Monday, March 29, 2010


Cloud-computing – a long-term opportunity: Excitement around the industry growth prospects from cloud computing is building. Our analysis suggests cloud computing is a robust growth opportunity, but over the long term. Among the various cloudmodels, growth will be driven by Business Process as a Service (BPaaS), whereas other cloud models such as Infra-as-a-service and Software-as-a-service (IaaS/SaaS) remain inconsequential for Indian IT companies. While the top-4 IT services companies are investing in these new engagement models, Infosys seemingly is leading the race, closely followed by TCS. (Cloud computing, simply described, offers IT resources to customers without upfront capital commitments).

Near-term growth to remain robust, but led by offshoring: Our confidence in the +20% sector growth expectations (next 2-3 years) continue to increase, underpinned by a secular up-tick in offshoring, in under-penetrated markets and services such as remote management services (RMS). There are several reasons why adoption of RMS will accelerate in the coming years, such as 1) significant fall in hardware costs, 2) declining bandwidth costs, with higher capacity and reliability; 3) introduction of robust remote monitoring tools and, 4) new engagement models that offer better IP and data security

Competitive risks manageable: We continue to expect India to dominate as the most attractive offshoring destination and global competition to remain manageable for the foreseeable future. Loss of vendor agnostic charm, questionable success of M&A in IT services and materially higher blended costs/pricing, would keep competitive pressure from the new “integrated players” at bay. Remain bullish on long-term sector fundamentals. Current valuations (c20x on FY11e) are close to the historic averages and the upside is driven primarily by earnings upgrades. Infosys remains our top pick, followed by HCLT. We do not change any estimates/recommendations in this report.

To read the full report: IT SERVICES