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3QFY11E preview. Earnings reports for the Dec 2010 quarter face a stern test of high
expectations, reflected in the sustained run-up in sector valuations in the quarter gone
by. More than the quarter, which we expect to be strong, we would keep our focus on
revenue momentum outlook, pricing commentary and margin protection levers amid
still stiff supply-side challenges. We remain positive and would continue to recommend
IT Tier-I names as core holdings. Infosys and TCS are top picks.
Expect consensus earnings estimates for Tier-I names to trend up
We expect demand indicators to come in strong providing further validation of demand buoyancy
and medium-term sustenance. We do not see the demand strength reflected completely in
consensus earnings estimates for the sector, especially the Tier-I names; further upgrades look
likely, especially if the Re does not appreciate meaningfully between now and earnings releases.
We note that our FY2012E EPS estimates for Infosys, TCS and Wipro are 8.2%, 7% and 4.1%
higher than the consensus, respectively.
3QFY11E earnings – high expectations leave little margin for error
Although consensus estimates for FY2012E are conservative in our view, Street’s expectations
from the quarter are running high, as reflected in strong recent run-up in sector valuations. Even
as we expect the Tier-I names to deliver a strong quarter, we would not worry if there is a minor
miss on a metric or two. We expect the Tier-I names to report 5.7%-7.5% qoq US$ revenue
growth, with Infosys and TCS both likely to top the 7% mark. We expect margins to expand qoq
for Infosys (+40 bps) and Wipro (+40 bps), a decline of 70 bps for TCS and flat for HCLT. Preclient-budget caution could drive a modest Mar 2011 quarter guidance.
A blockbuster FY2012E for the Tier-I names is in order, in our view, and we would recommend
these names as core portfolio holdings rather than trading bets into and out of a particular
quarter. While returns from these levels are unlikely to match those delivered in CY2010, we
expect the Tier-I stocks to outperform the broader market in CY2011E as well.
Key metrics to watch out for – volume momentum, pricing, CY2011E budget indicators, hiring
Metrics that we would focus on in the Dec 2010 earnings reports – (1) volume growth for the
quarter and the nature of the same (concentrated or broad based), (2) pricing trend and
commentary, (3) revenue growth in discretionary spend areas, (4) commentary on deal pipeline,
(5) net hiring numbers for the quarter and update on campus hiring, (6) attrition, utilization and
employee pyramid, and (7) client metrics, especially growth in top accounts.
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