BNP Paribas downgrades India’s IT sector to ‘deteriorating’, cut ratings
18 Aug 2011
The tough times for India's software services sector, which gets more than half of its revenue from the United States, is not showing any signs of abetment, with the latest being a downgrading by BNP Paribas.
BNP Paribas downgraded India's Information Technolgoy sector to 'deteriorating' and cut ratings of six top companies to 'reduce' from 'buy' with large cuts on earnings per share estimates over the next two fiscals.
The French firm downgraded Infosys Technologies, Tata Consultancy Services, Wipro, HCL Technologies, MindTree and Persistent Systems to "reduce", despite these stocks declining by an average of 13 per cent versus a 7 per cent drop in the benchmark Sensex.
Earlier this month, the IT index of India's national stock exchange hit an 18-month low on US recession fears and Europe's debt crises that continue to weigh on investors sentiment after the US lost its top-tier AAA credit rating.
In the first week of August, rating agency Standard and Poor's (S&P) lowered a long-term credit rating of the United States, the world's largest economy, in the wake of a hesitant budget deficit deal that barely avoided a debt default by the US government. (See: S&P lowers US rating from `AAA' to `AA+')
"We think they are yet to reflect a likely prolonged anaemic macro growth scenario and the 50 per cent chance of a US recession that our economics team forecasts. Moreover, we are yet to see material consensus downgrades since the macro data started worsening,'' it said.
''We believe that even two-three quarters of flat-to-muted q-q revenue growth over FY12-13 (vs market expectations of a 4-5 per cent average) for our covered companies could lead to large EPS cuts. We lower our FY13 EPS estimates by 12-31 per cent for the six stocks and to 10-30 per cent below Street downward revisions to historical US GDP data bring into question recent above-trend India IT growth,'' BNP said in a note to its clients.
Significant adverse macro data has recently emerged that could have a bearing on verticals such as financials, manufacturing and retail (61-74 per cent of revenue for large-cap Indian IT companies), the note said.
''Therefore, 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. In fact, our exercise suggests that another recession of a similar magnitude as 2008-09 could result in worse q-q revenue dips for Indian IT players than they saw in FY09,'' it said.
''For investors looking for sector exposure, we recommend higher-margin players (TCS, Infosys) as they are likely to better protect their earnings. The risk to our call is unexpected USD/INR depreciation,'' it added.
(See: Full report: Yes, things could get worse)
