Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Executive Summary
We reaffirm our faith in the Indian IT sector as growth rates have bounced back to presubprime
crisis levels and look set to sustain in the medium term. With global IT companies
reporting strong growth and players like Accenture, who rely on discretionary spending,
posting excellent growth in consulting business, it seems like we are in a ‘tech recovery’ cycle.
Given the current environment, investors’ key concern on the Indian IT sector is
sustainability of margins. We analyse and discuss threadbare various factors impacting
margins, which leads us to conclude that Tata Consultancy Services (TCS) and HCL
Technologies (HCLT) are likely to sustain margins. We believe the sector’s valuations are
reasonable despite stock out performance as the best performing stock—TCS—is trading at
lower average P/E (x) than Infosys did in the pre-subprime crisis. We retain TCS and HCLT as
our top picks in the sector as they are likely to report the highest operating profit growth in
FY12 owing to ramp up of large deals won. We maintain ‘BUY’ recommendation on TCS and
HCLT and ‘HOLD’ on Infosys as we believe client-specific issues will impact growth in the
medium term. We maintain ‘HOLD’ on Wipro as we expect its growth to be lower as it
metamorphoses under the new CEO.
Strong demand momentum continues
The Indian IT sector, primarily tier 1 companies and a select few mid-sized companies,
posted volume growth rates in YTD FY11 going back to pre-subprime crisis levels.
Comment from Infosys that FY12 will be a ‘normal year’ sums up the sentiment of tier 1
companies. TCS’ CEO Mr. N. Chandrasekaran in an investor meet hosted by Edelweiss
recently commented, “the recovery is not just in offshore services but this is ‘tech
recovery’”. The CQGR in revenues for players over the past four quarters is 6%, higher
than the CQGR of 2% in the preceding four quarters. Accenture reported a strong growth
of 16% Y-o-Y (the highest in any quarter in the last six years) in its consulting business
and Cognizant stated that it saw an uptick in discretionary spending from clients. Infosys’
indication of acceleration in Q-o-Q growth in FY12 and Cognizant’s guidance of at least
26% growth in CY11 indicates that demand momentum continues.
Several operating levers to defend margins
Strong demand is boosting revenue growth, which has bounced back to pre-subprime
crisis levels. But, lack of pricing uptick and high attrition are making investors nervous
on sector margins. In this report we have analysed all possible factors that have a
bearing on margins and discussed them threadbare. We conclude that while salary
inflation will continue in FY12, broadening the employee pyramid and sales productivity
are significant levers at TCS’ and HCLT’s disposal. The ratio of expected campus offers to
employee base has risen back to pre-slowdown levels, which infuses us with confidence
that it is indeed a potent margin lever for companies. Similarly, sales productivity
improvement due to client mining and large deal wins will aid margin defence.
Valuations and view: No irrational exuberance yet
The NSE IT Index has out performed broad market indices in the past 12 months, but in
the past two months it has performed in line. Stocks have done well primarily due to
earnings upgrade as the strong demand surprised the street. The best performing stock,
TCS, which has quadrupled in the past two years, is trading at 21x FY12E earnings,
lower than the average band Infosys has traded at between FY04 and FY08, presubprime
crisis. This suggests that there is no irrational exuberance in the street for tier
I IT stocks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Executive Summary
We reaffirm our faith in the Indian IT sector as growth rates have bounced back to presubprime
crisis levels and look set to sustain in the medium term. With global IT companies
reporting strong growth and players like Accenture, who rely on discretionary spending,
posting excellent growth in consulting business, it seems like we are in a ‘tech recovery’ cycle.
Given the current environment, investors’ key concern on the Indian IT sector is
sustainability of margins. We analyse and discuss threadbare various factors impacting
margins, which leads us to conclude that Tata Consultancy Services (TCS) and HCL
Technologies (HCLT) are likely to sustain margins. We believe the sector’s valuations are
reasonable despite stock out performance as the best performing stock—TCS—is trading at
lower average P/E (x) than Infosys did in the pre-subprime crisis. We retain TCS and HCLT as
our top picks in the sector as they are likely to report the highest operating profit growth in
FY12 owing to ramp up of large deals won. We maintain ‘BUY’ recommendation on TCS and
HCLT and ‘HOLD’ on Infosys as we believe client-specific issues will impact growth in the
medium term. We maintain ‘HOLD’ on Wipro as we expect its growth to be lower as it
metamorphoses under the new CEO.
Strong demand momentum continues
The Indian IT sector, primarily tier 1 companies and a select few mid-sized companies,
posted volume growth rates in YTD FY11 going back to pre-subprime crisis levels.
Comment from Infosys that FY12 will be a ‘normal year’ sums up the sentiment of tier 1
companies. TCS’ CEO Mr. N. Chandrasekaran in an investor meet hosted by Edelweiss
recently commented, “the recovery is not just in offshore services but this is ‘tech
recovery’”. The CQGR in revenues for players over the past four quarters is 6%, higher
than the CQGR of 2% in the preceding four quarters. Accenture reported a strong growth
of 16% Y-o-Y (the highest in any quarter in the last six years) in its consulting business
and Cognizant stated that it saw an uptick in discretionary spending from clients. Infosys’
indication of acceleration in Q-o-Q growth in FY12 and Cognizant’s guidance of at least
26% growth in CY11 indicates that demand momentum continues.
Several operating levers to defend margins
Strong demand is boosting revenue growth, which has bounced back to pre-subprime
crisis levels. But, lack of pricing uptick and high attrition are making investors nervous
on sector margins. In this report we have analysed all possible factors that have a
bearing on margins and discussed them threadbare. We conclude that while salary
inflation will continue in FY12, broadening the employee pyramid and sales productivity
are significant levers at TCS’ and HCLT’s disposal. The ratio of expected campus offers to
employee base has risen back to pre-slowdown levels, which infuses us with confidence
that it is indeed a potent margin lever for companies. Similarly, sales productivity
improvement due to client mining and large deal wins will aid margin defence.
Valuations and view: No irrational exuberance yet
The NSE IT Index has out performed broad market indices in the past 12 months, but in
the past two months it has performed in line. Stocks have done well primarily due to
earnings upgrade as the strong demand surprised the street. The best performing stock,
TCS, which has quadrupled in the past two years, is trading at 21x FY12E earnings,
lower than the average band Infosys has traded at between FY04 and FY08, presubprime
crisis. This suggests that there is no irrational exuberance in the street for tier
I IT stocks.
No comments:
Post a Comment