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IT 3QFY11 PREVIEW: Key things to watch out for – growth traction; budget cues; outlook on attrition and wage inflation

TCS and HCL Tech to outperform, with sequential revenue growth of 7% and 7.4% respectively (v/s 6.3% for Infosys and 5.4% for Wipro)

Sequential Rupee appreciation vs the USD to play a key role in 30-50bp QoQ decline in EBIDTA margins across the top-tier; expect HCL margins to remain flat

Expect Infosys to marginally increase its FY11 US$ revenue guidance by 1% (to 26%), owing to outperformance of its 3QFY11 US$ revenue guidance

Expect stock upsides if: [1] Sequential growth in top-tier US$ revenues exceeds 7%; [2] Infosys upgrades its US$ revenue guidance for FY11 beyond 26%; and [3] Positive commentary on budgets reflecting possibility of comparable growth in FY12 as that in FY11. We prefer Infosys, HCL Tech and Mphasis on these parameters. Amongst the other top tier companies, we prefer TCS over Wipro. Infosys remains our top large cap pick, while Mphasis remains our top mid cap pick.

We prefer playing the sector through companies gaining from [1] a pick-up in discretionary demand, [2] better operational scope, [3] greater MNC offshoring.