Research Notes – IT sector update (28 Jan 2014)
IT sector update
We maintain our positive view on Indian IT services industry as we see a cyclical demand uptick and a supportive FX backdrop. We believe the extent of rebound is still being underestimated. As per our models, even higher revenue growth for FY15-16 can be expected with a pick-up in US and Europe leading to higher IT spending in CY2014-15.
Below emerging trends make us more positive on the sector.
o Strong outsourcing booking growth from global peers such as IBM and Accenture suggests that Indian IT services companies may report a sharp rebound in revenue growth for FY15.
o Despite a mixed December 2013 quarter, outlook of Indian IT managements is now decidedly bullish.
o Core geographies are recovering and Indian players can expect multi-year growth.
o Constant-currency EBIT margins appear to have bottomed out in December 2013 quarter on cyclically higher growth and productivity gains across companies.
We raise our FY15-16 revenue and EPS estimates for our large-cap coverage stocks and also factor in recent results.
o We continue to have BUY ratings across our coverage, and retain Infosys and HCL Tech as our top picks based on their medium-term stories.
o For Mindtree, we cut our margin assumptions despite higher revenue estimates as we believe our previous projections may have been too bullish. For MphasiS, after recent meeting with CFO, we believe the HP channel revenue may be under greater pressure than expected, while client holidays (in near term), lower utilizations and higher sales investments could put margins under pressure.
DISCLAIMER: Geojit BNP Paribas Financial Services Limited (GBNPP) or any of its Group companies, affiliates,
subsidiaries or that of any of its shareholders do not accept any liability arising from the use of this report and the views
and observations contained herein. While every effort is made to ensure the accuracy and completeness of information
contained herein, GBNPP, or any of its group or associate companies or its affiliates take no guarantee and assume no
liability for any errors or omissions of the information contained herein. Information contained herein cannot be the basis
for any claim, demand or cause of action.
This material should not be construed as an offer to sell or the solicitation of an offer to buy any security. We are not
soliciting any action based on this material. It is for the general information of retail clients of GBNPP. It does not
constitute a personal recommendation or take into account the particular investment objectives, financial situations, or
needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider
whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of
the investments referred to in this material and the income from them may go down as well as up, and investors may
realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed
and a loss of original capital may occur.
This document is not for public distribution and has been furnished to you solely for your information and must not be
reproduced or redistributed to any other person. Persons into whose possession this document may come are required to
observe these restrictions. Opinion expressed herein is our current opinion as of the date appearing on this report only.
While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory,
compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any
forward-looking statements are not predictions and may be subject to change without notice.
Certain transactions - futures, options and other derivatives as well as non-investment grade securities - involve substantial
risks and are not suitable for all investors. Reports based on technical analysis is focused on studying charts of a stock's
price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match
with a report on a company's fundamentals. Our salespeople, traders, and other professionals may provide oral or written
market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed
herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the
recommendations expressed herein.
We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this
material, may from time to time have 'long' or 'short' positions in, act as principal in, and buy or sell the securities or
derivatives thereof of companies mentioned herein.
We or any of the group or associate or subsidiary companies affiliated to us and / or to any of our shareholders may from
time to time solicit or perform investment banking, or other services for, any company mentioned in this document.
We do not undertake to advise any change in our views expressed in this document. While we would endeavor to update
the information herein on a reasonable basis, Geojit BNP Paribas, its subsidiaries and associated companies, their directors
and employees are under no obligation to update or keep the information current. Also there may be regulatory,
compliance, or other reasons that may prevent Geojit BNP Paribas and affiliates from doing so. Prospective investors and
others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice.
January 28, 2014
IT sector update
We maintain our positive view on Indian IT services industry as we see a cyclical demand uptick and a supportive FX backdrop. We believe the extent of rebound is still being underestimated. As per our models, even higher revenue growth for FY15-16 can be expected with a pick-up in US and Europe leading to higher IT spending in CY2014-15.
Below emerging trends make us more positive on the sector.
o Strong outsourcing booking growth from global peers such as IBM and Accenture suggests that Indian IT services companies may report a sharp rebound in revenue growth for FY15.
o Despite a mixed December 2013 quarter, outlook of Indian IT managements is now decidedly bullish.
o Core geographies are recovering and Indian players can expect multi-year growth.
o Constant-currency EBIT margins appear to have bottomed out in December 2013 quarter on cyclically higher growth and productivity gains across companies.
We raise our FY15-16 revenue and EPS estimates for our large-cap coverage stocks and also factor in recent results.
o We continue to have BUY ratings across our coverage, and retain Infosys and HCL Tech as our top picks based on their medium-term stories.
o For Mindtree, we cut our margin assumptions despite higher revenue estimates as we believe our previous projections may have been too bullish. For MphasiS, after recent meeting with CFO, we believe the HP channel revenue may be under greater pressure than expected, while client holidays (in near term), lower utilizations and higher sales investments could put margins under pressure.
DISCLAIMER: Geojit BNP Paribas Financial Services Limited (GBNPP) or any of its Group companies, affiliates,
subsidiaries or that of any of its shareholders do not accept any liability arising from the use of this report and the views
and observations contained herein. While every effort is made to ensure the accuracy and completeness of information
contained herein, GBNPP, or any of its group or associate companies or its affiliates take no guarantee and assume no
liability for any errors or omissions of the information contained herein. Information contained herein cannot be the basis
for any claim, demand or cause of action.
This material should not be construed as an offer to sell or the solicitation of an offer to buy any security. We are not
soliciting any action based on this material. It is for the general information of retail clients of GBNPP. It does not
constitute a personal recommendation or take into account the particular investment objectives, financial situations, or
needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider
whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of
the investments referred to in this material and the income from them may go down as well as up, and investors may
realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed
and a loss of original capital may occur.
This document is not for public distribution and has been furnished to you solely for your information and must not be
reproduced or redistributed to any other person. Persons into whose possession this document may come are required to
observe these restrictions. Opinion expressed herein is our current opinion as of the date appearing on this report only.
While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory,
compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any
forward-looking statements are not predictions and may be subject to change without notice.
Certain transactions - futures, options and other derivatives as well as non-investment grade securities - involve substantial
risks and are not suitable for all investors. Reports based on technical analysis is focused on studying charts of a stock's
price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match
with a report on a company's fundamentals. Our salespeople, traders, and other professionals may provide oral or written
market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed
herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the
recommendations expressed herein.
We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this
material, may from time to time have 'long' or 'short' positions in, act as principal in, and buy or sell the securities or
derivatives thereof of companies mentioned herein.
We or any of the group or associate or subsidiary companies affiliated to us and / or to any of our shareholders may from
time to time solicit or perform investment banking, or other services for, any company mentioned in this document.
We do not undertake to advise any change in our views expressed in this document. While we would endeavor to update
the information herein on a reasonable basis, Geojit BNP Paribas, its subsidiaries and associated companies, their directors
and employees are under no obligation to update or keep the information current. Also there may be regulatory,
compliance, or other reasons that may prevent Geojit BNP Paribas and affiliates from doing so. Prospective investors and
others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice.
January 28, 2014
Categories:
GENERAL KNOWLEDGE