Early closure of IT budgets, slight improvement in discretionary spending and relatively better US GDP growth are all pointing to an improving revenue trend for Indian IT Services companies in FY14. However, with the recovery still tenuous, we believe that the management teams of the Indian IT companies are unlikely to paint an overly bullish picture in their results commentary.
On the other hand, numbers for the March quarter should reflect steady growth: 1-3% q/q top line with slight a contraction in margins despite the headwinds of the GBP's depreciation. Within our India portfolio, we maintain our OW stance on Indian IT with Infosys as our top pick.
Infosys – guidance could lead to volatility: First, given the low visibility in the IT Services market, there remains a possibility that Infosys does not give any formal guidance for the full year. Second, even if the company gives guidance, we expect it to remain conservative (10-12% full-year revenue growth in USD terms and flat to negative on EBIT margins). We also believe that management is unlikely to be bullish in the conference call and will likely be more cautious than other Indian IT companies.
TCS and HCL Tech – steady on growth. TCS and HCL Tech should continue to lead sector growth with 2.9% q/q growth for both, on our estimates. TCS could witness ~100bps negative impact on operating margins due to one-off expenditure of US$30mn in a recent settlement with employees. We expect both companies to maintain their constructive stance on operating environment and large deal flows.
Wipro – deal closures yet to result in revenue growth. Wipro could continue to suffer from a reduction in the number of small clients while large clients deliver a decent growth. Although we believe that the company has come far in its transition plan, revenue growth could still remain muted for another 1-2 quarters.
Infosys remains our top pick: We favour Infosys on the back of a) a turnaround in its revenue growth trajectory and b) the 13% valuation discount to TCS on P/E multiples (FY14E). We also like HCL Tech on the back of its reasonable valuations, the possibility of positive margin surprise and good revenue growth. We like TCS but expensive valuations prevent us from being more constructive on the stock.
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