Software & Services share price target

We believe stronger cloud adoption/cloud led transformation journey will help service providers can engage with their geographically dispersed customers in a cost-efficient yet personalized manner. Enterprise SaaS and domainspecific SaaS solutions are key to enterprise hybrid multi-cloud strategy. SaaS provides rich feature sets and faster time-to-market for standardized business processes, with low operational overhead and high reliability. We believe that cloud led digital transformation opportunity will bring strong double digit growth for IT services in next 3-5 years given 1) public cloud...

We are shifting to DCF valuation as we continue to see 1) Client spending cost pressures from 1) increased hiring to backfill attrition and fulfill strong order book and 2) increased sub-contracting costs may persist. We note that companies have not changed their FY22 margin guidance, implying no further negative surprises and confidence of managing margins. We remain positive on IT Sector given 1) the sector is in initial phase of strong technology upcycle, 2) digital is becoming mainstream across all verticals, 3) sustained strong deal momentum and faster ramp up, 4) resilient operating...

Our top Result Buys are: Wipro, Coforge, Persistent Systems Mindtree Our top Result Sells are: Cyient, Zensar Technologies

Deal wins (TCS-Proximus, Ericsson, Alcatel-Lucent, Virgin Atlantic; INFY-BP, Archrock, RXR, Britvic; HCLT-Hitachi ABB; WPRO-Levi Strauss, Bristol Water; LTI-Hoist Finance) remained strong in 1QFY22. Acquisition volumes continued in 1Q (WPRO-Ampion; TECHM-DigitalOnUs, Eventus; LTI-Cuelogic; PSYS-Sureline Systems select assets; MTCL-NxT Digital; ZENT-M3bi) to augment capabilities in cybersecurity, DevOps, product development and analytics. We believe that the elevated supply-side pressure is transient and will normalise over the next 1-2 quarters. Strong deal momentum (both pipeline and large deal bookings), broad-based industry-vertical trends towards digital transformation, positive cyclical indicators in product development/engineering services and consulting, accelerated hiring, and improving alignment with hyperscalers/SaaS indicate continuity of momentum for the sector (coverage universe). Tier-1 IT is expected to deliver 4% QoQ (3% organic) and 20% YoY (base impact) revenue growth. In comparison, mid-tier IT is expected to post 3.5% QoQ (range of -3.6% to +5.9% QoQ) with larger mid-tier averaging >4.5% QoQ. Margin will be impacted by wage increases, increase in sub-contracting/attrition, offset partly by operating leverage and FX/offshoring.

Things to monitor for Q1FY22E 1) Conversion of large deal pipeline, 2) Margin headwinds (utilization and attrition) and 3) Annual budgeting exercise. reduces. We downgrade LTI to Accumulate as stock has run up 12.6% in last two months and all positives (strong revenue growth and deal momentum, strong cloud and data capabilities, top tier alliances across partners and focusing on winning F-500 clients) are factored in 28X FY23 valuations. We have put Wipro and Persistent Under Review' because the stocks have run up 30% and 52% respectively vs NIFTY IT index gain of 5% in past three...

Things to monitor for Q1FY22E 1) Conversion of large deal pipeline, 2) Margin headwinds (utilization and attrition) and 3) Annual budgeting exercise. reduces. We downgrade LTI to Accumulate as stock has run up 12.6% in last two months and all positives (strong revenue growth and deal momentum, strong cloud and data capabilities, top tier alliances across partners and focusing on winning F-500 clients) are factored in 28X FY23 valuations. We have put Wipro and Persistent Under Review' because the stocks have run up 30% and 52% respectively vs NIFTY IT index gain of 5% in past three...

TCS and Wipro's margins are expected to be impacted by wage hikes. TCS will have a second wage hike for all employees while Wipro will have a wage hike for 20% of employees & dilution in margins due to Capco acquisition. For Infosys, we expect flat margins due to absence of wage hikes. Adjusting for HCL Tech's one-time bonus in Q4FY21 (which impacted margins by ~370 bps), the company's margins are expected to decline 50 bps QoQ due to investment in geo & sales expansion. Midcaps also expected to witness margin dip...

Pickup in large travel deal wins from 2HFY21 Mindtree (2 deals), Coforge (2 deals), TCS (3 deals), HCLT (1 deal) IT services companies are likely to be major gainers from structural changes in travel industry post Covid. We believe emerging themes of contactless booking, check-in, improved safety standards will require extensive use of technology for a smooth experience. Although full recovery in travel industry is 1-2 years away, worst seems over given rising vaccination and increase in domestic travel across geographies. Since 3Q21, IT services travel vertical...

