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Ahead of the recovery, buy rebounders where expectations are low
Demand moderation in FY13F, but no falling off the cliff
We see revenue growth in FY13F moderating to low-teen levels from our
estimated 22% in FY12F for Tier-1 IT companies, largely on clients’
decision-making inertia and not structural impairment of demand. Cost
moderation, pricing stability and rupee depreciation will however take EPS
growth to 15%, ahead of revenue growth in FY13F, on our estimates.
Tier-1 IT growth: Shift in IT spend allocations and simple economics
to power revenue growth closer to trendline
Our analysis suggests that the flow business is likely to support just half of
the historical industry growth rate. However, we believe Tier-1 IT players
will grow faster, at the expense of local players/MNC incumbents as trends
of increasing: 1) consolidation; 2) offshore penetration; 3) productization;
and 4) pervasiveness of technology play to their advantage. Clients'
inability to fund skill up-gradation of their local/captive tech workforce, as
well as macro-driven cost constraints, increase the attractiveness of
offshore outsourcing, in our view. We estimate Tier-1 IT revenue growth
will rebound to ~18% in FY14F as the speed of decision-making improves.
Action: Buy HCLT/INFO; Raise CTSH to Buy; iGATE: top Tier-2 pick
We believe buying into perceived risk and/or high pessimism (INFO, HCLT,
CTSH) will generate higher returns than buying into consensus favourites
(TCS, WPRO). We see HCLT gaining market share in a consolidating /
under-penetrated environment, and benefiting from the resumption of
productization spending. We upgrade CTSH to Buy on it benefiting from
consolidation/increased regulation spending trends given higher
reinvestments and client connect. INFO appears well-positioned for a
rebound when productization and pervasiveness of technology (BFSI
regulation spending) resume from 2HFY13F. At Wipro, the turnaround pace
is likely to disappoint investors; while TCS, despite continuing to outperform
peers, will likely see limited upside due to expensive valuations.
Valuation hit unlikely in near term; MNC outperformance may reverse
We expect Tier-1 IT firms to perform better than multi-national company
(MNC) IT players (e.g., Accenture/IBM), as clients shift towards higher
offshore delivery to save costs and rupee depreciation benefits India IT
firms more than MNCs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ahead of the recovery, buy rebounders where expectations are low
Demand moderation in FY13F, but no falling off the cliff
We see revenue growth in FY13F moderating to low-teen levels from our
estimated 22% in FY12F for Tier-1 IT companies, largely on clients’
decision-making inertia and not structural impairment of demand. Cost
moderation, pricing stability and rupee depreciation will however take EPS
growth to 15%, ahead of revenue growth in FY13F, on our estimates.
Tier-1 IT growth: Shift in IT spend allocations and simple economics
to power revenue growth closer to trendline
Our analysis suggests that the flow business is likely to support just half of
the historical industry growth rate. However, we believe Tier-1 IT players
will grow faster, at the expense of local players/MNC incumbents as trends
of increasing: 1) consolidation; 2) offshore penetration; 3) productization;
and 4) pervasiveness of technology play to their advantage. Clients'
inability to fund skill up-gradation of their local/captive tech workforce, as
well as macro-driven cost constraints, increase the attractiveness of
offshore outsourcing, in our view. We estimate Tier-1 IT revenue growth
will rebound to ~18% in FY14F as the speed of decision-making improves.
Action: Buy HCLT/INFO; Raise CTSH to Buy; iGATE: top Tier-2 pick
We believe buying into perceived risk and/or high pessimism (INFO, HCLT,
CTSH) will generate higher returns than buying into consensus favourites
(TCS, WPRO). We see HCLT gaining market share in a consolidating /
under-penetrated environment, and benefiting from the resumption of
productization spending. We upgrade CTSH to Buy on it benefiting from
consolidation/increased regulation spending trends given higher
reinvestments and client connect. INFO appears well-positioned for a
rebound when productization and pervasiveness of technology (BFSI
regulation spending) resume from 2HFY13F. At Wipro, the turnaround pace
is likely to disappoint investors; while TCS, despite continuing to outperform
peers, will likely see limited upside due to expensive valuations.
Valuation hit unlikely in near term; MNC outperformance may reverse
We expect Tier-1 IT firms to perform better than multi-national company
(MNC) IT players (e.g., Accenture/IBM), as clients shift towards higher
offshore delivery to save costs and rupee depreciation benefits India IT
firms more than MNCs.
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