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MOSL: INDIA TECHNOLOGY - Braced to maximize FY15 opportunity? - Following reinvestment of INR gains




Motilal Oswal Securities Ltd.


11 Feb 2014





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INDIA TECHNOLOGY: Braced to maximize FY15 opportunity Following reinvestment of INR gains, early indicators are encouraging Currency benefits of past two years saw significant reinvestment; and are on track to yield fruition amid healthy demand upturn (reflected in our 60-110bp margin upgrades across the top tier with operating leverages kicking in) While currency drove 15-51% FY14E earnings growth across top tier, we expect stronger fundamentals to drive 16-20% earnings growth in FY15 TCS should grow faster in FY15, but it needs to add ~USD2.4b incremental revenues to accelerate by over 1pp+ (v/s USD1.8-2b over FY12-14) Outsourcing TCV makes little case for acceleration at INFO, but discretionary revenues skew keeps us confident. OPM upside may be limited going forward as INFO is relatively under-invested in S&M (though 25% EBIT is the base) Potential to up payout ratio remains maximum at INFO even after factoring their inorganic thrust, and it will be a key re-rating trigger for the stock BT may be bottoming for TECHM. Guidance reaffirms improving revenue trajectory at WPRO, and margins are following suit. Visibility of FY15 growth acceleration is maximum at HCLT. INFO, TECHM are our top picks. CTSHs guidance implies its revenue grow may at best match CY13, but we continue to expect ~1.5pp revenue growth acceleration in FY15 for top-tier IT. WPRO: Improving revenue growth, with margin performance following suit WPROs guidance of last 3 quarters suggests improvement in revenue growth trajectory, and has been clearly better than 5 quarters earlier. We expect the current run rate to continue in FY15. WPRO remains most leveraged to growth coming back, given: [1] its investments in S&M, [2] low utilization, [3] lower offshoring and [4] continued productivity enhancement. We expect a healthy margin performance accompanying sanguine growth. HCLT: Maximum visibility on revenue acceleration HCLT is on track to increase deal signings TCV by 33% YoY (if it signs USD2b TCV of deals even in 2HFY14), implying maximum visibility on revenue growth acceleration. Accompanying improvement in software services growth bodes positively for the business mix. G&A optimization and productivity drove our margin upgrades for HCLT this quarter, and there remains more to extract from the same. CTSH: May not accelerate in CY14 but doesnt raise alarms on fundamentals CTSHs guidance implies unlikely acceleration in the companys CY14 growth. However, it is expected beat that guidance on a higher revenue base, and we continue to expect revenue growth acceleration for top-tier IT. Our current aggregate estimate of ~1.5pp growth delta in FY15E remains intact. INFO, TECHM our top picks We expect gradual but continued recovery in INFOs top line and OPM. Expectations from TCS run high and while we maintain that it will meet them, current valuations keep us Neutral, leaving little room for surprise. TECHMs strong growth has more than offset challenges from BT and we believe it will be able to mitigate much of the impacts from margin headwinds. At ~12.5x FY15E, it remains attractively valued. HCLTs revenue acceleration accompanied with improving business mix (better software services growth) will potentially drive re-rating. WPROs improving revenues is driving better profitability as it remains most geared to growth.

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