Click here to load reader

March Sector Report IT Services f - Edelweiss

  • View
    0

  • Download
    0

Embed Size (px)

Text of March Sector Report IT Services f - Edelweiss

IT 02Mar21 SRPranav Kshatriya +91 22 4040 7495
[email protected]
IT
Cloud fission to spur 16–17% CAGR?
Our cover page pictorial representation is of a chain reaction, which gets triggered
by hyper scalers, and is similar to the fission reaction that undergoes in a nuclear
reactor. We believe based on our several interactions with global
technologists/hyper scaler experts that cloud sales of hyper scalers can lead to 3
times services revenues spread over next 5–6 years. Moreover, the chain reaction
of hyper scalers cloud sale is irreversible, similar to the chain reaction in a nuclear
reactor. The above equation when translated into numbers imply a USD1 trillion
opportunity for technology services, which translates into USD250bn for global
sourcing and approximately incremental USD175bn for Indian IT services, in turn
implying doubling of revenues from current USD150bn of exports or a five-year
revenue CAGR of 16–17%.
( 3
=1
Where β1= 1 ; β2= 1.2β1; β3= 1.15β2 and βy>3 = 1.1β(y-1)
What our ‘Technology Ecosystem’ says
We diligently follow our set up procedure to revalidate our thesis every quarter, and
make a reasonable effort to cover all industry verticals, service segments and
geographies to find outliers, if any, in our thesis. We also ensure that while we get
the immediate picture right, we do not miss out on any deviation in clients’ five-year
spending plans (our track record of feedback has been good; refer to page 14–22).
Our quarterly exercise indicates the following:
Our recent (re)interactions with the who’s who of technology spends across
geographies and verticals reinforce the Techolution thesis (link). Such interactions
over the past 45 days indicate that technology spends are accelerating triggered by:
i) higher cloud adoption across industries/verticals/geographies; ii) substantial jump
in tech spends led by BFSI’s renewed propensity to spend, also spurred by hyper
activity from fintech players; iii) sharp bounce-back in manufacturing and product
engineering services; and iv) retail refocusing on core infrastructure as well as digital,
while telecom and energy spends remain subdued. Also, most CTOs have shown
extreme urgency to make the first move to cloud, reflected in hyper scalers’
revenues. However, the second wave of covid-19 has kept implementation slow,
leading to a sudden jump in deal award activity for outsourcers.
We reiterate—again enthused by emerging and reassuring evidence—that the mega
technology upcycle has just gotten underway. IT companies across the board have
started acknowledging that the margin improvement is more structural than anticipated
earlier. Consensus forecasts, though, are still building in revenue growth and margins
much lower (~150bps) than what companies themselves are indicating. This reality-
consensus mismatch again raises the odds of a big outperformance in Q4FY21 (barring
the currency risk), akin to the preceding three quarters and of 10–15% quick potential
returns by IT stocks over and above their roaring gains since May. Ride the Upcycle.
Margins to rise; execution savings higher than incremental costs
We estimate margins of key companies in our coverage to improve 250–350bps in
the next three years over FY20 levels and believe current consensus earnings
forecasts are still 10–25% lower, even in the base-case scenario. Our optimism on
Cloud fission implies doubling of industry
revenues in five years
been spot on in the past
Client spend momentum remains robust
2 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
margins is based on the following: i) sustained moderation in sub-contractor costs;
ii) stable wages at the bottom of the pyramid; iii) massive physical and virtual
training capabilities enabling lower skilling costs; and iv) opening up of talent pool in
tier 3-4 towns and narrowing gap between EBITDA and EBIT margins owing to lower
capex and depreciation, and substantial savings in overheads.
Key risks to our thesis: Broadly remain same
Serious data breach in the global technology ecosystem (FAANGS), adverse currency
movement, sharp depreciation of USD vis-à-vis INR and other currencies, substantial
cut in US technology budgets, particularly in digital, adverse regulatory provisions
and visa restrictions in key client markets could affect capability of Indian IT
companies to execute profitably.
Recommendations and conclusion: Just beginning of tech upcycle
We don’t have a negative view or ‘REDUCE’ on any of our under coverage stocks and
strongly believe that each company in the sector stands to gain from the powerful
tailwind that continues to gain heft. This tailwind will benefit one and all—and we
have been reiterating this through our Techolution series (World of apps dated June
8; Wave before storm dated September 2; Multiple Multipliers dated October 11).
A substantial rub-off effect on mid- and small-size companies would be in order too
aided by cost structure innovation and their high earnings sensitivity to margins. We
maintain ‘BUY’ on HCL Tech (TP INR1,616) Infosys (TP INR2,124) TCS (TP INR4,176)
Wipro (TP INR550), Tech Mahindra (TP INR1,450), LTI (TP INR4,732), LTTS ( TP
INR2,994) and Mindtree (TP INR2,821).
Edelweiss estimates
Revenues EBIDTA PAT EPS
(%)
Rationale behind our thesis of industry clocking 16–17% CAGR
Financial equation of reaction in cloud reactor:
If n=200bn (assumed hyper scalers’ cloud revenues in base year), y=year, X axis =
plotting services revenues from year 1 to 5; and Y axis=Hyper scalers’ revenue from
year 1 to 5, then it implies USD1 trillion of opportunity for technology services.
Then,
( 3
=1
Where β1= 1 ; β2= 1.2β1; β3= 1.15β2 and βy>3 = 1.1β(y-1)
Yes, the above is a financial equation of the pictorial representation of the chain reaction
that takes place in a nuclear reactor. We believe the impact of cloudification on global
technology spends closely resembles the above chain reaction and we call it “Cloud
reactor”. Global technology experts/CEOs believe that the follow through revenues for
technology/allied services is almost 3x of revenues of hyper-scalers (AWS, AZURE, GCP,
IBM and others). Interestingly, of the above, at least 1.5x are technology services and
balance allied services/products, but spread over five-six years. When we plot the above
revenues in an equation like the one attempted above, it closely resonated into a chain
reaction similar to the fission reaction that undergoes in a nuclear reactor.
The most important aspect of the above “nuclear reactor” which is comparable to
our thesis of “cloud reactor” is the irreversible/unstoppable nature of the fission
reaction which it undergoes ones triggered. In a “cloud reactor” also, similar to a
“chain reaction”, once a reaction is triggered in a reactor the fission can’t be
controlled; similarly, once a cloud subscription is sold, the follow-on revenue is
irreversible and unstoppable. The above nature of cloud business gives us the
confidence once again to reiterate our view that the current “ Techolution – Tech
Upcycle” is not any up-fronting of demand or a temporary phenomenon, but a very
long (three-five years) robust spend cycle.
The above equation, if translated into actual numbers, implies almost USD1tn of
additional spends from cloud over the next five-six years. Of this, global sourcing
at current rate of 25% should be USD250bn and India’s market share at current
rate of 70% should be incremental USD175bn (from current USD150bn exports),
implying Indian IT industry’s five years’ CAGR of 16-17% and superior growth rates
for our preferred picks.
