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Investor Survey
48 investors; 8 countries; $45bn+ invested in Indian equities
We surveyed 48 investors at CLSA’s recently concluded Investor Forum
in Hong Kong to assess their view on outlook for Indian IT stocks.
The surveyed investor base was well represented across Fund Sizes ($200m
to $6.5bn), Fund Focus (Global to India-dedicated), Fund Returns (Absolute
and Benchmarked) and Fund Sources (Domestic and Global).
We also had discussions with most of these investors on their thought
process backing most responses.
This note looks at investor outlook and arguments on Indian IT.
Our view remains cautious on the Indian IT Services space. We have NO
positive ratings in the sector.
Key takeaways from the Investor Survey
Medium-term investor outlook on Indian IT stocks seemed less than sanguine given
the clouded global outlook. However, a near-term boost from a depreciating
currency seemed attractive to a section of investors given the likely earnings
upsides in Sep/Dec-11 quarters. The note summarises the key conclusions from the
investor survey and discussions.
#1: Infosys is most likely to Outperform sector peers
Infosys’ poor financial/stock performance notwithstanding, over 60% of investors
believe that Infosys stock will most likely outperform its sector peers over the next
6-9 months. The key reasons attributed to this belief were: stability in the
organisation post the turmoil over the last 6-9 months, low street expectations
after the poor financial performance in Mar/Jun-11 and a more aggressive growth
strategy under the new leadership. Expectations of Infosys’ outperformance are
high especially among India-dedicated funds.
Despite TCS’ strong financial performance and management’s high optimism on
near-term business prospects, there appeared some scepticism on TCS’ relative
performance prospects ahead. While investors have no doubt on near-term
performance, worry stems from 2012 outlook. TCS’ 45% revenue exposure to
financial services and continued high street expectations and over-ownership
remain matters of concern. A section of investors believe that even a slight
moderation in commentary by TCS could trigger material stock downsides given the
stock’s outperformance even through the recent phase of correction.
Wipro continues to be the least preferred stock across the investor base. A few
investors indicated that Wipro’s underperformance through 2010 and resultant PE
discount had attracted them towards the stock. However, continued
underperformance through 2011 has been disappointing and there is less
willingness to give the stock the benefit of doubt at the moment. In our view
Wipro’s is a decade long underperformance and reversing it in a year is likely going
to be tough. Wipro’s PE discount to peers is a recognition of this underperformance
and financial outperformance needs to precede relative re-rating prospects.
HCL Tech still remains an outside bet for most investors. While HCL’s aggressive
growth has forced investors to devote more time than in the past (which is a
positive), confidence in margin performance remains low. A phase of solid growth
and stable margins could change investor mindset towards the stock. However,
given the current overhang from the macro, HCL seems to be a no-go area for now.
#2: Consensus FY13 earnings look OK but valuations at risk
The recent depreciation of the rupee has reduced investor worries on FY13 EPS for
Indian IT stocks. While most investors see the risk to FY13 $-revenue growth
estimates on the downside (14-20% are current street estimates for Tier-1 stocks),
a weaker rupee could balance that. Current street estimates build-in around Rs45/$
for FY13. Around 54% of investors surveyed believe that FY13 earnings should
meet current street expectations. According to a few investors, IT companies
should lock-in potential FY13 net inflows at the current INR level. That itself will
give a 6-7% earnings growth for FY13 (all else remaining equal).
Pessimism on valuations is much more pronounced c.f. earnings. PE multiple of
Indian techs is correlated more to $-revenue growth than to earnings growth (seen
much more in recent years when currency volatility has widened gaps between the
two) and the continued wobbly macro news-flow has investors worried. Over 64%
of investors believe that absolute valuations will likely deteriorate further with
almost 71% of these thinking of 10-20% PE deterioration from current levels.
#3: Neutral to Underweight stance of most investors
Almost 85% of the benchmarked investors were either Neutral or Underweight on
IT. Conversations with these investors indicated a sense of confusion on what to do
with these stocks at current levels. Most investors seem to be choosing not to act
at all. However, many suggested that an 8-10% correction in frontline IT names
could drive some of them to start buying these stocks regardless of the economic
uncertainty in Europe/US.
Absolute return investors seemed skeptical of any returns from these stocks over
the next 6-9 months. However, a few of them were looking at these names as a
NIFTY hedge primarily driven by rupee depreciation. Most absolute return investors
are looking at relative trades within the sector rather than a sector-wide call.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Investor Survey
48 investors; 8 countries; $45bn+ invested in Indian equities
We surveyed 48 investors at CLSA’s recently concluded Investor Forum
in Hong Kong to assess their view on outlook for Indian IT stocks.
