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India Computer Services
Infy should outperform TCS
post results
„Results season: Buy INFO & HCLT; Cautious on WPRO
Infy has been the worst performing large cap IT stock in the last 3 months. This
could reverse after results on Apr 15th given a) a possible muted guidance likely to
be outperformed, as per history b) post TCSs stock outperformance, Infy is now at
10% PE discount to TCS with similar FY12 EBITDA growth & higher EPS growth
forecast. HCLT should continue to benefit from operating leverage. TCS could
correct on lack of beat. Wipro could disappoint. Among mid caps, likely strong
results from Hexaware. Persistent could beat ests. Infotech could miss margins.
INFO: Buy on muted guidance; Watch for mgmt transition
Would Buy Infy particularly on any weakness post results given a) Infy’s FY12
USD rev & INR EPS guidance should not be below 17-19% & 14-16%, factoring
in 3-3.7% rev CQGR and 50-100bps margin decline. With Infy’s history of revising
up its USD rev & INR EPS guidance by a median of 9% & 11% over last 8 years,
consensus estimates of 25-26% USD rev growth should not be at risk b) We
expect Infy to bridge the PE discount to TCS, given similar EBITDA growth
forecast, after 2 years & higher EPS growth forecast, helped by tax hit being
behind. We would watch for any announcements on management transition. In
our view, this would be largely a natural progression, would put an end to the
uncertainty & could bring new energy. Buy at 22x FY12e PE for 23% 2yr EPSg.
TCS: Lack of beat may disappoint; Story partly priced in
While long term story looks intact after 3 quarters of USD rev beat at 6.5-11% qoq
growth and 7 qrts of margin beat, a seasonally weak 5% USD terms rev growth &
100bps qoq EBIT margin decline on hiring cost, ‘in line’ with guidance, may
disappoint. At 24xFY12e PE & 2yr EPSg of 20%, may consolidate. Retain Buy.
4Q: Operating leverage should help HCLT beat peers
Mar quarter is seasonally weak and we expect modest 4-5% qoq USD terms rev
growth across the top 4 vendors with HCLT at upper end. EBIT margins could
decline ~40bps qoq for Infy/Wipro (ex 1-time items) & 100bps for TCS on hiring
costs/utilization. However, we expect 30-40bps margin expansion at HCLT on
leverage of H1 investments in employees & sales. At 16xFY12 PE for 36% 2 yr
EPS CAGR, retain as top pick.
WPRO: Likely weak Mar qrt & Q1 organic revenue guidance
At Wipro IT services, employee churn post CEO & org structure change in Jan
and less favorable revenue mix given lower exposure to banking, higher exposure
to tech & lower exposure to discretionary spending we see downside risk to our
Mar qrt rev estimate & expect a weak Q1FY12 organic rev guidance (ex SAIC). At
19x FY12e PE, ~13% discount to Infy, we see limited upside. Neutral.
Results season: Stock action
Large caps: Buy INFO & HCLT; Cautious on WPRO
Results season kicks off on April 15
th
with Infy. We would be Buyers of Infosys
and HCLT Tech and believe Wipro could disappoint. Infy has been the worst
performing large cap IT stock in the last 3 months. This could reverse given a)
muted guidance will likely be outperformed b) 10% valuation discount to TCS
could close given similar FY12 EBITDA growth forecast & higher EPS growth
forecast. HCLT should continue to show modest margin expansion as the
operating leverage story plays out.
Mid caps: Buy Hexaware, Persistent; Cautious on Infotech
Among mid caps, we expect a strong result from Hexaware and Persistent could
beat expectations. Infotech could disappoint on margins (Table 10). While for the
qtr, Hexaware should report numbers similar to its guidance, we expect strong
management commentary on both the revenue and margin outlook for the year.
Persistent could surprise on revenue as 4Q is often a seasonally strong quarter
for royalty led revenues, from its Dec year end clients. The wage hike for next
year may also be lower than what market expects, given the 10% hike this
quarter and declining attrition.
INFO: Buy particularly into any weakness on guidance;
Watch for management transition
Believe April 15 should mark the end of Infy stock’s underperformance given:
Guidance will likely not concern street
FY12 USD rev & INR EPS guidance should not be below 17-19% & 14-16%,
factoring in 3-3.7% rev CQGR and 50-100bps margin decline. This is unlikely to
alarm the street (consensus growth expectations of 25-26% in USD rev growth &
23% in INR EPS growth) given Infy has revised up its USD rev & INR EPS
guidance by a median of 9% & 11% over the last 8 years from FY04 to FY11
Favorable risk-reward
Infy has been the worst performing large cap stock in the last 3 months. It now
trades at an attractive valuation of 22xFY12 PE, 10% discount to TCS (table 8).
