Sector Update | 28 April 2015
Technology
Is the party over?
Revenue miss across top tier; pricing pressure, and a contrarian perspective
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Weak revenue trends suggest pressure to growth from new technologies at tier-I. But
Accenture’s example suggests capabilities can drive sanguine growth
Currencies and seasonal US weakness seem to be key factors dragging revenues,
than any structural concerns
Pricing pressure is increasingly evident, but its impact on margins not yet
Currency-led earnings pressures may weigh on near-term valuations
Digital is BIG, but is it for the BIG?
That is the question coming up after the revenue miss across top tier in 4QFY15,
with noticeable pricing pressure in at least two of the top four and the consequent
fear that Digital may be cannibalizing more existing revenue than adding new ones.
But we do not believe it is a absolute gloomy scenario for larger companies in the
long run yet. Those gunning to aggressively build capabilities will still flourish –
Accenture, ~2x size of TCS, proved this recently (2 quarters of guidance uptick).
Growth dismal but not falling off a cliff, currencies are!
Constant currency (CC) growth in 4QFY15 came below expectations across the
board. But we note that YoY CC growth in 4QFY15 decelerated at TCS, has been the
same as 3Q at INFO, within a range at WPRO and has accelerated at HCLT in the last
two quarters. Even weak Americas was more seasonal than structural – growth
band was same as 4QFY14, with the exception of WPRO.
Pricing is a trend to watch for; factors protecting OPM
INFO’s pricing declined 1.7% QoQ in CC in each of the last two quarters, but margin
performance remained strong. TCS’ realization has been trending down, without
hurting its margin band, and likewise for WPRO. Currency and then utilization have
had offsetting impact at TCS, INFO and WPRO. This quarter we heard lot of
commentary on progress in automation, which is encouraging and imperative.
Prefer change resilience, though near term stress may prevail
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INFO guided for 380bp impact from cross currency to USD revenue growth, and
has greater exposure to USD bookings. Thus, WPRO, TECHM and TCS may suffer
~450bp hit in FY16E, with marginally higher impact on earnings too. Hence, EPS
growth across tier-I will likely be in high single digits, with leaders managing low
double digits, at best. That will likely weigh on near-term valuations.
As the new order establishes itself, industry growth may struggle to overcome
low double digits in the foreseeable future. In this shift, betting in the sector is
getting increasingly selective than being secular. Our preference is for
companies that are more resilient to these pressures either due to quicker
adoption of new offerings going forward (INFO – build and buy), or growth
drivers insulated due to lower penetration (HCLT – Engineering Services and
TECHM – Network Services).
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com); +91 22 3982 5424
Siddharth Vora
(Siddharth.Vora@MotilalOswal.com); +91 22 3982 5585
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