India IT Services -Two sides of a selectively good coin? Yes, we think so! ::JPMorganMorha

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“Two sides of a good coin” – this sums up how we see the road ahead for select
players in Indian IT amidst a tough macro environment. One side of this coin
represents buyer (client) expectations and behavior thereof, while the second
stands for IT offshoring vendors’ specific response mechanism in this
environment. Today, client expectations and client behavior are informed by a
much greater sense of realism and adjustment than before. Hand-in-hand, specific
vendors, in recognizing this reality are getting more pro-active and nimbler in
engaging with their clients. There can be a happy marriage between the two.
 Client behavior has decidedly changed from what it seemed to be in 2008-
09. Clients (especially in the developed markets) have largely reconciled
themselves to the new, lower normal. Accordingly, they are formulating their
strategies with IT spending linked/bound to them. This is different from the
Lehman crisis period (2008-09) when clients may have been in a state of
anticipation of resolution and subsequent shock and freeze, perhaps wishing the
macro away. When the Lehman collapse happened, BFS clients were
overwhelmed and it took time for them to wake up and realize that things were
going to be different hereon and adjustments for the medium-to-long term had to
be made. Therefore, a slower macro today, while worrying for clients, is
factored into their decision-making in a much better way than before. Healthy
balance sheets allow enterprises to make the required adjustments for the future,
as they see fit. We present a case study in this respect.
 Some Indian IT vendors such as Cognizant/TCS are smarter at working
with their clients and are more responsive on a real-time basis, in our view.
Earlier, Indian IT vendors might have expected their clients to make decisions.
Post Lehman, Indian IT did not necessarily reach out to them pro-actively but
instead waited for them to open up and client behavior to turn favorable. The
likes of TCS have learnt how to change their response and interaction. Today,
TCS is actively reaching out to its clients, to get a sense of their needs. TCS and
Cognizant do better today at suggesting remedies in real-time fashion, taking
stock of the clients’ situation.
 Depending on the real-time feedback they get into their client issues, TCS can
propose varied solutions on the fly, be it cost reduction imperatives,
globalization imperatives, working capital (cash flows), virtualization and
consolidation, new product introductions, quick-payback projects and so on.
TCS has well-developed solutions to cater to each of its clients’ agendas and,
depending on the situation that TCS gets insight into, can offer these solutions
on an opportunistic/tactical basis as well (in addition to helping with clients’
strategic journey). In this context, our analysis demonstrates that strategy
takes a back-seat to tough-minded execution.
 Also, in this report, we present two case studies that shed further light on
the sides of the “good” coin, in a manner of speaking.
 In short, both clients and select offshore IT companies have got smarter in
dealing with the macro, drawing on their lessons/prior experience. We
believe that the outlook for service providers such as TCS is not as gloomy as
the tough macro-environment suggests. TCS (OW) still remains our key pick in
the sector while we single out Wipro (OW) as a dark horse for the longer-term.