Information Technology ƒ Twin blow: Cross-currency impact and seasonal weakness… ƒ :Q3FY15 Result Preview : ICICI Securities, report

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Information Technology
ƒ Twin blow: Cross-currency impact and seasonal weakness…
The Q3FY15E performance of IT companies may be pale in comparison
to robust H1FY15 led by seasonal (holidays, furloughs) weakness.
Additionally, inter-quarter appreciation in the average dollar rate vis-à-
vis the euro (5.8%), GBP (2.6%) may impact dollar revenue growth.
However, average rupee depreciated 2.3% vs. the $ (61.9 vs. 60.6 in Q2)
and could aid rupee revenue growth, and margins. Tier-I IT companies
could report average dollar revenue growth of 0.7% QoQ vs. 3.7% in
Q2 (organic) and 2.2% in Q3FY14. Further, revenue growth within tier-Is
could likely converge, after many quarters – TCS (-0.1%), Infosys (1%),
Wipro (1%) and HCL Tech (1%) – vs. polarised earlier. Though the US
continues to witness a pick-up in project-based discretionary deals,
preview discussions suggest clients are increasingly circumspect to
discuss CY15E budgets and that its conclusion could linger. This is in
contrast to CY14 when budgets concluded in time. Europe continues to
battle macro headwinds yet demand for cost-optimisation and
outsourcing deals still exists. Positively, Accenture reported robust
outsourcing revenue growth (10% YoY) with healthy bookings,
indicating a better demand outlook.
ƒ However, rupee tailwinds could provide partial relief to margins…
Cross currency impact may partially offset rupee depreciation benefits
during the quarter. Operating margins across tier-Is could remain rangebound
barring HCL Tech (130 bps wage hike impact). We expect EBIT
margins to improve 41 bps QoQ for Infosys and flat for Wipro, TCS
given operational efficiencies (utilisation, offshoring) while it could
decline 108 bps QoQ for HCL Tech given cross currency and wage
hikes impact. Better translation gains coupled with f/x gains could aid
net profitability.
ƒ Barring NIIT Tech, growth may be broad-based across midcaps
Within midcaps, we expect Persistent Systems (4.8% $ growth), eClerx
(3.3%), TechM (2.8%) to better peers; MindTree, KPIT, Cyient (1.2%,
1%, 0.5%) may be stable while NIIT Tech (-0.9%) may lag. Persistent
may likely outperform led by pickup in platform and IP business. Nontop
5 clients may aid eClerx’ growth while Cyient’s revenue growth may
be broad-based. Delayed project ramp-ups and weakness in one US
BFSI client could hurt NIIT Tech’s growth. EBITDA margins may expand
in Q3 (13 to 66 bps range) with the exception being eClerx (-48 bps).

: Company specific view
Company Remarks
Cyient We expect $, | revenues to grow 1%, 3.1% QoQ to $111.9 million, | 693.2 crore
respectively, led by growth in DNO while engineering may be soft due to furloughs and
holidays. EBITDA margins may improve 13 bps QoQ to 16.2% led by currency tailwinds
and utilisation improvement offset by slower revenue growth. New deal wins,
acquisition pipeline, margin trajectory, updates on specific business units could be of
investor interest
eClerx We expect $, | revenues to grow 3.3%, 5.1% QoQ to $39.3 million, | 243.6 crore
respectively, led by traction in emerging clients in cable and sales & marketing business
while top 5, BFSI could be stable. EBITDA margins may decline 48 bps QoQ to 34.7% led
by growth in lower margin cable business (mid-20%s) partially offset by rupee tailwinds.
Investor interest: FY15E growth commentary, traction in non-cable business and margin
outlook
Firstsource
Solutions
We expect | revenues to grow 0.5% QoQ to | 773.6 crore as consolidation of loss
making telco client ($3-3.5 million quarterly run rate) could offset tailwinds from payer
and telco clients in the US and banking customer in the UK. EBITDA margins could be
flat sequentially at 12.3% as cost rationalisation and currency tailwind could offset
impact of revenue weakness. Revenue growth may pick up in Q4FY15E led by ramp-ups
in large deal wins. H1CY15E growth outlook, client consolidation update and margin
trajectory could be of investor interest
HCL Tech We expect $, | revenues to grow 1% ($ 1,447 million), 2.6% (| 8,964 crore) QoQ led by
ER&D services in core software (1.1% QoQ) and helped by IMS (1% QoQ). EBIT margins
may decline 108 bps QoQ to 22.8% led by partial impact of wage hike (130 bps) and
business reinvestments offset by currency tailwinds and better utilisation. Investor
interest: FY15E growth trajectory, TCV deal signings, pickup in application services and
margin outlook
Infosys US$ revenues could grow 1% QoQ to $2,223 million as seasonal weakness in
manufacturing, retail, BFSI verticals in the US and Europe weigh. Rupee revenues could
grow 3.2% QoQ to | 13,770 crore helped by ~2% inter-quarter depreciation in the
average rupee rate relative to the dollar. EBIT margins may improve 41 bps QoQ to
26.5% as operational efficiency and currency tailwinds may partially offset quarterly
promotions and S&M investment headwinds. Investor interest: update to FY15E
guidance, CY15E client budgeting trends, key verticals outlook and attrition
KPIT Tech Revenues could grow 0.5%, 2.8% QoQ to $125.7 million, | 778.4 crore after a strong Q2
led by healthy momentum in automotive SBU and top accounts while manufacturing
could be soft. EBITDA margins could improve 70 bps QoQ (14%) led by improvement in
SAP margins and currency tailwinds partially offset by investments in Impact
Automotive. SAP business growth and margin outlook, traction around new products
and services, M&A pipeline and outlook on BU's could be of investor interest
MindTree Dollar revenues are expected to grow 1.2% QoQ to $148.8 million while those in rupees
could grow 4.2% QoQ to | 925.7 crore led by continued ramp-ups in new deal wins and
existing accounts. However, furloughs in manufacturing vertical could moderate growth
during the quarter. At 20%, EBITDA margins could improve 25 bps QoQ led by utilisation
and currency tailwinds partially offset by wage hikes for 15% of the workforce (-100
bps) and increased hiring. Investor interest: hi-tech outlook, large deal wins and margin
trajectory
NIIT Ltd Net revenues could decline 0.7% YoY to | 232 crore led by continued weakness in ILS
(18% YoY decline) and SLS (14%) business partially offset by CLS business (16% YoY
growth). Slower economy pick-up continues to hurt ILS enrolments while conclusion of
government school contracts could impact SLS. Healthy order pipeline in MTS business
could drive CLS revenues. EBITDA margins could decline 93 bps YoY to 5.2% led by
negative operating leverage in ILS partially offset by growth in higher margin CLS
business. New CEO strategic roadmap, demand environment for CLS, growth in ILS
enrolments and private school sign-ups may be of investor interest
Source: Company, ICICIdirect.com Research

