Earnings Update: IT

Earnings Update of IT bellwethers and sector outlook

Infosys Technologies
Results Highlights       

CMP

1,230

Target 1,516

Consolidated Q3 revenues grew by 35.5% to Rs 5,786 crore while Net grew by 33.3% to Rs 1,641 crore. Sequentially revenues grew by 6.8% while Net grew by 14.6%. BFSI space posted robust growth of 28.6% yoy followed by manufacturing and retail growing @ 82.3% and 41.4% respectively. Utilisation rate declined to 68.5% from 70.7% having an effect of 1.1% on margins. Net Margin however improved to 31.9% from 29% in previous year’s quarter while Operating Margins too got better at 28.4% against 26.4% a quarter ago. Company is sitting on a huge cash of Rs 8,463 crore and 67% is with PSU banks. Net profit included tax write back of Rs 62 crore.

Quick comments on Q3 numbers: Though margins have improved and Q3 revenues are within guidance but the company has lowered its full-year guidance due to expected currency fluctuation which has been revised at 12-13% while in terms of constant currency at 17-18%. According to the management, the company's offshore revenues are up but its onshore revenues are going down as the flight to quality and value has impacted offsite revenues. The management does not see any project cancellations, but flow of new projects is expected to slowdown. The pricing is down 1.8% qoq basis but the company is looking at pricing as portfolio approach. However, it feels that the pricing may be under pressure if macro situation remains bad. The management said some clients are looking at freezing budgets and are expecting more clarity in February, while, most clients say they are looking to increase allocations. The company expects clients' budget in 2009 to be 'flat to down'. Further, it doesn't see any secular downtrend in telecom business, but sees currency impact now.
Infosys Quarter ended Dec-08 5786 3075 2711 274 406 2031 187 1844 40 241 1641 28.63 9 months ended Dec-08 16058 8720 7338 834 1200 5304 533 4771 223 617 4375 76.3

Consolidated P&L Account Rs Crore Net Sales Operating expenses Gross Profit Selling & marketing expenses General & Admin expenses EBIDTA Depreciation

QoQ % Growth 6.8% 6.4% 7.3% -9.6% -5.6% 13.2% 5.6% 14.0% -39.4% -4.0% 14.6% 14.7%

YoY % Growth 35.5% 32.3% 39.3% 33.7% 16.3% 45.9% 22.2% 48.8% -74.7% 45.2% 33.3% 33.3%

YoY % Growth 32.2% 29.7% 35.3% 20.3% 23.5% 41.1% 20.9% 43.7% -60.5% 30.2% 28.3% 28.3%

FY ended Mar-08 16,692 9,207 7485 916 1,331 5238 598 4640 704 685 4659 81.26

Deepak Tiwari Research Analyst deepakt@arthamoney.com T: + 91 22 4063 3007

Operating Income Other Income Taxes Net Profit Diluted EPS

Sources: Company website, Artha Money Research

January 23, 2009

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1

Tata Consultancy Services
Results Highlights        

CMP

496

Target 810

Consolidated Q3 revenues grew by 24.1% to Rs 7,277 crore while Net grew by 2.9% to Rs 1,374crore. Sequentially revenues grew by 4.7% while Net grew by 6.9%. Despite recession, its revenue share from the US increased to 52.2% v/s 49.7% a quarter ago. Utilisation rate pegged at 79.9% excluding trainees and 71.8% including trainees. Margins improved marginally; OPM at 24.7% while NPM at 18.9%. Its incurred forex loss was Rs 251 crore. Company is sitting on a huge cash of Rs 2,571 crore. The company has declared dividend for every quarter since it listed August 2004 and declared quarterly dividend of Rs 3 per share.

Quick comments on Q3 numbers: In dollar terms, the company has reported a flat revenues growth yoy however sequentially it grew by 5.8%. Pricing is under pressure which has gone down by 10 bps. Depreciation of Rupee helped bottom-line grow by 5.9%. The management is expecting significant reduction in IT budgets from clients as the next fiscal is expected to be more challenging. Thanks to the poor macro environment, the company is likely to revise its guidance downward. The company says that clients are looking to cut costs and increase efficiency levels and are either not spending or are delaying their decisions. Their discretionary spending is also going to be non-existent. The management believes that the budget cuts however may not result in volumes coming down. It has added 41 new clients and out of 6 large deals, 5 deals came from the US. The company has invested Rs 1.06 billion in technology infrastructure business but not aggressive on new recruitments.
TCS Consolidated P&L Account Rs Crore Net Sales Employee Costs Operations & Other expenses Total Costs EBIDTA Depreciation Operating Income Other Income Interest PBT Taxes Net Profit Diluted EPS Quarter ended Dec-08 7277 2560 2773 5333 1944 147 1797 -172 10 1614 240 1374 13.92 9 months ended Dec-08 20641 7339 7979 15318 5323 399 4924 -297 23 4604 645 3959 40.09

