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3QFY12 Preview: Benefit of INR depreciation
Constant currency revenue growth of 2.9-4.6%: We expect top-4 Indian IT
companies to report constant currency revenue growth of 2.9-4.6% QoQ. US$
revenue growth will be adversely impacted by 50-190bps due to cross
currency movement. However, USD/INR depreciation of 11.4% QoQ would
benefit reported revenues (INR), margins, and drive 20%+ QoQ EBIT growth.
We believe the stocks are factoring in FY13 US$ revenue growth of 10-15%
and don’t see any downside to these expectations. While macro environment
remains challenging, Indian IT companies are likely to benefit from the
outsourcing trend. Remain positive on the sector with a bias towards tier-
1 companies. Infosys/TCS remain our top picks in the sector; amongst
mid-caps we like eClerx/MindTree.
TCS and HCLT to lead revenue growth: TCS should report strongest
constant currency QoQ growth at 4.6%, followed by HCLT (4.4%), Infosys
(3.7%) and Wipro (2.9%). However, cross currency will adversely impact growth
by c.190bps for TCS/Wipro and c.160bps for HCLT. Infosys should report
highest growth in US$ terms at 3.2% QoQ. Amongst mid-caps, eClerx (+4%)
and MindTree (+3%) should report decent US$ revenue growth. Rupee
depreciation of 11.4% will drive EBIT margin expansion of 200-300bps QoQ
for most companies. Infosys may indicate bias towards lower end of FY12 US$
revenue guidance (17.1-19.1%), however raise EPS guidance to `148.
Investors to focus on CY12 demand outlook: We expect management
commentary on CY12 IT budgets to indicate a) no major delays in finalisation
of budgets, and b) largely flat IT budgets with minor downward bias. We
expect a moderation in the demand commentary and select instances of
project delays/cancellations from companies. Amongst verticals, we expect
manufacturing and retail outlook to be relatively better while financial
services and technology/telecom outlook may be muted.
Infosys/TCS top picks: We remain positive on Infosys/TCS and expect 15-
20% upside over 9-12 months. Stocks are factoring in 10-15% US$ revenue
growth for FY13 and currency reset will drive earnings upgrade. We believe
the risk/reward is most favourable for Infosys. Risk to our thesis is a freeze in
the global economy and/or legislative move against offshoring.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
3QFY12 Preview: Benefit of INR depreciation
Constant currency revenue growth of 2.9-4.6%: We expect top-4 Indian IT
companies to report constant currency revenue growth of 2.9-4.6% QoQ. US$
revenue growth will be adversely impacted by 50-190bps due to cross
currency movement. However, USD/INR depreciation of 11.4% QoQ would
benefit reported revenues (INR), margins, and drive 20%+ QoQ EBIT growth.
We believe the stocks are factoring in FY13 US$ revenue growth of 10-15%
and don’t see any downside to these expectations. While macro environment
remains challenging, Indian IT companies are likely to benefit from the
outsourcing trend. Remain positive on the sector with a bias towards tier-
1 companies. Infosys/TCS remain our top picks in the sector; amongst
mid-caps we like eClerx/MindTree.
TCS and HCLT to lead revenue growth: TCS should report strongest
constant currency QoQ growth at 4.6%, followed by HCLT (4.4%), Infosys
(3.7%) and Wipro (2.9%). However, cross currency will adversely impact growth
by c.190bps for TCS/Wipro and c.160bps for HCLT. Infosys should report
highest growth in US$ terms at 3.2% QoQ. Amongst mid-caps, eClerx (+4%)
and MindTree (+3%) should report decent US$ revenue growth. Rupee
depreciation of 11.4% will drive EBIT margin expansion of 200-300bps QoQ
for most companies. Infosys may indicate bias towards lower end of FY12 US$
revenue guidance (17.1-19.1%), however raise EPS guidance to `148.
Investors to focus on CY12 demand outlook: We expect management
commentary on CY12 IT budgets to indicate a) no major delays in finalisation
of budgets, and b) largely flat IT budgets with minor downward bias. We
expect a moderation in the demand commentary and select instances of
project delays/cancellations from companies. Amongst verticals, we expect
manufacturing and retail outlook to be relatively better while financial
services and technology/telecom outlook may be muted.
Infosys/TCS top picks: We remain positive on Infosys/TCS and expect 15-
20% upside over 9-12 months. Stocks are factoring in 10-15% US$ revenue
growth for FY13 and currency reset will drive earnings upgrade. We believe
the risk/reward is most favourable for Infosys. Risk to our thesis is a freeze in
the global economy and/or legislative move against offshoring.
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