Mutual Funds Commodities Research Tax Planning IPO Our Team Contact Us    
Union Budget
Budget 2011-2012 Home
Industry Expectations - Budget 2011-2012
Industry Reactions - Budget 2011-2012
Budget 2010-2011
Budget 2010-2011 Home
Industry Expectations - Budget 2010-2011
Industry Reactions - Budget 2010-2011
Contributor's Corner
Bonanza Portfolio
Hemant K Gupta
Krish Bhatt
Trinity Investments
Exchange Information
BSE 2009 Holidays
NSE 2009 Holidays
Investor Guide
Depository & Dematerialisation
Grievance Redressal
Investor Guide
Trading of Securities
Transfer of Securities
Your Rights
Budget 2009-2010
Budget 2009-2010 Home
Industry Expectations - Budget 2009-2010
Industry Reactions - Budget 2009-2010
Interim Budget 2009-2010 Home
Industry Expectations - Interim Budget 2009
Budget 2008-2009
Railway Budget 2008-2009
Industry Expectations - Budget 2008
Union Budget 2008-2009
Highlights of Budget 2008-2009
Summary of Budget 2008-2009
Industry Reactions - Budget 2008
Current IPOs
Past IPOs
IPO Subscription
Mutual Funds
Gold Exchange Traded Fund
MF Unique Holding
Forthcoming Dividends
ELSS Schemes Comparison
Tax Plans
New Fund Offers
Market Whispers
Tax Planning
Equity Linked Savings Scheme
Post Office MIS
9% GOI Senior Citizens Savings Scheme
8% Savings (Taxable) Bonds
Kisan Vikas Patra
National Savings Certificate
Public Provident Fund

| More

Technology 1QFY18 review: Tactical margin levers exercised well - Kotak

Posted On: 2017-08-07 21:43:50

Tactical margin levers exercised well. Indian IT reported weak growth. Margins were not as bad considering rupee headwinds and seasonal costs due to extreme cost optimization and increase in utilization (aggregate headcount of Tier-1 IT declined). Earnings were better courtesy Fx gains. Brace for weak growth in FY2018 as drag from legacy business exceeds upside from digital business and there is no pickup in US BFS spends as yet, optimism notwithstanding. Stocks are inexpensive and high payout provides support to stock price but lack triggers.

1QFY18—lacks seasonal strength

June 2017 quarter lacked characteristic seasonal strength. Tier-1 IT companies reported 0.2-2.7% sequential organic c/c revenue growth. Reasons for weakness are well-known—structural challenges in retail industry, regulatory headwinds in US healthcare vertical and no pickup in IT spends of US BFS clients. Growth was relatively better for Infosys and TCS but a tad soft for others. Among mid-tier companies, Hexaware impressed with 4.9% c/c sequential growth. Mindtree and L&T Infotech reported modest 1.2% and 1.5% organic c/c qoq growth while Tech M reported 2% decline.

North America drags, Europe better than expected

North America grew slower than the company average for most players. It was due to no pickup in IT spends of BFSI and structural challenges in retail in addition to weakness in healthcare; these three verticals account for 45% of North America IT spends. Management commentary on this geography didn't suggest any immediate pickup even as the companies remained optimistic about increase in BFS spends. Continental Europe was a surprise performer in June 2017 quarter. Indian IT companies are investing for growth in markets other than North America; however, improvement is not adequate to offset weakness in North America. Another reason for sluggishness is lower number of large deals and smaller deal sizes. Indian IT's commentary on digital opportunities was more optimistic even as progress lags expectations.

Margin defense led by impressive uptick in utilization and extreme cost optimization

Most Indian IT companies defended margins quite well in view of headwind from rupee appreciation in addition to wage hike and visa costs. Better-than-expected margin performance was driven by (1) increase in utilization up to 200 bps qoq and 370 bps yoy for Tier-1 IT. Indian IT have calibrated hiring; net headcount addition of Tier-1 IT was negative for the first time, (2) lower wage inflation and pushback of wage-hike rollout, and (3) extreme cost optimization. While margin performance has been impressive, it was driven by tactical levers. The more sustainable automation-led margin defense is still awaited. We note that net profit of most companies was better than estimates on higher other income driven by forex gains.

