IT - September 2012 quarter earnings preview - BRICS Research

We do not expect a spike in the revenue growth of IT Services companies in Q2FY13, in spite of Q2 being historically a strong quarter for the sector, due to the lingering effects of weak discretionary spending, delayed project starts and pricing pressure. The key issues to watch for will be changes in market share, spending pattern of IT budgets and sustainability of margins. The performance on the margins front is expected to be mixed, based on their varying annual wage hike cycles and acquisition related costs, as well as the tapering effect of visa and higher GnA costs reported in Q1FY13.

Revenue in US Dollar terms to grow 1-6% qoq: In Q2FY13, large cap IT companies are expected to report a muted growth of 1-3% qoq in US Dollar revenue, in spite of Q2 being historically a strong quarter for the IT Services sector, due to pricing pressure, low discretionary spending and company specific weakness in winning deals. Mid-cap players are likely to report a growth of 2-6% qoq, based on company specific factors. TECHM is expected to record a strong growth of 5.8% qoq, led by acquisitions and Persistent's growth will continue to be driven by IP-led businesses, while KPIT and Hexaware are likely to report a growth of 2-4% qoq, led by a strong growth momentum in volumes and continued strength in the key verticals.

Infosys likely to cut Rupee revenue guidance: Infosys is likely to cut its FY13 Rupee revenue growth guidance by 4.5% (to 15%), due to the sharp appreciation of the Rupee towards the end of Q2FY13 from the earlier exchange rate of Rs.55/US$ to Rs.52.4/US$. We believe that Infosys could also lower its US Dollar guidance if the company's performance for Q2FY13 once again comes in below expectations.

Outlook and valuation: We see little scope for an expansion in the valuations (12-17x FY14 for large-caps and 9-13x for mid-caps) amidst the current challenging operating environment resulting from weakness in the BFSI and Telecom verticals, muted discretionary spending, and US visa issues.

Prefer TCS and HCLT among large caps: Within the sector, we prefer TCS and HCLT over their peers due to the outperformance on the growth front by both the players. TCS will continue to deliver stable growth on the back of better adaptability to uncertain demand environment and strong execution in project delivery. We believe HCLT may deliver growth along with margin expansion led by strong order bookings, tapering-off of investment in sales-effort, and operational leverages like employee pyramid rationalisation and utilisation. We no longer prefer Infosys over TCS as its valuation discount to TCS has narrowed over last quarter and we believe it is too early to re-rate Infosys as growth underperformance will continue over FY13-FY14.

Source : Equity Bulls

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