IT Services
Still foggy
We see companies underperforming 3Q09 USD top-line guidance following the
sharp USD appreciation, even as volume growth remained muted in a seasonally
less productive quarter. While managements are likely to remain cautious in their
FY10 outlook, look out for their stance on price competition in the sector.

Muted volume growth; USD appreciation to hurt realised billing rates
We estimate a 1.3% qoq fall in 3Q09 organic revenue in USD terms (7.2% growth in INR) for
our IT services universe. Volume growth should slow – we expect average 0.8% qoq growth
in billed effort for the top four players – from project delays and slower ramp-ups and typical
lower billing days in the Oct-Dec quarter. Reported realisation will come under pressure from
the sharp USD appreciation. The impact could be higher on Tech Mahindra as 70% of its
billing is in GBP. Thus, we expect most players to miss at least the top end of the USD
guidance, except Wipro, which converts revenues at hedged rather than at spot FX rates.
The integration of the Axon and Liberata acquisitions should drive HCLT’s reported top line.
FY10 outlook – what to watch for in the results
Despite a 4% depreciation in INR, we expect players to maintain their FY09 EPS guidance
(by either lowering USD guidance or building in extraordinary expenses in 2H09). We also
expect a cautious stance for 2009. We suggest a closer look into: 1) growth in top 10 clients
– any client-specific issues here could affect volume outlook; 2) growth in average realisation
in constant currency terms – for pricing flexibility in the current environment; and 3)
managements’ stance on price competition in the sector – our channel checks suggest that
most tier-1 players may face 3-5% pressure in rate-card renegotiations. This could increase if
a scale player resorts to significant undercutting to protect volumes.
Stock-wise, we see a continued shift to scale players
We retain Infosys as our top pick; formal management guidance and high margin focus
should keep its valuation premium to peers despite a 7% outperformance vs the BSE IT
Index over the past six months. TCS is our strong Buy idea on a medium-term investment
horizon. We expect modest quarterly performance over 1H10 and any large follow-on BPO
deal wins to narrow its valuation discount to Infosys, currently at a historical high. Any senior
management changes at Satyam and investor-friendly moves (buyback/special dividend)
could allay immediate investor concerns and lift valuations. We advise Buy on Satyam for
12% near-term upside potential, although we will be cautious about any adverse business
impact from the recent events with a lag.

Contents
3Q09 earnings preview 3
We see companies underperforming 3Q09 USD top-line guidance following the
sharp USD appreciation, even as volume growth remained muted in a seasonally
weak quarter. While managements will likely remain cautious for FY10, look out for
their stance on price competition.
3
Company profiles 7
Infosys Technologies 8
Tata Consultancy 15
Wipro 22
Satyam Computer 29
2