Based on the above equation (which has been built based on innumerable inputs
from global technologists/experts/deal advisors) we believe even in a bear-case
scenario, Indian IT exports (current USD150bn) will double to USD300bn, a number
which Nasscom has also projected. In fact, our base and bull case assumptions imply
16% and 17% CAGR, respectively. But, the bigger story is the historical data which
clearly indicate that large Indian IT companies have outgrown industry growth rate
by 3-4% in the past. The above implies that 20-22% sustained revenue CAGR for
stronger/niche players is a realistic possibility going forward with stable margins (ex-
wild swings in currency / regulations).
The above implies that similar to what happened in 2009-16 where one-year forward
multiples looked insanely expensive were much below fair value if the high growth
of the cycle was discounted and hence gave away 10-15x return during the phase of
the cycle (2009-16; TCS, HCL and Tech Mahindra went up 10x, 14x and 16x
respectively- refer to, Techolution: Multiple Multipliers).
The chain reaction in Cloud is similar to
fission in a nuclear reactor
We slightly more bullish than Nasscom on
the industry view
Nasscom IT exports continue to be robust
USD bn FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 CAGR over
FY06-21
Nasscom IT Exports 24 31 41 47 50 59 72 77 88 98 108 117 126 136 147 150 13.1
Growth (%) 33.3% 32.6% 31.0% 14.6% 6.6% 18.7% 21.2% 6.7% 13.8% 12.1% 10.1% 8.3% 7.7% 7.9% 8.1% 2.0%
Source: NASSCOM
Source: Gartner
Top Indian companies outpacing exports growth
Revenue Growth (%) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Nasscom IT Exports 6.6 18.7 21.2 6.7 13.8 12.1 10.1 8.3 7.7 7.9 8.1
TCS 5.4 29.1 24.2 13.7 16.2 15.0 7.1 6.2 8.6 9.6 5.4
Infosys 3.0 25.7 15.8 5.8 11.5 5.6 9.1 7.4 7.4 7.6 8.3
HCL Tech 23.6 31.1 17.0 13.0 14.4 11.1 4.8 11.9 12.4 10.1 15.1
Source: Company, Edelweiss Research, Nasscom
Cloud revenue
Amazon Web Services 7.9 12.2 17.5 25.7 35.0 45.3
Microsoft Cloud Segment 23.7 25.0 27.4 32.2 39.0 48.4
Google - - 5.1 5.8 8.9 13.1
IBM 10.0 13.7 17.0 19.2 21.2 25.1
Alibaba* 0.3 0.7 1.4 2.5 4.0 6.6
Source: Company, Edelweiss Research. *9 months only.
SAP- Cloud revenues have outperformed software and licence revenues
EUR mn CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20 CAGR over
CY13-20
Software licenses and support 13,254 13,767 14,928 15,431 15,780 15,628 16,080 15,148 1.9
Cloud subscriptions and support 696 1,087 2,286 2,993 3,769 5,027 7,013 8,085 42.0
Source: Company, Edelweiss Research
Revenue of Salesforce and Workday
YE Jan FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
CAGR
over
FY11-20
Salesforce 1,657 2,267 3,050 4,071 5,374 6,667 8,392 10,540 13,282 17,098 28.7%
36.8 34.6 33.5 32.0 24.1 25.9 25.6 26.0 28.7
Workday 35 111 790 1,887 1,857 1,970 1,997 2,143 2,822 3,627 54.6%
Source: Company, Edelweiss Research
Market Share FY 05-06 FY 10-11 FY 15-16 FY 19-20
IBM 32% 26% 20% 18%
HP 12% 19% 14% 4%
Fujitsu 19% 15% 16% 14%
Accenture 11% 10% 13% 17%
CSC 10% 7% 3% 0%
DXC 0% 0% 0% 8%
Capgemini 4% 3% 4% 5%
Atos 4% 3% 4% 4%
Logica 2% 2% 0% 0%
CGI 2% 2% 3% 4%
TCS 1% 3% 6% 8%
Infosys 1% 2% 4% 5%
Wipro 1% 2% 3% 3%
HCL Tech 0% 1% 2% 3%
Cognizant 1% 2% 5% 7%
Altran 1% 1% 1% 1%
Total 100% 100% 100% 100%
Source: Edelweiss Research
6 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Trailing and implied PE (FY09-16)- Trailing PE misleading in a growth phase
TCS Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Mkt Cap 4,86,223 14,68,405 22,81,435 22,71,648 24,74,221 42,17,729 49,86,040 47,61,342
PAT ( 1 Yr Fwd) 68,895 87,303 1,06,850 1,39,060 1,91,168 2,16,961 2,42,149 2,62,890
Implied P/E
Trailing P/E 7.1 16.8 21.4 16.3 12.9 19.4 20.6
Implied P/E at 2009 base 5.6 4.6 3.5 2.5 2.2 2.0 1.8
HCL Tech Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Mkt Cap 82,200 2,49,926 3,11,926 2,67,984 4,32,122 8,79,472 11,28,570 11,91,904
PAT ( 1 Yr Fwd) 12,590 16,460 24,300 40,400 65,090 73,170 75,240 86,060
Implied P/E
Trailing P/E 2009 6.5 15.2 12.8 6.6 6.6 12.0 15.0
Implied P/E at 2009 base 5.0 3.4 2.0 1.3 1.1 1.1 1.0
Tech Mahindra Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Mkt Cap 31,802 1,21,159 88,347 73,036 1,19,280 4,26,225 6,11,428 5,02,807
PAT ( 1 Yr Fwd) 7,230 657 16,446 17,554 29,288 25,707 30,701 28,509
Implied P/E
Trailing P/E 2009 4.4 184.5 5.4 4.2 4.1 16.6 19.9
Implied P/E at 2009 base 48.4 1.9 1.8 1.1 1.2 1.0 1.1
Source: Company, Edelweiss Research
We firmly believe in the above equation, which we explained above, and our
confidence is based on our very detailed understanding and analysis of the entire
cloud cycle. We have vetted our above equation with several global technology
experts and have built in reasonable conservatism in it as well to avoid any big
disappointments.
In our view, investors can gain more confidence if they understand the whole value
chain of the cloud migration process right from buying access to cloud from hyper
scalers to the different tools, add-ons and security offerings which come along with
the cloud subscription. In our view, if the whole chain is understood from beginning
to end then our numbers of 16-20% growth will look reasonable and achievable.
Edelweiss Securities Limited
Digital revenue as % of total revenue
Infosys Wipro LTI Mindtree HCL
Q1FY18 22.6% 22.5% 29.0% -- --
Q2FY18 33.6% 24.1% 32.0% -- --
Q3FY18 26.1% 25.1% 33.0% -- --
Q4FY18 26.8% 27.3% 33.0% -- --
Q4FY20 41.9% -- 37.9% 38.5% 19.2%
Q1FY21 44.5% -- 42.0% 37.0% 20.3%
Q2FY21 47.3% -- 42.9% -- 20.9%
Q3FY21 50.1% -- 44.4% -- 22.7%
Source: Company, Edelweiss Research
Source: Bain & Company
Increase in online and digital activities
Source: We are social, Hootsuite
Global technology and business services spend
Source: Nasscom
Source: Nasscom
What does our “Technology Ecosystem” say?
