Morgan Stanley Downgrades Genpact Limited To Underweight; Expects Revs, Earnings To Decelerate

Morgan Stanley downgraded Genpact Limited G to Underweight from Equal-weight on declining earnings and revenue growth.

Based on the first half performance, the brokerage expects revenue growth of about 7 percent in 2016 (vs. 10 percent in 2015) which is towards the lower end of the guidance.

"We assume acceleration in growth in 2017 (~9% yoy), but our estimates are conservative and below consensus (by 1%-3% for 2017-18) given a challenging outlook for capital markets and healthcare verticals as stated by other companies in the sector," analyst Gaurav Rateria wrote in a note.

Further, the analyst expects the global clients (GC)-IT business to decline in the mid-single digits in 2016 and show marginal growth in 2017, while for GC-BPO, the analyst forecast 13-14 percent growth in 2016-17 (vs. 17 percent in 2015).

Hence, Rateria projects revenue growth for GC business to be slower (10-12 percent in 2016-17) than management's medium-term outlook of mid-teens.

The company's first half margins were 14.5 percent, but adjusted for non-recurring items, core margins were 13.7 percent. The analyst expects margins of 15.5 percent in 2016, with core margins assumed at 15.1 percent.

Rateria, who cut the price target on the stock to $22 from $25, noted that the Street's assumption of about 16 percent margins in 2017 may be aggressive given his expectation of flat margins in 2017.

As such, the analyst cut his revenue forecasts by 2-4 percent and adj. EPS forecasts by 2-8 percent over CY16-18.

"Given a tougher macro environment and consecutive revenue misses in the past two quarters, we believe the probability of the company delivering better than mid-teens growth in GC business has come down," Rateria added.