Outlook for the year remains positive. While the Mar-14 quarter is likely to be seasonally slow, Infosys’ recent cautious stance and TCS’ muted indications have prepared investors for this and we do not anticipate any negative surprise. We expect most companies to sound reasonably positive on the outlook for 2014. The cross-currency movement should also be in a narrow band for the quarter.
No specific trend in margins in March 2014. The average INR has appreciated marginally during the quarter, so that will not have a significant impact. Recent cost-cutting measures could help continuing margin improvement at Infosys despite muted growth. Tech Mahindra is likely to be impacted due to the wage increases and the resetting of one of its contracts with BT (British Telecom).
HCLT and Tech M could have the highest element of positive surprise (revenue), hedge losses could hurt Mindtree and Tech M earnings. Continuing strength in HCLT’s infra business and a possible pick-up in software could help its revenue. Further ramp-ups in Tech M’s telecom business could offset the reset of the BT contract.
We believe street expectation for Infosys’ FY14 revenue growth guidance is between 6% and 9% (assuming guidance is given)—a number lower than 6% will be a negative surprise. We have made slight changes to our estimates and a target price (Infosys to R3,650 from R3,800)
We expect HCL Technologies to continue to register solid growth with a 3.0% quarter-on-quarter revenue growth in USD terms.
We expect Ebit margins to drop 70 basis points q-o-q. This includes about 30 bp impact due to wage hikes awarded during the quarter. The company has also been talking about reinvesting some its recent margin gains.
HCLT continues to remain very well-positioned in the infrastructure outsourcing space despite rising competition. The software services segment is now showing signs of a revival. The management reported that there is increased focus on support and maintenance deals, its approach of ALT ASM (moving away from application support and maintenance business) is gaining traction and that there is greater confidence within the company to bid for large application outsourcing deals. Finally, we see industry-wide positive momentum in discretionary spending.
For the March 2014 quarter, we expect a sequential revenue growth of 1.5% (USD terms). The management had indicated that this quarter would be a bit weak for them. We expect margins to decrease 110 bp q-o-q. The company has awarded a wage