The surveyed investor base was well represented across Fund Sizes ($200m
to $6.5bn), Fund Focus (Global to India-dedicated), Fund Returns (Absolute
and Benchmarked) and Fund Sources (Domestic and Global).
We also had discussions with most of these investors on their thought
process backing most responses.
This note looks at investor outlook and arguments on Indian IT.
Our view remains cautious on the Indian IT Services space. We have NO
positive ratings in the sector.
Key takeaways from the Investor Survey
Medium-term investor outlook on Indian IT stocks seemed less than sanguine given
the clouded global outlook. However, a near-term boost from a depreciating
currency seemed attractive to a section of investors given the likely earnings
upsides in Sep/Dec-11 quarters. The note summarises the key conclusions from the
investor survey and discussions.
#1: Infosys is most likely to Outperform sector peers
Infosys’ poor financial/stock performance notwithstanding, over 60% of investors
believe that Infosys stock will most likely outperform its sector peers over the next
6-9 months. The key reasons attributed to this belief were: stability in the
organisation post the turmoil over the last 6-9 months, low street expectations
after the poor financial performance in Mar/Jun-11 and a more aggressive growth
strategy under the new leadership. Expectations of Infosys’ outperformance are
high especially among India-dedicated funds.
Despite TCS’ strong financial performance and management’s high optimism on
near-term business prospects, there appeared some scepticism on TCS’ relative
performance prospects ahead. While investors have no doubt on near-term
performance, worry stems from 2012 outlook. TCS’ 45% revenue exposure to
financial services and continued high street expectations and over-ownership
remain matters of concern. A section of investors believe that even a slight
moderation in commentary by TCS could trigger material stock downsides given the
stock’s outperformance even through the recent phase of correction.
Wipro continues to be the least preferred stock across the investor base. A few
investors indicated that Wipro’s underperformance through 2010 and resultant PE
discount had attracted them towards the stock. However, continued
underperformance through 2011 has been disappointing and there is less
willingness to give the stock the benefit of doubt at the moment. In our view
Wipro’s is a decade long underperformance and reversing it in a year is likely going
to be tough. Wipro’s PE discount to peers is a recognition of this underperformance
and financial outperformance needs to precede relative re-rating prospects.
HCL Tech still remains an outside bet for most investors. While HCL’s aggressive
growth has forced investors to devote more time than in the past (which is a
positive), confidence in margin performance remains low. A phase of solid growth
and stable margins could change investor mindset towards the stock. However,
given the current overhang from the macro, HCL seems to be a no-go area for now.
#2: Consensus FY13 earnings look OK but valuations at risk
The recent depreciation of the rupee has reduced investor worries on FY13 EPS for
Indian IT stocks. While most investors see the risk to FY13 $-revenue growth
estimates on the downside (14-20% are current street estimates for Tier-1 stocks),
a weaker rupee could balance that. Current street estimates build-in around Rs45/$
for FY13. Around 54% of investors surveyed believe that FY13 earnings should
meet current street expectations. According to a few investors, IT companies
should lock-in potential FY13 net inflows at the current INR level. That itself will
give a 6-7% earnings growth for FY13 (all else remaining equal).
Pessimism on valuations is much more pronounced c.f. earnings. PE multiple of
Indian techs is correlated more to $-revenue growth than to earnings growth (seen
much more in recent years when currency volatility has widened gaps between the
two) and the continued wobbly macro news-flow has investors worried. Over 64%
of investors believe that absolute valuations will likely deteriorate further with
almost 71% of these thinking of 10-20% PE deterioration from current levels.
#3: Neutral to Underweight stance of most investors
Almost 85% of the benchmarked investors were either Neutral or Underweight on
IT. Conversations with these investors indicated a sense of confusion on what to do
with these stocks at current levels. Most investors seem to be choosing not to act
at all. However, many suggested that an 8-10% correction in frontline IT names
could drive some of them to start buying these stocks regardless of the economic
uncertainty in Europe/US.
Absolute return investors seemed skeptical of any returns from these stocks over
the next 6-9 months. However, a few of them were looking at these names as a
NIFTY hedge primarily driven by rupee depreciation. Most absolute return investors
are looking at relative trades within the sector rather than a sector-wide call.
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