Indian IT Services-Most positive catalysts priced in: UBS

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UBS Investment Research
Indian IT Services
Most positive catalysts priced in

􀂄 Q2 FY11 results failed to impress the markets, except TCS
The Q2 FY11 earnings announcements from most large IT vendors have failed to
enthuse the markets. Infosys, Wipro, and HCL Tech have come off their preearnings
highs, and Wipro and HCL Tech have seen cuts in consensus EPS
estimates as well. TCS remains the sole exception, triggering significant upgrades
in EPS for FY11/12 as well as a sharp increase in the stock price post earnings
release.


􀂄 FY12 revenue outlook is improving, but margin concerns persist
Our recent interactions with company managements suggest improving confidence
in the demand outlook post 2011, with most companies indicating increased
confidence in volume growth. We expect this to keep supply pressures high and
believe that wage hikes are likely to average 15% in FY12 as well.

􀂄 Earnings upgrades have slowed, most positive catalysts are priced in
Momentum for earnings upgrades has slowed over the past six months for most
Tier I vendors in the sector, and current consensus estimates are building in equally
strong dollar revenue growth in FY12 as in FY11 (20-25%). At current levels, we
believe there are very few positive catalysts left for the sector, while supply
pressures and currency appreciation are yet to be fully priced in.

􀂄 We remain cautious, TCS remains preferred stock
We remain cautious in our outlook for the sector despite the underperformance
against local benchmarks over the past six months. TCS remains our preferred
stock with a revised price target of Rs1,150 (from Rs900 earlier). We retain our
Neutral ratings on TCS and Infosys, and Sell ratings on Wipro and HCL Tech.