We diligently follow our set up procedure to revalidate our thesis every quarter and
we make a reasonable effort to cover all industry verticals, service segments and
geographies to find out any outliers in our thesis. The reason to run the exercise at
a quarterly interval is simple--all stakeholders generally have a reasonable clarity
(we would say almost 95% + clarity) on quarterly spends by middle of the quarter
and hence it gives us a good idea on what is happening at the ground level. We also
ensure that along with the quarterly update on technology spend, we take an update
if there is any deviation in the earlier communicated five years’ plans. We believe,
while the quarterly update is a good exercise to revalidate our thesis, we are always
more interested in five years’ technology plans of global spenders.
What is the feedback we are receiving now?
Our quarterly exercise indicates the following:
Our recent (re)interactions with the who’s who of technology spends across
geographies and verticals reinforce the Techolution thesis (link). Such interactions
over the past 45 days show technology spends are accelerating triggered by: i) higher
cloud adoption across industries/verticals/geographies; ii) substantial jump in tech
spends led by BFSI’s renewed propensity to spend also spurred by hyper activity
from fintech players; 3) sharp bounce back in manufacturing and product
engineering services; 4) retail refocusing on core infrastructure as well as digital; and
5) telecom and energy remain subdued. Also, most CTOs have shown extreme
urgency in making the first move to cloud as reflected in hyper scalers revenues.
However, the second wave of covid-19 has kept implementation slow, thereby
leading to much higher deal award activity.
We reiterate—again enthused by emerging and reassuring evidence— that the
mega technology upcycle has just gotten underway. IT companies across the board
have started acknowledging that margin improvement is more structural than they
anticipated earlier. Consensus forecasts, though, are still building in revenue growth
and margins much lower (~150bps) than what companies themselves are indicating.
This reality-consensus mismatch again raises the odds of a big outperformance in
Q4FY21 (barring the currency risk), much like the preceding three quarters, and of
10–15% quick returns by IT stocks over and above their roaring gains since May. Ride
the Upcycle.
We cite a few new data points: i) Recovery in the BFSI vertical is much stronger than
anticipated and triggered by fintech disruption. ii) Focus on cloud has taken a clear
precedence over non-cloud spends. iii) Clients across the board are increasing tech
budgets for CY21 led by additional allocations triggered by cost savings in non-
technology costs.
Most clients are allocating a higher proportion to technology spends than
previous years. Besides, their perception of the future use of technology, its
adoption and benefits has undergone a meaningful shift.
Cloud has clearly taken precedence in spends as clients now increasingly and
strongly-than-ever believe that they need agile IT infrastructure to manage
variable data loads. This view is accentuated by the pandemic-led explosion in
online activity.
Clients have seen an increase in scope of technology adoption across
departments and functions post-pandemic, implying much higher adoption of
technology.
ever
across verticals/geographies
10 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
The BFSI segment is witnessing decadal-high budgetary allocations towards
technology triggered by the urgency to integrate the servers to app ecosystems
and connecting them to cloud. This is triggering spends not only in the pure
banking industry (which has been digitalised relatively more) but more so on the
non-banking side, e.g. asset management and wealth management.
Extensive inputs from global tech experts, consultants and technocrats, not to
mention management commentaries over the past nine months, indicate the Indian
IT industry is in a sweet spot to exploit this opportunity. The following reinforce our
confidence:
1. The global sourcing market is USD200–250bn, accounting for less than 25% of
global IT services spends (excluding in-house spends).
2. The Indian IT services sector has been consistently gaining market share by 1–
2% over past several years; its share now stands at ~70%.
3. Large technology players have been gaining substantial market shares at the
cost of large MNC outsourcing players such as IBM and HP (3% to 19% over
FY05–20; refer to Exhibit 5).
4. The current pandemic with higher demand for the WFA (work from anywhere)
model has further entrenched the labour arbitrage, thereby making it virtually
impossible to compete with Indian outsourcing players.
Margins to rise; execution savings higher than incremental costs
We expect margins of key companies in our coverage to improve by 250–350bps
over the next three years over FY20 levels, and believe current consensus earnings
forecasts are still 10–25% lower, even in the base case scenario. Our thesis is based
on a detailed reckoning of every single cost component along with first-hand input
from industry veterans.
Our optimism on margins is based on the following: i) sub-contractor costs, which
have moved up substantially (5-10%) over the past five years, will continue to
witness structural downturn led by higher offshoring and higher acceptability of
WFA model; 2) stable wages at the bottom of the pyramid over more than a decade;
ii) massive physical and virtual training capabilities enabling lower skilling costs; and
iii) new paradigms of execution (work from anywhere to work from home)
containing wage inflation structurally with opening up of talent pool from tier 3-4
towns, thereby widening the labour arbitrage vis-à-vis global players and
strengthening the entry barriers that Indian players have built over the years.
Moreover, it will narrow the gap between EBITDA and EBIT margins owing to lower
capex and depreciation and substantial savings in overheads.
We also beg to differ with the unfounded theory that pricing for Indian IT companies
will come under pressure as margins improve; we argue that margins are a function
of growth above anything else.
Margins not at risk as sub-contractor cost to
fall further
EBITDA margins of Indian IT companies
FY15 FY16 FY17 FY18 FY19 FY20 Q3 FY21
Infosys 27.9 27.4 27.2 27.0 25.3 24.5 28.6
TCS 26.1 28.2 27.5 26.4 27.0 26.8 29.1
HCL Tech 24.7 21.5 22.1 22.6 23.1 23.6 28.2
Tech Mahindra 18.4 16.1 14.4 15.3 18.2 15.5 19.6
Mindtree 19.9 17.5 13.5 13.6 15.2 13.7 23.1
L&T Infotech 20.2 17.5 18.9 16.3 19.9 18.7 23.2
L&T Technology Services 15.2 16.9 18.0 15.4 18.0 19.8 19.7
Source: Company, Edelweiss Research
Our discussions with current and ex-employees of Indian tech industry indicate
structural cost advantage going forward:
The outsourcing business is fundamentally a “work from anywhere” (WFA)
model and is now becoming mainstream with rising acceptance among clients as
well as employees.
Most employees will be happy to WFH even post-lockdown as it gives them relief
from a long, polluted commute, saving sizable time that promotes work-life
balance Moreover, there is a huge untapped WFH workforce available in the
market at 10–15% lower pricing than normal and potentially lower attrition too.
Such professionals will reduce wage cost and by extension additional capex for
facilities and depreciation charges or rentals (most companies spend 100–150bp
on the latter).
A large chunk of travel related to induction, interviews, appraisals, meetings and
training will shift to the electronic mode incrementally, enabling sustained and
substantial savings in travel/hospitality costs (most companies spend about
300bps on travel-related costs).
Last, but not the least, the covid-19 pandemic will engineer a structural change
in clients’ and service providers’ mind sets to revaluate onsite workforce
requirements. This will not only save costs for clients (as onsite billing rates are
3x offshore rates), but will be also margin-accretive to service providers,
although it will entail a somewhat negative impact on revenue growth.
