Friday, January 13, 2012

>IT SERVICES: Dec 2011 quarter preview (CLSA)

Dec-11 quarter results from Indian techs are likely to indicate continued moderation in demand. Reported revenue growth will also be hurt by adverse cross-currency moves. Consensus volume growth estimates for FY13 are at 13-15%YY, and downsides seem likely. However, currency movement continues to favour Indian techs and big margin benefits will be seen in Dec-11 quarter. Infosys remains the best bet to ride the weak currency environment amid an overall cautious view on the sector.

Dec-11 quarter: Answers for FY13 will need to wait till Apr’12

  • Infosys should be near the lower end of its US$ revenue guidance for the quarter. We expect 3.5%QQ growth to US$1,806m with some adverse impact of crosscurrency on guided growth. Margins should be up ~295bpsQQ with significant tailwinds from a weaker currency. Expect marginal forex losses of Rs300-400m.
  • Wipro should be above the middle end of its constant currency guidance. We expect Wipro to report 1.8%QQ growth in US$ revenues. We expect Mar-12 revenue growth guidance of 2-4%QQ. We expect margins to go up only 55bpsQQ given Wipro’s cash-flow hedging as forex losses will be booked above EBITDA line.
  • TCS should report a 3%QQ growth in revenues to US$2,601m. Cross currency moves can impact reported $-growth by 150-200bpsQQ. Margins should move up ~270bpsQQ with a benign currency environment the key driver. With US$1.3bn of hedges for Dec-11 quarter, TCS could report forex losses of Rs2-2.5bn.
  • HCLT’s 2%QQ US$ revenue growth should be near the bottom end of Tier-1 peers. Higher exposure to GBP/EUR (28%) could impact reported revenues growth by 150-175bpsQQ. Expect 80bpsQQ improvement in margins with $10m of forex loss.
  • Among mid-caps, Hexaware should report the best result with a 4.5%QQ $- revenue growth and ~300bps of margin improvement.

No fundamental catalysts for the sector. Infosys is the best bet
  • Most vendors are likely to avoid comments on FY13, as CY2012 budgets are still largely in discussion stages and the budgeting process is likely delayed again.
  • While risks to revenue growth remain on the downside, the weaker currency does provide some earnings respite. We find no reasons to change our overall cautious stance on the sector yet and have zero BUY ratings.
  • Within the sector Infosys is the biggest beneficiary of the weaker INR and is ourfavoured pick going into the quarter.
  • High expectations and hopes of a rapid turnaround amid contraction of valuation discount to Infosys/TCS make Wipro the most vulnerable stock at current level