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Technology
India
3QFY12E preview – quarter should meet/beat reset expectations. We expect solid,
though not spectacular, earnings reports from the Indian IT services companies, on a
currency-adjusted basis. Sequential sharp movements in various currencies versus the
US$ would pressure US$ revenues but propel margins, EBITDA, and net income. We
would focus on CY2012E budget indicators, pricing, lateral hiring, campus visits
update, and 4QFY12 guidance in the earnings prints and management commentaries.
Remain positive on the sector; INFO/TCS top Tier-I and MTCL/HEXW top Tier-II picks.
Dec 2011 quarter earnings preview – expect solid earnings in a seasonally weak quarter
Even as Indian IT services stocks, especially the Tier-I names (barring HCLT), have delivered solid
absolute and relative performance since the Sep 2011 earnings prints, we believe Street’s
nervousness on demand outlook remains high. Tier-I stock returns have partially been driven by
sustained weakness in the Re/US$ rate. Also, Infosys’ increasingly cautious stance through the
quarter has also contributed to the sustained nervousness on demand outlook despite reassuring
undertone in demand commentary from Infosys’ industry peers. We believe Dec 2011 earnings
reports from various companies should allay these concerns to some extent. We discuss our
forecasts for the quarter on various financial and operational parameters in the coming paragraphs.
Exhibit 5 depicts our earnings preview in detail.
Revenues – expect robust constant currency volume-led growth; cross-currency to exert pressure
We expect solid sequential volume growth (3.5-5% for Tier-I names, and 2-6% for Tier-II, barring
Mphasis) across companies. Expect constant-currency pricing to be stable – this should drive c/c
revenue growth numbers similar to volume growth estimates. Adverse cross-currency movements
will exert meaningful pressure on reported US$ revenue growth numbers, especially for companies
with substantial India exposure. We expect 50-200 bps cross-currency pressure on qoq revenue
growth rate across companies. Infosys is the best-placed among the Tier-I names on this front and
should lead the pack in terms of reported US$ revenue growth.
Margins – Rupee to aid
We expect strong sequential margin expansion across companies with zero or partial wage hike
pressure during the quarter. Margin expansion would primarily be led by benefits from sharp Re
depreciation during the quarter (10-12% better average Re realization across companies,
difference being on account of cash-flow hedging for some companies and different average spot
computation methodologies). Among the Tier-I names, we expect Infosys and TCS to report strong
margin expansion – we build in 180 bps and 150 bps qoq improvement, respectively. We note
that Wipro benefits only marginally from Re depreciation on account of its cash-flow hedges at
lower levels. We build in only a 40 bps qoq uptick in Wipro’s global IT margins. Special milestone
payouts to employees would mitigate some Re benefit at HCLT – we build in 110 bps qoq uptick.
Infosys guidance – expect cut in US$ revenue growth guidance, but a raise in Re EPS guidance
Exhibit 1 depicts our estimate of likely revision in Infosys’ FY2012E guidance. We expect Infosys to
lower its US$ revenue growth guidance to 17%-17.5% from the current 17-19%. Cut will be
driven by (1) adverse cross-currency movements, and (2) 3QFY12E revenue miss versus upper-end
of the guidance. Nonetheless, EBITDA margin and Re EPS guidance are likely to see an uptick,
driven by changed Re/US$ assumption. We expect Infosys to revise its FY2012E EPS guidance to
Rs148-150 at the upper-end from the current Rs145, an increase of around 2-4%.
Key factors to watch out for – volume growth (quantum and composition),
demand commentary, hiring trends, hedging status
Factors that we would watch closely in the Dec 2011 quarter earnings report and
management commentaries –
Commentary on CY2012E IT budgets with a focus on whether there are any delays in
decision-making. Direction of budgets (whether up, down or flat) is important, but we
believe normal decision-making cycle is more critical to the fortunes of the offshore
names, whose growth primarily comes on the back of market share gains and not market
growth.
Pricing trends and commentary – we would evaluate these to assess three factors – (1)
pricing discipline in the industry, (2) general pricing pressure, and (3) pricing pressure
arising from clients demanding some Re benefits to be passed on to them.
Lateral hiring trends and initial campus hiring numbers. Even as campus hiring numbers
may or may not mean much (given that joining deferral options can be exercised in case
things worsen meaningfully), lateral hiring trends (adjusted for Dec seasonality) should
serve as a good indicator of the activity in the market and players’ confidence on demand.
