Macquarie: Indian IT: Ready to fly in FY12; prefer TCS, Infosys and HCLT

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MacqTech Express
Indian IT: Ready to fly in FY12
Event
 We visited the ‘NASSCOM – India Leadership Forum’ hosted in Mumbai
from Feb 8–10, 2011. We present our takeaways from the annual Indian IT
industry congregation.
 Extensive conversations with industry leaders along the sidelines of the
conference reinforced our confidence on above consensus growth
expectations for the sector. Our preferred picks are TCS, Infosys and HCLT.

Impact
 Conference Mega Trend - ‘Cloud Services’. The impact of cloud computing
and how Indian IT companies can utilize the opportunity being offered by the
cloud was the main theme for the conference. Computer Science Corp (CSC),
Accenture, IBM, Computer Associates (CA), KPMG, Atos Origin, Ramco
Systems etc had cloud computing as the main theme for their stalls (Fig 1 &
2). Our detailed take on what is the Cloud opportunity for IT Services players
in general and Indian IT players in particular is brought out in our earlier report
Cloud: Paradigm shift in IT services, April 2010.
 Do Indian IT companies have the mindset of M&A as a Strategy tool?
Mahindra Satyam’s CEO, Mr CP Gurnani and Aegis BPO Global CEO, Mr A
Sengupta discussed their acquisition strategy and how they approached M&A
as a tool to deliver a company’s long term vision. With Indian IT companies’
significant cash balances on their balance sheets, we expect more M&A
announcements in FY12 following the recent Patni-iGate deal.
 Innovation, Redesign and Reinvent: Mantra for next decade. Our one-onone conversations with industry leaders, consultants and other stakeholders
during the summit led us to conclude that companies focused on value
maximization would triumph in the next decade over companies focused on
cost control. This showcases the need for the Indian IT companies to move up
the value chain from a linear, labour arbitrage mindset.
 Growth drivers for FY12. NASSCOM expects US as a geography and BFSI
as a segment to be the main growth driver for the industry in FY12. Apart from
the traditional growth areas, we foresee non linear initiatives likes Cloud,
Software as a Service (SaaS), Data analytics, mobility and software products
to be the additional growth drivers for the Indian IT industry.
 FY12 Outlook. NASSCOM projects Software and services export revenues to
grow by 16-18% and domestic revenues to grow by 15-17% for FY12. This is
on back of 16% growth witnessed by the sector in FY11. The sector is
expected to contribute US$88bn with IT services, BPO, Software products
and Hardware each contributing 50%, 19%, 17% and 14% respectively.
Outlook
 Reiterate positive outlook on the Indian IT sector. Our constructive view
on the sector is based on sustained potential of top-tiered vendors to deliver
robust top-line and bottom-line growth. Indian IT industry continues to be a
leader in global sourcing with 55% market share (FY10: 51%).