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India Equity Research Reports, IPO and Stock News
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Lower consensus expectations and
stronger margin levers in 2012 versus
2011 offer strong support to IT stocks
IT spend by banks expected to hold
steady or even rise in 2012
Absolute stock upside likely to be
gradual, but downside risks are low
Outperformance to continue. Indian IT stocks have
outperformed the market by almost 20% since the August
sell-off. While the sector is likely to remain range-bound in
the near term amid conflicting indicators and drivers, we
expect it to continue to outperform a weak market. We are
Overweight on Infosys, TCS and HCLT.
Indian IT firms gain market share. IT spend by large
banks (assets of USD5trn) was up near 6% y-o-y in first nine
months of 2011. This clearly suggests strong market share
gains for Indian firms, as revenues of the top-four IT
companies from the financial services sector grew c25% in
the same period. The continued offshoring of run-the-bank
operations should provide downside support to our estimates
for FY13, even if banks do not increase their IT budgets.
Furthermore, we believe bank IT spend intensity (the ratio of
IT spend to revenues) is likely to remain stable in 2012,
raising the possibility of an increase in technology budgets
as revenues rise. Historically, a rare or modest cut in
absolute IT spend, even in the worst of economic crises,
adds to this optimism (see pages 4-7).
A few red flags worth highlighting. While our survey of
industry participants and analysis of IT spend by global banks
offer a positive read-across for demand, it’s hard to ignore
the weak hardware sales by IBM and a poor quarter from
Oracle. At this stage, however, we see these more as corporate
performance blips than as indications of a broader sector trend
change. Even Oracle’s guidance next quarter (ending Feb
2012) is far stronger than the usual seasonality (see page 9).
We maintain our 15% FY13 growth forecast (for the sector).
Maintain positive sector view. Compared with a year ago,
demand/investor expectations of revenue growth are
seemingly lower for 2012, reinforced by company comments.
In our view, this bodes well for share price support, especially
in view of the favourable margins levers, including INR
weakness and slower wage inflation. Key risks are INR
appreciation, a collapse in demand and pricing pressure
Steady growth in 2012
Banks IT budgets rose 6% in 2011, coinciding with accelerated
market share gains by Indian companies
As banks IT spend intensity (IT spend to revenues ratio) remain
steady, technology budgets are likely to increase
Read-across from IBM and Oracle is negative, but IT services
spend appears more resilient
3Q preview
Seasonally weak quarter to benefit from INR weakness on the
bottom-line
Demand commentary for 2012 budgets likely to be cautious, but
not strongly negative
Expect stocks to remain range-bound during the results period
IT services companies are likely to remain rangebound
during the 3Q results period. We expect
volume growth of 3-4%, more or less in line with
market expectations. A seasonally weak quarter is
likely to worsen due to the cross currency impact
(GBP and EUR weakness) of 70-200bp q-o-q on
top-line growth. Much focus will be on demand
commentary and the 2012 outlook. Thanks to INR
depreciation, margins should expand during the
quarter, resulting in strong reported earnings growth.
Company-specific highlights. As illustrated in
the table 13 in detail, Infosys is likely to benefit
the most from INR depreciation. While Wipro and
TCS would see hedging losses impact earnings,
HCLT has one-off costs in this quarter, restricting
full benefit of INR depreciation flowing through
the bottom-line/margins. In terms of volume
growth, TCS is again likely to lead the pack with
near 4% q-o-q volume growth, closely followed
by Infosys and HCLT.
Mid-cap. We believe Mindtree is likely to benefit
strongly from INR depreciation in the quarter.
