Impact of the European Debt Crisis and US Economic Slowdown on Indian IT Sector - Global Banks/Brokerages View

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).

 

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 FY13-16.

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

IT sector demand momentum remains uncertain for 2012, as the macro economic data coming out of the US and Europe has been deteriorating quickly. 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.

 

BNP Paribas

1.Regression analysis of historical Indian IT services growth versus US 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.

 

Analysis:

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.