Infy, Tech Mahindra/Satyam up to Buy, ~25% pot. upside
We lift POs across our IT services coverage for 18-28% potential stock upside in
our Buy rated large caps. Key drivers: a) Earnings upgrades of up to 7% in
FY14/15, led by improved revenue confidence b) consequent re-rating of our
stocks by 7-8% and c) roll-forward of earnings by six months. We upgrade Infosys
and Tech Mahindra (on pro-forma combined financials including Satyam) to Buy
on early signs of success in addressing company-specific challenges. In our view,
Infy could surprise in Sept or Dec. quarter, TCS will likely report strong but largely
discounted results and Wipro could disappoint on quarter/guidance.
Demand environment looks up
Anecdotal evidence indicates that deal closures are picking up and softness in the
banking vertical is bottoming. This is likely due to increased confidence on
business outlook post the recent easing measures by central banks, in our view.
Not only are we seeing continued focus on optimization of the tech landscape, but
we are also hearing of a sustained pick-up in transformational deals. These deals
aim to – a) use technology to transform business models (eg, online retailing) and
processes (digital marketing, mobility banking, analytics) and b) transform the
client’s tech landscape by leveraging cloud, social media etc. Steady realization.
Upgrading Infosys to Buy; Potential 25% stock upside
Post 20% YTD underperformance vs Sensex, we upgrade INFY to Buy with a PO
of Rs3,200 on – a) 6-7% earnings upgrades in FY14/15 b) re-rating the stock from
a target of 14x 1yr forward PE to 16x, narrowing the discount vs. TCS to 10%.
INFY seems to be course-correcting its response in the commoditized application
& IT infrastructure maintenance (IMS) business, where it was losing share, by
exploring alternate delivery models. Also, with greater empowerment to the field
and transformation in sales, we anticipate improved customer responsiveness and
mining. Most importantly, with the organization restructuring well under way,
management seems to be more settled and in execution mode, as reflected in
initiatives taken to address IMS/apps maintenance and the Lodestone acquisition.
Tech Mahindra, Satyam up to Buy; >25% potential upside
We reset our estimates and raise Tech M to Buy, with a PO of Rs1,150, given our
forecast healthy 15% EPS CAGR over FY12-15 for the combined entity (final
merger approval expected by year end). Increasing traction in managed services
deals in Europe and Emerging Markets, an area of strength for TechM, increases
our confidence in rev outlook. Satyam’s rev traction is led by client mining and
increased deal participation rates. Moreover, improving scale, productivity and mix
lend margin support. At 10xFY14e combined financials, stock is attractively
valued and increasing revenue visibility, scale and liquidity should help re rate to
12x 1-yr forward. Satyam’s PO of Rs135 is based on announced swap ratio of 8.5
s hares for 1 share of Tech M. We are 5% ahead on FY14 consensus EPS.
