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IT: Key drivers in 2011
Volumes to surprise – expect ~24% growth (in INR terms, = 27% in USD terms) for FY12 for Tier 1 Cos
We raise our FY12E earnings to incorporate higher volume growth YoY (led by BFSI vertical), market share gains by Indian vendors
in large deals & higher INR rate of Rs 44.1 (vs. Rs 43.3 earlier, ~2%+)
Better earnings visibility and lower tax rates in FY13E (cash flow generation on a much higher revenue base) lead us to upgrade
our FY12E PE for majority for our covered companies
Large caps to grow higher than industry. Prefer BFSI-centric players: TCS, Infosys, OFSS & MphasiS. In mid-caps, we like Persistent
Key to watch would be Cognizant’s CY11E topline guidance in Feb 2011 (market expectations now placed at ~28-30% YoY
growth; Bloomberg consensus at ~25%)
Business visibility robust
Volumes / Revenues: Led by strong deal pipeline, discretionary spend in key verticals (such as BFSI, Retail etc.) and increased
market share gains by Indian vendors (20% YTD-2010 vs. 16% in 2009 and 13% in 2007)
Pricing: Product mix change led by higher growth in discretionary spends related offerings like Package Implementation &
Consulting, Application Development etc. led to blended price increase for certain large caps in Q2FY11. While managements
remain cautions on a coupon rate increase due to macro-economic challenges, we believe a consistent volume growth for 2-4 qtrs
and discretionary spend can potentially drive the blended pricing
Large caps preferred vs. mid-caps: Lower volume and revenue visibility, higher attrition rates and wage pressures (select players
may need to offer 2nd salary hikes in H2FY11) lead to lower earnings growth and visibility for mid-caps
Risks :
(1) Higher unemployment rate in developed countries (2) increase in non-trade barriers / visa challenges (3) supply-side
challenges (attrition / wage hikes) and (4) currency appreciation
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