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IT Services
On an even keel
The 3Q09 results from front-line IT companies may have set a base for mediumterm
fears, but they provided no significant triggers either. However, with other
sectors seeing earnings downgrades, larger IT players, with worst-case factored
in, could be relative outperformers. We rate TCS an attractive mid-term play.
Key recommendations & forecasts
Reuters Year end Recom Price Target
price
EPS
1fcst
PE
1fcst
Infosys Tech¹ INFY.BO Mar 2009 Buy Rs1281.65 Rs1410.00 102.7 12.50
Tata Consultcy¹ TCS.BO Mar 2009 Buy Rs498.65 Rs620.00 53.38 9.30
Wipro¹ WIPR.BO Mar 2009 Hold Rs224.05 Rs230.00 23.72 9.40
HCL Tech¹ HCLT.BO Jun 2009 Sell Rs122.10 Rs92.00 16.16 7.60
Tech Mahindra¹ TEML.BO Mar 2009 Hold Rs231.25 Rs214.00 70.20 3.30
Patni Computer¹ PTNI.BO Dec 2008 Hold Rs117.45 Rs226.00 27.27 4.30
NIIT Tech¹ NITT.BO Mar 2009 Buy Rs53.95 Rs74.00 20.07 2.70
Satyam Computer¹ SATY.BO Mar 2009 Sell Rs50.10 Rs14.00
1. Normalised EPS - Post-goodwill amortisation and pre-exceptional items
Priced at close of business 4 Feb 2009.
Source: Company data, ABN AMRO forecasts
Softness in volume growth likely to continue in the near term…
Average volume growth for the Top 4 players declined to less than 2% in 3QFY09, slowest in
the last 12 quarters, at least. We expect these companies to post flat to marginally negative
growth in organic business volume in 4QFY09, on a continued lag effect from the slowdown
in IT-spending-related decision making in CY08. This, along with cross-currency movements,
should affect qoq USD revenue growth – we forecast a 2.5% qoq decline for the Top 4.
… but a conservative medium-term outlook is priced in, in our view
We believe sluggish volume growth and realisation decline are already factored in. Current
IBES consensus estimates imply less than 2% yoy organic revenue growth for the Top 3
players in FY10 (0.6-1.7% CQGR from 4QFY09). Our estimate is higher at 7%, building in
11.2% volume growth and a 5.3% yoy decline in blended realisation. The Street and we are
more optimistic on margins, however, expecting only a modest decline of 100-150bp yoy.
Triggers for outperformance – when and what?
We suggest investors focus on qoq organic volume growth to analyze the health of a player’s
business, as cross-currency swings could mar realisation and financials. We believe the
street is building in 0-1.5% volume CQGR over FY10 for TCS and Infosys. Faster recovery in
clients’ decision making and ramp-up in annuity-based deals would be potential triggers.
TCS – an opportunity in scepticism?
We believe sentiment has turned overly pessimistic on TCS, with consensus implying
organic USD revenue CQGR of 0.6% over FY10 (we estimate 4.2%). Management has
recently indicated fresh business flow from existing large financial services (FS) clients while
the large deal pipeline remains strong. We see upside from any client churn at Satyam, given
TCS’s higher overlap vs peers. We also find valuations attractive, at 7.7x FY10F EPS and a
28% discount to Infosys.
Contents
Questions and answers 3
Here are the five key questions we are hearing from investors, and our responses. 3
IT services – the place to hide? 8
We believe that current consensus estimates for IT services build in the worst-case
operating assumptions, which may not be the case with other sectors. This could
drive a rerating of the IT sector following a couple of quarters of even an average
performance.
8
3QFY09 results summary – Top 4 players 10
IT services – current valuations 12
Company profiles 14
Infosys Technologies 15
Tata Consultancy 26
Wipro 36
HCL Technologies 47
Tech Mahindra 57
NIIT Technologies 66
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