Emkay's report on Indian IT sector
While the overall macro environment remains positive (positive macro data points from US, Europe continuing to open up for outsourcing), we reckon growth challenges for the IT Services Sector and thereby believe that there is downside risks to the modest revenue growth assumptions as well
We highlight below that over the past several quarters (street including us) have been cutting our revenue growth estimates for each of the Tier I names. Contrary to street expectations of acceleration in revenue growth, we have seen the YoY revenue growth trajectory slow down for the offshore IT Services players in recent quarters
While the 'offshoring/outsourcing penetration 'led traction in Europe continues, the revenue growth from US continues to be in low teens YoY revenue growth trajectory. We do not see any acceleration in terms of revenue growth from US ahead
Industry checks indicate that deal closures taking longer than usual with the Automation, Robotics and Cloud (ARC) effect making a broad based and rapid impact on pricing in the traditional business. Besides the global vendors seem better placed than the offshore players in capturing the 'Digital' Demand. We see increased captive sourcing as another risk for the Indian offshore players and our initial channel checks seem to corroborate that
Valuations at ~12.5x-15.5x FY17E P/E are cheap relative to historical multiples however need to be seen in the context of downside risks to revenue/earnings assumptions. TCS and HCL Tech remain our preferred bets in the Tier I IT Services space while Hexaware and eClerx remain our positive rated stocks in the Tier II coverage.
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