IT - Growth Momentum to Continue; Q2FY15 Result Preview: Edelweiss PDF link

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We expect Q2FY15 to extend the growth momentum seen in Q1FY15, riding improving visibility in the US markets and higher off-shoring from Europe. This, coupled with a seasonally strong quarter, induces us to forecast sequential growth of 3.0-7.2% for the top-4 IT players - Tata Consultancy Services (TCS), Infosys, Wipro and HCL Technologies (HCLT) - in Q2FY15. TCS is expected to lead the pack with ~7.2% QoQ growth (4.5% organic plus 2.7% from consolidation of IT Frontier Corporation). HCLT is likely to post 3.6% growth, while Infosys and Wipro are likely to clock 3.0% growth each. We expect Infosys to maintain its annual revenue guidance of 7-9%. Investors will keenly track Infosys’s commentary regarding changes in its strategy going ahead under the new CEO, Dr. Vishal Sikka. As for sector commentaries on demand outlook for the year, deal pipeline, discretionary spend particularly on consulting side remain key monitorables.

Q2FY15: Growth momentum to sustain

While Q1FY15 set the tone for a better FY15 than FY14, Q2FY15 (a seasonally strong quarter) is likely to witness the growth momentum to continue backed by improving visibility in the US and higher off-shoring from Europe. For the top-4 IT players, we have built in 3.0-7.2% growth. TCS is likely to grow 7.2% QoQ (4.5% organic plus 2.7% from consolidation of IT Frontier Corporation), driven by broad-based growth across verticals (unlike Q1FY15 where growth was driven by smaller verticals). HCLT is likely to maintain its growth momentum and grow 3.6% QoQ with IMS and BPO being the growth drivers. Infosys and Wipro are likely to post 3.0% growth each owing to seasonally strong quarter and ramp up of the deals won earlier. Tech Mahindra (TECHM) is expected to grow 3.6% QoQ.

Wage hikes to singe margins

EBITDA margins of the top-4 IT companies (except Infosys) are likely to decline by 30-80bps impacted by wage hikes (HCLT and Wipro), while consolidation of IT Frontier Corporation will impact TCS’ margin (60bps). Wage hikes are likely to mar Wipro’s and HCLT’s EBITDA margin by 80bps and 30bps, respectively. Infosys’s margins are likely to improve by 150bps as it ramps up deals won earlier thereby improving operational metrics.  Commentary by players on margin trajectory and levers available, particularly in wake of the stable currency scenario, will be keenly monitored by investors.

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https://www.edelweiss.in/research/IT--Growth-Momentum-to-Continue;-Q2FY15-Result-Preview/27186.html