otak Securities has come out with its report on technology. According to the research firm, Infosys
is expected to cut FY2013 organic revenue growth guidance to 3.6%. Implied growth in 4QFY13 would work out to a modest 2% and to cut FY2013 EPS guidance to Rs160 from Rs161 earlier.
3QFY13 preview: We expect another weak quarter. Furloughs and weak IT spending will lead to muted performance of IT companies in the December 2012 quarter. EBITDA margins will likely be under pressure due to lower billing days, select cases of wage revision and promotions and likely lower pricing. TCS and HCLT will likely report the strongest revenue growth. IT companies have done well to manage/lower expectations for the December 2012 quarter but will have to deal with hopes of accelerated growth in FY2014. We maintain a Cautious stance on the sector.
We expect another weak quarter; Tier-1 USD revenue growth of 1.8-3.1%
We expect modest organic US Dollar revenue growth of 1.8-3.1% for Tier-1 IT (including cross currency benefit of 20-40 bps). Revenue growth will likely be impacted by (1) typical year-end shutdowns and (2) weak IT spending with a near halt in flow business. Deceleration in revenue growth will continue with yoy organic growth likely to be 1.3-13.7%. TCS will once again lead the industry with sequential revenue growth of 3.1%. HCLT will likely report strong revenue growth of 2.9%, courtesy the front-ended nature of revenue from certain large deals. Tier-1 names will outperform the Tier-2 pack on revenue growth.
Operating margin may decline yoy for Tier-1 companies (except HCLT)
We expect flattish to 110 bps sequential decline in EBITDA margins on (1) lower billing days, (2) wage revision in the cases of HCLT and Infosys and promotions at Wipro, (3) likely lower pricing and (4) cost inflation, especially onsite. Surprisingly, yoy EBITDA margin will be under pressure (except HCLT) despite a ~200 bps benefit from Rupee depreciation. TCS is likely to report 260 bps and Infosys 550 bps decline in EBITDA margin yoy. Margins are likely to decline sequentially for mid-tier companies for similar reasons though they would increase yoy (for details on divergence in margin performance between large and mid-tier companies, refer our note titled 30s Knocked Down To 20s, 10s Move To 20s, dated November 16, 2012).
Strong deal wins are not translating into revenue growth
Traditional flow business (or ADM ramps) is important for healthy growth of Indian IT companies.The flow business growth is led largely by change in discretionary spending. Large deals add the necessary ‘kicker’ to growth. FY2013 is expected to be characterized by a good number of large deal signings but weak flow business. CY2013E IT budgets, as a result, would be critical in determining growth rates for Tier-1 IT. Data on this aspect is mixed: Accenture disappointed recently with muted growth in consulting services and decelerating growth in the outsourcing business. Cognizant’s 8K filing on growth targets that would determine senior management’s variable compensation in CY2013 indicates slowing growth. Oracle and SAP on other hand reported solid 17-18% growth in new license signings.
Guidance of Infosys/Wipro, though no more a sector proxy, may offer important cues
We expect Infosys to cut FY2013 organic revenue growth guidance to 3.6%. Implied growth in 4QFY13 would work out to a modest 2%. We also expect Infosys to cut FY2013 EPS guidance to Rs160 from Rs161 earlier. We expect Wipro ’s revenue growth guidance of 1-3% for the March 2013 quarter. In our view, Infosys and Wipro had a good share of deal wins over the past six months. They have not translated into strong revenue growth performance due to lack of flow business; a strong guidance for March 2013E (3-4%) could signal a change and provide some reasons for optimism in FY2014," Kotak Securities research report.
FIIs holding more than 30% in Indian cos
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