Persistent, KPIT, NIIT Tech preferred picks: Dolat Capital

Dolat Capital has come out with its report on IT stocks. Persistent, KPIT and NIIT Tech are the preferred picks in the space.

eClerx Services:
EClerx, is a niche BPO/KPO services provider serving its clients in financial services and sales & marketing supporting services segment with its domain expertise in data analytics and people, process & technology blend solutions. In the financial services domain, the company provides entire trade life cycle business to the banks whereas in the S&M Segment the Company is focused in providing the analytical services in the E-Commerce business.
We believe Eclerx fits our criteria perfectly in terms of possession of scalable niche with strong clientele but lacks visibility owing to high reliance on client mining for business growth. It has been proactive to spread its vertical offering by acquiring Agilyst but has not been expanding its delivery prowess beyond India which could restrict its growth in long term. We reiterate our positive view with a TP of Rs 765 valued at 10x (strong growth and OPM justify high PE) of its FY15E EPS of Rs 76.5. KPIT Cummins:
KPIT is the largest third party outsourcer to Global Automotive companies and a premium member of domain specific accreditations such as AUTOSAR and Jaspar. It has gained on the expertise through its long association with global leader in engine maker, Cummins; its JV partner. It also has strong offering in the Enterprise solution side with capabilities across all major ERP; SAP, Oracle and JD Edwards.
We remain positive on the stock in view of its focused approach on its niche strength (Automotive, Enterprise services) and sustained strong business traction through new deal wins and through successful integration of acquired entities. We maintain our BUY rating with a TP of Rs 155 (valued at 10x FY15E EPS). Mindtree:
Mindtree is a mid Tier IT player founded in 1999 with multi service offering covering both IT Services (ADM) and R&D services (OPD, testing and maintenance) for its 230+ clients across verticals. It has a total employee count of over 11,000 with over 80% efforts based in offshore locations.
Cut in revenue forecast, high expectancy from H2 and risk on OPM sustenance leads to lowering in our confidence on the stock despite economical valuations. Thus, we maintain our sector underperformer (among small cap stocks) on the stock with a Target price of Rs 765 valued at 8.5x of FY15E earnings (inline with current 1 year forward valuations). Mphasis:
MphasiS consistently delivers Applications services, Infrastructure services, and Business Process Outsourcing (BPO) services globally through a combination of technology knowhow, domain and process expertise. It services clients in BFSI, Manufacturing, Communications, Media & Entertainment, Healthcare, Transportation, Retail & CPG and Energy & Utilities around the world. It scaled up in FY08 as EDS India merged its India operation post the acquisition of Mphasis and managed a billion dollar mark in 2010 as it gained from ITO opportunity from parent, HP. However; the momentum has lost since then and the company seem struck revisiting its plan to grow as HP (55% of revenues) continues its downward spiral in its outsourcing to Mphasis.
Maintain underperformer rating despite attractive valuations (8.5x on its FY14E Oct EPS) owing to dismal financial performance and sustained weak demand from HP (55% of the revenues). NIIT Technologies:
NIIT Tech is leading provider of Services and solutions in US, Europe and Asia Pacific markets employing over 7600 IT personnel. It offers its wide service offerings of ADM, BPO, enterprise solutions, IP assets, managed services to it’s over 68 mn$ clients. It has carved its niche by focusing in specific verticals such as Transportation, Insurance, Manufacturing and Government sector.
We believe NIIT Tech perfectly fits in our criteria of differentiation model with business visibility perfectly and thus we reiterate our positive view with a Buy rating and TP of Rs 365 valued at 8x of its FY15E EPS of Rs 46. Historically, it has been trading at a lower multiple in the midcap space owing to its inconsistent growth in past, which we believe would fade away and thus could lead to even higher price performance. Persistent Systems:
Persistent Systems is a niche player with strong Product Engineering (PES) capabilities across the entire product lifecycle. They have made early strides in growing and next generation technologies such as Cloud Computing, Business analytics, enterprise mobility, collaboration and Bigdata.
We remain positive on account of ahead of industry growth, incremental focus on non linear – IP led revenues, sustained profitability outlook and attractive valuation (8x of FY15E Earnings). We maintain our Buy rating with a TP of ‘ 595 valued at 9.5x FY15E EPS of 62.4). Tech Mahindra:
Tech Mahindra is the largest Indian provider of networking technology solutions and business process outsourcing (BPO) services to the global telecommunications industry. It was formed out as a JV between British Telecom and Mahindra Group and gained on domain capabilities thorough its alliance with BT. In 2009 it acquired Mahindra Satyam to emerge out as a full service provider across verticals.
We have build in modest revenue growth of 11% over FY13-15E and OPM decline of 100bps which we believe is fairly conservative. We believe consensus estimates are quite pessimistic on earning gains post integration and thus would undergo regular upgradation in coming period. We maintain TechM as our top pick in the sector with a TP of Rs 1325, valued at 10x of its FY15E EPS of Rs 132.5. Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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