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Third quarter earnings preview: IT

SI Reporter/New Delhi 04 Jan 13 | 09:42 AM

We expect the top-tier information technology (IT) companies to report a soft volume growth led by a seasonal weakness. However, cross-currency tailwinds would aid the top line growth (around 40-60 basis points). Reported revenues growth to be in the range of 2.6-3.7%.

We expect the volume growth to remain weak on account of seasonal furloughs and lower billing days during the quarter coupled with a marginal impact of Hurricane Sandy. Infosys’ organic revenues are expected to grow by 1.3% quarter on quarter (QoQ), including Lodestone Management Consultants AG [Lodestone], 3.7%). On the other hand, revenues of Tata Consultancy Services (TCS), Wipro and HCL Technologies (HCL Tech) are expected to grow by 3.4%, 2.6% and 2.9% QoQ respectively.

In the mid-cap space under our coverage universe, we expect a similar soft top line growth except for CMC, where we expect a decent top line growth of 5%. On the other hand, NIIT Technologies (NIIT Tech), Persistent Systems and Polaris Financial Technology (Polaris) are expected to report a sequential growth of 3.4%, -0.5% and 1.5% respectively for Q3FY2013.

During the quarter, all the major currencies like Euro, Pound Sterling (GBP) and Australian Dollar (AUD) have further appreciated against the US dollar to the extent of 2.4%, 0.8% and 0.3% respectively. Thus, there will be positive tailwinds through the cross currencies on the reported revenues.

We expect Infosys to lower its organic dollar revenues guidance (current guidance stood at 5%), whereas consolidation of Lodestone financials for two months (October-December 2012) would help Infosys to marginally increase its guidance to around 5.5% from the current at least 5% level.

On the other hand, currency reset in the USD/INR rates from the earlier rate of Rs53 to the expected rate of Rs54.5 would help Infosys to maintain its current earnings per share (EPS) guidance of Rs160.61. 

Mixed results read through from Oracle and Accenture do not indicate secular demand uptick for the sector, whereas the market share gains among the vendors would continue to reflect in performance polarisation among the top-tier companies.

The management commentary on the annual IT budgets for CY2013 (likely to finalise around January-February 2013) and an uptick in the discretionary spend (given the recent resolutions to fiscal cliff) would be helpful to get more colours on the demand outlook for the coming quarters.

Within the IT services sector, we continue to draw more comfort in the IT mid-cap space given the valuation gap and growth outperformance vis-à-vis larger peers. In the mid-cap space, we like some differentiated companies such as Persistent Systems (niche offerings, best-in-class margin profile) and CMC (strong revenues predictability in both the domestic and international markets and strong management pedigree). Among the large-cap space, we like HCL Tech given its proven track record in market share gains and being a key beneficiary of the vendor churn exercise. On the other hand, though valuation appears to be in the comfort zone, we continue to remain sceptical on change in fortune for Infosys and Wipro at least for the next few quarters.

 Source: Sharekhan Fundamental Research

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