Monday, June 29, 2009


Joining the dots: Pick-up to take time

Stability, not recovery; Recovery to take time, in our view
We remain bearish on Indian IT stocks. We believe ‘stability’ is not recovery & that incrementally the Rupee poses downside risk to ests. Based on channel checks, including discussions with the senior partner/CEOs of two leading global IT outsourcing consultants, TPI & Alsbridge, we believe decisions are still not being taken & any recovery could be slow. We see no pricing power. We maintain our Underperform ratings on TCS, Infosys, Wipro & HCL Tech at 14-17x FY11 PE 0-4% 2yr EPSg. Of these, we have a relative preference for TCS on valuation & lower Re sensitivity. Greatest risk of disappointment from Wipro/HCL Tech. Niche
buys: MphasiS (8xFY11) on offshoring by EDS & WNS (7x FY11) on BPO.

CY09:“Summer pause now” & ramp ups likely next year

Good news: Market is not worsening & Requests for Information (RFIs) have picked up, but of course, pick up in discussions is from a much lower base than last year & budgets are unlikely to change this year. Bad news: Decisions still not being taken, given client business confidence is yet fragile. Secondly, the impact of the sluggish summer months, starting now, could be more pronounced this year. Finally, given start up costs of a new deal can be high, savings from
offshoring may be difficult to achieve this year, & hence the bulk of the deals could ramp next year.

CY10: Flattish budgets? Optimisation, buzz word

In line with our view that global macro recovery will likely be slow, consultants & customers confirm that “optimization” is the theme in IT spending. Hence, the pace of recovery in IT spending is debatable in 2010. Our best estimate is that budgets remain flattish next year & recovery in IT services could be late cycle.

Pricing risk: Too early to call victory

Pricing steadiness post the 5-15% pressure seen earlier in the year likely reflects improved sentiment, but could re-surface, in our view, when deals close. Near term pricing pressure stems from currently low levels of utilization. In BPO, competition from locations like Philippines could cap prices. Offshore vendors could fare better, but competition stiff Growth trends for offshore vendors are flat to positive, in our view, given the value offered & likely greater ‘passion’ of Indian vendors vs incumbents. That said, we have heard of a couple of global vendors being very competitive on pricing. Accenture has ~40,000 people in India now & IBM close to 55,000 in exports. Also alternate "near shore" locations including Mexico, domestic US,
Costa Rica etc. could nibble at demand, at the margin.

To see full report: IT SECTOR