As per Nasscom, IT exports are expected to grow at 13%-15% YoY in USD terms in FY15, with the growth momentum to be led by uptick in discretionary spend in the US and strong Europe growth on cost cutting compulsions. Indian IT firms have also steadily increased their contribution from newer service lines. With newer services likely to be key growth drivers, we expect continued focus on this aspect, said Karvy Stock Broking in its report.
Over the past few quarters, Europe revenue has grown ahead of company's average for the past 8 quarters for all the top-tier IT firms. This growth has been led by the need for cost cutting by European corporations. Secular growth in Europe is a positive. Given that Europe contributes around 30% to revenue, this could be a key driver going forward. The two largest markets (US and Europe), which contribute 80%-85% to revenue are seeing strong growth, lending confidence to our expectations of healthy revenue growth continuing through FY16E-FY17E, Karvy added.
Over the past few years, the INR has depreciated against the USD, which has been a tailwind to fight margin headwinds. Even post the General Election 2014 results in May 2014, the rupee has not appreciated and has traded in a range. This is a positive for Indian IT, the stock broking said.
Post the 2008-09 financial crisis, there has been notable polarization in revenue growth of Indian IT firms, as clients became more demanding. TCS and HCLT were able to adjust faster to the ‘new normal’ business environment. "We expect this polarization to continue in FY15-FY16, even as the extent could reduce by FY16, as Wipro and Infosys start to show improved growth," Karvy opined.
"We initiate coverage on the Indian IT space with a positive view, as we expect healthy revenue growth to drive good earnings growth. We would back Indian IT firms in a healthy revenue growth environment and like the quality of businesses as well, with high RoEs, low to NIL debt on the balance sheet and good cash flow. We have Buy ratings on Infosys, Wipro and HCLT and Hold rating on TCS," Karvy said.
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