September 25, 2018 2India IT Sector Currency impact: upside & downside The INR has depreciated sharply in the last fortnight to hit a low of 72.9/USD. Onaverage, every 1% change in USD/INR affects our EBIT margins by 20-40bps.Considering the current weakening of USD/INR, we raise our USD/INRassumptions to 71 for FY19-21E from 68. The USD has also strengthened againstGBP/EUR/AUD. This could have an adverse impact on revenue, depending on theshare of revenue in different currencies. While we cut USD revenue forecasts forFY19-21E by 0.8-1.7% for cross-currency headwind, we raise INR revenue by 1.6– 5.4% for INR depreciation tailwinds. Overall, we raise EPS by 0.5–8.1%.Fig 1: Change in EPS and TPParticulars Bbg CMP Rating FY19E Chg FY20E Chg FY21E Chg TP Chgcode (INR) New Old % New Old % New Old % New Old %Tata Consultancy Serv. TCS IN 2,198 HOLD 86.3 83.2 3.7% 100.7 94.6 6.5% 117.2 109.9 6.6% 2,110 1,990 6.0%Infosys INFO IN 718 HOLD 38.9 37.5 3.6% 44.4 41.7 6.6% 49.6 46.3 7.2% 755 665 13.5%HCL Tech HCLT IN 1,096 BUY 75.7 72.8 4.0% 88.6 83.0 6.7% 98.1 92.1 6.6% 1,240 1,160 6.9%Wipro WPRO IN 333 HOLD 19.5 18.8 3.9% 22.5 20.8 7.8% 24.5 22.7 8.1% 315 250 26.0%Tech Mahindra TECHM IN 749 BUY 47.8 46.8 2.1% 59.5 55.0 8.2% 66.8 61.8 8.1% 860 800 7.5%Mphasis MPHL IN 1,189 HOLD 58.0 56.0 3.6% 72.4 68.2 6.2% 84.8 78.8 7.6% 1,230 1,160 6.0%Hexaware Tech HEXW IN 451 HOLD 20.2 19.8 2.1% 26.2 24.4 7.4% 29.8 27.9 6.8% 470 440 6.8%Cyient CYL IN 711 BUY 38.8 38.4 1.0% 54.9 51.7 6.2% 66.8 62.0 7.8% 800 725 10.3%Persistent Systems PSYS IN 815 BUY 48.8 48.5 0.5% 63.2 59.7 5.9% 73.1 68.6 6.7% 950 895 6.1%TAKE Solutions TAKE IN 166 BUY 17.6 16.7 5.3% 23.5 21.9 7.1% 29.4 27.5 7.2% 285 270 5.6%Source: Maybank Kim EngFig 2: Changes in USD revenueRevenue (USDm)Particulars FY19E Chg FY20E Chg FY21E ChgNew Old % New Old % New Old %Tata Consultancy Serv. 20,967 21,128 -0.8% 23,203 23,437 -1.0% 25,642 25,901 -1.0%Infosys 11,640 11,729 -0.8% 12,756 12,885 -1.0% 14,061 14,203 -1.0%HCL Tech 8,492 8,571 -0.9% 9,356 9,470 -1.2% 10,293 10,418 -1.2%Wipro 8,496 8,485 0.1% 9,032 8,992 0.4% 9,630 9,541 0.9%Tech Mahindra 5,053 5,102 -1.0% 5,470 5,537 -1.2% 5,950 6,023 -1.2%Mphasis 1,114 1,130 -1.4% 1,292 1,315 -1.7% 1,501 1,517 -1.0%Hexaware Tech 683 686 -0.4% 802 808 -0.7% 919 926 -0.7%Cyient 673 680 -1.0% 767 777 -1.3% 878 889 -1.3%Persistent Systems 520 520 0.0% 590 590 0.0% 667 667 0.0%TAKE Solutions 305 305 0.0% 379 379 0.0% 459 459 0.0%Source: Maybank Kim EngSeptember 25, 2018 3India IT Sector Fig 3: Changes in INR revenue: HEXW, PSYS & TAKE the biggest beneficiariesRevenue (INRb)Particulars FY19E Chg FY20E Chg FY21E ChgNew Old % New Old % New Old %Tata Consultancy Serv. 1,469.1 1,435.8 2.3% 1,647.4 1,593.7 3.4% 