March 2012 quarter revenue guidance from Infosys and Wipro and CY2012E
revenue guidance from Cognizant.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Technology
India
3QFY12E preview – quarter should meet/beat reset expectations. We expect solid,
though not spectacular, earnings reports from the Indian IT services companies, on a
currency-adjusted basis. Sequential sharp movements in various currencies versus the
US$ would pressure US$ revenues but propel margins, EBITDA, and net income. We
would focus on CY2012E budget indicators, pricing, lateral hiring, campus visits
update, and 4QFY12 guidance in the earnings prints and management commentaries.
Remain positive on the sector; INFO/TCS top Tier-I and MTCL/HEXW top Tier-II picks.
Dec 2011 quarter earnings preview – expect solid earnings in a seasonally weak quarter
Even as Indian IT services stocks, especially the Tier-I names (barring HCLT), have delivered solid
absolute and relative performance since the Sep 2011 earnings prints, we believe Street’s
nervousness on demand outlook remains high. Tier-I stock returns have partially been driven by
sustained weakness in the Re/US$ rate. Also, Infosys’ increasingly cautious stance through the
quarter has also contributed to the sustained nervousness on demand outlook despite reassuring
undertone in demand commentary from Infosys’ industry peers. We believe Dec 2011 earnings
reports from various companies should allay these concerns to some extent. We discuss our
forecasts for the quarter on various financial and operational parameters in the coming paragraphs.
Exhibit 5 depicts our earnings preview in detail.
Revenues – expect robust constant currency volume-led growth; cross-currency to exert pressure
We expect solid sequential volume growth (3.5-5% for Tier-I names, and 2-6% for Tier-II, barring
Mphasis) across companies. Expect constant-currency pricing to be stable – this should drive c/c
revenue growth numbers similar to volume growth estimates. Adverse cross-currency movements
will exert meaningful pressure on reported US$ revenue growth numbers, especially for companies
with substantial India exposure. We expect 50-200 bps cross-currency pressure on qoq revenue
growth rate across companies. Infosys is the best-placed among the Tier-I names on this front and
should lead the pack in terms of reported US$ revenue growth.
Margins – Rupee to aid
We expect strong sequential margin expansion across companies with zero or partial wage hike
pressure during the quarter. Margin expansion would primarily be led by benefits from sharp Re
depreciation during the quarter (10-12% better average Re realization across companies,
difference being on account of cash-flow hedging for some companies and different average spot
computation methodologies). Among the Tier-I names, we expect Infosys and TCS to report strong
margin expansion – we build in 180 bps and 150 bps qoq improvement, respectively. We note
that Wipro benefits only marginally from Re depreciation on account of its cash-flow hedges at
lower levels. We build in only a 40 bps qoq uptick in Wipro’s global IT margins. Special milestone
payouts to employees would mitigate some Re benefit at HCLT – we build in 110 bps qoq uptick.
Infosys guidance – expect cut in US$ revenue growth guidance, but a raise in Re EPS guidance
Exhibit 1 depicts our estimate of likely revision in Infosys’ FY2012E guidance. We expect Infosys to
lower its US$ revenue growth guidance to 17%-17.5% from the current 17-19%. Cut will be
driven by (1) adverse cross-currency movements, and (2) 3QFY12E revenue miss versus upper-end
of the guidance. Nonetheless, EBITDA margin and Re EPS guidance are likely to see an uptick,
driven by changed Re/US$ assumption. We expect Infosys to revise its FY2012E EPS guidance to
Rs148-150 at the upper-end from the current Rs145, an increase of around 2-4%.
Key factors to watch out for – volume growth (quantum and composition),
demand commentary, hiring trends, hedging status
Factors that we would watch closely in the Dec 2011 quarter earnings report and
management commentaries –
Commentary on CY2012E IT budgets with a focus on whether there are any delays in
decision-making. Direction of budgets (whether up, down or flat) is important, but we
believe normal decision-making cycle is more critical to the fortunes of the offshore
names, whose growth primarily comes on the back of market share gains and not market
growth.
Pricing trends and commentary – we would evaluate these to assess three factors – (1)
pricing discipline in the industry, (2) general pricing pressure, and (3) pricing pressure
arising from clients demanding some Re benefits to be passed on to them.
Lateral hiring trends and initial campus hiring numbers. Even as campus hiring numbers
may or may not mean much (given that joining deferral options can be exercised in case
things worsen meaningfully), lateral hiring trends (adjusted for Dec seasonality) should
serve as a good indicator of the activity in the market and players’ confidence on demand.
March 2012 quarter revenue guidance from Infosys and Wipro and CY2012E
revenue guidance from Cognizant.
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