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UBS Investment Research
Indian IT Services
R upee likely to offer only temporary respite
Rupee depreciates to Rs47.6 against USD, to benefit vendors
The US dollar has strengthened by 3.2% in the past two weeks against the Indian
rupee to Rs47.6, with a 6.4% YTD gain against the rupee. Stocks have moved up
sharply in the past few days as investors factor in the positive impact on revenue
and margins. We estimate a one ppt change in the rupee against the dollar has a 30-
40bps impact on operating margins and 1.2-1.8% impact on earnings for larger
vendors.
Rupee has been inversely correlated to stock moves in the past three years
Our analysis suggests that over the past three years, changes in the rupee had a
negative correlation to the BSE IT Index. A similar trend can be observed in
individual stock prices’ movements as well. We believe that stock price upsides
based solely on currency will be unsustainable as stocks are strongly correlated to
revenue growth trends, where we see downside risks.
Demand headwind to resurface by the end of 2011/early 2012
We anticipate a slowdown in demand by end-2011/early 2012 based on weak deal
flows by the TPI and austerity measures announced by large financial institutions.
We expect a de-rating in Indian IT services based on our forecast of lower earnings
CAGR of 10-16% in FY11-16, compared to 30-35% CAGR in FY03-09.
Valuation: maintain our estimates and price targets
Despite the short-term positive from currency gains, we remain negative on the
sector and expect vendors to start becoming more cautious on their outlook by late
2011 and early 2012. We maintain Neutral ratings on Infosys and TCS and Sell
ratings on all other stocks in our coverage universe.
Statement of Risk
We believe a sharp decline in IT spending or currency appreciation could result
in downward revisions in earnings estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Indian IT Services
R upee likely to offer only temporary respite
Rupee depreciates to Rs47.6 against USD, to benefit vendors
The US dollar has strengthened by 3.2% in the past two weeks against the Indian
rupee to Rs47.6, with a 6.4% YTD gain against the rupee. Stocks have moved up
sharply in the past few days as investors factor in the positive impact on revenue
and margins. We estimate a one ppt change in the rupee against the dollar has a 30-
40bps impact on operating margins and 1.2-1.8% impact on earnings for larger
vendors.
Rupee has been inversely correlated to stock moves in the past three years
Our analysis suggests that over the past three years, changes in the rupee had a
negative correlation to the BSE IT Index. A similar trend can be observed in
individual stock prices’ movements as well. We believe that stock price upsides
based solely on currency will be unsustainable as stocks are strongly correlated to
revenue growth trends, where we see downside risks.
Demand headwind to resurface by the end of 2011/early 2012
We anticipate a slowdown in demand by end-2011/early 2012 based on weak deal
flows by the TPI and austerity measures announced by large financial institutions.
We expect a de-rating in Indian IT services based on our forecast of lower earnings
CAGR of 10-16% in FY11-16, compared to 30-35% CAGR in FY03-09.
Valuation: maintain our estimates and price targets
Despite the short-term positive from currency gains, we remain negative on the
sector and expect vendors to start becoming more cautious on their outlook by late
2011 and early 2012. We maintain Neutral ratings on Infosys and TCS and Sell
ratings on all other stocks in our coverage universe.
Statement of Risk
We believe a sharp decline in IT spending or currency appreciation could result
in downward revisions in earnings estimates.
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