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This report must be read with the disclosures and the analyst certifications in
the Disclosure appendix, and with the Disclaimer, which forms part of it.
Issuer of report: HSBC Securities and Capital
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sector; stronger guidance would indicate improving demand
implies a moderate improvement in 2Q over 1Q
and CTSH; Reduce Wipro
2Q was a busy quarter for IT investors, mostly driven by the exit of Infosys’s CEO and
related events. However, the quarter is nearly over and the operational update isn’t so
bleak. 1Q18 was one of the weakest 1Qs (from a sequential growth perspective),
although in line with expectations. 2Q18 is likely to be weak as well (vs historical 2Q q/q
trends), but better than 1Q18, with some pick-up across key demand markets like
insurance, payers, manufacturing, telecom and even sections of banking.
Accenture’s 4Q17 results on 28 September and guidance for FY18 could be a key trigger
for the sector in the near term. Table 1 highlights Accenture’s guidance history. It is
usually conservative and the company has beaten its guidance in 8 of the past 11 years
(of the 3 years of miss, 2 were the sub-prime years). Consensus numbers suggest +4-7%
for FY18 and any material deviation from this expectation could have a significant read-
across for the sector.
Commentary from large IT companies has been mixed, but implies some
improvement in 2Q over 1Q: Commentary on BFSI has been mixed. CTSH is seeing
decent demand pick-up in insurance and smaller banks, but larger banks are still slow in
spending. TCS continues to expect some improvement in the coming quarters in BFSI
(see our 29 August note from the TCS management meeting – ‘beyond the obvious’).
Infosys has not seen any improvement in BFSI, but that could be company specific in the
near term. Broadly, there has been positive commentary on the telecom business from
Infosys and TechM (see Tech Mahindra: Feedback from management roadshow,
4 September. Manufacturing is strong as well – as noted by both CTSH and TCS. For
CTSH, this is particularly positive as CTSH has been a relative laggard in manufacturing.
A pick-up in the payers market benefits CTSH and Wipro. Specific to Wipro, the company
has won some large deals in the recent past, but, in our view, this is already factored into
estimates and valuations. Retail remains challenging for all of the IT services companies.
Valuation summary
Current______ TP _______ __ Rating ___Upside/
Company Ticker Currency price OldNewOld New downside FY18e PE FY19e PE
TCS TCS IN INR 2498 2380 2380 Hold Hold -4.7% 19.6 17.9
Infosys INFO IN INR 912 1050 1050 Buy Buy 15.1% 14.6 13.4
Wipro WPRO IN INR 289 225 225 Reduce Reduce -22.2% 16.9 16.2
HCLT HCLT IN INR 894 990 990 Buy Buy 10.8% 14.6 13.9
Cognizant CTSH IN USD 73 68 68 Hold Hold -6.2% 19.3 17.0
Source: HSBC estimates, Bloomberg, priced as at close 19 September 2017
20 September 2017
Yogesh Aggarwal*
Head of Research, India
HSBC Securities and Capital Markets (India) Private Limited
yogeshaggarwal@hsbc.co.in
+91 22 2268 1246
Vikas Ahuja*
Analyst, IT services
HSBC Securities and Capital Markets (India) Private Limited
vikasahuja@hsbc.co.in
+91 22 6164 0690
Vivek Gedda*
Analyst, IT services & Autos
HSBC Securities and Capital Markets (India) Private Limited
vivekgedda@hsbc.co.in
+91 22 6164 0693
* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is
not registered/ qualified pursuant to FINRA regulations
Indian IT
EQUITIES
INDIAN IT SERVICES
India Demand update and near-term triggers
EQUITIES ● INDIAN IT SERVICES
20 September 2017Demand update and near-term triggers
Accenture’s 4Q17 results on 28 September and guidance for FY18 could be a key trigger for the
sector in the near term. The table below highlights the guidance history of Accenture. It is
usually conservative and the company has beaten its guidance in 8 of the past 11 years (of the
3 years of miss, 2 were the sub-prime years). Consensus numbers suggest +4-7% for FY18 and
any material deviation from this expectation could have a significant read-across for the sector.
Table 1. Accenture FY18 guidance will be important trigger for Indian IT sector
Source: HSBC and company data
We like TCS’ ability to drive through tech cycles; but high base
and valuations limit stock upside
Overall, we continue to believe sector growth in recent quarters has been led by both structural
and cyclical factors. Structural factors such as a high base effect (both absolute revenues and
market share) and growing competition in the digital space are permanent and unlikely to
recede. However, the impact of cyclical factors such as heightened protectionism and the
business impact of uncertain macro policies in the US may abate, driving an acceleration in
growth from the current 6-7% rate of the sector.
