IDFC(Initiaties)
Indian IT sector-
Indian IT is expected to deliver sustainable double-digit growth despite the volatile economic recovery. Improved business mix would buoy wallet share gains driven by opportunities in disruptive technologies like Cloud, Digital, ER&D, IIoT, BPO and AI. Companies with the right mix of verticals (BFSI, Retail and Telecom – early adopters of Digital) and service offerings (Consulting, Application Development and BPO) would lead the industry. We expect Indian IT to register a CAGR of 12% over FY14-20E. Our picks in the space are the growth leaders – Infosys, Tech Mahindra, TCS, Mindtree, Persistent and Hexaware. Infosys and Tech Mahindra are at the cusp of an earnings upgrade and rerating cycle, whereas TCS would track earnings growth. Among our mid-cap picks, Mindtree, Persistent and Hexaware would outperform driven by sustained industry leading performances. Moreover, the low-to-high-teen valuations of Indian IT despite prospects of double-digit revenue growth provide cushion from downside.
Double-digit growth momentum to sustain:Indian IT is expected to grow at a double-digit rate (12%+ CAGR over FY14-20) driven by market share gains and sustained recovery in the global economy. We believe growth would be driven by: 1) wallet share gain through accelerated Digital spend in the US (23% CAGR over FY14-20E) and 2) greater penetration into newer European geographies (55% market share of sourcing pie), which are at an early stage of the offshoring cycle.
Disruptive technologies – more opportunities than threats: Indian IT has successfully transitioned from just a cost player to a technology partner by improving the business mix. Though Cloud adoption is shrinking the addressable market for IT Services players, we believe Cloud and other disruptive technologies offer Indian IT capacious growth opportunities over FY14-18E: 1) Cloud – 26% CAGR, 2) Managed Security Services – 16%, 3) Enterprise Digital Transformation – 27%, 4) Global ER&D/PES – 15%, 5) IIoT – 35%, 6) BPO – 13% and 7) AI platform – 17%.
Positive on sector, but volatility to stay: A fragile and volatile economic recovery, smaller deal sizes, and disruption in existing business models would induce volatility in the financial performance of the sector. Nevertheless, the capacious growth opportunities would drive revenue/ earnings CAGR of ~11%/ 15% over FY15-18E for our coverage universe. We initiate coverage on Indian IT Services with an Overweight rating. Our top picks are Infosys, TechM and TCS in large-caps, and Mindtree, Persistent, Hexaware and KPIT in mid-caps.
Indian IT sector-
Indian IT is expected to deliver sustainable double-digit growth despite the volatile economic recovery. Improved business mix would buoy wallet share gains driven by opportunities in disruptive technologies like Cloud, Digital, ER&D, IIoT, BPO and AI. Companies with the right mix of verticals (BFSI, Retail and Telecom – early adopters of Digital) and service offerings (Consulting, Application Development and BPO) would lead the industry. We expect Indian IT to register a CAGR of 12% over FY14-20E. Our picks in the space are the growth leaders – Infosys, Tech Mahindra, TCS, Mindtree, Persistent and Hexaware. Infosys and Tech Mahindra are at the cusp of an earnings upgrade and rerating cycle, whereas TCS would track earnings growth. Among our mid-cap picks, Mindtree, Persistent and Hexaware would outperform driven by sustained industry leading performances. Moreover, the low-to-high-teen valuations of Indian IT despite prospects of double-digit revenue growth provide cushion from downside.
Double-digit growth momentum to sustain:Indian IT is expected to grow at a double-digit rate (12%+ CAGR over FY14-20) driven by market share gains and sustained recovery in the global economy. We believe growth would be driven by: 1) wallet share gain through accelerated Digital spend in the US (23% CAGR over FY14-20E) and 2) greater penetration into newer European geographies (55% market share of sourcing pie), which are at an early stage of the offshoring cycle.
Disruptive technologies – more opportunities than threats: Indian IT has successfully transitioned from just a cost player to a technology partner by improving the business mix. Though Cloud adoption is shrinking the addressable market for IT Services players, we believe Cloud and other disruptive technologies offer Indian IT capacious growth opportunities over FY14-18E: 1) Cloud – 26% CAGR, 2) Managed Security Services – 16%, 3) Enterprise Digital Transformation – 27%, 4) Global ER&D/PES – 15%, 5) IIoT – 35%, 6) BPO – 13% and 7) AI platform – 17%.
Positive on sector, but volatility to stay: A fragile and volatile economic recovery, smaller deal sizes, and disruption in existing business models would induce volatility in the financial performance of the sector. Nevertheless, the capacious growth opportunities would drive revenue/ earnings CAGR of ~11%/ 15% over FY15-18E for our coverage universe. We initiate coverage on Indian IT Services with an Overweight rating. Our top picks are Infosys, TechM and TCS in large-caps, and Mindtree, Persistent, Hexaware and KPIT in mid-caps.
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