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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Large cap Indian IT services stocks have corrected 20–33% since
March 2011, while earnings estimates have moved only by +2% to
-9%, implying that market is already building in further EPS cuts.
● According to our Global Strategy team, the scenario of an
‘ongoing sub-par recovery’ is much more likely than a US
recession. In such a scenario, growth estimates for Indian IT that
helps customers reduce costs, are unlikely to be significantly
reduced, in our view.
● At the same time, bottom-up commentary from large cap IT
companies—although cautious—has not yet turned negative.
Enterprise spending remains strong and there have been little to
no budget cuts or lengthening of decision cycles so far.
● While we have been cautious on the sector since April, current
prices, in our view, are starting to discount far worse a scenario
than our central case thesis. Longer-term investors should start to
accumulate stocks at current levels, though immediate positive
catalysts are hard to identify
Current stock prices already factor in further EPS cuts
Large cap Indian IT services stocks have corrected 20–33% since
March 2011 driven by the concerns of a recession in the developed
markets of North America and Europe. However, EPS estimates for
FY12 and FY13 have seen cuts of at most 9% so far.
Bottom-up commentary has not yet turned negative
Infosys and TCS both maintain that they are yet to see any budget
cuts/slowdown in decision making cycles post the recent turmoil in
financial markets. They are also unanimous in their commentary that
there has been no 'knee-jerk' reaction from their clients unlike at the
time of the Lehman crisis.
Slowdown more likely than recession => low downside for
Indian IT
Our Global Strategy team, in its recent note ‘Macro and market
scenarios’ on 25 August 2011, evaluated the likelihood of various
scenarios in the current global macroeconomic environment.
According to the report, a scenario of ongoing sub-par recovery—
GDP growth of 1.5%-2% in the US, 0.5%-1% in Europe—is most likely
We note that US GDP growth in 1H CY11 was less than 1% versus
growth of 3% in 2010. Despite this, in 1H CY11, Indian IT companies
have posted normal revenue growth and maintained a bullish stance
on the overall demand environment—i.e. a slowdown in US overall
growth does not automatically mean that Indian IT vendors would start
seeing slowing revenue.
In our view, for a value-additive process (for customers) such as IT
outsourcing, overall customer business dynamics have to deteriorate
significantly before one starts to see a negative impact. In a slow
growth environment, as opposed to a negative GDP growth
environment, we do not believe growth rate for Indian IT vendors
would need to come down significantly.
Fear significantly priced in
We currently do not build in the recession scenario in our estimates.
The top four Indian IT services companies are currently trading at 8–
15x FY13E EPS. While these are far from trough valuations, we do
believe that under our current view of the world, at current prices,
these stocks look attractive for the long term, given growth prospects.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Large cap Indian IT services stocks have corrected 20–33% since
March 2011, while earnings estimates have moved only by +2% to
-9%, implying that market is already building in further EPS cuts.
● According to our Global Strategy team, the scenario of an
‘ongoing sub-par recovery’ is much more likely than a US
recession. In such a scenario, growth estimates for Indian IT that
helps customers reduce costs, are unlikely to be significantly
reduced, in our view.
● At the same time, bottom-up commentary from large cap IT
companies—although cautious—has not yet turned negative.
Enterprise spending remains strong and there have been little to
no budget cuts or lengthening of decision cycles so far.
● While we have been cautious on the sector since April, current
prices, in our view, are starting to discount far worse a scenario
than our central case thesis. Longer-term investors should start to
accumulate stocks at current levels, though immediate positive
catalysts are hard to identify
Current stock prices already factor in further EPS cuts
Large cap Indian IT services stocks have corrected 20–33% since
March 2011 driven by the concerns of a recession in the developed
markets of North America and Europe. However, EPS estimates for
FY12 and FY13 have seen cuts of at most 9% so far.
Bottom-up commentary has not yet turned negative
Infosys and TCS both maintain that they are yet to see any budget
cuts/slowdown in decision making cycles post the recent turmoil in
financial markets. They are also unanimous in their commentary that
there has been no 'knee-jerk' reaction from their clients unlike at the
time of the Lehman crisis.
Slowdown more likely than recession => low downside for
Indian IT
Our Global Strategy team, in its recent note ‘Macro and market
scenarios’ on 25 August 2011, evaluated the likelihood of various
scenarios in the current global macroeconomic environment.
According to the report, a scenario of ongoing sub-par recovery—
GDP growth of 1.5%-2% in the US, 0.5%-1% in Europe—is most likely
We note that US GDP growth in 1H CY11 was less than 1% versus
growth of 3% in 2010. Despite this, in 1H CY11, Indian IT companies
have posted normal revenue growth and maintained a bullish stance
on the overall demand environment—i.e. a slowdown in US overall
growth does not automatically mean that Indian IT vendors would start
seeing slowing revenue.
In our view, for a value-additive process (for customers) such as IT
outsourcing, overall customer business dynamics have to deteriorate
significantly before one starts to see a negative impact. In a slow
growth environment, as opposed to a negative GDP growth
environment, we do not believe growth rate for Indian IT vendors
would need to come down significantly.
Fear significantly priced in
We currently do not build in the recession scenario in our estimates.
The top four Indian IT services companies are currently trading at 8–
15x FY13E EPS. While these are far from trough valuations, we do
believe that under our current view of the world, at current prices,
these stocks look attractive for the long term, given growth prospects.
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