Infosys, Wipro's growth crucial for Nasscom's FY14 growth target

Compared to growth rate of 10.2% expected for FY13, guidance that Nasscom has provided for seems significant

Indian IT services providers Infosys and Wipro will need to register better growth in FY14 for Nasscom to meet its export revenue guidance of 12-14% for the year.

Compared to the growth rate of 10.2% expected for FY13, the guidance that Nasscom has provided for seems significant, said a report by Motilal Oswal.

“Size of the export market in FY13 for the rest of the pack is $58 billion. Excluding sales in India, Infosys contributes around 13% to this number (FY13). Wipro contributes an additional 10-11%. A large part of the remainder comes from MNC IT and captives. Given that MNC IT may not grow as fast (considering Accenture's implied deceleration), the onus of growth acceleration falls on heavyweights, without which, meeting Nasscom's forecast becomes mathematically difficult,” Ashish Chopra, of Motilal Oswal in his report.

The maths for the accelerated growth is as following. Considering that Cognizant, which contributes around 9.7% to the export figure, has guided deceleration in growth from 20% in CY12 to 17% in CY13. And if we assume 15% growth at TCS (excluding India revenues) in FY14, the rest of the pack is expected to accelerate growth rates from 8.4% in FY13 to 10.8-13.4%, implying acceleration of 240-500 basis point, said the report.

Given that MNC IT may not grow as fast (considering Accenture's implied deceleration), the onus of growth acceleration falls on heavyweights, without which, meeting Nasscom's forecast becomes mathematically difficult.

“Infosys and Wipro will have to grow to propel the growth target announced by Nasscom. Assuming both these firms do not grow at all then meeting the guidance will not be possible. But the other aspect is that if Infosys and Wipro are not able to come out of their situation, even then the industry has managed to grow, though at a lower end,” said an analyst of a leading brokerage house.

Analyst also pointed out that based on the recent interaction with the management, Infosys management has maintained its stand on the outlook, but initial signs of a recovery are also evident.

“The commentary was more positive compared to three months back, an impact of new sales approach, improved pipeline and clients’ commentary. We believe the company is all set to regain its momentum in FY14,” said Shashi Bhushan and Pratik Shah of Prabhudas Liladher in their report.

Based on the contracts that Infosys has managed to bag in the third quarter of FY13, analyst believe that Infosys should manage to grow between 9 - 12% for FY14. This implies an organic growth of 7.5% in FY14 based on the outsourcing deals it closed in the third quarter of FY13. Including full year revenue of Lodestone, the growth will be 9.2% explains Motilal Oswal.

“Although, we agree that Infosys have tailwinds from low utilisation rate, however, list of potential headwinds are much greater such as low revenue growth expectations, rise in sub-contracting cost, reinvestment in geography expansion and wage hike,” said Pratik Gandhi of IDBI Capital.