Wednesday, April 1, 2009

>India IT Services Sector (UBS)

Can vendor consolidation offset revenue declines at top-tier companies?

We expect IT budgets to decline in 2009
We expect IT budgets to decline 2-20% in 2009 for Indian IT service clients. This will likely result in lower prices and flat volumes for the sector in FY10. We forecast a fall in US$ revenue of 5-7% and a decline in Rs EPS of 2-5% in FY10. We remain cautious on the sector and reiterate Infosys as our preferred pick.

Vendor consolidation to benefit top-tier vendors
We have analysed the impact of vendor consolidation through: 1) analysis of historical data; 2) meetings with management of IT companies and industry experts; and 3) analysis of IT buyer spending patterns. We conclude that top-tier companies will be able to largely offset the decline in IT budgets via vendor consolidation.

We prefer top-tier vendors
We believe vendor consolidation is a multi-year theme and that top-tier IT service providers will increase market share from 31% in FY08 to 36% in FY12E. Top-tier companies will outpace industry growth and return to a revenue growth trajectory of c15% from FY12E onwards.

Remain cautious on the sector; Infosys is our preferred pick
Infosys is our preferred pick in the sector based on high margin visibility and its positive growth outlook. We await better opportunities for Wipro and TCS. Demand uncertainty remains a key risk, but we believe valuations provide downside support for share prices.

To see full report: IT SECTOR

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