For some time now, we have maintained that the best of both worlds are coming together for the Indian IT sector ó a recovery in demand along with a sustainably weak rupee. We now model in R60 over FY14 and R63 beyond that, leading to a significant bump-up in our numbers. Given improving trends, we are also upgrading Tech Mahindra to buy (from hold). IT stocks have done well; however, we believe that there is more steam left.
Dollar has been sustainably below R50 since Aprí12 and has moved below R60 in the past two months. This provides a natural tailwind for the sector, as a majority of revenues are in overseas currencies ($, pound, euro, etc.) while most of the costs are in rupee .
We have been fairly sceptical of TechMís ability to grow given its significant exposure to telecom. However, the company has executed well and we are upgrading the stock as the telecom vertical is finally showing signs of life. Further sizeable quarterly revenues (~$725m) would mean an invitation to much larger deals, something that it was not a party to until now. While BT continues to decline at ~12% of revenues, it is small to move the needle. FY14E ROEs at 34% with a large part of goodwill knocked off reserves and ) valuations at ~10x FY15E EPS seem reasonable given the improved growth prospects.
We have revised our estimates across the board, as we now factor in a weak rupee. Our target prices also move up ó we have tweaked our target multiple only for TechM (13x vs 11x previously), as we believe that the discount to HCL Tech is likely to narrow over a period of time.