IT sector results preview for Q3FY12: PLilladher

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Prabhudas Lilladher has come with its December quarterly earning estimates for Information Technology sector. The research firm continue to remain positive on the outlook of Tier-1 Indian IT Services fuelled by four factors 1) No cut in IT budget 2) Increased offshoring 3) gaining market share 4) spend from first-time outsourcers

Prabhudas Lilladher research report on Information Technology sector:

We continue to remain positive on the outlook of Tier-1 Indian IT Services fuelled by four factors 1) No cut in IT budget 2) Increased offshoring 3) gaining market share 4) spend from first-time outsourcers. However, we remain Neutral on Tier-2 IT Services companies due to high client, verticals and geography concentration. According to the management, early discussions with clients are not giving any warning signs on IT spends. We expect volume growth to remain moderate at 3-5% in the current quarter due to seasonality effect (2% lower working days). We expect continued weakness in Europe, but the US growth remains on track. Our channel checks and management¡¯s interactions indicate no signs of sharp pull-back in demand.

Infosys - FY12 USD revenue guidance to cut to 17-18%:

We expect Infosys to cut their USD revenue growth guidance at 17-18% YoY, due to cross currency impact. The company is expected to give in-line performance in Q3FY12 (translating 4-6% QoQ growth guidance in H2FY12). Moreover, we expect EPS guidance to be revised to Rs145-149 due to rupee depreciation. However, we also expect the management to maintain their overtly cautious tone, citing uncertainty in global macro-economic environment.

Forex losses could offset some margin tailwinds, but PBT to-get boost of 100-200bp:

Euro/GBP weakened against USD by ~4.7/2.4% and is likely to have a negative impact by ~1-2% in USD terms revenue. Moreover, rupee depreciated against USD, EUR and GBP by 11.1%, 6.0% and 8.4% QoQ, respectively, which would create a margin tailwind of 250-400bps QoQ. However, our analysis shows that mark-to-market forex loss could offset some of the forex gain made during the quarter. Current quarter would reap maximum benefit of Rupee depreciation.

What to look for? 1) Commentary on IT budget for CY12 2) Key resilient verticals that would give steady growth 3) Commentary on discretionary spend and Pricing 4) Any delay in project ramp-ups 5) Any warning signal as IT companies across world tone was cautious 6) Demand environment in Europe and Continental Europe 7) Deal pipeline, (strategic & tactical deals) 8) Strategy to tackle protectionism

Tier-2 IT companies to participate in the growth momentum:

We expect Tier-1 companies to deliver their 3-5% volume growth, with 0-0.5% improvement in realization, whereas we expect mid and small tier Indian IT companies to report 2- 5% growth. We expect positive commentary from Polaris, MindTree and eClerx on client spending, but cautious tone from Mphasis and Tech Mahindra.

HCL Tech and Infosys ¨C our top pick in the sector: We expect Infosys to give stronger result as compared to larger cap peers, whereas HCL Tech is likely to report strong quarter in terms of volume growth, with improvement in margins.

Summary Financials ‐ Quarterly (Rs m)
Q3FY12E	Q3FY12E	Q2FY12	QoQ gr. (%)	Q3FY11	YoY gr. (%)
TataConsultancyServices
Sales	131,943	116,335	13.4	96,634	36.5
PAT	28,559	24,390	17.1	23,461	21.7
Infosys
Sales	92,080	80,990	13.7	71,060	29.6
PAT	22,488	19,060	18	17,800	26.3
Wipro
Sales	98,627	90,070	9.5	78,202	26.1
PAT	14,645	13,009	12.6	13,188	11
HCLTechnologies
Sales	52,115	46,513	12	38,884	34
PAT	5,910	4,971	18.9	3,997	47.9
TechMahindra
Sales	15,000	13,333	12.5	12,111	23.8
PAT	2,733	2,404	13.7	2,570	6.3

 

 

 

 

 

 

 

 

 

 

 

 

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