Indian IT Services: Pedal to the metal: Prabhudas Lilladher

Visit http://indiaer.blogspot.com/ for complete details �� ��



Tier‐1 Indian IT Services companies reported the strongest quarter in the last four years,
driven by a strong volume growth and stable pricing. The growth came from across the
geographies, service lines and verticals. Given the management’s commentaries on a
stable IT budget with a positive bias for CY11, we expect volume moment to be in high
single digit. We reiterate TCS, Infosys and HCL Tech as our pecking order.


 An all‐round performance: Tier‐1 Indian IT vendors grew by 9.5% QoQ (@cc 8.6%) in
USD terms, led by TCS (11.7%, @cc 11%), INFO (10.2%, @cc 9.3%), HCLT (9.5%, @cc
7.4%) and WPRO (5.8%, @cc 4.8%). The growth was led by volume (8.9% QoQ) and
stable pricing (improved business mix & cross currency gains).
 What surprised us? Positively: 1) Volume momentum of ~9% QoQ against our
expectation of 5.5% QoQ 2) Pricing improvement of 1%, largely driven by businessmix
and cross‐currency movement 3) Highest number of net active client addition
(58) in the last 2.5 years 4) Net employee addition and lateral hires for the quarter is
26.5K and 22.2K, respectively, highest ever in a quarter 5) Utilization (incl. trainees)
less than ~75% 6) Onsite contribution inches up by 41bps, a positive move for fourth
quarter in succession 7) BFSI (11.1%) and Retail (13.3%) grew in double digits QoQ,
Telecom (5% QoQ) stable 8) Consulting & PI (12.3%) and PES (12.3%) continue QoQ
growth dream run Negatively: 1) Attrition still high at 21‐23% (quarterly annualized)
despite round of wage hike 2) EBITDA margin at the same level despite supportive
currency 3) Guidance for the next quarter in the range of 3.5‐5% QoQ growth 4)
Tapering M&A related work.
 Cognizant, Capgemini, and Logica – Reinforcing strong outsourcing demand:
Cognizant reported double‐digit revenue growth for two consecutive quarters
(Q2CY10: 15.2%, Q3CY10: 10.1%). Capgemini outsourcing booking surged to €897m,
a YoY growth of 27.4% (@cc 21. Logica reported Q3CY10 revenues of £863m (+1% ex
FX) (vs cons £849m). This was driven by better outsourcing (+7% YoY ex FX).
 What to expect going forward?: 1) We expect volume growth to be in high single
digit 2) We anticipate pricing to start showing improvement in Q4FY11 (JFM‐11) 3)
We believe that attrition rate would taper down from Q3 (OND) quarter, stabilizing
at low‐to‐mid‐teens by Q1FY12 4) The momentum in package implementation is
likely to continue 5) The next leg of growth is expected to be delivered from Europe,
driven by stable economic outlook and increased outsourcing.

 Valuation and Recommendation – TCS, Infosys and HCL Tech remains our top‐pick:
Growth driven by existing client mining, new logos win across the geography and
service line, TCS, Infosys and HCL Tech has managed to grab market share and
deliver stronger growth than its peers. We expect TCS, Infosys and HCL Tech to
provide industry leading growth. Hence, reiterate ‘BUY’ rating on TCS, Infosys and
HCL Tech, with a target price of Rs1,160, Rs3,500 and Rs500.