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IT Services
Amongst Tier II companies, Persistent and Hexaware are expected to report strong
revenue performance (+5% /3% QoQ). eClerx and Mindtree which reported strong
revenue performance in Sep14 quarter will report modest revenue growth in Dec14
Operating margins are expected to inch up sequentially across most of the companies
aided by ~2.3% QoQ INR depreciation against US$ except for HCL Tech, Hexaware ( on
wage hikes hits) and First source( ramp downs on large projects)
Currency reset to Rs 63/$ for FY16/17 drive raise in EPS estimates for coverage barring
eClerx. While we retain our preference for Tier Is, we upgrade Hexaware to ACCUM, TP
Rs 230 as we back upsides to earnings aided by strong operating performance
Hexaware
CMP
201
ACCUMULATE
Target Price
230
eClerx Services
CMP
1,289
HOLD
Target Price
1,220
Infosys
CMP
1,974
BUY
Target Price
2,250
Mindtree
CMP
1,296
REDUCE
Target Price
1,030
NIIT Tech
CMP
367
HOLD
Target Price
380
Persistent Systems
CMP
1,733
SELL
Target Price
1,400
TCS
CMP
2,546
ACCUMULATE
Target Price
2,860
Tech Mahindra
CMP
2,595
ACCUMULATE
Target Price
2,800
Wipro
CMP
552
HOLD
Target Price
630
HCL Tech
CMP
1,605
ACCUMULATE
Target Price
1,750
EV/EBIT
P/E
FY15E
FY16E
FY15E
FY16E
FY15E
FY16E
Infosys
109
124
13.9
11.7
18.5
16.3
TCS
110
129
18.1
14.9
23.4
20
35
41
11.9
10
15.7
13.6
HCL Tech**
107
117
12.5
11
15.1
13.7
Tech Mahindra
139
171
14.3
11.2
18.8
15.2
Mindtree
65
76
15.5
12.3
19.8
17.2
eClerx
81
95
12.1
9.8
16.4
13.9
Hexaware*
11
15
13.3
9.9
19.1
14
Persistent Systems
76
85
20.7
16.2
24.6
22
NIIT Tech
31
36
7.9
6.4
12.4
10.7
Mphasis
35
32
6.8
7.5
11.1
12
9.2
6.9
9.9
7.5
Wipro
Firstsource
Emkay
View
Mphasis
CMP
390
Firstsource
CMP
35
HOLD
Target Price
410
ACCUMULATE
Target Price
45
Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES.
IT Services
Operating margins to improve sequentially for most of the universe barring HCL
Tech, Hexaware and Firstsource
We expect the operating margins for most of the coverage universe to improve sequentially aided
by growth leverage and INR depreciation albeit for companies like HCL Tech and Hexaware
(impact of wage hikes) and Firstsource (headwinds from ramp downs in a large client). We note
that the benefit from INR depreciation V/s USD will be limited during the current quarter on
account of adverse INR move against other currencies like GBP and Euro.
Exhibit 1: Emkay Dec14 quarter earnings estimates for Indian IT Services players
Co Name
Revenues
Revenue growth
EBITDA
EBITDA growth
Net profits
QoQ
QoQ
YoY
QoQ
YoY
(in Rs mn)
QoQ
YoY
Infosys
2,236
1.6
6.5
39,434
4.5
8.9
52
31,625
2.1
10.0
TCS
3,947
0.5
14.8
71,150
4.5
6.4
35
-247
54,699
3.4
2.9
Wipro*
1,791
1.1
6.7
24,748
4.6
5.7
64
21,809
4.6
8.2
HCL Tech
1,450
1.2
9.7
21,816
-0.5
2.7
-95
-182
17,607
-6.0
17.8
Tech M
926
2.9
17.1
11,771
7.3
3.6
41
-279
8,141
13.1
-19.4
eClerx
39
1.5
8.4
862
5.7
-2.9
58
-470
650
4.3
4.2
Hexaware
113
3.0
13.2
1,249
3.4
-10.4
-32
-479
895
4.0
-13.3
NIIT Tech
96
-3.2
0.9
853
3.7
-10.9
45
-187
462
15.6
-13.0
148
0.6
16.4
1,832
4.3
18.9
28
55
1,375
0.1
55.5
Mindtree Ltd
Persistent
80
5.1
14.7
1,101
15.1
-8.1
142
-564
814
14.2
26.8
Mphasis**
238
-1.1
-5.3
2,200
2.6
-6.3
38
-183
1,584
-1.1
-12.3
Firstsource
126
-1.0
-1.6
933
-1.7
0.2
-46
15
521
-15.0
7.4
Dec'14
Sep'14
Dec'13
QoQ
YoY
Average
62.24
60.78
61.90
2.4%
0.5%
Close
63.33
61.61
61.90
2.8%
2.3%
Average
1.24
1.31
1.37
-5.4%
-9.6%
Close
1.22
1.27
1.38
-4.2%
-11.8%
Average
1.57
1.66
1.63
-5.1%
-3.3%
Close
1.56
1.63
1.65
-4.4%
