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Technology
India
2QFY12E preview – expect a robust quarter; demand commentary critical. We
expect the Sep 2011 quarter to be a strong quarter on volume growth for all Tier-Is
(barring Wipro) with TCS and Cognizant once again leading the pack. Among Tier-IIs,
we see MindTree leading on revenue growth and Hexaware on margin expansion.
Rupee volatility and differing wage hike cycles will induce wide variability in net income
performance across companies. We remain positive on the sector and would be buyers
in TCS, Infosys, and MindTree going into the results. Expect Re-led EPS upgrades
Revenue growth – expect robust volume growth to sustain; cross-currency movements adverse
We expect robust sequential volume growth (4-7%) for most players in the industry barring
Wipro among the Tier-Is and Mphasis/ Tech Mahindra among the Tier-II names. We see TCS and
Cognizant once again leading the Tier-I pack on volume growth with Infosys and HCLT also
reporting robust numbers. Wipro is likely to lag, though on expected lines. Among Tier-IIs, we
expect MindTree and Satyam to lead the pack. Adverse cross-currency movements will hit reported
US$ revenue growth by 50-80 bps across companies. Overall, we expect 3.5-6% US$ revenue
growth across Tier-I names and 0.5-6.5% growth across Tier-IIs.
Margins – Rupee to aid; wage hike cycles to drive variability across companies
We expect strong sequential margin expansion across companies with zero or partial wage hike
pressure during the quarter. Margin expansion would primarily be led by benefits from sharp Re
depreciation during the quarter (3-4% across companies, difference being on account of cashflow
hedging for some companies and also different average spot computation methodologies).
Among the Tier-I names, we expect Infosys and TCS to report strong margin expansion – we build
in 140 bps and 90 bps qoq improvement, respectively. HCLT faces wage hike headwinds and so
does Wipro (2-month impact). We also note that Wipro benefits only marginally from Re
depreciation on account of its cash-flow hedges at lower levels. We build in 140 bps qoq decline
in Wipro’s global IT margins and 120 bps decline for HCLT.
Hedging gains/ losses to have major bearing on net income performance
Sharp movement in the Rupee versus US$ and other currencies, more so on end-period levels,
will drive meaningful forex gains or losses depending on quantum (under-hedged/ over-hedged),
composition (plain vanilla forwards or options or exotic contracts), and timing of maturity of
hedges. Hedging actions during the quarter also have a meaningful impact given the sharp intraquarter
movement in currencies. We note that forex gains or losses are particularly difficult to
forecast given the above-mentioned complexities and lack of details. That said, TCS has indicated
Rs2 bn of forex losses at the other income level. We expect Infosys and HCLT to report forex gains,
while Wipro could report forex loss, though on account of its (under-hedged) Yen debt exposure.
Infosys guidance – expect cut in US$ revenue growth guidance, but a raise in Re EPS guidance
Exhibit 1 depicts our estimate of likely revision in Infosys’ FY2012E guidance. We expect Infosys to
lower its US$ revenue growth guidance to 17%-18% from the current 18-20%, despite likely
meeting the upper-end of its Sep 2011 revenue guidance. Cut will be driven by (1) adverse crosscurrency
movements, and (2) additional caution built into 2HFY12E revenue guidance. Nonetheless,
EBITDA margin and Re EPS guidance are likely to see an uptick, driven by changed Re/US$
assumption. We expect Infosys to revise its FY2012E EPS guidance to Rs136 at the upper-end from
the current Rs130, an increase of a little under 5%.
Key factors to watch out for – volume growth – quantum and composition,
demand commentary, hiring trends, hedging status
Factors that we would watch closely in the Sep 2011 quarter earnings report and
management commentaries –
Quantum and composition of volume growth – as discussed earlier, we expect robust
sequential volume growth for the sector. Marginal outperformance is likely to be ignored
by the market; however, any underperformance versus expectations would likely be
punished, given the increased caution on demand outlook. We will also watch out for the
composition of volume growth, especially in discretionary spend areas and Europe.
Demand commentary – likely the most critical factor going into the earnings. We expect
managements to add a dose of caution to what should be an otherwise confident
demand outlook.
Hiring trends and initial campus hiring numbers.
