITDA margin by 114bp/144bp for Infosys/TCS; restrict fall to 56bp/139bp for Wipro/HCLT
from planned wage hikes. We expect Satyam’s margin expansion to continue (+133bp) given the
push-out of wage hikes. We estimate -4-13% qoq PAT growth for the Top4; defensive hedge
positions should check FX losses across players; Infosys could see gains.
Growth outlook could get tempered. While Accenture and Oracle’s recent results suggest a
sustained pace of execution, Accenture’s flat 1Q12 revenue guidance indicates limited growth
visibility. We expect a cut-back in Infosys’ FY12 US$ revenue guidance though INR weakness
could prop up EPS guidance (See Infosys – An early start to winter? dated 22 September ‘11).
What to focus on in the results? 1) Stickiness of service portfolio – maintenance business in
discretionary spend horizontals; 2) Growth in FS vertical – restructuring risks in FS client base; 3)
large deal wins + incremental changes to pipeline – TPI, an outsourcing advisor, estimates
US$51bn+ TCV outsourcing contracts awards in 2H CY11.
We see Tier-1 range-bound near-term; buy into select mid-caps for results surprise. We
expect Tier-1 to remain range-bound near-term as guidance moderation/cautious commentary
could stress valuations especially post the 7-16% bounce-back from quarter’s lows on INR
weakness. HCLT remains our preferred play (continued volume/deal momentum + INR uplift to
margin + sharpest valuation correction); we find risk-reward attractive in Satyam (margin
buoyancy on wage-hike push-out) and OFSS (healthy license sales growth). We would buy into
any sharp fall in Infosys on FY12 guidance cut-back from a mid-range investment horizon.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
2Q FY12 preview – Back to the future?
We see 2-6% qoq US$ revenue growth across our coverage universe, net of cross
currency headwinds (0.5-0.8%); -11% to 14% EPS growth net of FX gains/losses.
Initial impact of restructuring at major BFS clients could weigh on Infosys’ 2Q volume
growth (+4.6% qoq). TCS and HCLT to remain revenue growth leaders (5.8%/4.5%).
INR depreciation to help: 112bp/148bp EBIT margin gains for Infosys/TCS; lower
56bp/121bp drop for Wipro/HCLT from the scheduled wage hikes.
2H12 outlook: Focus on a) stickiness of service portfolio; b) restructuring risks in BFS
clients; and c) large deal pipeline visibility. Infosys’ FY12 US$ revenue growth guidance
may get lowered to 16-18%; though EPS could go up to Rs134-136 on INR uplift.
Tier1 valuations to remain under stress near-term; HCLT is our key risk-reward play.
2Q FY12E: INR tailwinds to the rescue. We see relatively muted 2.8-6.5% volume growth for
the Top4 players in a seasonally strong quarter. US$ growth could be restricted to 2-6% by the
strong cross-currency headwinds. However, concurrent INR weakness (2.3% qoq average) could
push EBITDA margin by 114bp/144bp for Infosys/TCS; restrict fall to 56bp/139bp for Wipro/HCLT
from planned wage hikes. We expect Satyam’s margin expansion to continue (+133bp) given the
push-out of wage hikes. We estimate -4-13% qoq PAT growth for the Top4; defensive hedge
positions should check FX losses across players; Infosys could see gains.
Growth outlook could get tempered. While Accenture and Oracle’s recent results suggest a
sustained pace of execution, Accenture’s flat 1Q12 revenue guidance indicates limited growth
visibility. We expect a cut-back in Infosys’ FY12 US$ revenue guidance though INR weakness
could prop up EPS guidance (See Infosys – An early start to winter? dated 22 September ‘11).
What to focus on in the results? 1) Stickiness of service portfolio – maintenance business in
discretionary spend horizontals; 2) Growth in FS vertical – restructuring risks in FS client base; 3)
large deal wins + incremental changes to pipeline – TPI, an outsourcing advisor, estimates
US$51bn+ TCV outsourcing contracts awards in 2H CY11.
We see Tier-1 range-bound near-term; buy into select mid-caps for results surprise. We
expect Tier-1 to remain range-bound near-term as guidance moderation/cautious commentary
could stress valuations especially post the 7-16% bounce-back from quarter’s lows on INR
weakness. HCLT remains our preferred play (continued volume/deal momentum + INR uplift to
margin + sharpest valuation correction); we find risk-reward attractive in Satyam (margin
buoyancy on wage-hike push-out) and OFSS (healthy license sales growth). We would buy into
any sharp fall in Infosys on FY12 guidance cut-back from a mid-range investment horizon.
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