RETAIL RESEARCH

IT Sector Preview Q4FY15

April 13, 2015

Sector Preview:
USD Revenue growth to be subdued in Q4FY15, led by seasonality & cross currency headwinds
We expect the Tier I IT players to witness subdued USD revenue growth in Q4 (in the range of 0-0.8%), led by seasonality (delays in project ramp up during the start of
the year) & cross currency headwinds (which is likely to impact the revenue growth by 250-380 bps Q-o-Q, since major global currencies have depreciated vs. USD by 410%% during the quarter. We expect TCS & Wipro to underperform its peers in terms of revenue growth, while Infosys & HCL Tech could perform relatively better. Tech
Mahindra is likely to report the lowest organic revenue growth in CC, while its consolidated growth is likely to be higher due to consolidation of LCC. Among Tier II
vendors like Mindtree, NIIT Tech and KPIT Tech, growth is likely to be soft due to USD appreciation and client-specific issues. Besides TCS & HCL Tech (which have
indicated sluggish Q4 due to cross currency headwinds), KPIT Tech & Persistent system have also lowered their growth forecast for Q4FY15. However, Hexaware is likely
to report decent growth despite cross currency headwinds. Revenues in rupee terms are likely to be marginally higher due to marginal INR depreciation vs. USD during
the quarter (by ~0.4%).

Cross currency headwinds, wage hikes & higher investments to put pressure on margins
We expect EBITDA margins of most of the IT players to decline sequentially on the back of cross currency headwinds / INR appreciation against currencies like GBP, Euro
and AUD. Rupee depreciation was marginal vs. USD and hence is unlikely to provide any cushion to margins. Productivity improvements could partly offset the negative
impact of cross currency fluctuations in case of Wipro. Margins of some of the players like HCL Tech and Tech Mahindra are likely to be impacted more due to wage
hikes, high investments in S&M (in case of HCL Tech) and integration of low margin acquisitions (in case of Tech Mahindra). However, margins of some players like
Mphasis & Persistent could improve sequentially on the back of better mix.

Focus will be on the Managements Commentary on IT sector outlook

Some of the key things, which would be tracked closely by the market participants in the management commentary by the IT companies include i) Outlook on client
spending (discretionary / non discretionary) and project ramp ups in top clients; ii) Demand environment in US and Europe and Continental Europe; iii) Comments on
demand and pricing trends in financial services vertical; iv) Demand outlook on Key verticals; v) Hiring trends; vi) Margins trajectory; vii) Expectations on forex moves viii)
Outlook on client Budgets. While Accentures Q2 result reflects improving demand environment, the pre-quarter earnings commentaries by some Indian IT companies
were not so optimistic (for the next 1-2 quarters). Hence management commentaries from players like TCS, Infosys, Wipro & HCL Tech about the growth outlook for
FY16 would be keenly watched.

IT sector has outperformed the BSE Sensex in Q3 despite expectations of subdued growth in Q4; poor results could lead to correction in the near term
Despite the expectations of subdued Q4 on the back of cross currency headwinds, the IT index has outperformed the BSE Sensex in Q3, rising 7.7% compared to 1.7%
gains reported by BSE Sensex. This could be due to sectors underperformance in Q2, which resulted in some value buying and on hopes of recovery in growth in the

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coming quarters. The returns could have been much higher, but the index corrected from its peak post the cautious pre quarter commentaries from companies like TCS,
HCL Tech, KPIT Tech & Persistent Systems as regards growth outlook in Q4.
While the growth in the constant currency is unlikely to be subdued, cross currency headwinds is likely to impact the USD revenue growth and margins of most IT players
in Q4. Further, Nasscoms recent guidance of 12-14% export growth in FY16 is largely flattish vs. FY15 on a constant currency basis, leading investors to wonder whether
demand environment could remain strong and to what extent will revenue growth accelerate in FY16. Also, recently Gartner stated that global IT spending will shrink
1.3% to $3.66 trillion in 2015 amid a strong U.S. dollar. Its a downward revision from last quarters prediction of 2.4% growth. This could certainly cap the upside in the
IT index in the near term. Further, we do not expect any positive surprises in Q4, which has been largely factored in the stock prices. Hence demand outlook for FY16 will
hold key for sectors outperformance in the near term. Negative surprises in Q4 and cautious outlook could result in correction in the IT stocks in near term.
We would also continue to track the oil prices closely. If oil prices continue to decline, then it could result in slowdown in the global economy (IT spending could be
impacted) and lead to large volatility in currencies (further cross currency headwinds). Under such a scenario, the upside could be capped and the sector could witness a
material correction. Hence for IT sector to do well, stability in oil prices and currency is essential.
Particulars (Rs. In Million)

Quarter End

Q4FY15E

Infosys

Q3FY15

Q4FY14

Net Revenue

137960

128750

Operating Profit

39540

36420

PAT (Adjusted)

32500

29920

56.8

52.3

TCS

Q3FY15

Q4FY14

Net Sales

245011

215511

Operating Profit

70531

66534

PAT (Adjusted)

54441

52967

27.8

27.0

Q3FY15

Q4FY14

EPS (Rs.)

