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UBS Investment Research
Indian IT Services
D emand headwinds to prompt de-rating [EXTRACT]
We expect a structural de-rating in Indian IT services
We have been expecting a de-rating in Indian IT services based on our forecast of a
lower earnings CAGR for large vendors. We forecast a 10-16% earnings CAGR in
FY11-16, compared to the 30-35% CAGR in FY03-09. Valuations have fallen
steadily in the past six months and, with demand headwinds gaining strength, we
expect a structural de-rating for the sector.
Expect a slowdown in demand by end-2011/early 2012
Deal flows have weakened in the past nine months, as evidenced by the TPI Index,
which monitors 20% of outsourcing deals worldwide. Large financial institutions
(40% of Indian IT exports) have announced austerity measures that are likely to
impact IT spending. We believe this will result in a demand slowdown by end-
2011/early 2012, causing risks to UBS and consensus revenue growth estimates.
Lower-margin vendors likely to add to growth woes
We believe lower-margin vendors like Cognizant and HCL Technologies have now
attained the critical mass to compete more aggressively with the larger vendors.
We think this is likely to amplify pricing and margin pressures in a tight demand
environment and make it more difficult to gain market share.
Turning incrementally negative, no Buy ratings after Infosys downgrade
We are lowering our FY13-16 EPS estimates 6-10% for large caps and 10-17% for
smaller vendors. We downgrade our rating for Infosys from Buy to Neutral. We
maintain our Neutral rating on Tata Consultancy Services and our Sell ratings on
Wipro, Mahindra Satyam and HCL Technologies. We downgrade our ratings for
MphasiS, Patni Computer Systems and Tech Mahindra from Neutral to Sell. The
possibility of significantly lower revenue guidance from large vendors remains a
key downside risk to our earnings estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Indian IT Services
D emand headwinds to prompt de-rating [EXTRACT]
We expect a structural de-rating in Indian IT services
We have been expecting a de-rating in Indian IT services based on our forecast of a
lower earnings CAGR for large vendors. We forecast a 10-16% earnings CAGR in
FY11-16, compared to the 30-35% CAGR in FY03-09. Valuations have fallen
steadily in the past six months and, with demand headwinds gaining strength, we
expect a structural de-rating for the sector.
Expect a slowdown in demand by end-2011/early 2012
Deal flows have weakened in the past nine months, as evidenced by the TPI Index,
which monitors 20% of outsourcing deals worldwide. Large financial institutions
(40% of Indian IT exports) have announced austerity measures that are likely to
impact IT spending. We believe this will result in a demand slowdown by end-
2011/early 2012, causing risks to UBS and consensus revenue growth estimates.
Lower-margin vendors likely to add to growth woes
We believe lower-margin vendors like Cognizant and HCL Technologies have now
attained the critical mass to compete more aggressively with the larger vendors.
We think this is likely to amplify pricing and margin pressures in a tight demand
environment and make it more difficult to gain market share.
Turning incrementally negative, no Buy ratings after Infosys downgrade
We are lowering our FY13-16 EPS estimates 6-10% for large caps and 10-17% for
smaller vendors. We downgrade our rating for Infosys from Buy to Neutral. We
maintain our Neutral rating on Tata Consultancy Services and our Sell ratings on
Wipro, Mahindra Satyam and HCL Technologies. We downgrade our ratings for
MphasiS, Patni Computer Systems and Tech Mahindra from Neutral to Sell. The
possibility of significantly lower revenue guidance from large vendors remains a
key downside risk to our earnings estimates.
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