1QFY14E preview – a mixed bag. 1QFY14E will disappoint the Street’s expectations for a broad-based acceleration in revenue growth; instead we will see more of the same. Companies that have execution momentum (TCS and HCLT) will report 3.1-3.5% growth, fair for a seasonally strong period. Turnaround plays will struggle with modest revenue growth and possible margin decline. Cross-currency headwinds, primarily from Rupee and AUD depreciation, will have 50-80 bps impact on revenue growth but 150-180 bps tailwind to margins. TCS and HCLT will report the strongest performance among Tier-1 IT companies, Infosys the weakest. Rupee depreciation is the key risk to our Cautious view.
1QFY14E – struggle for turnaround themes. US$ revenue growth to be hit by Rupee deprecation
1QFY14E will be no different from the theme for the past four quarters – companies with execution momentum, i.e. TCS and HCLT, will deliver a steady quarter with 3.1-3.5% revenue growth in US$ terms. Turnaround themes will struggle with modest revenue growth of 0.8% for Infosys and flat revenues for Wipro. Revenue growth will be impacted by 50-80 bps due to adverse cross-currency movement; TCS with 0.8% and Infosys, Wipro with 0.7%, will be the worst-hit. Revenue growth for the quarter will be driven by infrastructure management services and BPO. However, the quarter will fall short of the much ‘expected’ acceleration-of-industry-growth view of the Street.
Currency has a role to play in every quarter – 1QFY14E will be no different
Following factors will influence operating margin for the quarter – (1) visa costs as H-1B visa applications for the next financial year are accepted from Apr 1 of each year. FY2014E H-1B visa applications cap was reached in 5 days, (2) compensation revision. TCS has revised onsite and offshore compensation from Apr 1. Infosys and Wipro’s revision will be effective for part of the quarter. HCLT’s revision is spread over Sep and Dec quarters, and (3) hedges and revenue booking methodology. On the whole, we expect flattish EBITDA margin for Tier-1 IT (except Infosys) despite 150-180 bps currency tailwind for the margins.
Commentary on demand and ‘reinvestment’ strategy to be important
Commentary on demand and pick-up in discretionary spending will be important, especially against the backdrop of disappointing performance of enterprise software companies and Accenture. Commentary on pricing, competition and pace of expansion in Europe will also be closely tracked. We believe pricing in the industry will remain under pressure. Finally, the ‘reinvestment’ strategy of companies on the gains of recent deprecation of the Rupee against US$ will be closely tracked, in our view. We retain our Cautious view on Indian IT; depreciation of the Rupee against US$ is the key risk to our call.
Discussions on individual players – expectations reset for Infosys, steady growth for TCS
Infosys – struggle for margins but alright on revenue growth. We expect Infosys to retain 6-10% revenue growth guidance for FY2014E. We also expect a relatively weak 0.8% sequential revenue growth. However, operating margins are likely to disappoint due to a combination of (1) ramp-up of upfront margin-dilutive deals, (2) compensation revision and (3) visa costs. We expect 140 bps of margin decline. We also expect a quarter of expectations reset by the company on profitability. Communications on growth and turnaround will be equally critical for stock performance. We have an ADD rating with 12-month forward target price of Rs2,750. Our ADD rating is based on expectations of pick-up in revenue growth momentum and inexpensive valuations.
1QFY14E – struggle for turnaround themes. US$ revenue growth to be hit by Rupee deprecation
1QFY14E will be no different from the theme for the past four quarters – companies with execution momentum, i.e. TCS and HCLT, will deliver a steady quarter with 3.1-3.5% revenue growth in US$ terms. Turnaround themes will struggle with modest revenue growth of 0.8% for Infosys and flat revenues for Wipro. Revenue growth will be impacted by 50-80 bps due to adverse cross-currency movement; TCS with 0.8% and Infosys, Wipro with 0.7%, will be the worst-hit. Revenue growth for the quarter will be driven by infrastructure management services and BPO. However, the quarter will fall short of the much ‘expected’ acceleration-of-industry-growth view of the Street.
Currency has a role to play in every quarter – 1QFY14E will be no different
Following factors will influence operating margin for the quarter – (1) visa costs as H-1B visa applications for the next financial year are accepted from Apr 1 of each year. FY2014E H-1B visa applications cap was reached in 5 days, (2) compensation revision. TCS has revised onsite and offshore compensation from Apr 1. Infosys and Wipro’s revision will be effective for part of the quarter. HCLT’s revision is spread over Sep and Dec quarters, and (3) hedges and revenue booking methodology. On the whole, we expect flattish EBITDA margin for Tier-1 IT (except Infosys) despite 150-180 bps currency tailwind for the margins.
Commentary on demand and ‘reinvestment’ strategy to be important
Commentary on demand and pick-up in discretionary spending will be important, especially against the backdrop of disappointing performance of enterprise software companies and Accenture. Commentary on pricing, competition and pace of expansion in Europe will also be closely tracked. We believe pricing in the industry will remain under pressure. Finally, the ‘reinvestment’ strategy of companies on the gains of recent deprecation of the Rupee against US$ will be closely tracked, in our view. We retain our Cautious view on Indian IT; depreciation of the Rupee against US$ is the key risk to our call.
Discussions on individual players – expectations reset for Infosys, steady growth for TCS
Infosys – struggle for margins but alright on revenue growth. We expect Infosys to retain 6-10% revenue growth guidance for FY2014E. We also expect a relatively weak 0.8% sequential revenue growth. However, operating margins are likely to disappoint due to a combination of (1) ramp-up of upfront margin-dilutive deals, (2) compensation revision and (3) visa costs. We expect 140 bps of margin decline. We also expect a quarter of expectations reset by the company on profitability. Communications on growth and turnaround will be equally critical for stock performance. We have an ADD rating with 12-month forward target price of Rs2,750. Our ADD rating is based on expectations of pick-up in revenue growth momentum and inexpensive valuations.