EXPECTED BUDGET IMPACT: Neutral
LONG TERM OUTLOOK: Positive
FY13 has been a challenging year for the IT sector, more so for exports. Exports are now forecast to grow at about 10.2% as compared to the earlier projection of 11% - 14%. The on-going uncertainty in the developed economies - USA and Europe - has led to slower decision making and consequently lower order-flows. The resultant increase in competitive intensity has led to an impact on profitability. However, companies have indicated some improvement in client sentiment, of late. 3QFY13 results also reflect better growth in discretionary businesses.
However, the uncertainty over increasing the debt ceiling in USA still persists. Resolution of the same may improve sentiments further, we believe. Companies have also said that, CY13 client budgets should be finalized only by February end and that they should be almost flat for most clients.
The industry is expected to provide direct employment to 2.8mn people in FY13 and indirect employment to another 8.9mn. In this backdrop, the budget is expected to focus on maintaining an environment conducive to the future growth of this largely export-oriented industry. The sector has asked for abolition of / reduction in rates of MAT on SEZs, tax support for SMEs, Tier II / III cities, etc, though we do not expect these demands to be fulfilled.
The FM may address issues such as providing more clarity on withholding tax, service tax refunds, taxation of on-site income, etc. We expect the focus of the budget to be on enabling issues like promoting higher technical education (so as to meet the potential demand for employees from the sector), promoting better infrastructure facilities in Tier II cities and other related issues like skills development.
We remain optimistic on the longer term prospects of the industry. Indian vendors have moved up the value chain. They are focusing on newer opportunities like cloud computing, mobility, etc. Newer pricing models will likely make them participate in the growth prospects of the clients while also making business more non-linear. Also, focused smaller companies with expertise on select verticals will be able to move up the value chain and attract larger clients, thereby, improving their longer term prospects. Companies, however, need to contend with higher competitive pressures and improve efficiencies.
Stocks of most IT companies have stabilized over the past two weeks after rising post 3Q numbers. We expect decent returns over the medium term, subject to near term volatility. At current levels, we prefer larger names like TCS; we also retain our positive bias for select mid-caps like KPIT Cummins and NIIT Technologies.