In constant currencyLower EndUpper EndFinal reportedBEAT/(MISS)
Inorganic
contribution
FY079.0%12.0%13.0%2.5%
FY089.0%12.0%11.0%0.5%
FY099.0%12.0%0.0%-10.5%
FY10-3.0%1.0%-2.0%-1.0%
FY117.0%10.0%15.0%6.5%
FY127.0%10.0%11.0%2.5%
FY135.0%8.0%4.0%-2.5%1.0%
FY142.0%6.0%5.0%1.0%2.0%
FY154.0%7.0%11.0%5.5%1.0%
FY165.0%8.0%10.0%3.5%2.0%
FY17*5.0%8.0%7.0%0.5%2.0%
FY18*4.0%7.0%5.0%n/a2.0%
* based on consensus numbers.
Chart 1. Accenture’s growth has slowed in recent quarters, implying a cyclical slowdown.
Consequently, strong FY18 guidance would offer a positive read-across for overall
demand environment (organic revenue growth y/y)
Source: Company data, HSBC
8.0%
10.0%
8.0%
10.0%
8.0%
10.0%
8.0%
6.5%
5.0%4.5%5.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
1Q152Q153Q154Q151Q162Q163Q164Q161Q172Q173Q17EQUITIES ● INDIAN IT SERVICES
20 September 2017
TCS remains well positioned to benefit from this recovery. However, it is hard to see upside to
estimates due to the large base effect, and valuations are at a premium. As seen in the chart
below, the company needs to add cUSD1.67bn in FY19e to achieve the current estimates and
USD1.70bn in FY20e.
Chart 2. TCS constant currency organic revenue trends. The asking rate for FY19 is much
higher than FY17/18 and already factors in a recovery in the demand environment
Source: HSBC estimates, company reports
Infosys: Looking beyond the current situation
The loss of such a high-profile, technocratic CEO is not ideal and recent events may have
disappointed shareholders. Nevertheless, there are various reasons why we are reluctant to
take a structurally negative view on the company. We think Infosys’s brand and client
relationships are strong and, as such, believe the impact of Sikka’s departure on client
relationships and the far-reaching transformation required in the IT business will need to be
evaluated and tracked over the next three to four months. We also note that management exits
have been a regular phenomenon for Infosys in recent years and believe it is possible a change
in company leadership could reinvigorate the revenue momentum that has not been much
better than peers in the recent quarters. Obviously time is of essence here. A quick selection of
a CEO will be critical to re-establish confidence with clients and investors.
TechM: High telecom business – advantages vs disadvantages
In recent years, high telecom exposure has generally been considered a weakness for TechM
by the street. However, in an environment where the overall IT market is weakening, high
telecom exposure could be an advantage. Telecom growth for TechM seems to be cyclical
(Chart 3) and ‘loosely’ linked to the 3G/4G/5G roll-outs in the US/Europe and vendor
consolidation cycles across major clients. With 5G roll-out pending in the coming years and
major consolidation behind its top clients, growth could pick up in the coming years. Near term,
management is confident of growth in the non-telecom business due to the stronger pipeline
and order book in the manufacturing, banking and retail verticals.
1,984 1,625
1,883 1,892 1,714
1,373 1,347
1,672 1,700
24.2%
16.0%16.3%14.1%
11.1%
8.3%7.7%8.8%8.2%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
-
500
1,000
1,500
2,000
2,500
FY12FY13FY14FY15FY16FY17FY18eFY19eFY120e
CC organic incremental revenues (USD m)CC organic growth (y/y)
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20 September 2017Chart 3. Telecom business has been cyclical in the past and there are chances of decent
recovery in the coming years
Source: Company reports
CTSH – certainty but factored into estimates
CTSH 3Q seems to be on track with guidance of 1.6-3.0%. This would mean the company
should be able to achieve its full year guidance of 9-10% (may be the closer to the upper end).
However, we are more concerned over 2018 growth for CTSH. The company has to calibrate
both its growth and margin expansion now, which is not its usual strategy. On top of that, the
stock trades at a premium to sector peers on earnings, which factor in sector leading growth
and margin expansion.
33.3%
44.3%
3.5%0.7%
15.6%
2.7%4.2%
25.3%21.4%
-1.9%
7.1%5.3%8.9%
-10%
0%
10%
20%
30%
40%
50%
FY06FY07FY08FY09FY10FY11FY12FY13FY14FY15FY16FY17FY18eFY19e
Clean techM telecom revenues y-o-y growth
Chart 4. CTSH constant currency organic revenue trends. We expect CTSH to add
USD1.6bn and USD1.7bn in FY19e/FY20e
Source: HSBC estimates, company reports
1,411 1,176
1,500 1,365
1,678
1,199 1,223
1,553 1,658 30.7%
19.2%20.4%
15.4%
16.4%
9.7%9.1%10.4%10.1%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
FY12FY13FY14FY15FY16FY17FY18eFY19eFY20e
CC organic incremental revenues (USD m)CC organic growth (y/y)
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