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India IT Services Sector------------------------------------------------ Maintain MARKET WEIGHT
IBM Dec-10 results point to strong demand environment
● IBM reported its 4Q FY12/10 results overnight. We analyse IBM’s
global services business results to deduce trends for Indian IT
Services.
● IBM reported 23% YoY growth (constant currency (CC) terms) in
outsourcing signings – which is the main area of overlap with
Indian IT services companies. It also indicated renewed client
interest in large deals (of over US$100 mn total contract value).
● Strong results by both global IT services and enterprise software
vendors indicate that the demand environment remains strong.
This is corroborated by rate increases for offshore vendors. We
thus remain very comfortable with our 30% revenue growth
forecasts for Infosys and TCS in FY3/12.
● Multiples are also at the lower end of the historical range. We thus
maintain our positive stance on Infosys and TCS.
● Strong comfort on environment should also lead to
outperformance of some well-placed stocks beyond the top two.
HCL Tech remains our favourite name in this space, with
reasonable top-line visibility, EPS leverage and cheap multiples.
IBM sees strong growth in outsourcing signings
IBM reported record services signing growth of 18% YoY (USD terms
and CC terms) to US$22.1 bn in the December 2010 quarter,
compared to -7% YoY (-6% YoY in CC terms) in the previous quarter.
The services backlog has thus increased to US$142 bn. Outsourcing
signings were the key area of strength, growing 23% YoY;
transactional signings also grew 9% YoY.
Return of large deals
IBM’s management signalled renewed client interest in large deals.
IBM signed 19 deals over US$100 mn in the December 2010 quarter
compared to ten such deals in the previous quarter.
Continued revenue growth driven by discretionary spend
Global Services revenue grew 2% YoY in CC terms, similar to that in
the previous quarter. This was driven by 4% YoY CC growth in the
business services sub-segment, which is more discretionary in nature.
Indian IT – all indicators remain strong
Recent results of global vendors (IBM and Accenture in IT Services
and Oracle, SAP in Enterprise software) are indicating a rather strong
environment for enterprise spending. Even in the PC space, we find
corporate spending and developed markets picking up pace. Clearly,
Indian IT companies, with their high exposure to developed market
corporate spending are in a sweet spot of growth.
This is also visible in the like to like pricing improvement being
exhibited by leading Indian IT vendors such as Infosys and TCS.
Revenue growth should also remain strong, with Infosys’ management
clearly indicating in its results call that it expects the Indian IT services
industry to grow in mid-to-high teens in FY3/12. We thus forecast 30%
revenue growth for Infosys/TCS in FY3/12, significantly ahead of
consensus estimates of 23-25%.
Looking beyond the top two
Along with our positive view on Infosys and TCS, we believe that a
strong demand environment should also lead to robust performance
from a few smaller stocks. HCL Tech is one of our favourite plays in
this space due to decent revenue visibility, margin and EPS leverage
and cheap multiples.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
India IT Services Sector------------------------------------------------ Maintain MARKET WEIGHT
IBM Dec-10 results point to strong demand environment
● IBM reported its 4Q FY12/10 results overnight. We analyse IBM’s
global services business results to deduce trends for Indian IT
Services.
● IBM reported 23% YoY growth (constant currency (CC) terms) in
outsourcing signings – which is the main area of overlap with
Indian IT services companies. It also indicated renewed client
interest in large deals (of over US$100 mn total contract value).
● Strong results by both global IT services and enterprise software
vendors indicate that the demand environment remains strong.
This is corroborated by rate increases for offshore vendors. We
thus remain very comfortable with our 30% revenue growth
forecasts for Infosys and TCS in FY3/12.
● Multiples are also at the lower end of the historical range. We thus
maintain our positive stance on Infosys and TCS.
● Strong comfort on environment should also lead to
outperformance of some well-placed stocks beyond the top two.
HCL Tech remains our favourite name in this space, with
reasonable top-line visibility, EPS leverage and cheap multiples.
IBM sees strong growth in outsourcing signings
IBM reported record services signing growth of 18% YoY (USD terms
and CC terms) to US$22.1 bn in the December 2010 quarter,
compared to -7% YoY (-6% YoY in CC terms) in the previous quarter.
The services backlog has thus increased to US$142 bn. Outsourcing
signings were the key area of strength, growing 23% YoY;
transactional signings also grew 9% YoY.
Return of large deals
IBM’s management signalled renewed client interest in large deals.
IBM signed 19 deals over US$100 mn in the December 2010 quarter
compared to ten such deals in the previous quarter.
Continued revenue growth driven by discretionary spend
Global Services revenue grew 2% YoY in CC terms, similar to that in
the previous quarter. This was driven by 4% YoY CC growth in the
business services sub-segment, which is more discretionary in nature.
Indian IT – all indicators remain strong
Recent results of global vendors (IBM and Accenture in IT Services
and Oracle, SAP in Enterprise software) are indicating a rather strong
environment for enterprise spending. Even in the PC space, we find
corporate spending and developed markets picking up pace. Clearly,
Indian IT companies, with their high exposure to developed market
corporate spending are in a sweet spot of growth.
This is also visible in the like to like pricing improvement being
exhibited by leading Indian IT vendors such as Infosys and TCS.
Revenue growth should also remain strong, with Infosys’ management
clearly indicating in its results call that it expects the Indian IT services
industry to grow in mid-to-high teens in FY3/12. We thus forecast 30%
revenue growth for Infosys/TCS in FY3/12, significantly ahead of
consensus estimates of 23-25%.
Looking beyond the top two
Along with our positive view on Infosys and TCS, we believe that a
strong demand environment should also lead to robust performance
from a few smaller stocks. HCL Tech is one of our favourite plays in
this space due to decent revenue visibility, margin and EPS leverage
and cheap multiples.
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