Indian IT Services Decent revenues; INR weakness to boost margins::IDFC Cap

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We expect the top4 IT Services companies to report 2-4% qoq USD revenue growth – volume growth of 4-5% would be
offset by 1-2% decline in realization (cross-currency impact). We believe this is reasonable especially given that the
Oct-Dec quarter has lower billing days due to holidays (Diwali, Christmas), which typically impacts T&M projects. We
expect commentary on the environment from all players to be incrementally cautious and see Infosys further lowering
guidance for FY12 USD revenue growth to 17-18% (from 17-19%). Even the smaller players are expected to report
decent revenue growth of 2-6% and also a sharp improvement in margins. Rupee depreciation of ~11% (on periodaverage
basis) should aid EBIT margins by 330-390bp, though the actual increase may be lower due to cross-currency
headwinds (50-70bp) and re-investment of gains back into the business. We also incorporate rupee estimates of Rs51/
USD for H2FY12 and Rs49/ USD for FY13. With the continued macroeconomic uncertainty we expect 2012 IT budgets
to be largely flat, adversely affecting FY13 revenue growth. We reiterate our underweight stance on the sector and
believe larger names like Infosys and TCS are better placed in the uncertain macroeconomic environment.
We expect decent revenue growth amid weak seasonality
We expect the top4 companies to report 2-4% USD revenue growth (vs. 6-8% in Q3FY11), which we believe is
reasonable given the seasonal weakness (holidays) associated with the quarter. We expect 4-5% qoq volume growth
and a 1-2% decline in blended realization (cross-currency impact). Tier2 companies are likely to deliver 2-6% qoq
revenue growth, with a few companies benefiting from a lower base. Key observation: We expect similar USD revenue
growth rates (~4% qoq) from TCS and Infosys despite divergent commentaries during the quarter.
Rupee depreciation of ~11% to boost margins
The recent sharp depreciation of the INR will be a key margin lever for our coverage universe. We estimate 3.3-3.9%
INR-related tailwinds and 50-70bp cross-currency headwinds for operating margins. EBIT margins would improve by
~200bp for Infosys/ TCS and ~120bp for Wipro-IT/ HCL Tech. Tier2 companies are expected to benefit more from the
weak rupee and see margin expansion of 100-450bp. Key exceptions: Mahindra Satyam – ~70bp margin decline due
to negative impact of wage hikes; eClerx – 600bp margin improvement due to higher offshore mix/ wage seasonality.
Incorporating weak INR into our forecasts
We have applied revised INR/USD forecasts of Rs51/Rs49 for H2FY12/FY13 across our coverage universe now, after
having revised estimates for top4 companies, Mphasis and Persistent in Dec 2011. This raises our FY12/13 earnings
estimates for the rest of the companies by 3-15%. (Please refer to exhibit 7 for details)
Expect mixed commentary; maintain cautious stance; stick to Tier1 stocks
We expect the companies to maintain a cautiously optimistic stance on CY12 IT spend and FY13 revenue growth. We
expect Infosys to cut its FY12 USD revenue growth guidance to 17-18% yoy, but raise its INR earnings guidance
factoring in a weaker rupee. We maintain our cautious stance on the sector as we expect the business headwinds to
persist despite a benign currency helping margins/ earnings. Infosys and TCS remain our key picks (Outperformerrated);
Wipro, HCL Tech and Mphasis are Neutral and the rest Underperformers