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Lehman’s Bearish View on Indian IT Sector

October 10, 2007

Report just inLehman Brothers have just released an equity research report initiating coverage on Indian IT stocks. Here is the overview before we get into the details. The report assumes USD pricing of Rs 36 and is Negative on the IT sector.

  • Infosys Technologies [Equal Weight] – 12 Month DCF price Target of Rs 1,793.
  • TCS [Underweight] – 12 Month DCF price Target of Rs 914.
  • Wipro [Underweight] – 12 Month DCF price Target of Rs 422
  • Satyam Computers – [Underweight] – 12 Month DCF price Target of Rs 287

Infosys Technologies:
The macro environment is likely to remain unfavourable due to the appreciating rupee and a possible slowdown in the banking and financial services (BFS) vertical. Lehman estimates a 15.7% EPS CAGR for the next three years (FY07-FY10E) compared with 43.5% in the past three years. Volume growth and price hikes may be impacted negatively due to a cut in discretionary IT spend. The demand environment continues to be good; US dollar revenue CAGR of 35% for the next three years.

Tata Consultancy Services:
A 14% EPS CAGR for the next three years (FY07-FY10E) compared to 35.8% for the past three years. Volume growth and price hikes may be impacted negatively due to cuts in discretionary IT spending. The demand environment continues to be good, because US dollar revenue CAGR of 30.8% for the next three years.

Wipro:
Wipro continues to be hit by relatively slow growth in Telecom equipment manufacturing (TEM) and BPO segments. Lehman projects a 30.6% US dollar revenue CAGR for the company’s Global IT Services and Products business on an organic basis for the next three years compared with 35% for Infosys Technologies (INFY, 2-Equalweight) during the same period. Should result in an EPS CAGR of 15.6% for Wipro in FY07-FY10E.

Wipro has underperformed the most among tier-1 Indian IT stocks in the past five years. This will continue because margins to fall by more than 300bp for the next three years.

Satyam Computers:
Given the deteriorating environment, robust QoQ volume growth as witnessed in the past five quarters and price hikes could be pressured in FY09, in our view. Despite strong volume growth, we estimate an EPS CAGR of 13.4% for the next three years given our expectation of falling margins.

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