Substantial capex savings with increasing proportion of WFA workforce
Revenues EBIDTA EBIT Depreciation Capex EBIDTA % EBIT% Dep % Capex %
TCS 15,69,490 4,21,184 3,85,884 35,290 23,770 27% 25% 2% 2%
Infosys 9,07,910 2,22,680 1,93,740 28,940 75,690 25% 21% 3% 8%
Wipro 6,13,401 1,26,592 1,06,151 20,861 31,054 21% 17% 3% 5%
HCL Tech 7,06,780 1,66,930 1,38,530 28,400 25,121 24% 20% 4% 4%
Tech Mahindra 3,68,677 57,261 40,628 14,458 13,773 16% 11% 4% 4%
LTI 1,08,786 20,292 17,561 2,731 2,806 19% 16% 3% 3%
LTTS 56,192 11,105 9,403 1,829 1,492 20% 17% 3% 3%
Mindtree 77,643 10,623 7,869 2,754 1,253 14% 10% 4% 2%
Cyient 44,275 5,961 4,083 1,878 660 13% 9% 4% 1%
Persistent 35,658 4,929 3,270 1,660 1,512 14% 9% 5% 4%
Eclerx 14,375 3,236 2,527 709 750 23% 18% 5% 5%
Source: Company, Edelweiss Research
Positive impact on margins due to WFA and consequent savings
Margin Working Infosys TCS HCL Tech Tech M Mindtree LTI LTTS
Margin - FY20 2,130 2,460 1,960 1,100 1,010 1,610 1,650.0
Currency Tailwind ( in bps) 113 101 113 90 113 113 113.0
Travel Expense ( H1 FY21) - Savings 104 130 130 140 194 135 90.0
Increment in H2 FY21 (35) (45) (40) (40) (75) (75) (75.0)
Lockdown Overhead Saving 30 50 60 60.0
Bankruptcies/pricing/discounts - Covid 19 (100) (110) (150) (150) (110) (110) (110.0)
Margin (bps) - FY21 2,241 2,536 2,013 1,190 1,132 1,733 1,728
Margin ( %) - FY21 22.4 25.4 20.1 11.9 11.3 17.3 17.3
Currency Tailwind ( in bps) - - - - - -
Travel Expense Reversal of FY21 (78) (85) (60) (91) (126) (88) (58.5)
Increment (60) (60) (85) (50) (75) (75) (75.0)
Work from home savings 60 50 70 50 50 50 50.0
Savings in lease/depreciation due to WFH 37 40 50 40 40 40 45.0
Other overheads 90 100 100 145 285 135 145.0
Margin (bps) - FY22 2,291 2,582 2,089 1,284 1,306 1,795 1,835
Margin ( %) - FY22 22.9 25.8 20.9 12.8 13.1 18.0 18.3
Increment (60) (60) (60) (50) (75) (75) (75.0)
Work from home savings 60 50 50 40 20 40 40.0
Savings in lease/depreciation due to WFH 41 30 30 30 30 30 30.0
Other overheads 40 40 30 70 30 90 65.0
Margin (bps) - FY23 2,372 2,642 2,139 1,374 1,311 1,880 1,895
Margin ( %) - FY23 23.7 26.4 21.4 13.7 13.1 18.8 18.9
Increment (60) (50) (50) (50) (70) (70) (70.0)
Work from home savings 60 45 50 50 50 50 50.0
Savings in lease/depreciation due to WFH 41 32 30 30 35 35 25.0
Other overheads 30 37 37 57 37 37 35.0
Margin (bps) - FY24 2,443 2,706 2,206 1,461 1,363 1,932 1,935
Margin ( %) - FY24 24.4 27.1 22.1 14.6 13.6 19.3 19.3
Q3 FY21 EBIT Margin 25.4 26.6 22.9 15.9 19.6 20.6 15.2
Source: Edelweiss Research
Edelweiss Securities Limited
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 13
Why should you trust our Technology ecosystem feedback?
We have been regularly publishing our technology ecosystem feedback through our
quarterly notes and we have attempted to put a snapshot of our findings, our
broader inputs and compared them with actuals. The table below clearly compares
our research with actuals both qualitatively and quantitatively.
Most bullish in a decade note – 12th April 2018
What we said in our report based on inputs from our ecosystem feedback?
We visited US’ Bay Area (Ground Zero) to gain deeper insights into the deal
environment and test the veracity of our bullish call on the Indian IT sector. Our
interactions with a large sample of technologists and industry specialists convinced
us that outlook on the Indian IT sector is the "most bullish in a decade". Our
conviction is based on: i) rising number & size of digital deals; ii) recovery of spends
in BFSI, retail & utilities verticals, which contribute ~53% to Indian IT services’
revenues; and iii) front-ending of local hiring mitigating dependency on H1B visas.
Potential INR depreciation is likely to be additional margin tailwind. We reiterate our
positive stance on the sector as: a) we estimate structural acceleration in growth
rate from 6% to 10% over FY18-21; b) uptick in margins with digital gaining scale;
and c) sustenance of high cash distribution (including buy backs).
What was the stock price when we recommended?
Target Price as of 12th April, 2018
Recommendation Price (As on 12th Apr, 2018) TP (As on 12th Apr, 2018)
TCS Hold 1576 1625
Infosys Buy 586 738
HCLTech Buy 496 613
Wipro Hold 221 320
TECHM Buy 672 789
LTI Buy 1398 1750
Persistent Buy 689 1014
LTTS Buy 1194 1625
Cyient Buy 647 765
eClerx Hold 1258 1450
Source: Edelweiss Research. TCS, Infosys, HCL Tech prices adjusted for Bonus
Outcome:
USD Rev CAGR over
Source: Company, Edelweiss Research
Squeeze Up Cycle 1.0– 12th September 2019
What we said in our report based on inputs from our technology ecosystem
feedback?
Our “Squeeze-up Cycle” analysis shows the mid-cap disruption is underway; hence,
we prescribe a “model portfolio” consisting of Infosys, TCS, HCL Tech, Tech M, LTI,
LTTS, Cyient, Mindtree and eClerx, among others. We are also initiating coverage on
Mindtree with a ‘BUY’ rating and 7.5% weighting at a target price of INR824. Cyient,
Mindtree, eClerx and Persistent are trading at mouth-watering valuations and offer
an excellent entry point at present.
What was the stock price we recommended?
Target Price and Multiple as of 12th September, 2019
Price Base case multiple Target multiple Floor Price Target Price
TCS 2125 16 22 1598 2137
Infosys 816 14 20 652 923
HCL Tech 1051 12 16 1040 1360
Wipro 245 13 14 213 261
TECHM 700 10 16 615 935
LTI 1605 17 20 1816 2068
Persistent 564 12 14 638 721
LTTS 1585 18 20 1628 1821
Cyient 451 12 14 585 632
eClerx 467 10 12 720 747
Mindtree 679 15 16 757 824
Source: Edelweiss Research
Price (As on 12th Sep, 2019) CMP Return
TCS 2125 2924 37.6%
Infosys 816 1267 55.3%
HCLTech 526 930 77.0%
Wipro 245 414 69.0%
TECHM 700 936 33.7%
LTI 1605 3608 124.8%
Persistent 564 1687 199.1%
LTTS 1585 2578 62.6%
Cyient 451 652 44.6%
eClerx 467 936 100.4%
Mindtree 679 1634 140.6%
Techolution – World of apps – 8th June 2020
What we said in our report based on inputs from our technology ecosystem
feedback?
