IT Sector Update - Earnings preview: September 2012 quarter :: BRICS Research

IT
September 2012 quarter earnings preview


We do not expect a spike in the revenue growth  of IT Services companies in
Q2FY13,  in spite of Q2 being historically a strong quarter for the sector,
due  to  the  lingering  effects  of  weak  discretionary spending, delayed
project  starts  and  pricing pressure. The key issues to watch for will be
changes  in market share, spending pattern of IT budgets and sustainability
of  margins.  The performance on the margins front is expected to be mixed,
based  on  their  varying  annual  wage hike cycles and acquisition related
costs, as well as the tapering effect of visa and higher GnA costs reported
in Q1FY13.

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Revenue  in  US  Dollar  terms  to  grow  1-6% qoq: In Q2FY13, large cap IT
companies  are  expected  to report a muted growth of 1-3% qoq in US Dollar
revenue,  in  spite  of  Q2  being historically a strong quarter for the IT
Services  sector,  due  to pricing pressure, low discretionary spending and
company  specific  weakness in winning deals. Mid-cap players are likely to
report  a  growth  of 2-6% qoq, based on company specific factors. TECHM is
expected  to  record  a  strong growth of 5.8% qoq, led by acquisitions and
Persistent’s  growth will continue to be driven by IP-led businesses, while
KPIT  and  Hexaware  are  likely  to  report a growth of 2-4% qoq, led by a
strong  growth  momentum  in  volumes  and  continued  strength  in the key
verticals.

Infosys  likely to cut Rupee revenue guidance: Infosys is likely to cut its
FY13  Rupee  revenue  growth  guidance  by  4.5% (to 15%), due to the sharp
appreciation  of  the  Rupee  towards  the  end of Q2FY13  from the earlier
exchange  rate   of Rs.55/US$ to Rs.52.4/US$. We believe that Infosys could
also  lower  its US Dollar guidance if the company’s performance for Q2FY13
once again comes in below expectations.

Outlook  and  valuation:  We  see  little  scope  for  an  expansion in the
valuations  (12-17x  FY14 for large-caps and 9-13x for mid-caps) amidst the
current  challenging  operating  environment resulting from weakness in the
BFSI  and  Telecom  verticals,  muted  discretionary  spending, and US visa
issues.

Prefer  TCS and HCLT among large caps: Within the sector, we prefer TCS and
HCLT over their peers due to the outperformance on the growth front by both
the  players.  TCS  will  continue  to deliver stable growth on the back of
better adaptability to uncertain demand environment and strong execution in
project  delivery.  We  believe  HCLT  may deliver growth along with margin
expansion  led  by  strong  order  bookings,  tapering-off of investment in
sales-effort,    and    operational   leverages   like   employee   pyramid
rationalisation  and  utilisation.  We no longer prefer Infosys over TCS as
its valuation discount to TCS has narrowed over last quarter and we believe
it is too early to re-rate Infosys as growth underperformance will continue
over FY13-FY14.