IT Sector Preview – Q3FY15 :: HDFC Securities

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Sector Preview:
USD Revenue growth to be subdued in Q3FY15, led by seasonality & cross currency headwinds; INR revenues to be higher due to INR depreciation
We expect the Tier I IT players to witness subdued USD revenue growth in Q3 (in the range of 0.3-2.5%), led by seasonal weakness (owing to furloughs in verticals like
Manufacturing and Retail and lower number of working days) & cross currency headwinds (which is likely to impact the revenue growth by 120-220 bps Q-o-Q). We
expect TCS to underperform its peers in terms of revenue growth (the company has already indicated some sluggishness during Q3, while Tech Mahindra is likely to lead
the pack with growth at the higher end (likely to be benefited by 1.3% from merger of MES). Energy & Utilities vertical of the companies could be impacted during the
quarter due to sharp fall in the oil prices. Revenues in rupee terms are likely to be higher due to INR depreciation vs. USD during the quarter (by ~2.3%) though impacted
by adverse cross currency moves.
USD Revenue growth of Tier II players is likely to be in the range of 0.1-4.1% Q-o-Q with Persistent Systems likely to lead the pack on the back of strong growth expected
in IP led revenues. Cyient (due to seasonality and cross currency headwinds), KPIT tech (due to seasonality in 3Q and furloughs in Manufacturing) & Mphasis (due to
weakness in the HP channel and Digital Risk) could witness lower growth in revenues (in the range of 0.1-0.8%).
Despite INR depreciation, Sector to witness flat to marginally lower margins on Q-o-Q basis, as the gains from INR depreciation would be offset by
wage hikes, lower utilization, weak revenue growth or higher investments
Despite INR tailwinds, we expect most of the companies to report flat to marginally lower EBITDA margins due to impact of wage hikes, lower utilization, weak revenue
growth or higher investments. Companies like HCL Tech, Mind Tree, Mphasis & Hexaware (due to wage hike), eclerx (due to traction in the low margin cable segment)
could witness marginal decline in the EBITDA margins, while Infosys, Wipro & KPIT Tech could witness flat margins sequentially. However, NIIT Tech, Tech Mahinidra &
TCS could witness marginal expansion in margins.
Focus will be on the Managements’ Commentary on IT sector outlook
Some of the key things, which would be tracked closely by the market participants in the management commentary by the IT companies include i) Outlook on client
spending (discretionary / non discretionary) and project ramp ups in top clients; ii) Demand environment in US and Europe and Continental Europe; iii) Comments on
demand and pricing trends in financial services vertical; iv) Demand outlook on Key verticals; v) Clarity on fresh hiring (Campus offers for FY16 would be a key data to
look out for); vi) Margins trajectory; vii) Expectations on forex moves viii) Outlook on demand environment in 2015 compared to a year ago and on client Budgets.
Further the comments on impact of the recent turbulence in the crude oil market and its impact on global growth and currency moves would also be closely watched. In
case of Infosys, the change in FY15 USD revenue growth guidance and commentary on growth strategy going forward from new MD & CEO Mr. Vishal Sikka and for TCS,
comments on recent restructuring of its workforce & growth outlook would hold importance.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010600