Pickup in large travel deal wins from 2HFY21 Mindtree (2 deals), Coforge (2 deals), TCS (3 deals), HCLT (1 deal) IT services companies are likely to be major gainers from structural changes in travel industry post Covid. We believe emerging themes of contactless booking, check-in, improved safety standards will require extensive use of technology for a smooth experience. Although full recovery in travel industry is 1-2 years away, worst seems over given rising vaccination and increase in domestic travel across geographies. Since 3Q21, IT services travel vertical...

based demand environment characterized by (1) cost take-out and transformation led outsourcing or lift-shift-transform deals and (2) digital and cloud adoption led deals. Consecutive quarters of record hiring(freshers)...

Infy is probable candidate to announce buyback given its strong FCF/PAT conversion (105% on 9MFY21), strong cash balance & lower payout ratio. in payout of most of the IT companies in FY20 as compared to their historical average payout. (Exhibit 4). However, strong cash flow management in FY21 resulted in improving capital allocation for HCLT & TechM. While TCS and Wipro have healthy FCF/PAT, they have recently completed...

Things to monitor for Q4FY21E 1) Conversion of large deal pipeline, 2) Margin headwinds and 3) Annual budgeting exercise. will decline a bit in coming quarters on account of wage hike and bonuses, but will comfortably remain 100-150bps higher than pre-Covid levels in FY22. We expect TCS, INFY, Wipro to lead growth in Tier-1 and LTI, MTCL, LTTS in Tier-2. We expect Infy to guide 12-14% YoY CC revenue growth & 22-24% EBIT margin guidance for FY22E. Similarly, HCLT can give revenue guidance of 10-12% YoY CC and margin guidance of 20-21% for FY22E. We expect...

The key are as follows: Our top Result Buys are: Infosys, TCS, HCL Tech, L&T; Infotech, Mindtree Our top Result Sells are: Cyient, Zensar Technologies

Infosys & Wipro are expected to register ~130-150 bps decline in EBIT margins due to wage hike, lower utilisation, higher travel & facility cost. HCL Technologies is expected to report 375 bps decline due to partial wage hike and one-time bonus of | 700 crore. However, TCS is expected to report 186 bps higher margins due to absence of wage hikes. In midcap also margins to be impacted by wage hikes In midcap companies, LTI & MindTree are expected to report 172 bps & 263 bps decline in margins led by wage hike, lower utilisation & reskilling,...

Our picking order from Large-cap: HCL Tech, Tech Mahindra, Infosys, TCS, Wipro Our Picking order from Midcaps: Persistent Systems, LTTS, Mindtree, LTI, Cyient, Zensar

We expect the IT sector revenue to grow at 14.4/10.8% (in USD terms) for FY22/23E with mid-tier IT growth to come in at 15.1/12.5%. We expect a margin expansion of ~55ps over FY21-23E (10/45 bps expansion in FY22/23E), following a 220bps expansion in FY21, leading to ~17% EPS CAGR over FY21-23E. We remain higher than consensus (HSIE EPS is ~6% ahead for FY23E) and expect the outperformance to continue. We increase multiples for Mindtree/Cyient/Zensar/Sonata and roll forward to Mar-23E for our coverage universe. Earnings for Wipro is revised downwards by 6.5/3.9% due to acquisition impact while we have increased estimates for Mindtree/Zensar/Sonata/Teamlease. We prefer INFY, HCLT, Persistent and Sonata We hosted our 5th Tech Investor forum with 20 corporates/experts participating in the event (virtual). The participants represented the full spectrum: (1) Large-cap IT services (TCS, Infosys, Wipro, Tech Mahindra, L&T; Infotech), (2) IT/ER&D; midcaps & small caps (Mphasis, L&T; Technology, Mindtree, Tata Elxsi, Happiest Minds, Zensar, Sonata, Intellect and Mastek), (3) Staffing (Teamlease) and (4) Tech industry experts (IBM, Capgemini, Salesforce, ISG, and Captive expert ANSR). The commentary across companies/experts indicated a continuation of multi-year industry tailwind (cloud acceleration) and optimism around the sector hitting and sustaining double-digit growth rate was validated

Growing from strength to strength

transformation. Most leading companies are simultaneously transforming multiple parts of their enterprises. Pre-COVID digital leaders are racing to widen the gap and digital laggards are racing to leap frog. This is driving force for broad based recovery across IT industry. ACN's outsourcing order book stood at 6.3$ Bn, grew 46.5% YoY in USD terms (quarterly average of 5.93$ Bn in FY20). This mirrors well for demand for Tier-1 Indian IT companies. Consulting order book grew 9.3% YoY (+2.2% QoQ) indicating pickup in discretionary spend. ACN management stated that...

transformation. Most leading companies are simultaneously transforming multiple parts of their enterprises. Pre-COVID digital leaders are racing to widen the gap and digital laggards are racing to leap frog. This is driving force for broad based recovery across IT industry. ACN's outsourcing order book stood at 6.3$ Bn, grew 46.5% YoY in USD terms (quarterly average of 5.93$ Bn in FY20). This mirrors well for demand for Tier-1 Indian IT companies. Consulting order book grew 9.3% YoY (+2.2% QoQ) indicating pickup in discretionary spend. ACN management stated that...