IT: A wrap-up of recent discussions with the industry and consultants : Credit Suisse

● FY14 is poised to be a good year: Recent discussions with
industry sources, consultants and companies reaffirm a strong
demand environment and pick-up in discretionary spending.
● Immigration bill is a non-issue for customers: Buyers are not
quizzing consultants about this. Senior leaders in the US
Congress have assured the industry on the absence of
discriminatory clauses. An industry survey of CIOs suggested that
most will be forced to offshore more in case of an adverse fallout.
● Some other key issues: Cloud revenues will be like a "reverse
hockey" stick – lots of work initially before any drop in revenue. Buyers
are not renegotiating rates down due to the INR depreciation. In
Europe, there is strong growth in the Netherlands, Germany and
Sweden. There is some insourcing of data centres but not a trend.
● Company-specific feedback from consultants continue to favour
TCS: TCS remains the best service provider and a "strategic
thinker", Infosys is more aggressive by bundling IPs but not
reducing like-to-like pricing, Wipro needs to be more consistent,
HCLT's infra business remains very strong with recent wins

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FY14 is poised to be a good year
FY14 is likely to end at the higher end of NASSCOM's 12-14% growth
expectation. Companies are positive on early discussions for next year
with their customers. Consultants feel that companies are winning a lot
of deals, but are not willing to announce them. Discretionary spending
seems to be picking up. Financial services looks strong.
With engineering capacity much higher than demand, the supply side
issues are looking benign (see our note, Supply-side worries take a
breather, dated 20 November 2013).
While multinational companies are able to offer the same offshore
pricing as Indian firms, the latter appear more willing and able to use
more offshore.
Immigration bill is a non-issue for customers
Buyers do not seem to be concerned with the immigration bill, as per
consultants. The industry has received assurances from senior
leaders in the Congress that they won't include any discriminatory
provisions. An industry survey of 70 CIOs suggested that they will be
forced to offshore more in case of an adverse impact as switching
costs are high in this business.
Post the Infosys settlement on the visa front, this has become an
important focus area for the companies. The industry feels that
companies are fairly compliant, but they need to do more in terms of
communication. Companies are beginning to have a structured
government relation programme.
Some other key issues
Cloud can be disruptive on the infrastructure services side but less so
on applications. However, the disruption is beneficial for Indian IT
service providers as it reduces the advantage that global hardware
vendors have. Cloud revenues will be like a "reverse hockey" stick.
Significant revenue could get generated initially as companies move
to a private cloud and platforms are built for SMEs. Once all this is
done, work could get commoditised and revenues will drop but this
phase will take a few years to reach.
While there seems to be some instances of customers asking for
discounts due to the INR depreciation, buyers don't really seem to care
much about the INR depreciation as this could set a precedent and they
will need to increase rates when the INR appreciates. There is some
scope of reductions in cases of contracts that are being renewed though.
Relatively new markets in Europe are strong growth drivers. There is
strong momentum in the Netherlands, Germany and Sweden. Industry
consultants feel that Germany is now in the same place as the US
was in 2001-02. No Indian IT services vendor seems to see China as
a strategic market. The market is very competitive with many small IT
services vendors competing for the business and large multinationals
winning business from larger companies. There is little headway in
Japan as well and Japanese vendors have started setting up
significant presence here.
The apprehensions of in-sourcing are overblown, in our view. Some
companies are taking datacenters in-house because the technology
component is becoming critical to success. But this is not a trend.
Company-specific feedback from consultants
TCS remains the best service provider and a "strategic thinker",
Infosys is more aggressive by bundling IPs but not reducing like-tolike pricing, Wipro needs to be more consistent, HCLT's infra business
remains very strong with recent wins against global MNCs.
We remain positive on the sector – we do not think P/E multiples are
stretched relative to recent peaks and continuing upward growth
revisions can sustain multiples easily. Our top two picks are HCLT
(extremely attractive valuations, accelerating momentum in infra and
possibility of a pick-up in software services – see our note 2014 could
be the year for some multiple expansion dated 2 December 2013) and
TCS (continuing strong execution and sales and very positive
feedback from industry consultants and customers)