IT: Large-caps lead growth momentum, says Angel Broking
Angel Broking has come out with its report on IT sector. According to the research firm, TCS and HCL Technologies are expected to lead growth in the tier-I IT pack by growing higher than the industry average in FY2014.
Angel Broking has come out with its report on IT sector. According to the research firm, TCS and HCL Technologies are expected to lead growth in the tier-I IT pack by growing higher than the industry average in FY2014. Expect IT budgets to remain largely flat for CY2013 and volume growth of tier-I Indian IT companies to be 9% plus, says Angel.
For 3QFY2013, the overall results of large cap IT companies were better than their mid-cap peers. The tier-I IT pack under our coverage posted a better-than-expected revenue growth. Volumes were soft during the quarter, which is partly attributable to lower billing days. Moderate realization improvement coupled with subdued volume growth led to better-than-expected revenue growth, with tier-I firms’ USD revenue posting 3.9% qoq growth (3.4% excluding Lodestone).
BFSI performance surprises positively but telecom continues to be a laggard: During 3QFY2013, tier-I IT companies witnessed better-than-expected revenue growth from the BFSI industry vertical despite the impact from furloughs and Hurricane Sandy, which could be an indication of consolidation in gains and improvement in discretionary spends. The telecom vertical continued to be a laggard. Verticals such as lifesciences & healthcare, manufacturing and retail maintained their revenue growth momentum.
Initial signs of divergence in commentary fading away: The commentaries given by the Managements of the top four Indian IT players suggest pockets of optimism for the sector. Initial signs show that CY2013 IT budgets are expected to remain flat. Infosys’ Management indicated that the environment remains almost as same as where it was a few months back, however, Infosys signed eight large deals with TCV worth US$750mn during 3QFY2013. Infosys’ Management indicated at flat to declining IT budgets for CY2013 with more clarity coming in by February 2013. TCS’ Management sounded confident of FY2014 being a better year than FY2013 as clients seem to have a better handle on the kind of projects they want to execute, and are aware of the challenging macro environment. They have planned their IT spending considering these challenges. Cognizant has issued CY2013 guidance of at least 17% yoy growth in revenues.
Outlook and Valuation: Nasscom has recently issued guidance of 12-14% yoy growth for the Indian IT exports and estimates the industry to reach ~US$84- 87bn in FY2014. We believe demand for IT offshore services would continue to be strong due to the need for operational efficiency & cost rationalization and regulatory compliance & risk management. Given the current economic situation, we see IT budgets to remain largely flat for CY2013 and expect volume growth of tier-I Indian IT companies to be 9% plus.
We expect TCS and HCL Tech to lead growth in the tier-I IT pack by growing higher than the industry average in FY2014. TCS’ stock price has run up significantly and is currently trading at 18.3x FY2014E EPS, which leaves little room for upside in the stock price. The PE premium between TCS and Infosys has reduced now given Infosys’ outperformance during 3QFY2013 after six quarters of disappointment. We believe, a couple of quarters of outperformance is required from Infosys for its stock to get re-rated further. HCL Tech is trading at 13.4x FY2014E EPS; we maintain Accumulate rating on the stock with a target price of `765. Among mid-caps, we recommend Buy rating on Hexaware with a target price of `113. 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, says Angel Broking research report.
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