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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● The uncertain demand environment is the #1 issue on investors'
minds. While visibility for the companies in the sector extends to
just about 6-9 months, we are working with a base-case
assumption of a continuing global sluggish environment, but not a
double-dip recession. Most recent datapoints, including project
wins, point to a reasonably good demand environment in our view.
● The other issue occupying investors' minds is the potential
structural decline in margins and the consequent derating in
valuation multiples. Given that margins will likely decline
structurally, the key question pertains to the ‘right’ multiple 5 or 7
years from now. Using Accenture as a guidance, we think that a
multiple of 14-15x earnings should be considered 5-7 years out.
● There is not much debate on the relative attractiveness of the
sector. In the Indian context, we think the IT services stocks are
very well placed—the demand environment is reasonable,
valuations are not very rich even after the recent run-up and the
rupee poses upside risk to consensus numbers (we think
consensus estimates are at Rs47/US$ versus the current Rs51+).
Figure 1: Recent significant project wins for our coverage universe
Month Vendor Deal particulars Client
Nov '11 Hexaware 5-year deal worth US$250 mn Multi-billion dollar firm in the UK
Nov '11 TCS 15-year deal worth US$2.2 bn Friends Life
Nov '11 Wipro SCM support and
development
Premier Foods
Sep '11 Infosys 3-year deal Farmers New World Life
Insurance
Sep '11 TCS Multi-year deal Nets
Sep '11 Wipro Multi-year deal SAAB
Aug '11 Wipro Multi-year deal TalkTalk
Aug '11 HCLT Multi-year deal Vancouver City Savings Credit
Union
Aug '11 Infosys 5-year deal Alcoa
Aug '11 Infosys Multi-year deal Phoenix Life Insurance
Jul ’11 HCLT Multi-year deal Eli Lily
Jul ’11 Hexaware 5-year deal worth US$177 mn US-based client
Source: Company data
Issue #1: Uncertain demand environment
While we concur that visibility for the companies in the sector extends
to just about six-nine months, we are working with a base case
assumption of a continuing global sluggish environment, but not a
double-dip recession. The best that investors and analysts can do is
to follow as many datapoints as possible given the lack of any
significant leading indicators of demand for the sector. Most
datapoints, in our view, point to a reasonably good demand
environment. The two large deals announced in the past two weeks—
one by a large company (TCS) and the other by a mid-sized one
(Hexaware) and both in Europe form one such positive datapoint.
Issue #2: The ‘right’ long-term P/E multiple, given the
structural decline in margins
Given that margins will likely decline structurally for the sector—the
key question then is what will be the ‘right’ multiple five or seven years
from now. For this, we look at the Accenture stock for guidance. Fiveseven
years from now, the larger Indian companies should be
approximately the size of what Accenture is right now, will probably be
growing at the rate that Accenture is growing at right now (low doubledigits)
and will still have higher OPM than Accenture's current 13-14%.
Accenture is currently trading at 14-15x earnings and we think this is
the multiple range that investors should consider for the IT services
stocks five-seven years out. However, multiples will not straight-line to
those levels—we will see a lot of volatility in between driven by the
marginal changes in growth from year to year.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● The uncertain demand environment is the #1 issue on investors'
minds. While visibility for the companies in the sector extends to
just about 6-9 months, we are working with a base-case
assumption of a continuing global sluggish environment, but not a
double-dip recession. Most recent datapoints, including project
wins, point to a reasonably good demand environment in our view.
● The other issue occupying investors' minds is the potential
structural decline in margins and the consequent derating in
valuation multiples. Given that margins will likely decline
structurally, the key question pertains to the ‘right’ multiple 5 or 7
years from now. Using Accenture as a guidance, we think that a
multiple of 14-15x earnings should be considered 5-7 years out.
● There is not much debate on the relative attractiveness of the
sector. In the Indian context, we think the IT services stocks are
very well placed—the demand environment is reasonable,
valuations are not very rich even after the recent run-up and the
rupee poses upside risk to consensus numbers (we think
consensus estimates are at Rs47/US$ versus the current Rs51+).
Figure 1: Recent significant project wins for our coverage universe
Month Vendor Deal particulars Client
Nov '11 Hexaware 5-year deal worth US$250 mn Multi-billion dollar firm in the UK
Nov '11 TCS 15-year deal worth US$2.2 bn Friends Life
Nov '11 Wipro SCM support and
development
Premier Foods
Sep '11 Infosys 3-year deal Farmers New World Life
Insurance
Sep '11 TCS Multi-year deal Nets
Sep '11 Wipro Multi-year deal SAAB
Aug '11 Wipro Multi-year deal TalkTalk
Aug '11 HCLT Multi-year deal Vancouver City Savings Credit
Union
Aug '11 Infosys 5-year deal Alcoa
Aug '11 Infosys Multi-year deal Phoenix Life Insurance
Jul ’11 HCLT Multi-year deal Eli Lily
Jul ’11 Hexaware 5-year deal worth US$177 mn US-based client
Source: Company data
Issue #1: Uncertain demand environment
While we concur that visibility for the companies in the sector extends
to just about six-nine months, we are working with a base case
assumption of a continuing global sluggish environment, but not a
double-dip recession. The best that investors and analysts can do is
to follow as many datapoints as possible given the lack of any
significant leading indicators of demand for the sector. Most
datapoints, in our view, point to a reasonably good demand
environment. The two large deals announced in the past two weeks—
one by a large company (TCS) and the other by a mid-sized one
(Hexaware) and both in Europe form one such positive datapoint.
Issue #2: The ‘right’ long-term P/E multiple, given the
structural decline in margins
Given that margins will likely decline structurally for the sector—the
key question then is what will be the ‘right’ multiple five or seven years
from now. For this, we look at the Accenture stock for guidance. Fiveseven
years from now, the larger Indian companies should be
approximately the size of what Accenture is right now, will probably be
growing at the rate that Accenture is growing at right now (low doubledigits)
and will still have higher OPM than Accenture's current 13-14%.
Accenture is currently trading at 14-15x earnings and we think this is
the multiple range that investors should consider for the IT services
stocks five-seven years out. However, multiples will not straight-line to
those levels—we will see a lot of volatility in between driven by the
marginal changes in growth from year to year.
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