India IT Services- Sep-11 should be robust; outlook could be tinged with some caution:: Credit Suisse,

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We expect growth to be reasonably strong this quarter. We think
messages on the outlook will be mixed—a reiteration of the
current demand environment combined with caution given the
uncertainty in the global environment.
● Cross-currency movements would negatively impact reported
USD-revenue growth for the companies under our coverage. On
the other hand, depreciation of the INR against major currencies
should improve EBIT margin by 80-100 bp for our coverage
universe from what it would have otherwise been. Losses on
currency hedges pose uncertainty though they should largely be
offset by translation gains of current assets.
● We expect overall margin performance to be mixed with TCS and
Infosys reporting increases in margins while we think HCL Tech
and Wipro will report declines due to wage hikes.
● We believe the near-term demand outlook looks attractive. Even if
the external environment were to take a turn for the worse, we
believe the sector will be a relatively safe place to be in. We
reiterate our Overweight stance and our preference for TCS as
top pick.


Currency to skew results
The EUR, the GBP and the INR have fallen significantly versus the
USD though the average movement for the quarter is slightly more
muted. While the companies would report lower USD-revenue growth
due to unfavorable cross-currency movements, the overall impact on
net income should be positive due to a depreciation of the INR.
As highlighted in our note on 22 September 2011, Currency can be a
bonus, the depreciation of the INR impacts P&L in three ways: (1)
EBIT goes up, (2) translation gains on current assets, mainly
receivables help net income and (3) losses on hedges hurt net income.


Robust revenue growth
Even adjusting for the impact of a weaker EUR/GBP against the USD,
we expect companies to report robust revenue growth in $-terms. It
must be noted that recent commentary from global companies such
as Accenture and Oracle has been strong
We expect TCS to report 5.6% $-rev growth in the Sep ’11 quarter.
We expect it to deliver 5%qoq growth at the top-end of its own
guidance
Positive commentary
We expect mgt commentary to be mixed. While current business
pipelines appear to be strong, we do expect management
commentary on outlook to be tinged with caution given the uncertainty
in the global environment.
In the case of Infosys in particular, it is likely that they are also
influenced by headwinds due to ongoing organisational changes.
There has been conjecture recently on the possibility of Infosys
reducing its FY3/12 $-revenue guidance. We estimate cross currency
movements of the AUD, Euro and pound between June 30 and Sep
30 to impact $ denominated revenue by about 125 bps though we
think Infosys may likely keep full-year revenue growth guidance
unchanged at 18-20%.
Mixed performance on margins
We expect Infosys and TCS to report a 70-80 bp QoQ increase in
margins on a weaker INR and low base in June-11. On the other hand,
HCL Tech and Wipro could see a margin dip of 110-140 bp QoQ due
to wage hikes. Wipro increased wages effective 1st June while HCL
Tech hiked wages effective 1st July.
Reiterate positive stance
In our view, current revenue growth should be strong and even if the
external environment were to deteriorate, this sector can be a
relatively safer place - the beneficial impact of an INR depreciation
also provides some hedge against a weak external environment.