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Too early an optimism?

US$ reported revenues to be aided by ~170-230 bps for Wipro, TCS and Infy Expect Infy, Wipro to beat upper end of quarterly revenue guidance while TCS will report the least QoQ decline Tech M could report highest sequential revenue growth in US$ terms aided by GBP, Euro strength against US$. Expect an upgrade in US$ revenue guidance for Infy aided only by cross currency benefits to US$ 4,475 mn-4,615 mn and would be surprised by any volume led increase in guidance Upper end of INR EPS guidance to be lowered to ~Rs 98 from Rs 101.2 Commentary could be mildly positive across vendors as pace of project ramp downs decelerated during June’09 However any absolute upsides from current levels warrant meaningful EPS upgrades in our view.

Expect mildly positive commentary across vendors

We expect a mildly positive commentary cutting across IT vendors in the ensuing quarterly results which in our view is stemming from the reduction of the pace of sharp project ramp downs from clients as had been the case over the past 2 quarters as well as the lack of any macro global shock (some client blowing up etc). We have always been of the view that IT outsourcing decisions tend to get more impacted by macro shocks than by actual economic growth parameters and this could be lending confidence to more positive comments in media from Indian techs. We expect Infosys to revise it’s US$ revenue guidance upwards to ~US$ 4,475 mn-4,615 mn (YoY decline of 4%-1%) V/s US$ 4,350 mn-4,520 mn (YoY decline of 7%-3%) however aided only by reset in guiding exchange rates. Upper end of INR EPS outlook is expected to be cut to ~Rs 98 from Rs 96.7-Rs 101.2.

Cross currency to aid US$ reported numbers; Tech M gets the boost

During the quarter, GBP and Euro have appreciated by ~18% and ~10% V/s the US$ (~8% QoQ and ~6% QoQ on an average level), which should aid the US$ reported revenues for Indian offshore vendors with Tech M benefiting the most. We expect Tech M to report US$ 223 mn (+5.3% QoQ), however benefit of INR depreciation V/s GBP would be restricted to ~70 bps QoQ expansion in operating margins on reported basis (had a one time provision write back of ~Rs 250 mn during Q4FY09). Reported pricing would also be aided on account of cross currency benefits. Key things to watch out for We believe that investors need to watch Indian tech vendors’ comments on

(1) Outlook on pricing/volumes

(2) Comments on aggressive MNC competition (our channel checks indicating of some MNC vendors quoting significantly low offshore bill rates and using Balance sheet to fund client spends) and

(3) Integration related opportunities at financial services clients (Infy has already
indicated of some integration related opportunities emerging at JP Morgan+WAMU, BofA+Merrill Lynch etc) We believe that Indian IT stocks have run up sharply ahead of any improvement in core demand fundamentals. Further in our view any absolute upsides from current levels would need meaningful EPS upgrades. Our positive bias remains inclined only towards Mphasis and Tech M in our IT coverage universe.

INFOSYS TECHNOLOGIES (HOLD, TP 1,640)

Q1FY10 Result expectations (Reports 10th July’2009)

We expect Infosys to report revenues of US$ 1,087mn, (-3% QoQ, INR term revenues seen down by ~6.1% QoQ, +9% YoY) beating the upper end of US$ revenue guidance of US$ 1,060-1,080 mn, however note aided by cross currency benefits of ~230 bps. Operating margins are estimated to be down ~200 bps sequentially to 31.6% driven by lower utilization levels and higher SGA spend. We expect net profits at Rs 13,808 mn (-14.4% QoQ,+ 6.1% YoY).

TATA CONSULTANCY SERVICES (HOLD, TP 265)

Q1FY10 Result expectations (Reports 17 July’2009)

We expect TCS to report revenues of US$ 1,428 mn, -0.3% QoQ (INR term revenues seen at Rs 69,489 mn down 3.1% QoQ, up 8.4% YoY) helped by cross currency benefit of ~200 bps. Operating margins are expected to be down by 200 bps sequentially to 24.2%, driven by slippage on utilization, pricing pressure and higher SG&A expenses. We estimate net profits at Rs 13,093mn (-0.4% QoQ, +5.3% YoY) as we build in forex losses of Rs 127 mn V/s Rs 1,920 mn in Q4FY09.

WIPRO (REDUCE, TP 240)

Q1FY10 Result expectations (Reports 22nd July’2009)

We expect Wipro to report US$ revenues of US$ 1,037 mn (-0.9% QoQ,-2.9% YoY), INR revenues of Rs 64,681 mn (-1.2% QoQ, +8.5% YoY), above the upper end of US$ revenue guidance of US$ 1,022 mn helped by ~150 bps benefit from cross currency movements. We estimate EBIT margins to decline by 100 bps sequentially to 16.6%, impacted negatively by higher S,G&A expenses during the quarter. We estimate net profits at Rs 9,184 mn (+1.2% QoQ, +12.8% YoY on account of lower forex losses

HCL TECHNOLOGIES (HOLD, TP 124)

Q4FY09 Result expectations (Reports in August’09)

We expect HCL Tech to report US$ revenues of US$ 572 mn (+1.4% QoQ, +13.6% YoY). Operating margins are expected to decline by ~130 bps QoQ to 19.3%, impacted by ~4% INR appreciation V/s US$. We expect net profits at Rs 3,333 mn (+69.9% QoQ, +182.4% YoY) aided by translation gains on net monetary liabilities and reduction in hedge losses on account of INR appreciation V/s US$.

TECH MAHINDRA (ACCUMULATE, TP 550)

Q1FY10 Result expectations (Reports 22nd July’2009)

We expect Tech M to report US$ revenues of US$ 223mn (+5.3% QoQ, -18.1% YoY) aided largely by GBP appreciation V/s US$. Operating margins are expected to be down by ~120 bps sequentially to 25.8% on reported basis despite the help from INR depreciation V/s GBP as Q4FY09 had one time provision write back of ~Rs 250 mn. We expect net profits at Rs 1,658 mn (-28% QoQ, -35.8% YoY) impacted largely by interest paid on account of debt raised for buying Satyam stake.

MPHASIS (BUY, TP 310)

Q3FY09 Result expectations (Reports in August’09)

We expect Mphasis to report US$ revenues of US$ 213mn (+2.3% QoQ) and INR revenues of Rs 10,475 mn (-0.1% QoQ,+41.1% YoY). Operating margins are estimated to be down by ~140 bps sequentially to 25.5%. We expect net profits at Rs 1,662 mn (-25.9% QoQ, +110.5% YoY) impacted negatively by forex translation losses of ~Rs 268 mn in Quarter ending July’09.

PATNI (NOT RATED)

Q2CY09 Result expectations (Reports 29 July’2009)

We expect Patni to report US$ revenues of US$ 160.6mn (+2.7% QoQ,-12% YoY) and INR revenues of Rs 7,816 mn (-1.7% QoQ,-0.3% YoY). Operating margins are estimated to be down by ~80 bps sequentially to 15.9%. We expect net profits at Rs 917 mn (+20.6% QoQ,-11.6% YoY) helped by higher other income.


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