20100921-Oppenheimer-IT Offshore Industry

KEY POINTS
n Iyengar anticipates the Indian Offshore services market to grow at a high-20%
pace in 2011 and remain robust for several years thereafter. Growth will be
driven by continued demand for discretionary projects, from new verticals
leveraging offshore services, and from expanding usage from well-established
users such as Financial Services.
n Secular growth for the offshoring industry remains at a relatively early stage.
Gartner sizes the broad IT Services market at $700-$750B and suggests the
offshore services share of the market at ~$80B, or just ~11%. Consider that the
consensus revenue estimates for INFY (FY11 ended March) and CTSH (FY10
ended Dec) approximate $5.8B and $4.5B, respectively.
n Iyengar believes the Chinese IT Services market has great growth potential but
appears somewhat surprised that it has not ramped faster. Furthermore, he
believes the Chinese IT Services market remains at least 3-5 years behind the
Indian market in terms of maturity/infrastructure from a service delivery
perspective.
n In contrast to recent commentary from offshore management teams, Iyengar
anticipates wage inflation to return to pre-recessionary levels (+30%) over the
relatively near term. That said, he believes industry profitability will remain
stable despite wage inflation and increased front-end investment as the offshore
providers have several levers (e.g., pricing, shifting resources to lower cost
cities) to maintain margins.
n We maintain Outperform ratings on CTSH, VIT, LFT and CIS and our Perform
rating on INFY. Our earnings estimates remain unchanged; however, we raise
our price target for CTSH to $70 from $67 and for VIT to $35 from $30, given
our increased conviction regarding each company's near- and intermediate-term
growth potential