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Information Technology
ƒ Preview discussions modestly disheartening
Inter quarter discussions with Tier I IT vendors were modestly
disheartening. They suggest that though there were no cancellations or
maintenance project delays yet, instances of ‘discretionary’ projects for
European customers getting pushed out has crept in. Acknowledging
that it is premature to talk about CY12 IT budgets yet there seems to be
‘ample’ macro anxiety at the CIO level to influence CY12 IT budgets and
amplify the “doing-more-for-less” rhetoric.
ƒ Depreciating rupee may aid operating margins but cross currency
headwinds persist
Intra-quarter, the average rupee rate has depreciated 2.5% against the
US dollar. As a rule of thumb, every 100 bps depreciation of the rupee
yields 25-40 bps in operating margin expansion and implies operating
margin benefit of 60-100 bps in Q2FY12. However, a sharp depreciation
of the rupee could also yield mark-to-market losses on the hedged
portfolio and is a function of the size of the portfolio. Were the rupee to
remain at current levels of | 49 for the remainder of the year, average
FY12E |/$ rate could be | 47.4 vs. | 44.5 assumed by Infosys in its FY12
guidance (given at the end of Q1FY12) and could yield operating margin
relief of 150-240 bps. Noticeably, this could lead to Infosys revising its
FY12 operating margin guidance of a 250 bps decline. Separately, the
US$ has appreciated 1.8% vs. the euro (EUR) and 1.3% vs. the British
pound (GBP). At current rates of 1.36 for EUR/US$, 1.57 for GBP/US$
and 0.98 for AU$/US$, the average FY12 rates could be 1.39, 1.59 and
0.98, respectively, vs. guidance assumption of 1.45, 1.60 and 1.07,
respectively. It could likely lead to Infosys revising its FY12E US$
revenue growth guidance to 17-19% vs. 18-20% given at the end of
Q1FY12 (Exhibit A).
ƒ Size of hedge portfolio to dictate bottomline impact
Intra-quarter depreciation of the rupee vs. the dollar could have a
varying impact at the PAT level driven by losses on the hedge portfolio.
Exhibit B highlights the hedge portfolio of IT companies. With one of the
largest hedge portfolios, TCS ($1.1 billion for Q2FY11, $1.7 billion for
FY12 and $600 million for FY13) and Wipro ($1.7 billion) could witness
higher f/x losses in the other income line compared to Infosys ($745
million) and HCL Tech ($390 million).
Company specific view
Company Remarks
HCL Tech We expect US$ revenue growth of 4.4% QoQ mainly driven by core software (4.6%
QoQ growth) & infrastructure structure services (5.8%). EBIT margins may decline
180 bps led by wages hikes (200 bps, ~12-14% offshore & 2-4% onshore) & fresher
hiring (50 bps) partially offset by rupee depreciation (70 bps)
Infosys We expect US$ revenue growth of 4.1% QoQ and rupee revenue growth of 6.5% QoQ
led by volume growth and favourable currency impact of around 250 bps (for rupee
revenue growth). EBIT margins will improve by 125 bps to 27.3%. PAT margins are
expected to increase marginally (15 bps) due to hedge losses
Mahindra
Satyam
Rupee revenues are expected to grow 3.3% assuming muted volume growth &
favourable currency movement. EBIT margin trend should be flat to positive given
wage hikes have been deferred to Q3FY12. Other income, mainly interest income,
could be | 50-55 crore vs. | 100 crore in Q1FY12 led by lower gains on hedges
Mastek We expect revenues to decline 2.7% QoQ. UK pound based revenues could be
impacted by the appreciating dollar vs. the pound. Wage hikes of 10-12% offshore and
2% onsite will impact EBITDA margins by 300-400 bps. Mastek could be EBITDA
negative in Q1FY12
NIIT Ltd We expect modest 5-7% YoY growth in SLS and ILS business leading to overall QoQ
growth of 8.6% in rupee terms. EBITDA margins are expected to be at ~13%. For
FY12E, we expect 15-18% EBITDA margins for Individual learning solutions (ILS), 16-
17% for corporate (CLS) and 20% for school (SLS) business
Patni Computers We expect US$ revenues and rupee revenues to decline by 3.9% and 1.5%,
respectively, due to a shift of client accounts from Patni to iGate. The management
commentary on iGate-Patni integration and delisting of Patni should be of investor
focus
Rolta We expect revenues to grow 3.2% QoQ due to favourable currency movements.
Wage hikes of 12% offshore and 2% onshore could affect the EBITDA margins by 180
bps. Expect FY12E tax rates to be in 16-18% range. Depreciation of the rupee could
lead to losses on outstanding FCCB's.
Sasken We expect Sasken to report 1% QoQ decline in revenues as Nokia continues to shift
onsite work offshore. rupee revenues are expected to grow by 0.2% due to favourable
currency movements. Wage hikes of 12% offshore and 5% onshore can negatively
impact the EBITDA by 330 bps
TCS We expect 4.4% US$ and 6.8% rupee revenue growth led by strong volume growth
and 2.5% due to favourable rupee movement. EBIT margins should improve by 94 bps
to 27.1% vs. 26.2% in Q4FY11. Losses on hedge portfolio could limit the improvement
in PAT margins
Tech Mahindra We expect US$ revenues to grow 1% primarily driven by 5% QoQ growth in non-BT
accounts and modest decline in BT revenues. EBITDA margins will decline 250 bps
due to salary hikes effective July 1. Satyam's earnings could boost consolidated PAT
to | 231 crore vs. standalone PAT of | 140 crore
Wipro We expect IT services revenues to grow 1.1% QoQ in US$ terms. Wage hikes
effective June should have a two month impact on IT EBIT margins. Modelling 180
bps decline in EBIT margins to 20.2%. Consolidated rupee revenues are expected to
grow 3.4% QoQ, while EBIT margin should decline 93 bps to 16.5%
Source: Company, ICICIdirect.com Research
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