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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Technology
India
Revenue traction good; weak Re an icing on the cake. We remain positive. We
believe the Street’s revised volume/pricing estimates for FY2013E build in sufficient
macro-related caution – we see higher upside risk than downside. In addition, weak Re
levels, if they sustain, provide further buffer to earnings. We incorporate our economist’s
revised Re/US$ assumptions and raise FY2012/13E EPS estimates for Infosys, TCS and
HCLT by 3.0-12.8%. We raise our TP for Infosys to Rs3,300 (from 3,000; retain BUY),
for TCS to Rs1,260 (from Rs1,150; upgrade to BUY from REDUCE), and for HCLT to
Rs450 (from Rs400, upgrade to REDUCE from SELL). We shall incorporate revised Re/US$
assumptions for other names over the coming days. Infosys/TCS remain our top picks.
IT services demand indicators remain solid
Recent earnings reports of IT companies – global SIs, software majors, and offshore pureplays –
have thrown several positive lead indicators over the past few weeks. IBM and Accenture have
both reported strong order bookings, Accenture more so. SAP (in their preliminary announcement)
and Oracle have reported sustained strength in ERP license sales. Most importantly, offshore
names (including mid-sized companies) have also reported strong volume growth and hiring trends.
Campus offers from various companies (for FY2013 joinees) belie fears of a sharp slowdown.
Macro-micro dichotomy has only gotten stronger in recent weeks, in short.
Recent estimate revisions have tilted in favor of macro concerns and build in sufficient caution
The Street, including us, has built in the increasing weakness in macro indicators into its FY2013E
volume and pricing assumptions for the Indian IT names, despite the sustained strength emanating
from micro indicators. Granted, we are still not looking at a repeat of post-Lehman scenario. We
strongly believe that the extent of post-Lehman impact was a function of decision-making freeze
(driven by the shock that Lehman collapse was) and not a question mark on the secular market
share gain story for the offshore pureplays. Unless such a shock recurs, we see low downside risks
to our or Street’s revised FY2013E US$ revenue growth assumptions for the industry. In fact, if
things do not deteriorate and some of the expected regulatory spending in the US BFS sector
accelerates, we could be in for a nice positive surprise on demand.
Weak Rupee provides additional earnings buffer
Rupee’s sharp and sudden recent depreciation has added another interesting dimension to
investing in Indian IT names. Bears are calling (and rightly, to an extent but only to an extent) the
recent surge in the sector valuations a currency play. Arguments against applying a multiple to EPS
upgrades on the back of a weaker Re have also been made by some. To us, Re assumptions are as
integral to building EPS forecasts for Indian IT names as any of the operating assumptions. Hence,
our approach would be to not alter target multiples but to highlight EPS risks (upside or downside)
from lower or higher levels of Re versus what’s incorporated into our model. We do not think we
are qualified enough to define what ‘normalized long-term’ Re/US$ level should be? Should it be
45 or 44 or 46? Why not 40? Why not 55? We admit we do not know.
To us, the bottomline is that there is a good 5-15% gap in the Street’s current EPS estimates for
FY2013E versus where EPS would be, if Re were to average close to current levels in FY2013E. We
do not find valuations for select names (especially Infosys and TCS) expensive at current Street
estimates – hence, we see no reason to call these currency plays, yet. Putting it differently, we
believe the Street’s current EPS estimates for FY2013E can be met at a Re/US$ rate of 45-46; Re at
49 is a welcome additional buffer to earnings estimates.
Incorporating our economist’s revised Re/US$ forecasts into our models for
Infosys, TCS, and HCLT
Our economist has revised his Re/US$ assumptions for FY2012/13E to Rs47.50/49.75 from
Rs46.6/45.6, respectively. We incorporate these revisions into our earnings models for
Infosys, TCS, and HCLT. Exhibits 1, 2, and 3 depict the revised forecasts for the three names.
We note that we have assumed significant reinvestment of benefits from Re depreciation
into the business and accordingly built conservative margin flow-through. Bulk of EPS
upgrade is on account of pure translation impact.
We raise our target price for Infosys to Rs3,300/share (from Rs3,000) and reiterate BUY. We
upgrade TCS to BUY (from REDUCE) with a revised target price of Rs1,260/share (from
Rs1,150). We also upgrade HCLT to REDUCE (from SELL) with a revised target price of
Rs450/share (Rs400 earlier).
We shall incorporate our revised currency assumptions for the companies that have not
reported September quarter earnings yet post their earnings release. For others that have
released already, we shall update our models over the coming days.
