It seems that pain is not yet over for the markets in general and IT pack in particular. Markets have been reeling under pressure along with global peers for over two weeks now on account of subprime shock waves coupled with Yen carried trade. IT stocks were also hit along with other sectors but one factor, which went in favour of IT companies in last few day was slight depreciation of rupee against US dollar. Rupee depreciated by around 1.5% from its recent lows. (Rupee had appreciated around 10% in last 6 months).

After a short-lived relief rally yesterday, markets once again fell flat on its face in line with its Asian peers and the recent political stalemate in Delhi on the Indo US nuclear deal compounded the woes of the markets.

Analysts across the financial services have started factoring the exposure of IT companies to the BFSI for their valuations before estimating Q2 earnings in the wake of subprime mortgage issue in US. This has added insult to already injured IT companies leading to sharp decline in their prices and most of the IT stocks are trading near to their 52 week lows.

IT major Infosys has fallen Rs 678 or 27.8% from its 52 week high and ended today at Rs 1761 close to its 52 week low of Rs 1723. Satyam, Mphasis and Rolta India have been relatively hit lesser than their peers. I-flex has got the maximum BFSI exposure and so it has fallen maximum i.e 55% from its 52 week high. It has got 100 exposures in the BFSI segment.

The promoter and promoter group stakes in India’s top five IT services exporters TCS, Infosys, Wipro, Satyam and HCL Technologies have come down between FY2005 and FY2007, even as these companies chart an aggressive roadmap to expand global footprint.

Over the last three years, these companies witnessed a decline in their promoter group holding, and some of them saw the Foreign Institutional Investor (FII) holdings going up. The decline was steep – in excess of five percentage points in case of Infosys and Satyam, while it was a little over three percentage points in case of TCS, Wipro and HCL.The decline in Infosys is due to the company’s sponsored secondary ADS offers during these years, wherein promoters diluted their holdings to certain extent. Infosys’ two sponsored secondary ADS offerings — in May 2005 and November 2006 — saw its overseas float increase to 19 per cent.

In the case of Wipro, the promoter’s holding declined as the total number of shares went up due to Employee Stock Options (ESOPs). Wipro sources said there was no divestment of any shares by the promoter group, Mr Azim Premji and family, during the period. Mr Premji and family owned 79.58 per cent of Wipro’s shares as of end-June, 2007. But Wipro did see the FII holding going up from 3.80 per cent as of March 2005 to 5.26 per cent as of June 2007.

For TCS, the promoters’ holding came down partly on account of merger of Tata Infotech with TCS through a share-swap. This involved issue of new shares, leading to dilution of promoter stake. In addition, the promoters have sold some shares to institutional shareholders. The TCS scrip also appears to have attracted the interest of FIIs, who have raised their holding by one percentage point between FY2005 and FY2007 through the open market.

The promoters’ stake in HCL stood at 70.67 per cent in FY 05 and came down to 67.55 per cent in FY07 due to stock options. The promoter holding in June 2007 remained virtually unchanged at 67.55 per cent.

Interestingly, in the case of Infosys and Satyam, the FII shareholding has come down during the past three years in the Indian float. FII holding in Infosys, which stood at 42.87 per cent as of March 2005 came down to 37.91 per cent in March 2006 and slid further to 32.55 per cent by end-March 2007. In Satyam, the FII holding declined to 47.85 per cent in June 2007 as against 56.06 per cent in March 2005. Satyam’s promoters have already corporatised their holdings last year. Satyam officials did not respond to Business Line’s queries on decline in promoter stake.

Software stocks faced a relentless sell-off on the bourses after they unveiled their first quarter earnings, with a few companies failing to meet estimates. It was a turbulent quarter for IT majors as they struggled to maintain margins amidst a 7 per cent surge in the rupee value and wage hikes of 12-18 per cent. However, an analysis of the quarterly financial and operational metrics reported by the frontline IT companies (Infosys, TCS, Wipro and Satyam) reveals that thoug h the rupee factor has played spoilsport, there are several positive business trends that could have a bearing on the medium-term outlook for these companies.

