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2QFY12 results preview
With a spate of consensus EPS downgrades last month and continued
adverse macro news-flow, Indian IT stocks head into the October results
with low expectations. While FY12 EPS could see upsides with the
currency tailwind, we argue that the investment thesis has already
shifted to FY13, where we see downside risks to street revenue growth
estimates and consequently stock valuations. We see the up-coming
results season as a mere hiatus leading to the uncertainty of the 2012
budgeting season. Upcoming months should see fresh lows in stocks, as
current areas of optimism in currency depreciation, cheap valuations and
“this is not 2008” give way to a sobering reality. We retain our NEGATIVE
stance on the sector and have no positive ratings.
2QFY12 results: Do not expect any major surprises
q Infosys should beat the upper end of its US$ revenue guidance of 5%QQ growth.
We expect 5.6%QQ growth to US$1,765m despite a 30bpsQQ adverse impact of
cross-currency on guided growth. Margins should be up ~175bpsQQ with tailwinds
from a weaker currency and absence of wage hikes.
q Wipro should be near the middle end of its constant currency guidance. We expect
Wipro to report 3.5%QQ growth in US$ revenues aided by full quarter consolidation
of SAIC acquisition. We expect Dec-11 revenue growth guidance of 2-4%QQ. We
expect margins to go down 100bpsQQ driven by adverse impact of wage hikes.
q TCS should report a 6.4%QQ growth in revenues to US$2,566m, at the higher end
of peer comparables. Cross currency moves can impact reported $-growth by upto
110bpsQQ. Margins should move up ~150bpsQQ with a benign currency
environment balancing adverse impact of promotion costs.
q HCLT’s 5.8%QQ US$ revenue growth should be near the top end of Tier-1 peers.
Higher exposure to GBP/EUR (28%) could impact reported revenues growth by upto
80bpsQQ. With HCLT splitting wage hikes across 2 quarters and benefit of a weaker
currency, margins should be down 130bpsQQ c.f. earlier expectation of 250bpsQQ.
q Among mid-caps, Mindtree should report the best result with a 6.2%QQ $-revenue
growth and ~100bps of margin improvement.
Expect no answers in 2Q results to the questions that matter
q We find some vendors still optimistic on growth in Europe, financial services, and
on stability of pricing. These three variables are headed southward, in our view, as
the next budgeting season reveals the full extent of the slowdown. We expect more
uncertainty in the Jan-Apr12 timeframe.
q We expect Infosys to reduce the upper end of its FY12 $-revenue growth guidance
range by 1ppt. The new revenue growth guidance will likely be 18-19%YY. A
weaker currency assumption for 2HFY12 should also push FY12 EPS guidance up to
Rs138 at the higher end from Rs130 currently.
A downgrade cycle has started but a long way to go ahead
q A spate of earnings cuts across consensus are now reflecting a weaker second half
in FY12, and 5-8ppts lower YY US$ revenue growth in FY13.
q We believe that on-going revenue cuts will need more downgrades ahead. In our
view, consensus is never able to capture discontinuity in the revenue growth
trajectory and one such is at hand right now.
q While current currency assumptions Rs49/$ can somewhat buffer the EPS risks
ahead, valuation multiples remain slaves of $-revenue growth and the key
downside risk to stocks remains multiple de-rating.
No positive ratings in CLSA’s Indian IT coverage
q We find no fundamental catalysts for the sector yet.
q A few valuation anomalies do exist within the sector, but a correction of these gaps
will likely follow rather than precede proof of improved financials.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
2QFY12 results preview
With a spate of consensus EPS downgrades last month and continued
adverse macro news-flow, Indian IT stocks head into the October results
with low expectations. While FY12 EPS could see upsides with the
currency tailwind, we argue that the investment thesis has already
shifted to FY13, where we see downside risks to street revenue growth
estimates and consequently stock valuations. We see the up-coming
results season as a mere hiatus leading to the uncertainty of the 2012
budgeting season. Upcoming months should see fresh lows in stocks, as
current areas of optimism in currency depreciation, cheap valuations and
“this is not 2008” give way to a sobering reality. We retain our NEGATIVE
stance on the sector and have no positive ratings.
2QFY12 results: Do not expect any major surprises
q Infosys should beat the upper end of its US$ revenue guidance of 5%QQ growth.
We expect 5.6%QQ growth to US$1,765m despite a 30bpsQQ adverse impact of
cross-currency on guided growth. Margins should be up ~175bpsQQ with tailwinds
from a weaker currency and absence of wage hikes.
q Wipro should be near the middle end of its constant currency guidance. We expect
Wipro to report 3.5%QQ growth in US$ revenues aided by full quarter consolidation
of SAIC acquisition. We expect Dec-11 revenue growth guidance of 2-4%QQ. We
expect margins to go down 100bpsQQ driven by adverse impact of wage hikes.
q TCS should report a 6.4%QQ growth in revenues to US$2,566m, at the higher end
of peer comparables. Cross currency moves can impact reported $-growth by upto
110bpsQQ. Margins should move up ~150bpsQQ with a benign currency
environment balancing adverse impact of promotion costs.
q HCLT’s 5.8%QQ US$ revenue growth should be near the top end of Tier-1 peers.
Higher exposure to GBP/EUR (28%) could impact reported revenues growth by upto
80bpsQQ. With HCLT splitting wage hikes across 2 quarters and benefit of a weaker
currency, margins should be down 130bpsQQ c.f. earlier expectation of 250bpsQQ.
q Among mid-caps, Mindtree should report the best result with a 6.2%QQ $-revenue
growth and ~100bps of margin improvement.
Expect no answers in 2Q results to the questions that matter
q We find some vendors still optimistic on growth in Europe, financial services, and
on stability of pricing. These three variables are headed southward, in our view, as
the next budgeting season reveals the full extent of the slowdown. We expect more
uncertainty in the Jan-Apr12 timeframe.
q We expect Infosys to reduce the upper end of its FY12 $-revenue growth guidance
range by 1ppt. The new revenue growth guidance will likely be 18-19%YY. A
weaker currency assumption for 2HFY12 should also push FY12 EPS guidance up to
Rs138 at the higher end from Rs130 currently.
A downgrade cycle has started but a long way to go ahead
q A spate of earnings cuts across consensus are now reflecting a weaker second half
in FY12, and 5-8ppts lower YY US$ revenue growth in FY13.
q We believe that on-going revenue cuts will need more downgrades ahead. In our
view, consensus is never able to capture discontinuity in the revenue growth
trajectory and one such is at hand right now.
q While current currency assumptions Rs49/$ can somewhat buffer the EPS risks
ahead, valuation multiples remain slaves of $-revenue growth and the key
downside risk to stocks remains multiple de-rating.
No positive ratings in CLSA’s Indian IT coverage
q We find no fundamental catalysts for the sector yet.
q A few valuation anomalies do exist within the sector, but a correction of these gaps
will likely follow rather than precede proof of improved financials.
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