IT Services Companies – Slow Spend + Deteriorating Pricing

The news is not at all good for the Indian IT companies. Citi conducted a survey and the outcome is Negative – IT budgets down 10%-20%, marking a rapid deterioration from past survey of 200 CIOs in Sep-08, which indicated weak 1% growth. IT buyers may defer spending until 2H09 to protect against further budget cuts. Large banks are asking for a ~15% cut, in return for increased volumes. If the top 10%-15% of customers get 10%-12% discounts and the remaining 85%-90% with less purchasing power may get discounts approaching 3%-6%.

Goldman Sachs has revised estimates for FY2010 put us as at an average EPS growth of 1% in INR terms and -3% in USD terms (vs. 10% and 9% previously). On a market-cap weighted average basis, we now forecast IT Services revenue growth of 3.2%, operating profit growth of -4.8%, and net income growth of -1.2%, in USD terms. Additionally, expect – A more muted IT spending environment, Reduced pricing leverage, Margin compression due to pricing declines, and Incremental FX impact.

HSBC said it may be too early to turn positive just yet, as we think
downward revisions have yet to run their full course. The risk of further negative news flow could lead to near-term share-price volatility, and hence are cautious on the sector.

Earnings Estimates for Tier-I IT Companies:

Infosys Technologies:
HSBC and Goldman Sachs expects Infy to report an EPS of Rs 101 for FY09 and Rs 114 for FY10. Citi expects Rs 110 for FY10 under current market scenario.

TCS:
HSBC expects TCS to report an EPS of Rs 55 and Rs 60 for FY09 and FY10. Goldman Sachs is bullish on TCS with EPS expectations of Rs 57 for FY09.

Satyam Computer Services:
HSBC’s revised EPS estimates are Rs 33.5 and Rs 37.3 for FY09 and FY10 respectively. Goldman Sachs expects Rs 35 EPS for FY09.

Wipro Technologies:
Goldman expects Wipro’s consolidated EPS to be Rs 29 for FY09. HSBC expects it to be Rs 27 for FY09 and Rs 29 for FY10.

HCL Technologies:
Post Axon deal, HSBC expects HCL’s EPS to be Rs 21.9 for June-10 and Rs 24.65 for June-11. Goldman expects HCLT to report an EPS of Rs 20.9 for June-10.

We are working on publishing Earnings estimates from various research orgs. on all of the BSE-200 companies so it becomes easier for you to decide weighing the fundamentals and bottomline.