On the back of healthy volume growth and stable pricing scenario, we expect Tier 1 players to report USD revenue growth in the range of 2.5-7.5% Q-o-Q with TCS likely to lead the pack with growth at the higher end.

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Sector Preview:
Robust USD Revenue growth expected in Q2FY15, led by seasonality & improved demand scenario, however, cross currency headwinds likely to have
some impact; INR revenues to be higher due to INR depreciation
We expect the IT players (both Tie I & II) to witness strong USD revenue growth in Q2, led by seasonality & improved demand scenario across the verticals &
geographies. On the back of healthy volume growth and stable pricing scenario, we expect Tier 1 players to report USD revenue growth in the range of 2.5-7.5% Q-o-Q
with TCS likely to lead the pack with growth at the higher end. IT companies are expected to witness budget flush from clients on discretionary and capital spending.
Verticals like BFS are likely to do well. We expect good growth in major IT markets viz; US & Europe.
USD Revenue growth of Tier II players is also likely to be stronger in the range of 3-6.5% Q-o-Q with Persistent Systems likely to lead the pack on the back of strong
growth expected in IP led revenues. Cyient, KPIT tech & Hexaware are also likely to report healthy growth, while Mphasis could witness a sequential decline in revenues
due to fall in revenues from Hewlett-Packard Company and Digital Risk.
Cross currency movements during the quarter (due to depreciation of Euro & GBP by ~6% & 5% respectively vs. USD) are likely to have negative impact on the USD
revenue growth (by 60-80 bps Q-o-Q) of IT pack. However, revenues in rupee terms are likely to be higher due to INR depreciation vs. USD during the quarter (by ~1.5%).
Sector to witness Q-o-Q margin expansion on overall basis on the back of absence of visa costs, wage hikes & INR depreciation
We expect the operational performance of Tier I & II IT players to be better in Q2. We expect most of the companies to report expansion in EBITDA margins on the back
of absence of visa costs, wage hikes & INR depreciation, except for a few players like Wipro, HCL Tech & Mindtree, whose margins could be impacted due to wage hikes
& higher S&M investments. Companies like Infosys, KPIT Tech, Cyient, Tech Mahindra are likely to witness sequential margin expansion. TCS is expected to report stable
margins.
Focus will be on the Managements’ Commentary on IT sector outlook
Some of the key things, which would be tracked closely by the market participants in the management commentary by the IT companies include i) Outlook on client
spending (discretionary / non discretionary) and project ramp ups in top clients; ii) Demand environment in US and Europe and Continental Europe; iii) Comments on
demand and pricing trends in financial services vertical; iv) Key verticals/Geography growth/de-growth expectation; v) Clarity on fresh hiring; vi) Margins trajectory; vii)
Expectations on forex moves. In case of Infosys commentary on growth strategy from the new MD & CEO Mr. Vishal Sikka would hold a lot of importance.
Better than expected Q2 numbers and optimistic guidance could result in further PE expansion
Improving consumer confidence and structural policy decisions in the developed markets are providing the required momentum to kick-start the economy on to the
path of recovery. In the emerging markets, consumer spending and investment sentiments have improved significantly. The global multilateral agencies have forecasted
RETAIL RESEARCH Oct 08, 2014IT Sector Preview – Q2FY15

