The Street is expecting sequential revenue growth for the IT services sector to be muted at best, ranging between 0 to 3% in Q4FY12 with a few outliers primarily Wipro and Hexaware.
Issues ranging from delays in discretionary project take-offs and lower actual spending versus projected budgets to visa problems are cited as the key reasons for this. 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 bps q-o-q margin compression for the Tier I companies given the near 4% rupee appreciation in this period.
The revenue growth guidance is especially important this year if only to understand what is behind the divergence between the strong revenue outlook reported by Accenture, Cognizant and the more cautious outlook from India IT service companies, states a Kotak Institutional research report. HSBC Research adds that most leading indicators such as software sales, consulting services, IT employment in US and India are not suggesting a material slowdown in IT spending. However, it adds, there is no evidence of any acceleration which caps the upside potential of current estimates.
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 TCS management indication of strong ramp-ups in Q1FY13 after deals delayed from November 11 were signed in March 12, Q1FY13 revenue outlook is also critical for Infosys 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.
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% dollar revenue growth guidance and an EPS guidance of Rs 159-166 for FY2013, assuming 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 compounded quarterly growth run rate for FY13 and 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% in FY13 and expect guidance to be between 11-15%. 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 among the top tier companies and Hexaware in mid-caps to show strong revenue growth this quarter, HSBC points to Persistent Systems to show strong revenue growth and better Q1FY13 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, with pricing pressures in the US banking and financial space being flagged as a possible concern by Kotak Research.