>IT Services:: 2 Quarter Preview

Action: Prefer HCL Tech followed by Infosys

HCLT is our top pick within tier 1 IT on expectations of strong revenue

growth (5.4% q-q), lower EBITDA margin declines despite wage hikes, on

rupee depreciation and reasonable valuation comfort. At Infosys, we

expect a cut in revenue growth guidance and think any fall in the stock

should be used as an opportunity to add positions as we believe prices

already factor in a moderation in growth. We remain cautious on TCS and

CTSH on high BFSI/Europe/Client concentration exposure and lower

valuation comfort. Wipro remains our least-preferred stock in tier 1 IT.

Catalyst: Stability in macroeconomic conditions and continuation of

rupee depreciation trends would be potential positive triggers for IT

stocks.

Strong quarter: no material revenue growth pain; earnings surprises driven by rupee

No material revenue growth moderation in 2Q

We expect USD revenue growth of 3.4-6.5% q-q across tier 1 IT

companies, with CTSH and TCS leading on revenue growth. Infosys and

Wipro should be in line with guidance. The impact of the recent economic

slowdown is unlikely to be visible in results this quarter, in our view.

Likely FY12F revenue guidance cut at Infosys, EPS guidance raise

The first impact of the slowdown, in our view, would be with Infosys cutting

its FY12F revenue growth guidance to 16-18% (from 18-20%) as

discretionary demand tapers and cross-currency impacts hurt USD

revenue growth. However, we see EPS guidance being raised to around

INR135 (from INR128-130) largely driven by rupee depreciation and

optimized hiring towards year-end.

Valuation: EPS up on rupee depreciation; upgrade Patni to Neutral

We revised our EPS estimates higher as we factor a new FY13F USD-INR

rate of 45 vs 44 earlier. We upgrade Patni to Neutral from Reduce.

To read the full report: IT Services