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Timeline of triggers
A seasonally strong quarter ahead but 2012 IT budgeting uncertainty
thereafter. Watch-out for fresher hiring trends in Dec’11/Jan’12.
The last decade indicates that even in the best of times, Jan-June has been a
relatively weaker period for Indian tech names. July-Dec has been the best phase
of stock performance. The 2H pick-up has not been set in motion this year due to
the the early set backs on multiple fronts with (i) Infosys and Wipro being held
back due to internal issues (ii) meaningfully sized players such as
Temenos/Software AG having to cut guidance significantly post European macro
issues (iii) overall subdued macro environment.
Looking at a timeline of triggers, we see the fresher hiring season of Dec’11/Jan’12
as the key barometer of 2012 demand trends. October result season will likely
satisfy moderated street expectations but is unlikely to be good enough for a
bounce back in tech stocks. We expect little near term impact on revenues from the
current macro issues globally and we think it is unlikely that tech frontliners will
report any slowdown indicators with their 2QFY12 performance. However, we
expect subdued commentary on the pricing environment.
However, post October/November 2011, another phase of uncertainty could ensue.
This will be the time when 2012 IT budgets are framed and also when the health of
demand over the medium term will be judged. Judging by past trends, we expect
the current macro uncertainty to result in a more extended budgeting cycle, leading
to a weak start to 2012 for most leading outsourcing vendors.
Scale of campus hiring for the graduating class of 2012 will be an important lead
indicator of demand trends. Unlike in pre-2008 timeframe, when IT companies
visited campuses 6 months before the following year budgeting period (in June-
July), nowadays, quantum of fresher offers is more in synch with next year demand
trends. The 6 month lag in campus recruitment c.f. pre-2008 gives IT vendors a
buffer period to assess demand trajectory.
We reject the hypothesis that honouring of fresher hiring commitments for
graduating class of 2011 is a sign of strong demand. Much of the current hiring
(fresher + lateral) is to meet 2011 demand and back-fill attrition. As we have
mentioned earlier in the note, the current macro uncertainty is unlikely to impact
2011 growth by much. Moreover, IT companies do have an opportunity to cut-back
on lateral hiring in case of incremental changes in growth outlook for FY12 (though
we would assign a very low probability to that).
CLSA view on Indian techs continues to be cautious. While near-term
uncertainty will invariably keep stock performance muted, the lack of a
secular medium term re-rating story backs our continued negative stance
on Indian techs. While trough PEs for tech stocks will be higher than the
2008 slowdown, we expect those to sustain for a longer period of time. We
have no positive recommendations in the Indian IT Services space.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Timeline of triggers
A seasonally strong quarter ahead but 2012 IT budgeting uncertainty
thereafter. Watch-out for fresher hiring trends in Dec’11/Jan’12.
The last decade indicates that even in the best of times, Jan-June has been a
relatively weaker period for Indian tech names. July-Dec has been the best phase
of stock performance. The 2H pick-up has not been set in motion this year due to
the the early set backs on multiple fronts with (i) Infosys and Wipro being held
back due to internal issues (ii) meaningfully sized players such as
Temenos/Software AG having to cut guidance significantly post European macro
issues (iii) overall subdued macro environment.
Looking at a timeline of triggers, we see the fresher hiring season of Dec’11/Jan’12
as the key barometer of 2012 demand trends. October result season will likely
satisfy moderated street expectations but is unlikely to be good enough for a
bounce back in tech stocks. We expect little near term impact on revenues from the
current macro issues globally and we think it is unlikely that tech frontliners will
report any slowdown indicators with their 2QFY12 performance. However, we
expect subdued commentary on the pricing environment.
However, post October/November 2011, another phase of uncertainty could ensue.
This will be the time when 2012 IT budgets are framed and also when the health of
demand over the medium term will be judged. Judging by past trends, we expect
the current macro uncertainty to result in a more extended budgeting cycle, leading
to a weak start to 2012 for most leading outsourcing vendors.
Scale of campus hiring for the graduating class of 2012 will be an important lead
indicator of demand trends. Unlike in pre-2008 timeframe, when IT companies
visited campuses 6 months before the following year budgeting period (in June-
July), nowadays, quantum of fresher offers is more in synch with next year demand
trends. The 6 month lag in campus recruitment c.f. pre-2008 gives IT vendors a
buffer period to assess demand trajectory.
We reject the hypothesis that honouring of fresher hiring commitments for
graduating class of 2011 is a sign of strong demand. Much of the current hiring
(fresher + lateral) is to meet 2011 demand and back-fill attrition. As we have
mentioned earlier in the note, the current macro uncertainty is unlikely to impact
2011 growth by much. Moreover, IT companies do have an opportunity to cut-back
on lateral hiring in case of incremental changes in growth outlook for FY12 (though
we would assign a very low probability to that).
CLSA view on Indian techs continues to be cautious. While near-term
uncertainty will invariably keep stock performance muted, the lack of a
secular medium term re-rating story backs our continued negative stance
on Indian techs. While trough PEs for tech stocks will be higher than the
2008 slowdown, we expect those to sustain for a longer period of time. We
have no positive recommendations in the Indian IT Services space.
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