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Apr-Jun 2013 Earnings Preview
Shashi Bhusan
shashibhusan@plindia.com
+91-22-6632 2300
Pratik Shah
pratikshah@plindia.com
+91-22-6632 2256
Top picks
Infosys
Wipro
MindTree
Information Technology
The demand environment for Indian IT Services companies continues to be stable
with no material change in the outlook. We expect divergent commentaries on
overall demand environment due to client-specific issues. Unlikely Q4FY13 (JFM-13)
quarter, we are not expecting too many negative surprises in the results. Despite
deal closures, the project ramp-ups continue to be slow. The sales cycle continues to
remain long. The results from tech majors like Oracle, Accenture and Red Hat has
been little tepid, nevertheless backlogs and bookings are encouraging. The
commentary will continue to be positive for the US, with some improvement in
Europe. The pricing environment gets better, with no pressure on pricing.
Infosys – Guidance of 6‐10% USD term revenue growth likely to be retained for
FY14: The commentary from Infosys’ management likely to site caution on the
demand environment. We expect the management to retain its FY14 USD revenue
growth guidance of 6-10%. We are not expecting any change in the managements’
commentary. However, our analysis indicates improvement in deal pipeline for
Infosys. The cross-currency headwind is likely to be absorbed.
Currency–Cross currency negative impact by 60‐100bps, translation loss to erode
bottom‐line: Euro/GBP/AUD depreciated against USD by 1.1%/1%/4.7% and is likely
to have a negative impact by ~60-100bps in USD terms revenue. Rupee depreciated
in the quarter against USD, EUR and GBP; hence, will have a positive impact on the
operating margin (tailwind of 60-150bps). Moreover, the quarter end rate for JFM-13
quarter was Rs54.17/$ against AMJ-13 quarter end rate of Rs59.39/$ will have
tailwind at the bottom-line due to revaluation of financial assets. Few companies
might have thick hedges at Rs55-57/$; hence, will have some losses due to rupee
depreciation.
What to look for? 1) Commentary on IT budgets 2) Pricing pressure v/s pricing
discipline 3) Key verticals/Geography growth/de-growth expectation 4)
Discretionary/Non-Discretionary spending 5) Any delay in project ramp-ups 6)
Demand environment US/Europe/Continental Europe.
Tier‐2 IT companies – Performance likely to be in narrow range: We expect Tier-1
companies to deliver their 0.5-3.5% volume growth, with stable realization, whereas,
we expect mid and small Tier Indian IT companies to report 0-4% growth.
Infosys, Wipro, and MindTree – our top pick in the sector: We expect Infosys to give
in-line result and we see a room of positive surprise as expectation is running low.
Wipro is likely to show another improvement on QoQ performance. Moreover, we
expect Wipro to guide for 1-4% QoQ growth in Q2FY14. MindTree is our preferred
pick in Tier-2 as we expect momentum to get stronger in CY13 with stickiness in
margins.
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