-5.5%
Average
0.85
0.91
0.92
-6.7%
-7.6%
Close
0.82
0.87
0.89
-5.8%
-5.8%
Average
115.96
105.43
101.81
10.0%
13.9%
Close
120.28
109.40
104.96
9.9%
9.9%
USD/INR
Euro/USD
GBP/USD
AUD/USD
JPY/USD
IT Services
Watch out for demand across key verticals/geographies, CY15 IT budgetary trends
While the Dec14 quarter results will be modestly weak, we believe that investors need to focus
on management commentary on outlook on client spending in key verticals like Banking and
Financial Services, Retail and geographies like US (strong macro with pick up in GDP growth
rates, note that the YoY revenue growth trajectory of revenues from US for the offshore techs
has improved in H1FY15 after a relatively weak H2FY14 ) as well as Continental Europe( given
increased acceptance for offshoring as reflected from deal activity from the region over the past
12-15 months).
Besides commentary on margin outlook (given the changing mix of revenues) will be monitored.
We highlight that some of the mid-tier players have seen a sharp decline in margins over the
past 4 quarters driven by both a change in business mix as well as the required Sales and
marketing investments.
Exhibit 3: YoY revenue growth from US has been better in H1FY15 after a relatively weak
performance in H2FY14
25%
20%
15%
10%
5%
Sep'14
Jun'14
Mar'14
Dec'13
Sep'13
Jun'13
Mar'13
Dec'12
Sep'12
Jun'12
0%
Source: Company, Emkay Research. Combined revenue growth rate for TCS, Infosys, Wipro, HCL Tech and Cognizant.
Exhibit 4: Few of the mid-tier players have seen a sharp decline in margins over the past 4 quarters
EBITDA Margin
Sep'13
Dec'13
Mar'14
June'14
Sep'14
Dec'14
Infosys
26.1%
27.8%
28.3%
26.9%
28.3%
28.3%
TCS
31.6%
31.4%
30.9%
28.8%
28.6%
28.9%
Wipro
25.1%
25.8%
27.3%
25.6%
24.8%
24.8%
HCL Tech
26.3%
26.0%
26.7%
26.3%
25.1%
24.1%
Tech Mahindra
23.3%
23.2%
21.2%
18.1%
20.0%
20.4%
Mindtree
20.8%
19.5%
21.5%
20.0%
19.8%
20.0%
Persistent
25.9%
27.7%
27.0%
21.8%
20.6%
22.0%
Hexaware
23.8%
22.5%
19.2%
16.7%
18.0%
17.7%
NIIT Tech
15.1%
16.3%
15.1%
13.8%
14.3%
14.6%
Tier I Companies
Tier II companies
IT Services
Old
FY16E
New % change
Old
FY17E
New % change
Old
Change in TP
New % change
Old
New % change
Tier I
TCS
108.3
110.4
1.9%
127.6
129.0
1.1%
146.8
146.6
-0.2%
2860
2860
0%
Infosys
108.6
109.1
0.4%
120.7
123.7
2.5%
133.3
136.2
2.2%
2100
2250
7%
Wipro
36.0
35.5
-1.5%
39.7
41.1
3.5%
44.4
45.0
1.3%
630
630
0%
HCL Tech
104.5
106.6
2.0%
113.7
116.9
2.8%
126.6
130.6
3.1%
1700
1750
3%
Tech Mahindra
136.1
138.5
1.7%
160.5
171.5
6.8%
177.9
191.3
0.1%
2650
2800
6%
Mindtree
63.8
65.5
2.6%
73.3
75.6
3.1%
83.1
85.1
2.4%
970
1030
6%
Hexaware
10.9
10.7
-1.8%
13.7
14.6
6.5%
15.9
17.3
8.6%
190
230
21%
eClerx
83.1
81.0
-2.6%
96.7
95.2
-1.5%
105.6
104.4
-1.2%
1200
1220
2%
NIIT Tech
30.3
30.6
0.9%
34.2
35.7
4.2%
37.9
39.8
5.1%
360
380
6%
Persistent
75.2
76.3
1.5%
80.6
85.2
5.6%
92.1
99.0
7.5%
1100
1400
27%
Mphasis
32.3
32.4
0.2%
34.2
35.7
4.5%
33.3
35.2
5.6%
400
410
2%
3.6
3.5
-2.9%
4.7
4.6
-1.5%
5.0
5.3
6.6%
47
45
-4%
Tier II
Firstsource
Source: Emkay Research
While we continue to prefer Tier Is over Tier IIs our order of preference within Tier Is
changes to Infosys, HCL Tech, TCS in that order Versus Infosys, TCS and HCL Tech
earlier. We also upgrade Hexaware to ACCUMULATE, TP RS 230 (V/s REDUCE, TP RS 190
earlier) as we back upsides to earnings aided by strong operating performance ahead. We
continue to back downsides for REDUCE rated Mindtree and SELL rated Persistent given
expensive valuations and downside risks to margins/earnings in the near/medium term.