We believe the Indian IT sector will enter a high-growth phase with stocks poised to
return20-56% upside and near-term downside risk limited to 10%. Our anti-
consensus conviction (our revenue/EPS is 2-8%/2-17% higher than Street) is much
higher now than our “Most bullish in a decade “stance two years ago and is based
on the following key arguments:
1. Recent commentaries of global 200 companies (contribute >50% revenue to
Indian tech) indicate sharp cuts in non-tech capex and higher allocation towards
technology. Past cycles indicate benefits of higher allocation flow across the
value chain and should benefit Indian outsourcers significantly. For instance,
Microsoft’s hyper growth has benefitted Mindtree immensely (Microsoft 4-year
CAGR 12.4% vs. its growth of 32.5% for Mindtree).
2. COVID-19 is a boon for technology players as it has forced exponential use of
apps and platforms, right from online shopping to e-learning to telemedicine.
This has led to a technological revolution or “Techolution” which will drive
technological spend across the value chain. The biggest beneficiary will be cloud
providers as increased data usage will accelerate migration to efficient frontier
or Cloud. For instance, Microsoft reported 61% YoY spurt in its cloud business
in the last reported quarter.
3. Digital spends will accelerate led by substantial jump in online
sales/activity/change in clients’ behaviour accentuated by COVID-19. The higher
online activity will channelise traditional marketing spends towards digital,
evident from Facebook’s results as well.
4. High growth (25-30%) in digital services to lead to further demand-supply
mismatch of talent in clients’ markets, thereby keeping pricing stable for
outsourcing players. Moreover, cost reduction initiatives owing to covid-19 (e-
travel, e-meetings, e-appraisals) will enable enterprises to restructure and re-
innovate their business substantially to keep their margins stable, excluding
currency fluctuations.
expansion going forward.
Target price and multiple as of 8th June, 2020
CMP TM TP Dividend Total Return
Infosys 705 21 950 68 44.3%
TCS 2,053 24 2,310 146 19.6%
HCL Tech 575 16 846 49 55.7%
TECHM 580 16 798 46 45.6%
Mindtree 920 22 1,281 52 44.9%
LTI 1,856 22 2,598 109 45.8%
LTTS 1,338 20 1,872 69 45.1%
Source: Edelweiss Research
Outcome
Returns since 8th June, 2020
Price (As of 8th June) TM (As of 8th June) TP (As of 8th June) CMP Returns (%)
Infosys 705 21 950 1267 79.7
TCS 2,053 24 2,310 2924 42.4
HCL Tech 575 16 846 930 61.7
TECHM 580 16 798 936 61.4
Mindtree 920 22 1,281 1634 77.6
LTI 1,856 22 2,598 3608 94.4
LTTS 1,338 20 1,872 2578 92.7
Source: Edelweiss Research
Edelweiss Securities Limited
Techolution – TCS - The Colossal Shines– date 26th July, 2020
What we said in our report based on inputs from our technology ecosystem
feedback?
1. We believe the technology industry, after consolidating for several years, is
potentially ready for a high-growth phase led by three factors. i) The current
core infrastructure of enterprises has gasped out of capacity and can’t sustain
pandemic-led pressure of online explosion. ii) The time for trade-off between
cloud security-related concerns and growth has clearly tilted towards growth
and survival. iii) The digital upcycle has substantially elongated due to covid-19
disruption, jump in online activity and new aspects of growth such as zero-touch
becoming mainstream.
2. TCS’s, Infosys’s and Accenture’s results reinforce our confidence that the IT
industry is currently at the bottom of an upcycle. We also believe leaders such
as TCS and Infosys will gain disproportionately from this consolidation phase as
well (market share loss of CTSH and Capgemini). Our in-depth analysis of TCS’s
FY20 annual report (AR) suggests the strength of its Mission 25X25 execution
model led by Secure Borderless Workspaces (SBWS) and its sizable ~38mn hours
of training in relevant technology, both of which position it strongly to gain
further market share and cost rationalization. SBWS is a revolutionary
innovation of execution model.
3. The high cash distribution/ESG grading are additional kickers for TCS’s rerating.
We believe the best way to capture this upcycle will be to raise the target
multiple (to 27x from 24x) while earnings would follow. Maintain ‘BUY’ with a
revised TP of INR2586 (Positive on the entire sector).
What was the stock price when we recommended?
The stock was trading at INR2,159 and our 12 month target price was INR2,586.
Outcome
The stock achieved our TP on 5th October i.e. within three months of
recommendation and today trades at INR2,924 up 35.4% since the above report.
Techolution – Wave before storm– 2nd September 2020
What we said in our report based on inputs from our ecosystem feedback?
1. Our findings reveal a massive demand surge continues to brew led by the
explosion in online activity. A downward revision in global digital penetration
led by substantial increase in scope of applicability will further extend the high-
growth phase for digital from FY24 to FY27 at the least.
2. That structural cost savings from rising adoption of WFA on the back of
reduction in travel cost, lower wages for talent in tier 3–4 towns, lower capex
and resultant depreciation would follow are of no less significance and can
power companies on their own standing—and our realistic optimism on the
space. Squirting out of pent-up demand and GDP bounce-back are going to be
the icing on the cake.
3. We expound consensus revenue and EPS forecasts are 10–35% lower for FY22-
23E and that Indian IT stocks are trading at steep 20–60% discounts to their fair
values and 50% to global peers. In our view, this anomaly would correct over
two–three years; déjà vu FAANGs companies’?
What was the stock price we recommended?
Target price and multiple on 2nd September, 2020
Rating CMP (On 2nd Sep) TM (On 2nd Sep) TP (On 2nd Sep)
Infosys Buy 935 27 1266
TCS Buy 2246 30 2874
HCL Tech Buy 706 20 1058
Wipro Buy 272 18 322
Tech Mahindra Buy 728 20 1002
Mindtree Buy 1141 25 1460
LTI Buy 2472 25 2998
LTTS Buy 1534 22 2009
Cyient Buy 401 14 489
Eclerx Buy 693 16 1229
Persistent Buy 962 22 1344
Source: Edelweiss Research
Price (On 2nd Sep) CMP Returns (%)
Infosys 935 1267 35.5
TCS 2246 2924 30.2
Wipro 272 414 52.2
Mindtree 1141 1634 43.2
LTI 2472 3608 46.0
LTTS 1534 2578 68.1
Cyient 401 652 62.6
Eclerx 693 936 35.1
Persistent 962 1687 75.4
Source: Company, Edelweiss Research
Techolution – Multiple multipliers– 6th October 2020
What we said in our report based on inputs from our ecosystem feedback?
1. Fast-forward to FY23-27. We project digitalisation-led Techolution to drive
sector revenue/PAT CAGR of 15%/22%, with digital revenues of companies
poised to grow at >30%. The growth driver, this time around, will make up 40%
of revenue of larger players compared with a modest 15% in case of the IMS-
and Assurance Services-led rally post-GFC. We are being conservative; once the
wave rises, a tidal gush of earnings growth could unleash. Come, surf the digital
wave; it will be thrilling.
