>Indian It services (IDFC SSKI)

Not out of woods

The Indian IT services sector faces strong headwinds as recesssion has
concurrently hit most of its target markets. We expect tepid revenue growth over
the next two years with volumes returning only in H2FY10. However, pricing
(constant currency) could come off by 5-7% over FY10-11 and lead to flat-todeclining
earnings. In view of this, we rule out stocks giving material absolute
returns till business concerns start waning. However, stock valuations are close to
historic lows and we see limited downside. We thus recommend market weight on
IT services and prefer Tier 1 companies with a strong track record which assumes
more importance post the Satyam debacle. We rate Infosys, TCS and Wipro as
Outperformers with a year’s view though the recent outperformance (as also
guidance overhang for Infosys) would keep stock under pressure in near term and
may also prevent their participation in bear market rally, if any. We have a Neutral
stance on HCL Tech and rate Patni and Tech Mahindra as Underperformers.

To see full report: IT SERVICES