Please Share::
India Equity Research Reports, IPO and Stock NewsVisit http://indiaer.blogspot.com/ for complete details �� ��
http://www.kotaksecurities.com/pdf/dmb/MorningInsight09042012.pdf
INFORMATION TECHNOLOGY
We expect companies under our coverage to report a sequential revenue
growth of about 1.3%, driven by higher volumes but impacted by currency
fluctuations. Volumes for the Top 4 companies are expected to rise between
0.2% - 3%. This is a quarter where client budgets are normally finalized and
order flow turns stronger in the April - June quarter. Slower growth in
discretionary spends and continued delays in spending decisions will also
impede revenue growth, we believe. The cross currency volatility impact is
expected to be marginal as compared to last quarter. Average realizations
are expected to have remained stable QoQ, barring few cases of declines.
EBIDTA margins are expected to be lower QoQ on the back of the rupee
appreciation and lower volume increases, along with reduced utilization
rates. We expect EBIDTA to fall by 1.5% QoQ, for companies under our
coverage.
Companies follow different hedging strategies and different accounting
policies. This may lead to corresponding impact of currency volatility on
other income. We expect significant volatility in the other income
component on a QoQ basis for several companies. Consequently, PAT is
expected to remain flat for companies under our coverage (also for Top 4).
The guidance from Infosys will be even more important this time. With
continuing uncertainty on depending decisions (largely discretionary
spends), the guidance may be conservative.
Among other things, we will also watch out for :
a) Comments on CY12 budgets; more importantly on expected spending
patterns,
b) Pricing declines, if any and comments on the same,
c) Salary increments for FY13 and
d) Comments on new opportunities like Cloud Computing, etc
We maintain our optimistic view on the medium-to-long term prospects of
the sector. Over the medium term, we expect large caps to out-perform as
they are better equipped to counter the impact, if any, of any variation in
the demand scenario. We will keep a close watch on the evolving macro
scene in developed economies, where recent economic developments are
concerning.
Infosys and TCS remain our preferred large-cap picks. In mid-caps, we prefer
NIIT Technologies and KPIT Cummins. Mphasis is not covered here because
quarter ends in April.
0.2% - 3% sequential volume growth expected for top tier companies
We expect top-tier companies to report volume growth of about 0.2% - 3% QoQ.
We understand that, there have been some delays in decision making and also, the
actual amount of spends as compared to budgets are relatively lower this fiscal.
While the order flows from US are expected to have grown, we will closely hear
management comments on the potential order flows from Europe, where economic
news has been a source of worry.
While volumes are expected to rise QoQ, we expect realizations to be largely stable,
subject to some cases of reductions. However, we will closely watch out for management comments on potential price reductions.
Impact of cross currency movements
The Indian rupee has appreciated v/s USD (1.3%), Euro (3.9%) and GBP (1.6%).
The USD has appreciated v/s Euro (2.9%) and remained almost flat v/s GBP. To that
extent, the impact on USD-based revenues is expected to be marginally as compared to the previous quarter. However, INR-based revenues for the quarter are expected to be negatively impacted to the extent of 100 - 150bps for top - tier companies.
For the Top 4 companies, we expect revenues to be about 0.7% higher in INR terms
and for the whole universe, revenue growth is expected to be about 1.3%.
Margins expected to be lower
We expect margins to be lower sequentially. Marginal volume growth, rupee appreciation and lower utilization rates are expected to impact profitability QoQ. Cost efficiencies may set off part of the impact.
Volatility in other income
With relatively lower fluctuations in exchange rates during the quarter, the impact
on companies may be muted. However, the QoQ variation in the forex gains / losses
is expected to be significant. This will also be influenced by the hedging strategies
and accounting methods followed. Consequently, PAT is expected to remain almost
flat for companies under our coverage.
Factors to watch
The guidance from Infosys will be more important this time. The management has
been consistent in saying that, FY12 will be a normal year as far as demand is concerned and that there have been no budget cuts from clients. However, it has also
cautioned that, there have been delays in decision making and the uncertainty has
increased, of late. Management comments on the macro scene and client spending
will gain additional importance. We also note that, other large companies have also
been cautious on the macro scenario.
Apart from Infosys' guidance, we will closely track comments on CY12 budgets from
other companies. Pricing declines, if any and comments on the same, further insights into any pick up in discretionary spends, hiring trends and comments on new
opportunities like Cloud Computing, etc will be also of importance to us.
We will closely watch the progress made by and expectations of the various companies in new areas of opportunities. Cloud Computing provides a big potential and
order flows in this business will be of interest to us.
Companies are also now increasingly looking at moving to newer types of pricing
models like outcome-based pricing, transaction-based pricing, etc. Trends in these
will be of interest to us from the point-of-view of margin protection and improvement. We will also watch out for management comments on pricing pressures, if
any.
Remain positive on medium-to-long term prospects; to watch
macro scene closely
We maintain our positive bias on sector fundamentals over the medium-to-long
term. In the event of a slow recovery in the global economy, it should reflect in increased business for Indian IT vendors, though over the medium term. Indian companies have likely been able to increase their market share in the global outsourcing
pie.
However, the economic data from developed economies, especially from Europe,
has not been encouraging. Any major weakness in these economies can impact
demand for Indian IT vendors.
Larger companies are better-equipped to handle any variation in demand. We prefer
Infosys and TCS in the large caps. NIIT Technologies and KPIT Cummins are the
preferred mid cap stocks based on vertical focus and expertise.
No comments:
Post a Comment