The financials

Revenue growth was on the lower side for all the four companies, with rupee appreciation leading to lower realisations for the companies. While TCS and Satyam recorded a 0.79 per cent and 2.87 per cent sequential increase respectively in revenues, Infosys’s revenues remained unchanged. Wipro registered a decline of 3.44 per cent in revenues from the previous quarter.

On a sequential basis, earnings before interest, taxes and depreciation (EBIDTA) fell for TCS (8.54 per cent lower), Infosys (9.44 per cent) and Wipro (4.95 per cent), but remained almost flat for Satyam (0.02 per cent) on a sequential basis. But the profit after tax has declined significantly for three of the four companies, except TCS, which showed a marginal increase in earnings over the preceding quarter.

Damage Control

The pressure on realisations because of rupee appreciation was mitigated partly by hedging of forex exposures and partly through volume growth. TCS has taken forward contracts for about $2.5 billion, Infosys for $925 million, Wipro for around $400 million and Satyam has hedged around $750 million worth of contracts for the year, ranging between 20 per cent and 50 per cent of estimated revenues.

This partly helped companies lock into a fixed exchange rate of (Rs 40.5-42 to a dollar), reducing the downside risk in revenue realisation from further rupee appreciation. The other mitigating factor was the volume-led (person months billed) growth, witnessed by all four companies. TCS had a volume growth of 7.6 per cent, Infosys 6.9 per cent, and Wipro 6.5 per cent; while Satyam topped the list with a 9.5 per cent volume growth on a sequential basis.

Volume-led growth is important earnings driver when realisations are under pressure as a higher volume of billable work can make up for lower rupee rates. TCS, Infosys and Satyam were more successful at protecting or growing the topline. However, Wipro could not increase its volumes enough nor did it hedge enough to compensate for the topline erosion caused by rupee appreciation.

Business Metrics

Services mix: Application development and maintenance continues to be the key revenue generator for these companies. For TCS and Infosys they contribute half the revenues and for Satyam the contribution is around 43.7 per cent. But a h ealthy trend is that some of the high-value and margin services, such as consulting, package implementation and product engineering are all seeing an increasing trend for the four companies.

Another interesting development is that infrastructure management services (IMS), with high revenue generating potential, has begun to contribute significantly to the revenues. So, the big four do appear to be making headway in improving the profile of their offerings to ensure growth.

Verticals: Not surprisingly, the banking financial services and insurance (BFSI) vertical continues to be the top contributor to revenues, considering that this segment sees the highest IT spend by clientele overseas. For TCS, this seg ment contributed 43.1 per cent (41.3 per cent the previous quarter), for Infosys 36.1 per cent (37) and for Satyam 23.7 per cent (24.7). In addition, the manufacturing and telecom segments are also increasing their contributions, accounting for 30-45 per cent of the revenues. Globally, there is an increased spend in technology in the latter two segments, and the big four appear well-placed to tap this potential.

Geographic Spread: North American clients continue to be the biggest revenue sources. For TCS this stood at 51.3 per cent (51.1 per cent the previous quarter), Infosys 62.6 per cent (62.6), and for Satyam 61.7 per cent (62.5). Geograph ic diversification in client base is evident from the fact that Europe has started to contribute between 20-30 per cent of the revenues of all these companies, and has shown an increasing trend sequentially; so is the case with Asia-Pacific and West Asia. This may help companies diversify their currency exposures so that exposure to the dollar could eventually be reduced.

Billing Patterns: Large companies have reported increases of 1-2 per cent in billing rates, indicating improved pricing power. Billing patterns, in terms of a higher proportion of fixed price billing have also shown positive trends wit h TCS (42.7 per cent) and Satyam (32 per cent) leading the way. TCS and Infosys (27.5 per cent) have shown a sequential increase and this is a healthy trend.

