Slower ramp ups, continued uncertainty in Europe coupled with softness in telecom and BFS verticals leads us to forecast a muted growth of 0-3% for Top 4 IT players in Q1FY13, further worsened by negative impact of cross currency (CC) movement. We also believe large cap players’ margins will expand 10-110bps led by significant (~7.5%) INR depreciation in the previous quarter. While Street expects Infosys to cut its guidance from 8-10% to 6-8%, we believe the cut will be limited to 7-9%, primarily to adjust for unfavourable CC impact.
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Slow ramp ups and CC movement to impact USD growth
We expect a muted June quarter due to slow ramp ups further impacted by CC impact of 0.5-1.0%. We forecast 0.0-3.0% QoQ growth in USD revenue for Indian large cap IT players with TCS and HCL Tech (HCLT) leading the pack with 3% sequential growth. Infosys is expected to post a muted growth of 0.6% in USD terms, in line with its guidance of 0-1%, slightly impacted by CC impact.
Currency to absorb wage hikes and visa costs; margins to expand
The INR has depreciated 7.5% versus the previous quarter (INR/USD from ~50.3 to ~54.0), which in our view will positively impact margins by ~225bps. This, in our view, will largely absorb the impact of both wage hikes (TCS full quarter impact and Wipro one month) and H1B visa costs. In fact, we expect a margin improvement of 10-110bps for large cap players with Wipro and Infosys leading the pack.
Infosys: USD guidance to reduce (7-9%), INR guidance to increase.
While we admit that the current quarter will also be weak for Infosys and growth is likely to be ~0.6% in USD terms (-0.5% due to cross currency), we expect growth to ramp up from next quarter. We also expect the company to cut its USD full year FY13 guidance from 8-10% to 7-9% to adjust for CC impact, although we do not foresee any cut in constant currency guidance.
Outlook: Growth to be back ended
We expect past delays in decision making that had postponed project ramp ups to not only impact overall FY13 revenue growth, but also lead to back-ended growth. While we believe cost cutting pressures in the European geography will drive growth for Indian IT companies, we expect most of it to pick up only from H2FY13. We expect TCS’ and HCLT’s revenue growth to outperform both Infosys and Wipro in the current year due to past wins and relatively higher traction in growth verticals. We also expect Infosys’ and Wipro’s margins to improve in the current year even excluding currency impact.
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