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We are initiating coverage on niche mid-cap players, mainly, NIIT Tech (BUY, TP:
Rs350, CMP: Rs265), CMC (Accumulate, TP: Rs1,200, CMP: Rs978), and Hexaware
(Reduce, TP: Rs100, CMP: Rs118). The gap between large-cap and mid-cap is
widening. However, we think growth is still achievable in an age of budgetary
austerity with niche services.
Undifferentiated valuations: The share price currently is not factoring in upside
to earnings estimates and implies slower growth than Tier-1. We are confident
that business mix and scale can sustain the share gains in the niche segments
they operate. Moreover, upcoming corporate’s cost cognizance as the top-most
priority would give an edge to the mid-tier companies, who have service
offering at a discount compared to larger players. We think compelling
valuations create a good entry point.
Differentiated business model distinguish each from others: The breadth of
services being offered across the verticals for Tier-1 encompasses all the service
offerings by mid-tier companies. Despite tough competitive landscape, NIIT Tech
(edge in Travel, Transportation & Logistic), CMC (Strong India presence), and
Hexaware (Peoplesoft advantage) continue to hold their ground. We expect
many of the mid-tier and specialized clients would prefer to work with the
companies that can offer more customized service and attention.
What to own? We favour NIIT Technologies and CMC. Our analysis indicates
that they can continue to capture market share, but valuations appear low
relative to their fundamental growth outlook. We think they are best positioned
for multiple expansions as operating margin expand along with growth
momentum.
What to avoid? We think that Hexaware is fairly valued in our base case, but
faces the highest probability of downside risk in our bear case. The company has
already stretched the margin levers, expanding operating margin in-line with
Tier-1 players. We see current run-up in the stock price is not only valuing the
growth momentum, but also acquisition premium. As the acquisition rumours
wind down, we think the valuation overhang will increase. The current valuation
leaves little room for disappointment. Our base case factors in 20% downside
risk from the current level.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We are initiating coverage on niche mid-cap players, mainly, NIIT Tech (BUY, TP:
Rs350, CMP: Rs265), CMC (Accumulate, TP: Rs1,200, CMP: Rs978), and Hexaware
(Reduce, TP: Rs100, CMP: Rs118). The gap between large-cap and mid-cap is
widening. However, we think growth is still achievable in an age of budgetary
austerity with niche services.
Undifferentiated valuations: The share price currently is not factoring in upside
to earnings estimates and implies slower growth than Tier-1. We are confident
that business mix and scale can sustain the share gains in the niche segments
they operate. Moreover, upcoming corporate’s cost cognizance as the top-most
priority would give an edge to the mid-tier companies, who have service
offering at a discount compared to larger players. We think compelling
valuations create a good entry point.
Differentiated business model distinguish each from others: The breadth of
services being offered across the verticals for Tier-1 encompasses all the service
offerings by mid-tier companies. Despite tough competitive landscape, NIIT Tech
(edge in Travel, Transportation & Logistic), CMC (Strong India presence), and
Hexaware (Peoplesoft advantage) continue to hold their ground. We expect
many of the mid-tier and specialized clients would prefer to work with the
companies that can offer more customized service and attention.
What to own? We favour NIIT Technologies and CMC. Our analysis indicates
that they can continue to capture market share, but valuations appear low
relative to their fundamental growth outlook. We think they are best positioned
for multiple expansions as operating margin expand along with growth
momentum.
What to avoid? We think that Hexaware is fairly valued in our base case, but
faces the highest probability of downside risk in our bear case. The company has
already stretched the margin levers, expanding operating margin in-line with
Tier-1 players. We see current run-up in the stock price is not only valuing the
growth momentum, but also acquisition premium. As the acquisition rumours
wind down, we think the valuation overhang will increase. The current valuation
leaves little room for disappointment. Our base case factors in 20% downside
risk from the current level.
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