QoQ % Growth 4.7% 3.7% 4.1% 3.9% 6.8% 5.2% 6.9% 1.8% 79.3% 7.2% 8.9% 6.9% 7.2%

YoY % Growth 24.1% 27.6% 18.1% 22.5% 28.9% 2.1% 31.7% -196.3% 36.2% 5.1% 20.0% 2.9% 2.7%

YoY % Growth 24.6% 24.8% 22.8% 23.7% 27.0% -1.2% 30.0% -149.6% -0.6% 5.6% 15.4% 4.1% 3.8%

FY ended Mar-08 22863 7855 9055 16910 5954 564 5390 486 30 5846 786 5060 51.36

Sources: Company website, Artha Money Research

January 23, 2009

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2

Wipro
Results Highlights 

CMP

217.60 Not Rated

      

Consolidated Q3 revenues grew by 25.2% to Rs 6,600 crore while Net grew by 2.5% to Rs 994 crore. Sequentially revenues grew by 1% while Net grew by 2.5%. This revenue includes revenues from consumer care & lighting business also. The IT business however grew by 29.7% while operating profit grew by 26.3% yoy at Rs 5,916 crore and Rs 1,088 crore respectively. The IT business operating margin remained flat at 18.4%. The company’s MTM forex loss was whopping Rs 1,575 crore. The company won 4 multi-year multi-million dollar deals during the quarter. Company is sitting on a huge cash of Rs 3,838 crore. The company added 31 new customers. Q4 IT revenue guidance expected at $1.045 billion (including revenues from the acquisition of Citi Technology Services).

Quick comments on Q3 numbers: The provisions made for losses from Nortel dragged its profit and margins down. The company has also made one-time provision in respect of receivables from large customers which impacted margins by 60 bps. It saw sequential growth across the verticals in constant currency terms while the price realisations were up 1% in constant currency terms. Going forward, the management expects a growth of 5-6% in constant currency terms in Q4. However, admits that clients have asked for price cuts and were mitigating price cut demands via cost transformation proposals. It is also envisages that the IT budgets of many clients would be sharply lower in 2009, but does not see many project cancellations.

Wipro Quarter ended Dec-08 6600 4461 463 422 5346 1254 163 1090 121 57 1155 161 994 6.89 9 months ended Dec-08 19172 12933 1395 1090 15419 3753 463 3290 233 182 3341 479 2862 19.79

Consolidated P&L Account Rs Crore Net Sales Cost of sales & services Selling & marketing expenses General & Admin expenses Total Costs EBIDTA Depreciation Operating Income Other Income Interest PBT Taxes Net Profit Diluted EPS

QoQ % Growth 1.0% 0.4% -2.3% 22.0% 1.6% -1.6% 7.0% -2.8% 60.7% -7.0% 1.7% -3.3% 2.5% 2.8%

YoY % Growth 25.2% 24.2% 21.3% 45.2% 25.4% 24.5% 23.2% 24.7% -25.5% -25.1% 20.1% 45.9% 16.8% 17.6%

YoY % Growth 34.4% 33.6% 38.6% 43.5% 34.7% 33.2% 30.0% 33.6% -34.5% 48.7% 23.9% 52.1% 20.2% 20.1%

FY ended Mar-08 19980 13528 1422 1075 16025 3955 497 3459 417 169 3707 455 3252 22.51

Sources: Company website, Artha Money Research

January 23, 2009

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Outlook for the Industry
Indian IT sector is one of the major victims of current financial crisis. Given the uncertainty looming large, growth visibility for the FY 2010 is very poor. IT bellwethers are likely to report single digit growth in the ballpark of 5-8% during FY 2010. There are various issues that plague the sector such as volume growth is under stress, significant pricing pressure is mounting, IT spending is reported to be getting postponed or whittled down. The IDC estimates that the IT offshore spending will grow @ 18% ~ 2012. Many projects are getting postponed or cancelled altogether. Not only BFSI (Banking, Financial Services and Insurance) sectors which contribute largest portion to the IT companies’ revenues, other sectors particularly manufacturing, retail are also feeling the pinch. Apart from general slowdown across the globe, there are several other enemies of the IT sectors’ growth such as cross currency, expected protectionist policies in developed economies, fears of outsourcing backlash due to soaring unemployment rate and intense competition coming from MNCs like IBM, HP and Accenture. Indian IT companies like Infosys and TCS deliver high quality IT services at significantly low cost than their global peers. In current scenario where clients will try every trick to stay afloat, we believe more outsourcing will happen with a view to minimise their expenses. Some IT spending will be streamlined and they will spend only on those services that are extremely essential. This is clearly reflected in the downward revision of guidance announced by the IT majors. We further believe, these companies have survived recessions earlier in the past and they will survive this phase also. Moreover they will emerge stronger in the light of measures taken like better cost management and improvement in the utilization rate will help them to improve their margins to some extent.

Relative Stock Performances vis-a-vis Sensex
120%

100%

80% Infosys TCS 40% Wipro Sensex 20%

60%

0%
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January 23, 2009

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