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improved recovery prospects for the global economy and have suggested that the growth momentum is likely to gain momentum over the next few years. This could
result in demand turnaround, enabling the corporate players in the recovering economies to enhance their CAPEX program including incremental IT spending. The Indian
IT companies are well placed to capture the upswing in the demand uptick, which is expected from developed & emerging economies. IT companies with their ability to
generate strong cash flows & strong ROEs in a rapidly changing technological landscape would continue to remain long term structural investment plays.
Global recovery, healthy deal pipeline, increasing M&A activity in Tech at high valuations and stability in rupee leave good scope for expansion in PE of IT sector
(especially in large cap stocks which continue to show improved financial performance) in the near to medium term. Part of re-rating has already begun, as evident from
the fact that the BSE IT index has gained 15.6% since July 2014 till date, clearly outperforming the BSE Sensex, which has gained 3.4%. This outperformance & the sector
PE expansion could continue in the near term (after a brief correction) if Q2 results are better than expected & management guidance on IT sector outlook is optimistic.
Particulars (Rs. In Million) Quarter End Q2FY15E
Infosys Q1FY15 Q2FY14  Sequential USD revenue growth could be 2.8-3% Q-o-Q, which would be largely volume driven. Pricing is more or less expected
to remain stable. Better traction would result in decent growth across most of the verticals except in retail, life sciences &
healthcare & hi-tech, which continue to face challenges. Deal wins in the recent past would drive the revenue growth. Cross
currency headwinds are likely to impact the USD revenue growth by 50-60 bps Q-o-Q. INR revenue growth would be relatively
higher due to rupee depreciation during the quarter. (~1.5% Q-o-Q).
 Absence of Wage hikes, visa cost & rupee depreciation could result in 50-60 bps Q-o-Q expansion in EBITDA margins.
 Key thing to watch out for in the management commentary would be the change / restoration in FY15 annual revenue
guidance, outlook on discretionery spending, outlook on demand from key verticals/geographies, traction in deal pipeline,
trend in margins going forward and business strategy by new CEO, Dr. Vishal Sikka.
 We expect FY15 USD revenue growth guidance to be maintained in the range of 7-9%. In an investor conference held on 26
August 2014, Infosys' COO UB Pravin Rao reportedly reiterated the company's 7% to 9% US dollar revenue growth guidance for
FY15. Mr. Rao also reportedly said that Infosys would look to maintain operating profit margins at 24-25% for FY15.
Net Revenue 127700 129650
Operating Profit 34410 33890
PAT (Adjusted) 28860 26260
EPS (Rs.) 50.5 45.9
TCS Q1FY15 Q2FY14  USD revenues are likely to grow by 7-7.5% Q-o-Q, largely volume driven. ~2.5% growth is likely to be contributed by integration
of Mitsubishi JV (management expects $100 mn contribution from the JV in Q2). We expect the pricing to remain stable. Cross
currency headwinds could impact the USD revenues growth by 80 bps Q-o-Q (as stated by the management in its quarterly
analyst interaction in Sept). INR revenue growth is likely to be higher on the back of INR depreciation.
 In its quarterly analyst interaction, the management had stated that it expects BFS to accelerate in Q2, though weakness is
likely to remain in insurance. Media, Travel & Hospitality, Life Sciences are likely to be weaker than Q1. Geographically, Indian
business growth is likely to be strong with pick up likely in the deal activity. Asia pacific region would grow at a higher rate than
the company average growth in Q2. However, it expects Europe to be soft in Q2 due to holidays in July and August.
 The management expects EBIT margins to remain stable in Q2. It stated that the absence of wage hike and one-time
depreciation impact (which existed in Q1) is likely to offset the impact of JV consolidation charge on EBIT margins. Other
income could be lower by Rs. 300 cr led by special dividend payment in Q2 (Rs. 150 bn announced on the occasion of the 10th
anniversary of the IPO) and forex losses. We don’t expect any major variation to the management estimates.
 Commentary on demand outlook and discretionery spending, client budgets, view on business ramp ups & pipeline conversion,
pricing trends, outlook on BFSI & retail verticals & margin trajectory are key things to watch out.
Net Sales 221110 209772
Operating Profit 63670 66390
PAT (Adjusted) 50578 47018
EPS (Rs.) 25.8 24.0
Wipro Q1FY15 Q2FY14  Q-o-Q USD IT revenue growth could be 2.5-2.75%, within the range guided by the company (1.7% to 4% Q-o-Q). The growth

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Net Sales 111358 107727 factors in revenue contribution from recently signed ATCO deal. The growth would be largely volume driven and pricing is
expected to remain more or less stable. Cross currency headwinds could impact the USD revenue growth by 50-60 bps.
However, Q-o-Q INR revenue growth is likely to be higher due to rupee depreciation during the quarter.
 EBIT margins are likely to decline on the back of 2 months impact from wage hikes (w.e.f. June 01, 2014).
 Key things to watch out: Management commentary on Q3FY15 USD revenue growth guidance (could be in the range of 2-4% Q-
o-Q), demand environment, commentary on large deal wins, ramp up and budget trends.
EBIT 23771 22422
PAT (Adjusted) 21032 19321
EPS (Rs.) 8.5 7.8
HCLTech Q4JY14 Q1JY14  USD Revenues are likely to grow by 3.5-3.6% Q-o-Q, which would be driven by growth in Infra management business and ramp
up of large deals signed over the last two to three quarters. Growth would be largely volume driven, while pricing is expected to
remain more or less flat. Pickup in core services growth witnessed over the last few quarters is likely to continue. Cross currency
headwinds are likely to impact the USD revenue growth by 60-70 bps Q-o-Q. However, Q-o-Q INR growth is likely to be higher
due to rupee depreciation.
 EBITDA margins are expected decline on the back of wage hikes and higher S&M investments.
 Deal pipeline, demand outlook for IMS and IT services, revival in volume growth in ADM / BPO segment, margin trends, outlook
on discretionery spending would be keenly watched in the management commentary.
Net Sales 84240 79610
Operating Profit 22170 20930
PAT (Adjusted) 18359.5 14160
EPS (Rs.) 26.3 20.3
Analyst: Mehernosh K. Panthaki – IT, FMCG & Midcaps; Email ID: mehernosh.panthaki@hdfcsec.com
RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office
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2496 5066 Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com
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