>India IT Services (MORGAN STANLEY)

Quick Comment: Read-through from CTSH Results

Comforting but Not Euphoric: We believe the industry’s revenue outlook still appears to be scraping the bottom. CTSH reported revenues marginally ahead of guidance, but earnings were in line with consensus expectations. Q2CY09 guidance is for +2% qoq revenue growth and is in line with consensus expectations. Adjusting for ~4% higher working days in Q2, revenue
guidance implies sequential decline in Q2 (vs. +1% qoq adjusted revenue growth in Q1) on a like-for-like basis.

2009 Guidance: CTSH maintained full-year revenue guidance but lowered GAAP EPS guidance by 1 cent, to US$1.53, primarily due to FX losses and lower other income.

Management is not seeing any signs of a material rebound in 2H: However, the pace of revenue decline does not appear to be accelerating materially.

Revenues and margins for India IT services vendors have been less volatile than those of their regional technology peers have. Consequently, although the revenue decline was not as severe in the last few quarters, relative revenue growth rates are likely to be muted in the event of a turnaround, we believe. Expectations of a sharp turnaround or sharply improved growth rates appear a bit stretched, in our view.

Valuations are key: CTSH currently trades at 18x consensus C09e EPS, a 10-40% premium to India IT peers, which are now trading at 12-15x FY10e EPS for an EPS CAGR of 0-5% during the FY09-11e period. We believe P/E multiples for the sector could erode over the coming quarters.

To see full report: IT SERVICES