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Stay Underweight Indian IT
See more uncertainty ahead; PLUS Notes from the last two slowdowns
Despite the absolute downsides in most tech stocks YTD, it remains difficult to
build a case of sustainable upsides going forward.
• We think it is unlikely that tech frontliners will report any material slowdown
indicators with their 2QFY12 performance. 2Q is a seasonally strong quarter
and better than June performance is expected from most leading vendors
but the street is already looking for clarity on FY13 earnings.
• Post October, Indian techs head into the year end global IT budgeting cycle
for 2012, which will be a closely watched event this time.
• A Dec11-Jan12 uncertainty on IT budgets seems a likely scenario and
pending clarity on those, stock performance will likely remain muted.
• Unlike in 2011, when IT budgets were framed in a much more buoyant
economic environment, the current deterioration in sentiment suggests a
much more cautious approach to 2012 budgeting.
Industry-wide pricing power remains suspect even as salary costs go up.
• Pricing trends and accompanying vendor commentary indicates some
downward pressure on pricing even as salary costs remain elevated.
• The increasing commoditisation of the IT Services business is precluding
pricing power the vendors enjoyed earlier. Attempts are underway at most
leading vendors to de-commoditise their offering but these are unlikely to
result in any meaningful outcomes in the next 12-18 months in our view.
While FY12 performance from Indian techs should meet street expectations,
lack of upsides/potential downside to FY13 earnings remains a key hurdle.
• Stock upsides over the next 1 year will be driven by PE rollover to FY13
earnings and we see challenges given the uncertainty on FY13 trajectory.
• With street building in 20%+ revenue growth for FY13 for most vendors,
upside potential seems precluded and risk remains on the downside.
• Prospects of lower growth will likely drive valuation de-rating and leading IT
stocks seem unlikely to yield any return over the next 9-12 months.
• The long term structural trend in Indian techs will continue to be dominated
by: A slower topline momentum given the higher revenue base and multiple
headwinds on the cost side (wage hikes, visa issues) and lower earnings
Cagr (mid teens) over any 3-year period ahead.
We also looked at the experience of the last two slowdowns in IT spending. Key
highlights from the two periods:
• Growth visibility changed fast, in fact within weeks in the run-up to March
2003/June 2008. There was a marked change in management commentary
between Jan03 to Apr03 and Apr08 to Jul08.
• Pricing was a bigger/quicker casualty than volumes. Through the worst
quarters of the slowdown, volume growth remained in positive territory on
YY basis. However, pricing waned rapidly and 5-7% cuts happened quickly.
• The “slowdown” lasted ~3 quarters. Indian techs were able to successfully
sell their cost competitive proposition and re-start the growth process.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Stay Underweight Indian IT
See more uncertainty ahead; PLUS Notes from the last two slowdowns
Despite the absolute downsides in most tech stocks YTD, it remains difficult to
build a case of sustainable upsides going forward.
• We think it is unlikely that tech frontliners will report any material slowdown
indicators with their 2QFY12 performance. 2Q is a seasonally strong quarter
and better than June performance is expected from most leading vendors
but the street is already looking for clarity on FY13 earnings.
• Post October, Indian techs head into the year end global IT budgeting cycle
for 2012, which will be a closely watched event this time.
• A Dec11-Jan12 uncertainty on IT budgets seems a likely scenario and
pending clarity on those, stock performance will likely remain muted.
• Unlike in 2011, when IT budgets were framed in a much more buoyant
economic environment, the current deterioration in sentiment suggests a
much more cautious approach to 2012 budgeting.
Industry-wide pricing power remains suspect even as salary costs go up.
• Pricing trends and accompanying vendor commentary indicates some
downward pressure on pricing even as salary costs remain elevated.
• The increasing commoditisation of the IT Services business is precluding
pricing power the vendors enjoyed earlier. Attempts are underway at most
leading vendors to de-commoditise their offering but these are unlikely to
result in any meaningful outcomes in the next 12-18 months in our view.
While FY12 performance from Indian techs should meet street expectations,
lack of upsides/potential downside to FY13 earnings remains a key hurdle.
• Stock upsides over the next 1 year will be driven by PE rollover to FY13
earnings and we see challenges given the uncertainty on FY13 trajectory.
• With street building in 20%+ revenue growth for FY13 for most vendors,
upside potential seems precluded and risk remains on the downside.
• Prospects of lower growth will likely drive valuation de-rating and leading IT
stocks seem unlikely to yield any return over the next 9-12 months.
• The long term structural trend in Indian techs will continue to be dominated
by: A slower topline momentum given the higher revenue base and multiple
headwinds on the cost side (wage hikes, visa issues) and lower earnings
Cagr (mid teens) over any 3-year period ahead.
We also looked at the experience of the last two slowdowns in IT spending. Key
highlights from the two periods:
• Growth visibility changed fast, in fact within weeks in the run-up to March
2003/June 2008. There was a marked change in management commentary
between Jan03 to Apr03 and Apr08 to Jul08.
• Pricing was a bigger/quicker casualty than volumes. Through the worst
quarters of the slowdown, volume growth remained in positive territory on
YY basis. However, pricing waned rapidly and 5-7% cuts happened quickly.
• The “slowdown” lasted ~3 quarters. Indian techs were able to successfully
sell their cost competitive proposition and re-start the growth process.
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