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Information Technology
CY12E IT budget commentary to reveal opportunities
We expect tier-I IT companies to report 2-4% US$ revenue growth led
by volume growth (3-3.5%) partially offset by cross currency headwinds
due to 2.4%, 4.8% & 3.5% inter-quarter appreciation of the average
US$ vs. the Pound, Euro, & Australian dollar. Rupee revenue growth
could be 11-14% led by 11.1% depreciation in the average rupee rate.
Our preview discussions suggest that CY12E IT budget growth could be
flat with negative bias. While clients might continue to spend their
maintenance budgets, conclusion of discretionary budgets could be
delayed. That said timing of budget finalisation should be the key theme
to watch in Q3 earnings.
Likely CY12E IT spend trends across verticals
From a vertical perspective, retail, financial services & Insurance (FSI)
could be demand drivers in CY12 as companies invest for digital
consumers, real-time analytics, regulatory compliance, payments,
securities processing. Though banks could continue to spend their
maintenance budgets, discretionary wallets continue to be scrutinised at
the highest level and are released based on priority. Extended, than
usual, plant shutdowns for maintenance in December 2011 coupled with
elevated contribution of enterprise application & system integration
related work could keep manufacturing vertical spends “Neutral” in
CY12. Telecom spends again could be neutral with negative bias as
modest demand from “wireless” business could be offset by weakness
in the “wire-line” side. We reiterate that individual company
performance across verticals could vary depending on their offerings &
portfolio mix
Rupee is the king
Depending on the operating model, every 100 bps depreciation in the
rupee yields 25-40 bps of operating margin relief. Inter-quarter the
average rupee has depreciated 11.1% against the US$ and suggests, a
likely operating margin benefit of 275-440 bps for tier-I companies.
However, we expect companies to reinvest part of the benefit in SG&A
spends. Note, below EBIT, companies would incur losses on the hedged
portfolio depending on the size of their portfolio. We believe, Infosys
could raise its FY12E rupee EPS guidance (|143.02-|145.26 guided
range) by either raising the lower end of the band or by sharing only the
top end of its previous guidance to accommodate the uncertain macro
Company specific view
Company Remarks
HCL Tech We expect US$ revenue growth of 2.8% QoQ mainly driven by core software (4.5%
QoQ growth), whereas the | revenue growth to be around 12.8% due to favourable
currency movements. Profit margins are expected to be around 10.2% vs. 10.6% in
Q1 with hedging losses of $15-$16 million
Infosys We expect US$ revenue to be around the lower end of the guidance with 3.2% QoQ
growth and rupee revenue growth of 13.3% QoQ led by volume growth and
favourable currency impact of around 980 bps (for rupee revenue growth). EBIT
margins to expand by 218 bps to 30.3% from 28.2% in Q2FY12
Mahindra
Satyam
Rupee revenues are expected to grow 9% QoQ assuming dollar growth of 2% QoQ &
favourable currency movement. EBITDA margins could decrease by 70 bps as impact
of wage hikes (-220 bps) given in this quarter offsets currency benefit of 150bps.
Volume growth is expected to be around 3.5%.
Mastek We expect | revenues to increase by 7.7% QoQ. UK pound based revenues could be
impacted by the appreciating dollar vs. the pound. EBIT could continue to be negative
in Q2FY12 though EBIT margins could improve to -6.4% from -18.6%
NIIT Ltd We expect 24% & 18% YoY growth in SLS and ILS business whereas CLS business
could decline 61% YoY to account for Element-K divestiture . Revenues could decline
by 23.9% YoY whereas EBITDA margins could improve by 350 bps YoY due to
improvement in CLS EBITDA margins after Element-K sale
NIIT Tech We expect | revenues to grow by 11.3% QoQ partially due to currency benefits and
stable volumes. We expect EBITDA margins to improve 268 bps to 17.5% from
14.8% in Q2FY12 as Q2FY12 margins were impacted due to the transition cost
related to Morris.
Rolta We expect revenues to grow 2.9% QoQ due to favourable currency movements. EBIT
margins to improve by 190 bps due to lower base and currency benefits. Expect
FY12E tax rates to be in 16-18% range. Depreciation of the rupee could lead to further
losses on outstanding FCCB's.
Sasken We expect Sasken to report 5.9% QoQ increase in | revenues and $ revenues to
decline by 0.9% QoQ. Currency could likely be the driver for the reported numbers.
Management commentary on telecom vertical IT spending could be the key theme to
watch in Q3 earnings call
TCS We expect 2.7% US$ revenue growth, while 13.5% rupee revenue growth would be
led by favourable rupee movement (9.7%). EBIT margins could improve by 193 bps to
29.1% vs. 27.1% in Q2FY12. Losses on hedge portfolio could limit the improvement in
PAT margins
Tech Mahindra We expect | revenues to grow 11.2%QoQ primarily driven by currency. US$
revenues could decline by 1.7%QoQ as BT woes continue to impact overall revenues.
Satyam's earnings could boost Con.PAT to | 221 crore vs. standalone PAT of | 121
crore
Wipro We expect IT services revenues to grow 2.4% QoQ in US$ terms. Currency benefit on
revenues can be tepid as Wipro accounts the impact of hedges on the revenue line
item. Consolidated revenues could increase by 7.3% QoQ with IT products growing
10% YoY and Consumer and lightening growing 20% YoY. EBIT margin are expected
to rise by 103 bps.
