Redeeeming factors likely to be strong demand, marginal rise in pricing.
Aided by strong volume growth and a pricing uptick quarter-on-quarter, India’s top software services companies, with the exception of Wipro, are expected to post revenue growth of three to five per cent in the June quarter.
While revenue growth is robust, operating profit margins are likely to come down due to wage inflation. Net profit growth is also expected to fall, due to the discontinuation of tax exemption under Sections 10A and 10B (profits from software exports).
| MARGIN PRESSURE | ||||
| TCS | Infosys | Wipro | HCL Tech | |
| Revenues | 10,666 | 7,500 | 8,371 | 4,316 |
| Q-o-Q chg (%) | 5.0 | 3.4 | 1.2 | 4.3 |
| OPM (%) | 28.4 | 29.6 | 19.9 | 17.7 |
| Q-o-Q chg (bps) | -186 | -246 | -39 | 95 |
| Net profit | 2,261 | 1,737 | 1,323 | 485 |
| Q-o-Q chg (%) | -5.9 | -4.5 | -3.8 | 9.7 |
| EPS (Rs) | 11.5 | 29.8 | 5.3 | 6.7 |
| All figures are consolidated estimates for the June 2011 quarter Source: Analyst reports (Figures in Rs cr unless otherwise indicated) | ||||
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TCS, HCL TECH SHINE THROUGH |
Says Kunal Sangoi, IT analyst at Edelweiss Securities, “We expect demand to remain buoyant, as clients take up initiatives to not only reduce costs but also increase revenues. With no substantial pricing increases, margins would remain under pressure for the sector. As Infosys and Wipro are undergoing transition in organisation structure, we believe their performance would lag that of TCS and HCL Tech.”
With IT spending budgets for calendar year 2011 estimated to grow two to three per cent, the demand is expected to be strong. Pricing has also firmed up, with minor uptick on some deals. Analysts believe visa-related issues have not impacted the IT majors significantly, as they are stepping up local hiring. The visa issue, coupled with a soft March quarter performance, were the key reasons the BSE IT index fell 6.4 per cent in the June quarter; the Sensex was down three per cent.
The IT analyst at Pinc Research, Rohit Kumar Anand, says while indicators are positive for outsourcing, a key concern remains a double-dip global recession affecting demand. Based on the current valuations, he prefers Infosys, HCL Tech, TCS and Wipro, in that order.
While robust demand and positive surprises in the June quarter earnings are positives, growth in European markets, as well as in discretionary spends and pipeline, will be key parameters.
TCS
The leader is expected to show volume growth of five per cent over the March quarter. Wage inflation is expected to pull down the Ebit margin by 186 bps, despite some cushion provided by better pricing and utilisation.
Further, a 220 bps q-o-q rise in tax rate to 23 per cent will result in a six per cent fall in net profit. Key factors to watch would be outlook on growth and hiring. The challenge for TCS is its under-performance in discretionary segments. While the stock has given muted returns of 1.3 per cent over the past month, it commands a rich valuation of 22.6 times for 2011-12. As the outperformance is already factored in the current prices, further upsides will be limited, believe analysts.
INFOSYS
The IT bellweather is likely to beat the upper end of its earnings guidance by five-six per cent, due to favourable currency and pricing gains. Though volume/pricing are expected to grow by two to three per cent, q-o-q, wage rises will squeeze operating margins by 250 bps, lower than its guidance of 300 bps. It is likely to keep its full-year dollar revenue guidance (18-20 per cent growth) unchanged and guide for an estimated five-six per cent dollar revenue growth for the September quarter. The stock is up five per cent in the past month and currently trades at 21.3 times 2011-12 estimated earnings.
The growth is likely to be better in the second half of the financial year, because the new team will be better entrenched and should deliver higher growth, leading to some positive surprises on the margin front, said analysts.
WIPRO
The company is likely to report muted volume growth of 0.1 per cent for the quarter. The SAIC acquisition will bring in revenues of close to $16 million, enabling it to meet its revenue guidance for the quarter.
Wipro is likely to guide for a subdued 2.5-3.5 per cent sequential growth in IT services revenue. The double whammy of wage rises (one month) and higher tax rate (19.5 per cent versus 15.9 per cent in March) will hit net profit. Watch for management commentary on demand outlook in the telecom and technology business. The scrip has fallen four per cent in the past month and currently trades at 18 times FY12 estimated earnings.
HCL TECH
HCL Tech is expected to register volume growth of five to six per cent. Its operating profit margin expansion will be led by higher utilisation and intake of freshers and wage rises in the September quarter (year ends in June). While the company is likely to announce a few large deals in the quarter, reduction in its business process outsourcing losses would be the key issue to watch. A higher tax rate of 24 per cent (22.7 per cent in March) will impact its profits. The stock is down two per cent in the past month and currently trades at 21.3 times FY12 estimated earnings.
