Never mind the slow start

Updated: Apr 7 2014, 16:25pm hrs
Outlook for the year remains positive. While the Mar-14 quarter is likely to be seasonally slow, Infosys recent cautious stance and TCS muted indications have prepared investors for this and we do not anticipate any negative surprise. We expect most companies to sound reasonably positive on the outlook for 2014. The cross-currency movement should also be in a narrow band for the quarter.

No specific trend in margins in March 2014. The average INR has appreciated marginally during the quarter, so that will not have a significant impact. Recent cost-cutting measures could help continuing margin improvement at Infosys despite muted growth. Tech Mahindra is likely to be impacted due to the wage increases and the resetting of one of its contracts with BT (British Telecom).

HCLT and Tech M could have the highest element of positive surprise (revenue), hedge losses could hurt Mindtree and Tech M earnings. Continuing strength in HCLTs infra business and a possible pick-up in software could help its revenue. Further ramp-ups in Tech Ms telecom business could offset the reset of the BT contract.

We believe street expectation for Infosys FY14 revenue growth guidance is between 6% and 9% (assuming guidance is given)a number lower than 6% will be a negative surprise. We have made slight changes to our estimates and a target price (Infosys to R3,650 from R3,800)

HCL Technologies

We expect HCL Technologies to continue to register solid growth with a 3.0% quarter-on-quarter revenue growth in USD terms.

We expect Ebit margins to drop 70 basis points q-o-q. This includes about 30 bp impact due to wage hikes awarded during the quarter. The company has also been talking about reinvesting some its recent margin gains.

HCLT continues to remain very well-positioned in the infrastructure outsourcing space despite rising competition. The software services segment is now showing signs of a revival. The management reported that there is increased focus on support and maintenance deals, its approach of ALT ASM (moving away from application support and maintenance business) is gaining traction and that there is greater confidence within the company to bid for large application outsourcing deals. Finally, we see industry-wide positive momentum in discretionary spending.


For the March 2014 quarter, we expect a sequential revenue growth of 1.5% (USD terms). The management had indicated that this quarter would be a bit weak for them. We expect margins to decrease 110 bp q-o-q. The company has awarded a wage hike to onsite employees this quarter.


We believe street expectation for Infosys FY14 revenue growth guidance is between 6% and 9% (assuming guidance is given) a number lower than 6% will be a negative surprise.

For the March 2014 quarter, we expect a sequential revenue growth of 0.5% (USD terms). The management has indicated that revenue would come in at the low end of its guidance of -0.4% to +1.4% growth. We expect margins to increase 50 bp q-o-q as the companys cost-cutting measures continue to bear fruit.


We expect MindTree to report 3% q-o-q revenue growth in USD terms. The product engineering segment was impacted by furloughs in the previous quarter as in earlier years. We expect Ebit (earnings before interest and taxes) margins to stay flat q-o-q.

We expect a similar forex loss as the previous quarter, primarily due to translation losses on receivables.

NIIT Technologies

We expect the company to report 3.0% q-o-q growth in USD terms. This assumes that the company is able to book revenues related to the AAI (Airports Authority of India) project in this quarter. Separately, we understand that a large client in the travel vertical has cut back on IT spending temporarily. We expect this to negatively impact revenues as well.

We expect Ebit margins to decrease 20 bp q-o-q. Benefits from improving revenue mix are likely to be offset by cost overruns in some government projects.

We expect the company to report a translation loss of R100m, 13% of PBT (profit before tax) in the quarter.


We expect the company to report a sequential revenue growth of 1.8% q-o-q in USD terms. Growth has been a bit muted due to seasonal slowness in international revenues and a cyclical downturn in the Indian market.

We expect margin compression of 70 bp q-o-q due to continued investments and a minor impact of the currency.

Tech Mahindra

We expect revenue growth of 2.5% q-o-q in USD terms. Revenue growth would be impacted by lower deferred revenue amortisation (40 bp). The enterprise solutions business has been witnessing good traction.

We expect Ebit margin to decrease 180 bp q-o-q. Key margin drivers are lower deferred revenue amortisation and wage hikes, offset partially by operational improvement. We have estimated a net forex loss of R1.5 bn, 18% of PBT in this quarter.


The company had guided to 2.0-4.0% q-o-q revenue growth (constant currency) in its IT services business. We expect IT services revenue growth to be 2.8% q-o-q in USD terms.

Wipro had acquired Opus in early January we estimate that this contributes to about $10m of revenue in this quarter and organic growth is thus about 60 bp lower. The company has been showing some improving revenue momentum. We expect guidance for the June quarter to reflect a slightly higher range than that for the March quarter (in organic terms).

We expect Ebit margins to be marginally down q-o-q.

Currency impact

An INR appreciation impacts the P&L in three ways: (i) Ebit goes down, (ii) translation of current assets, mainly receivables, hurts net income, and (iii) gains on hedges help net income (depending on when the hedges were taken up). Companies usually pass the impact of translation of long-term loans through the balance sheet. A 1% INR change impacts Ebit margins by 25-50 bp for our coverage universe, but the quantum of gains/losses on hedges and receivables will determine the PAT (profit after tax) impact. The INR has been relatively stable in the March quarter on average.

We have assumed an exchange rate of R61.5/USD for the March 2014 quarter and R60 for future quarters.

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