Buy HCL Tech, Infosys; Accumulate TCS: P Lilladher

The anaemic growth performance in Q4FY12 (JFM-12) could largely be attributed to three factors 1) weak deal flow in CY11 2) delay in the project ramp-ups and 3) seasonality. Slow ramp-up of the projects was a negative surprise that resulted in below-expectation performance for Tier-1. We are not anticipating any accelerated recovery in the project ramp-up. However, some of the deferred projects have begun to ramp-up in the quarter (Q1FY13). Moreover, the quarterly results of some of the global tech majors indicate moderation, corroborated by the TPI index report. Our volume growth expectation has now been moderated to low-teens from midteens. We prefer “Infosys” due to lower expectation resulting in cheap valuation.

Top-4 has miscellanea in Q4FY12, with positive surprise from TCS and HCL Tech. However, they are negative to cautious commentary from Infosys and Wipro. The growth is likely to be largely led by a volume growth, if any. HCL Tech delivered the strongest growth of 2.6% QoQ (Volume: 2.9%; Pricing:-1.4%; @CC: 1.9%), TCS of 2.4% QoQ (V: 3.2%; P:-1.6% @CC: 2.3%), Wipro of 2.0% QoQ (V: 0.8% P: 0.7% @CC: 1.3%) and Infosys of -1.9% QoQ (V:-0.6% P:-1.1% @CC:- 2.1%). Q4FY12 was the slowest quarter (1.2% QoQ) since Q4FY09 in USD terms. Top-4 added only US$83m of incremental revenue, weakest since Q1FY10. Although the performance looks to find trough, we are not expecting accelerated recovery in Q1FY13.

Q4FY12 quarter was the weakest quarter since Q4FY09 (a quarter post Lehman crisis), with slowest volume growth since Q4FY09 and incremental revenue add since Q1FY10. We believe that a weak deal flow in CY11 has been realized in the last two quarter’s performance, with growth rate being troughed; however, we do not expect revenue to accelerate. We expect Top-4 to report 2-4% QoQ growth in CY12. The growth in FY13 is likely to moderate to low-teen levels (from low to mid-teen expectation earlier), when the full impact of slow CY11 deal signing realizes. The management’s concern (largely from Infosys, Cognizant and Wipro) was not on the deal closure front, but was more related to the new project ramp-up. We expect new projects to start seeing ramp-ups. However, the pace of recovery is going to be slow in Q1FY13. We see deal pipeline to improve as CY12 progresses due to positive macro-data from the US and cost pressure on Europe (government and private enterprises). We reiterate our ‘BUY’ on HCLT and Infosys and downgrade TCS to ‘Accumulate’ due to a limited upside.

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