Anand Rathi Securities has come out with its report on the third quarter (October-December) earnings' expectations for the IT sector. The report says the growth in IT will be driven by volumes as the pricing environment is still flattish.
Anand Rathi report
Once again, TCS is expected to steal the show with 3.4 percent sequential growth, while Wipro is expected to report 2.5 percent sequential growth, the lowest of the top-four.
Despite frequent senior-level exits and management mentioning the possibility of choppy revenue growth for two more quarters, we expect Infosys to deliver 3.1 percent sequential revenue growth, next only to TCS.
HCL Tech should continue to deliver on growth (AR est. 2.9 percent qoq for 2QFY14) on its strong IMS revenue growth.
Tata Consultancy Services (TCS)
We expect a 30.1 percent EBIT margin in 3QFY14, similar to the 30.2 percent of 2QFY14. This reflects our assumptions of the flattish pricing environment, hiring to build capacity for 2014 and better utilization offset by investments in S&M. Demand outlook and budget expectations, hiring plans for 2014 and pricing and margin outlook. The stock trades at 20.5x FY15e PE and 14.4x FY15e EV/EBITDA. We retain our Hold recommendation on the rich valuations.
Infosys could revise the upper limit of its FY14 USD revenue guidance to 12 percent (from 10 percent as of 2QFY14) if it succeeds in capitalizing on the mounting demand for technology services. Our revenue-growth estimates currently peg it s USD revenue growth rate for FY14 at 13 percent. We expect the 3QFY14 EBIT margin to expand 110bps qoq (excluding the impact of visa-related charges in 2QFY14) to reach 24.7 percent, driven by operational and cost efficiencies. Demand outlook and guidance revision; clarity regarding succession planning. The stock trades at 16.2x FY15e PE and 11.0x FY15e EV/EBITDA. We maintain our positive stance on the company. Recommend Buy.
We expect Wipro to report an EBIT margin (excluding forex gains/losses) of 19.3 percent in 3QFY14 compared to 18.8 percent in 2QFY14. This includes workforce rationalization/automation benefits being partially offset by increased S&M investments. Mr Kurien mentioned during the 2QFY14 earnings call that there are sales-capability gaps in areas of newclient acquisition. These need to be plugged. Business outlook for 4QFY14, management commentary on demand outlook for 2014 and attrition (involuntary). In the past month, the stock has outperformed its larger peers and now quotes at 16.5x FY15e PE and 11.9x FY15e EV/EBITDA. We prefer to wait for 3QFY14 earnings before turning more constructive concerning the stock. We retain our target price of `530 though the rating change reflects the stock price run-up in the recent past.
HCLTech hikes wages at different times in a year for different groups of employees. For some, wage hikes occur w.e.f. 1st July, which then reflects in 1QFY14 earnings. For others, wages are hiked w.e.f. 1st October, reflected in 2QFY14 earnings. Because of this management has guided to a 120-bp impact on the margin. We expect a 22.2 percent EBIT margin, compared to 23.8 percent in 1QFY14, largely reflecting currency and utilization movements apart from the effects of the wage hikes. Management comments on broader growth, dividend payouts and margin outlook.
The stock quotes at 14.3x FY15e PE and 9.4x FY15e EV/EBITDA. The valuation is in the comfort range, given that the size of the IMS opportunity is huge and HCLTech is gaining market share. We look forward to cues from the management in the earnings call regarding the payout ratio. Our Hold rating reflects the recent run-up in the stock price.
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