Visit http://indiaer.blogspot.com/ for complete details �� ��
Technology
India
FY2012E, top-3, 30% revenue growth? Check. We believe FY2012E has the
potential to be a 30%+ constant currency revenue growth year for the top-3* Indian IT
services companies (TCS, Infosys, Cognizant) on the back of – (1) broad-based IT spend
revival, (2) strong large deal renewal cycle with greater participation (and win rate) for
the Indian names, (3) sustained market share gains for offshore pure-plays, (4) continued
footprint expansion across un/under-penetrated areas, and (5) pricing uptick.
FY2012E shaping up to be a blockbuster year for the Tier-I pack
We remain positive on strength and sustainability of demand upturn for the Indian IT services
industry. We see strong demand tailwinds for FY2012E building up in the form of (1) improving
pace of decision making, (2) greater conversion of IT budgets into spends, (3) release of pent-up
discretionary spend, (4) deal-size sweet spot for Indian names in the ongoing strong renewal cycle,
(5) improved new deal flow across verticals, and (6) good potential for a pricing uptick. We do not
rule out the possibility of a 30% constant currency revenue growth for the Tier-I names (TCS,
Infosys and Cognizant) in FY2012E – Street estimates in the 20-25% range leave ample room for
further revenue upgrades; a stable Re will lead to flow-through EPS upgrades as well.
One-off kickers aside, the growth story is fundamental and secular
Skeptics could point at M&A integration opportunities, pent-up IT spends and the likes, view them
as temporary growth kickers, and call for a slowdown in revenue growth rate for the Indian IT
players. We focus, instead, on the two fundamental forces in favor of the Indian IT services
companies – (1) secular off-shoring trend – expected counter-cyclicality failed to play out during
the downturn as clients froze decision making but the trend has made a strong resurgence in the
past few quarters and is likely to sustain in the medium term, in our view, and (2) wider and
deeper acceptance of the Tier-I Indian IT companies (TCS, Infosys, CTS, and Wipro) as true IT
transformation partners, a clear up-move from just a credible cost-reduction alternative.
30% growth arithmetic – challenging, but not outside the realm of possibility
Alright, so we are talking six quarters out and arithmetic suggests that a 30% constant currency
revenue growth in FY2012E demands a 6-7% revenue CQGR through 1Q-4QFY12E, depending
on how the remaining two quarters of FY2011E pan out. Even with a pricing uptick of 1-2% for
the full year, 30% revenue growth demands a 5.5-6.5% volume CQGR through FY2012E. While
admittedly challenging, we note that the CQGR dynamics change meaningfully with one great
quarter of sequential revenue growth ala the Sep 2010 quarter for TCS and Infosys.
Reiterate positive stance on Tier-I names; Infosys, TCS our top picks
As discussed above, we continue to see possibility of further revenue upgrades for the Tier-I names.
Also, with most of the Street now having reset their Re/US$ assumptions to 43-44.5 for FY2012E,
a weaker Re could lead to meaningful EPS upgrades as such. Supply-side pressure remains high
but again is built into the wage hike assumptions for these companies. Essentially, the risk to EPS
estimates is higher on the upside than on the downside. Recent stock performance, especially
for Infosys, appears to be ignoring this upside risk and provides a good opportunity to BUY, in our
view. We reiterate our positive stance on the Tier-I names with strong conviction BUYs on Infosys
and TCS. We remain cautious on the Tier-II pack (with the exception of Hexaware) on two counts
– (1) margin risk has not played out fully, and (2) revenue growth could continue to lag larger
names.
No comments:
Post a Comment