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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
INFORMATION TECHNOLOGY
We expect companies under our coverage to report a sequential revenue
growth of about 7%, driven by higher volumes and favourable currency
movement. Volumes for the Top 4 companies are expected to rise between
3% - 6%. The cross currency volatility may impact USD revenues by about
25bps - 50bps QoQ for the top companies. However, the rupee depreciation
v/s USD (~2.3% average) should help INR revenues to the extent of 150 -
200bps. Average realizations are expected to remain stable.
EBIDTA margins are expected to be higher on a QoQ basis on the back of
good volume increases and also the rupee depreciation. Several companies
give salary increments to employees during this quarter and we expect that
to have an impact on margins of those companies - Wipro and HCLT in Top
4.
Companies follow different hedging strategies and different accounting
policies. This may lead to corresponding impact of currency volatility on
other income. Consequently, PAT is expected to rise by about 6% for
companies under our coverage (similar for Top 4). We have given quarterly
expectations of Mahindra Satyam but understand that, the numbers can be
materially different from our expectations.
The guidance from Infosys will be important. We expect volume growth
guidance (implied from USD revenue guidance) to be maintained. The
uncertain macro environment may lead to continued conservatism from the
management, despite no indications of any impact at the micro (customer)
level, as yet. If Infosys guides for 2HFY12 September-end exchange rates, the
INR guidance will be scaled up, we opine. Normally Infosys gives guidance
at the exchange rate prevailing at the end of the just-concluded quarter.
Management comments on the macro scene and client spending / budgets
will gain additional importance.
Among other things, we will also watch out for :
a) Pricing declines, if any and comments on the same, b) Further insights
into sustainability of discretionary spends, etc., c) hiring trends and d)
Comments on new opportunities like Cloud Computing, etc
We maintain our optimistic view on the medium-to-long term prospects of
the sector. Over the medium term, we expect large caps to out-perform as
they are better equipped to counter the impact, if any, of any variation in
the demand scenario. We will keep a close watch on the evolving macro
scene in developed economies, where recent economic developments are
concerning.
Infosys and TCS remain our preferred large-cap picks. In mid-caps, we prefer
NIIT Technologies and KPIT Cummins. Mphasis is not covered here because
quarter ends in October.
3% - 6% sequential volume growth expected for top tier companies
We expect top-tier companies to report volume growth of about 3% - 6% QoQ. The
expected growth is on the back of higher demand and market share. We understand
that, despite the weak macro scene, clients have not cut back on any IT
spends and there are very few instances of delays. Indian companies have been
witnessing business flows and are likely gaining additional market share. Wipro is
expected to report subdued growth of about 3% in volumes due to the recent reorganisation.
HCLT should report the highest QoQ volume growth of about 6%.
While the order flows from US are expected to have grown, we will closely hear
management comments on the potential order flows from Europe, where economic
news has been a source of worry.
While volumes are expected to rise QoQ, we expect realizations to be largely stable.
However, we will closely watch out for potential price reductions and management
comments regarding these will be of importance to us.
Impact of cross currency movements
The Indian rupee has depreciated v/s USD (2.3%), Euro (0.5%) and GBP (1.1%).
The USD has also appreciated v/s Euro. To that extent, USD-based revenues are expected
to be impacted marginally 25bps - 50bps. However, INR-based revenues for
the quarter are expected to be positively impacted to the extent of 150 - 200bps for
top - tier companies.
For the Top 4 companies, we expect revenues to be about 7% higher in INR terms
and so also for the coverage universe.
Margins expected to be higher
We expect margins to be higher sequentially. Volume growth and the rupee depreciation
(v/s USD) are expected to help improve profitability QoQ. Cost efficiencies
are also expected to help. Within the Top 4, Wipro and HCLT will see lower profitability
due to salary increments, we believe. Zensar will also be similarly impacted,
while NIIT Tech will be incurring a one-time integration cost of about $2.5mn.
