India IT services :4QFY15F preview: Nomura Research

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Key to gauge: 1HFY16 momentum in the backdrop

of softness in recent macro data

Growth deceleration and margin headwinds from cross currency

4QF results will likely see: 1) tier 1 IT USD revenue growth decelerate to

11.3% y-y, making it the sixth consecutive quarter of deceleration from the

peak of ~15.5% y-y, partly driven by cross currency (CC) impacts (second

straight quarter of 200bps+ q-q impact) and deceleration in large segments like

BFSI/Retail; and 2) EBIT margin impacts of 40-80bps q-q on CC moves. In

addition, 4QF results are coming in the backdrop of some softness in recent

US macro data (PMI, US client financials and jobs data). Hence, 4Q becomes

important for gauging the start-of-the-year demand momentum. We expect

HCLT to lead on organic CC growth (3.5% q-q), and TECHM to lag with near

flat q-q growth, while the rest of the tier 1 IT players are likely to grow at ~2-

2.5% q-q. INFO/HCLT/TECHM will likely see 100-290bps q-q margin declines,

while TCS/WPRO/CTSH will likely exhibit more stable margins, in our view.

Catalysts: Strong start-of-the-year momentum on demand

Key to watch: Guidance and demand outlook

We expect INFO to guide for 7-10% USD revenue growth in FY16F, WPRO to

guide for 0-2% q-q growth in 1QFY16F and CTSH to retain its guidance of

19%+ growth for CY15F. At INFO, cash return of lower than USD1.5bn+ per

annum going forward could be taken negatively. Start-of-the-year momentum

at TCS (after soft commentary lately) and at WPRO (given seasonal weakness

in 1Q) are key for stock performance. Commentary on decelerating segments

like BFSI/Retail (~50% of tier 1 IT revenues) would be keenly watched.

Action: HCLT, TCS, CTSH remain our top Buys in tier 1 IT

Ahead of 4QF, street expectations have been toned down at TCS (post

analyst briefing), TECHM (growth/margin caution) and at HCLT (pre-quarter

announcement suggesting margin caution) which has also led to stock price

corrections. We sense that street expectations are higher at INFO on capital

return/turnaround and at WPRO on translation of deal flow to growth and

breakage of start-of-the-year seasonal weakness. Lower expectations and

greater comfort on growth drives our preference for HCLT, TCS, CTSH and

TECHM among tier 1 IT. We remain negative on tier 2 IT with Reduce on

IGTE, HEXW and MPHL on growth sustainability/valuation concerns.