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India Equity Research Reports, IPO and Stock News
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Focus shifts to near- and medium-term demand outlook
Given uncertain macro, Sept-Q results are likely to take a back seat. Instead, key
catalysts for stocks would be: (a) 2HFY12E guidance and (b) feedback from
preliminary discussion on the nature and size of customers' CY12E IT budgets.
While Infosys will likely cut its FY12E USD revenue growth guidance by 1ppt to
17.1-19.1% (vs 18-20% earlier) due to adverse currency movements, rupee
depreciation will help move its INR EPS guidance to INR135-137 (vs INR128-130
earlier), thus limiting near-term downside. TCS remains our top pick in the sector.
Sept-Q: Cross-currency headwinds reduce benefits from a weaker rupee
We expect top-tier Indian IT services companies to report USD revenue growth of
3-4.7%qoq. Even though volume growth is likely to be in the range of 4-5.5%qoq,
the appreciation of the USD vs other key billing currencies like EUR, GBP and AUD
will likely have a negative impact of 50-130bps on the reported USD revenue
growth. However, reported rupee revenues are likely to benefit from 3.9%qoq
depreciation (average quarterly rates) of the INR vs USD. The rupee revenue
growth for the top tier is thus likely to be in the range of 6-8.5%qoq. We believe
Infosys would be the top beneficiary of the rupee depreciation and we forecast it
to report 11%qoq improvement in net income.
Infosys likely to reduce FY12E USD revenue growth guidance by 1ppt
Adverse cross-currency movements are also likely to have a negative impact on
Infosys’ USD revenue guidance. We thus expect its FY12E USD revenue growth
guidance to be revised downward by 1ppt to 17.1-19.1% yoy vs 18-20% yoy
earlier. After incorporating the 9% depreciation of the INR vs USD (period end
rates) over the Sept-Q, the rupee revenue growth guidance would move up to
21.9-24% vs 15.5-17.5% earlier. Consequently, we think EPS guidance is likely to
increase to INR135-137 vs INR128.2-130.08 earlier.
Top five issues in focus
Given the severe deterioration in the global macroeconomic outlook, we believe
the key issues in focus will be: (a) preliminary discussions on the nature and size
of customers’ CY12E IT budgets, (b) changes to employee hiring targets for FY12-
13E, (c) the status of large deals, especially from the financial services sector, (d)
potential delays in decision-making by clients across verticals and (e) the pipeline
of discretionary spend-related projects.
Reiterating TCS as our top pick
We base our target prices on P/Es relative to their historical trading range to peers
and growth rates. Our target multiples are now in the range of 13-20x, which we
believe fairly reflect a substantially increased macro uncertainty. We reiterate TCS
as our top pick in the sector and our Buy ratings on Infosys and Wipro. Key risks:
recession in the US and Europe impacting technology spend and higher-thanexpected rupee appreciation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Focus shifts to near- and medium-term demand outlook
Given uncertain macro, Sept-Q results are likely to take a back seat. Instead, key
catalysts for stocks would be: (a) 2HFY12E guidance and (b) feedback from
preliminary discussion on the nature and size of customers' CY12E IT budgets.
While Infosys will likely cut its FY12E USD revenue growth guidance by 1ppt to
17.1-19.1% (vs 18-20% earlier) due to adverse currency movements, rupee
depreciation will help move its INR EPS guidance to INR135-137 (vs INR128-130
earlier), thus limiting near-term downside. TCS remains our top pick in the sector.
Sept-Q: Cross-currency headwinds reduce benefits from a weaker rupee
We expect top-tier Indian IT services companies to report USD revenue growth of
3-4.7%qoq. Even though volume growth is likely to be in the range of 4-5.5%qoq,
the appreciation of the USD vs other key billing currencies like EUR, GBP and AUD
will likely have a negative impact of 50-130bps on the reported USD revenue
growth. However, reported rupee revenues are likely to benefit from 3.9%qoq
depreciation (average quarterly rates) of the INR vs USD. The rupee revenue
growth for the top tier is thus likely to be in the range of 6-8.5%qoq. We believe
Infosys would be the top beneficiary of the rupee depreciation and we forecast it
to report 11%qoq improvement in net income.
Infosys likely to reduce FY12E USD revenue growth guidance by 1ppt
Adverse cross-currency movements are also likely to have a negative impact on
Infosys’ USD revenue guidance. We thus expect its FY12E USD revenue growth
guidance to be revised downward by 1ppt to 17.1-19.1% yoy vs 18-20% yoy
earlier. After incorporating the 9% depreciation of the INR vs USD (period end
rates) over the Sept-Q, the rupee revenue growth guidance would move up to
21.9-24% vs 15.5-17.5% earlier. Consequently, we think EPS guidance is likely to
increase to INR135-137 vs INR128.2-130.08 earlier.
Top five issues in focus
Given the severe deterioration in the global macroeconomic outlook, we believe
the key issues in focus will be: (a) preliminary discussions on the nature and size
of customers’ CY12E IT budgets, (b) changes to employee hiring targets for FY12-
13E, (c) the status of large deals, especially from the financial services sector, (d)
potential delays in decision-making by clients across verticals and (e) the pipeline
of discretionary spend-related projects.
Reiterating TCS as our top pick
We base our target prices on P/Es relative to their historical trading range to peers
and growth rates. Our target multiples are now in the range of 13-20x, which we
believe fairly reflect a substantially increased macro uncertainty. We reiterate TCS
as our top pick in the sector and our Buy ratings on Infosys and Wipro. Key risks:
recession in the US and Europe impacting technology spend and higher-thanexpected rupee appreciation.
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