Technology - Modest acceleration as discretionary remains muted - ICICISecurities

We expect Top-4 Indian IT vendors to post dollar revenue growth of 2.5% QoQ in Q1FY14 (YoY growth of 12.3%), a modest acceleration from the 2.2% growth posted in Q4FY13 (10.7% YoY). Cross currency (CC) would be a growth headwind of around 60bps on average in Q1FY14. Including Cognizant, the revenue growth numbers will be 3% QoQ (2.5% QoQ in Q4FY13) and 13.5% YoY (12.2% YoY in Q4FY13), which we see as a healthy growth in an environment where discretionary spends are still generally muted as pointed by the recent results from Oracle (weak new license sales for two quarters running) and Accenture (10% weaker than expected consulting order book). The issue with the Industry has been that growth has not been uniform across players which has made industry fundamentals look worse than they really are. Q1FY14 should represent a continuation of that trend with Cognizant (atleast 5.4% QoQ growth), TCS (~4.5% growth in CC) and HCL Tech (~4% growth in CC) expected to lead the growth and Infosys and Wipro to lag with QoQ growth of just ~1.5% and ~1% in CC respectively. We expect Infosys to retain its full year revenue growth guidance of 6% to 10% and expect Wipro to guide revenues in the range of 1% - 3% for Q2FY14. Discretionary commentary from TCS, extent of margin erosion (in CC terms) in near term at Infosys, deal commentary at Wipro and headcount trends at HCLT will be closely watched metrics for each company respectively.

- Higher Visa costs and wage hikes to impact margins; currency the key offset. INR has depreciated against USD by 3.5% QoQ during Q1FY14 which should aid margins by 100bps in general. We expect EBIT margin for TCS to be flat QoQ at 26.5% despite the full quarter impact of wage hikes given the offsets in currency and the absence of US$30mn charge taken in Q4FY13 related to visa claim settlement in the US. Margins for Infosys will be under pressure the most and down 80bps QoQ to 22.8% given multiple headwinds in 1) Increase in Visa costs 2) two month impact of 8% wage hikes given to sales force in May'13, 3) one month incremental impact of 2% -3% wage hikes given to onsite resources in Feb'13 4) Impact of 10k promotions given in Q4FY13 and 5) Likely further decline in like to like pricing. Margins should grow for Wipro and HCL Tech as Wipro has only one month impact of wage hikes to absorb and with HCL Tech's wage cycle to start only in July (for billable resources).

- Translation gains to aid earnings. INR has depreciated by around 7% QoQ against USD on a closing basis, which would result in significant gains on translation of net monetary assets on the balance sheet.

- Mixed performance expected from mid-caps. Barring MindTree and Persistent Systems, where we expect revenues to grow ~3% QoQ, other mid caps in our coverage universe like Infotech Enterprises (flat to -1%), Hexaware (flat QoQ) and NIIT Tech (~1.5% QoQ) should witness muted revenue trends. Margins should also be down for each of these companies except Hexaware, where we expect margins to expand 220bps QoQ (wage hikes in Q3CY13 unlike others), with half of the expansion aided by currency depreciation. Growth should pick-up meaningfully for Hexaware in Q3 and Q4 of CY13 given the accelerating momentum in the PeopleSoft business. In summary, Infotech is expected to be weaker relative to earlier expectations on revenues and margins, Persistent is expected to be weaker on margins given HPCA consolidation and Hexaware is expected to surprise on margins while NIIT Tech and Mindtree should be broadly in-line with expectations.

- Key things to watch for - we believe that HCLT can surprise relative to expectations, especially on the margins. For Wipro, more than the results, US$ revenue guidance for Q2FY14 would be more important, where we expect 1-3% QoQ guidance. For Infosys, revenue growth of 2% or more will be taken positively. We would expect least divergence relative to expectations in the case of TCS which makes their commentary on discretionary spends more important to watch out for.

Source : Equity Bulls

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