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IT Services (Diviya Nagarajan)
Budget 2011 impact: Marginal negative
We believe that the increase in MAT from 18% to 18.5% and its levy on SEZ
profits is largely EPS neutral for Indian IT vendors, with marginal impact on
cash flows (2-4% given that the current profit contribution from SEZ is low).
Tax benefits under section 10A/10B of the STPI (Software Technology Parks of
India) scheme have not been extended, and are likely to expire by 31 March
2011. This is already factored into our estimates, and hence EPS neutral.
Sector view: remain cautious, upsides limited
We retain cautious call on the Indian IT services industry. We believe that the
Indian IT Services sector is at the beginning of a multi-year growth cycle (in the
absence of macroeconomic shocks) and 20%-plus revenue growth rates over the
next 1-2 years. We believe that this growth will come at the expense of
profitability as the wage arbitrage gap continues to narrow.
We expect minimum 15-16% wage hikes in 2011, and expect operating margins
to tend lower despite likely positives from pricing gains. As seen in FY11, we
expect cost pressures to hurt margins (operating margins already lower by 100-
300bp from the peaks seen in FY09-10), and expect EPS growth to lag revenue
over the near-to-medium term.
Top Picks
TCS (Neutral rated) is our top pick in the sector. We believe that most Indian IT
stocks are expensive and maintain our Neutral ratings on Infosys Technologies,
and Tech Mahindra, and our Sell ratings on HCL Technologies, Wipro, and
Mahindra Satyam.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IT Services (Diviya Nagarajan)
Budget 2011 impact: Marginal negative
We believe that the increase in MAT from 18% to 18.5% and its levy on SEZ
profits is largely EPS neutral for Indian IT vendors, with marginal impact on
cash flows (2-4% given that the current profit contribution from SEZ is low).
Tax benefits under section 10A/10B of the STPI (Software Technology Parks of
India) scheme have not been extended, and are likely to expire by 31 March
2011. This is already factored into our estimates, and hence EPS neutral.
Sector view: remain cautious, upsides limited
We retain cautious call on the Indian IT services industry. We believe that the
Indian IT Services sector is at the beginning of a multi-year growth cycle (in the
absence of macroeconomic shocks) and 20%-plus revenue growth rates over the
next 1-2 years. We believe that this growth will come at the expense of
profitability as the wage arbitrage gap continues to narrow.
We expect minimum 15-16% wage hikes in 2011, and expect operating margins
to tend lower despite likely positives from pricing gains. As seen in FY11, we
expect cost pressures to hurt margins (operating margins already lower by 100-
300bp from the peaks seen in FY09-10), and expect EPS growth to lag revenue
over the near-to-medium term.
Top Picks
TCS (Neutral rated) is our top pick in the sector. We believe that most Indian IT
stocks are expensive and maintain our Neutral ratings on Infosys Technologies,
and Tech Mahindra, and our Sell ratings on HCL Technologies, Wipro, and
Mahindra Satyam.
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