×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

IT may see growth revival on back of offshore market

IT may see growth revival on back of offshore market
Comment E-mail Print Share
First Published: Tue, Jan 18 2011. 09 15 PM IST
Updated: Tue, Jan 18 2011. 09 15 PM IST
We believe FY12 is likely to show another 26-30% growth for tier I information technology (IT) vendors as was the case in FY11. Interactions with firms and channel partners suggest that FY11’s growth is a sustained and structural increase in demand for offshore services. Growth in FY12 will be driven by greater offshoring by existing client base; market share increase for Indian IT firms in the renewal deal market; and sustained improvement in IT spending, revival and embracing offshore market.
Upfront discretionary commitments
IT budgets for 2011 are likely to see greater offshore spending with significant commitment on discretionary spending. Conventional cost take-out continues to drive growth for various services, while revenue enhancement is driving expenditure in enterprise solutions, consulting and package implementations. We anticipate discretionary expenditure commitments from large clients to drive visibility for tier 1 companies going into FY12.
Also See | IT calling (Graphic)
What to expect from December quarter
Barring the impact of fewer working days during the December quarter, performance is expected to be similar to the second quarter of FY11. The trend of stable pricing and high attrition will remain unchanged. While broadening of the employee pyramid will be favourable, rupee appreciation against dollar and pound will be a margin headwind.
Revising FY12 forecast
We are revising our FY12 dollar revenue growth forecast from 21-23% to 26-30% for Tata Consultancy Services Ltd (TCS), Infosys Technologies Ltd and HCL Technologies Ltd, and from 20% to 22% for Wipro Ltd. The resultant increase in earnings per share varies from 1.5% to 6.5% across companies. For tier II companies, our FY12 revenue forecast is unchanged, while tweaking the margin assumption leads to 2-4% downward revision for Patni Computer Systems Ltd and InfoTech Enterprises Ltd.
We also introduce FY13 forecast for our coverage universe. We factor in a 17-21% dollar growth for top four companies and 15-20% growth for mid-tier companies.
Outlook and valuation
The IT index has outperformed the benchmark index (the Bombay Stock Exchange’s Sensex) by 14% in the past six months. With continued traction in business and upgrades in earnings, outperformance will continue. We continue to prefer TCS (buy) over Infosys and upgrade HCL to buy. Better client mining, aggressive sales approach in renewal deal market and improving margins will lead to narrowing of HCL’s valuation discount to TCS and Infosys. We maintain hold recommendation on Infosys and Wipro.
Re-rating in mid-caps is imminent and will continue to be selective (like in Hexaware Technologies Ltd, our erstwhile top pick) and not broad based.
Supply-side problems
Against expectations of most companies of easing supply pressure by the December quarter, attrition continues to be at higher levels. While tier I companies are better positioned to manage the margin impact on this account, it is likely to restrict the anticipated margin improvement for tier II companies.
Strong increase in fresher addition by most companies in FY11 and FY12 is aimed at broadening the bottom of the employee pyramid and reducing the average cost per employee. TCS and Infosys have shared their intent of making 35,000 and 25,000 campus offers for FY12, respectively. While the lack of fresher addition during FY10 led to narrowing of the employee pyramid, reversal of the same through FY12 will lead to decline in per employee cost.
Result expectations
We expect volume growth of 5-6% sequentially in the third quarter of FY11 across the board. While pricing has remained stable, given that the dollar has depreciated against the pound and the euro, reported pricing is likely to show some growth. Thus, in dollar terms, we expect average revenue growth of 6-7% sequentially.
Earnings before interest, tax, depreciation and amortization margins are likely to decline in the third quarter of FY11 as utilization will remain lower sequentially due to fewer working days and because the rupee has appreciated against the dollar and and the pound.
While we expect 60 basis points (bps) sequential decline in margins for Infosys, TCS is likely to face a fall of 80 bps sequentially on account of bad debt provision in the second quarter of FY11.
Wipro is likely to report stable margins. HCL is likely to report a marginal decline primarily due to rupee appreciation and continued investments in selling, general and administration. Info Edge (India) Ltd is likely to report the most improvement in margins driven by higher revenue growth (operating leverage) and lack of advertisement expenditure over the previous quarter.
Graphic by Ahmed Raza Khan/Mint
Edited excerpts from a report by Edelweiss Securities Ltd. Your comments are welcome at mintmoney@livemint.com
Comment E-mail Print Share
First Published: Tue, Jan 18 2011. 09 15 PM IST