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Results Preview: IT Sector

Results Preview: IT Sector
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First Published: Wed, Jul 08 2009. 11 23 AM IST
Updated: Wed, Jul 08 2009. 11 23 AM IST
We expect a muted first quarter of FY10 for the Indian IT companies under our coverage.
We expect volume growth for the top tier companies to remain largely stable q-o-q, impacted by the continuing economic slowdown, price declines and client specific issues.
Cross-currency tailwinds are expected to aid reported USD numbers, while the average 2.5% INR appreciation during the quarter is likely to lead to lower rupee revenues, q-o-q.
We expect EBITDA margins to contract due to lower utilization and currency, leading to a likely 5-15% EBITDA decline q-o-q, for the Tier 1 names.
Reported PAT though is likely to be more volatile depending on company hedging policies- Wipro and HCLT being the names likely to see PAT growth q-o-q, in Tier 1.
Mid-caps, as a group, are expected to be more impacted- in terms of volumes and pricing, given trends of vendor consolidation benefiting larger players.
Opportunities nevertheless exist in niche players and reasonable valuations- Mphasis, Zensar.
We will closely track management comments on i) prospects of volume ramp up starting Q2/Q3FY10E ii) pricing outlook, and iii) employee hiring plans.
During Q1FY10, Infosys and TCS underperformed the Sensex while Wipro mirrored the benchmark; names like HCLT and Patni outperformed the broader markets handsomely.
We are encouraged by the initial signs of stability in some parts of the US economy, with BFSI and IMS demand stabilizing, for some vendors.
Further improvement in business outlook, greater visibility on FY11E will remain the variables to monitor.
While we remain positive on longer term prospects of IT services companies, near term valuations look ample, and we retain our selective approach towards the sector. Mphasis, Oracle, Zensar are our preferred picks.
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First Published: Wed, Jul 08 2009. 11 23 AM IST
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