>INDIAN IT SERVICES (CITI)

2Q09 TPI Index: Signs of Stability; No Acceleration Seen

■ Still down yoy; flattish sequentially — 2Q09 saw Total Contract Value (TCV) down 23% yoy; Annualized Contract Value (ACV) down 29% yoy – however, last year's 2Q was very strong. Sequentially, there is stability – TCV up ~5% qoq and ACV down ~5%. Pace of contraction has stabilized between $17-24b in the last 4 quarters (post a strong 1H08). TPI saw an uptick in May and June but July was soft (partly seasonal) – ties in with Infosys’s commentary post its 1Q results.

■ Some signs of stability; do not expect acceleration in 2009 — TPI does not see a market rebound soon, although the award profile could hint at sustained values through the year. Though pipelines remain strong, decision making is still slow. 2009 TCV could be below $80b – the last time this happened was in 2001.

■ BPO down significantly — TCV was down ~47% qoq; decline was across regions. As per TPI, the limited capital with clients is making them spend more on areas of higher returns – namely, ITO and ADM. However, there is considerable activity in the sub-$25m range, particularly in the staff augmentation segment.

■ ITO helps sustain the overall market — Despite a strong 1H08, ITO held up reasonably well in 1H09. A lot of ADM and Infrastructure bundled deals are happening in the market – a sweet spot for Tier-I Indian IT vendors. YTD there have been over $6b of such deals; more than that of entire CY08.

■ Discernible trends in 1H09 — (1) About half of mega deals awarded have focused on network services. (2) Five of the eight global mega deals were signed in EMEA. (3) Average TCV in Asia Pacific increased by more than 50%, while the other regions experienced declines. (4) In Americas, TCV signed during the past three years has stabilized. (5) Telecom, Transportation, Retail and Diversified Financials were relatively strong and represented ~47% of TCV awarded thus far. (6) Banking, Insurance, Oil & Gas, Consumer Durables were weak.

■ Pricing stable; vendors rational — TPI has seen pricing stabilize in 2Q09. Most of the pricing negotiations are done and conversations are now moving towards leveraging for growth. TPI noted that vendor behavior in pricing has been rational.

■ Demand stabilizing but valuations back at pre-slowdown levels — Latest demand commentary across companies suggests some stability on demand. However, valuations are not too far from 2007 levels (pre-slowdown) and stocks will need positive surprises/earnings upgrades to move up materially. We recommend playing the sector through TCS/Infosys.

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