EPS (Rs.)
Wipro

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Sequential USD revenue growth could be 0.6-0.8% Q-o-Q, which would be largely volume driven. Pricing is more or less
expected to remain stable. Growth is likely to be subdued across verticals like insurance, energy and utilities & retail. Growth in
constant currency is expected to be 2.6-2.8% Q-o-Q. Cross currency headwinds are likely to impact the USD revenue growth by
~190-200 bps Q-o-Q. INR revenue growth would be marginally higher, as rupee has depreciated marginally by 0.5% Q-o-Q
during the quarter.
EBITDA margins are expected to decline by 60-70 bps Q-o-Q on the back of cross currency headwinds and the absence of a
write-back in provisions, which aided the margins Q3.
Key thing to watch out for in the management commentary would be annual USD revenue growth guidance for FY16, outlook of
client budgets, outlook on demand from key verticals/geographies, traction in deal pipeline, margin outlook, capital allocation
strategy and outlook on attrition. We expect the management to provide USD revenue growth guidance of 8-10% for FY16E.
However as per some sources, it is looking to scrap providing quarterly revenue guidance & stick to annual forecasts.
We expect Q-o-Q USD revenue growth to be 0-0.1%. Cross currency headwinds are likely to impact the USD revenues by 220230 bps Q-o-Q. Growth in CC is likely to be 2.2-2.4%.
TCS expects revenue in constant currency to be in line with Q4FY14 (1.9% Q-o-Q CC growth) performance and expects cross
currency headwinds to impact the USD growth by 230 bps Q-o-Q. The management expects stability in verticals like retail
manufacturing, hi-tech & BFS. However, it expects volatility in sectors like telecom, insurance and energy.
EBITDA margins are likely to decline by 30-40 bps Q-o-Q on the back of cross currency headwinds.
Commentary on demand outlook for FY16, outlook on discretionery spending, client budgets, view on business ramp ups &
pipeline conversion, pricing trends, growth outlook on BFSI, manufacturing, insurance & retail verticals, demand outlook in US
& Europe and margin trajectory are key things to watch out.
Q-o-Q USD IT revenue growth could be flat to 0.1%. Cross currency headwinds are likely to impact the revenue growth by

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Net Sales

119929

116535

EBIT

24034

25810

PAT (Adjusted)

21928

22265

EPS (Rs.)
8.9

9.0

HCLTech

Q2JY15

Q3JY14

Net Sales

92830

83490

Operating Profit

23190

22320

PAT (Adjusted)

19160

16242

27.3

23.2

EPS (Rs.)

around 250 bps Q-o-Q. The growth in CC is likely to be ~2.5% (within the range of 1-3% CC revenue growth guided in Q3).
Growth in energy vertical, which has been a major growth driver for the company historically, could continue to remain
subdued due to lower oil prices.
EBIT margins are likely to decline by 10-20 bps Q-o-Q, impacted by cross currency fluctuations, partly offset by productivity
improvements.
Key things to watch out: Management commentary on Q1FY15 USD revenue growth guidance (which could be in the range of 13% Q-o-Q), demand environment, commentary on large deal wins, ramp up and budget trends, growth outlook in verticals like
energy (17-18% to the total revenues).
USD Revenues are likely to grow by ~0.7% Q-o-Q, likely to be driven by both core software services and IMS. Growth would be
largely volume driven, while pricing is expected to remain more or less flat. Cross currency headwinds are likely to impact the
USD revenue growth by ~280 bps Q-o-Q (as stated by the management in pre-quarter earnings update). Growth in CC is likely to
be ~3.5% Q-o-Q.
EBITDA margins are expected to decline by 90-100 bps Q-o-Q on the back of staggered wage hike impact, cross currency
headwinds and higher S&M investments.
PAT could decline sequentially on the back of flat treasury income expected and forex loss.
Deal pipeline, demand outlook for IMS and core software services and margin trends would be keenly watched in the
management commentary.

Fundamental Research Analyst: Mehernosh K. Panthaki IT, FMCG & Midcaps; Email ID: mehernosh.panthaki@hdfcsec.com
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