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Mar 21, 2013, 12.16 PM IST | Source: Moneycontrol.com

Indian IT: Long term growth outlook intact, says Angel

Angel Broking has come out with its report on Information Technology (IT) sector update - March 2013. The research firm expects TCS and HCL Tech to lead the growth in tier-I IT pack by growing higher than the industry average in FY2014 and recommends accumulate rating on TCS and HCL Tech with target price of Rs 1,624 and Rs 875, respectively.

Angel Broking has come out with its report on Information Technology (IT) sector update - March 2013. The research firm expects TCS and HCL Tech to lead the growth in tier-I IT pack by growing higher than the industry average in FY2014 and recommends accumulate rating on TCS and HCL Tech with target price of Rs 1,624 and Rs 875, respectively.

The global economy is set to improve going ahead with global GDP predicted to grow by 3.5 percent in CY2013 and 4.1 percent in CY2014. Global IT - business process management (BPM) spend is expected to grow in the range of 5-6 percent over the next two years and global sourcing is set to grow faster at ~8 percent during 2013 and 2014. India continues to be the global sourcing leader, but it accounts for only ~10 percent of the total global IT-BPM spend of US$124-130bn, which implies that the market is huge and presents immense untapped opportunity. Indian IT-BPM firms are well positioned to take advantage of these trends by working towards developing new capabilities, servicing the entire IT services value chain and expanding their focus to new geographies, technologies and industry verticals. Indian companies grabbing market share vs global peers: We expect worldwide IT spending (excluding hardware) to post a three-year CAGR of 4.4 percent while the total sourcing market is expected to grow by ~7-8 percent (~2x of worldwide spend).

Top IT service players globally have been increasing their market share every year in the overall IT-BPM spending and have gained ~110bp per annum share annually since the last five years. While the worldwide IT services market has posted a five year CAGR of just ~3.5 percent and global sourcing market having posted a CAGR of ~9 percent commensurately, Indian software services revenue has posted a 16 percent CAGR (almost 2x of growth in global sourcing); primary reason for the same being the labor arbitrage or cost savings to clients. The top-5 Indian IT companies have been increasingly gaining market share since last five years in the overall revenues from biggies of IT services sector globally.

Indian IT - Large cap companies leading the growth: The top-5 Indian IT services vendors have increased their share of Indian IT exports by ~135bp per annum. This supplements the fact that Indian large-cap players have been surpassing mid-cap companies in terms of grabbing market share. Taking into notice the average market share gains over the past six years (FY2007-12) and 7-8 percent CAGR in global sourcing spend for the next three years, the top-5 Indian IT companies are likely to grow at ~14 percent CAGR over the next three years.

Valuation: We continue to remain positive on TCS and HCL Tech from a longer term perspective, though current valuations preclude us from taking any considerable upsides from current levels for the next couple of quarters. We expect TCS and HCL Tech to lead the growth in tier-I IT pack by growing higher than the industry average in FY2014. We recommend Accumulate rating on TCS and HCL Tech with target price of Rs 1,624 and Rs 875, respectively. The PE premium commanded by TCS over Infosys has reduced now, given Infosys' outperformance during 3QFY2013 after six quarters of disappointing results. We maintain Accumulate rating on Infosys as well as Wipro with target price of Rs 3,132 and Rs 473, respectively.

Tech Mahindra remains one of our preferred picks in the entire IT space as the company has recently acquired two companies which will give it inorganic boost. Also, post its merger with Mahindra Satyam, the risks which the company is facing right now such as client concentration and industry concentration will be curtailed and the company will be able to reap benefits from Mahindra Satyam 's capability in enterprise services. Along with Tech Mahindra, we like KPIT Cummins among mid-caps at the current level with a target price of Rs 130, owing to recent correction in the stock price despite industry leading revenue growth," says Angel Broking research report.

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