2 shiv nadar associates 502 28 239 source deutsche

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Unformatted text preview: nd (c) management transition (change in CEO). Our key concerns in the medium term continue to be a drop in margins on account of wage hikes and higher reliance on lateral recruits. The stock has outperformed the Sensex in CY13, and at its current FY14E P/E, it offers limited potential upside, leading us to our Sell rating. Valuation We value Indian IT service firms on a P/E basis relative to their historical trading range in relation to peers as well as growth rates. We value HCL Tech at 12x FY14E/12 P/E (vs. 14x FY14), supported by an earnings CAGR of 6.3% (FY14-16E). Given (a) the lopsided revenue growth profile, (b) expected revenue growth underperformance vs. Infosys and (c) headwinds to margins, we have reverted to valuing HCL Tech at a discount to Infosys. Our target P/E multiple for HCL Tech is now at a 30% discount to Infosys, in line with its average historical discount. Risks We identify three key upside risks to our call: a) Ramp ups in the near term in IMS beyond our estimates. This could happen from uneven ramp ups of deals won in the past few quarters. b) Further currency appreciation could give room for HCL Tech to increase margins beyond current levels. Margins could also vary if HCL Tech chooses to cut down on its SG&A spends in the immediate term. c) Further improvement in the macro and spend environment could be a boost for the entire sector. Deutsche Bank AG/Hong Kong Page 33 7 January 2014 Software & Services Indian IT Services Fiscal year end 30-Jun Model updated:06 January 2014 Running the numbers 2011 2012 2013 2014E 2015E 2016E 23.63 23.63 8.00 120.6 36.36 36.36 8.00 153.5 58.01 58.01 8.00 205.7 78.16 78.16 8.00 277.7 81.44 81.44 8.00 353.7 87.12 87.12 8.00 436.5 699 297,973 294,024 699 306,859 297,688 696 450,757 407,328 699 864,648 752,188 702 864,648 692,497 702 864,648 625,102 P/E (DB) (x) P/E (Reported) (x) P/BV (x) 18.0 18.0 3.93 12.1 12.1 3.06 11.2 11.2 3.77 16.0 16.0 4.51 15.4 15.4 3.54 14.4 14.4 2.87 FCF Yield (%) Dividend Yield (%) 2.6 1.9 2.4 1.8 8.8 1.2 8.4 0.6 7.3 0.6 8.2 0.6 1.9 10.8 13.3 1.4 7.4 8.6 1.6 7.0 7.9 2.3 9.6 10.7 1.9 8.6 9.7...
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This document was uploaded on 02/06/2014.

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