Source: Company, ICICIdirect.com Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Information Technology
CY12E IT budget commentary to reveal opportunities
We expect tier-I IT companies to report 2-4% US$ revenue growth led
by volume growth (3-3.5%) partially offset by cross currency headwinds
due to 2.4%, 4.8% & 3.5% inter-quarter appreciation of the average
US$ vs. the Pound, Euro, & Australian dollar. Rupee revenue growth
could be 11-14% led by 11.1% depreciation in the average rupee rate.
Our preview discussions suggest that CY12E IT budget growth could be
flat with negative bias. While clients might continue to spend their
maintenance budgets, conclusion of discretionary budgets could be
delayed. That said timing of budget finalisation should be the key theme
to watch in Q3 earnings.
Likely CY12E IT spend trends across verticals
From a vertical perspective, retail, financial services & Insurance (FSI)
could be demand drivers in CY12 as companies invest for digital
consumers, real-time analytics, regulatory compliance, payments,
securities processing. Though banks could continue to spend their
maintenance budgets, discretionary wallets continue to be scrutinised at
the highest level and are released based on priority. Extended, than
usual, plant shutdowns for maintenance in December 2011 coupled with
elevated contribution of enterprise application & system integration
related work could keep manufacturing vertical spends “Neutral” in
CY12. Telecom spends again could be neutral with negative bias as
modest demand from “wireless” business could be offset by weakness
in the “wire-line” side. We reiterate that individual company
performance across verticals could vary depending on their offerings &
portfolio mix
Rupee is the king
Depending on the operating model, every 100 bps depreciation in the
rupee yields 25-40 bps of operating margin relief. Inter-quarter the
average rupee has depreciated 11.1% against the US$ and suggests, a
likely operating margin benefit of 275-440 bps for tier-I companies.
However, we expect companies to reinvest part of the benefit in SG&A
spends. Note, below EBIT, companies would incur losses on the hedged
portfolio depending on the size of their portfolio. We believe, Infosys
could raise its FY12E rupee EPS guidance (|143.02-|145.26 guided
range) by either raising the lower end of the band or by sharing only the
top end of its previous guidance to accommodate the uncertain macro
Company specific view
Company Remarks
HCL Tech We expect US$ revenue growth of 2.8% QoQ mainly driven by core software (4.5%
QoQ growth), whereas the | revenue growth to be around 12.8% due to favourable
currency movements. Profit margins are expected to be around 10.2% vs. 10.6% in
Q1 with hedging losses of $15-$16 million
Infosys We expect US$ revenue to be around the lower end of the guidance with 3.2% QoQ
growth and rupee revenue growth of 13.3% QoQ led by volume growth and
favourable currency impact of around 980 bps (for rupee revenue growth). EBIT
margins to expand by 218 bps to 30.3% from 28.2% in Q2FY12
Mahindra
Satyam
Rupee revenues are expected to grow 9% QoQ assuming dollar growth of 2% QoQ &
favourable currency movement. EBITDA margins could decrease by 70 bps as impact
of wage hikes (-220 bps) given in this quarter offsets currency benefit of 150bps.
Volume growth is expected to be around 3.5%.
Mastek We expect | revenues to increase by 7.7% QoQ. UK pound based revenues could be
impacted by the appreciating dollar vs. the pound. EBIT could continue to be negative
in Q2FY12 though EBIT margins could improve to -6.4% from -18.6%
NIIT Ltd We expect 24% & 18% YoY growth in SLS and ILS business whereas CLS business
could decline 61% YoY to account for Element-K divestiture . Revenues could decline
by 23.9% YoY whereas EBITDA margins could improve by 350 bps YoY due to
improvement in CLS EBITDA margins after Element-K sale
NIIT Tech We expect | revenues to grow by 11.3% QoQ partially due to currency benefits and
stable volumes. We expect EBITDA margins to improve 268 bps to 17.5% from
14.8% in Q2FY12 as Q2FY12 margins were impacted due to the transition cost
related to Morris.
Rolta We expect revenues to grow 2.9% QoQ due to favourable currency movements. EBIT
margins to improve by 190 bps due to lower base and currency benefits. Expect
FY12E tax rates to be in 16-18% range. Depreciation of the rupee could lead to further
losses on outstanding FCCB's.
Sasken We expect Sasken to report 5.9% QoQ increase in | revenues and $ revenues to
decline by 0.9% QoQ. Currency could likely be the driver for the reported numbers.
Management commentary on telecom vertical IT spending could be the key theme to
watch in Q3 earnings call
TCS We expect 2.7% US$ revenue growth, while 13.5% rupee revenue growth would be
led by favourable rupee movement (9.7%). EBIT margins could improve by 193 bps to
29.1% vs. 27.1% in Q2FY12. Losses on hedge portfolio could limit the improvement in
PAT margins
Tech Mahindra We expect | revenues to grow 11.2%QoQ primarily driven by currency. US$
revenues could decline by 1.7%QoQ as BT woes continue to impact overall revenues.
Satyam's earnings could boost Con.PAT to | 221 crore vs. standalone PAT of | 121
crore
Wipro We expect IT services revenues to grow 2.4% QoQ in US$ terms. Currency benefit on
revenues can be tepid as Wipro accounts the impact of hedges on the revenue line
item. Consolidated revenues could increase by 7.3% QoQ with IT products growing
10% YoY and Consumer and lightening growing 20% YoY. EBIT margin are expected
to rise by 103 bps.
Source: Company, ICICIdirect.com Research
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