We expect Infy to bridge the PE discount to TCS, given similar EBITDA growth
forecast, after 2 years of underperformance & higher FY11-13 EPS growth
forecast at 23% helped by tax hit being behind. In FY12 we forecast 24% EPS
growth for Infy vs 16% for Wipro and 18% for TCS. (Table 5)
On the one hand, TCS has pulled a large part of its margin levers and on the
other hand Infy will likely give an in-line with industry wage hike this year and is a
greater beneficiary of a rebound in higher margin enterprise solutions demand.
This should lead to a similar FY12 margin trajectory for Infy and TCS.
We feel comfortable with our 26% USD revenue growth forecast vs 27% likely to
be achieved this year. In FY12 should Infy should benefit from:
1. The return of spending on discretionary services specially enterprise
solutions (i.e. roll out of software packages like SAP). Accenture recent result
also highlighted traction in consulting revs, systems integration on back of ERP
modernization cycle and analytics.
2. Worst in telecom likely behind
Post 9% YoY decline in telecom equipment capex during 2009, it is expected to
recover 2010 onwards, as per Gartner, which could finally, see IT spends
recovering. Last year, while Infy performed in line on other verticals, it suffered in
the telecom vertical.
What to watch for
To watch for positive surprise in:
1) Pricing on improved proportion of enterprise solutions and better bill
rates
2) April 15 might also see announcement of the imminent management
transition. As per media reports (Economic Times, Feb 2 – 2011) Shibu
(current COO) could take over from Kris as CEO. We believe some
other senior members could also get larger roles. This would end the
uncertainty & essentially be a natural progression, while bringing
renewed energy. Infy has also stated that they will state the successor to
the founder and Chairman Mr. Narayana Murthy by July. Mr. Murthy
retires in August this year.
4Q: Operating leverage should help HCLT beat peers
Mar quarter is seasonally weak and we expect modest 4-5% qoq USD terms rev
growth across the top 4 vendors with HCLT at upper end. EBIT margins could
decline ~40bps qoq for Infy/Wipro (ex 1-time items) & 100bps for TCS on hiring
costs/utilization. However, we expect 30-40bps margin expansion at HCLT on
leverage of H1 investments in employees & sales.
Next quarter should see another 100bps margin expansion. At 16xFY12 PE for
36% 2 yr EPS CAGR, retain as top pick.
India Contenders & Defenders: Rotation into Tech; HCLT new contender
We also highlight our quant view where the new India Contender this month is
HCL Technologies. The Allocation model for India also rotates into Information
Technology at the expense of Financials.
TCS: Lack of beat may disappoint; Story largely priced in
While long term story is intact after 3 quarters of USD rev beat at 6.5-11% qoq
growth and 7 qrts of margin beat, a seasonally weak 5% USD terms rev growth &
100bps qoq EBIT margin decline on hiring cost, ‘in line’ with guidance, may
disappoint. At 24xFY12e PE & 2yr EPSg of 20%, may consolidate. Retain Buy.
WPRO: Likely weak Mar qrt & Q1 organic revenue guidance
At Wipro IT services, employee churn post CEO & org structure change in Jan
and less favorable revenue mix given lower exposure to banking, higher exposure
to tech & lower exposure to discretionary spending we see downside risk to our
Mar qrt rev estimate & expect a weak Q1FY12 organic rev guidance (ex SAIC). At
19x FY12e PE & and 2-yr EPSg of 18% see limited upside. Neutral.
4Q seasonally weak
4Q likely to be a modest quarter for the top vendors with a 4-5% qoq growth in
USD revenue (vs 5.5-7.5% last quarter) on seasonal softness driven by lower
working days and delays in ramp ups as clients hand out new budgets.
Reported basis (INR terms), rev growth expected to be a similar 4-5% qoq growth
on flattish USD-INR rates through the quarter.
EBITDA margins for TCS/Infy/WIT expected to show a 40bps to 100bps qoq
decline primarily on lower utilization rates while HCLT should see a 30-40bps
improvement post bottomed out margin performance in last qtr. Currency is not
likely to be a major swing factor as it is largely in line with last quarter and
guidance.
