We thus expect the operating margins of the company

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Unformatted text preview: 193.6 579,231.0 659,512.6 107,160.0 115,580.0 131,997.3 148,251.9 169,550.0 83,160.0 94,210.0 103,522.1 118,599.8 138,738.3 145.38 164.70 180.98 207.34 242.55 145.38 164.70 180.98 207.34 242.55 21.7 13.3 9.9 14.6 17.0 18.4 15.1 19.4 16.9 14.5 12.3 10.2 13.0 11.0 9.1 37.37 42.00 46.61 53.29 62.34 1.4 1.7 1.3 1.5 1.8 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close Deutsche Bank AG/Hong Kong Page 29 7 January 2014 Software & Services Indian IT Services Investment Thesis Outlook Our Hold rating is predicated primarily on worries over (a) market share loss, (b) dwindling growth in traditional services, (c) inferior positioning in the new growth market (Continental Europe), (d) reduced focus on under-USD50m clients, and (e) a drop in pricing/margins. Valuation We value Indian IT services firms on a P/E basis relative to their historical trading range, compared with both peers and growth rates. We value Infosys at 16x FY14E/06. We believe the multiple is justified based on our forecast for an earnings CAGR of 13% over FY14-16E and because it is better positioned than in 2003 on such key factors as revenue size, net worth, dependence on the US and client concentration. Given the muted earnings growth in FY14E, we have a PEG ratio of 1.1. Risks Key downside risks include a severe and protracted global recession, significant rupee appreciation in the near term, and global vendor competition. We believe the rhetoric over outsourcing will likely remain strong and may even become a sector overhang as political pressure on outsourcing increases. Key upside risks include cessation of project rampdowns in the financial services vertical and improvement in discretionary spending. Infosys, winning back its strategic vendor status with its large customers could also drive longterm upside. Page 30 Deutsche Bank AG/Hong Kong 7 January 2014 Software & Services Indian IT Services Fiscal year end 31-Mar Model updated:06 January 2014 Running the numbers 2011 2012 2013 2014E 2015E 2016E 119.46 119.46 60.03 478.1 145.38 145.38 37.37 585.0 164.70 164.70 42.00 695.8 180.98 180.98 46.61 826.8 207.34 207.34 53.29 976.6 242.55 242.55 62.34 1,151.9 571 1,617,619 1,449,289 572 1,530,614 1,320,814 572 1,420,454 1,179,794 572 2,007,346 1,715,643 572 2,0...
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This document was uploaded on 02/06/2014.

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