Of the two key methods of billing, fixed price contracts are done on the basis of proportion of work completed, while time and material billing is based on resources deployed in the project, often on a per-hour basis.

The ability to price a contract on fixed billing requires a clear ability to forecast the timelines, resources and expertise required to complete a project. This can help predict cash flows to formulate a suitable hedging strategy.

Utilisation: Except TCS, which saw a 0.5 percentage point decrease in employee utilisation levels to a still healthy 79.1 per cent , the other three companies had higher employee utilisation levels this quarter. While in Infosys the le vel was 73.9 per cent (73 per cent the previous quarter), Wipro had 74.5 per cent (68.2) and Satyam 79.9 per cent (78.4). The maximum level considered practicable is around 80 per cent. The fact that all four companies are moving towards that level indicates improved efficiency, especially given the volume growth.

Attrition Rates: Satyam managed marginally lower attrition rate (14.9 per cent) sequentially; while Infosys’s attrition rate(13.7 per cent) was the same as the last quarter; TCS’s attrition rate increased by a marginal 0.2 percentage points to 11.5 per cent. Wipro’s attrition rate of 20.1 per cent is among the highest in the industry. Attrition is a key execution risk. While TCS, Infosys and Satyam seem to have it in control, the figures indicate that Wipro may have a greater challenge on its hands. Rupee appreciation and wage increases may also pose risks in terms of erosion of competitive advantage for these companies.

Looking ahead

Putting a turbulent quarter behind, each of these companies made certain strategic moves that are expected to deliver value and revenue growth in the long run. TCS has hived off its banking product software division into a strategic business unit, to provide a separate and focussed thrust to banking sector clientele.

Infosys has struck a deal with Philips BPO, which is expected to widen expertise in the financial accounting space for its BPO division and make its offerings more integrated.

Satyam has a won a deal from FIFA for software development which is expected to deepen its expertise in newer areas and generate revenues.

Wipro has taken the inorganic route and has acquired US-based Infocrossing, an IMS specialist. Though this acquisition may reduce margins in the near term, given Wipro’s presence in computers and peripherals, together with software expertise, this move may help Wipro widen its client base.

There is increasing evidence from recent numbers that the top four IT companies are being sought by clients for quality and value arbitrage rather than mere cost arbitrage (though cost is still a primary driver), which signifies a move up the value chain.

Multi-million dollar client additions continue to be healthy for all the four companies and have increased sequentially. The repeat business percentage for Infosys and TCS is over 99 per cent and for Satyam is at 89.5 per cent. The number has improved significantly on a sequential basis in all three cases — further evidence of improving quality of service delivery. A high repeat business percentage may also help reduce sales expenditure to mine new clients.

On the rupee front, recently, the RBI curbed external commercial borrowing (ECB) levels for Indian companies. This move, if it curbs a further sharp appreciation in the rupee, could prevent a further squeeze on realisations for these companies. However, the prognosis for the rupee would also hinge on other capital flows through the FII and FDI routes.

The key take-away from the quarterly numbers for frontline IT companies is that these companies have made reasonable progress on the operational and business aspects that are within their control — a move up the value chain on service offerings, headway in geographic diversification and more efficient use of resources.

On the people front, TCS, Infosys and Satyam seem to have made reasonable progress in dealing with attrition, while Wipro, which has done reasonably with regard to other metrics, may have to critically address issues on the HR front to stay competitive. The medium-term outlook still appears positive for the ‘big four’.

From an investment perspective, a possible US slowdown or a slowdown in IT spend by overseas clientele, has replaced the rupee factor as a key risk to the major technology companies. With several companies having a significant exposure to the banking and financial services vertical, the recent turmoil in this space could have significant implications on the business and pricing environment. A close watch on developments on this front is warranted at this juncture.

