Technology: 3QFY15E preview: currency to sway results ::Kotak Securities

Please Share::

3QFY15E preview: currency to sway results. 3QFY15 will have cross-currency
headwinds of 160-220 bps besides the usual seasonal weakness, resulting in muted
0-1.2% US dollar revenue growth. Commentary on the magnitude of increase and
timely closure of IT budgets and deal pipelines will be important—we expect 2015 to be
similar to 2014, if not better, in terms of growth. Stock prices corrected 5-10% over the
past month and offer reasonable upsides of 12-20% from current levels. Infosys and
Tech Mahindra are our top picks in the sector.

�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��

��

-->
3QFY15—seasonally weak; Tech Mahindra to lead industry on growth
The December quarter is seasonally weak and impacted by holidays and furloughs across many
verticals. We expect tier-1 IT companies to report sequential organic constant-currency (c/c)
revenue growth of 2.2-3.5%. Tech Mahindra (TM) will lead the industry with organic c/c
growth of 3.5%. Infosys will report 2.8% and is set to achieve the lower end of 7-9% revenue
growth guidance based on end-September 2014 currency rates. TCS will report muted 2.2%
growth (c/c). Among mid-tier companies, Mindtree will grow 2.5% in c/c terms.
Currency to play spoilsport on reported US dollar growth
The euro, British pound and Australian dollar depreciated by 5.9%, 5% and 7.7% in 3QFY15.
The currencies account for 5-15%, 5-20% and 5-6% of revenues for Indian IT. Depreciation of
currencies will impact reported US dollar revenues by 1.6-2.2%. The depreciation of the rupee
by about 2.7% against the US dollar means the consolidated impact on revenues in reported
currencies, the rupee, will be marginally positive. TCS, HCLT and Wipro will be hit hardest by
currency movements. Benefits at the margin level from currency movements will be limited to
30 bps. Year-on-year net-profit growth for the big three will slow to mid-single digits.
2015 will be similar to 2014, if not better, in terms of demand
In 2014, demand strengthened in select areas and weakened in some—we expect 2015 to be
no different. Positives are (1) an improving economic scenario in the US, (2) expected recovery
in IT spending in the banking vertical after the past two years were impacted by regulatory fines
in the US; we understand not all the fines were funded by the corporate center and (3) large
deals and continued market-share gains. Negatives are (1) the impact of the decline in oil prices
on energy and utilities, which will impact select segments of manufacturing and (2) volatile
demand in emerging markets. On the whole, we believe demand will be similar to that in 2014,
if not better. Funding of digital initiatives by clients through incremental spending rather than
through self-funding mechanisms (aggressive cost take-outs in the legacy business) can be an
additional growth driver. We highlight that the traditional link between earnings and growth in
IT spending has not worked post the global financial crisis. We will watch for commentary of
companies on the outcome of clients’ budgeting.
Stock corrections offer a good buying opportunity
Stock prices corrected 5-10% over the past few days due to concerns about demand slowdown
and cross-currency impact. We believe concerns about demand are exaggerated based on
factors highlighted above. The cross-currency impact without a compensatory rupee benefit
(rupee depreciation against the US dollar) will be a concern; however our economist forecasts
depreciation of the rupee against the USD to 63 in FY2016 and 65 in FY2017 We maintain our
constructive view on the sector. Infosys (low hanging fruit captured, hard work starts but the
company is on the right track) and Tech Mahindra (market share gains in the telecom and
enterprise segments) are our top picks.

link
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily31122014ar.pdf