Company Remarks
NIIT Tech Reported $ revenues may decline 0.9% QoQ to $ 96.3 million, led by continued rampdown
in one BFSI client (among top 10) partially offset by new deal ramp-ups while |
revenues could grow 1% QoQ to | 594 crore. While PFR revenues could remain stable,
services revenues could be weak owing to seasonality and sluggish insurance market in
the US. EBITDA margins could improve 63 bps QoQ to 14.6% led by ramp-up in high
margin deals, productivity improvements and hedge gains. Order bookings could range
at $80-90 million lower than $100 million run-rate for past couple of quarters. Q4FY15E
growth outlook, margin trajectory, attrition and execution of large deals could be of
investor interest
Persistent
Systems
We expect $, | revenues to grow 4.8%, 5.4% to $80 million, | 489.1 crore, respectively,
led by traction in platforms and digital portfolio in PEPS with continued momentum in IP
business. Account-led strategy (top accounts mining) and sell-with platforms (wins in
enterprise) may boost revenue growth. EBITDA margins may improve 36 bps QoQ to
21% primarily due to currency depreciation and growth in non-linear IP revenues
partially offset by increased onsite hiring and investments. Investor interest: enterprise
accounts mining, traction in IP and margin outlook
TCS US$ revenues could decline 0.1% to $3,925 million while those in rupee could grow
1.8% to | 24,237 crore. Constant currency revenues could grow ~2% while cross
currency could impact dollar growth by hefty 220 bps. India business (6.4% of H1FY15
revenues) could moderate after a strong H1 (8.4% CQGR). EBIT margins could be flat
QoQ at 26.8% as cross currency impact is offset by rupee. Investor interest: Insights into
CY15 client budgets, insurance, retail and BFS vertical outlook, pricing trends, traction in
digital technologies and lay-off concerns
Tech
Mahindra
Revenues are expected to grow 2.8%, 4.4% QoQ to $ 925 million, | 5,730 crore
respectively, led by 1) top accounts mining, 2) large deal ramp ups in manufacturing
and, 3) contribution from MES merger. Cross currency could impact significantly
(negative ~200 bps), given higher exposure to euro and GBP. EBITDA margins may
improve 49 bps QoQ to 20.5% led primarily by currency tailwinds, operating efficiencies
(utilisation, trainees) and partially offset by higher onsite effort and large deal
investments. Margin trajectory, CY15E budget environment, attrition, wage hikes
quantum could be of investor interest
Wipro IT services $ revenues could grow 1% QoQ to $ 1,789 million while constant currency
revenues could grow 3% QoQ (2-4% guidance) led by new deal ramp-ups while heavy
dependence on energy vertical (17% of revenues) could weigh on recovery (averaged
3.4% growth in trailing four-quarters vs. 2% company average). Consolidated | revenues
could grow 2.3% QoQ to | 12,082 crore. IT services EBIT margins could remain flat QoQ
(22%) led by utilisation improvement and currency tailwinds offset by absence of
investment gains in Q2. Investor interest: Q4FY15E guidance, client commentary related
to energy vertical, CY15E IT budget outlook, margin and deal pipeline outlook
Source: Company, ICICIdirect.com Research

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