Table 9: USD/INR Impact
Q4 Average rate 45.25
Rate for Infy's Q4 guidance 44.71
Forex benefit in qtr 1.2%
Q4 Closing rate 44.75
FY11 Average rate 45.52
Forex impact to FY12 guidance -1.7%
Source: BofA Merrill Lynch Global Research
What to look out for?
Trend in discretionary spends
We expect discretionary spends (as opposed to spends driven by the objective of
cost-cutting) which have been seeing a steady pick-up over 2010 to take centrestage in 2011 with an increased impetus on upgrading packaged software and
modernizing legacy applications. All vendors, especially Infosys, HCL Tech and
Hexaware have seen a strong pick-up in services like enterprise solutions,
product engineering over the past 2 qtrs. We believe this is positive both from the
perspective of driving growth and margins.
Pricing
We believe commentary on pricing should be positive led by mix improvement
with enterprise solutions likely growing in mix as well as an upward bias to billing
rates given wage inflation.
Wage inflation
Top vendors Infosys, TCS and Wipro will likely announce their annual wage hike.
HCL Tech has it in their Q1 which is the Sep quarter. We expect similar to slightly
lower wage inflation, given a declining trend in employee attrition rates. However,
similar to last year, the impact from wage hikes should be largely offset by
pyramid widening and price realization increases.
Price objective basis & risk
HCL (XHCLF)
Our Price Objective of Rs620 assumes a one-year forward FY13e P/E of nearly
15x as margins bottom. We believe this is justified as it implies a conservative
FY12 EV/EBITDA to 2yr EBITDA growth (EEG) of 0.5x, a discount of over 30% to
Wipro' s target EEG. Downside risks stem from higher than expected investments
delaying margin recovery, macro led delays in discretionary IT spending, higher
than expected wage hike pressures and Rupee appreciation.
Hexaware Tech (XFTCF)
Our PO of Rs80 is at 12x CY12E at approx 30% discount to tier one vendors
given high revenue concentration and exposure to discretionary spends like ERP.
We expect the stock to re-rate on back of improving revenue visibility and
turnaround in margins.
Downside risks: Slower-than-expected margin expansion, risk to PeopleSoft
implementation revenues, and industrywide risks of growing competition, wage
pressures and Rupee appreciation. Upside risks: Large deal closures currently
being pursued by the company.
Infosys Tech (INFYF)
Our Price Objective of Rs4,000 (US$87 for ADR, at parity) is based on a target
FY12 EV/EBITDA to 2yr EBITDA growth of 0.85x, in-line with its 5yr avg multiple.
This implies a FY13e P/E of approximately 22x, broadly in line with current 1yr
forward (FY12e) PE. Downside risks to estimates stem from macro led delays in
IT spend or sharp appreciation of the Rupee.
Infotech Enterprises Ltd (IFKFF)
Our PO of Rs190 is at 12x FY13E, at approximately a 30% discount to Tier one
vendors. Risks to our price objective and estimates are the following: 1) nonannuity revenues in GIS, 2) increasing competition from large Indian IT vendors,
3) rupee appreciation and industry-wide wage inflation.
Persistent Systems (XPSYF)
Our PO of Rs550 is set at approx13xFY13 P/E, a 5-10% premium vs. other midtier IT services vendors, justified in our view given highest EBITDA growth and
ROCE vs. peers. Exceptional jump in tax rate from 9% (FY11) to 30%(FY12)
impacts implied P/E for FY12 (16x).
Downside risks to our price objective are a slowdown in th US technology sector,
sharp appreciation of the Rupee vs. the USD and higher-than-expected wage
inflation in India.
Tata Consultancy (TACSF)
Our Price Objective of Rs1,400 is based on a target FY12 EV/EBITDA-to-2-year
EBITDA growth of 0.85x, in line with Infosys. This implies a target FY13e PE of
22x, in line with the current 1-year forward (FY12e) PE. Downside risks to our
estimates stem from macro-led delays in IT spending or a sharp appreciation of
the Rupee.
Wipro (WIPRF)
Our Price Objective of Rs500 is set at 17x FY13e EPS, at a 20% discount to our
target multiple for Infosys. This is higher than the average P/E discount of about
15% in past 3 years due to slower earnings growth trajectory. Downside risks to
our price objective are delays in recovery of IT spending by technology and
telecom verticals apart from macro risks relating to IT spending and Rupee.
