‘Cloud’ on the Tech Sector :: HDFC Sec

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‘Cloud’ on the Tech Sector
Globally, the technology sector has seen a sluggish 3QCY14 with major
companies like IBM, SAP, Oracle, TCS and HCL Tech witnessing a sharp
correction in stock prices post their results. A major worry was the
revenue slippages reported by the bellwethers of the sector. IBM’s share
price plunged 7% post its results owing to a drop in revenues, driven by
weakness in the hardware and services business. IBM has also
withdrawn its goal of achieving an EPS of USD 20 by CY15. Oracle’s
revenue miss was owing to weakness in the hardware business as well
as softer new license sales. SAP was down 4% post its 3QCY14 result as
the company trimmed its operating profit guidance for CY14E on
account of higher traction of its cloud business. Back home, TCS and HCL
Tech, which have been the darlings in the IT sector, saw a rare
disappointment with both companies missing on the revenue front.
Critics have partly blamed the sales miss of these tech majors on higher
traction in cloud based offerings. A new breed of vendors like
Salesforce.com, NetSuite and Workday, which exclusively focus on
delivering applications on cloud, have seen a rapid scale up in their
business over the past few years. In this note, we study the transition to
cloud and its impact on various companies across the tech value chain.
Impact of traction in cloud based applications on Indian IT vendors
 Revenue leakage in traditional ERP Implementation projects : Traditional
on-premise SAP or Oracle implementation projects have offered a steady
revenue stream for Indian IT vendors. These projects had elements of
consulting, implementation, global rollout, and support services. However,
higher traction in cloud based platform offerings would jeopardize a portion
of these revenues. Enterprise Application Services account for 15-30% of
total revenues for Indian IT vendors based on their method of classification.
 Loss of application development work : As more and more enterprises
access cloud base applications, we believe the Indian IT vendors could see
some revenue weakness in the new application development business.
 Larger clients to adapt cloud in a phased manner : SMBs have been the
fastest adapters of cloud based applications. Indian IT vendors derive a
major share of revenues from Fortune 500 companies. These larger
enterprises are adapting to cloud in a phased manner and the transition
could happen over a three-five year period. Hence, we do not see a drastic
impact on revenues in the near term.
 Integration and data migration might result in new deals : As per our
channel checks, integration of cloud based applications with clients’ existing
applications and data migration would result in new projects.
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 Overall, we believe that though there will be leakage in revenues in a few
service lines, cloud will also offer new opportunities for Indian IT vendors.
Integrating the existing applications with cloud based applications and data
integration would lead to multiple projects. However, the deal sizes would
be smaller in TCV and shorter in tenure. The transition to cloud by large
clients would be a gradual shift over a three year period. Hence, this would
not be a major threat for Indian IT vendors in the medium term. We retain
our positive view on all Tier 1 IT stocks.

http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010078