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India IT Services
Implications of IBM 2Q11
Results for India IT Vendors
Quick Comment: Improved services backlog (+11%yoy
in reported terms helped by currency) and new signings
by IBM in 2Q11, yoy growth in key markets and strong
double-digit growth in its growth markets indicate
continued strength in the demand environment for
outsourcing services, in our view. We believe in such a
demand environment large India IT vendors could grow
revenues by 25-30% yoy in FY12e.
What's new: IBM’s services business revenues grew
+10% yoy on reported basis in 2Q11 and +2% yoy on
constant currency basis. Growth in services was driven
by higher sales into the existing client base. IBM gets
~47% of its total services revenues from outsourcing
business, which grew +3% yoy on constant currency
basis. IBM indicated that it expects to improve margins
and grow profits in services business by double digits in
2H2011.
Non-traditional markets have grown strongly for
India IT vendors as well: We note that IBM’s growth in
new markets is similar to trends seen with India IT
vendors that have seen strong growth in emerging
markets (especially in Asia) in recent quarters. IBM
management indicated that margins in growth markets
unit are better than matured markets by 2%. However,
India IT vendors have so far not shown such a margin
divergence across their key geographies.
Maintain an In-Line industry view: Within our
coverage universe, Infosys remains our preferred pick in
the large cap space. We believe Wipro could remain
range bound and consensus estimates for
FY12e/FY13e could come down over the coming
quarters. Despite strong results, rich valuations could
limit upside in TCS from the current levels, in our view
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India IT Services
Implications of IBM 2Q11
Results for India IT Vendors
Quick Comment: Improved services backlog (+11%yoy
in reported terms helped by currency) and new signings
by IBM in 2Q11, yoy growth in key markets and strong
double-digit growth in its growth markets indicate
continued strength in the demand environment for
outsourcing services, in our view. We believe in such a
demand environment large India IT vendors could grow
revenues by 25-30% yoy in FY12e.
What's new: IBM’s services business revenues grew
+10% yoy on reported basis in 2Q11 and +2% yoy on
constant currency basis. Growth in services was driven
by higher sales into the existing client base. IBM gets
~47% of its total services revenues from outsourcing
business, which grew +3% yoy on constant currency
basis. IBM indicated that it expects to improve margins
and grow profits in services business by double digits in
2H2011.
Non-traditional markets have grown strongly for
India IT vendors as well: We note that IBM’s growth in
new markets is similar to trends seen with India IT
vendors that have seen strong growth in emerging
markets (especially in Asia) in recent quarters. IBM
management indicated that margins in growth markets
unit are better than matured markets by 2%. However,
India IT vendors have so far not shown such a margin
divergence across their key geographies.
Maintain an In-Line industry view: Within our
coverage universe, Infosys remains our preferred pick in
the large cap space. We believe Wipro could remain
range bound and consensus estimates for
FY12e/FY13e could come down over the coming
quarters. Despite strong results, rich valuations could
limit upside in TCS from the current levels, in our view
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