Upside risks are faster than expected success of new CEO in the rebuild process
and mining top accounts.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Computer Services
Infy should outperform TCS
post results
„Results season: Buy INFO & HCLT; Cautious on WPRO
Infy has been the worst performing large cap IT stock in the last 3 months. This
could reverse after results on Apr 15th given a) a possible muted guidance likely to
be outperformed, as per history b) post TCSs stock outperformance, Infy is now at
10% PE discount to TCS with similar FY12 EBITDA growth & higher EPS growth
forecast. HCLT should continue to benefit from operating leverage. TCS could
correct on lack of beat. Wipro could disappoint. Among mid caps, likely strong
results from Hexaware. Persistent could beat ests. Infotech could miss margins.
INFO: Buy on muted guidance; Watch for mgmt transition
Would Buy Infy particularly on any weakness post results given a) Infy’s FY12
USD rev & INR EPS guidance should not be below 17-19% & 14-16%, factoring
in 3-3.7% rev CQGR and 50-100bps margin decline. With Infy’s history of revising
up its USD rev & INR EPS guidance by a median of 9% & 11% over last 8 years,
consensus estimates of 25-26% USD rev growth should not be at risk b) We
expect Infy to bridge the PE discount to TCS, given similar EBITDA growth
forecast, after 2 years & higher EPS growth forecast, helped by tax hit being
behind. We would watch for any announcements on management transition. In
our view, this would be largely a natural progression, would put an end to the
uncertainty & could bring new energy. Buy at 22x FY12e PE for 23% 2yr EPSg.
TCS: Lack of beat may disappoint; Story partly priced in
While long term story looks intact after 3 quarters of USD rev beat at 6.5-11% qoq
growth and 7 qrts of margin beat, a seasonally weak 5% USD terms rev growth &
100bps qoq EBIT margin decline on hiring cost, ‘in line’ with guidance, may
disappoint. At 24xFY12e PE & 2yr EPSg of 20%, may consolidate. Retain Buy.
4Q: Operating leverage should help HCLT beat peers
Mar quarter is seasonally weak and we expect modest 4-5% qoq USD terms rev
growth across the top 4 vendors with HCLT at upper end. EBIT margins could
decline ~40bps qoq for Infy/Wipro (ex 1-time items) & 100bps for TCS on hiring
costs/utilization. However, we expect 30-40bps margin expansion at HCLT on
leverage of H1 investments in employees & sales. At 16xFY12 PE for 36% 2 yr
EPS CAGR, retain as top pick.
WPRO: Likely weak Mar qrt & Q1 organic revenue guidance
At Wipro IT services, employee churn post CEO & org structure change in Jan
and less favorable revenue mix given lower exposure to banking, higher exposure
to tech & lower exposure to discretionary spending we see downside risk to our
Mar qrt rev estimate & expect a weak Q1FY12 organic rev guidance (ex SAIC). At
19x FY12e PE, ~13% discount to Infy, we see limited upside. Neutral.
Results season: Stock action
Large caps: Buy INFO & HCLT; Cautious on WPRO
Results season kicks off on April 15
th
with Infy. We would be Buyers of Infosys
and HCLT Tech and believe Wipro could disappoint. Infy has been the worst
performing large cap IT stock in the last 3 months. This could reverse given a)
muted guidance will likely be outperformed b) 10% valuation discount to TCS
could close given similar FY12 EBITDA growth forecast & higher EPS growth
forecast. HCLT should continue to show modest margin expansion as the
operating leverage story plays out.
Mid caps: Buy Hexaware, Persistent; Cautious on Infotech
Among mid caps, we expect a strong result from Hexaware and Persistent could
beat expectations. Infotech could disappoint on margins (Table 10). While for the
qtr, Hexaware should report numbers similar to its guidance, we expect strong
management commentary on both the revenue and margin outlook for the year.
Persistent could surprise on revenue as 4Q is often a seasonally strong quarter
for royalty led revenues, from its Dec year end clients. The wage hike for next
year may also be lower than what market expects, given the 10% hike this
quarter and declining attrition.
INFO: Buy particularly into any weakness on guidance;
Watch for management transition
Believe April 15 should mark the end of Infy stock’s underperformance given:
Guidance will likely not concern street
FY12 USD rev & INR EPS guidance should not be below 17-19% & 14-16%,
factoring in 3-3.7% rev CQGR and 50-100bps margin decline. This is unlikely to
alarm the street (consensus growth expectations of 25-26% in USD rev growth &
23% in INR EPS growth) given Infy has revised up its USD rev & INR EPS
guidance by a median of 9% & 11% over the last 8 years from FY04 to FY11
Favorable risk-reward
Infy has been the worst performing large cap stock in the last 3 months. It now
trades at an attractive valuation of 22xFY12 PE, 10% discount to TCS (table 8).
