Dolat Capital has come with its earning estimates on IT sector for June quarter. According to the research firm, growth in the reported Rupee revenues would be strong owing to sharp fall of Rupee versus USD (7% average decline on QoQ basis).
Dolat Capital earning estimates on IT sector for June quarter: Modest volume growth: We expect stocks in our coverage universe to report flat to 3% sequential growth in USD revenues as clients have gone slow on finalizing the budgets and deal closure, given the macro uncertainty. Volume to grow modest and also adverse Cross currency movement would restrict growth in USD terms. Growth in the reported Rupee revenues would be strong owing to sharp fall of ` versus USD (7% average decline on QoQ basis). Infy outlook/wage hike to set the tone: We believe Infosys outlook for rest of the year and its call on wage hikes would set the tone in terms of overall view on the sector/business environment. The stock has gained momentum over last few weeks in anticipation of better outlook and Rupee depreciation. We believe any positive commentary would drive earnings/target upgrades. Margins to witness uptick: Operating profits would grow by even higher rate than revenues owing to Fx gains on offshore cost component and would negate the salary hike pressure due in current as well as forthcoming quarter. TCS, KPIT would have a full quarter effect of salary hikes whereas Wipro, Mindtree, (both effective in month of June) Persistent (only hike for onsite) would have partial impact in the current quarter. Profit however would grow in wide range of 2-9% as some of the gains would get negated due to losses on the hedged portfolio. Outlook for FY13: We believe that the Indian Tier I IT players would continue to clock systemic 3-4% CQGR (annual 14 - 17%) over next 6-8 quarters supported by strong existing pipeline and incremental market share wins through off shoring leverage. We have built in INR/USD realised rate of 53 for our reported estimates which would ensure sustainable margins for FY13 and has inherent upside risk to our EPS estimates. Compelling Valuations: Most of the stocks in our coverage universe (except TCS) are trading at a discount to their five year average trading multiples, owing to uncertainty in the future earnings. The stocks are trading in the same price range as they were quoting a year back despite 20%+ growth in the earnings in FY12. Preferred Picks: We continue to remain overweight on sector in view of visible recovery signs in US (contributes 60% of Indian IT revenues) and sustained business traction in Europe (about 25% of Indian IT; penetration of just 4% as against 8% in US). We maintain Infosys and TCS as our Top picks in Tier I space owing to their strong deal pipeline, focused client mapping approach, attractive valuations and superior earning quality. We like Tech Mahindra for its strong earning upticks through Satyam business recovery and attractive valuations. We also like KPIT for its strong financial outperformance in the core IT driven by well defined strength areas in its niche of Automotive (22% of rev) and Enterprise services (74% of revenue).| Company | Sales (Rs mn) | PAT (Rs mn) | ||||
| Q1FY13E | QoQ(%) | YoY(%) | Q1FY13E | QoQ(%) | YoY(%) | |
| TCS | 144,204 | 8.8 | 33.6 | 30,427 | 2.7 | 26.3 |
| Infosys | 95,127 | 7.5 | 27.1 | 25,114 | 8.4 | 45.8 |
| Wipro | 104,954 | 6.3 | 22.6 | 15,848 | 6.3 | 18.3 |
| HCLTech | 56,484 | 8.3 | 31.4 | 6,439 | 6.9 | 26 |
| Mphasis | 14,508 | 9.2 | 12.1 | 2,133 | 12.6 | 9.5 |
| Tech Mahindra | 14,820 | 4.4 | 14.7 | 3,100 | 2.5 | 12.1 |
| OFSS | 7,596 | -11.9 | 6.7 | 2,210 | 14.3 | 8.4 |
| Mindtree | 5,626 | 7 | 36.2 | 757 | 9.8 | 116.3 |
| Persistent | 2,902 | 7.2 | 30.9 | 447 | 8.5 | 62.1 |
| KPIT Cummins | 5,235 | 9.1 | 65.6 | 440 | -3.8 | 82.5 |
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