A seasonally strong quarter coupled with increasing visibility on US markets and traction in upcoming verticals like retail induce us to forecast a moderate growth of 1-4% for Top 4 IT players in Q2FY13; TCS and HCL Tech will lead the pack with ~4% growth and Infosys’ growth may come a tad closer to ~3%. We expect margins to decline slightly for Wipro and HCL Tech led by wage hike impact, and marginally for TCS due to investments in new initiatives. Infosys is likely to maintain its full year guidance of 5% (organic basis) in CC with a positive bias.
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Infosys and TCS growth gap to narrow down
We expect the wide gap of underperformance of Infosys vis-a-vis TCS to narrow down to around 1% in the current quarter (organic basis) led by both low base effect for Infosys and some uptick in discretionary spend. While Infosys is expected to post sequential growth of 3%, TCS is likely to grow around 4%. HCL Tech and Wipro are likely to grow 4% and 1%, respectively, sequentially in USD terms.
Wage hikes and investments to impact margins
We expect wage hike impact of 160bps each, on margins of Wipro (two months) and HCL Tech (staggered over two quarters), and a 60bps impact of investments in new deals and initiatives for TCS. Infosys’ margin is likely to expand 20bps driven by slightly better realisations on sequential basis. We keenly await company’s guidance for next year’s campus hiring.
Infosys: Organic guidance to be maintained, INR guidance to be cut
While we admit that Q2FY13 will also be slightly weak for Infosys versus TCS and HCL Tech, we strongly believe that the wide performance gap will narrow down to a meager 1%. We also expect Infosys to reiterate its 5% growth guidance for FY13, with some positive bias for outperformance. In INR terms, revenue guidance is likely to be cut to~17.0% from 19.7% earlier.
Outlook: Growth to pick up
We expect demand environment to improve in H2FY13 in spite of one seasonally weak quarter (December) and a yearend quarter, due to improving visibility in the US market and better visibility also substantiated by robust growth in Accenture’s outsourcing order book in Q4FY12. Although TCS’ and HCLT’s revenue growth is likely to outperform both Infosys and Wipro in Q2FY13 due to higher growth in the first half, we believe H2 growth for at least Infosys will be at par with TCS and HCL Tech. We also remain a bit skeptical on Wipro’s growth and believe that the company will underperform for at least one more quarter.
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