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India IT Sector Summary

Core Content

The report provides an analysis of the Indian IT sector, focusing on the impact of currency fluctuations, revenue growth, earnings, and the performance of key companies. It also highlights the improving demand and the role of digital contracts in the sector's growth.

Main Points

• Currency Impact: The USD has strengthened against most currencies, including EUR, GBP, and AUD, which could negatively affect USD revenue. However, the INR has depreciated, leading to a positive impact on INR revenue and EBIT margins.

• EPS Forecast: The report forecasts an increase in EPS by 0.5 - 8.2% for FY19-21E, driven by INR depreciation and improving demand. This is expected to benefit the sector in the second half of FY19.

• Digital Contracts: Digital contracts are moving from the proof-of-concept stage to actual contracts, contributing to the sector's growth. This is a key catalyst for future performance.

• Sector Valuation: The NSE IT Index has gained 37% YTD and is trading at 18.2x 1-year forward EPS, close to 1SD above its 10-year mean of 19x. This suggests that some positives have been factored in, but further improvements in demand and market share in digital contracts are expected.

Key Information

• USD/INR Impact: A 1% change in USD/INR affects EBIT margins by 20-40bps and earnings by 1.5 - 2%.

• Revenue Changes:

  • USD revenue is expected to decline by 0.8 - 1.7% for FY19-21E due to USD appreciation.
  • INR revenue is forecast to increase by 1.6 - 5.4% for FY19-21E due to INR depreciation.

• Earnings Sensitivity: The report notes that the sector's earnings are highly sensitive to USD/INR changes, with 1% affecting earnings by 1.5 - 2%.

• Company-Specific Outlook:

  • TCS: Forecast to lead in revenue growth, with USD revenue growth of 9.8 - 10.7% and an EPS CAGR of 20.2%. Valued at 21x FY20E EPS, still at 1SD below its 5-year mean.
  • INFO: USD revenue growth of 6.4 - 10.2% and EPS CAGR of 13.6%. Valued at 17x FY20E EPS, with a 14% upside.
  • HCLT: Strong presence in engineering services and application services, with USD revenue CAGR of 14.8% and EPS CAGR of 15.9%. Valued at 14x FY20E EPS, its 5-year average.
  • WPRO: Upgraded from SELL to HOLD, with a 26% upside. Valued at 14x FY20E EPS, still at 1SD below its 5-year mean.
  • TECHM: Forecast to achieve 16.5% EPS CAGR, with a 14.5x P/E multiple. Valued at 860 INR, with a 14.5x P/E.
  • MPHL: Expected to grow at 13.9% revenue CAGR, valued at 17x FY20E EPS, which is 2SD above its 5-year mean.
  • HEXW: Forecast to achieve 14.8% USD revenue CAGR, valued at 18x FY19E EPS.
  • CYL: Upgrade to BUY from HOLD, with an 10.3% upside. Valued at 14.5x P/E, in line with its 5-year average.
  • PSYS: Upgrade to BUY from HOLD, with a 6% upside. Valued at 15x FY20E EPS, still at a 20% discount to its 5-year average.
  • TAKE: Upgrade to BUY, with a 72% upside. Valued at 12x FY20E EPS, with a 12.0x P/E multiple.

Summary Table of Key Companies

Summary of EBIT Margin Changes

• EBIT margin changes are influenced by USD/INR movements, with 1% affecting margins by 20-40bps.
• INFO, TCS, and TECHM are expected to benefit the most from EBIT margin improvements.

Conclusion

The Indian IT sector is experiencing positive trends in revenue and earnings, driven by INR depreciation and improving demand. While USD appreciation poses some risks, the sector's focus on digital contracts and improved EBIT margins is expected to support further growth. The report recommends BUY ratings for TECHM, HCLT, and TAKE, and HOLD for others, with specific targets and valuations based on expected performance and market conditions.