IT to see strong revenue growth in Q1: Which stocks to buy?

Nasrin Sultana
Moneycontrol Bureau

Just as Arun Jaitley finishes reading out his maiden Budget speech, India Inc will kick start earnings season of April-June quarter (FY14) with Infosys results scheduled on July 11. The market will turn all attention to company specific results, after noise around Budget dies down. Most analysts feel that technology companies will see strong revenue growth in the first quarter on firm client demands and seasonal acceleration.

According to Kotak Securities, overall demand scenario has remained stable and improved across sectors in the quarter. The economies of USA and EU have continued to show signs of improvement and stabilisation which should bode well for client spending, it says.

Credit Suisse is also optimistic that management commentary around this time is relatively more positive. "Average quarterly growth in first half versus the preceding second half of fiscal has been 185 basis points higher on average in the past eight years excluding FY09. We estimate a 200 bps pick-up in 1HFY15," it adds.

IT companies are expected to see a revenue growth of around 40 basis points. Kotak estimates cross currency to boast revenues to the extent of 30-40 bps while Emkay believes tier I IT companies will report a 1.6-5.2 percent or 40-50 bps quarterly growth in dollar revenue terms.

As per Emkay, TCS will be leading the pack with a solid 5.2 percent Q-o-Q USD revenue growth and Wipro will be at the lower end (over 1.6 percent Q-o-Q. Amongst tier II companies, it expects Mindtree to lead the charge with a 4.9 percent Q-o-Q USD revenue growth.

Margins to be hit

Analysts, however, warn that EBITDA margins may be under pressure. Rupee appreciation (2.8 percent Q-o-Q), salary increments and additional visa costs may eat away a chunk of margins. Emkay feels operational margins may be adversely impacted by around130-230 bps Q-o-Q in the tier 1 companies while Kotak expects EBIDTA to be lower by about 4 percent on quarterly basis.

What to watch out for

Kotak will watch out for improvement in discretionary spends, management commentary on pricing, competitive intensity, new areas of opportunities and demand trends in cloud computing, analytics and mobility.

Emkay sees some acceleration in revenue performance from North America given that it remains critical to lend visibility to 'mid teens' revenue growth trajectory despite the strong traction visible evident from Europe. Besides monitoring commentary on deal flow and wins, net hiring will be key this quarter.

Infosys FY15 guidance

Despite the recent management, Kotak is not hoping to see any major change in the guidance for FY15 by Infosys. It expects FY15 guidance to be guided by conservatism.

According to Emkay's estimates, Infosys may see a 2.4 percent Q-o-Q USD revenue growth supported by 40 bps cross currency gains while EBITDA margins are expected to decline by 210 bps Q-o-Q to 26.2 percent. Profits are expected to decline by 12 percent Q-o-Q on account of EBITDA margin decline as well as absence of forex losses unlike March 14 quarter. It advises investors to focus on annual revenue/margin outlook for FY15, restoration in quarterly revenue guidance and performance in verticals like financial services and outlook on demand from key verticals and geographies.

What to buy?

Kotak has a constructive view on the medium-to-long term prospects on expectations of improving demand over this period.

Emkay continues to prefer tier I companies on valuations with order of preference to be Infosys, TCS and Wipro. "Amongst the mid tiers, while Mindtree continue to deliver well on revenue growth, we continue to reckon that earnings upgrades are largely behind and hence limit cases for further stock upsides. NIIT Tech remains the sole buy rated stock in our mid tier IT services coverage universe," it advises.

Credit Suisse thinks this is a good time to relook at some of the stocks. It top picks are
HCL Tech , Tech Mahindra and TCS for medium term given the strength in fundamentals. It also suggests it is a good tactical time to look at Wipro with relative valuations at a 10-year low.