1Q disappoints, Modern continues to report losses; high other income, lower taxes push up profits:

Geometric reported consolidated dollar revenue of 27.9m, down 1.4% QoQ. Rupee revenue was down 9.1% QoQ. EBITDA margin for 1QFY08 was down 640bp to 7% due to decline in dollar revenue, salary hikes, rupee appreciation and losses in Modern Engineering (net loss of US$0.321m). High forex gains and low tax rate pushed net profit up 15.5% QoQ to Rs117m v/s expected decline of 20.3%.

Y08 guidance of 50% dollar revenue and 30% rupee profit growth to be back-ended in FY08:

The management has revised its earlier guidance of 50% revenue growth in rupee terms down to 50% growth in dollar terms. The net profit guidance, however, remains intact at 30% rupee growth. The management is confident of achieving its guidance with stronger ramp ups in 2HFY08.

Losses in Modern Engineering to depress margins in FY08:

Losses in Modern are expected to be continued over the next two quarters. Given that Geometric’s scale of operations renders it sharply vulnerable to project delays, slower than expected project ramp ups could derail margin recovery in FY08.

Outlook and view:

While the demand environment for Geometric continues to be robust, we believe slower revenue ramp ups over the next few quarters and slower turnaround in Modern Engineering would dampen both revenue and margins over the next few quarters. Our downgraded estimates for FY08E and FY09E (diluted) reflect our expectations of slower revenue off take as well as higher rupee appreciation. At CMP, the stock trades at 15.6x FY08E and 11.5x FY09 EPS (diluted) estimates. We expect muted revenue and margin expectations to result in the stock underperforming the sector over the near–medium term. Downgrade to Neutral.

The markets rallied smartly last week led by frenzied buying in metal stocks. The BSE Metal index gained a whopping 11.4% (1,226 points) with the heavyweights SAIL, Tata Steel and Hindalco — the three stocks amount for almost 59% weightage in the index of 15 stocks — making sharp gains.

The Banks, FMCG and realty stocks also witnessed considerable buying activity. While Infosys’ lowering its guidance for the full-year had limited impact on the technology stocks, pharma stocks continued to sag.

The Nifty is close to its short-term target of 4520. The index has reached here rather sooner than expected. The index touched a lifetime high of 4514, and ended the week 120 points higher at 4505.



KEY LEVELS
Sensex Nifty

S3 14960 4400

S2 15020 4420

S1 15080 4440

Close 15273 4505

R1 15465 4570

R2 15525 4590

R3 15585 4610

S-Support level
R-Resistance level

With momentum on its side, and the index in unchartered territory, it will be difficult to set an upside target for the Nifty. The bulls are unlikely to give up initiative. However, one may see some profit-taking around the 4600-4690 level.

The short-term bias remains extremely bullish as long as the index trades above the 4420-mark.

The Sensex, from an intra-week low of 14,830, soared to a new high of 15,331 — a swing of 501 points during the week. The index finally ended with a gain of 309 points at 15,273. The Sensex may rally to 15,500-15,780. On the downside, the index is likely to find considerable support in the range of 14,930-15,100 for remaining part of the month.

The CNX 100 index, which ended with a gain of 126 points at 4433, is likely to touch the 4530 level this week, with an eye on 4700 in the short-term. On the downside, the index is likely to find support in the range of 4340-4370.

It was a very dramatic day of trade. In fact, when trading began this morning, there were a lot of concern on the subprime market in the US and the way the markets there closed.

Then, Infosys comes in with its guidance, which is on rupee terms at least a lot lower and the Sensex closed almost 100 points down; the Nifty too closed to about half a percentage point or so down. So, your frontline Indices didn’t have a very good day.

But the broader markets did reasonably well. Both Indices were over 0.5% up. As a result, the advance-decline ratio has closed nearly 1:1 in trade today. So, it is not looking too bad, with the broader markets performing.

No complaints on the turnover, which is still in the early days of that series; Rs 50,000 crore has been crossed quite convincingly today. So that too is not looking bad. But it was Infosys all the way, pretty much from 9 in the morning and that stock reacted, over 5% down for itself, with that rupee guidance being lowered. That had a rub-off effect on the rest of the technology pack. Satyam, TCS, HCL Technologies - all lost anywhere between 1% and 4% for themselves. So, tech was looking very weak in trade today.

