Indian IT Services - Lackluster showing; we remain underweight:: IDFC Sec

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The CNX IT index has recently recovered, but we believe the rally will be short-lived. The recovery was largely driven by the sharp INR decline and relatively positive commentary by Infosys management and not due to easing of the macro concerns. In fact, business performance of IT services companies has been lackluster in Q2FY12 – indicating slowing demand. For the quarter, while Infosys met estimates and surprised on outlook revision, TCS and HCL Tech disappointed and Wipro posted mixed performance. At ~5% qoq, overall volume growth was weak despite it being a seasonally strong quarter. With the exception of Infosys, management commentaries have been incrementally cautious across the board. While most have ruled out any project cancellations/ ramp-downs, many cited delayed decision-making by clients. For global tech majors too, though they reported healthy quarterly results, guidance has been largely conservative in the wake of economic concerns. We believe the uncertainty could weigh on IT spending/ budgets in CY12. As tech demand reacts to economic activity with a lag of a few quarters, IT services companies may be affected from the upcoming December or March quarter, which implies pressure on growth in FY13. Macro data over the next few months remain a key monitorable. In this backdrop, we remain Underweight on the sector and recommend sticking to the top tier (TCS and Infosys).