UBS Investment Research Indian IT Services Q 1 FY12 earnings preview 􀂄 Strong performance in Q1 will be critical to prevent derating With earnings momentum slowing down for the Indian IT services sector, we believe that beats and meaningful upgrades to consensus will be needed in Q1 FY12 in order to sustain valuations at current levels. Stocks have run up from recent lows, and we fear that much of the surprise could already be priced in. 􀂄 TCS likely to lead the pack, margin uptick likely in HCL TCS and HCL are likely to report close to 7% QoQ growth in revenue, better than the 3.6% QoQ and 1% QoQ growth likely to be reported by Infosys and Wipro, respectively. We expect operating margins to decline by 100-200bp for vendors that offered wage increases in April. We estimate a 100bp increase in operating margins for HCL, boosted by better cost control and employee utilisation. 􀂄 Guidance upgrade necessary for stock upside in Infosys We do not expect Infosys to revise its revenue guidance for FY12, but expect a 50bp improvement to the margin guidance of a 300bp decline. We expect EPS guidance to be revised to Rs 129.5-131.4 from Rs126.05-128.1 at present. We believe guidance upgrade will be the key upside trigger for the Infosys stock price. 􀂄 See limited upside for Indian IT; Infosys remains the only Buy We remain cautious on the Indian IT services sector on the view that persistent cost pressures will lead to further margin decline. With earnings momentum flagging, we see downside risk to valuations for most vendors. Infosys is the only Buy-rated stock. We retain our Neutral rating on TCS and Sell ratings on Wipro and HCL Tech.

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UBS Investment Research
Indian IT Services
Q 1 FY12 earnings preview
􀂄 Strong performance in Q1 will be critical to prevent derating
With earnings momentum slowing down for the Indian IT services sector, we
believe that beats and meaningful upgrades to consensus will be needed in Q1
FY12 in order to sustain valuations at current levels. Stocks have run up from
recent lows, and we fear that much of the surprise could already be priced in.
􀂄 TCS likely to lead the pack, margin uptick likely in HCL
TCS and HCL are likely to report close to 7% QoQ growth in revenue, better than
the 3.6% QoQ and 1% QoQ growth likely to be reported by Infosys and Wipro,
respectively. We expect operating margins to decline by 100-200bp for vendors
that offered wage increases in April. We estimate a 100bp increase in operating
margins for HCL, boosted by better cost control and employee utilisation.
􀂄 Guidance upgrade necessary for stock upside in Infosys
We do not expect Infosys to revise its revenue guidance for FY12, but expect a
50bp improvement to the margin guidance of a 300bp decline. We expect EPS
guidance to be revised to Rs 129.5-131.4 from Rs126.05-128.1 at present. We
believe guidance upgrade will be the key upside trigger for the Infosys stock price.
􀂄 See limited upside for Indian IT; Infosys remains the only Buy
We remain cautious on the Indian IT services sector on the view that persistent cost
pressures will lead to further margin decline. With earnings momentum flagging,
we see downside risk to valuations for most vendors. Infosys is the only Buy-rated
stock. We retain our Neutral rating on TCS and Sell ratings on Wipro and HCL
Tech.