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RETAIL RESEARCH

IT Sector Preview – Q4FY15

April 13, 2015

Sector Preview:
USD Revenue growth to be subdued in Q4FY15, led by seasonality & cross currency headwinds
We expect the Tier I IT players to witness subdued USD revenue growth in Q4 (in the range of 0-0.8%), led by seasonality (delays in project ramp up during the start of
the year) & cross currency headwinds (which is likely to impact the revenue growth by 250-380 bps Q-o-Q, since major global currencies have depreciated vs. USD by 410%% during the quarter. We expect TCS & Wipro to underperform its peers in terms of revenue growth, while Infosys & HCL Tech could perform relatively better. Tech
Mahindra is likely to report the lowest organic revenue growth in CC, while its consolidated growth is likely to be higher due to consolidation of LCC. Among Tier II
vendors like Mindtree, NIIT Tech and KPIT Tech, growth is likely to be soft due to USD appreciation and client-specific issues. Besides TCS & HCL Tech (which have
indicated sluggish Q4 due to cross currency headwinds), KPIT Tech & Persistent system have also lowered their growth forecast for Q4FY15. However, Hexaware is likely
to report decent growth despite cross currency headwinds. Revenues in rupee terms are likely to be marginally higher due to marginal INR depreciation vs. USD during
the quarter (by ~0.4%).

Cross currency headwinds, wage hikes & higher investments to put pressure on margins
We expect EBITDA margins of most of the IT players to decline sequentially on the back of cross currency headwinds / INR appreciation against currencies like GBP, Euro
and AUD. Rupee depreciation was marginal vs. USD and hence is unlikely to provide any cushion to margins. Productivity improvements could partly offset the negative
impact of cross currency fluctuations in case of Wipro. Margins of some of the players like HCL Tech and Tech Mahindra are likely to be impacted more due to wage
hikes, high investments in S&M (in case of HCL Tech) and integration of low margin acquisitions (in case of Tech Mahindra). However, margins of some players like
Mphasis & Persistent could improve sequentially on the back of better mix.

Focus will be on the Managements’ Commentary on IT sector outlook
Some of the key things, which would be tracked closely by the market participants in the management commentary by the IT companies include i) Outlook on client
spending (discretionary / non discretionary) and project ramp ups in top clients; ii) Demand environment in US and Europe and Continental Europe; iii) Comments on
demand and pricing trends in financial services vertical; iv) Demand outlook on Key verticals; v) Hiring trends; vi) Margins trajectory; vii) Expectations on forex moves viii)
Outlook on client Budgets. While Accenture’s Q2 result reflects improving demand environment, the pre-quarter earnings commentaries by some Indian IT companies
were not so optimistic (for the next 1-2 quarters). Hence management commentaries from players like TCS, Infosys, Wipro & HCL Tech about the growth outlook for
FY16 would be keenly watched.

IT sector has outperformed the BSE Sensex in Q3 despite expectations of subdued growth in Q4; poor results could lead to correction in the near term
Despite the expectations of subdued Q4 on the back of cross currency headwinds, the IT index has outperformed the BSE Sensex in Q3, rising 7.7% compared to 1.7%
gains reported by BSE Sensex. This could be due to sector’s underperformance in Q2, which resulted in some value buying and on hopes of recovery in growth in the