2. We believe the Indian technology services industry is at the same juncture in
terms of prospects where it was post-GFC. Then, stocks had plunged to historically
low PEs in the wake of demand uncertainty and the GFC; now, covid-19 has
wreaked a more broad-based havoc, bringing the global economy to a standstill
of sorts. Both Black Swans have stark similarities—GDP declines, job losses,
bankruptcies and swift central banks’ responses, except the current one is a
health crisis and a technology enabler, while the GFC was a financial monster.
What was the stock price we recommended?
Target price and multiple on 6th October, 2020
Rating Price (As of 6th Oct) TM (As of 6th Oct) TP (As of 6th Oct)
Infosys Buy 1112 36.0 1688
TCS Buy 2811 40.0 4000
HCL Tech Buy 857 30.0 1481
Wipro Buy 375 25.0 447
Tech Mahindra Buy 856 25.0 1253
Mindtree Buy 1517 35.0 2044
LTI Buy 2926 35.0 4197
LTTS Buy 1627 30.0 2740
Cyient Buy 385 18.0 629
Eclerx Buy 713 20.0 1536
Persistent Buy 1305 30.0 1833
Source: Edelweiss Research
Price (As of 6th Oct) CMP Returns (%)
Infosys 1112 1267 13.9
TCS 2811 2924 4.0
Wipro 375 414 10.4
Mindtree 1517 1634 7.7
LTI 2926 3608 23.3
LTTS 1627 2578 58.5
Cyient 385 652 69.4
Eclerx 713 936 31.3
Persistent 1305 1687 29.3
Source: Edelweiss Research, Company
Techolution – The Squeeze Up-Cycle 2.0– 23rd September 2020
What we said in our report based on inputs from our technology ecosystem
feedback?
1. Our “Squeeze-up Cycle” analysis indicates that mid-cap disruption is behind,
except for a temporary effect of the current pandemic. Hence, mid-caps in our
coverage such as LTTS, Mindtree, Persistent, eClerx and Cyient should yield
substantial returns hereon (already up 20–100% since phase 3 began last year;
refer to September 2019 report). Our detailed analysis of select mid-size and
small-size companies in India’s technology sector—Mastek, Birlasoft, Sonata,
KPIT and Firstsource (all Not Rated)— shows they too would be the potential
beneficiaries of the upcoming tidal wave.
2. We don’t have a negative view or ‘REDUCE’ on any stock in Indian IT stocks
under coverage and strongly believe each company stands to gain from the
powerful tailwind that continues to gain heft. This sectoral tailwind will benefit
one and all—which we have been reiterating time and again through our
Techolution series (World of apps – 8th June 2020; Wave before storm – 2nd
September 2020). A substantial rub-off effect on mid-size and small-size
companies would be in order too. While mid-cap IT companies have run up 20–
100% in just one year (since we highlighted the potential upside in our
September 2019 note (The Squeeze-up Cycle), we believe substantial upside
remains aided by cost structure innovation and the high earnings sensitivity of
these companies to margins.
Target price and multiple on 23rd September, 2020
Rating Price (As on 23rd Sep) TM (As on 23rd Sep) TP (As on 23rd Sep)
Mindtree Buy 1,271 25 1460
LTTS Buy 1,665 22 2009
Cyient Buy 406 14 489
Persistent Buy 1,160 22 1344
Source: Edelweiss Research
Price (On 23rd Sep) CMP Returns (%)
Mindtree 1,271 1634 28.6
LTTS 1,665 2578 54.8
Cyient 406 652 60.6
Persistent 1,160 1687 45.4
Source: Company, Edelweiss Research
Techolution – On a roll – 6th December 2020
What we said in our report based on inputs from our technology ecosystem
feedback?
1. Our recent (re)interactions with who’s who of technology spends across
geographies and verticals reinforce the Techolution thesis (link). Such
interactions over the past 45 days show technology spend is accelerating
triggered by: i) higher technology budget allocations than 2019; and ii) a carry-
forward of unused budget of 2020—exception to the usual zero-budget
practice. Much lower-than expected furloughs, BFSI’s renewed propensity to
spend and companies ongoing focus on technology spends stands out too.
2. We reiterate—again enthused by emerging and reassuring evidence—that the
mega technology upcycle has just gotten underway. IT companies across the
board have started acknowledging that margin improvement is structural.
Consensus forecasts, though, are still building in revenue growth and margins
much lower (~150bps) than what companies themselves are suggesting. This
reality-consensus mismatch again raises the odds of a big outperformance in
Q3FY21 (barring the currency risk), much like the preceding two quarters, and of
10–15% quick returns by IT stocks over and above their roaring gains since May.
What was the stock price we recommended?
Target price and multiple as on 6th December, 2020
Rating Price (As on 6th Dec) TM (As on 6th Dec) TP (As on 6th Dec)
TCS Buy 2,723 40 4,000
Infosys Buy 1,134 36 1,850
HCL Tech Buy 858 28 1,481
Wipro Buy 361 25 467
Tech Mahindra Buy 923 25 1,253
LTI Buy 3,267 35 4,197
LTTS Buy 1,802 30 2,740
Mindtree Buy 1,438 35 2,044
Persistent Buy 1,220 30 1,833
Cyient Buy 479 18 629
Eclerx Buy 781 20 1,536
Source: Edelweiss Research
Price (As on 6th Dec) CMP Returns (%)
TCS 2,723 2924 7.4
Infosys 1,134 1267 11.7
Wipro 361 414 14.7
LTI 3,267 3608 10.4
LTTS 1,802 2578 43.1
Mindtree 1,438 1634 13.6
Persistent 1,220 1687 38.3
Cyient 479 652 36.1
Eclerx 781 936 19.8
Source: Company, Edelweiss Research
Key risks to our thesis: Broadly same
Serious data breach: We believe the biggest risk to our digital surge-driven thesis
stems from any serious data breach at global tech companies primarily in the
FAANGs ecosystem. Such events may significant bring down online web traffic
and have a domino effect on technology spends owing to cautious traffic growth
outlook. In fact, any major breach event could substantially reverse investments
for a small period (say about two quarters).
Adverse currency movement: USD depreciation vis-à-vis INR and adverse cross
currency movements would modestly affect growth and earnings estimates of
the Indian technology companies.
BPS Impacts/%
USD/INR Movement EPS Impact
FY20 Margins 2% 4% 6% 8% 10% 2% 4% 6% 8% 10%
Infosys 25 21.3 0.50 1.00 1.50 2.00 2.50 2.3% 4.7% 7.0% 9.4% 11.7%
TCS 20 24.6 0.40 0.80 1.20 1.60 2.00 1.6% 3.3% 4.9% 6.5% 8.1%
HCL Tech 19 19.6 0.38 0.76 1.14 1.52 1.90 1.9% 3.9% 5.8% 7.8% 9.7%
Wipro 20 18.0 0.40 0.80 1.20 1.60 2.00 2.2% 4.4% 6.7% 8.9% 11.1%
Tech Mahindra 20 11.0 0.40 0.80 1.20 1.60 2.00 3.6% 7.3% 10.9% 14.5% 18.2%
Mindtree 25 10.1 0.50 1.00 1.50 2.00 2.50 5.0% 9.9% 14.9% 19.8% 24.8%
LTI 30 16.1 0.60 1.20 1.80 2.40 3.00 3.7% 7.5% 11.2% 14.9% 18.6%
LTTS 27 16.5 0.54 1.08 1.62 2.16 2.70 3.3% 6.5% 9.8% 13.1% 16.4%
Persistent 23 9.2 0.46 0.92 1.38 1.84 2.30 5.0% 10.0% 15.0% 20.0% 25.0%
Eclerx 15 17.6 0.30 0.60 0.90 1.20 1.50 1.7% 3.4% 5.1% 6.8% 8.5%
Cyient 25 9.2 0.50 1.00 1.50 2.00 2.50 5.4% 10.9% 16.3% 21.7% 27.2%
Source: Company, Edelweiss Research
Budgetary allocations: A substantial cut in US technology budgets, particularly
in digital, could mar the expected surge in growth at Indian IT companies.
