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India Equity Research Reports, IPO and Stock News
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Indian IT services
The glass is half full
Event
Indian IT stocks have bounced off the August lows as fears of a complete
collapse in demand have receded. We believe an uncertain macro
environment could make it difficult for investors to get a solid grasp on global
IT spending trends. The dichotomy of worsening global growth and a superior
financial performance by selected vendors may continue for the foreseeable
future. We would stay selective; we prefer TCS and HCLT. Mindtree is our
preferred mid-cap pick given the limited upside at Hexaware.
Estimate changes. Given the lack of visibility on future demand, we reassess
our growth forecast and cut our US$ revenue growth forecast by 600-
800bps across our coverage for FY13 (see pg 2 for details). We expect this to
be partially offset at the EPS level by our revised FX estimate. (FY13
US$/INR average of 46 vs. 43 earlier).
Impact
Macro check – Slowing economy, but global majors defying slowdown.
The US unemployment rate has stubbornly remained elevated, but we note
that the same statistic for IT workers has eased in the last year (Fig 3). We
also draw comfort from outsourcing order bookings at Accenture and from
new license sales momentum at Oracle (Figures 4 and 5).
BFSI troubles mounting – IT spend at peril? Turmoil in the global financial
markets and news flow on job cuts at global banks have caused apprehension
about IT spending in the biggest revenue generating vertical. In this report, we
outline the details of the IT budgets of global banks. In addition, we have
attempted to illustrate the substantial cost savings generated in IT during an
M&A integration process.
Vendors toe the demand line – campus hiring in full throttle. We recently
met with placement officers of 10 engineering colleges to check if bullish
demand comments are matched by action on the supply side. Our checks
indicate that aggressive hiring is underway and that fresher salaries remain
flat, helping the companies to manage margins.
Would hedges stem the advantage of INR depreciation? The Indian rupee
has lost 10% vs. the USD in the last four weeks. Sharp currency swings have a
direct bearing on P&Ls of the Indian IT vendors. Fortunately, Indian IT vendors
have become more prudent with FX management based on their experience
with currency hedges during the GFC. Our analysis of past hedge books show
that TCS and HCLT had substantial outstanding hedges in FY08 (74% and
107% of annual revenues). This is dramatically different now (page 8).
New TPs reflect lower target multiples, but premiums to market wellearned.
Proven business models, attractive RoEs, FCF generation and
healthy balance sheets justify premium PERs for Indian IT vendors, in our
view.
Outlook
Add stocks with solid execution track record. In an uncertain demand
environment, we favour stocks that have executed well in the last 18 months.
TCS and HCLT score well. Among mid-caps, we prefer Hexaware and
Mindtree.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian IT services
The glass is half full
Event
Indian IT stocks have bounced off the August lows as fears of a complete
collapse in demand have receded. We believe an uncertain macro
environment could make it difficult for investors to get a solid grasp on global
IT spending trends. The dichotomy of worsening global growth and a superior
financial performance by selected vendors may continue for the foreseeable
future. We would stay selective; we prefer TCS and HCLT. Mindtree is our
preferred mid-cap pick given the limited upside at Hexaware.
Estimate changes. Given the lack of visibility on future demand, we reassess
our growth forecast and cut our US$ revenue growth forecast by 600-
800bps across our coverage for FY13 (see pg 2 for details). We expect this to
be partially offset at the EPS level by our revised FX estimate. (FY13
US$/INR average of 46 vs. 43 earlier).
Impact
Macro check – Slowing economy, but global majors defying slowdown.
The US unemployment rate has stubbornly remained elevated, but we note
that the same statistic for IT workers has eased in the last year (Fig 3). We
also draw comfort from outsourcing order bookings at Accenture and from
new license sales momentum at Oracle (Figures 4 and 5).
BFSI troubles mounting – IT spend at peril? Turmoil in the global financial
markets and news flow on job cuts at global banks have caused apprehension
about IT spending in the biggest revenue generating vertical. In this report, we
outline the details of the IT budgets of global banks. In addition, we have
attempted to illustrate the substantial cost savings generated in IT during an
M&A integration process.
Vendors toe the demand line – campus hiring in full throttle. We recently
met with placement officers of 10 engineering colleges to check if bullish
demand comments are matched by action on the supply side. Our checks
indicate that aggressive hiring is underway and that fresher salaries remain
flat, helping the companies to manage margins.
Would hedges stem the advantage of INR depreciation? The Indian rupee
has lost 10% vs. the USD in the last four weeks. Sharp currency swings have a
direct bearing on P&Ls of the Indian IT vendors. Fortunately, Indian IT vendors
have become more prudent with FX management based on their experience
with currency hedges during the GFC. Our analysis of past hedge books show
that TCS and HCLT had substantial outstanding hedges in FY08 (74% and
107% of annual revenues). This is dramatically different now (page 8).
New TPs reflect lower target multiples, but premiums to market wellearned.
Proven business models, attractive RoEs, FCF generation and
healthy balance sheets justify premium PERs for Indian IT vendors, in our
view.
Outlook
Add stocks with solid execution track record. In an uncertain demand
environment, we favour stocks that have executed well in the last 18 months.
TCS and HCLT score well. Among mid-caps, we prefer Hexaware and
Mindtree.
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