India IT Good fundamentals likely to be marred by currency movements [J.P. Morgan] $QQQQ

4QFY10 preview: Good fundamentals likely to be marred by currency movements

• Good 4QFY10 fundamentals likely to be marred by adverse exchange rate movement: We expect US$ revenues to increase 3-4% Q/Q driven primarily by volume growth and helped by stable prices. GBP, Euro appreciation vs. US$ is likely to impact US$ revenues by 0.5-1% and rupee appreciation against US$ should lead to a ~1-2% Q/Q rupee-based revenue growth. EBITDA margins should be flat to slightly down Q/Q due to rupee appreciation and salary hikes (Wipro). EPS growth would vary depending on hedging losses/gains, in our view.


• The key would be Infosys FY2011 guidance – we expect it to be 12- 14%. While improvement in business pipelines and hence improved growth in FY11 is already consensus, the quantum of growth would be key. We believe that consensus is already assuming 20%+ volume growth in FY11 for large players. However, we expect Infosys management to adopt a more conservative stance and guide for 12-14% US$-based revenue growth – historically, the company has outperformed guidance given at the start of a year by 4% to 15% in all years except FY09. Again, we believe that market already expects this guidance.

• Investment view – robust fundamentals already reflect in valuations: We have been positive on sector fundamentals and believe that Indian IT companies would continue to benefit from robust CY2010 IT budgets. However, we believe this is more than adequately reflected in valuations, with consensus already expecting ~18-20% growth in FY11. We see limited absolute share price upside from current levels.







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