1,820.6 1,761.3 3.4%Infosys 814.8 797.8 2.1% 905.7 876.1 3.4% 998.3 965.8 3.4%HCL Tech 594.5 581.9 2.2% 664.3 643.9 3.2% 730.8 708.4 3.2%Wipro 592.8 575.4 3.0% 643.1 611.4 5.2% 683.6 648.7 5.4%Tech Mahindra 353.5 346.5 2.0% 388.4 376.5 3.1% 422.4 409.6 3.1%Mphasis 78.1 76.8 1.7% 91.7 89.4 2.6% 106.6 103.1 3.3%Hexaware Tech 46.7 46.0 1.6% 57.0 54.9 3.7% 65.3 63.0 3.7%Cyient 47.1 46.2 1.9% 54.5 52.9 3.1% 62.3 60.5 3.1%Persistent Systems 36.4 35.3 3.1% 41.9 40.1 4.4% 47.3 45.3 4.4%TAKE Solutions 21.3 20.7 3.2% 26.9 25.8 4.4% 32.6 31.2 4.4%Source: Maybank Kim EngFig 4: Changes in EBIT margins: INFO, TCS & TECHM the biggest beneficiariesEBIT marginParticulars FY19E Chg FY20E Chg FY21E ChgNew Old bp New Old bp New Old bpTata Consultancy Serv. 26.8% 26.3% 46 28.1% 27.2% 97 28.7% 27.7% 103Infosys 24.1% 23.6% 46 24.8% 23.8% 98 25.2% 24.1% 113HCL Tech 20.4% 20.0% 45 21.0% 20.2% 81 21.1% 20.3% 80Wipro 16.0% 15.7% 31 16.9% 16.2% 71 17.3% 16.6% 71Tech Mahindra 14.2% 13.7% 45 15.5% 14.6% 93 15.9% 15.0% 94Mphasis 16.9% 16.5% 37 18.5% 17.8% 70 18.8% 18.0% 86Hexaware Tech 14.9% 14.5% 34 16.8% 16.0% 86 16.7% 16.0% 67Cyient 11.2% 10.8% 41 13.0% 12.3% 72 13.6% 12.9% 69Persistent Systems 12.7% 12.2% 50 13.7% 12.9% 81 14.0% 13.2% 75TAKE Solutions 14.0% 13.7% 37 15.1% 14.6% 50 15.9% 15.3% 53Source: Maybank Kim Eng September 25, 2018 4India IT Sector Fig 5: Example: Impact of USD/INR movements on EBIT margins of INFO Source: Company, Bloomberg# In 2Q14, benefits of USD/INR depreciation were 300bpsFig 6: Details of hedgesParticulars Hedge RemarksUSDmCYL 125Hedged 70% for next 12 months for major currencies. USD/INR forward cover rate of 68HCLT 1,800 Mix of short- and long-term hedges, forwards and optionsHEXW 203 Hedged for next 8 quarters, hedge rate of 70.14INFO 1,875 Hedged for two quarters, mix of options and forwards, a small portion is cash flow hedgesMPHL 558 Hedged for up to 24 months, hedge rate of 68.4, mostly cash flow hedgesPSYS 123 12-month rolling plain-vanilla forwards, hedge rate 67.81TCS 5,100 Approximate number, mix of short- and long-term hedgesTECHM 1,240 Mix of short- and long-term hedges, average hedge rate of 70.7WPRO 2,600 Mix of short- and long-term hedges, high proportion of cash flow hedgesSource: CompanyFig 7: Currency billing mixParticulars USD EUR GBP AUD OthersCYL 57.1% 12.0% 8.4% 13.0% 9.5%INFO 67.0% 12.3% 4.9% 8.3% 7.5%TCS 53.8% 10.2% 13.6% NA 22.5%TECHM 49.3% 11.4% 11.6% 4.8% 22.9%Source: Company 50.0 52.0 54.0 56.0 58.0 60.0 62.0 64.0 66.0 68.0 70.0 -100 -80 -60 -40 -20 0 20 40 60 80 100 1Q 14 2Q 14 # 3Q 14 4Q 14 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 3Q 16 4Q 16 1Q 17 2Q 17 3Q 17 4Q 17 1Q 18 2Q 18 3Q 18 4Q 18 1Q 19 USD/INR benefit (bp)average USD/INR。。。。。。