European IT Services
SECTOR REVIEW
Weaker for longer
IT Services is a late-cycle play and typically lags software by 1–2 quarters. IT
Services should therefore continue to see weakness even following any
improvement in the license revenues of Software companies. We are still
cautious about owning assets in this space for three reasons: the risk of
consensus estimate downgrades remains substantial; restructuring costs will
likely be high; and most importantly recovery will likely be slow and painful with
2009E and 2010E seeing limited growth owing to the late-cycle positioning. As a
result, we would avoid leveraged IT Services firms.
Who benefits the most/least?: Given that the European market is not growing
at a pace fast enough to accommodate the growth of all the IT service vendors,
it looks clear to us that offshore firms will gain market share from the European
and the Global IT service players. Notwithstanding their ’proximity‘ to European
clients, European firms have lost market share in the past two years and we
expect this trend to continue at a faster pace for the next 15–18 months.
Capgemini—In pole position: For FY09, we now forecast revenues to decline by
c5% yoy organically to