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No great expectations

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SummaryWe expect another weak quarter: Furloughs and weak IT spending will lead to muted performance of IT companies in the December 2012 quarter.

Muted performance likely on weak IT spending

We expect another weak quarter: Furloughs and weak IT spending will lead to muted performance of IT companies in the December 2012 quarter. Ebitda (earnings before interest, taxes, depreciation and amortisation) margins will likely be under pressure due to lower billing days, select cases of wage revision and promotions and likely lower pricing. TCS and HCL Technologies will likely report the strongest revenue growth. IT companies have done well to manage/lower expectations for the December 2012 quarter but will have to deal with hopes of accelerated growth in FY2014. We maintain a Cautious stance on the sector.

We expect Tier-I USD revenue growth of 1.8-3.1%: We expect modest organic US Dollar revenue growth of 1.8-3.1% for Tier-I IT (including cross-currency benefit of 20-40 bps). Revenue growth will likely be impacted by (i) typical year-end shutdowns and (ii) weak IT spending with a near halt in flow business. Deceleration in revenue growth will continue with year-on-year organic growth likely to be 1.3-13.7%. TCS will once again lead the industry with sequential revenue growth of 3.1%. HCLT will likely report strong revenue growth of 2.9%, courtesy the front-ended nature of revenue from certain large deals. Tier-I names will outperform the Tier-II pack on revenue growth.

Operating margin may decline y-o-y for Tier-I companies (except HCLT): We expect flattish to 110 bps (basis points) sequential decline in Ebitda margins on lower billing days, wage revision in the cases of HCLT and Infosys and promotions at Wipro, likely lower pricing and cost inflation, especially onsite. Surprisingly, y-o-y Ebitda margin will be under pressure (except HCLT) despite a 200 bps benefit from Rupee depreciation. TCS is likely to report 260 bps and Infosys 550 bps decline in Ebitda margin y-o-y. Margins are likely to decline sequentially for mid-tier companies for similar reasons though they would increase y-o-y.

Strong deal wins are not translating into revenue growth: Traditional flow business (or ADM ramps) is important for healthy growth of Indian IT companies. The flow business growth is led largely by change in discretionary spending. Large deals add the necessary Ďkickerí to growth. FY2013 is expected to be characterised by a good number of large deal signings but weak flow business. CY2013e IT budgets, as a result, would be critical in determining growth rates for Tier-1 IT.

Guidance of Infosys/ Wipro: We expect Infosys to cut FY2013 organic revenue growth guidance to 3.6%. Implied

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