Please Share:: 
A quarter of unconventional strength. We draw four key inferences from the December 2014 quarter results—(1) the quarter will assuage demand concerns of the Street, (2) the relevance of USD revenue growth numbers will reduce, (3) importance of large deals is evident in numbers of HCLT and Wipro. This can provide strong growth in certain quarters but also means volatility in quarterly performance, and (4) companies are evolving to tackle increasing complexities of the business. We maintain our constructive view on the sector. Infosys and Tech Mahindra are our top picks
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
December quarter results should assuage concerns on demand The December 2014 quarter was one of the best quarters for Indian IT with constant-currency revenue growth significantly better than December 2013. This growth was helped by revenue recognition from large deals. There are various positives on demand, which lend comfort that 2015 will be similar to 2014, if not better—(1) timely closure of IT budgets, (2) positive commentary on large deal pipelines by IT companies. ISG’s outsourcing index was strong with record US$5.8 bn of ACV, (3) likely improvement in IT budgets of financial services clients, especially in Europe. Of course, the results of US banks for the December quarter was disappointing and need to be closely tracked, in our view, (4) continued market share gains in Europe and (5) Accenture raised FY2015 local currency growth guidance from 4-7% to 5-8%. Exhibit 3 summarizes commentaries of various IT companies on demand. Reducing relevance of USD revenue growth to track performance of Indian IT Analysts/investors historically focused on USD revenue growth (as opposed to rupee revenues) as (1) North America contributed the bulk (80%+) to IT services revenues. Hence, USD revenues became a good proxy to track operational performance, and (2) investors were keen to separate operational performance from currency movement. Volatility in rupee against other currencies eliminated its role as the primary currency to measure operational performance. However, reliability of USD as the default currency to measure operational growth in revenues is reducing. This is on account of increasing exposure of Indian IT to other currencies (non-USD billing varies at 30-45% of overall billings) and increasing volatility in the global currency markets. We feel that constant-currency revenue is now a better measure. Accenture and IBM’s communications on revenue growth are based on constant-currency numbers. Tracking large deal wins is important but disclosure is poor December is a seasonally weak quarter due to furloughs and client shutdowns. However, no one told this to Wipro and HCLT, who reported one of the best quarters in a long time; the secret sauce—revenues from large deals, especially in the infra segment. Infosys and TCS had normal quarters while HCLT and Wipro had toppings from large deal recognition. At a more fundamental level, increasing complexity of projects causes greater volatility in performance relative to the company’s own expectations; hence, even seemingly weak quarters for the industry can spring massive positive surprises, and vice versa. To detail the point on large deals further, we highlight that many deals are multi-tower and require smart deal structures to deliver savings to the client and meet own margin aspirations. Delivering on these deals also create surplus for clients that can be used to fund digital initiatives. Such deals require leveraging and integrating multiple services and in many cases, offering it on a managed service basis. Offshore pure-plays have an increasing element of such deals causing pushback and volatility in performance.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily04022015rq.pdf
A quarter of unconventional strength. We draw four key inferences from the December 2014 quarter results—(1) the quarter will assuage demand concerns of the Street, (2) the relevance of USD revenue growth numbers will reduce, (3) importance of large deals is evident in numbers of HCLT and Wipro. This can provide strong growth in certain quarters but also means volatility in quarterly performance, and (4) companies are evolving to tackle increasing complexities of the business. We maintain our constructive view on the sector. Infosys and Tech Mahindra are our top picks
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
December quarter results should assuage concerns on demand The December 2014 quarter was one of the best quarters for Indian IT with constant-currency revenue growth significantly better than December 2013. This growth was helped by revenue recognition from large deals. There are various positives on demand, which lend comfort that 2015 will be similar to 2014, if not better—(1) timely closure of IT budgets, (2) positive commentary on large deal pipelines by IT companies. ISG’s outsourcing index was strong with record US$5.8 bn of ACV, (3) likely improvement in IT budgets of financial services clients, especially in Europe. Of course, the results of US banks for the December quarter was disappointing and need to be closely tracked, in our view, (4) continued market share gains in Europe and (5) Accenture raised FY2015 local currency growth guidance from 4-7% to 5-8%. Exhibit 3 summarizes commentaries of various IT companies on demand. Reducing relevance of USD revenue growth to track performance of Indian IT Analysts/investors historically focused on USD revenue growth (as opposed to rupee revenues) as (1) North America contributed the bulk (80%+) to IT services revenues. Hence, USD revenues became a good proxy to track operational performance, and (2) investors were keen to separate operational performance from currency movement. Volatility in rupee against other currencies eliminated its role as the primary currency to measure operational performance. However, reliability of USD as the default currency to measure operational growth in revenues is reducing. This is on account of increasing exposure of Indian IT to other currencies (non-USD billing varies at 30-45% of overall billings) and increasing volatility in the global currency markets. We feel that constant-currency revenue is now a better measure. Accenture and IBM’s communications on revenue growth are based on constant-currency numbers. Tracking large deal wins is important but disclosure is poor December is a seasonally weak quarter due to furloughs and client shutdowns. However, no one told this to Wipro and HCLT, who reported one of the best quarters in a long time; the secret sauce—revenues from large deals, especially in the infra segment. Infosys and TCS had normal quarters while HCLT and Wipro had toppings from large deal recognition. At a more fundamental level, increasing complexity of projects causes greater volatility in performance relative to the company’s own expectations; hence, even seemingly weak quarters for the industry can spring massive positive surprises, and vice versa. To detail the point on large deals further, we highlight that many deals are multi-tower and require smart deal structures to deliver savings to the client and meet own margin aspirations. Delivering on these deals also create surplus for clients that can be used to fund digital initiatives. Such deals require leveraging and integrating multiple services and in many cases, offering it on a managed service basis. Offshore pure-plays have an increasing element of such deals causing pushback and volatility in performance.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily04022015rq.pdf
No comments:
Post a Comment