Exhibit 6: IT Services valuation summary
Target
EPS
P/E
EV/EBIT
ROE
Price
New FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E
Co Name
CMP Recco.
Infosys
2,013 Buy
2,250
109
124
136
18.5
16.3
14.8
13.9
11.7
10.2
25.4
26.0
25.0
TCS
2,579 Accumulate
2,860
110
129
147
23.4
20.0
17.6
18.1
14.9
12.8
35.4
34.3
32.6
630
35
41
45
15.7
13.6
12.4
11.9
10.0
14.0
23.4
23.1
44.1
Wipro
557 Hold
HCL Tech**
1,605 Accumulate
1,750
107
117
131
15.1
13.7
12.3
12.5
11.0
9.6
39.8
33.7
30.2
Tech Mahindra
2,607 Accumulate
2,800
139
171
191
18.8
15.2
13.6
14.3
11.2
9.9
28.4
27.5
24.4
Mindtree
1,299 Reduce
1,030
65
76
85
19.8
17.2
15.3
15.5
12.3
10.4
28.3
24.5
21.4
eClerx
1,324 Hold
1,220
81
95
104
16.4
13.9
12.7
12.1
9.8
8.4
38.5
37.8
34.9
Hexaware*
Persistent Systems
204 Accumulate
1,874 Sell
230
11
15
17
19.1
14.0
11.8
13.3
9.9
8.6
27.1
36.2
41.0
1,400
76
85
99
24.6
22.0
18.9
20.7
16.2
13.6
19.0
21.7
21.5
NIIT Tech
380 Hold
380
31
36
40
12.4
10.7
9.5
7.9
6.4
5.3
13.9
14.7
14.9
Mphasis
390 Hold
410
35
32
36
11.1
12.0
10.9
6.8
7.5
6.4
14.8
13.3
13.7
45
3.5
4.7
5.4
9.9
7.5
6.5
9.2
6.9
5.7
10.6
12.5
12.7
Firstsource
35 Accumulate
Source: Bloomberg, Companies, Emkay Research* Note: FY15 refers to FYDec'14 for Hexaware and so on, ** FY15 refers to FY ending June'15 for HCL Tech and so on.
