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IT Services
Expect 2010 growth momentum to continue…
…as sector benefits from secular offshoring and pick-up in
discretionary spending
Infosys is our top pick, followed by HCLT and TCS
2011 sector outlook
2011 revenue growth prospects look strong for the
IT sector. We forecast 23-25% growth (in USD
terms) on a) increased offshoring, and b) revival
of discretionary IT spending. Further, we expect
revenue growth to reach across several industry
sectors, and Indian companies to benefit from the
trend towards smaller contracts (versus megadeals),
which will expand the addressable market.
While EBITDA margins should remain largely
stable for the big players, an increase in the tax
rate (STPI tax exemption sunset) will adversely
impact net margins; still, we expect earnings to
grow a healthy c20% and be the key driver of
stock performance in 2011.
Revenue growth to be broad-based in 2011.
Banking and financial services (BFSI) led the IT
spending recovery in 2010 and we expect
revenues from BFSI to grow 20%+ in 2011 as
well. We saw three pillars of growth in 2010:
compliance-led IT spending, M&A integration
and cost optimisation. We forecast a c20% growth
in IT spending led by compliance and financial
regulations. While M&A-led integration work is
likely to decline by c25% in 2011, the decline
should be well compensated by an uptick in
discretionary spending as banks look to invest in
new channels of growth and customer service
(please see Revenue growth from banking sector
to remain strong, published 23 Nov-10).
While leading sectors (such as BFSI) should
remain on track, lagging sectors such as telecoms
should start contributing to growth in 2011.
Revenues from the telecom sector (top-4
companies) have declined from 22% of total
revenues to 15% in the past three years, and we
expect this trend to reverse in 2011. Recovery
should be led by increase in offshoring in the
wireless business of Telecom Service Providers
(TSPs), increased investment in new technologies
such as 4G by TSPs, and finally increased
investment in BSS (Business Support Services),
heavy billing and customer facing systems (see IT
spend in telecom sector to accelerate, 29 Oct-10).
Secular offshoring trend to remain on track.
Market share gains led by increased offshoring
will remain the mainstay of Indian IT sector
growth. Clients will continue to refrain from
signing mega deals (>USD1bn) and are breaking
up deals in the USD25-200m range to squeeze out
costs from services contracts. This has
exponentially increased the addressable market
for Indian companies. We expect the trend to
continue and drive 10-15% of the sector’s growth,
with discretionary spending driving the rest of our
20%+ growth expectation for 2011.
2011 top pick
Infosys, OW, INR3,830
Infosys is our top pick, given that it is
competitively best positioned to benefit from
global trends (which skews earnings risks
upwards) and it has minimal incremental exposure
to changes in tax rates.
We expect Infosys to benefit from the continued
momentum in the BFSI market and revival in the
telecom market. Supply-side pressures (driven by
i-RACE) are behind the company now and we
expect attrition to remain in line with peers, such
as TCS. We forecast a USD revenue CAGR of
c24% in FY11-13 and EPS growth of 23.5%. We
are 1.5% above consensus on FY12e EPS, as we
expect stronger top-line growth (c25% vs 23%
consensus for FY10-12). Infosys is better
positioned than peers in 2011 due to higher cash
reserves (cUSD4bn), lower increase in tax rate in
FY12 and ability to leverage the uptick in
discretionary spending.
In view of the robust earnings growth outlook, we
expect the stock to trade at 22x one-year forward
earnings, in line with the historical average; we
believe returns will be at least in line with the
earnings growth.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
IT Services
Expect 2010 growth momentum to continue…
…as sector benefits from secular offshoring and pick-up in
discretionary spending
Infosys is our top pick, followed by HCLT and TCS
2011 sector outlook
2011 revenue growth prospects look strong for the
IT sector. We forecast 23-25% growth (in USD
terms) on a) increased offshoring, and b) revival
of discretionary IT spending. Further, we expect
revenue growth to reach across several industry
sectors, and Indian companies to benefit from the
trend towards smaller contracts (versus megadeals),
which will expand the addressable market.
While EBITDA margins should remain largely
stable for the big players, an increase in the tax
rate (STPI tax exemption sunset) will adversely
impact net margins; still, we expect earnings to
grow a healthy c20% and be the key driver of
stock performance in 2011.
Revenue growth to be broad-based in 2011.
Banking and financial services (BFSI) led the IT
spending recovery in 2010 and we expect
revenues from BFSI to grow 20%+ in 2011 as
well. We saw three pillars of growth in 2010:
compliance-led IT spending, M&A integration
and cost optimisation. We forecast a c20% growth
in IT spending led by compliance and financial
regulations. While M&A-led integration work is
likely to decline by c25% in 2011, the decline
should be well compensated by an uptick in
discretionary spending as banks look to invest in
new channels of growth and customer service
(please see Revenue growth from banking sector
to remain strong, published 23 Nov-10).
While leading sectors (such as BFSI) should
remain on track, lagging sectors such as telecoms
should start contributing to growth in 2011.
Revenues from the telecom sector (top-4
companies) have declined from 22% of total
revenues to 15% in the past three years, and we
expect this trend to reverse in 2011. Recovery
should be led by increase in offshoring in the
wireless business of Telecom Service Providers
(TSPs), increased investment in new technologies
such as 4G by TSPs, and finally increased
investment in BSS (Business Support Services),
heavy billing and customer facing systems (see IT
spend in telecom sector to accelerate, 29 Oct-10).
Secular offshoring trend to remain on track.
Market share gains led by increased offshoring
will remain the mainstay of Indian IT sector
growth. Clients will continue to refrain from
signing mega deals (>USD1bn) and are breaking
up deals in the USD25-200m range to squeeze out
costs from services contracts. This has
exponentially increased the addressable market
for Indian companies. We expect the trend to
continue and drive 10-15% of the sector’s growth,
with discretionary spending driving the rest of our
20%+ growth expectation for 2011.
2011 top pick
Infosys, OW, INR3,830
Infosys is our top pick, given that it is
competitively best positioned to benefit from
global trends (which skews earnings risks
upwards) and it has minimal incremental exposure
to changes in tax rates.
We expect Infosys to benefit from the continued
momentum in the BFSI market and revival in the
telecom market. Supply-side pressures (driven by
i-RACE) are behind the company now and we
expect attrition to remain in line with peers, such
as TCS. We forecast a USD revenue CAGR of
c24% in FY11-13 and EPS growth of 23.5%. We
are 1.5% above consensus on FY12e EPS, as we
expect stronger top-line growth (c25% vs 23%
consensus for FY10-12). Infosys is better
positioned than peers in 2011 due to higher cash
reserves (cUSD4bn), lower increase in tax rate in
FY12 and ability to leverage the uptick in
discretionary spending.
In view of the robust earnings growth outlook, we
expect the stock to trade at 22x one-year forward
earnings, in line with the historical average; we
believe returns will be at least in line with the
earnings growth.
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