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UBS Investment Research
Indian IT Services
Q3 FY11 earnings preview
„ Focus on 2011 IT budgets and offshore allocation
We expect further clarity and increased confidence in the 2011 demand outlook to
be the key focus areas in the Q3 FY11 earnings commentary. Industry feedback
suggests IT services budgets will be up modestly in 2011, with increased offshore
allocation. Discretionary spending is also likely to pick up, with most vendors
noting an increase in demand for enterprise services.
„ Business seasonality likely to moderate revenue growth in Q3 FY11
We expect IT companies to report strong dollar revenue growth of 5-8% QoQ,
albeit slower than the growth rates seen in Q2 due to a lower number of billing
days (2-3%) in the December quarter. We estimate volume growth of 5-7% QoQ
for companies under our coverage.
„ Currency appreciation likely to impact rupee revenue and margins
The Indian rupee appreciated 3.5% QoQ (on an average basis) in Q3 FY11, which
is likely to impact both rupee revenue and margins. Cross currency movements
have also been relatively unfavourable during the quarter. We estimate a 10-55bp
decline in operating margins, mainly due to adverse currency movements.
„ Valuation: expensive valuations should limit share prices of Tier I stocks
We believe large cap Indian stocks are expensive at FY12E PE of 20-22x, and we
factor in strong demand upsides in 2011. We maintain our Neutral ratings on
Infosys Technologies (Infosys) and Tata Consultancy Services (TCS), and our Sell
ratings on HCL Technologies (HCL Tech) and Wipro. We prefer selective mid cap
stocks at current levels. We maintain our Buy ratings on MphasiS and Patni, and
our Neutral rating on Tech Mahindra.
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