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Technology
India
Revised currency assumptions drive EPS upgrades. We raise FY2012-14E EPS
estimates for the Tier-I Indian IT names by 1.5-5.5% while reducing USD revenue
growth forecasts for these names. Both the changes are currency-led – (1) changes in
cross-currency (EUR/USD, GBP/USD, etc.) assumptions drive cuts in USD revenue
forecasts, and (2) changes in Re/USD assumptions drive increase in EPS estimates. Sector
view (attractive) and preference within Tier-Is (Infosys/ TCS) remain unchanged.
Business update – recent indicators positive on balance; 3QFY12 revenue growth likely to be soft
Within the broader macro/micro dichotomy debate, micro indicators on IT services demand
continue to track well, barring a few dampeners. One such indicator suggesting caution was
Oracle’s subdued new license sales growth for the Nov 2011 quarter. Nonetheless, this one should
be seen in conjunction with the several other positive indicators in recent times. Some of these
were Cognizant’s 8-K filing, Accenture’s Nov 2011 earnings, TIBCO’s earnings, as well as sustained
hiring momentum in the industry. We are not suggesting one ignores the negative indicators;
macro environment is far too challenging for us to even suggest that. All we are suggesting is to
remain flexible on one’s demand view while keeping in mind the structural market share gain story
and weak macro-micro correlation as far as Indian IT services revenue growth is concerned.
That said, our channel checks and recent interactions with managements suggest a soft sequential
revenue USD growth scenario for 3QFY12 across companies. Even as we expect robust volume
growth of around 2.5-5% (healthy for seasonally weak Dec quarter), adverse cross-currency
movements (50-200 bps impact for various companies) are likely to dampen USD growth rates.
Incorporating our economist’s revised Re/US$ forecasts into our models for Infosys, TCS, and HCLT
Our economist has revised his Re/US$ assumptions for FY2012/13E to Rs48.70/52.50 from
Rs47.50/49.75, respectively. We also build in his revised view on GBP and EUR levels versus the
USD (he expects USD to strengthen further) – this impacts our USD revenue forecasts. We
incorporate these revisions into our earnings models for Infosys, TCS, and Wipro.
Exhibits 1-3 depict the revised forecasts for these three names, respectively. We note that we have
assumed significant reinvestment of benefits from Re depreciation into the business and
accordingly built conservative margin flow-through. Bulk of EPS upgrade is on account of pure
translation impact. Our EPS estimates for FY2013E would be 5-10% higher if we build in 100%
flow-through of margin benefits.
We maintain our target price on Infosys at Rs3,300/share and reiterate BUY. We also reiterate BUY
on TCS with a revised target price of Rs1,300/share (from Rs1,260). We retain ADD on Wipro with
a revised target price of Rs450/share (Rs410 earlier).
Exhibits 4-6 give the revised condenses financial forecasts for Infosys, TCS, and Wipro, respectively.
We shall incorporate our revised currency assumptions for other companies over the coming days.
We remain positive on the sector with a bias towards Infosys and TCS among large-caps and
MindTree and Hexaware among mid-caps.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Technology
India
Revised currency assumptions drive EPS upgrades. We raise FY2012-14E EPS
estimates for the Tier-I Indian IT names by 1.5-5.5% while reducing USD revenue
growth forecasts for these names. Both the changes are currency-led – (1) changes in
cross-currency (EUR/USD, GBP/USD, etc.) assumptions drive cuts in USD revenue
forecasts, and (2) changes in Re/USD assumptions drive increase in EPS estimates. Sector
view (attractive) and preference within Tier-Is (Infosys/ TCS) remain unchanged.
Business update – recent indicators positive on balance; 3QFY12 revenue growth likely to be soft
Within the broader macro/micro dichotomy debate, micro indicators on IT services demand
continue to track well, barring a few dampeners. One such indicator suggesting caution was
Oracle’s subdued new license sales growth for the Nov 2011 quarter. Nonetheless, this one should
be seen in conjunction with the several other positive indicators in recent times. Some of these
were Cognizant’s 8-K filing, Accenture’s Nov 2011 earnings, TIBCO’s earnings, as well as sustained
hiring momentum in the industry. We are not suggesting one ignores the negative indicators;
macro environment is far too challenging for us to even suggest that. All we are suggesting is to
remain flexible on one’s demand view while keeping in mind the structural market share gain story
and weak macro-micro correlation as far as Indian IT services revenue growth is concerned.
That said, our channel checks and recent interactions with managements suggest a soft sequential
revenue USD growth scenario for 3QFY12 across companies. Even as we expect robust volume
growth of around 2.5-5% (healthy for seasonally weak Dec quarter), adverse cross-currency
movements (50-200 bps impact for various companies) are likely to dampen USD growth rates.
Incorporating our economist’s revised Re/US$ forecasts into our models for Infosys, TCS, and HCLT
Our economist has revised his Re/US$ assumptions for FY2012/13E to Rs48.70/52.50 from
Rs47.50/49.75, respectively. We also build in his revised view on GBP and EUR levels versus the
USD (he expects USD to strengthen further) – this impacts our USD revenue forecasts. We
incorporate these revisions into our earnings models for Infosys, TCS, and Wipro.
Exhibits 1-3 depict the revised forecasts for these three names, respectively. We note that we have
assumed significant reinvestment of benefits from Re depreciation into the business and
accordingly built conservative margin flow-through. Bulk of EPS upgrade is on account of pure
translation impact. Our EPS estimates for FY2013E would be 5-10% higher if we build in 100%
flow-through of margin benefits.
We maintain our target price on Infosys at Rs3,300/share and reiterate BUY. We also reiterate BUY
on TCS with a revised target price of Rs1,300/share (from Rs1,260). We retain ADD on Wipro with
a revised target price of Rs450/share (Rs410 earlier).
Exhibits 4-6 give the revised condenses financial forecasts for Infosys, TCS, and Wipro, respectively.
We shall incorporate our revised currency assumptions for other companies over the coming days.
We remain positive on the sector with a bias towards Infosys and TCS among large-caps and
MindTree and Hexaware among mid-caps.
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