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India: Technology: IT Services
Equity Research
HCL and Infosys better placed to gain from currency tailwinds
Currency movements provide tailwinds to FY12/FY13 earnings
Major global currencies have witnessed significant movements in the last
two months (esp. against USD), including 10% depreciation of INR vs. USD.
We analyze their impact on earnings for our sector, including the upcoming
2QFY12 results. While the impact on revenues and operating margins are
positive across our coverage, we expect HCL Tech (CL-Buy) and Infosys
(Buy) to benefit the most owing to their conservative hedging policies. We
estimate positive impact of 6%-14% on FY12E EPS for the large caps, if INR
sustains at the current spot levels of Rs48/USD.
Hedges: HCL/INFY better placed, TCS/Wipro EPS to get impacted
Within our large-cap coverage, HCL and INFY are the least exposed to
hedges, with 9% of their FY12E revenues hedged with derivative contracts,
vs. average 25% of FY12E revenues hedged for TCS and Wipro. Lower
quantum of hedges for HCL/ INFY will result in lesser hedging losses, while
we expect the margin benefits of TCS/Wipro to be offset by the hedging
losses. We reiterate our Buy (on Conviction List) on HCL and expect a
combination of steady topline growth and visibility into newer client
additions to be strong catalysts for the stock over the next two quarters.
2Q to remain solid, volume growth and INR to boost EPS growth
We expect the coming 2Q results season to be strong, driven by sustained
revenue momentum. We forecast 6.5% revenue growth (qoq) for our sector,
largely driven by 5%+ volume growth for the 3-large cap companies – TCS,
Infosys and HCL and about 200 bp positive impact of INR depreciation. We
forecast 7.4% EBIT growth qoq, as margins for INFY/TCS recover post wage
hikes last quarter. However, earnings growth will likely be muted owing to
hedging losses; we expect only INFY to report material positive earnings growth.
Consensus upgrades on INR tailwinds could happen with a lag
Our large-cap universe underperformed the BSE Sensex for most of the year
due to macro concerns in US/EU leading to 16% reduction in MSCI India IT index
earnings. However, the underperformance has recovered after the rally in the
last few weeks (MSCI India IT up 11% in the last 6 weeks). We attribute this
largely to favorable currency movements. However, we note a corresponding
upgrade in consensus earnings has not followed, and poses upside risk to the
Street’s numbers (in INR terms) post 2QFY12 results as currencies stabilize.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Technology: IT Services
Equity Research
HCL and Infosys better placed to gain from currency tailwinds
Currency movements provide tailwinds to FY12/FY13 earnings
Major global currencies have witnessed significant movements in the last
two months (esp. against USD), including 10% depreciation of INR vs. USD.
We analyze their impact on earnings for our sector, including the upcoming
2QFY12 results. While the impact on revenues and operating margins are
positive across our coverage, we expect HCL Tech (CL-Buy) and Infosys
(Buy) to benefit the most owing to their conservative hedging policies. We
estimate positive impact of 6%-14% on FY12E EPS for the large caps, if INR
sustains at the current spot levels of Rs48/USD.
Hedges: HCL/INFY better placed, TCS/Wipro EPS to get impacted
Within our large-cap coverage, HCL and INFY are the least exposed to
hedges, with 9% of their FY12E revenues hedged with derivative contracts,
vs. average 25% of FY12E revenues hedged for TCS and Wipro. Lower
quantum of hedges for HCL/ INFY will result in lesser hedging losses, while
we expect the margin benefits of TCS/Wipro to be offset by the hedging
losses. We reiterate our Buy (on Conviction List) on HCL and expect a
combination of steady topline growth and visibility into newer client
additions to be strong catalysts for the stock over the next two quarters.
2Q to remain solid, volume growth and INR to boost EPS growth
We expect the coming 2Q results season to be strong, driven by sustained
revenue momentum. We forecast 6.5% revenue growth (qoq) for our sector,
largely driven by 5%+ volume growth for the 3-large cap companies – TCS,
Infosys and HCL and about 200 bp positive impact of INR depreciation. We
forecast 7.4% EBIT growth qoq, as margins for INFY/TCS recover post wage
hikes last quarter. However, earnings growth will likely be muted owing to
hedging losses; we expect only INFY to report material positive earnings growth.
Consensus upgrades on INR tailwinds could happen with a lag
Our large-cap universe underperformed the BSE Sensex for most of the year
due to macro concerns in US/EU leading to 16% reduction in MSCI India IT index
earnings. However, the underperformance has recovered after the rally in the
last few weeks (MSCI India IT up 11% in the last 6 weeks). We attribute this
largely to favorable currency movements. However, we note a corresponding
upgrade in consensus earnings has not followed, and poses upside risk to the
Street’s numbers (in INR terms) post 2QFY12 results as currencies stabilize.
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