IT Q1FY13 Preview: Dollar revenue seen subdued; Weak rupee to boost growth
- Subdued dollar revenue likely due to difficult environment, cross-currency movements: Nirmal Bang expects the companies in their Information Technology (IT) universe to post low single-digit sequential revenue growth in US dollar (USD) terms (-0.2-2.4%) in Q1FY13, as the global economic environment remains challenging and key verticals like banking and financial services witness slower growth. They expect volume growth of 0-3% QoQ, with billing rates likely to register a 1% QoQ decline, partly owing to adverse cross-currency movements. The euro (EUR), Australian dollar (AUD) and Indian rupee’s (INR) weakness against the USD is likely to adversely impact dollar revenue growth by 40-100bps in Q1FY13, with the company-specific impact greater on Tata Consultancy Services (TCS, 95bps) and MindTree (90bps), given their relatively higher India exposure (61bps impact for TCS, 57bps for MindTree). TCS’ EUR and AUD billings are likely to adversely impact its reported dollar revenue by 42bps, while for MindTree its European exposure is likely to adversely impact dollar revenue by 39bps. However, rupee revenue growth is expected to get a significant boost owing to the weak currency; the average INR rate/USD in Q1FY13 was Rs54.16, down nearly 8% QoQ. Owing to this, Nirmal Bang expects rupee revenue growth of 8-11% QoQ as compared with -0.2-2.4% QoQ growth in dollar terms. In constant currency terms, they expect revenue growth of 0.5-3.2% QoQ (TCS the highest, Infosys the lowest).
- Weak rupee to boost margins: The rupee weakness is likely to boost margins of the companies in Nirmal Bang's universe for the June 2012 quarter. They expect Wipro, HCL Tech and MindTree to post 114bps, 130bps and 116bps expansion in margins, respectively, owing to a weak rupee and no wage hike impact, except in the case of MindTree, which will witness a one-month impact (June) for 75% of its staff. This will be more than compensated by rupee weakness and operational efficiency, and we expect MindTree to report its highest margins in nearly three years (since 2QFY10). TCS and Infosys are expected to report 105bps and 86bps fall in margins, respectively, owing to wage hikes in the case of the former, while poor growth and higher visa costs are likely to be margin headwinds for the latter. If not for weakness in the rupee, the margins for these two companies could have fallen further.
- Bottom-line to benefit on higher margins, but forex losses to reduce growth: NIrmal Bang expects MindTree to post 10.3% QoQ growth in net profit in Q1FY13. However, this is slower than EBITDA growth (17.4% QoQ) due to forex losses on hedging. They expect Wipro and HCL Tech to report 5.0% and 4.8% QoQ growth, respectively, while Infosys is likely to report a 0.3% QoQ rise. They expect TCS to report a 2% QoQ decline due to lower margins and forex losses.
- Expect Infosys to downgrade FY13 dollar revenue guidance to 6.8-8.8%, lower currency rates to lead to rupee EPS guidance in excess of Rs175: Nirmal Bang expects Infosys to downgrade its dollar revenue growth guidance for FY13 to 6.8-8.8% YoY (8-10% YoY earlier) on adverse cross-currency movements, as it will have to take lower end-of-period rates of the British pound (GBP), EUR and AUD against the USD for conversion. However, owing to a weaker rupee, they expect revised rupee revenue growth guidance of 25.9-28.2% (13.9-16.0% earlier) along with a 200bps improvement in EBIT margin guidance. This is likely to lead the company to significantly raise its rupee EPS guidance to more than Rs175 (Rs158.8-161.4 earlier). Nirmal Bang expects this factor to provide downside support to the stock, even as a multiple re-rating hinges on improved growth prospects. They would watch out for comments on the slowdown in the banking space and also any signs of a cut in IT budgets (particularly on the discretionary side) or pricing pressure from select clients in the light of a weak rupee.
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Founded in 1986 by Nirmal Bang, the Nirmal Bangis recognized as one of the largest retail broking houses in India, providing an array of financial products and services. Their retail and institutional clients have access to products such as equities, derivatives, commodities, currency derivatives, mutual funds, IPOs, insurance, depository services and PMS. The Group is headed by Mr. Dilip Bang and Mr. Kishore Bang.
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