SENSEX NIFTY
Mar 30, 2012, 02.46 PM IST | Source: Moneycontrol.com

IT Budget delays to slow down QoQ growth; all eyes on FY13

Nirmal Bang has come out with its report on IT space preview. "We expect TCS and Infosys to register net profit decline of 5.1% and 2.2% QoQ, respectively, while HCL Technologies and Wipro are expected to report 3.0% and 3.8% QoQ growth, respectively."

Nirmal Bang has come out with its report on IT space preview.

Subdued dollar revenue growth likely on delay in IT budgets: We expect the top four information technology (IT) companies in our coverage universe to post 1-3% QoQ volume growth in 4QFY12. Subdued volume growth is likely mainly due to delay in finalisation of CY12 IT budgets. On the pricing front, we expect a downward trend and factor in around 0.2-1.1% QoQ dip in blended pricing owing to an as-yet challenging business environment and intense competition, leaving little scope for a hike in billing rates. From a currency standpoint, we do not expect any significant impact as the quarterly average movement of all major currencies versus the US dollar was range-bound in 4QFY12. Overall, we expect a mere 0.3-2.9% QoQ dollar revenue growth for the top four IT firms combined, while in rupee terms we expect a negative 2.0% to positive 1.5% sequential growth owing to slight rupee appreciation (1.4% QoQ on quarterly average). It should be noted that a similar trend was observed in global consulting major Accenture’s results for 2QFY12 (quarter ended 29 February 2012), with the company posting around 4% QoQ decline in revenues, likely owing to IT budget delays, particularly on the discretionary spending side given that consulting revenues dipped 7.5% QoQ.

Margins to remain flat-to-negative: We expect a combined 76bps QoQ decline in EBITDA margin of companies in our coverage universe for 4QFY12 at 26.0% (26.8% in 3QFY12), mainly on slower revenue growth and higher wage costs. Company-wise, we expect Tata Consultancy Services (TCS) to report a steep 162bps QoQ decline and Infosys to post a 40bps QoQ fall, while we expect Wipro and HCL Technologies to report largely flattish margins.

Bottom-line performance to be subdued on flat-to-lower margins: We expect a combined 1.8% QoQ decline in net profit in 4QFY12 for companies in our coverage universe. From a company-specific perspective, we expect TCS and Infosys to register net profit decline of 5.1% and 2.2% QoQ, respectively, while HCL Technologies and Wipro are expected to report 3.0% and 3.8% QoQ growth, respectively.

Key issues - Infosys FY13 guidance, deal finalisation comments, discretionary spend: Apart from 4QFY12 results, we believe what will be of utmost importance is the growth outlook for FY13. Given the stock price run-up and current high valuations of top-tier IT stocks, we believe the FY13 revenue growth outlook assumes significant importance and expect Infosys to give guidance of 12-14% YoY dollar revenue growth. Given the volatile trend in IT spending patterns of clients, this leads to lower revenue visibility and greater unpredictability in forecasting growth, which, in our view, is the key reason why Infosys is unlikely to have the luxury of guiding for over 15% revenue growth.

We believe anything below 12-14% revenue growth guidance by Infosys will be taken as a negative by the street, given expectations of at least 14-15% growth for the top-tier pack. However, we also note that Infosys’ revenue guidance has ceased to be a benchmark for overall industry growth prospects and would therefore refrain from extrapolating too much from Infosys’ guidance to other IT firms. We would watch more for management commentary on deal finalisation and discretionary spending and whether there has been any improved velocity in decision making and approvals for discretionary projects. The hiring target for FY13 would also be an indicator of the kind of revenue traction expected by the IT major.

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