Sunday, February 14, 2010

>INDIA TECHNOLOGY: More evidence of a solid FY11 (BNP PARIBAS)

CTSH outlook a likely pre-cursor to strong Infosys guidance
Cognizant’s (CTSH) CY2009 results provided the latest data point supporting an improving demand environment for Indian IT services players. The revenue (USD903m) and non-GAAP EPS (USD0.50) topped the consensus view of USD889m/ USD0.47. More significantly, the CY2010 revenue growth guidance of “at least” 20% matches current consensus estimates, and leaves scope for upgrades as the revenue visibility improves. Using this and NASSCOM’s recent industry exports growth estimate of 13-15%, we believe the upper end of Infosys’ initial FY11 (March 2011) growth guidance could be 16-17%. We expect this to be raised through the year (as is typical with Infosys) to eventually meet or exceed our 21% projection. Healthy US corporate free cash flows (because of reduced investments last year) driving increased tech spending through FY11 has been the theme driving our positive sector view; barring unexpected adverse macro events, we see little risk to that outlook.

More evidence supporting corporate spending recovery theme
Over the past few weeks, further evidence points to improving pipelines and faster deal closures: 1) Positive commentary from Cisco, Oracle and SAP – all call for a recovery in enterprise spending in 2010; 2) Our recent industry checks suggest an unusually high RFP activity carrying forward from the December holiday season into 2010 so far; 3) Genpact, the US-listed BPO services provider, guided for 14- 17% CY2010 revenue growth, which implies mid-high 20s growth from its non-GE accounts (60% of revenue) to offset flat revenue from GE; 4)Industry hiring is picking up significantly. Our checks with local recruitment agencies suggest significantly increased business for them, while gross hiring is likely to exceed CY08 levels, which would put companies on course to achieve our estimates.

Recent correction provides buying opportunity
Frontline Indian IT stocks have corrected 9-13% from their recent highs, in line with the overall market, on heightened concerns of debt default from countries such as Greece, Spain, Portugal and Ireland. We point out that this should not be an immediate concern for Indian players, unless this cascades into another global crisis as: 1) they generate insignificant revenue from the above countries, and 2) the cross-currency impact since December (beyond what we are modelling) from a falling EUR and GBP has been more than offset by a depreciating USD/INR. We reiterate BUY on Infosys and TCS among the large caps, and HCL Tech, Tech Mahindra, Satyam and Rolta among the smaller names. We have a near term bias towards the larger caps, which we see as less volatile stocks.

To read the full report: INDIA TECHNOLOGY