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MOSL: TECHNOLOGY - 2QFY14+ : INFO's guidance, TCS' pricing, WPRO's growth - INFO, WPRO our top picks




Motilal Oswal Securities Ltd.


28 Oct 2013





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TECHNOLOGY: 2QFY14+: INFO’s guidance, TCS’ pricing, WPRO’s growth INFO, WPRO our top picks; valuations keep us Neutral on TCS Historical trend suggests that INFO should comfortably beat its 2H guidance. While INFO has been the slated aggressor in pricing, the trend in pricing decline has been similar for TCS too. The trend in TCV of deal signings by top service providers, as shared by TPI, suggests sustained revenue momentum at WPRO. Our pecking order in top-tier IT is INFO followed by WPRO; valuations keep us Neutral on TCS. INFO’s historical 2H trends imply guidance beat Infosys (INFO) posted 15.1% YoY growth in USD revenue in 2QFY14, marking growth acceleration for the fourth quarter in a row. Volume growth in the last two quarters has been the highest in nine quarters. Our confidence that INFO should comfortably beat its 2H guidance stems from the following: [1] implied CQGR is the lowest in six years, barring FY09, when the Lehman crisis had brought about a near-freeze in IT spending, and [2] the current environment in terms of trajectory is exactly the opposite as that in FY09. Pricing trend at TCS as weak as at INFO 2QFY14 was another quarter of continued bridging in the growth gap between INFO and TCS (difference down to 2pp v/s 10pp in 2QFY14). Despite TCS’ comments of stable pricing compared to INFO’s clear pricing aggression over the last few quarters, pricing trends for both companies have been similar. Deal signings data shared by TPI suggests sustained revenue momentum at WPRO CY13 is only the first time when Wipro (WPRO) has been mentioned in the list of top outsourcing providers as per TPI’s outsourcing index, in terms of TCV of deals won in every quarter. In CY09 and CY10, WPRO was among the top-10 in Americas and APAC, and in CY11 and CY12, only in APAC. Given that ramp-ups take time, WPRO’s growth should remain healthy. We are confident of sustained revenue momentum in 2HFY14 as well as in FY15. Prefer INFO, WPRO in the top-tier 2QFY14 was the third quarter in the last four, when INFO surprised positively on revenue growth. Our target price of INR3,750 discounts FY15E EPS by 17x. INFO is our top pick in the sector. While we expect TCS to continue outperforming industry growth, with leading profitability, valuations keep us Neutral on the stock. Our target price of INR2,180 discounts FY15E EPS by 20x. Early signs of fruition of WPRO’s investments were visible in 2QFY14 performance and continued deal closures. WPRO currently trades at 15x FY14E and 13.3x FY15E EPS. Our target price of INR570 discounts FY15E EPS by 16x.

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