Tech titans gear up for a better FY14

Last Updated: Fri, Jan 18, 2013 20:21 hrs

Unlike the quarter ended September, when Tata Consultancy Services (TCS) raced ahead of its peers on both revenue and the net profit growth, it saw competition from its peers in the December quarter. While Infosys led the top-four information technology (IT) companies (TCS, HCL and Wipro are the others) in terms of sequential revenue growth (5.7 per cent), HCL Technologies posted the highest net profit growth of 9.3 per cent for the quarter (sequential).

A pickup in discretionary spends was the key growth driver for these companies. Analysts remain bullish on HCL Tech and TCS. While they feel an improvement in the deal pipeline and volume growth would be vital to re-rating Wipro, the Infosys stock appears to have priced in all the positives. The Street would look for consistency in the financial performance of Infosys.

“We estimate Infosys would trade at a nine per cent discount and a premium of 25 per cent to TCS and HCL Technologies, respectively. In the recent past, the company has seen a number of key management changes and we believe this may negatively impact its revenue growth trajectory,” says Anantha Narayan, information technology (IT) analyst at Credit Suisse. He has a neutral’ rating for Infosys.

The well-diversified business model of TCS, along with good traction at the clients’ end, makes it the favourite of most analysts.

HCL Technologies’ increased focus on improving operational efficiencies and bagging large deals would enable it to post strong margin gains, analysts say. “We upgrade HCL Technologies to buy’ (from reduce’), with a target price of Rs 800 (earlier Rs 550). HCL Technologies remains a margin story, with the Ebit (earnings before interest and tax) margin expanding 560 basis points since the first quarter of FY12 on operational improvements. We expect it to continue to run balancing growth with a constant currency Ebit margin target of 18-19 per cent,” says Abhiram Eleswarapu, IT analyst at BNP Paribas Equities.

For the quarter ended December, all companies saw a sharp sequential rise in realisations, and this drove revenue growth in the quarter. With pricing gains of about 300 basis points, Wipro led the pack, followed by Infoys (up 180 basis points),TCS (up 130 basis points) and HCL Technologies (up 50 basis points). On the volume growth front, however, Wipro was the laggard (-1 per cent), against 1.25 per cent for TCS and three per cent for HCL Technologies. While TCS bagged about seven large deals in the quarter and HCL bagged 12, Wipro continued to struggle on this front. This was reflected in Wipro’s March 2013 quarter revenue forecast (0.5-3 per cent growth). Most analysts had expected a forecast of one to three per cent.

In contrast, Infosys maintained its FY13 organic revenue forecast of five per cent growth, against analysts’ expectations of three per cent. The company gained from a pickup in discretionary budgets.

TCS and HCL also forecast good growth. While TCS expects this year to be better than the last, HCL expects good growth due to higher discretionary spends and improved client mining. Among the key verticals, banking, financial services and insurance and manufacturing continued to grow at a healthy pace; telecom was a drag.

For most companies, Europe contributed the most to growth.

Changing business mix
On the margin front, barring Infosys, all other players registered Ebitda (earnings before interest, tax, depreciation and amortisation) margin expansion on a sequential basis. For Infosys, the fall was largely due to wage increases. “ The portfolio shift towards higher-realisation services like consulting and enterprise solutions helped TCS report a better-than-expected margin performance,” says Aniruddha Mehta, IT analyst at IIFL.

Improving utilisations and cost rationalisations fuelled margin expansion at HCL Technologies. The rise in the net profits of these companies was driven by non-core factors. While lower foreign exchange losses boosted HCL’s profit, the profits of TCS, Infosys and Wipro resulted from high other income and lower taxes.

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