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We recently met the managements of TCS, Infosys, Wipro and MindTree,
respectively, to gauge their earnings risk. The commentary was consistent across
companies. There are no warning signs from the clients’ IT budget as yet. The
currency depreciation is going to result in operating margin tailwinds, but crosscurrency
movement could be a spoil-sport for revenue growth in USD terms.
However, in the quarter where the revenue performance is likely to be bunched-up,
we expect the companies with better operating leverage to deliver stronger growth
at the bottom-line. We expect stronger‐than‐peer performance for Infosys and HCL
Tech as we enter Q3FY12. Hence, we reiterate Infosys and HCLT as our top‐picks.
Volume growth likely to be bunched up: Based on our recent discussion with
the management, we expect Tier-1 Indian IT companies to deliver low-to-midsingle
digit volume growth. The growth pack is likely to be led by Infosys and
HCL Tech, whereas we expect Wipro to continue lagging behind its peers.
However, cross-currency exposure would differentiate USD performance for the
companies. We see Wipro and TCS as the worst affected due to high rupee and
GBP exposure.
Operating leverage would drive positive surprise: This quarter has witnessed
the strongest tailwind from the currency depreciation ever (excl Q3FY09). We
expect Indian IT companies to see tailwind of ~300bps in Q3FY12. However, due
to higher hedge, book positions of TCS (US$2.6bn) and Wipro (US$1.7bn) would
be a drag at the bottom-line. Moreover, stretched margin levers of Wipro and
TCS would result in margin erosion at constant currency terms. We expect
Infosys and HCL Tech to deliver stronger quarter as these two are better placed
in terms of operating leverages. However, aggressive pricing by HCL Tech to gain
market share could yield negative surprise on operating margins.
Infosys and HCL Tech – remain our top‐pick in the sector: Our recent discussion
with the companies’ management indicates no signs of cut in the IT budget. The
companies maintained a cautious tone due to uncertainties in Europe, but
highlighted no early signs of any cut in IT budget for CY12. We expect the
current quarter performance to be differentiated based on the operating
leverage. We see that Infosys and HCL Tech are advantageous as compared to
TCS and Wipro in terms of exploiting these leverages. We reiterate Infosys and
HCL Tech as our top‐picks in the sector.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We recently met the managements of TCS, Infosys, Wipro and MindTree,
respectively, to gauge their earnings risk. The commentary was consistent across
companies. There are no warning signs from the clients’ IT budget as yet. The
currency depreciation is going to result in operating margin tailwinds, but crosscurrency
movement could be a spoil-sport for revenue growth in USD terms.
However, in the quarter where the revenue performance is likely to be bunched-up,
we expect the companies with better operating leverage to deliver stronger growth
at the bottom-line. We expect stronger‐than‐peer performance for Infosys and HCL
Tech as we enter Q3FY12. Hence, we reiterate Infosys and HCLT as our top‐picks.
Volume growth likely to be bunched up: Based on our recent discussion with
the management, we expect Tier-1 Indian IT companies to deliver low-to-midsingle
digit volume growth. The growth pack is likely to be led by Infosys and
HCL Tech, whereas we expect Wipro to continue lagging behind its peers.
However, cross-currency exposure would differentiate USD performance for the
companies. We see Wipro and TCS as the worst affected due to high rupee and
GBP exposure.
Operating leverage would drive positive surprise: This quarter has witnessed
the strongest tailwind from the currency depreciation ever (excl Q3FY09). We
expect Indian IT companies to see tailwind of ~300bps in Q3FY12. However, due
to higher hedge, book positions of TCS (US$2.6bn) and Wipro (US$1.7bn) would
be a drag at the bottom-line. Moreover, stretched margin levers of Wipro and
TCS would result in margin erosion at constant currency terms. We expect
Infosys and HCL Tech to deliver stronger quarter as these two are better placed
in terms of operating leverages. However, aggressive pricing by HCL Tech to gain
market share could yield negative surprise on operating margins.
Infosys and HCL Tech – remain our top‐pick in the sector: Our recent discussion
with the companies’ management indicates no signs of cut in the IT budget. The
companies maintained a cautious tone due to uncertainties in Europe, but
highlighted no early signs of any cut in IT budget for CY12. We expect the
current quarter performance to be differentiated based on the operating
leverage. We see that Infosys and HCL Tech are advantageous as compared to
TCS and Wipro in terms of exploiting these leverages. We reiterate Infosys and
HCL Tech as our top‐picks in the sector.
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