While moderating volume growth of 4-5% q-o-q
is expected, we would like to see more diversified
revenue growth across top clients. Persistent has
recently downgraded its full year top-line growth
guidance to 20-22% (from 29%) and PAT
guidance to INR1,250-1,350m, flat y-o-y. This
suggests a nearly flat top-line growth quarter, and
therefore an eventless quarter
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Lower consensus expectations and
stronger margin levers in 2012 versus
2011 offer strong support to IT stocks
IT spend by banks expected to hold
steady or even rise in 2012
Absolute stock upside likely to be
gradual, but downside risks are low
Outperformance to continue. Indian IT stocks have
outperformed the market by almost 20% since the August
sell-off. While the sector is likely to remain range-bound in
the near term amid conflicting indicators and drivers, we
expect it to continue to outperform a weak market. We are
Overweight on Infosys, TCS and HCLT.
Indian IT firms gain market share. IT spend by large
banks (assets of USD5trn) was up near 6% y-o-y in first nine
months of 2011. This clearly suggests strong market share
gains for Indian firms, as revenues of the top-four IT
companies from the financial services sector grew c25% in
the same period. The continued offshoring of run-the-bank
operations should provide downside support to our estimates
for FY13, even if banks do not increase their IT budgets.
Furthermore, we believe bank IT spend intensity (the ratio of
IT spend to revenues) is likely to remain stable in 2012,
raising the possibility of an increase in technology budgets
as revenues rise. Historically, a rare or modest cut in
absolute IT spend, even in the worst of economic crises,
adds to this optimism (see pages 4-7).
A few red flags worth highlighting. While our survey of
industry participants and analysis of IT spend by global banks
offer a positive read-across for demand, it’s hard to ignore
the weak hardware sales by IBM and a poor quarter from
Oracle. At this stage, however, we see these more as corporate
performance blips than as indications of a broader sector trend
change. Even Oracle’s guidance next quarter (ending Feb
2012) is far stronger than the usual seasonality (see page 9).
We maintain our 15% FY13 growth forecast (for the sector).
Maintain positive sector view. Compared with a year ago,
demand/investor expectations of revenue growth are
seemingly lower for 2012, reinforced by company comments.
In our view, this bodes well for share price support, especially
in view of the favourable margins levers, including INR
weakness and slower wage inflation. Key risks are INR
appreciation, a collapse in demand and pricing pressure
Steady growth in 2012
Banks IT budgets rose 6% in 2011, coinciding with accelerated
market share gains by Indian companies
As banks IT spend intensity (IT spend to revenues ratio) remain
steady, technology budgets are likely to increase
Read-across from IBM and Oracle is negative, but IT services
spend appears more resilient
3Q preview
Seasonally weak quarter to benefit from INR weakness on the
bottom-line
Demand commentary for 2012 budgets likely to be cautious, but
not strongly negative
Expect stocks to remain range-bound during the results period
IT services companies are likely to remain rangebound
during the 3Q results period. We expect
volume growth of 3-4%, more or less in line with
market expectations. A seasonally weak quarter is
likely to worsen due to the cross currency impact
(GBP and EUR weakness) of 70-200bp q-o-q on
top-line growth. Much focus will be on demand
commentary and the 2012 outlook. Thanks to INR
depreciation, margins should expand during the
quarter, resulting in strong reported earnings growth.
Company-specific highlights. As illustrated in
the table 13 in detail, Infosys is likely to benefit
the most from INR depreciation. While Wipro and
TCS would see hedging losses impact earnings,
HCLT has one-off costs in this quarter, restricting
full benefit of INR depreciation flowing through
the bottom-line/margins. In terms of volume
growth, TCS is again likely to lead the pack with
near 4% q-o-q volume growth, closely followed
by Infosys and HCLT.
Mid-cap. We believe Mindtree is likely to benefit
strongly from INR depreciation in the quarter.
While moderating volume growth of 4-5% q-o-q
is expected, we would like to see more diversified
revenue growth across top clients. Persistent has
recently downgraded its full year top-line growth
guidance to 20-22% (from 29%) and PAT
guidance to INR1,250-1,350m, flat y-o-y. This
suggests a nearly flat top-line growth quarter, and
therefore an eventless quarter
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