PINC Sector Update – IT Services

Revisiting estimates factoring demand & currency

After the downgrade of credit rating of US, the prospects of good growth in FY13 were dismal which forced us to revise our business volume estimates in our earlier report ("Rebound expected after medium term pressures" dated 22 Aug 2011). However, then tech stocks were beaten and valuations were attractive and we continued to be positive on the sector with BUY rating on tier-1 stocks viz. Infosys, TCS and Wipro and HCL Tech. All except HCL Tech have given around 23-26% absolute return in approx. last four months. The current business environment continues to be uncertain which will further put pressure on discretionary IT spending and USD revenue growth in FY13. We further revise downwards our volume growth estimates but it is likely to be in the range of 12-15%YoY for tier-1 firms. However, weaker rupee will suppress negative impact of low volume growth.

Discretionary spending falling more than expected– There are delays in decision making for discretionary spending. We revise volume estimates downwards with higher decline for HCL Tech and Infosys for FY13.

Outsourcing trend maintained positive, new client addition healthy, pricing intact

The new order bookings for outsourcing has shown sustained growth for Accenture based on latest results. Also, Indian IT firms are getting more enquiries from clients for outsourcing. The new client addition has been strong in last couple of years post the Lehman crisis in 2008, for all tier-1 firms.

Restating that attrition and salary increments will be on downtrend - The attrition rate is expected to be lower going ahead. Salary increments will be lower in FY13. According to companies, salary levels for freshers are similar to last year.

VALUATIONS AND RECOMMENDATION

The uncertainties on global front has decreased the prospects of technology spending in FY13 but outsourcing is expected to be on a positive trend and tier-1 players are expected to post double digit dollar revenue growth. Rupee depreciation will help rupee revenue growth & margins. The value proposition of Indian IT firms remains intact as enquiries for outsourcing increases and more verticals & geographies open up along with growth in the main market of US. We have further lowered volume estimates and revised INR/USD rate to 48 for FY12 & 49 for FY13 (earlier 47.5 for FY12 & 46.5 for FY13) leading to change in earnings estimates by 3-6% for FY13.

Source : Equity Bulls

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