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With low global GDP growth looking increasingly likely, we analyse the potential impact on
earnings and valuations. Under our bear-case scenario, our FY13 EPS for Indian IT large caps is
5-7% lower than our current estimates which would result into 20-22% cut in our price targets.
Background to our analysis
Many commentators are now suggesting that Europe and the US will tip into recession later this
year and into the next. We have examined our EPS forecasts for FY13 and estimated potential
recession valuations assuming a material slowdown under such a bear-case scenario. However,
assuming more economic pain in Europe (contributes 25-30% for Indian IT) than in the US (60-
65% of revenue), we expect the impact on Indian IT to be lower than in the 2008-09 slowdown. A
depreciating rupee would also provide earnings support, limiting the FY13F EPS impact to 5-7%
on our estimates for Indian IT large caps.
Valuation approach: today and under a recessionary outlook
We generally value our coverage on PE multiples based on the average historic multiples and
premiums/discounts to our sector benchmarks Infosys and TCS. As earnings fall in our bear case
scenario, multiples would also fall. In our bear case scenario, our target PE multiple for the large
caps falls c15% from our current estimates (though we do not rule out stocks touching materially
lower multiples before stabilising at our target multiples in a bear case scenario). Our target PE
multiple for most mid caps falls by 18-20% accounting for their smaller size, lesser diversification
and increasing risk of vendor consolidation.
Free cash flow variance and balance sheet vulnerability
We do not expect any significant changes in long-term capex programmes. However, if there
were a prolonged recession, we would expect players to delay facility expansion. Given negligible
leverage of balance sheet and significant exposure to Fortune/Global 1000 clients, we do not
anticipate any major cash flow issues in this scenario. All large caps are net cash positive with
only HCL Tech and Wipro carrying relatively high gross debt. The same is even true for all mid
caps we cover which are net cash positive. This is positive for the sector given the rising interest
rates in India.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
With low global GDP growth looking increasingly likely, we analyse the potential impact on
earnings and valuations. Under our bear-case scenario, our FY13 EPS for Indian IT large caps is
5-7% lower than our current estimates which would result into 20-22% cut in our price targets.
Background to our analysis
Many commentators are now suggesting that Europe and the US will tip into recession later this
year and into the next. We have examined our EPS forecasts for FY13 and estimated potential
recession valuations assuming a material slowdown under such a bear-case scenario. However,
assuming more economic pain in Europe (contributes 25-30% for Indian IT) than in the US (60-
65% of revenue), we expect the impact on Indian IT to be lower than in the 2008-09 slowdown. A
depreciating rupee would also provide earnings support, limiting the FY13F EPS impact to 5-7%
on our estimates for Indian IT large caps.
Valuation approach: today and under a recessionary outlook
We generally value our coverage on PE multiples based on the average historic multiples and
premiums/discounts to our sector benchmarks Infosys and TCS. As earnings fall in our bear case
scenario, multiples would also fall. In our bear case scenario, our target PE multiple for the large
caps falls c15% from our current estimates (though we do not rule out stocks touching materially
lower multiples before stabilising at our target multiples in a bear case scenario). Our target PE
multiple for most mid caps falls by 18-20% accounting for their smaller size, lesser diversification
and increasing risk of vendor consolidation.
Free cash flow variance and balance sheet vulnerability
We do not expect any significant changes in long-term capex programmes. However, if there
were a prolonged recession, we would expect players to delay facility expansion. Given negligible
leverage of balance sheet and significant exposure to Fortune/Global 1000 clients, we do not
anticipate any major cash flow issues in this scenario. All large caps are net cash positive with
only HCL Tech and Wipro carrying relatively high gross debt. The same is even true for all mid
caps we cover which are net cash positive. This is positive for the sector given the rising interest
rates in India.
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