its top line, while maintaining operating margins. Our analysis suggests that TCS’s USD revenue CAGR over FY14-16e could increase to 24.5% (vs our current estimate of 21.8%). Consequently, it could report an earnings CAGR of 23.8% (vs our current estimate of 18.3%).
Infosys–loss of talent will affect deal win rates: Though theoretically Infosys should be the second best beneficiary, the loss of senior business heads in the strongest market (the US) and inferior positioning in its key growth market (Continental Europe) increase the hurdles before the management in its quest for a revenue growth revival. While a weaker rupee can help Infosys price its services competitively in order to win back market share, the continuation of senior management exits could blunt the effectiveness of these measures.
Reiterating positive view on the sector: We maintain our positive view on the sector given (i) an economic recovery in the US, (ii) a rebound in demand from the financial services vertical, (iii) continued strength in demand for outsourcing from Europe, (iv) a pick-up in discretionary spending and (v) a weaker-than-expected rupee.
Valuing IT service stocks as before: We continue to value the stocks at 12-20x one-year forward earnings (relative to their historical trading range and compared with peers as well as growth rates) and will revisit our earnings estimates and target PE (price-to-earnings) multiples once there is more clarity on the nature and size of IT budgets and the sustainability of the demand pick-up. The key sector risks relate to cross-currency headwinds.