Regulations: Any adverse regulatory provisions and visa restrictions in key client
markets may affect Indian IT companies’ capability to execute profitably.
Other risks: Some risks specific to companies (subject to their vertical
exposure/mix) are also worth a mention. They are: i) bankruptcy of a large client;
ii) delayed revival of the travel, transportation, hospitality and retail segments;
iii) loss of revenue from top client; and iv) slower-than-expected recovery in BFSI.
Edelweiss Securities Limited
Recommendation and valuation–All is Well (in fact better)
TCS–Total contract value
Source: Company, Edelweiss Research
Source: Company, Edelweiss Research
Accenture–New bookings
Q1 19 Q2 19 Q3 19 Q4 19 Q1 20 Q2 20 Q3 20 Q4 20 Q1 21
Accenture 10.19 11.78 10.6 12.89 10.34 14.2 11.03 14.00 12.90
Source: Company, Edelweiss Research
Infosys–Large deal signings
Q4 19 Q1 20 Q2 20 Q3 20 Q4 20 Q1 21 Q2 21 Q3 21
Infosys 1.6 2.7 2.8 1.8 1.7 1.7 3.2 7.1
Source: Company, Edelweiss Research
(U SD
b n
Outsourcing Revenue Consulting Revenue
24 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Growth of major IT companies–Jump in revenue, EBITDA and EPS CAGR
Revenue CAGR EBIDTA CAGR Earnings CAGR
CMP FY13-FY18 FY19-FY23 FY13-FY18 FY19-FY23 FY13-FY18 FY19-FY23
Microsoft 232 7.2% 11.5% 9.0% 13.9% -5.4% 12.4%
Amazon 3,093 25.6% 20.4% 47.3% 23.4% 105.6% 47.1%
Google 2,022 19.8% 8.9% 13.6% 19.4% 19.3% 13.8%
Apple 121 9.2% 6.4% 8.0% 5.4% 10.0% 5.5%
Facebook 258 51.5% 20.8% 50.3% 22.6% 71.5% 22.4%
Source: Company, Bloomberg
Revenues EBIDTA PAT EPS
(%)
Our findings are based on, inputs from global experts (consultants, technologists and
deal makers), and market share data spanning the past 20 years (refer to exhibit 8).
What is unmistakable is the brewing demand surge led by the explosion in online
activity. Moreover, a downward revision in digital penetration based on a realisation
of a multi-fold increase in the scope of applicability of technology during post-
pandemic re-assessment by global enterprises bolsters our confidence that the high-
growth phase would extend from FY24 earlier to FY27 in the least.
Demand surge: The power of three
1. Technology becoming mainstream: Most experts we interacted with during our
current cycle of feedback indicate that clients are clearly acknowledging rising
relevance of technology to their business than ever before. This feedback has
been unequivocal in Europe, UK and US; Asia Pacific, though, has been muted
on this front.
2. Cloud: Enterprises’ current core infrastructure has gasped out of capacity and
cannot sustain the pandemic-led online explosion. This is driving faster
migration to cloud. The time for a trade-off between cloud security-related
concerns and growth has clearly tilted towards growth and survival.
3. Digital re-scoping and adoption: The covid-19-induced disruption has greatly
elongated the digital upcycle to at least FY27 from FY24 earlier.
Edelweiss Securities Limited
Hence, we conclude the following:
The current change in fortunes of IT companies is more than a cycle; it is a
technology revolution or Techolution and will last at least five–seven years (until
FY27). And we are just at the beginning of the cycle.
Consensus, and even companies, would underestimate the wave and the
opportunity; they would keep upgrading estimates and target prices, respectively,
for the next few years.
Size is not a criterion to define multi-baggers; in fact, strongest players are super-
primed to yield multi-bagger returns.
We argue the obsession to unearth multi-baggers overlooking the strongest players
has not been a good idea in the technology sector, at least for the past three cycles.
For instance, TCS’s m-cap jumped 9.8x over FY09–16 on the back of CAGRs of 16%
in revenue and 25% in PAT. Similarly, HCL Tech’s m-cap surged 14.5x (CAGRs 16x and
24x). Tech Mahindra delivered 15.8x returns over FY09–16 (including Satyam
acquisition; CAGRs 22% in revenue and 17% in earnings).
Moreover, sustained market share gains by Indian players over the past several
years accentuated by leadership changes at Capgemini and Cognizant are an icing
on the cake. On the earnings front, acceptance of the WFA model has widened the
already substantial labour arbitrage--it allows to loop in cost-effective talent from
tier 3–4 towns and usually at steep discounts. Additionally, lower facility capex,
resultant depreciation and limited travel add up to momentous cost savings.
Conclusion: Rounding up our thesis; recommendations
We don’t have a negative view or ‘REDUCE’ on any stock in Indian IT under our
coverage and strongly believe that each company in the sector stands to gain from
the powerful tailwind that continues to strengthen. This tailwind will benefit one
and all—and we have been reiterating this through our Techolution series (World of
apps dated June 8; Wave before storm dated September 2; Multiple Multipliers
dated October 11).
A substantial rub-off effect on mid- and small-size companies would be in order too.
While mid-cap IT companies have run up 20–100% in just one year (since we
highlighted the potential upside in our September 2019 note The Squeeze-up Cycle),
we believe they have potential to generate substantial returns even hereon, aided
by cost structure innovation and their high earnings sensitivity to margins.
Edelweiss estimates
Revenues EBIDTA PAT EPS
(%)
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson FirstCall, Reuters and Factset Edelweiss Securities Limited
DISCLAIMER Edelweiss Securities Limited (“ESL” or “Research Entity”) is regulated by the Securities and Exchange Board of India (“SEBI”) and is licensed to carry on the business of broking, depository services and related activities. The business of ESL and its Associates (list available on www.edelweissfin.com) are organized around five broad business groups – Credit including Housing and SME Finance, Commodities, Financial Markets, Asset Management and Life Insurance.
This Report has been prepared by Edelweiss Securities Limited in the capacity of a Research Analyst having SEBI Registration No.INH200000121 and distributed as per SEBI (Research Analysts) Regulations 2014. This report does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 includes Financial Instruments and Currency Derivatives. The information contained herein is from publicly available data or other sources believed to be reliable. This report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in Securities referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors.
