Top-tier Indian IT names have rallied in the recent past, led by favorable data points from the U.S.
Tata Consultancy Services (TCS) now trades at a premium of about 15-20 percent to Infosys Limited (NASDAQ:INFY)/Wipro LTD. (NYSE:WIT) while HCL Technologies trades at a marginal discount to the Sensex.
Mid January, tech bellwethers Infosys and TCS reported their third-quarter numbers. While the results were largely in line with Street expectations, flattish fourth-quarter revenue guidance from Infosys dampened the sentiment. In addition, TCS management suggested that discretionary projects were getting delayed and said that discretionary spend in the fourth quarter was expected to start slowly.
However, over the last three weeks or so, TCS has moved up about 15 percent while Infosys is up about 8 percent. In the same time frame, the Sensex is up about 7 percent while the Indian rupee has further appreciated by about 2 percent.
Jefferies said there have been some positive data points coming out of the U.S, the lower unemployment levels a case in point. Further, a good guidance from Cognizant and NASSCOM forecasts for fiscal 2013 boosted the investor sentiment.
Last week, Cognizant said it earned $240.1 million, or 78 cents a share share, higher than $206.2 million, or 66 cents a share, in the fourth quarter of 2010. On a non-GAAP basis, the company earned 84 cents a share. Revenue for the fourth quarter of 2011 rose 27 percent to $1.66 billion.
For the first quarter, Cognizant sees earnings of 79 cents a share on GAAP basis and 85 cents a share on non-GAAP basis on revenue of at least $1.70 billion. Wall Street expects the company to earn 79 cents a share on revenue of $1.71 billion, according to analysts polled by Thomson Reuters.
For the full year 2012, the company expects earnings of $3.43 a share on a GAAP basis, and $3.69 a share on a non-GAAP basis on revenue of at least $7.53 billion, up at least 23 percent from 2011. Analysts expect earnings of $3.44 a share on revenue of $7.53 billion.
For the year 2011-12, aggregate revenue for the Indian IT-BPO sector is estimated to cross $101 billion, with eports accounting for $69 billion, growing by 16.3 percent over the last fiscal year.
For fiscal 2013, the export revenues are expected to grow by 11-14 per cent while the domestic revenues will grow by 13-16 percent, according to National Association of Software and Services Companies (NASSCOM).
NASSCOM added that India retains its number one position as the world's leading sourcing location for IT-BPO services, despite the rise of several alternative sourcing locations, with a share of over 58 percent in 2011. India-based resources are estimated to account for about 60-70 percent of the offshore delivery capacities across the leading multinational IT-BPO players.
For the year ahead, global technology spending is estimated at 4.5 percent and global sourcing is expected to be a major driver of technology spending.
Following are the valuation multiples of top Indian IT companies according to Jefferies:
TCS – Price target of Rs.1,245 is based on 19x Jun 13E EPS. This is within the 6-23x price-to-earnings (PE) band that the stock has traded in over the past three years and is higher than the average of about 17x to factor in the recent superior financial performance.
Infosys – Price target of Rs.3,040 is based on 18x Jun 13E EPS. This is within about 11-25x PE band that the stock has traded in over the past three years and is slightly lower than the average of about 19x to factor in the earnings deceleration.
Wipro – Target price of Rs.510 is based on 18x Jun 13E EPS. This is within about 6-22x PE band that the stock has traded in over the last three years and marginally higher than the average of about 17x. This implies a marginal discount of about 5 percent to target multiple for TCS as the company has lower margins and return ratios.
HCL – Price target of Rs.555 is based on 15x Jun 13E EPS. This is within about 5-19x PE band (average about15x) that the stock has traded in over the past three years. It also implies about 20 percent discount to target multiple for TCS and factors in the lower margins and return profile for HCL.