The other big event for the day - late afternoon - was the fact that DLF hit the Rs 1,00,000 crore market cap and that is Rs 591 for that stock on closing. So that was a very remarkable sort of a play for a large market cap player. And that rubbed off on stocks like Unitech, GMR Infra - an associated real estate player, and Indiabulls Real Estate, which made a year-high for itself, up about 7% or thereabouts.

Outside that though, on the futures side, the discount has trimmed to two points from 20-25 points just a couple of days ago and there is a lot of action happening in that futures and options play. Midcaps are seeing the brunt of it. A lot of long positions on that particular front, Tata Steel and RNRL and some of the other stocks where you are seeing some long positions added. DLF, Power Finance and cement led by ACC saw some long positions added, though on the flip side some short positions built up in some of those technology stocks like Satyam and TCS, Infosys also and some covering in stocks like IFCI, Nagarjuna Fertilizers and GMR to wind up what’s happened on the futures side.

A few winners like Tata Steel and Reliance Energy on the frontliners on the Nifty, the odd MTNL and SAIL also, Reliance Petroleum to go with it, had a very good day on the frontline indices and of course cement, we touched on that on the futures side, all of those stocks. In fact, even Prism Cement from that midcap space, making a high for itself looking good.

A few losers, included the likes of ABB, Punjab National Bank, the odd Ambuja Cement, Sterlite, Tata Motors - all of those stocks cooling off relatively in trade today. But the midcap space, we spoke about that in the breadth. Stocks like Nagarjuna Fertilizers, IOB, Gati, Aptech, all of them having a remarkable sort of a day with great volumes.

Some of the other stocks like Bank of India, Punj Lloyd, PFC all of them having a reasonable day and a couple of stocks choosing to take the day off, the odd Euro Ceramics, which has had a dream run, the odd Indian Bank and Dish TV decided to give up about 3 or 4 percentage points.

Earnings season is in full drive right now. Let us see how we can pick up tomorrow and whether we can put behind us the disappointment of what technology has delivered today.

Infosys management said due to Rupee rise impacted revenues to the extent of Rs 287 crore. Growth in North America has been at 7.5% while in Europe it has been at 8.5%. The Rupee appreciation impact was on EPS as well as on margins. We absorbed 7% cost increases and margins were impacted by only 3.5%. Visa cost was up 1% while wages were up 2.5%. Volume growth of 6.9% witnessed in Q1.

OPMs could be impacted by 100-200 bps in FY08. The company has factored in Rs 40.58 on the exchange rate. They are seeing 9.3% growth in non top-10 clients. 26000 employees will be added in FY08. The company has added 10 $ 1 million clients in Q1.

The offshore wages were up 12-15% and onsite was up 5-6%. Almost 73% of the company's revenues come in Dollar terms, 13% in Pound and 5% in Euro terms.

All round growth is seen in all geographies. We are seeing 3-4% improvement in billing in new contracts. We mitigated 4.5% from 7.3% hit on the margin. We have $ 4 billion target in FY08 for revenues. Pricing has been stable with an upward bias. Utilization increased by 1.5% for Q1, the compan says. There will be no price rise assumed in guidance. BPO business could be significantly impacted by Rupee rally. Consulting grew by 22% which forms 4.9% of revenue. Subprime exposure is less than 1%.

Infosys said that the company is comfortable with high of 70% and low of 80% utilisation. Meanwhile the Infosys management declined to comment on Capgemini acquisition. The company is actively looking at US, Europe for inorganic growth.

The company is hedging for short-term to cover 2 quarters. Company has hedged $ 925 million as of June end agianst $ 470 million QoQ. The Rupee is likely to move between 39-41/ $ in the short-term.

Margins from BPO business are down from 21-22% to 16-17%. Tax sops for BPOs should be continued for next 5 years. Price of renegotiated financial deals seen 1.5 % higher.

