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India IT
Feedback from Asia investors: Indian
IT in Neutral zone?
Event
We spent last week on the road meeting over 30 investors based in Asia. The
uncertain business outlook for Indian IT vendors, coupled with a sharp fall in
stock prices, has had investors waiting on the sidelines before taking a call in
either direction. We retain TCS as our preferred pick in the sector in India.
Impact
Biggest concern on IT: If US economy sneezes, India catches a cold.
Indian IT companies are suffering from a US economy overhang. We believe
that markets are clearly discounting a budget squeeze and expected high
single-digit revenue growth in FY13. The latest macro data (unemployment
rate, ISM Manufacturing Index) has stoked speculation of a potential US
recession and over the fallout for demand at Indian IT players.
Interest in large caps vs. mid caps. Just when investors were getting
excited about the growth prospects for selected Tier 2 names, scepticism over
demand has translated into reduced the risk appetite for mid cap names in the
IT space. Hexaware remains our preferred mid-cap player in the space.
2Q performance – not in focus currently. Given the increased overhang on
the potential for the sector to grow through the economic cycle, we received
limited queries on performance expectations for the current quarter. Investors
recognise that since there have been no abrupt project cancellations the
quarterly performance for Jul – Sept might not reflect the trends that could
emerge two quarters down the line.
Is the correction temporary or is it a structural de-rating? This has been
one of the vexing questions facing investors in the sector. Investors who
believe that high teens growth for these companies is a thing of the past are
justified in arguing for lower PERs for the sector leaders. Even so, we think
otherwise. It is difficult to argue against potential demand slack in the near
term due to slowdown in the developed markets, but we think the business
model is resilient and can show growth spurts in the coming years.
Outlook
Stay selective – prefer TCS. Our scenario analysis implies that the risk
reward is stacked favourably for the sector leaders at current stock prices. We
believe that TCS has navigated well in a difficult environment and is our
preferred pick in the space in India.
Remain cautious on Wipro. Wipro stock has declined 19% following 1Q
results (vs. TCS’ 9% and Infosys 17%). We believe the company would
struggle to reach industry average growth rates in FY12 and uncertain end
market dynamics weaken the bullish investment arguments hinging on FY13
revival.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India IT
Feedback from Asia investors: Indian
IT in Neutral zone?
Event
We spent last week on the road meeting over 30 investors based in Asia. The
uncertain business outlook for Indian IT vendors, coupled with a sharp fall in
stock prices, has had investors waiting on the sidelines before taking a call in
either direction. We retain TCS as our preferred pick in the sector in India.
Impact
Biggest concern on IT: If US economy sneezes, India catches a cold.
Indian IT companies are suffering from a US economy overhang. We believe
that markets are clearly discounting a budget squeeze and expected high
single-digit revenue growth in FY13. The latest macro data (unemployment
rate, ISM Manufacturing Index) has stoked speculation of a potential US
recession and over the fallout for demand at Indian IT players.
Interest in large caps vs. mid caps. Just when investors were getting
excited about the growth prospects for selected Tier 2 names, scepticism over
demand has translated into reduced the risk appetite for mid cap names in the
IT space. Hexaware remains our preferred mid-cap player in the space.
2Q performance – not in focus currently. Given the increased overhang on
the potential for the sector to grow through the economic cycle, we received
limited queries on performance expectations for the current quarter. Investors
recognise that since there have been no abrupt project cancellations the
quarterly performance for Jul – Sept might not reflect the trends that could
emerge two quarters down the line.
Is the correction temporary or is it a structural de-rating? This has been
one of the vexing questions facing investors in the sector. Investors who
believe that high teens growth for these companies is a thing of the past are
justified in arguing for lower PERs for the sector leaders. Even so, we think
otherwise. It is difficult to argue against potential demand slack in the near
term due to slowdown in the developed markets, but we think the business
model is resilient and can show growth spurts in the coming years.
Outlook
Stay selective – prefer TCS. Our scenario analysis implies that the risk
reward is stacked favourably for the sector leaders at current stock prices. We
believe that TCS has navigated well in a difficult environment and is our
preferred pick in the space in India.
Remain cautious on Wipro. Wipro stock has declined 19% following 1Q
results (vs. TCS’ 9% and Infosys 17%). We believe the company would
struggle to reach industry average growth rates in FY12 and uncertain end
market dynamics weaken the bullish investment arguments hinging on FY13
revival.
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