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IT Services
• We expect 5‐9% sequential growth in USD revenues for our IT services universe. The key drivers leading this trend are
sustained volume traction from the key clients and scale up in the deals won last financial y p year. Gains on better pricing
realizations on new accounts would be mellowed down by increased shift towards offshoring the delivery efforts
• The revenue growth in reported currency would be lower in the range of 3‐7% on account of rupee appreciation by
2.3% (average for quarter) against US Dollar. New deal wins and commentary on IT budgets to further lift the
sentiments in the sector as also affirmed in our channel checks survey
• Our latest channel checks in the US / vendors further reinforce our view on sustained volume traction for CY2011.
Budgets cycle are getting normalized with various clients across the verticals (specifically in BFSI and Retail) finalizing
their IT spends during Q4CY10 and Q1CY11. Clients are utilizing the savings in IT towards fresh discretionary spends in
form of new implementation and cloud initiatives
• We expect healthy headcount addition, increased average employee cost on lateral hiring and adverse currency
movement to restrict earnings growth for the Tier I vendors. Mid tier vendors to benefit on improved demand
environment during the quarter
• We expect attrition to normalize as hiring shifts to campus. We expect announcement of promotional/performance
hikes by some player and the impact of same has already been captured in our estimates. We believe the recovery in the pricing realizations to hold key in determining the profitability performance going forward
• While our volume growth outlook remains positive, INR appreciation and supply side metrics need to be closely
monitored. We also expect selective mid‐cap stocks to participate the rally mid in view of benefit of cyclical recovery and
deep discount valuations
• Our preferred play in the sector remains TCS and Infosys among the large‐cap due to their robust deal wins and
impressive margin defense. We also like Mphasis, OFSS, Persistent and NIIT Tech among the mid tier segment for their
sustained business traction and economical valuations
IT Services – Top Picks
Infosys
• The improved news flow from US and robust demand outlook is giving us confidence to raise our earnings multiples in
line with the pre crisis scenario. We prefer Infosys as it stands to gain the most in this supportive environment and
better margin defense
• We expect 20% revenue CAGR and an EBIT CAGR of 21% over FY10‐FY12E as we build in 26% volume growth and
sustained margin profile over projected years. We have valued Infosys at 25x of its FY12E earnings of Rs.146
Mphasis
• We like it for its sustained revenue growth outperformance, renewed strategy to boost non‐HP revenues and its strong
margin resilience despite the pricing pressure
• We expect 20% revenue CAGR over FY10‐FY12E and an EBIT CAGR of 16% as we assume a 150bp decline in operating
margin due to renegotiated pricing with HP and tax rate impact of 200bp. We have valued Mphasis at 14x (40% discount to Tier I) of FY12 (Twelve month ending April) earnings of Rs.59.1, with a target price of Rs.827
OFSS
• OFSS shall be the key beneficiary from the improved demand (spends) scenario in the BFSI segment (Flexcube) and
increased importance of the efficient compliance system (Reveleus, Mantas)
• With the induction of new management team the company has drawn a new focused approach to tap opportunities in
the US and China. With the brand appeal & global sales support of Oracle, we expect it to witness better traction in new
license sales
• We expect 30% CAGR in the new license sales over FY10‐12E which would lead into sustained strong margin profile. Our
We expect 21% CAGR in the product revenues translating into an EBIDTA /EPS CAGR of 18% / 24% over FY2010‐12E..
We value the FY12 earnings at 20x (in line with its 5 yr average) to derive our target price of Rs.2830
Persistent Systems
• We like Persistent Systems for its strong business opportunity in the niche OPD space, its head lead in the next
generation technology, impressive client profile and superior operating metrics among peers
• We expect 24% revenue CAGR and EPS CAGR of 16% over FY10‐12E. We have valued PSYS at 14x of its FY12E EPS of
Rs.38.7; at a 40% discount to Tier‐I companies target multiple
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