Infosys: Is there scope for PE multiples to rise in IT stocks?


There is a very broad-based industry-wide tailwind which is translating into an uptick for the Indian IT companies, says Apurva Prasad, DVP-Research, Institutional Equities, HDFC Securities.

What were the key highlights or your takeaways from everything that Accenture announced?
The key highlights would be the continuity and strong outsourcing deal booking which was up significantly. The historical first quarter in terms of book to bill were significantly above their 0.9 book to bill. They were at about 1.16. The large deals also continue to chug along well. There have been about 16 deal wins which were $100 million plus and the good thing was this is fairly broad-based.

That has led to the guidance going up from 2-5% to 4-6%. It was a combination of the stronger first quarter performance as well as the indication of acceleration in the second half. Some of these factors translate into the overall ecosystem looking positive. If I would want to quote a couple of other instances from their results, it is the utilisation which is expected to moderate a bit and from a demand perspective, that is also a positive indicator. They continue to spend on M&M. They do about $1.7 billion or so annually, more than 20% of their operating cash and which indicates the demand environment has certainly recovered.

We had written about this sometime around May-June when we were expecting some of these things to play out. Overall, it is a multi-year opportunity and even if we look at incremental growth over the next few years, that is significantly higher than what was being added over the past few years. So it is a very broad-based industry-wide tailwind which is translating into an uptick for the Indian IT companies.

Do you think that in FY21 we will be on the path of a double digit growth?
Certainly in FY22. In FY21, at the beginning of the pandemic, the anticipation was mid to high single digit type of a decline and that has not happened. It is going to be a slight growth this year but all of that demand is going to translate into double digit growth into FY22 and that is what I meant when I said if you look at the incremental growth from FY21 to FY23 and that is almost twice as what was added over the prior four-year period.

Whether you look at the overall IT services by Gartner estimates or whether you look at even growth estimates for the larger tier-1 cities, some of these demand drivers in terms of acceleration of move to Cloud, digital adoption has become a key focus point for most of the enterprises and this is across industries.

Some of the industries were laggards in adopting these technologies. It is just that the adoption curve has improved significantly and that is what is leading to increased spends. BFSI was actually not doing too well till about a couple of years or almost a year back but some of the larger global banks are spending on technology despite being already mature buyers, These are indications that a lot more technology spend as a percentage of revenue by enterprises is going to happen over the next few years.

That augurs well for many of the IT companies. For the past two quarters, most of them have been upping their guidance. If you look at the deal, DCB numbers have been at an all time high. So yes, these would be positive indicators. What has also helped in the recent past is that they had some of the gains on margins. Some of that normalises as they get into the wage cycle but there have also been very strong operational levers at play over the past two quarters. Some of that will go away as travel resumes at some stage. But yes, we see broader positive tailwinds for the sector to continue.

Do you think that there is more scope for raising PE multiples in IT?
Multiples are certainly at a premium to historical valuations. All are between one and two standard deviations above the historical. For example, TCS is giving about 27 times multiples. For Infosys we are ascribing 23 times, HCL we are ascribing about 18 times. Next few years’ growth rates are going to be far greater than the last few years, Scale is also a very important factor. The integrated nature of services as well as relevance for the end clients have dramatically increased over the recent past versus the past five to six years.

Some of those qualitative aspects have gone up and will certainly justify multiples apart from the fact that at cash generation, they have probably been the best in the past few quarters. Some of those variables will also lend support to valuations as they are also paying out a lot more than they did earlier and that goes a long way. Apart from the fact that there is longevity of high growth for a longer period of time, all of this would play into multiples remaining at premium to historical level. And that is where we are. HCL Tech shows relative valuation comfort as well as the businesses that use broad-based multi factor matrices. We like HCL Tech and Infosys among tier one companies.





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