The following article published in myiris site. This is for our information, please:
India Infoline in its latest sector research report gave their investment rationale & outlook on IT sector. The same is as follows:
Frontline IT stocks have gone through a tumultuous fall from the CY11 highs in the wake of heightened economic concerns in the West. Broad economic data has continued to give an increasing sense of slowdown in developed economies. While the managements has not turned negative, a cautious stance seems to be order of the day. Elongating decision cycles, shorter term projects, steep fall in deal signings in H1 CY11 (down 20% yoy) and employee cuts announced by large global banks (BFSI is the biggest vertical) suitably indicate a demand slow-down. Even with lowered estimates of the Tier-1 players (considering the demand concerns), Infosys, HCLT and TCS have become strong value plays. Recent sharp depreciation in rupee, if sustained, can lead to further upsides.
Continued selling on the back of intensifying demand concerns; Growth slowdown probable
The tumultuous fall of Indian IT stocks was triggered by downgrade of US sovereign credit rating, sovereign debt issues in EU nations as well as weakening of these economies. CNX IT fell more than 25% from YTD highs with large cap companies witnessing valuation de-rating to 11-16x FY13E. With prolonged weakness in macro data points viz. IIP, services PMI, jobless claims, unemployment, GDP, etc, an expectation of slower demand cycle seems reinforced. We have reduced estimates by 1-5%/ 4-16% for FY12/FY13 for our large-cap universe.
Attractive entry points for long term investors; Recommend BUY on Infosys, HCLT and TCS
Frontline IT stocks corrected 20-33% from CY11 highs on the back of demand concerns and consequently they are trading 20-25% (except TCS) lower than their 5-year average 1-year forward P/E. While they have bounced-back (except for relatively weak Wipro), valuation still remain at significant discount. Although the demand momentum is likely to slow down due the macro issues, the current stock prices appear to factor a much sharper cut in demand. The sustained fall in the prices is also not consistent with the fundamental strength in the sector viz. the business models, growth headroom (Indian IT constitutes only 4-5% of total global IT spends) and continued cost efficiency/transformation needs of clients worldwide.
Rupee depreciation - a non-operational tailwind
Rupee has depreciated sharply (v/s dollar) in the last couple of weeks. It has fallen by 10% from the previous quarter ending rate. While the impact on the operating performance would be diluted as translation is done on average rates, the forex gains could be materially up in such a scenario (assuming no hedge covers). Continued fall in the rupee could pose material upside risks to our earnings estimates (6-13%) which are currently based on Rs/USD assumption of Rs45/45 in FY12/FY13. Amongst the large companies, Infosys and HCLT are expected to benefit more considering their lower hedge covers (USD 745 million and USD 390 million respectively as of Q1FY12) as compared to TCS and Wipro.
Following are the three IT stocks from Edelweiss research:
Tata Consultancy Services - BUY
CMP: Rs 991
Target Price: Rs 1,180
Upside 19.0%
> TCS has been a consistent outperformer.
> Discretionary exposure relatively less; well-diversified service mix to sustain growth.
> Margin management strong; expect it to remain range bound.
> Relative out-performance to continue; Recent up-move validates the same; maintain BUY.
Infosys - BUY
CMP: Rs 2,340
Target Price: Rs 2,960
Upside 26.5%
> Valuations attractive post sharp correction
> Well-poised to corner larger single sourced deals post restructuring
> Sufficient levers for margin maintenance
HCL Tech - BUY
CMP: Rs 388
Target Price: Rs 500
Upside 28.9%
> Volume growth momentum to moderate a bit
> Higher discretionary exposure - a near-term concern
> Margin to remain flat v/s earlier expectation of improvement
> Stock offers decent return potential at current price
Frontline IT stocks have gone through a tumultuous fall from the CY11 highs in the wake of heightened economic concerns in the West. Broad economic data has continued to give an increasing sense of slowdown in developed economies. While the managements has not turned negative, a cautious stance seems to be order of the day. Elongating decision cycles, shorter term projects, steep fall in deal signings in H1 CY11 (down 20% yoy) and employee cuts announced by large global banks (BFSI is the biggest vertical) suitably indicate a demand slow-down. Even with lowered estimates of the Tier-1 players (considering the demand concerns), Infosys, HCLT and TCS have become strong value plays. Recent sharp depreciation in rupee, if sustained, can lead to further upsides.
Continued selling on the back of intensifying demand concerns; Growth slowdown probable
The tumultuous fall of Indian IT stocks was triggered by downgrade of US sovereign credit rating, sovereign debt issues in EU nations as well as weakening of these economies. CNX IT fell more than 25% from YTD highs with large cap companies witnessing valuation de-rating to 11-16x FY13E. With prolonged weakness in macro data points viz. IIP, services PMI, jobless claims, unemployment, GDP, etc, an expectation of slower demand cycle seems reinforced. We have reduced estimates by 1-5%/ 4-16% for FY12/FY13 for our large-cap universe.
Attractive entry points for long term investors; Recommend BUY on Infosys, HCLT and TCS
Frontline IT stocks corrected 20-33% from CY11 highs on the back of demand concerns and consequently they are trading 20-25% (except TCS) lower than their 5-year average 1-year forward P/E. While they have bounced-back (except for relatively weak Wipro), valuation still remain at significant discount. Although the demand momentum is likely to slow down due the macro issues, the current stock prices appear to factor a much sharper cut in demand. The sustained fall in the prices is also not consistent with the fundamental strength in the sector viz. the business models, growth headroom (Indian IT constitutes only 4-5% of total global IT spends) and continued cost efficiency/transformation needs of clients worldwide.
Rupee depreciation - a non-operational tailwind
Rupee has depreciated sharply (v/s dollar) in the last couple of weeks. It has fallen by 10% from the previous quarter ending rate. While the impact on the operating performance would be diluted as translation is done on average rates, the forex gains could be materially up in such a scenario (assuming no hedge covers). Continued fall in the rupee could pose material upside risks to our earnings estimates (6-13%) which are currently based on Rs/USD assumption of Rs45/45 in FY12/FY13. Amongst the large companies, Infosys and HCLT are expected to benefit more considering their lower hedge covers (USD 745 million and USD 390 million respectively as of Q1FY12) as compared to TCS and Wipro.
Following are the three IT stocks from Edelweiss research:
Tata Consultancy Services - BUY
CMP: Rs 991
Target Price: Rs 1,180
Upside 19.0%
> TCS has been a consistent outperformer.
> Discretionary exposure relatively less; well-diversified service mix to sustain growth.
> Margin management strong; expect it to remain range bound.
> Relative out-performance to continue; Recent up-move validates the same; maintain BUY.
Infosys - BUY
CMP: Rs 2,340
Target Price: Rs 2,960
Upside 26.5%
> Valuations attractive post sharp correction
> Well-poised to corner larger single sourced deals post restructuring
> Sufficient levers for margin maintenance
HCL Tech - BUY
CMP: Rs 388
Target Price: Rs 500
Upside 28.9%
> Volume growth momentum to moderate a bit
> Higher discretionary exposure - a near-term concern
> Margin to remain flat v/s earlier expectation of improvement
> Stock offers decent return potential at current price