We expect Infy to bridge the PE discount to TCS, given similar EBITDA growth
forecast, after 2 years of underperformance & higher FY11-13 EPS growth
forecast at 23% helped by tax hit being behind. In FY12 we forecast 24% EPS
growth for Infy vs 16% for Wipro and 18% for TCS. (Table 5)
On the one hand, TCS has pulled a large part of its margin levers and on the
other hand Infy will likely give an in-line with industry wage hike this year and is a
greater beneficiary of a rebound in higher margin enterprise solutions demand.
This should lead to a similar FY12 margin trajectory for Infy and TCS.
We feel comfortable with our 26% USD revenue growth forecast vs 27% likely to
be achieved this year. In FY12 should Infy should benefit from:
1. The return of spending on discretionary services specially enterprise
solutions (i.e. roll out of software packages like SAP). Accenture recent result
also highlighted traction in consulting revs, systems integration on back of ERP
modernization cycle and analytics.
2. Worst in telecom likely behind
Post 9% YoY decline in telecom equipment capex during 2009, it is expected to
recover 2010 onwards, as per Gartner, which could finally, see IT spends
recovering. Last year, while Infy performed in line on other verticals, it suffered in
the telecom vertical.
What to watch for
To watch for positive surprise in:
1) Pricing on improved proportion of enterprise solutions and better bill
rates
2) April 15 might also see announcement of the imminent management
transition. As per media reports (Economic Times, Feb 2 – 2011) Shibu
(current COO) could take over from Kris as CEO. We believe some
other senior members could also get larger roles. This would end the
uncertainty & essentially be a natural progression, while bringing
renewed energy. Infy has also stated that they will state the successor to
the founder and Chairman Mr. Narayana Murthy by July. Mr. Murthy
retires in August this year.
4Q: Operating leverage should help HCLT beat peers
Mar quarter is seasonally weak and we expect modest 4-5% qoq USD terms rev
growth across the top 4 vendors with HCLT at upper end. EBIT margins could
decline ~40bps qoq for Infy/Wipro (ex 1-time items) & 100bps for TCS on hiring
costs/utilization. However, we expect 30-40bps margin expansion at HCLT on
leverage of H1 investments in employees & sales.
Next quarter should see another 100bps margin expansion. At 16xFY12 PE for
36% 2 yr EPS CAGR, retain as top pick.
India Contenders & Defenders: Rotation into Tech; HCLT new contender
We also highlight our quant view where the new India Contender this month is
HCL Technologies. The Allocation model for India also rotates into Information
Technology at the expense of Financials.
TCS: Lack of beat may disappoint; Story largely priced in
While long term story is intact after 3 quarters of USD rev beat at 6.5-11% qoq
growth and 7 qrts of margin beat, a seasonally weak 5% USD terms rev growth &
100bps qoq EBIT margin decline on hiring cost, ‘in line’ with guidance, may
disappoint. At 24xFY12e PE & 2yr EPSg of 20%, may consolidate. Retain Buy.
WPRO: Likely weak Mar qrt & Q1 organic revenue guidance
At Wipro IT services, employee churn post CEO & org structure change in Jan
and less favorable revenue mix given lower exposure to banking, higher exposure
to tech & lower exposure to discretionary spending we see downside risk to our
Mar qrt rev estimate & expect a weak Q1FY12 organic rev guidance (ex SAIC). At
19x FY12e PE & and 2-yr EPSg of 18% see limited upside. Neutral.
4Q seasonally weak
4Q likely to be a modest quarter for the top vendors with a 4-5% qoq growth in
USD revenue (vs 5.5-7.5% last quarter) on seasonal softness driven by lower
working days and delays in ramp ups as clients hand out new budgets.
Reported basis (INR terms), rev growth expected to be a similar 4-5% qoq growth
on flattish USD-INR rates through the quarter.
EBITDA margins for TCS/Infy/WIT expected to show a 40bps to 100bps qoq
decline primarily on lower utilization rates while HCLT should see a 30-40bps
improvement post bottomed out margin performance in last qtr. Currency is not
likely to be a major swing factor as it is largely in line with last quarter and
guidance.