Remain positive on the sector, on balance, with a bias towards Infosys and TCS among
large-caps and MindTree and Patni among mid-caps.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Technology
India
Revenue traction good; weak Re an icing on the cake. We remain positive. We
believe the Street’s revised volume/pricing estimates for FY2013E build in sufficient
macro-related caution – we see higher upside risk than downside. In addition, weak Re
levels, if they sustain, provide further buffer to earnings. We incorporate our economist’s
revised Re/US$ assumptions and raise FY2012/13E EPS estimates for Infosys, TCS and
HCLT by 3.0-12.8%. We raise our TP for Infosys to Rs3,300 (from 3,000; retain BUY),
for TCS to Rs1,260 (from Rs1,150; upgrade to BUY from REDUCE), and for HCLT to
Rs450 (from Rs400, upgrade to REDUCE from SELL). We shall incorporate revised Re/US$
assumptions for other names over the coming days. Infosys/TCS remain our top picks.
IT services demand indicators remain solid
Recent earnings reports of IT companies – global SIs, software majors, and offshore pureplays –
have thrown several positive lead indicators over the past few weeks. IBM and Accenture have
both reported strong order bookings, Accenture more so. SAP (in their preliminary announcement)
and Oracle have reported sustained strength in ERP license sales. Most importantly, offshore
names (including mid-sized companies) have also reported strong volume growth and hiring trends.
Campus offers from various companies (for FY2013 joinees) belie fears of a sharp slowdown.
Macro-micro dichotomy has only gotten stronger in recent weeks, in short.
Recent estimate revisions have tilted in favor of macro concerns and build in sufficient caution
The Street, including us, has built in the increasing weakness in macro indicators into its FY2013E
volume and pricing assumptions for the Indian IT names, despite the sustained strength emanating
from micro indicators. Granted, we are still not looking at a repeat of post-Lehman scenario. We
strongly believe that the extent of post-Lehman impact was a function of decision-making freeze
(driven by the shock that Lehman collapse was) and not a question mark on the secular market
share gain story for the offshore pureplays. Unless such a shock recurs, we see low downside risks
to our or Street’s revised FY2013E US$ revenue growth assumptions for the industry. In fact, if
things do not deteriorate and some of the expected regulatory spending in the US BFS sector
accelerates, we could be in for a nice positive surprise on demand.
Weak Rupee provides additional earnings buffer
Rupee’s sharp and sudden recent depreciation has added another interesting dimension to
investing in Indian IT names. Bears are calling (and rightly, to an extent but only to an extent) the
recent surge in the sector valuations a currency play. Arguments against applying a multiple to EPS
upgrades on the back of a weaker Re have also been made by some. To us, Re assumptions are as
integral to building EPS forecasts for Indian IT names as any of the operating assumptions. Hence,
our approach would be to not alter target multiples but to highlight EPS risks (upside or downside)
from lower or higher levels of Re versus what’s incorporated into our model. We do not think we
are qualified enough to define what ‘normalized long-term’ Re/US$ level should be? Should it be
45 or 44 or 46? Why not 40? Why not 55? We admit we do not know.
To us, the bottomline is that there is a good 5-15% gap in the Street’s current EPS estimates for
FY2013E versus where EPS would be, if Re were to average close to current levels in FY2013E. We
do not find valuations for select names (especially Infosys and TCS) expensive at current Street
estimates – hence, we see no reason to call these currency plays, yet. Putting it differently, we
believe the Street’s current EPS estimates for FY2013E can be met at a Re/US$ rate of 45-46; Re at
49 is a welcome additional buffer to earnings estimates.
Incorporating our economist’s revised Re/US$ forecasts into our models for
Infosys, TCS, and HCLT
Our economist has revised his Re/US$ assumptions for FY2012/13E to Rs47.50/49.75 from
Rs46.6/45.6, respectively. We incorporate these revisions into our earnings models for
Infosys, TCS, and HCLT. Exhibits 1, 2, and 3 depict the revised forecasts for the three names.
We note that we have assumed significant reinvestment of benefits from Re depreciation
into the business and accordingly built conservative margin flow-through. Bulk of EPS
upgrade is on account of pure translation impact.
We raise our target price for Infosys to Rs3,300/share (from Rs3,000) and reiterate BUY. We
upgrade TCS to BUY (from REDUCE) with a revised target price of Rs1,260/share (from
Rs1,150). We also upgrade HCLT to REDUCE (from SELL) with a revised target price of
Rs450/share (Rs400 earlier).
We shall incorporate our revised currency assumptions for the companies that have not
reported September quarter earnings yet post their earnings release. For others that have
released already, we shall update our models over the coming days.
Remain positive on the sector, on balance, with a bias towards Infosys and TCS among
large-caps and MindTree and Patni among mid-caps.
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