This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ESL and associates / group companies to any registration or licensing requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and persons in whose possession this report comes, should observe, any such restrictions. The information given in this report is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. ESL reserves the right to make modifications and alterations to this statement as may be required from time to time. ESL or any of its associates / group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. ESL is committed to providing independent and transparent recommendation to its clients. Neither ESL nor any of its associates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including loss of revenue or lost profits that may arise from or in connection with the use of the information. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Past performance is not necessarily a guide to future performance .The disclosures of interest statements incorporated in this report are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The information provided in these reports remains, unless otherwise stated, the copyright of ESL. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright of ESL and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.
ESL shall not be liable for any delay or any other interruption which may occur in presenting the data due to any reason including network (Internet) reasons or snags in the system, break down of the system or any other equipment, server breakdown, maintenance shutdown, breakdown of communication services or inability of the ESL to present the data. In no event shall ESL be liable for any damages, including without limitation direct or indirect, special, incidental, or consequential damages, losses or expenses arising in connection with the data presented by the ESL through this report.
We offer our research services to clients as well as our prospects. Though this report is disseminated to all the customers simultaneously, not all customers may receive this report at the same time. We will not treat recipients as customers by virtue of their receiving this report.
ESL and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the
Securities, mentioned herein or (b) be engaged in any other transaction involving such Securities and earn brokerage or other compensation or act as a market maker in the financial
instruments of the subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other potential/material conflict of interest with
respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. ESL may have proprietary long/short
position in the above mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not consider risk appetite or investment
objective of any particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business
with ESL.
ESL or its associates may have received compensation from the subject company in the past 12 months. ESL or its associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. ESL or its associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. ESL or its associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. ESL or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research report. Research analyst or his/her relative or ESL’s associates may have financial interest in the subject company. ESL and/or its Group Companies, their Directors, affiliates and/or employees may have interests/ positions, financial or otherwise in the Securities/Currencies and other investment products mentioned in this report. ESL, its associates, research analyst and his/her relative may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance.
Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i) exchange rates can be volatile and are subject to large fluctuations; ( ii) the value of currencies may be affected by numerous market factors, including world and national economic, political and regulatory events, events in equity and debt markets and changes in interest rates; and (iii) currencies may be subject to devaluation or government imposed exchange controls which could affect the value of the currency. Investors in securities such as ADRs and Currency Derivatives, whose values are affected by the currency of an underlying security, effectively assume currency risk.
Research analyst has served as an officer, director or employee of subject Company: No
ESL has financial interest in the subject companies: No
ESL’s Associates may have actual / beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report.
Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No
ESL has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No
Subject company may have been client during twelve months preceding the date of distribution of the research report.
There were no instances of non-compliance by ESL on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years except that ESL had submitted an offer of settlement with Securities and Exchange commission, USA (SEC) and the same has been accepted by SEC without admitting or denying the findings in relation to their charges of non registration as a broker dealer.
A graph of daily closing prices of the securities is also available at www.nseindia.com
Analyst Certification:
The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson FirstCall, Reuters and Factset Edelweiss Securities Limited
Additional Disclaimers
Disclaimer for U.S. Persons
This research report is a product of Edelweiss Securities Limited, which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.
This report is intended for distribution by Edelweiss Securities Limited only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.
In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Edelweiss Securities Limited has entered into an agreement with a U.S. registered broker-dealer, Edelweiss Financial Services Inc. ("EFSI"). Transactions in securities discussed in this research report should be effected through Edelweiss Financial Services Inc.
Disclaimer for U.K. Persons
The contents of this research report have not been approved by an authorised person within the meaning of the Financial Services and Markets Act 2000 ("FSMA"). In the United Kingdom, this research report is being distributed only to and is directed only at (a) persons who have professional experience in matters relating to investments falling within Article 19(5) of the FSMA (Financial Promotion) Order 2005 (the “Order”); (b) persons falling within Article 49(2)(a) to (d) of the Order (including high net worth companies and unincorporated associations); and (c) any other persons to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”). This research report must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this research report relates is available only to relevant persons and will be engaged in only with relevant persons. Any person who is not a relevant person should not act or rely on this research report or any of its contents. This research report must not be distributed, published, reproduced or disclosed (in whole or in part) by recipients to any other person. Disclaimer for Canadian Persons
This research report is a product of Edelweiss Securities Limited ("ESL"), which is the employer of the research analysts who have prepared the research report. The research analysts preparing the research report are resident outside the Canada and are not associated persons of any Canadian registered adviser and/or dealer and, therefore, the analysts are not subject to supervision by a Canadian registered adviser and/or dealer, and are not required to satisfy the regulatory licensing requirements of the Ontario Securities Commission, other Canadian provincial securities regulators, the Investment Industry Regulatory Organization of Canada and are not required to otherwise comply with Canadian rules or regulations regarding, among other things, the research analysts' business or relationship with a subject company or trading of securities by a research analyst.
This report is intended for distribution by ESL only to "Permitted Clients" (as defined in National Instrument 31-103 ("NI 31-103")) who are resident in the Province of Ontario, Canada (an "Ontario Permitted Client"). If the recipient of this report is not an Ontario Permitted Client, as specified above, then the recipient should not act upon this report and should return the report to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any Canadian person.
ESL is relying on an exemption from the adviser and/or dealer registration requirements under NI 31-103 available to certain international advisers and/or dealers. Please be advised that (i) ESL is not registered in the Province of Ontario to trade in securities nor is it registered in the Province of Ontario to provide advice with respect to securities; (ii) ESL's head office or principal place of business is located in India; (iii) all or substantially all of ESL's assets may be situated outside of Canada; (iv) there may be difficulty enforcing legal rights against ESL because of the above; and (v) the name and address of the ESL's agent for service of process in the Province of Ontario is: Bamac Services Inc., 181 Bay Street, Suite 2100, Toronto, Ontario M5J 2T3 Canada.
Disclaimer for Singapore Persons
In Singapore, this report is being distributed by Edelweiss Investment Advisors Private Limited ("EIAPL") (Co. Reg. No. 201016306H) which is a holder of a capital markets services license and an exempt financial adviser in Singapore and (ii) solely to persons who qualify as "institutional investors" or "accredited investors" as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore ("the SFA"). Pursuant to regulations 33, 34, 35 and 36 of the Financial Advisers Regulations ("FAR"), sections 25, 27 and 36 of the Financial Advisers Act, Chapter 110 of Singapore shall not apply to EIAPL when providing any financial advisory services to an accredited investor (as defined in regulation 36 of the FAR. Persons in Singapore should contact EIAPL in respect of any matter arising from, or in connection with this publication/communication. This report is not suitable for private investors.
Disclaimer for Hong Kong persons
This report is distributed in Hong Kong by Edelweiss Securities (Hong Kong) Private Limited (ESHK), a licensed corporation (BOM -874) licensed and regulated by the Hong Kong Securities and Futures Commission (SFC) pursuant to Section 116(1) of the Securities and Futures Ordinance “SFO”. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to SFO. Any investment or investment activity to which this document relates is only available to professional investor and will be engaged only with professional investors.” Nothing here is an offer or solicitation of these securities, products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The report also does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of any individual recipients. The Indian Analyst(s) who compile this report is/are not located in Hong Kong and is/are not licensed to carry on regulated activities in Hong Kong and does not / do not hold themselves out as being able to do so.
Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved.
Aditya Narain
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098 Tel: +91 22 4009 4400. Email: [email protected]
IT-Mar-21-EDEL.pdf