IT Services
Name
Dec'14
Sep'14
1,39,291
1,33,420
1,30,260
6.9%
39,434
37,730
36,200
8.9%
28.3
28.3
27.8
52 bps
31,625
30,960
28,750
10.0%
27.7
27.1
25.2
10.0%
2,45,901
2,38,165
2,12,940
15.5%
71,150
68,087
66,866
6.4%
28.9
28.6
54,699
52,883
53,140
2.9%
27.9
27.0
27.2
2.9%
1,19,702
1,18,161
1,13,317
5.6%
24,748
23,670
23,418
5.7%
20.7
20.0
20.7
1 bps
21,809
20,848
20,148
8.2%
8.8
8.5
8.2
8.0%
Infosys
CMP(Rs)
2,013
2,312
Reco
Buy
2,250
% Upside
12%
EPS (Rs)
CMP(Rs)
2,579
5,052
Comments
TCS
Reco
2,860
% Upside
11%
EPS (Rs)
557
Wipro**
CMP(Rs)
Mkt Cap (Rs bn)
1,376
Reco
Hold
630
% Upside
13%
EPS (Rs)
1.3% Building in a 2.8% QoQ US$ revenue growth, ~170 bps cross
currency headwinds. IT Services EBIT margins estimated at
4.6% 22%,flat QoQ in reported terms but up ~50 bps adjusted for
one offs in Sep'14 quarter. Profits expected to increase by ~4.6
64 bps % QoQ. Key things to watch out for (1) Mar'15 quarter revenue
guidance( we expect a 1.5-3.5% QoQ growth outlook), (2)
4.6%
outlook for business from key verticals/geographies and (3)
margin outlook
4.6%
IT Services
Exhibit 8: IT Services
Name
Dec'14
Sep'14
Comments
HCL Tech
CMP(Rs)
1,605
90,338
87,350
81,840
10.4%
3.4%
1,127
21,816
21,920
21,250
2.7%
-0.5%
24.1
25.1
-95 bps
17,607
18,740
14,950
17.8%
-6.0%
24.9
26.5
21.2
17.9%
-5.9%
57,686
54,879
48,985
17.8%
11,771
10,973
11,363
3.6%
20.4
20.0
8,141
7,196
8,899
-8.5%
33.7
29.8
37.4
-9.8%
2,410
2,318
2,195
9.8%
862
816
888
-2.9%
Reco
1,750
% Upside
9%
Tech Mahindra
CMP(Rs)
2,607
614
2,800
7%
eClerx Services
CMP(Rs)
Mkt Cap (Rs bn)
1,324
40
Reco
Hold
35.8
35.2
1,220
650
623
623
4.2%
EPS (Rs)
21.1
20.2
20.3
3.7%
% Upside
-8%
IT Services
Exhibit 9: IT Services
Name
Dec'14
Sep'14
Comments
Hexaware Technologies
CMP(Rs)
204
7,061
6,706
6,200
13.9%
61
1,250
1,208
1,394
-10.4%
17.7
18.0
Reco
230
895
861
1,032
-13.3%
% Upside
13%
EPS (Rs)
3.0
2.9
3.4
-13.4%
1,874
4,997
4,642
4,328
15.5%
1,101
957
1,198
-8.1%
Persistent Systems
CMP(Rs)
Mkt Cap (Rs bn)
75
Reco
Sell
22.0
20.6
1,100
814
713
642
26.8%
% Upside
-41%
EPS (Rs)
20.4
17.8
16.1
26.8%
5,912
5,883
5,873
0.7%
-10.9%
NIIT Tech
Reco
Hold
14.4
14.0
380
462
400
531
-13.0%
% Upside
0%
EPS (Rs)
7.7
6.7
8.9
-13.0%
15.6%
CMP(Rs)
380
23
853
822
957
IT Services
Name
Dec'14
Sep'14
9,142
8,886
7,906
15.6%
1,832
1,755
1,541
18.9%
20.0
19.8
19.5
55 bps
1,375
1,374
885
55.5%
16.4
16.4
10.5
55.3%
14,648
14,649
15,640
-6.3%
2,200
2,146
2,636
-16.5%
15.0
14.6
1,584
1,602
1,870
-15.3%
7.5
7.6
8.9
-15.3%
Comments
Mindtree
CMP(Rs)
1,299
109
Reco
Reduce
1,030
% Upside
-21%
EPS (Rs)
2.9% Building in ~0.6% QoQ US$ revenue growth with 110 bps
cross currency headwinds. Margins estimated to improve by
4.3% ~2 bps QoQ to 20% led by currency depreciation and growth
leverage despite wage hikes for ~15% of the staff. We expect
28 bps net profits to remain flat QoQ. Key things to watch out for (1)
growth outlook in both IT Services (Key verticals like
0.1%
Manufacturing and BFSI) and PES business, (2) outlook on
-0.1% margins and attrition, (3) large deal pipeline.
Mphasis*
CMP(Rs)
390
82
Reco
Hold
410
% Upside
5%
EPS (Rs)
Firstsource Solutions
CMP(Rs)
35
23
Reco
Target Price (Rs)
% Upside
7,907
7,740
7,998
-1.1%
2.2%
933
949
931
0.2%
-1.7%
11.8
12.3
11.6
15 bps
-46 bps
520
612
483
7.6%
-15.1%
EPS (Rs)
0.8
0.9
0.7
7.4%
-15.1%
IT Services
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