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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India IT Services Sector----------------------------------------------------- Maintain OVERWEIGHT
The positive case for corporate spending
● We present takeaways for the Indian IT services sector from the
report, Corporate spend: stick to software, by our global equity
strategist, Andrew Garthwaite, published on 21 July 2011. Please
write to us or click here for the full report.
● Corporate spending is currently a topic of interest for investors in
Indian IT companies, given: (1) poor US macroeconomic data; (2)
funding concerns at European banks and (3) recent profit warnings.
● According to our strategist, there is still a case for being
overweight in some sectors leveraged to corporate spend. The
reasons most relevant to IT services are: (1) investment typically
holds up well during mid-cycle slowdowns (2) corporate
confidence is high and (3) companies still seem to be very underinvested
and corporate balance sheets are in good shape.
● Our strategist prefers sectors that do not have stretched sales
growth/margin improvement expectations and are reasonably
valued. We think that the Indian IT services sector appears
attractive in this context. HCL Tech is our top pick in this space.
We present takeaways for the Indian IT services sector from the
report, Corporate spend: stick to software, by our global equity
strategist, Andrew Garthwaite, published on 21 July 2011.
Why the worry on corporate spending?
Corporate spending is currently a topic of interest for investors in
Indian IT services companies since (1) the US macroeconomic data
has been poor; (2) European banks are facing funding concerns,
implying a risk to corporate lending and (3) Temenos AG and
Software AG recently issued pre-results comments warning of a
muted June quarter. Temenos AG also revised down its CY11 fullyear
licence revenue growth guidance to 5-10% from 19-24% earlier.
The positive case for corporate spending
According to our strategist, there is still a case for being overweight in
some sectors leveraged to corporate spend. We highlight the reasons
most relevant to IT services spend below.
(1) Investment typically holds up well during mid-cycle
slowdowns
In past periods when ISM new orders had fallen by as much as it has
since February (i.e., in past mid-cycle slowdowns), the US investment
spending held up relatively well, outperforming GDP growth by a
factor of 3.5x (and investment intentions have remained stable on the
NFIB survey).
(2) Corporate confidence is high
Corporate sentiment is still considerably higher than consumer
sentiment. This is consistent with management commentary from both
Indian (TCS, Wipro) and foreign IT services vendors (IBM) who state
that clients are optimistic on their businesses and have not cut IT
budgets despite uncertainty in the macroeconomic environment
(3) Companies still seem to be very under-invested and
corporate balance sheets are in good shape
The investment share of GDP in the developed economies is near alltime
lows (suggesting the potential for a continued rebound is still in
place), while the free cash flows relative to GDP is close to an all-time
high (suggesting that companies can easily afford an increase in
spending).
Balance sheets are healthy and in particular, the ratio of net debt to
EBITDA is at historical trough levels.
Indian IT services attractive; HCL Tech is our top pick
Our strategist advises investors to be wary of sectors that have: (1)
high margins relative to history, (2) improvement in earnings coming
from margin improvement rather than sales growth, (3) sales growth
expected to be above trend (average CAGR) and (4) high P/E and
P/B relative to the broader market. We note that Indian IT services
fares better than most other sectors on these criteria.
In this environment, we would prefer cheap stocks with potential for
upside surprise. HCL Tech is our top pick in this space. We expect
HCLT to post an EPS CAGR of 36% over FY11-13 and believe it is
reasonably valued at 15x FY12E earnings.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India IT Services Sector----------------------------------------------------- Maintain OVERWEIGHT
The positive case for corporate spending
● We present takeaways for the Indian IT services sector from the
report, Corporate spend: stick to software, by our global equity
strategist, Andrew Garthwaite, published on 21 July 2011. Please
write to us or click here for the full report.
● Corporate spending is currently a topic of interest for investors in
Indian IT companies, given: (1) poor US macroeconomic data; (2)
funding concerns at European banks and (3) recent profit warnings.
● According to our strategist, there is still a case for being
overweight in some sectors leveraged to corporate spend. The
reasons most relevant to IT services are: (1) investment typically
holds up well during mid-cycle slowdowns (2) corporate
confidence is high and (3) companies still seem to be very underinvested
and corporate balance sheets are in good shape.
● Our strategist prefers sectors that do not have stretched sales
growth/margin improvement expectations and are reasonably
valued. We think that the Indian IT services sector appears
attractive in this context. HCL Tech is our top pick in this space.
We present takeaways for the Indian IT services sector from the
report, Corporate spend: stick to software, by our global equity
strategist, Andrew Garthwaite, published on 21 July 2011.
Why the worry on corporate spending?
Corporate spending is currently a topic of interest for investors in
Indian IT services companies since (1) the US macroeconomic data
has been poor; (2) European banks are facing funding concerns,
implying a risk to corporate lending and (3) Temenos AG and
Software AG recently issued pre-results comments warning of a
muted June quarter. Temenos AG also revised down its CY11 fullyear
licence revenue growth guidance to 5-10% from 19-24% earlier.
The positive case for corporate spending
According to our strategist, there is still a case for being overweight in
some sectors leveraged to corporate spend. We highlight the reasons
most relevant to IT services spend below.
(1) Investment typically holds up well during mid-cycle
slowdowns
In past periods when ISM new orders had fallen by as much as it has
since February (i.e., in past mid-cycle slowdowns), the US investment
spending held up relatively well, outperforming GDP growth by a
factor of 3.5x (and investment intentions have remained stable on the
NFIB survey).
(2) Corporate confidence is high
Corporate sentiment is still considerably higher than consumer
sentiment. This is consistent with management commentary from both
Indian (TCS, Wipro) and foreign IT services vendors (IBM) who state
that clients are optimistic on their businesses and have not cut IT
budgets despite uncertainty in the macroeconomic environment
(3) Companies still seem to be very under-invested and
corporate balance sheets are in good shape
The investment share of GDP in the developed economies is near alltime
lows (suggesting the potential for a continued rebound is still in
place), while the free cash flows relative to GDP is close to an all-time
high (suggesting that companies can easily afford an increase in
spending).
Balance sheets are healthy and in particular, the ratio of net debt to
EBITDA is at historical trough levels.
Indian IT services attractive; HCL Tech is our top pick
Our strategist advises investors to be wary of sectors that have: (1)
high margins relative to history, (2) improvement in earnings coming
from margin improvement rather than sales growth, (3) sales growth
expected to be above trend (average CAGR) and (4) high P/E and
P/B relative to the broader market. We note that Indian IT services
fares better than most other sectors on these criteria.
In this environment, we would prefer cheap stocks with potential for
upside surprise. HCL Tech is our top pick in this space. We expect
HCLT to post an EPS CAGR of 36% over FY11-13 and believe it is
reasonably valued at 15x FY12E earnings.
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