Brace for another tough year; we like Infosys in the IT pack

Slowdown in growth rates is due to synchronized sequence of negatives—we do expect rebound in growth rates, but it will be only for a select few who invested in digital capabilities and are well-positioned to defend their share of business in traditional areas. TCS, Infosys and Mindtree appear well-positioned in this journey. Putting a valuation layer as well to the underlying inherent business model strength, Infosys stands out as the most attractive; this, of course, comes with the caveat of business distractions emanating from the continuing friction between the founders and the board.

Hiring, attrition and utilization

Aggregate headcount of Tier-1 IT companies declined by 1,340 as against net hiring of close to 15,000 in June quarter in the previous two years. We note that joining of freshers from campus usually commences from June quarter. It looks like companies may have given later joining dates this year and also reduced freshers hiring.

A trend that is consistent across players is easing of attrition over the past three quarters and it is a reflection of muted demand. Low attrition has allowed companies to improve utilization rates and delivery efficiency, especially in fixed-price projects. That said, extended period of low attrition also limits ability of companies to manage employee pyramid. The current attrition level of most Indian IT companies is in line or above optimum attrition (attrition level that helps companies the most without impacting ability to manage employee pyramid).

Highlights from June 2017 quarter performance

- Revenue growth. Topline growth was soft but in line with our estimates for almost all companies with the exception of Hexaware (strong outperformance) and Mindtree (disappointed). On organic c/c basis, growth of Tier-1 ITs varied from 0.2-2.7% whereas that of mid-tier companies was in the range of -2% to 4.9%. The divergence in trend was largely due to ramp-up in large deals, won over the past 2-3 quarters, at mid-tier companies. Among Tier-1 IT, Infosys and TCS led the pack with about 2.7% and 2% qoq organic constant-currency growth followed by HCLT (1%) and Wipro (0.2%). Hexaware stood out with 4.9% c/c revenue growth aided by accelerated ramp-up of deals won in the recent past.

- Vertical, geos and service mix. The performance of verticals varied across Tier-1 IT largely reflecting deal wins and/or client-specific challenges in the underlying portfolio. Telecom was robust for Infosys and TCS but weak for others suggesting market share gain/losses. BFSI was robust and steady for Wipro and HCLT indicating ramp-up in deals won recently (and acquisition). On the geos front, North America was weak while Europe grew. The outlook and management commentary for North America was muted. Cross-currency tailwinds aided Europe growth in US$ terms. Acquisitions boosted growth for HCLT. Among services, there was no uniform trend. Growth in IMS, the usual growth driver, was a tad weak for Tier-1 IT but strong for mid-tiers. ER&D services revenue grew well for Infosys and HCLT but was muted for Wipro. TCS has reorganized service offerings and has discontinued service-line disclosures in the near term.

- Operating margins. EBIT margins of a few companies declined on a yoy basis (TCS, Wipro, Tech M, Mindtree and L&T Infotech) whereas for others (Infosys, HCLT and Hexaware) it was flat or better. Key headwinds were—(1) appreciation of INR against USD, (2) continued pricing pressure and (3) additional investments in digital capabilities. These headwinds were partly offset by operational efficiencies (largely utilization) and automation. Infosys reported release of about 3,500+ FTEs in 1QFY18 through automation initiatives.

Source: Equity Bulls

Click here to send ur comments or to

Disclaimer:The article above is a gist / extract of the original report prepared by the research firm / brokerage firm. This article is not to be considered as an offer to sell or a solicitation to buy any securities. This article is meant for general information only., its employees or owners or the research firms, its employees or owners won't be responsible for any liability that may arise from information, errors or omissions in these articles. or its employees or owners / the research firms or its employees or clients or owners may from time to time hold positions in securities referred in this article. For detailed research reports, please contact the concerned research firm directly.

