Technology: Raise estimates& target prices; positive Tier-I bias: Kotak Sec

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Technology
India
Raise estimates and target prices; reiterate positive Tier-I bias. We raise our
FY2012E EPS estimates (5-6% for the Tier-I names, 1-9% for Tier-II) and target prices
(0-14%) to factor in higher revenue growth and revised house assumptions on Re/US$
rate. We remain positive on the demand momentum for the Indian IT services
companies and see scope for 8-13% returns for the Tier-I names from current levels.
Remain Cautious on mid-caps. Infosys and TCS are our top picks.
Raise estimates and target price
We factor in higher revenue growth assumptions and our economist’s revised Re/US$ estimates
and raise our EPS estimates for FY2011/12E for companies across our coverage universe. Our
relatively higher conviction on Tier-I names reflects in a higher revenue upgrade for these names –
Infosys, TCS and Wipro. We also incorporate revised Re/US$ rates – now at 45.6 for FY2011E
(45.5 earlier) and 45.5 for FY2012E (44.5). Our target prices on various companies also stand
revised higher by 0-14%.


FY2012E could see blockbuster revenue growth for Tier-I companies
As highlighted in some of our recent notes (do see our Dec 1 sector note for detailed thoughts),
we see a confluence of factors driving strong revenue growth for the Indian IT services players in
FY2012E. In fact, we do not rule out the possibility of a 30%+ revenue growth in FY2012E for
players like Infosys, TCS and Cognizant; industry growth could track a tad lower in the low-to-mid-
20s region, in our view. We also note that Street’s current estimates appear a tad conservative to
us and we expect revenue/EPS upgrade cycle to continue for the sector.

Reiterate thesis – play demand strength through Tier-I names
We reiterate our preference for Tier-I names with conviction BUYs on Infosys and TCS. We remain
cautious on the Tier-II pack (with the exception of Hexaware) on two counts – (1) margin risk has
not played out fully, and (2) revenue growth could continue to lag larger names. More
importantly, relative revenue growth would determine relative margin performance given supplyside pressure and likelihood of high attrition and wage pressure sustaining in FY2012E, in our
view; Tier-I names are better-positioned on this aspect.


Valuations appear expensive but we find comfort in upside risks to estimates
Tier-I stocks are trading at seemingly rich multiples (19-21.5X our revised FY2012E EPS,
higher on consensus estimates) and returns from these levels are likely to be more a function
of earnings upgrades than multiple expansion. Our positive stance on these names is based
on just that – we see upside to even our higher-than-consensus earnings estimates for the
top companies. Exhibit 6 looks at the historical one-year forward trading multiple for the
Tier-I names.