INFORMATION TECHNOLOGY :Q4FY12 RESULTS PREVIEW :Kotak Securities PDF link

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http://www.kotaksecurities.com/pdf/dmb/MorningInsight10042012.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