Other Headlines:

Energy: 3QFY18E preview-expect a strong quarter
Telecom: Thoughts on Jio's latest price cut - Kotak
Initiating Coverage: Vascon Engineers Ltd - BUY - TP Rs.60 - Kotak
Initiating Coverage: Dilip Buildcon Ltd - BUY - TP Rs.1217 - Kotak
Brigade enterprises Ltd - Research Report - Rating - ACCUMULATE - Arihant Capital Markets
Jindal Stainless (Hisar) - Initiating Coverage - BUY - TP Rs.318 - Kotak
Consumer Products - Cautious: Quick look back at what worked in CY2017 - Kotak
VRL Logistics Ltd - Company Update - BUY - TP Rs.500 - Kotak
HDFC Bank board approves raising Rs.24,000 crore: Angel Broking
Talbros Automotive Components Ltd - Initiating Coverage - Buy - Kotak Securities
Shemaroo Entertainment Ltd - Q2 FY2018 Result Update Rating - NEUTRAL - Arihant Capital Markets
Bodal Chemicals Ltd - Result Update - REDUCE - TP Rs.176 - Kotak
Management Meet Update: Time Technoplast Ltd - ACCUMULATE - TP Rs.214 - Kotak
Petronet LNG - Company Update - BUY - TP Rs.285 - Kotak
FIEM Industries Ltd - Result Update - BUY - TP Rs.1203
Quarterly Market Outlook - Kotak Securities
Dollar Industries Ltd - Result Update - BUY - TP Rs.560 - Kotak
Infosys gets a new CEO and MD: Angel Broking
November Auto Sales Analysis: Angel Broking
NBCC (India) Ltd - Result Update - SELL - TP Rs.250 - Kotak
Bajaj Quadricycles, not enough to see a rally: Angel Broking
Sector Update: Infrastructure Sector - Kotak
Management Meet Update: Blue Dart Express - ACCUMULATE - TP Rs.4375 - Kotak
TRAI unequivocally votes for net neutrality: Angel Broking
The Pitch Report - Initiating Coverage: NESCO Ltd - BUY - TP Rs.611
KNR Constructions Ltd - Result Update - BUY - TP Rs.306 - Kotak
Dr. Reddy's gets EIR for Vizag Plant: Angel Broking
PNC Infratech Ltd - Result Update - ACCUMULATE - TP Rs.198 - Kotak
MRPL - Company Update - ACCUMULATE - TP Rs.138 - Kotak
AIA Engineering Ltd - SELL - TP Rs.1130 - Result Update - Kotak
Minda Industries (MNDA.IN) - Robust performance - CSEC Research
Karur Vysya bank (KVB IN) - Moderate loan growth, coupled with deteriorating asset quality - CSEC Research
Aksharchem India Ltd - REDUCE - TP Rs.680 - Result Update - Kotak
Voltamp Ltd - BUY - TP Rs.1248 - Result Update - Kotak
Shankara Building Products Ltd - BUY - TP Rs.1654 - Result Update - Kotak
Simplex Infrastructure Ltd - BUY - TP Rs.590 - Result Update - Kotak
MOIL Ltd - ACCUMULATE - TP Rs.265 - Result Update - Kotak
CHHOTA (to) MOTA ideas: Eveready Industries Ltd - BUY - TP Rs.522 - Kotak
Castrol India Ltd - Q2FY18 Result Update - Religare
Minda Corporation - Q2FY18 Result Update - Religare
Mold-Tek Packaging - Q2FY18 Result Update - Religare
The India Cements Ltd - BUY - TP Rs.223 - Result Update - Kotak
Tata Motors - BUY - TP Rs.514 - Result Update - Kotak
Ashok Leyland - ACCUMULATE - TP Rs.126 - Result Update - Kotak
Oil India Ltd - ACCUMULATE - TP Rs.381 - Result Update - Kotak
Sun TV Network - REDUCE - TP Rs.878 - Result Update - Kotak
Larsen & Toubro - ACCUMULATE - TP Rs.1337 - Result Update - Kotak
Voltas - ACCUMULATE - TP Rs.610 - Result Update - Kotak
Allcargo Logistics - BUY - TP Rs.205 - Result Update - Kotak
Mahindra & Mahindra - BUY - TP Rs.1604 - Result Update - Kotak

Website Created & Maintained by : Chennai Scripts
West Mambalam, Chennai - 600 033,
Tamil Nadu, India

disclaimer copyright © 2005 - 2018