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Cautious outlook, revenue guidance key

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The Street is expecting sequential revenue growth for the information technology (IT) services sector to be muted at best, ranging between zero and three per cent in the fourth quarter of the just-ended financial year 2011-12 — with a few outliers, primarily, and Hexaware.

The key reasons cited are issues ranging from delays in discretionary project take-offs and lower actual spending versus projected budgets to visa problems. The margins are also expected to compress on account of a mix of the sharp rupee appreciation and lower utilisation on the muted revenue growth. HSBC Research forecasts a flat to 200 basis points (bps) quarter-on-quarter (q-o-q) margin compression for the Tier-1 companies, given the near-four per cent rupee appreciation in this period.

The revenue growth guidance is especially important this year, if only to understand the factors behind the divergence between the strong revenue outlook reported by Accenture, and the more cautious outlook from Indian IT service companies, according to a Kotak Institutional Research report. HSBC Research adds that most leading indicators, such as software sales, consulting services and IT employment in the US and India are not suggesting a material slowdown in IT spending. However, it says there is no evidence of any acceleration that caps the upside potential of current estimates.

In Rs crore TCS Infosys Wipro HCL Tech
9M FY12  35,635 24,882 27,656 6,120
Y-o-Y change (%) 31.17 22.87 21.32 36.66
Q4FY12E 13,190 9,170 10,130 5,260
Q-o-Q change (%) -0.10 -1.40 2.50 0.30
9M FY12  10,840 8,384 6,099 1,839
Y-o-Y change (%) 28.35 23.37 14.34 71.09
Q4FY12E 3,820 2,980 1,880 930
Q-o-Q change (%) -6.60 -6.60 0.50 -3.80
9M FY12  7,519 6,000 4,092 1,277
Y-o-Y change (%) 16.65 19.88 4.33 77.70
Q4FY12E 2,710 2,230 1,440 570
Q-o-Q change (%) -6.00 -5.80 -1.10 0.30
All consolidated figures except HCL Tech                                             E:Estimates 
Source: HSBC Research, Capitaline

The Street would like to hear commentary on the demand environment and finalised IT budgets for 2012. This would be a key trigger for Infosys, particularly given its relatively disappointing performance for the last three quarters. HSBC Research believes that given the management’s indication of strong ramp-ups in the first quarter of the new financial year after deals delayed from November 11 were signed in March 12, the Q1 FY13 revenue outlook is also critical for and Wipro. Investors are likely to brush off any back-ended revenue growth outlook, and regard it as a client-based, company-specific issue, which the company has been negating, rather than a sector-wide trend, the report suggests.

The revenue growth guidance from Infosys is expected to be in a very wide range and more than typically conservative. Kotak Research pegs the base case expectation of a 9-12 per cent dollar revenue growth guidance and an EPS guidance of Rs 159-166 for FY2013, assuming a rupee-dollar rate of 51 and a margin decline of 50-100 bps y-o-y. This would also translate to a 2.5-3 per cent compounded quarterly growth run rate for FY13. This is expected to be its growth guidance level for Q1FY13 as well. HSBC Research expects the company to report a revenue growth of 13 per cent in FY13 and expect guidance to be between 11-15 per cent. At this stage, any upside on this range seems unlikely, and guidance lower than that could be taken negatively by the Street, the report adds.

While Kotak Research expects Wipro to be among the top tier companies and in mid-caps to show strong revenue growth this quarter, HSBC points to Persistent Systems to show strong revenue growth and better Q1 FY13 revenue visibility in the mid-cap space. Margin outlook is not a major concern, as wage inflation is expected to be softer in FY13. Relatively lower levels of employee utilisation and a favourable pyramid positioning of employee experience are strong potential margin levers for the year ahead.

Other monitorables include indications on discretionary project spending and starts and hiring numbers. Pricing trends are expected to be stable this quarter after the strong uptick last quarter, according to HSBC, but commentary on industry pricing discipline and general outlook are important. Kotak Research flags pricing pressures in the US banking and financial space as a possible concern.

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