TRENDS: Rising labour costs and declining margins prompt the larger firms to open overseas centres.

Faced with attrition rates as high as 40-50 per cent and rising labour costs that are squeezing profit margins, some of the larger Indian IT companies are acquiring businesses or setting up development centres in such countries as Mexico, Philippines and Thailand, where English-speaking skilled manpower is available at half the wage rate prevailing in India.

“It is a case of companies going where talent exists,” says Pravin Chand Tatavarti, managing director, Allegis India, the Indian subsidiary of the $5 billion Allegis Group, a leading provider of technology, recruitment and human capital management solutions to business.

“I would not refer to this trend as outsourcing by Indian companies but would rather call it a multi-centre strategy to attract talent.” He says that more than cost reasons, this provides Indian companies with a competitive advantage-high-end skills blended with low-cost resources.

The trend is evident in both IT and BPO firms such as call centres; banking, financial services and insurance (BFSI); and payroll and benefits administration.

Jobs that are being outsourced include R&D specialists, business analysts, programmers, customer service representatives and process specialists in finance and HR.

Offshoring is also happening due to a lack of skills in areas such as high-end product design, architecture or industry- or company-specific expertise that India lacks.

Allegis India, for example, having acquired EASi Technologies, a tier one supplier of high-end engineering design and analysis services to automobile OEMs across the globe, outsources some of its automotive designing requirements.

Bangladesh, Sri Lanka and China are some of the locations where companies have set up back-offices. Eastern and Northern European countries such as Hungary, Czech Republic, Slovakia, Northern Ireland, Latin America, and Asian countries such as the Philippines and Thailand, among others, are the biggest beneficiaries of this development.

Says Veena Gundavelli, CEO of SITI Corp, a Hyderabad-based provider of offshore recruitment process outsourcing services: “A major factor that has contributed to this trend of increasing the presence in certain parts of the world is to capture more business- for example, having a European outsourcing centre can increase the probabilities of attracting more business from Europe.”

Certain parts of Europe, she says, combine cost-effective operations along with the availability of highly-skilled labour in engineering, technical research and business consulting.

“Jobs that are being outsourced are mainly those of R&D specialists, customer representatives and payroll administrators,” says Chaitanya Nadkarny, director, operations and HR, at ThoughtWorks Technologies, a global IT consultancy that focusses on end-to-end global software development and delivery.

Satyam an outperformer; target of Rs 542

Event

Using our proprietary margin analysis framework, we conclude that for FY08, there will be an EBITDA margin erosion of 261bps for Satyam. However, we believe Satyam is a good candidate to cross the tier-1 valuation chasm based on strong revenue growth, its converging ROE with Infosys and focus on high-growth engineering services business. We maintain our long-term Outperform rating on the stock, but cut our FY08 EPS forecast by 7%.

Impact

In our proprietary margin analysis, we quantified the effect of ‘sorrow’ factors like a stronger rupee regime (Macquarie’s forecast for FY08 is Rs 40.3 per USD) and wage inflation, and ‘joy’ factors like pricing power and various productivity gain levers. Satyam has USD 650 million of hedging on its books. Based on the 58% natural hedge available to the company and our economics team’s exchange rate forecasts, our calculations suggest that the realised Re rate for Satyam in FY3/08 will be Rs 42.5 per USD. Re appreciation will shave of 248bps from Satyam’s EBITDA margin in FY3/08. Rising wages will dent this by a further 466bps. We have assumed a 15% rise in offshore wages and a 4% increase in onsite wages. The above negatives will be partially offset by levers like better pricing power (163bps), productivity gains (75bps), improvement in the offshore-onsite mix (19bps), an increase in utilisation (22bps) and SG&A leverage (173bps).

Earnings revision

Because of adverse exchange rate movement, we have cut our FY3/08E EPS from Rs 25.8 to Rs 24.0 and our FY3/09E EPS from Rs 31.7 to Rs 30.9.

