>INDIAN IT SERVICES 2QFY10 PREVIEW (MORGAN STANLEY)

Sep09 Results Preview: In-line results may not be good enough

Quick Comment: We believe inline results may not be good enough to sustain the current stock valuations. Given the rising market expectations and the continued uncertainty on the ground (as indicated by Accenture’s results and new bookings) India IT companies may find the market expectations a bit stretched in our view.

We expect reasonable 2Q10 but muted guidance for 3Q10: For the quarter, we expect reported revenues to be in the 3%-3.5% qoq range for the large vendors including the impact of higher number of working days and cross-currency benefits for the quarter. However, revenue guidance for Q3 could be in the flat to 1% qoq growth range in our view.

Margin outlook is key: The margin outlook for top 3 companies is likely to converge this quarter onwards. So far, TCS and Wipro have indicated flat margins whereas Infosys has guided for -150bps margin decline. We believe the yearend result could be somewhere mid-way for the large companies.

Infosys guidance: Though Infosys could have a 2-2.5% benefit due to higher working days and cross-currency in Q2, Q3 has lower working days. We believe Q3 guidance and FY10e EPS revisions would be key focus areas for the results. We believe Infosys could revise its FY11e EPS guidance to ~Rs100-101.

In our view, stocks are already pricing in FY11e EPS expectations but any EPS cuts for Infosys could tamper rising expectations post Q2. With USD depreciating against key currencies, we would now recommend investors to position their portfolios for an appreciating rupee as well. Wipro would likely be a key beneficiary of an appreciating rupee environment in our view.

To see full report: INDIAN IT SERVICES