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Underweight on IT Services + Earnings to Drop in FY10 – Anand Rathi

November 17, 2008

The risk of IT demand growth falling to 2001-02 levels is increasing. Gartner models worst case scenario of demand decline in 2009. The BFSI segment accounts for 23.5% of global IT services demand. The current credit crunch is squeezing this segment. We expect this to impact demand adversely. Around 55% of Indian IT companies’ revenues come from the US. IT service providers would have to work harder in conveying cost reduction and/or deliver at predictable costs. Competition on price is likely to turn severe in IT management services.

Expect financial services companies to reduce their IT spends. However, the impact would be modest since some expenses are necessary to keep businesses running. Moreover, crisis scenarios present new opportunities either due to the changing business environment or due to new regulations/ government structures.

End of Tax Incentives:
100% deduction for ten years in profits from IT/ITES exports. This window is available up to 31 Mar ’10. US$ revenues for IT large caps have been growing slower since Dec ’07. Indian IT stocks (proxy used CNXIT Index) have, not surprisingly, reacted negatively in the same time frame.

Infosys Technologies:
Infosys unfortunately has a combination of both problematic BFSI (34.5% of TTM revenue) and North America (61.7% of TTM revenue). This potent mix would act as a revenue dampener. Infosys is expected to report an EPS of Rs 105 for FY09 and is expected to fall to Rs 95 in FY10.

TCS:
TCS added 124 clients (net) in FY08 (vs 32 clients in FY07). The number of active clients stands at 920. Strong delivery capabilities helped it receive a Rs10bn government contract. Management has indicated a strong order pipeline. TCS expects to earn an EPS of Rs 60.7 for FY)9 and then drop to Rs 55 in FY10.

Wipro:
The company is the top player in India centric IT operations. Wipro is steadily progressing towards higher fixed-price projects (up 100bps qoq, to 31.6% in
2Q) making it successful in non-linear initiatives. It is being helped by higher utilisation, changing client mix and price increases. Wipro’s EPS is expected to be Rs 26.1 for FY09 and Rs 23.4 for FY10 respectively.

Satyam Computers:
BFSI contributed 21.5% of TTM revenue. Among peers, Satyam has a better vertical mix, including manufacturing, retail, etc. Also, its non-BFSI revenue is concentrated on enterprise solutions, placing Satyam in the driver’s seat to ride the present uncertainty. Satyam is expected to report an EPS Of Rs 38.2 and Rs 34 for FY09 and FY10 respectively.

HCL Technologies:
HCL Tech’s 1QFY09 was its eighth consecutive quarter of revenue deceleration, crawling at 0.1% sequentially to US$505m. All its three businesses, core software, infrastructure management and BPO, slowed. EPS for FY09 is expected to be Rs 23 and then take a sharp drop to Rs 17 in FY10.

Tech Mahindra:
Tech Mahindra is the largest Indian IT services player in the telecom service provider space. Given its strong relationships with the likes of BT (which owns 31%) and AT&T, Tech Mahindra would benefit from their spend. EPS is expected to be Rs 91 for FY09 and is likely to drop to Rs 83 in FY10.

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