Depreciation in the value of the Indian Rupee and the growing investments in IT by firms in the US has been a big boost for the Indian IT industry, especially for those companies whose major business comes from offshore. The depreciation of rupee will help the company increase the EBITDA and PAT as the operating cost in dollar terms will decrease. There is also expectation that the big deals in the pipeline will move fast as the discretionary spending is likely to improve based on the economic data being received from the US region. However, the other important market, Europe, will continue to be under pressure in the coming quarters. So we are not optimistic on the European region. Overall, the industry is expected to grow by 12-14% in FY14. With the improvement in business sentiments, we expect growth to be in the higher teens next year. Below, I have discussed the three top Indian IT firms listed in the US.
Depreciating rupee and large size deals sign up will boost the Company's shares
Infosys (INFY): Infosys 1st quarter results were above the consensus estimates. The company has maintained its previous guidance which we view as conservative. The company's core business verticals, like manufacturing and retail, have shown strong growth. The positive sentiment in retail and manufacturing will help the company improve its revenue and profitability in the coming quarter.
In the last quarter, the company signed seven big deals with a total cumulative value of US$600 million. Three were in the BFSI vertical, 2 in manufacturing and the rest in other verticals. Overall, the company added 66 new customers last quarter. The demand environment and the pipeline are stable. Infosys's new pricing strategy will help it add new customers and increase the deal size. This will reduce the margin for the company but will help increase the revenue.
The attrition rate was high for the company in the 1st quarter. But, the wage hike for both onsite and offshore personnel announced in June will help check the attrition. Low attrition will help reduce the operating expense, which will help improve the margin for the company.
Improving Business environment and fast deals conversion will help the company recover fast in coming quarters
Wipro (WIT): Wipro announced its first quarter results which were in line with the consensus estimates. The company has upgraded its guidance for the 2nd quarter FY14 of 2.0%-3.9% qoq. This is based on improvement in large deals closure. The improvement in the US has been better and the company is expecting that it will translate into better discretionary spending in the second half of the year.
The improvement in IT spending by the retail and manufacturing industries augurs well for the company's future. Wipro has the second largest revenue from these verticals after Infosys. So we believe the increasing spending in these verticals will help Wipro improve its future revenue. The Asia Pacific region has been showing softness in the recent quarters. As the company has around 10% business and 12% revenue from this region, the revenue from this region can come under pressure. We expect an improvement in revenue and profit in the 2nd quarter and for the full financial year FY14.
The depreciating rupee will help the company cover up the effects of the wage rise it announced in June. As we expect the rupee to slide further against dollar, the margin for the company will increase in the coming quarters. The strong pipeline and faster deals finalization will help the company post better 2nd quarter results.
Currency movement and Immigration bill delay will help this company post higher revenue and margin
Cognizant (CTSH): The company will announce its 2nd quarter results on 6th August. We believe the company will beat its own guidance and raise the guidance for the whole year. The falling rupee and the diminishing probability of the Immigration bill getting through the congress will help Cognizant the most among its peers.
Improving market sentiments will benefit Cognizant the most, as according to the company ~79% of its revenue comes from North America as compared to Infosys's 62% and Wipro's 56%. The increase in business sentiments in North America will help Cognizant more than its peers. European region being under pressure and the emerging markets remaining soft will have little impact on Cognizant compared to its Indian peers.
The Immigration bill is unlikely to get through the US Congress, which will soothe the nerves of Cognizant, as it was expected to be the worst hit. This will help the company mitigate the risk it has on its margin. The company now can concentrate on growth without worrying about the consequences of the immigration bill.
In the last two months the rupee has depreciated by around 14% against the dollar, and this will help Cognizant improve its margin. The depreciating rupee will help the company post strong profits in 2nd quarter FY14. So we see a run on this stock post the 2nd quarter results.
The depreciating rupee and the improved business sentiments in the US region augur well for the Indian IT industry. With discretionary spending improving in the US, more pipeline deals will be finalized and will help the companies increase their revenue and margin. The other factors which will benefit the Indian IT companies especially Cognizant is the uncertainty about the immigration bill. There is less chance that the bill will pass through in the US congress. The delay in the bill will help the Indian companies, as they would have been the worst hit by the immigration law. Overall, the conditions and the environment are suitable for the Indian IT companies, and we expect these companies to post strong results in the remaining quarters of financial year FY14.