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IT: Mixed results; growth likely to be subdued

Reliance Securities | 21 Aug, 2012  | Follow Author | Add to my Favourites 
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Key points

Q1FY2013 results mixed; Rs depreciation drives growth

The top-four IT companies in their coverage reported mixed results for Q1FY13. TCS and HCL Technologies (HCLT) reported industry leading volume growth of 5.3% and 4.6% QoQ respectively, suggesting strong growth momentum, while, the other two large players i.e. Infosys and Wipro reported a subdued growth of 2.7% and 0.8% QoQ respectively. Further, the commentary and guidance provided by these two companies (i.e. Infosys and Wipro) is a cause of concern.

Results – A snapshot

Revenue growth below expectations: For Q1FY13, revenues grew ~1.1% QoQ and ~9.4% YoY to USD8.1bn for the companies under their coverage, which was below their estimates. In Rs terms, top-line grew 10.6% QoQ to Rs44,142cr (above their estimates) due to higher than anticipated depreciation of Rs. TCS and HCLT led the growth in the large cap segment, whereas, Hexaware, KPIT and Polaris delivered strong top-line performance in the mid-cap segment.

Substantial margin improvement: EBIT margin for the IT companies in our coverage stood at 23.7% (+20bp QoQ), as most of the mid-cap companies witnessed sharp improvement in margins, which was partially offset by weaker performance of Infosys and wage hikes. Only four out of the eleven companies in their universe i.e. TCS, Hexaware, KPIT and MindTree provided wage hikes during Apr-Jun 2012 quarter. HCLT, Polaris, Tech Mahindra and Mahindra Satyam will provide wage hike w.e.f. July 1, 2012, while, Infosys and Wipro have not yet indicated anything on this front.

Forex losses and higher taxes suppressed PAT: Most of the IT companies reported foreign exchange losses, which impacted bottom-line growth. Further, effective tax rates increased substantially particularly for large cap companies (more than 200bp qoq increase in effective tax rates for Infosys and HCLT), which compressed the profitability. As a result, PAT margin was flat at ~19.3% (on QoQ basis).

- In-line with estimates: TCS, Hexaware, Polaris, Tech Mahindra, Mahindra Satyam, CMC

- Above estimates:HCL Technologies, KPIT, MindTree

- Below estimates: Infosys,Wipro

Guidance for the IT sector: Given the top-line performance of IT stocks in their universe, Reliance sec believe that the NASCCOMs top-line growth guidance of 11- 14% for FY2013E would be under threat. NASCCOM will provide an update on its forecast in October 2012. In the meanwhile, Technology Partner International (an Information Services Group company) has announced that Q2CY12 Global Market Total Contract Value (TCV) increased ~7% QoQ and YoY to USD21.4bn. The main reason behind the improvement was strong growth in Business Process Outsourcing (BPO) segment (+32% QoQ increase in TCV to USD8.3bn) and increase in demand from Asia Pacific region (+162% QoQ increase in TCV to USD4.7bn). Further, Gartner has raised its USD growth forecast for global IT spending in 2012 from 2.5% in April 2012 to 3.0% in July 2012, which is quite encouraging.

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About Reliance Securities

Reliance Securities, the broking arm of Reliance Capital, is one of the India’s leading retail broking houses, providing customers with access to equities, derivatives, currency, IPOs, mutual funds, bonds, and corporate FDs amongst others. The large array of financial offerings helps customers fulfilling their investment objectives on one platform. Focus on timely & error-free execution represents its core strength. Their best in class research offerings, high degree of compliance with stock exchange regulations, ethical business standards, & strong risk management capabilities; Reliance Securities positions itself amongst strong & innovative brands in the financial services space.

For more information please write in to [email protected]

Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.


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