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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Technology
India
Increasing earnings uncertainty. S&P’s downgrade of US sovereign debt and looming
macro risks in several other developed economies, especially the Eurozone, increase the
earnings uncertainty for the Indian IT services players. Memories of the 2008 global
financial crisis (GFC) and its delayed impact on offshore IT revenues are still fresh and
hence, the strong current micro indicators may not lend much confidence to the Street.
We would view an earnings blip, if any, as a cyclical hit, in a secular growth story for
offshore IT. Nonetheless, we present earnings sensitivity to potential volume/pricing hit.
US rating downgrade adds to the uncertainty
Fears of a double-dip recession-led demand slowdown for the IT services industry, including
offshore players, have been in the air for some time now. The recent S&P downgrade of long-term
US sovereign debt adds to the fear. Double-dip recession has the potential of impacting clients’ IT
budgets moving into CY2012E. Risks (mostly downside, some upside) to assumptions on several
other variables in our earnings model also come into play, consequently. Four key variables, in our
view, are
Volume growth. A function of how the clients’ IT budgets shape up hereon, and more
importantly, what happens to the pace of decision-making on deal renewal, vendor
consolidations instances, etc. It is worthwhile to recall that the volume slowdown and
subsequent pick-up for the offshore players had less to do with what happened to the overall
client IT budgets and more to the decision-making cycle. A freeze in decision-making post the
Lehman crisis meant that the expected counter-cyclical benefits (market share gains) for
offshore players were delayed by 2-3 quarters. Clichéd as it may sound, we believe things could
be different this time – clients are better geared for a recessionary environment and the drive
for cost rationalization could pick some slack from IT budget cuts and potentially keep the
volume growth story going for the Indian players. Increased protectionism, if the recession
translates into a sharp rise in unemployment in client geographies, poses another volume risk.
Pricing. This is where negative surprises could come in. In addition to the macro-led pressure
from clients, recent relative volume growth underperformance of Infosys and Wipro versus TCS
and Cognizant could also play a role in how pricing shapes up for the Tier-I pack. Mid-sized
companies, anyway, are price takers in the market.
Currencies. Re/US$ as well as US$ versus the European currencies (GBP and EUR). Economists
are making arguments both ways; potential depreciation of the USD (versus the Re and/or
European currencies) of course, would be a negative for offshore Indian IT names.
Supply-side pressure. This could potentially ease out if demand does slow down materially,
providing some buffer on margins.
Short-term pressure on stocks likely; long-term risk/reward favorable, on balance
Even as we are believers in the long-term market share gain story for the offshore IT services
players, macro events could induce cyclicality to the extent of gains in different time periods.
Macro and micro indicators, at this point, continue to paint different pictures – however,
memories of demand slowdown post 2008 GFC are fresh and could keep the scale tilted on the
side of caution, in the near term. We look at earnings sensitivity to volume/pricing risks for various
companies and find the longer-term risk/reward favorable at current valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Technology
India
Increasing earnings uncertainty. S&P’s downgrade of US sovereign debt and looming
macro risks in several other developed economies, especially the Eurozone, increase the
earnings uncertainty for the Indian IT services players. Memories of the 2008 global
financial crisis (GFC) and its delayed impact on offshore IT revenues are still fresh and
hence, the strong current micro indicators may not lend much confidence to the Street.
We would view an earnings blip, if any, as a cyclical hit, in a secular growth story for
offshore IT. Nonetheless, we present earnings sensitivity to potential volume/pricing hit.
US rating downgrade adds to the uncertainty
Fears of a double-dip recession-led demand slowdown for the IT services industry, including
offshore players, have been in the air for some time now. The recent S&P downgrade of long-term
US sovereign debt adds to the fear. Double-dip recession has the potential of impacting clients’ IT
budgets moving into CY2012E. Risks (mostly downside, some upside) to assumptions on several
other variables in our earnings model also come into play, consequently. Four key variables, in our
view, are
Volume growth. A function of how the clients’ IT budgets shape up hereon, and more
importantly, what happens to the pace of decision-making on deal renewal, vendor
consolidations instances, etc. It is worthwhile to recall that the volume slowdown and
subsequent pick-up for the offshore players had less to do with what happened to the overall
client IT budgets and more to the decision-making cycle. A freeze in decision-making post the
Lehman crisis meant that the expected counter-cyclical benefits (market share gains) for
offshore players were delayed by 2-3 quarters. Clichéd as it may sound, we believe things could
be different this time – clients are better geared for a recessionary environment and the drive
for cost rationalization could pick some slack from IT budget cuts and potentially keep the
volume growth story going for the Indian players. Increased protectionism, if the recession
translates into a sharp rise in unemployment in client geographies, poses another volume risk.
Pricing. This is where negative surprises could come in. In addition to the macro-led pressure
from clients, recent relative volume growth underperformance of Infosys and Wipro versus TCS
and Cognizant could also play a role in how pricing shapes up for the Tier-I pack. Mid-sized
companies, anyway, are price takers in the market.
Currencies. Re/US$ as well as US$ versus the European currencies (GBP and EUR). Economists
are making arguments both ways; potential depreciation of the USD (versus the Re and/or
European currencies) of course, would be a negative for offshore Indian IT names.
Supply-side pressure. This could potentially ease out if demand does slow down materially,
providing some buffer on margins.
Short-term pressure on stocks likely; long-term risk/reward favorable, on balance
Even as we are believers in the long-term market share gain story for the offshore IT services
players, macro events could induce cyclicality to the extent of gains in different time periods.
Macro and micro indicators, at this point, continue to paint different pictures – however,
memories of demand slowdown post 2008 GFC are fresh and could keep the scale tilted on the
side of caution, in the near term. We look at earnings sensitivity to volume/pricing risks for various
companies and find the longer-term risk/reward favorable at current valuations.
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