SAP's robust preliminary result is yet another indicator boding well for Indian IT; our constructive view remains intact:: JPMorgan,

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 SAP (covered by JPM European software & IT services analyst Stacy Pollard)
announced its preliminary financial results for 3QFY11 (Jul-Sep quarter). The
company reported impressive revenue growth of 32% Y/Y (constant
currency (CC)) in its Software business and 16% Y/Y (CC) growth in
Software and software-related services revenues. We view this as a positive
for consulting and package implementation business of Indian IT companies.
This is yet another positive in a series of good data points for the sector in the
past few weeks – consistent with our thesis.
 SAP suggested that the demand environment remains healthy and project
pipeline is still ‘very strong’. Clients are willing to invest in IT primarily in
innovative software solutions. The company maintained its full year guidance
of 10-14% Y/Y revenue growth (constant currency, non-IFRS) in its software
and software-related services business and reiterated its expectation to achieve
‘the high end’ of the guidance range. We note that SAP had given this guidance
on July 26th, before the S&P downgrade of the US sovereign rating. This
signifies that the demand environment has not changed materially, if at all, due
to/after the downgrade (as feared by investors).
 Strong growth in software and services business of SAP allays some of the
growth concerns for FY13 that investors have regarding Indian IT. We note
that downstream revenues (i.e. implementation and services) start flowing in 2-3
quarters after the sale of SAP licenses. Robust SAP software revenues in Sep-11
quarter are a leading indicator for Indian IT companies’ package implementation
revenues. Hence, a portion of Indian IT companies' discretionary revenue stream
(SAP-implementation based) seems protected at least for the next 2-3 quarters.
 The commentary and performance of SAP is in line with our longheld/
expressed view that in the current (potential) downturn, clients are
willing to look beyond the near-term weakness and they intend to invest for
long-term revenue growth. They view IT as a revenue growth driver and a tool
for differentiation than merely a cost rationalization alternative. Our channel
checks suggest that clients are more interested in conversations and
engagements on cloud, mobility, analytics and other innovative technologies,
than pricing cuts, as in the earlier downturns.
 Though strong revenue growth for SAP is a positive for Indian IT services
industry as a whole, HCLT (OW) is likely to benefit more because of its
relatively high exposure to SAP implementation revenues, particularly after
AXON acquisition.
 Investment view. Our constructive view on Indian IT remains intact.
Infosys’ 2QFY12 management commentary on business was also more positive
than it has been in the recent past, another indicator pointing to the healthy state
of demand in the sector consistent with our long-held view. This is also echoed
by commentary and/or results of peers such as TCS, Accenture and Cognizant
and the other upstream software company – Oracle (besides SAP). We continue
to be positive on the Indian IT sector with TCS (OW) as our top pick.