Table 9: USD/INR Impact
Q4 Average rate 45.25
Rate for Infy's Q4 guidance 44.71
Forex benefit in qtr 1.2%
Q4 Closing rate 44.75
FY11 Average rate 45.52
Forex impact to FY12 guidance -1.7%
Source: BofA Merrill Lynch Global Research
What to look out for?
Trend in discretionary spends
We expect discretionary spends (as opposed to spends driven by the objective of
cost-cutting) which have been seeing a steady pick-up over 2010 to take centrestage in 2011 with an increased impetus on upgrading packaged software and
modernizing legacy applications. All vendors, especially Infosys, HCL Tech and
Hexaware have seen a strong pick-up in services like enterprise solutions,
product engineering over the past 2 qtrs. We believe this is positive both from the
perspective of driving growth and margins.
Pricing
We believe commentary on pricing should be positive led by mix improvement
with enterprise solutions likely growing in mix as well as an upward bias to billing
rates given wage inflation.
Wage inflation
Top vendors Infosys, TCS and Wipro will likely announce their annual wage hike.
HCL Tech has it in their Q1 which is the Sep quarter. We expect similar to slightly
lower wage inflation, given a declining trend in employee attrition rates. However,
similar to last year, the impact from wage hikes should be largely offset by
pyramid widening and price realization increases.
Price objective basis & risk
HCL (XHCLF)
Our Price Objective of Rs620 assumes a one-year forward FY13e P/E of nearly
15x as margins bottom. We believe this is justified as it implies a conservative
FY12 EV/EBITDA to 2yr EBITDA growth (EEG) of 0.5x, a discount of over 30% to
Wipro' s target EEG. Downside risks stem from higher than expected investments
delaying margin recovery, macro led delays in discretionary IT spending, higher
than expected wage hike pressures and Rupee appreciation.
Hexaware Tech (XFTCF)
Our PO of Rs80 is at 12x CY12E at approx 30% discount to tier one vendors
given high revenue concentration and exposure to discretionary spends like ERP.
We expect the stock to re-rate on back of improving revenue visibility and
turnaround in margins.
Downside risks: Slower-than-expected margin expansion, risk to PeopleSoft
implementation revenues, and industrywide risks of growing competition, wage
pressures and Rupee appreciation. Upside risks: Large deal closures currently
being pursued by the company.
Infosys Tech (INFYF)
Our Price Objective of Rs4,000 (US$87 for ADR, at parity) is based on a target
FY12 EV/EBITDA to 2yr EBITDA growth of 0.85x, in-line with its 5yr avg multiple.
This implies a FY13e P/E of approximately 22x, broadly in line with current 1yr
forward (FY12e) PE. Downside risks to estimates stem from macro led delays in
IT spend or sharp appreciation of the Rupee.
Infotech Enterprises Ltd (IFKFF)
Our PO of Rs190 is at 12x FY13E, at approximately a 30% discount to Tier one
vendors. Risks to our price objective and estimates are the following: 1) nonannuity revenues in GIS, 2) increasing competition from large Indian IT vendors,
3) rupee appreciation and industry-wide wage inflation.
Persistent Systems (XPSYF)
Our PO of Rs550 is set at approx13xFY13 P/E, a 5-10% premium vs. other midtier IT services vendors, justified in our view given highest EBITDA growth and
ROCE vs. peers. Exceptional jump in tax rate from 9% (FY11) to 30%(FY12)
impacts implied P/E for FY12 (16x).
Downside risks to our price objective are a slowdown in th US technology sector,
sharp appreciation of the Rupee vs. the USD and higher-than-expected wage
inflation in India.
Tata Consultancy (TACSF)
Our Price Objective of Rs1,400 is based on a target FY12 EV/EBITDA-to-2-year
EBITDA growth of 0.85x, in line with Infosys. This implies a target FY13e PE of
22x, in line with the current 1-year forward (FY12e) PE. Downside risks to our
estimates stem from macro-led delays in IT spending or a sharp appreciation of
the Rupee.
Wipro (WIPRF)
Our Price Objective of Rs500 is set at 17x FY13e EPS, at a 20% discount to our
target multiple for Infosys. This is higher than the average P/E discount of about
15% in past 3 years due to slower earnings growth trajectory. Downside risks to
our price objective are delays in recovery of IT spending by technology and
telecom verticals apart from macro risks relating to IT spending and Rupee.
Upside risks are faster than expected success of new CEO in the rebuild process
and mining top accounts.
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