Volatility in other income
With sharp movements in exchange rates during the quarter, the impact on companies
may be varied. This will also be influenced by the hedging strategies and accounting
methods followed. While specific details on hedging in 2Q across companies
are not available, we expect Infosys and HCLT among the Top 4 to be better
placed due to relatively lower hedges. TCS and Wipro may have losses on higher
amount of hedges. Consequently, PAT is expected to grow by about 6% over the
previous quarter for our coverage companies and also for the Top 4.
Factors to watch
n The guidance from Infosys will be important. The management has been consistent
is saying that, FY12 will be a normal year as far as demand is concerned
and that there have been no budget cuts from clients. Management comments
on the macro scene and client spending will gain additional importance.
n Apart from Infosys' guidance, we will closely track a) Pricing declines, if any and
comments on the same, b) Further insights into sustainability of discretionary
spends, c) hiring trends and d) Comments on new opportunities like Cloud Computing,
etc
n We will closely watch the progress made by and expectations of the various
companies in new areas of opportunities. Cloud Computing provides a big potential
and order flows in this business will be of interest to us.
n Companies are also now increasingly looking at moving to newer types of pricing
models like outcome-based pricing, transaction-based pricing, etc. Trends in
these will be of interest to us from the point-of-view of margin protection and improvement.
n Pricing is expected to have largely stabilized during the quarter and we will
watch out for comments on any potential pricing declines from clients
Remain positive on medium-to-long term prospects; to watch
macro scene closely
We maintain our positive bias on sector fundamentals over the medium-to-long
term. A slow recovery in the global economy should reflect in increased business for
Indian IT vendors. Indian companies have likely been able to increase their market
share in the global outsourcing pie.
However, the recent economic data from developed economies has not been encouraging.
Developments in Greece have cast a shadow over the financial system of
that region. The US economy has also seen employment and housing scenario deteriorating.
Any major weakness in these economies can impact demand for Indian IT
vendors.
Larger companies are better-equipped to handle any variation in demand. We prefer
Infosys and TCS in the large caps. NIIT Technologies and KPIT Cummins are the
preferred mid cap stocks based on vertical focus and expertise. We have not covered
the estimates for Mphasis because its quarter ending will be in October
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
INFORMATION TECHNOLOGY
We expect companies under our coverage to report a sequential revenue
growth of about 7%, driven by higher volumes and favourable currency
movement. Volumes for the Top 4 companies are expected to rise between
3% - 6%. The cross currency volatility may impact USD revenues by about
25bps - 50bps QoQ for the top companies. However, the rupee depreciation
v/s USD (~2.3% average) should help INR revenues to the extent of 150 -
200bps. Average realizations are expected to remain stable.
EBIDTA margins are expected to be higher on a QoQ basis on the back of
good volume increases and also the rupee depreciation. Several companies
give salary increments to employees during this quarter and we expect that
to have an impact on margins of those companies - Wipro and HCLT in Top
4.
Companies follow different hedging strategies and different accounting
policies. This may lead to corresponding impact of currency volatility on
other income. Consequently, PAT is expected to rise by about 6% for
companies under our coverage (similar for Top 4). We have given quarterly
expectations of Mahindra Satyam but understand that, the numbers can be
materially different from our expectations.
The guidance from Infosys will be important. We expect volume growth
guidance (implied from USD revenue guidance) to be maintained. The
uncertain macro environment may lead to continued conservatism from the
management, despite no indications of any impact at the micro (customer)
level, as yet. If Infosys guides for 2HFY12 September-end exchange rates, the
INR guidance will be scaled up, we opine. Normally Infosys gives guidance
at the exchange rate prevailing at the end of the just-concluded quarter.
Management comments on the macro scene and client spending / budgets
will gain additional importance.
Among other things, we will also watch out for :
a) Pricing declines, if any and comments on the same, b) Further insights
into sustainability of discretionary spends, etc., c) hiring trends and d)
Comments on new opportunities like Cloud Computing, etc
We maintain our optimistic view on the medium-to-long term prospects of
the sector. Over the medium term, we expect large caps to out-perform as
they are better equipped to counter the impact, if any, of any variation in
the demand scenario. We will keep a close watch on the evolving macro
scene in developed economies, where recent economic developments are
concerning.
