Impact of the European Debt Crisis and US Economic Slowdown on Indian IT Sector by krpresearch


Impact of Current Debt crisis on the India IT and Business Proces Outsourcing Industry

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									Impact of the European Debt Crisis and US
 Economic Slowdown on Indian IT Sector

         Global Banks/Brokerages View
            August-September 2011

                 Rajesh Prabhakar           1
                     Brokerages View – Indian IT Sector
Citi Bank       1.     US credit and the Euro zone worries shifted investor focus to the global
                       macro economic and decision-making could get impacted which is a
                       concern for Indian IT vendors.
                2.     Stable pricing is assumed for the next fiscal year at this point, but any
                       further deterioration in the global macro environment could put pressure
                       on both pricing and margins
                3.     IT sector’s strong correlation with US earnings growth leads to moderate
                       volume growth with stable pricing and estimates for the next fiscal year
                       beginning April 2012 being trimmed by 6-11%.
                4.     Strong correlation between revenue growth of the top four Indian IT
                       services firms and the S&P 500’s operating earnings.
                5.     Sector escaped 2001 downturn as a smaller industry but could not
                       escape slowdown in 2008.Industry grew by 20-30% in early 2000 but
                       after 2008 slowdown flat revenue growth due to large size.
Goldman Sachs   1.     Reduced revenue estimates for IT large caps by up to 9% for the fiscal
                       years ending 31 March 2012 through 31 March 2014, forecasting 14%
                       revenue growth for the next fiscal year.
                2.     Despite stable near-term outlook by most managements, there is
                       uncertainty on demand pipeline going into 2012. As customers start their
                       budgeting process, a deteriorating outlook for 2012 could impact the
                       dollar value of IT budgets.
                3.     Historically, IT services growth lags gross domestic product by six-eight
                       months (67% correlation).
                                    Rajesh Prabhakar                                           2
                          Brokerages View – Indian IT Sector
Standard Chartered   1.     Deals will come for renewal between October and December this year
                            and CY12 IT budgets to be flat and applications outsourcing deals will
                            see tougher negotiations.
                     2.     Maintenance contracts could see y-o-y rate card cuts (though not as
                            sharp as 10-15 per cent cuts of 2008-09).
                     3.     Slowdown hangs over their heads and companies may stray from
                            pricing discipline to sustain growth in revenues.
UBS                  1.     Lowered its earning per share estimates for large cap Indian IT
                            companies by 6-10 percent and 10-17 percent for smaller vendors for
                     2.     Increasing competition, slowing deal flows and falling valuations would
                            see a structural de-rating in the sector.
                     3.     Lower margin venders like Cognizant and HCL technologies to compete
                            more aggressively, which is likely to amplify pricing and margin pressure
                            on larger vendors eventually, making it difficult for the latter to gain
                            market share.
HSBC                 1.     IT sector demand momentum remains uncertain for 2012, as the macro
                            economic data coming out of the US and Europe has been deteriorating
                     2.     Unless the macro situation deteriorates materially from here, we do not
                            see significant downside risk to our average 10-15% USD top-line
                            growth forecast for the sector
                     3.     IT hiring in India has grown 7% month-on-month.
                                        Rajesh Prabhakar                                             3
                             Brokerages View – Indian IT Sector

                        1.     Regression analysis of historical Indian IT services growth versus US
BNP Paribas                    GDP (gross domestic product) growth and a base effect variable
                               suggests a fairly strong relationship.
                        2.     Over the next few quarters, not only should Indian IT growth slow due to
                               a higher base from continued headcount dependence, but weaker
                               macro data should only worsen the situation
RBS                     1.     Headwinds impact on the IT sector will be lower than 2008. The bank
                               adds that valuations in the sector are reasonable currently post the
                               recent downgrade. It has reduced FY13F EPS by 6-8%.
                        2.     Client spending is rational right now, and the sector is better placed than
                               in 2008.

The view from all the brokerages seem to be tough 2012 with tighter IT budgets. But all of them predict
a slow growth for the India vendors and it wouldn’t be as tough as 2008.
Stability in Pricing, slowdown in hiring and tough negotiations by the clients is expected and all the
vendors are preparing for such scenario.
The extent of uncertainty will further be known in coming three months and various policies adopted by
the governments to control the debt crisis and over come the economic slowdown is key for the Indian
IT sector growth.

                                           Rajesh Prabhakar                                              4

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