Price catalyst

12-month price target: Rs 542.00 based on a PER methodology. Catalyst: Large deal wins (>USD 50 million) or an acquisition to penetrate Europe/Japan or building product capabilities.

Action and recommendation

We have cut our earnings forecasts marginally as well as our price target. We maintain our Outperform rating on the stock, with 16% upside from the current level. In the short term, there could be some weakness as Satyam may cut its guidance for FY3/08. However, for long-term investors, it remains an attractive pick in our view.



Neutral on Wipro

Event

Using our proprietary margin analysis framework, we have quantified the effect of ‘sorrow’ factors such as a stronger Rupee regime (Macquarie forecast for FY08 is at Rs 40.3 per USD), wage inflation and ‘joy’ factors such as pricing power and various productivity gain levers. We conclude that for FY08, there will be an EBITDA margin erosion of 388bp for Wipro. This large impact (relative to its peers) is due to its weak hedging position (2 months of net forex inflows compared with the 4 months for Infosys and 7 months for Satyam); coupled with absence of software business and limited pricing power. We downgrade the stock to Neutral from Outperform and cut our FY08 EPS forecasts by 20.3%.

Impact

Wipro has the least amount (USD 600 million) of hedge available among the Tier-1 IT companies. This is sufficient to protect margins only till June 2007. For the full FY3/08, the average realised USD/Rs exchange rate works out to Rs41.1. The rupee appreciation should reduce the EBITDA margin in FY3/08 by 467bp, which is the highest compared with its peers. Rising employee cost, both onsite (4%) and offshore (15%), will result in further decrease in EBITDA margins by 443bp in FY3/08. Coming to some rescue of the EBITDA margin are the levers such as higher price realisation (111bp), productivity gains (78bp), further offshore movement of work (19bp), increase in utilisation (13bp) and SG&A leverage (300bp). We note that Wipro’s margin protection levers are small primarily due to a weaker pricing power and absence of software products business.

Earnings revision

Owing to the negative exchange rate movement, we reduce our EPS estimates for FY3/08 and FY3/09 from Rs 25.2 and Rs 31.1 to Rs 19.8 and Rs 23.4, respectively.

Price catalyst

12-month price target: Rs 499 based on a PER methodology.

Catalyst: Initiatives in the products space or winning large deals (>USD 100 million) or acquisition to penetrate Europe/Japan.

Action and recommendation

We have cut our earnings forecast and revised our price target from Rs 673 to Rs 499. We downgrade Wipro to Neutral from Outperform, and we expect a negative surprise in the 1Q FY3/08 results. There are news reports that the company is looking at a major acquisition in Germany to expand its business in Europe’s largest economy. This may pose an upside risk to our recommendation.



TCS an outperformer; target Rs 1399

Event

Using our proprietary margin analysis framework, we conclude that for FY08 there will be an EBITDA margin erosion of 261bps for Tata Consultancy Services (TCS). However, we believe TCS can adjust to the new paradigm thanks to diversification of its delivery base in near-shore locations like Latin America and Eastern Europe, initiatives in the products business, and inorganic growth potential. We maintain our Outperform rating on the stock, but cut our FY08 EPS forecast by 13%.

Impact

Our proprietary margin analysis quantified the effect of ‘sorrow’ factors like a stronger rupee regime (Macquarie: FY08E Rs 40.3 per USD) and wage inflation, and ‘joy’ factors like pricing power and various productivity gain levers. WTCS started the current financial year with USD 1.1billion of currency forwards and options. This, coupled with 42% of natural hedging provided by its foreign exchange expenses and investments, is enough to shield margins until July 2007. Our calculations suggest that the realised foreign exchange rate for TCS will be Rs 41.4 per USD in FY3/08. The adverse impact of Re appreciation will result in a lowering of its EBITDA margin by 351bps in FY3/08. An increase in onsite wages (4%) and offshore wages (15%) will have a further negative impact of 399bps. The good news is the positive impact of levers like pricing (122bps), productivity gains (88bps), further offshore movement of work (17bps), an increase in utilisation (18bps) and SG&A leverage (244bps).

