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India IT Services
US economic outlook: Sub-par, yet
solid
Event
�� We hosted Rebecca Hiscock-Croft, our US Economist, for a conference call
with investors to understand how global political and economical headwind
would shape the US economic outlook. We present key thoughts from the call
and our analysis of what it means for Indian IT. Replay details: Replay ID:
14178632, Replay Dial in Details: India - '000 800 100 6548 / 022 30360400,
Global Access: +61282355000.
Impact
�� Expect sub-par, yet solid US GDP growth in 2H11-2012. The demand
outlook for Indian IT vendors is tightly linked with the growth outlook and
economic activity in the developed economies. Macquarie estimates 1.7%
GDP growth in 2011 and 2.4% in 2012 for the US economy. These
estimates incorporate the growing risks of financial contagion, but more
significantly, a weaker path of consumption growth in line with the recent
disappointing employment growth. Rebecca still expects a boost to growth
over the remainder of 2011, compared to the anaemic, weather and supply
chain impacted, levels seen in 1H11.
�� Our FY13 estimates are already cautious. In our report, “The glass is half
full”, 4 Oct we have scaled back our FY13 revenue growth est. by 600-800bps
with coverage universe growth now at 14%. At the EPS level there is little
change to our forecast since depreciating INR aids bottom line. If sentiment
on the US economy improves we see upside to our and street growth
expectations.
�� US banks’ direct exposure to European sovereign debt minimal… Fig 1
outlines the US foreign claims on Greece, Portugal and Ireland amount to
US$64 billion currently. This compares with Tier 1 capital of US$700bn for the
top 10 banks alone.
�� …the real problem is confidence. Rebecca believes that weaker investment
confidence and domestic political risks casting a shadow on policy clarity is
hurting the equity markets. A case in point is the MoM change in job hiring
and job opening data (Figure 2).
�� Equipment and Software investments - the powerhouse behind US GDP.
Equipment & software investment accounted for 30% percent of GDP growth in
2010, and 60% percent in 1H11. Fig 3 and 4 explains the sizeable disconnect
between personal consumption expenditure and equipment and software
growth. We note that durable goods orders and capital goods shipment (exdefence)
data suggests that this trend is likely to continue in 3Q11.
�� Key indicators to watch out for – ISM index and Capital goods shipment.
Outlook
�� Investment view on Indian IT – stay selective. We would stay selective; we
prefer TCS and HCLT. Mindtree is our preferred mid-cap pick given the
limited upside at Hexaware.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India IT Services
US economic outlook: Sub-par, yet
solid
Event
�� We hosted Rebecca Hiscock-Croft, our US Economist, for a conference call
with investors to understand how global political and economical headwind
would shape the US economic outlook. We present key thoughts from the call
and our analysis of what it means for Indian IT. Replay details: Replay ID:
14178632, Replay Dial in Details: India - '000 800 100 6548 / 022 30360400,
Global Access: +61282355000.
Impact
�� Expect sub-par, yet solid US GDP growth in 2H11-2012. The demand
outlook for Indian IT vendors is tightly linked with the growth outlook and
economic activity in the developed economies. Macquarie estimates 1.7%
GDP growth in 2011 and 2.4% in 2012 for the US economy. These
estimates incorporate the growing risks of financial contagion, but more
significantly, a weaker path of consumption growth in line with the recent
disappointing employment growth. Rebecca still expects a boost to growth
over the remainder of 2011, compared to the anaemic, weather and supply
chain impacted, levels seen in 1H11.
�� Our FY13 estimates are already cautious. In our report, “The glass is half
full”, 4 Oct we have scaled back our FY13 revenue growth est. by 600-800bps
with coverage universe growth now at 14%. At the EPS level there is little
change to our forecast since depreciating INR aids bottom line. If sentiment
on the US economy improves we see upside to our and street growth
expectations.
�� US banks’ direct exposure to European sovereign debt minimal… Fig 1
outlines the US foreign claims on Greece, Portugal and Ireland amount to
US$64 billion currently. This compares with Tier 1 capital of US$700bn for the
top 10 banks alone.
�� …the real problem is confidence. Rebecca believes that weaker investment
confidence and domestic political risks casting a shadow on policy clarity is
hurting the equity markets. A case in point is the MoM change in job hiring
and job opening data (Figure 2).
�� Equipment and Software investments - the powerhouse behind US GDP.
Equipment & software investment accounted for 30% percent of GDP growth in
2010, and 60% percent in 1H11. Fig 3 and 4 explains the sizeable disconnect
between personal consumption expenditure and equipment and software
growth. We note that durable goods orders and capital goods shipment (exdefence)
data suggests that this trend is likely to continue in 3Q11.
�� Key indicators to watch out for – ISM index and Capital goods shipment.
Outlook
�� Investment view on Indian IT – stay selective. We would stay selective; we
prefer TCS and HCLT. Mindtree is our preferred mid-cap pick given the
limited upside at Hexaware.
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