>INDIAN TECHNOLOGY (PRABHUDAS LILLADHER)

We believe that the growth momentum of top tier Indian IT services firm is likely to continue. We are not anticipating any negative commentary from the management about the IT budget for CY10. As the corporate profits rebound in CY10 after hitting a new low in CY08-09, we expect the companies to spend more on their IT. We continue to believe that a discretionary spend in IT is still 2-3 quarters away but may witness some large transformational contracts on the blocks in H1CY10. We continue to prefer large cap Indian IT services companies for their clients, geographical and service offering diversification.

■ IT services – building blocks for the sustained competency of companies: We believe that as companies in S&P500 witness stability in their business in CY10 after declining sales and profitability in CY08-09, the willingness to spend more is going to increase. We expect the
companies to continue to take more of tactical decision for IT outsourcing deals with sporadic transformation deals in the first half of 2010 before large deals would be put on blocks for outsourcing. We are not ruling out positive surprises in our assumptions.

Return of the Indian IT sector

■ Volume momentum – help maintain margins: We are expecting that the cost cognizance measures taken by the companies in FY10 are likely to continue. Although the hiring plans by large peers and its global competitors give early indication of wage inflation, we believe that the weak hiring and lay-offs in CY08-09 did ease the supply-side constraints for the next two quarters. But the aggressive hiring plan on the cards could result in wage inflation in H2CY10.

■ Revising our estimates upward for FY10 and FY11: We are factoring in a volume growth of 13-17% for FY11, with no negative bias on pricing. We are revising our revenue estimates by 0-1% and 0-2% for FY10 and FY11, respectively. We revise our EPS estimates for 0-3% and 0-5% for FY10 and FY11, respectively.

■ Valuations and Recommendations: We upgrade Wipro to ‘BUY’, with a revised target price of Rs815 (from Rs680). We reiterate ‘BUY’ on TCS, with revised target price of Rs850 (from Rs680), ‘Accumulate’ on Infosys, with a revised target price of Rs2,900 (from Rs2400) and ‘Accumulate’ on HCL Tech, with a revised target price of Rs430 (from Rs360). We assign a target multiple are 23.0x, 23.0x, 22.0x and 15.0x FY11 earnings for TCS, Wipro, Infosys and HCL Tech, respectively.

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