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Indian IT Services Q2FY15 Result Preview
Robust order book; Seasonal up‐tick may lead to strong $‐revenue growth...
Seasonally Strong Quarter ‐ TCS, TechM, HCLT to lead $‐revenue growth…
We expect leading growth in our Tier‐I coverage universe for TCS (+7.6% Q/Q), TechM (+3.7% Q/Q), and
HCLT (+3.6% Q/Q). Despite company‐specific issues revenue growth for Infosys (+2.8% Q/Q) and Wipro
(+2.7% Q/Q) relatively could be better than historical average. We expect Infosys to maintain its annual
revenue growth guidance of 7‐9%. Wipro’s Q3FY15 revenue guidance is expected to be in the range of 2.5‐
4.5% Q/Q. Cross‐currency movements are likely to impact revenue growth by 60‐90bp Q/Q across the top‐
tier. We expect Infosys/TCS/TechM to report ~60/141/187 bps Q/Q improvement in EBITDA margins led
by higher revenue growth, INR depreciation and absence of one off costs (e.g. visa costs). However, EBITDA
margins will decline sequentially for Wipro and HCL Tech on account of wage hikes. Robust order backlog,
improving visibility in US markets and higher off‐shoring from Europe to lead $‐revenue growth in Q2FY15.
KPIT & SQS ‐ Mid‐cap growth leaders…
In our mid‐tier coverage, we expect KPIT and SQS to lead $‐revenue growth followed by Mastek. On back
of revival in SAP demand and strong order backlog, we expect KPIT to report leading $‐revenue growth of
3.5% Q/Q. On back of favourable growth momentum in testing services, SQS is likely to deliver 2.6% Q/Q $‐
revenue growth. Due to continuous scale down by key client, we expect 1.9% Q/Q $‐revenue de‐growth in
NIIT Tech. Also muted show from insurance and government vertical, Mastek could post only 1.1% $‐
revenue growth. Amongst mid‐cap companies, we expect Mastek to see ~381 bps improvement in margins
sequentially aided by revenue growth and absence of one off costs.
Key Monitorables: ‐ (I) Infosys ‐ FY15 $‐revenue outlook, (II) BFSI, Manufacturing and Retail vertical
outlook, (III) Commentary on discretionary spend, (IV) TCS – future demand outlook and commentary on
margin front post Mitsubishi Corp’s ITF merger, (V) Wipro – Q3FY15 $‐revenue guidance, (VI) HCLT –
Outlook of software segment and margin commentary, (VII) TechM – Key deal wins/synergies & cross‐
selling opportunity (VIII) NIIT Tech – EBITDA margin commentary, Fresh Order intake & revenue growth,
(IX) KPIT – free cash flow generation/Top Client performance, and (X) Mastek – Insurance vertical
performance, and (xI) SQS – progress on integration front.
Prefer Mastek & KPIT…
We prefer Mid‐cap over larger‐cap as major positives are already factored in the price for Tier‐I coverage
universe. The strong revenue performance and valuation discount (v/s peers) leaves some room for re‐
rating opportunity in case of HCLTech and TechM. Infosys underperform relative to its peers could narrow
down on back of global recovery and stability towards the top management. However, the top
management focus areas to deliver industry average growth (Product or Services) remains the key
question. TCS is a consistent performer and we expect its impressive performance to continue, but current
valuations factors major positives. After re‐organization & de‐merger of non‐IT segment, Wipro is returning
to industry level growth and sustenance could lead to re‐rating. We prefer KPIT on back of strong order
book and SAP segment revival. Mastek could be a significant value creator in long‐run ‐ de‐merger of
Insurance and Services business separately is the first step towards that direction.
Key risk: Strengthening rupee (v/s USD) and deceleration in US and Europe economic revival.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
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Indian IT Services Q2FY15 Result Preview
Robust order book; Seasonal up‐tick may lead to strong $‐revenue growth...
Seasonally Strong Quarter ‐ TCS, TechM, HCLT to lead $‐revenue growth…
We expect leading growth in our Tier‐I coverage universe for TCS (+7.6% Q/Q), TechM (+3.7% Q/Q), and
HCLT (+3.6% Q/Q). Despite company‐specific issues revenue growth for Infosys (+2.8% Q/Q) and Wipro
(+2.7% Q/Q) relatively could be better than historical average. We expect Infosys to maintain its annual
revenue growth guidance of 7‐9%. Wipro’s Q3FY15 revenue guidance is expected to be in the range of 2.5‐
4.5% Q/Q. Cross‐currency movements are likely to impact revenue growth by 60‐90bp Q/Q across the top‐
tier. We expect Infosys/TCS/TechM to report ~60/141/187 bps Q/Q improvement in EBITDA margins led
by higher revenue growth, INR depreciation and absence of one off costs (e.g. visa costs). However, EBITDA
margins will decline sequentially for Wipro and HCL Tech on account of wage hikes. Robust order backlog,
improving visibility in US markets and higher off‐shoring from Europe to lead $‐revenue growth in Q2FY15.
KPIT & SQS ‐ Mid‐cap growth leaders…
In our mid‐tier coverage, we expect KPIT and SQS to lead $‐revenue growth followed by Mastek. On back
of revival in SAP demand and strong order backlog, we expect KPIT to report leading $‐revenue growth of
3.5% Q/Q. On back of favourable growth momentum in testing services, SQS is likely to deliver 2.6% Q/Q $‐
revenue growth. Due to continuous scale down by key client, we expect 1.9% Q/Q $‐revenue de‐growth in
NIIT Tech. Also muted show from insurance and government vertical, Mastek could post only 1.1% $‐
revenue growth. Amongst mid‐cap companies, we expect Mastek to see ~381 bps improvement in margins
sequentially aided by revenue growth and absence of one off costs.
Key Monitorables: ‐ (I) Infosys ‐ FY15 $‐revenue outlook, (II) BFSI, Manufacturing and Retail vertical
outlook, (III) Commentary on discretionary spend, (IV) TCS – future demand outlook and commentary on
margin front post Mitsubishi Corp’s ITF merger, (V) Wipro – Q3FY15 $‐revenue guidance, (VI) HCLT –
Outlook of software segment and margin commentary, (VII) TechM – Key deal wins/synergies & cross‐
selling opportunity (VIII) NIIT Tech – EBITDA margin commentary, Fresh Order intake & revenue growth,
(IX) KPIT – free cash flow generation/Top Client performance, and (X) Mastek – Insurance vertical
performance, and (xI) SQS – progress on integration front.
Prefer Mastek & KPIT…
We prefer Mid‐cap over larger‐cap as major positives are already factored in the price for Tier‐I coverage
universe. The strong revenue performance and valuation discount (v/s peers) leaves some room for re‐
rating opportunity in case of HCLTech and TechM. Infosys underperform relative to its peers could narrow
down on back of global recovery and stability towards the top management. However, the top
management focus areas to deliver industry average growth (Product or Services) remains the key
question. TCS is a consistent performer and we expect its impressive performance to continue, but current
valuations factors major positives. After re‐organization & de‐merger of non‐IT segment, Wipro is returning
to industry level growth and sustenance could lead to re‐rating. We prefer KPIT on back of strong order
book and SAP segment revival. Mastek could be a significant value creator in long‐run ‐ de‐merger of
Insurance and Services business separately is the first step towards that direction.
Key risk: Strengthening rupee (v/s USD) and deceleration in US and Europe economic revival.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
LINK
http://www.indianivesh.in/Admin/Upload/635483571946478750_NiveshDaily%20October%208,%202014.pdf
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