Tougher deal chase, strong rupee to limit upsides for IT biggies

Most brokerages expect the performance of Tier-I information technology (IT) companies in the quarter ended September to be better than in the previous quarter, given the September quarter has traditionally been the strongest for the IT sector.

For the quarter ending September, revenue growth (in rupee terms) for leading technology companies is pegged at three to five per cent. However, continued weakness in the banking, financial services & insurance and telecom sectors could restrict the headroom for positive surprises on this front, analysts say. Also, the jury is still out on when the discretionary demand scenario would improve. These are key overhangs in the sector, and markets would closely track managements’ indications on these issues.

“Stock prices are discounting modest FY13 growth, but investors would try to consider the initial views of managements on the FY14 outlook. Trends on budgets, decision-making, discretionary spends and pricing would be keenly monitored. We expect 2013 to see some acceleration over 2012,” say Citigroup’s Surendra Goyal and Rishi V Iyer.
 

SEPT ’12 QUARTER: TCS, INFY TO LEAD EARNINGS GROWTH
In Rs crore	TCS	Infosys	Wipro	HCL Tech
Revenues	15,554	9,905	10,846	6,147
Q-o-Q change (%)	4.6	3.0	3.5	3.8
OPM (%)	29.1	31.0	18.6	19.9
Q-o-Q change (bps)	-	40	-240	-170
Net profit	3,440	2,382	1,572	793
Q-o-Q change (%)	4.9	4.1	-0.5	-5.8
All figures are average consolidated estimates for September 2012 quarter from Citigroup, Nomura and IIFL reports

For the September quarter, while TCS is likely to hold on to its margins, Infosys’ margins could see a slight uptick. A rise in wages, coupled with the rupee appreciation, is expected to hit Wipro and HCL Technologies’ margins. Large-cap IT companies' margins are expected to witness pressure from a stronger rupee and a weak pricing environment.

“Many companies face the unusual combination of losses on hedges and translation losses this quarter. The rupee appreciation, in the wake of the recent economic measures announced by the government, and the improved sentiment of foreign investors towards India remain significant risks for the sector,” say Anantha Narayan and Sagar Rastogi of Credit Suisse.

Among top IT stocks, analysts remain bullish on TCS and HCL Tech, while they expect the turnaround at Infosys and Wipro may take a few more quarters. Nomura Equity Research’s Ashwin Mehta and Pinku Pappan say, “While we expect market share-focused players (HCL Tech/TCS) to continue to lead dollar revenue growth, Infosys is likely to see a lower growth differential in the quarter, with Wipro likely to see the worst performance of the lot.”

TCS remains the favourite of most brokerages. However, any moderation in demand would impact the stock negatively. While its foreign exchange losses are expected to be negligible, volume growth is likely to be weak on a sequential basis. Most brokerages expect Infosys to hold on to its dollar revenue growth guidance of five per cent for this financial year. However, a stronger rupee would drive a cut of two to three per cent in its earnings per share guidance for FY13. While the Street is incrementally factoring in a wage rise by Infosys, this may impact its full-year earnings guidance.

Wipro is expected to lag its peers on the earnings growth front. Markets would be keenly looking for improvement in the company’s large-deal wins, which could expedite a turnaround. Analysts estimate the company's revenue in the December quarter at two to three per cent sequentially.

While HCL Technologies saw significant momentum in deal wins, volatile margins remain a key overhang on the company stock. HCL’s volume growth would be driven by strong growth in the infrastructure vertical, say analysts.