Indian IT Sector - Early Signs of Price Increase - Motilal Oswal

INDIAN IT: Early signs of price increase; Moderate improvements will alleviate wage inflation impact to a large extent

Top-Tier IT needs ~3% increase in blended realization to offset the impact of wage hike of the order of 10% offshore and 3% onsite.

Constant currency pricing sequentially increased signifying the comfort of clients around the stability and growth prospects of their own businesses.

Currency rate, the only other key potential threat to the margins, is currently at Rs45.5/US$. Comparing it v/s our est., currency is currently a tailwind.

Prevailing currency rate implies an upside of between 1.6-2.1% to FY12 earnings for our top-tier coverage universe.

We are positive about HCL Tech due to (1) continued traction in IMS (23% of revenue), (2) pick-up in lagging segments like Engineering Services (ERS), Enterprise Application Services (EAS) (40% of revenue), (3) large deal prowess in a returning deals scenario and expected successes in impending contract renegotiations and (4) better-than-peer group EPS CAGR of 26% over FY11-13. Maintain Buy with a target price of Rs550, based on 15x FY13E earnings.

Source : Equity Bulls

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