Infosys and TCS remain our preferred large-cap picks. In mid-caps, we prefer
NIIT Technologies and KPIT Cummins. Mphasis is not covered here because
quarter ends in October.
3% - 6% sequential volume growth expected for top tier companies
We expect top-tier companies to report volume growth of about 3% - 6% QoQ. The
expected growth is on the back of higher demand and market share. We understand
that, despite the weak macro scene, clients have not cut back on any IT
spends and there are very few instances of delays. Indian companies have been
witnessing business flows and are likely gaining additional market share. Wipro is
expected to report subdued growth of about 3% in volumes due to the recent reorganisation.
HCLT should report the highest QoQ volume growth of about 6%.
While the order flows from US are expected to have grown, we will closely hear
management comments on the potential order flows from Europe, where economic
news has been a source of worry.
While volumes are expected to rise QoQ, we expect realizations to be largely stable.
However, we will closely watch out for potential price reductions and management
comments regarding these will be of importance to us.
Impact of cross currency movements
The Indian rupee has depreciated v/s USD (2.3%), Euro (0.5%) and GBP (1.1%).
The USD has also appreciated v/s Euro. To that extent, USD-based revenues are expected
to be impacted marginally 25bps - 50bps. However, INR-based revenues for
the quarter are expected to be positively impacted to the extent of 150 - 200bps for
top - tier companies.
For the Top 4 companies, we expect revenues to be about 7% higher in INR terms
and so also for the coverage universe.
Margins expected to be higher
We expect margins to be higher sequentially. Volume growth and the rupee depreciation
(v/s USD) are expected to help improve profitability QoQ. Cost efficiencies
are also expected to help. Within the Top 4, Wipro and HCLT will see lower profitability
due to salary increments, we believe. Zensar will also be similarly impacted,
while NIIT Tech will be incurring a one-time integration cost of about $2.5mn.
Volatility in other income
With sharp movements in exchange rates during the quarter, the impact on companies
may be varied. This will also be influenced by the hedging strategies and accounting
methods followed. While specific details on hedging in 2Q across companies
are not available, we expect Infosys and HCLT among the Top 4 to be better
placed due to relatively lower hedges. TCS and Wipro may have losses on higher
amount of hedges. Consequently, PAT is expected to grow by about 6% over the
previous quarter for our coverage companies and also for the Top 4.
Factors to watch
n The guidance from Infosys will be important. The management has been consistent
is saying that, FY12 will be a normal year as far as demand is concerned
and that there have been no budget cuts from clients. Management comments
on the macro scene and client spending will gain additional importance.
n Apart from Infosys' guidance, we will closely track a) Pricing declines, if any and
comments on the same, b) Further insights into sustainability of discretionary
spends, c) hiring trends and d) Comments on new opportunities like Cloud Computing,
etc
n We will closely watch the progress made by and expectations of the various
companies in new areas of opportunities. Cloud Computing provides a big potential
and order flows in this business will be of interest to us.
n Companies are also now increasingly looking at moving to newer types of pricing
models like outcome-based pricing, transaction-based pricing, etc. Trends in
these will be of interest to us from the point-of-view of margin protection and improvement.
n Pricing is expected to have largely stabilized during the quarter and we will
watch out for comments on any potential pricing declines from clients
Remain positive on medium-to-long term prospects; to watch
macro scene closely
We maintain our positive bias on sector fundamentals over the medium-to-long
term. A slow recovery in the global economy should reflect in increased business for
Indian IT vendors. Indian companies have likely been able to increase their market
share in the global outsourcing pie.
However, the recent economic data from developed economies has not been encouraging.
Developments in Greece have cast a shadow over the financial system of
that region. The US economy has also seen employment and housing scenario deteriorating.
Any major weakness in these economies can impact demand for Indian IT
vendors.
Larger companies are better-equipped to handle any variation in demand. We prefer
Infosys and TCS in the large caps. NIIT Technologies and KPIT Cummins are the
preferred mid cap stocks based on vertical focus and expertise. We have not covered
the estimates for Mphasis because its quarter ending will be in October
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