Indian IT stocks have corrected sharply in the last two weeks given global financial turmoil. Uncertainty of demand environment and achievable growth in 2009E/FY10E is the key issue. Valuations are at new lows; confidence in earnings also remains low. While lower valuations/reduction in consensus means that risks have largely been priced in, there are no near-term upside catalysts in sight.
While weaker IT spending does lead to headwinds, we believe the structural offshore trend remains intact, with customers pushing more work offshore in a downturn due to cost advantage. Like the last downturn, we expect market share gains for offshore to accelerate in the downturn, leading to 10%/12% growth in Indian IT exports in 2009E/2010E. As a word of caution, in our due diligence, we have found out that increasingly companies are looking to offshore to China Development Centers due to higher productivity than in India.
We have outlook from various brokerages on front line IT stocks as summarized below.
JP Morgan expects an EPS of Rs 100 and a target price of Rs 1,825
BNP Paribas has a target of Rs 1,720 on Infosys
JP Morgan Expects an EPS of Rs 57.6 and a target price of Rs 850
Citi has a target price of Rs 925 [Looks like it has not been revised]
BNP Paribas has set gloomy expectations out of TCS with a target price of Rs 580 on an EPS of Rs 58.75.
JP Morgan expects Wipro to report an EPS of Rs 26.7 with a target price of Rs 400
Citi has a target price of Rs 440
BNP Paribas has set a target of Rs 320
JP Morgan has an EPS expectation of Rs 33.7 and a target price of Rs 475
Citi laos has a target of Rs 475
BNP Paribas has a target of Rs 380
All the targets are for the next 9 to 12 months. Finally, wait for the next 3 weeks when we will have comments by tier-I companies on the outlook on volume/pricing will be the key focus for investors. We expect companies to be very cautious on their near-term outlook.