RETAIL RESEARCH

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Cross currency headwinds are likely to impact the USD revenue growth by ~190-200 bps Q-o-Q.6-0.1%.2-2. which aided the margins Q3. growth outlook on BFSI.coming quarters. FY15 on a constant currency basis.6-2. Pricing is more or less expected to remain stable.66 trillion in 2015 amid a strong U. While the growth in the constant currency is unlikely to be subdued.8% Q-o-Q. insurance & retail verticals. HCL Tech. Further. Growth in CC is likely to be 2.4%. the upside could be capped and the sector could witness a material correction. traction in deal pipeline.1%.)  EPS (Rs.5% Q-o-Q during the quarter. client budgets. outlook on demand from key verticals/geographies.) Wipro RETAIL RESEARCH   Sequential USD revenue growth could be 0. we do not expect any positive surprises in Q4. recently Gartner stated that global IT spending will shrink 1. It’s a downward revision from last quarter’s prediction of 2. pricing trends. energy and utilities & retail. Cross currency headwinds are likely to impact the USD revenues by 220230 bps Q-o-Q. Growth is likely to be subdued across verticals like insurance. Q-o-Q USD IT revenue growth could be flat to 0. capital allocation strategy and outlook on attrition. Cross currency headwinds are likely to impact the revenue growth by Page | 2 .3% to $3.8 52.S. leading investors to wonder whether demand environment could remain strong and to what extent will revenue growth accelerate in FY16. which would be largely volume driven.8% Q-o-Q. Key thing to watch out for in the management commentary would be annual USD revenue growth guidance for FY16. Nasscom’s recent guidance of 12-14% export growth in FY16 is largely flattish vs. insurance and energy. but the index corrected from its peak post the cautious pre quarter commentaries from companies like TCS. We expect the management to provide USD revenue growth guidance of 8-10% for FY16E. Hence demand outlook for FY16 will hold key for sector’s outperformance in the near term. then it could result in slowdown in the global economy (IT spending could be impacted) and lead to large volatility in currencies (further cross currency headwinds). Further. The returns could have been much higher. TCS expects revenue in constant currency to be in line with Q4FY14 (1. In Million) Quarter End Q4FY15E Infosys Q3FY15 Q4FY14 Net Revenue 137960 128750 Operating Profit 39540 36420 PAT (Adjusted) 32500 29920 56. If oil prices continue to decline. EBITDA margins are expected to decline by 60-70 bps Q-o-Q on the back of cross currency headwinds and the absence of a write-back in provisions. EBITDA margins are likely to decline by 30-40 bps Q-o-Q on the back of cross currency headwinds. Growth in constant currency is expected to be 2.0 Q3FY15 Q4FY14    EPS (Rs. Commentary on demand outlook for FY16. Negative surprises in Q4 and cautious outlook could result in correction in the IT stocks in near term. cross currency headwinds is likely to impact the USD revenue growth and margins of most IT players in Q4. The management expects stability in verticals like retail manufacturing. stability in oil prices and currency is essential.8 27. KPIT Tech & Persistent Systems as regards growth outlook in Q4. Particulars (Rs. outlook of client budgets. dollar. Hence for IT sector to do well. INR revenue growth would be marginally higher. it is looking to scrap providing quarterly revenue guidance & stick to annual forecasts. hi-tech & BFS. margin outlook. Also. We expect Q-o-Q USD revenue growth to be 0-0. This could certainly cap the upside in the IT index in the near term. However. view on business ramp ups & pipeline conversion. it expects volatility in sectors like telecom.3 TCS Q3FY15 Q4FY14  Net Sales 245011 215511  Operating Profit 70531 66534 PAT (Adjusted) 54441 52967 27. which has been largely factored in the stock prices. However as per some sources. manufacturing.4% growth. demand outlook in US & Europe and margin trajectory are key things to watch out. outlook on discretionery spending. We would also continue to track the oil prices closely. as rupee has depreciated marginally by 0. Under such a scenario.9% Q-o-Q CC growth) performance and expects cross currency headwinds to impact the USD growth by 230 bps Q-o-Q.

partly offset by productivity improvements. We may have from time to time positions or options on. Near Kanjurmarg Station. EBITDA margins are expected to decline by 90-100 bps Q-o-Q on the back of staggered wage hike impact. RETAIL RESEARCH Page | 3 .com Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. any company mentioned in this document. The information contained herein is from sources believed reliable. Key things to watch out: Management commentary on Q1FY15 USD revenue growth guidance (which could be in the range of 13% Q-o-Q). entry prices and/or other parameters mentioned in this document may or may not match or may be contrary with those of the other Research teams (Institutional. cross currency headwinds and higher S&M investments. Growth in energy vertical. growth outlook in verticals like energy (17-18% to the total revenues). Growth would be largely volume driven. impacted by cross currency fluctuations. Crompton Greaves. while pricing is expected to remain more or less flat. PAT could decline sequentially on the back of flat treasury income expected and forex loss.3 23. This document is not to be reported or copied or made available to others. Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Website: www. "Alpha". Fundamental Research Analyst: Mehernosh K.2   EPS (Rs.com Email: hdfcsecretailresearch@hdfcsec.Net Sales 119929 116535 EBIT 24034 25810 PAT (Adjusted) 21928 22265   EPS (Rs. ratings.) around 250 bps Q-o-Q. EBIT margins are likely to decline by 10-20 bps Q-o-Q.com RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office HDFC securities Limited.0 HCLTech Q2JY15 Q3JY14 Net Sales 92830 83490 Operating Profit 23190 22320  PAT (Adjusted) 19160 16242  27. and buy and sell securities referred to herein. Opp. or perform investment banking.hdfcsec. could continue to remain subdued due to lower oil prices. PCG) of HDFC Securities Ltd. likely to be driven by both core software services and IMS. We do not represent that it is accurate or complete and it should not be relied upon as such. Growth in CC is likely to be ~3.5% (within the range of 1-3% CC revenue growth guided in Q3).9 9. commentary on large deal wins. This report is intended for non-Institutional Clients This report has been prepared by the Retail Research team of HDFC Securities Ltd. Office Floor 8. ramp up and budget trends. target price. demand outlook for IMS and core software services and margin trends would be keenly watched in the management commentary.) 8. USD Revenues are likely to grow by ~0. Deal pipeline.B. Email ID: mehernosh. We may from time to time solicit from.panthaki@hdfcsec. opinions. Building . The growth in CC is likely to be ~2.5% Q-o-Q. demand environment. FMCG & Midcaps. estimates. Panthaki – IT. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. or other services for. The views. which has been a major growth driver for the company historically. I Think Techno Campus. Kanjurmarg (East).7% Q-o-Q. Cross currency headwinds are likely to impact the USD revenue growth by ~280 bps Q-o-Q (as stated by the management in pre-quarter earnings update).