Unlike the September 2012 quarter, where Tata Consultancy Services (TCS) raced ahead of its peers on both revenues as well as net profit growth parameters, the technology giant got some competition from its peers in the December 2012 quarter. While Infosys led the top-four IT companies on revenue growth front (up 5.7%), HCL Technologies posted the highest net profit growth of 9.3% for the quarter. Pick up in discretionary spends was the key growth driver for these companies. Going forward, analysts remain bullish on HCL Tech and TCS. While analysts believe improvement in deal pipeline and volume growth will be key to re-rating of Wipro, Infosys scrip appears to have priced in all the positives and the street will watch out for consistency in Infosys' financial performance.
"We estimate Infosys will trade at a 9 and 25% discount and premium to TCS and HCL Technologies, respectively. The company has seen a number of key management changes in the recent past and we believe that this may negatively impact its revenue growth trajectory", says Anantha Narayan, IT analyst at Credit Suisse. He has a Neutral rating on Infosys.
TCS' well-diversified business model along with good traction at clients' end makes it a favourite of most analysts. HCL Technologies' increased focus on improving operational efficiencies along with bagging large deals will enable it to post strong margin gains, believe analysts.
"We upgrade HCL Technologies to Buy (from Reduce) with a Target Price of Rs 800 (Rs 550 previously). HCL Technologies remains a margin story, with the EBIT margin having expanded 560 basis points since Q1'FY12 on operational improvements. We expect it to continue to run balancing growth with a constant currency EBIT margin target of 18-19%, believes Abhiram Eleswarapu, IT analyst at BNP Paribas Equities.
Pick up Infosys, large deal wins still elusive for Wipro
Sharp sequential increase in realisations was the common thread across all companies and drove top-line growth for the December 2012 quarter. With pricing gains of over 300 basis points, Wipro led the pack, followed by Infoys (up 180 basis points),TCS (up 130 basis points) and HCL Technologies (up 50 basis points). Wipro, though was the laggard on the volume growth front (-1%), as against its peers' volume growth of 1.25% (TCS) to 3% (HCL Technologies). While its peers bagged about 7 (TCS) -12 (HCL Technologies) large deals in the quarter, Wipro continued to struggle on this front. This fact was well reflected in Wipro's March 2013 quarter revenue guidance (0.5-3% growth). Most analysts were expecting the guidance of 1.0-3.0%. In stark contrast, Infosys maintained its FY13 organic revenue guidance of 5% growth as against analysts' expectations of the company pruning it to about 3% level. The management commentary also spelt confidence as the company gained from pick up in discretionary budgets. TCS and HCL Technologies too continued their strong outlook for future growth. While TCS expects 2013 to be better than 2012, HCL Tech also expects to grow on the back of higher discretionary spends as well as improved client mining. Amongst the key verticals, BFSI and Manufacturing continued to grow at a healthy pace, Telecom was a key drag. Marketwise, Europe led the growth for most players.
Changing business mix improves margins
On the margin front, barring Infosys, all other players registered EBITDA margin expansion on a sequential basis (see table). This fall was largely a function of wage hikes impacted by the company. "Portfolio shift towards higher realisation services like consulting and enterprise
solution helped TCS report better-than-expected margin performance", says Aniruddha Mehta, IT analyst at IIFL. Improving utilisations and cost rationalisations fuelled margin expansion at HCL Technologies. The net profit beat by these companies was driven by non-core factors. While lower forex losses boosted HCL Technologies' bottomline, that of TCS, Infosys and Wipro gained from strong other income and lower tax rates.
