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Technology
Late cyclicality has started to bite the IT industry since November with a
slowdown in ramp-ups as a weak macro-economic environment finally
trickles into the IT decision making process. Growth rates for 3Q and 4Q
are likely to be muted due to greater than normal seasonality. Increased
scrutiny of smaller deals and delays in ramp-ups seen in the December
quarter is likely to impact the budget setting process for CY12 with weak
budgets across the board. The strong appreciation of the US dollar against
other major global currencies (GBP, EUR, AUD, etc.) is likely to provide a
negative headwind on reported US dollar revenue growth compared to
consensus expectations.
Although demand and reported USD revenue growth is likely to be soft, the
industry is likely to enjoy margin benefits of the ~16-17% currency depreciation
and reduced attrition that is likely to aid its ability to (a) invest in the business and
(b) offer lower billing rates to customers to drive volume growth. Lower billing
rates are likely to be hard for the industry to win back in a following up turn
reducing the long term earnings growth potential of the industry. Certain industry
participants are also likely to report hedging losses due to hedging contracts
entered at lower realisation rates. We expect the industry to increase its hedging
volumes to lock in the benefits of the attractive exchange rates.
Preparing for the upcoming results
We bring down our 3Q and 4Q US dollar revenue growth estimates and pencil in
margin gains from currency depreciation. We move our long term base currency
rate to 50 from 45 for USDINR and other currencies based on closing rates.
Key factors to watch: (a) Weakness in discretionary services (Enterprise application
services, Application development) (b) Management commentary on sustainability
of growth in strong verticals such as BFSI amidst spending deferments by Western
banks; (c) campus recruitment and lateral hiring momentum.
Ambit v/s Consensus
For the quarter, we are at the low end of consensus estimates for HLCT (given a
flagged weak quarter as HCLT focused on deal wins for next year) and below
average on TCS, Wipro, Polaris and Redington. We are at the upper end for
Persistent and in line with Infosys.
Recommendation
HCL tech (BUY) is our preferred pick primarily due to presence in both short term
(RIM) as well as long term growth drivers (Consulting). We continue to like TCS
and continue find it close to fair value. We would avoid Wipro (SELL) and Infosys
(SELL) because a) Heightened expectations of a recovery are likely to be
disappointed, b) They have not positioned their business in line with the changing
industry and c) They continue to grapple with internal challenges. Amongst
midcaps we like: (a) Persistent (BUY) given its presence in the fast growing
“high end” OPD business and margin protection from IP led revenues, and (b)
Polaris (BUY) given our expectation of strong growth in the products business
(Intellect).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Technology
Late cyclicality has started to bite the IT industry since November with a
slowdown in ramp-ups as a weak macro-economic environment finally
trickles into the IT decision making process. Growth rates for 3Q and 4Q
are likely to be muted due to greater than normal seasonality. Increased
scrutiny of smaller deals and delays in ramp-ups seen in the December
quarter is likely to impact the budget setting process for CY12 with weak
budgets across the board. The strong appreciation of the US dollar against
other major global currencies (GBP, EUR, AUD, etc.) is likely to provide a
negative headwind on reported US dollar revenue growth compared to
consensus expectations.
Although demand and reported USD revenue growth is likely to be soft, the
industry is likely to enjoy margin benefits of the ~16-17% currency depreciation
and reduced attrition that is likely to aid its ability to (a) invest in the business and
(b) offer lower billing rates to customers to drive volume growth. Lower billing
rates are likely to be hard for the industry to win back in a following up turn
reducing the long term earnings growth potential of the industry. Certain industry
participants are also likely to report hedging losses due to hedging contracts
entered at lower realisation rates. We expect the industry to increase its hedging
volumes to lock in the benefits of the attractive exchange rates.
Preparing for the upcoming results
We bring down our 3Q and 4Q US dollar revenue growth estimates and pencil in
margin gains from currency depreciation. We move our long term base currency
rate to 50 from 45 for USDINR and other currencies based on closing rates.
Key factors to watch: (a) Weakness in discretionary services (Enterprise application
services, Application development) (b) Management commentary on sustainability
of growth in strong verticals such as BFSI amidst spending deferments by Western
banks; (c) campus recruitment and lateral hiring momentum.
Ambit v/s Consensus
For the quarter, we are at the low end of consensus estimates for HLCT (given a
flagged weak quarter as HCLT focused on deal wins for next year) and below
average on TCS, Wipro, Polaris and Redington. We are at the upper end for
Persistent and in line with Infosys.
Recommendation
HCL tech (BUY) is our preferred pick primarily due to presence in both short term
(RIM) as well as long term growth drivers (Consulting). We continue to like TCS
and continue find it close to fair value. We would avoid Wipro (SELL) and Infosys
(SELL) because a) Heightened expectations of a recovery are likely to be
disappointed, b) They have not positioned their business in line with the changing
industry and c) They continue to grapple with internal challenges. Amongst
midcaps we like: (a) Persistent (BUY) given its presence in the fast growing
“high end” OPD business and margin protection from IP led revenues, and (b)
Polaris (BUY) given our expectation of strong growth in the products business
(Intellect).
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