Change in outstanding hedges versus end-June 2011 levels
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Technology
India
2QFY12E preview – expect a robust quarter; demand commentary critical. We
expect the Sep 2011 quarter to be a strong quarter on volume growth for all Tier-Is
(barring Wipro) with TCS and Cognizant once again leading the pack. Among Tier-IIs,
we see MindTree leading on revenue growth and Hexaware on margin expansion.
Rupee volatility and differing wage hike cycles will induce wide variability in net income
performance across companies. We remain positive on the sector and would be buyers
in TCS, Infosys, and MindTree going into the results. Expect Re-led EPS upgrades
Revenue growth – expect robust volume growth to sustain; cross-currency movements adverse
We expect robust sequential volume growth (4-7%) for most players in the industry barring
Wipro among the Tier-Is and Mphasis/ Tech Mahindra among the Tier-II names. We see TCS and
Cognizant once again leading the Tier-I pack on volume growth with Infosys and HCLT also
reporting robust numbers. Wipro is likely to lag, though on expected lines. Among Tier-IIs, we
expect MindTree and Satyam to lead the pack. Adverse cross-currency movements will hit reported
US$ revenue growth by 50-80 bps across companies. Overall, we expect 3.5-6% US$ revenue
growth across Tier-I names and 0.5-6.5% growth across Tier-IIs.
Margins – Rupee to aid; wage hike cycles to drive variability across companies
We expect strong sequential margin expansion across companies with zero or partial wage hike
pressure during the quarter. Margin expansion would primarily be led by benefits from sharp Re
depreciation during the quarter (3-4% across companies, difference being on account of cashflow
hedging for some companies and also different average spot computation methodologies).
Among the Tier-I names, we expect Infosys and TCS to report strong margin expansion – we build
in 140 bps and 90 bps qoq improvement, respectively. HCLT faces wage hike headwinds and so
does Wipro (2-month impact). We also note that Wipro benefits only marginally from Re
depreciation on account of its cash-flow hedges at lower levels. We build in 140 bps qoq decline
in Wipro’s global IT margins and 120 bps decline for HCLT.
Hedging gains/ losses to have major bearing on net income performance
Sharp movement in the Rupee versus US$ and other currencies, more so on end-period levels,
will drive meaningful forex gains or losses depending on quantum (under-hedged/ over-hedged),
composition (plain vanilla forwards or options or exotic contracts), and timing of maturity of
hedges. Hedging actions during the quarter also have a meaningful impact given the sharp intraquarter
movement in currencies. We note that forex gains or losses are particularly difficult to
forecast given the above-mentioned complexities and lack of details. That said, TCS has indicated
Rs2 bn of forex losses at the other income level. We expect Infosys and HCLT to report forex gains,
while Wipro could report forex loss, though on account of its (under-hedged) Yen debt exposure.
Infosys guidance – expect cut in US$ revenue growth guidance, but a raise in Re EPS guidance
Exhibit 1 depicts our estimate of likely revision in Infosys’ FY2012E guidance. We expect Infosys to
lower its US$ revenue growth guidance to 17%-18% from the current 18-20%, despite likely
meeting the upper-end of its Sep 2011 revenue guidance. Cut will be driven by (1) adverse crosscurrency
movements, and (2) additional caution built into 2HFY12E revenue guidance. Nonetheless,
EBITDA margin and Re EPS guidance are likely to see an uptick, driven by changed Re/US$
assumption. We expect Infosys to revise its FY2012E EPS guidance to Rs136 at the upper-end from
the current Rs130, an increase of a little under 5%.
Key factors to watch out for – volume growth – quantum and composition,
demand commentary, hiring trends, hedging status
Factors that we would watch closely in the Sep 2011 quarter earnings report and
management commentaries –
Quantum and composition of volume growth – as discussed earlier, we expect robust
sequential volume growth for the sector. Marginal outperformance is likely to be ignored
by the market; however, any underperformance versus expectations would likely be
punished, given the increased caution on demand outlook. We will also watch out for the
composition of volume growth, especially in discretionary spend areas and Europe.
Demand commentary – likely the most critical factor going into the earnings. We expect
managements to add a dose of caution to what should be an otherwise confident
demand outlook.
Hiring trends and initial campus hiring numbers.
Change in outstanding hedges versus end-June 2011 levels
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