INR affects quarter, but demand environment strengthens
Given the improved demand environment (per multiple indicators) and
with INR appreciation worries receding, we think several Tier-1 firms
warrant re-rating. We expect strong growth in TCS, HCLT and TechM this
quarter but expect the commentary to be positive across all Tier-1
firms. We think that sustained demand improvement will be visible
towards 1HCY15. We expect a fairly immediate re-rating for HCLT and
Wipro while Infosys’ re-rating will be contingent on large deal wins
(we expect it in 1HCY15). Among mid-caps we favour Cyient and NIIT
Ltd, expecting client-specific issues to continue to weigh on eClerx.
$ Rupee woes earlier overdone, rerating across sector large-caps:
Considering the sharp de-rating that happened to the IT Sector
post-election results in India, a rebound could have been expected in
several names. We think the improved demand environment in the US, and
likely stable currency from here on warrant a rerating across most of
our Tier-1 universe barring TCS which already trades at a steep
premium. We argue for rerating of HCLT, Wipro and TechM, with Infosys’
being contingent on large deal wins (USD200Mn+).
$ Margins to be hit this quarter due to rupee appreciation and wage
hikes: In addition to the impact of lower INR realizations, margins
for TCS, Infosys, Cyient and eClerx will also be impacted this quarter
due to salary hikes. Wage hikes for Wipro will be effective for only
one month this quarter while for HCLT, only for part of the workforce.
Despite the margin-hit this quarter and the unfavourable margin
comparisons YoY and QoQ for most firms, we think valuations have
bottomed out considering the strong demand environment.
$ Demand environment firming up per multiple sources: From our
analysis of long-term CIO-spending (vide note dated Oct-07-2013), a
pickup in other areas including IT strategy consulting precedes
spending on IT Services. As per Accenture’s recent commentary,
management consulting is seeing traction, a good leading indicator for
IT Services spending. Our channel checks indicate that ticket sizes of
discretionary spends on new projects in cloud and digital have risen
to USD5-10Mn YoY from USD 1-3Mn.
$ Recommendation and key risks: We maintain BUY on Wipro, HCLT,
Infosys and Cyient and HOLD on TCS, TechM and eClerx, as also BUY on
NIIT Ltd with a TP of Rs70 (Rs55 earlier). We have changed our target
multiple for HCLT to 16x from 14x considering its continued leadership
in large infrastructure deals and improving traction in application
services. We also increase target multiples for Wipro and TechM to 15x
and 14x respectively in view of continued improvements to their
service portfolios and key contract wins. Key risks: (1) currency
volatility and (2) Regulatory changes such as the US Immigration Bill.
Thanks & Regards
--
��
Given the improved demand environment (per multiple indicators) and
with INR appreciation worries receding, we think several Tier-1 firms
warrant re-rating. We expect strong growth in TCS, HCLT and TechM this
quarter but expect the commentary to be positive across all Tier-1
firms. We think that sustained demand improvement will be visible
towards 1HCY15. We expect a fairly immediate re-rating for HCLT and
Wipro while Infosys’ re-rating will be contingent on large deal wins
(we expect it in 1HCY15). Among mid-caps we favour Cyient and NIIT
Ltd, expecting client-specific issues to continue to weigh on eClerx.
$ Rupee woes earlier overdone, rerating across sector large-caps:
Considering the sharp de-rating that happened to the IT Sector
post-election results in India, a rebound could have been expected in
several names. We think the improved demand environment in the US, and
likely stable currency from here on warrant a rerating across most of
our Tier-1 universe barring TCS which already trades at a steep
premium. We argue for rerating of HCLT, Wipro and TechM, with Infosys’
being contingent on large deal wins (USD200Mn+).
$ Margins to be hit this quarter due to rupee appreciation and wage
hikes: In addition to the impact of lower INR realizations, margins
for TCS, Infosys, Cyient and eClerx will also be impacted this quarter
due to salary hikes. Wage hikes for Wipro will be effective for only
one month this quarter while for HCLT, only for part of the workforce.
Despite the margin-hit this quarter and the unfavourable margin
comparisons YoY and QoQ for most firms, we think valuations have
bottomed out considering the strong demand environment.
$ Demand environment firming up per multiple sources: From our
analysis of long-term CIO-spending (vide note dated Oct-07-2013), a
pickup in other areas including IT strategy consulting precedes
spending on IT Services. As per Accenture’s recent commentary,
management consulting is seeing traction, a good leading indicator for
IT Services spending. Our channel checks indicate that ticket sizes of
discretionary spends on new projects in cloud and digital have risen
to USD5-10Mn YoY from USD 1-3Mn.
$ Recommendation and key risks: We maintain BUY on Wipro, HCLT,
Infosys and Cyient and HOLD on TCS, TechM and eClerx, as also BUY on
NIIT Ltd with a TP of Rs70 (Rs55 earlier). We have changed our target
multiple for HCLT to 16x from 14x considering its continued leadership
in large infrastructure deals and improving traction in application
services. We also increase target multiples for Wipro and TechM to 15x
and 14x respectively in view of continued improvements to their
service portfolios and key contract wins. Key risks: (1) currency
volatility and (2) Regulatory changes such as the US Immigration Bill.
Thanks & Regards
--
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