Earnings revision

Primarily due to the adverse exchange rate movement, our FY3/08E and FY3/09E EPS have been cut from Rs 54.7and Rs 73.1, to Rs 47.8 and Rs 62.9, respectively.

Price catalyst

12-month price target: Rs 1399 based on a PER methodology.

Catalyst: US listing or an acquisition to penetrate Europe/Japan, or some large deal wins (>USD 100 million).

Action and recommendation

We have cut our earnings forecasts and revised our price target from Rs 1654 to Rs 1399. We maintain our Outperform rating on the stock, with 22% upside from the current level. In the short term, there could be some weakness as TCS may guide for slow EPS growth for FY3/08. However, for long-term investors, the stock remains attractive in our view.



Infosys an outperformer; target of Rs 2437

Event

Using our proprietary margin analysis framework, we conclude that for FY08 there will be an EBITDA margin erosion of 210 bps for Infosys. However, we believe Infosys can adjust to the new paradigm thanks to its pricing power, initiatives in the products business and inorganic growth potential. Despite cutting our FY08 EPS forecast by 8.1%, we maintain our Outperform rating on the stock.

Impact

In our proprietary margin analysis, we quantified the effect of ‘sorrow’ factors like a stronger rupee regime (Macquarie’s forecast for FY08 is Rs 40.3/USD) and wage inflation, and ‘joy’ factors like pricing power and various productivity gain levers. Infosys has USD 1billion of hedging on its books. Based on the natural hedge available to the company and our economics team’s exchange rate forecasts, our calculations suggest that the realised Re rate for Infosys in FY3/08 will be Rs 41.6 per USD. Rupee appreciation will shave off 335bps from the EBITDA margin in FY3/08. Meanwhile, rising wages will dent this by a further 377bps. We have assumed a 15% rise in offshore wages and 4% increase in onsite wages. The above negatives will be partially offset by levers like pricing (147bps), productivity gains (77bps), further offshore movement of work (25bps), an increase in utilisation (37bps) and SG&A leverage (217bps).

Earnings revision

Because of adverse exchange rate movement, our FY3/08E EPS has been cut from Rs 83.7 to Rs 76.9, and our FY3/09E EPS been lowered from Rs 113.4 to Rs 103.9.

Price catalyst

12-month price target: Rs 2,437.00 based on a DCF methodology. Catalyst: Winning a couple of greater than USD 100 million deals or acquisition around Europe/Japan penetration.

Action and recommendation

We have cut our earnings forecasts marginally and revised our price target from Rs 2,671 to Rs 2,437. We maintain our Outperform rating on the stock, with 25% upside from the current level. In the short term, there could be some share price weakness as Infosys may cut its guidance for FY3/08 when announcing 1Q FY3/08 results in the second week of July. However, for long-term investors, it remains an attractive pick in our view.

Download Here

AnandrathiJAGRANprakashen26April
ANANDRAthiITSectorupdate_Rupee1
ANANDRAthiDailyTech26apr
ANANDRAthiDailyStrat26apr
ANANDRAthiDailyFund26apr

Download Here

kotakPATNICOMPUTER
kotakZENSARTECH
Kotak_Daily
SSKI_ideacellular

CITIGROUP INDIAN IT SECTOR, Reliance Communications, Tata Power, UNION BANK OF INDIA, WIPRO


Download Here

Latin Manharlal Securities Tulip IT


Download Here

Motilal Oswal TCS Q4 FY07 Result Update 16 April

Download Here

First Global - Infosys Technologies April 18


Download Here

ENAM Infotech Enterprises 18 April.


Download Here

Edelweiss HCL+Technologies-result+update-18 Apr-07


Download Here

ASKRJ HCL Technologies Result Update 18 April


Download Here

SSKI - Igate

Man financial - Mphasis

Download Here