India IT Services: Q1 preview: Slow start to shift burden of growth expectations to H2

Research evidence excerpt

India IT Services: Q1 preview: Slow start to shift burden of growth expectations to H2

company for its ability to grow faster than peer set through a combination of strong

front-end alongside reasonable delivery. This is likely to reflect by way of growth being

higher or growth delta lasting longer than visible / estimated in a DCF model.

Downside risks: (i) Increase in competitive intensity by large-caps (ii) Any appreciation

(or stabilization) in INR vs USD can restrict the potential to invest in AI capabilities

Upside risks: (i) Execution ahead of expectations on announced M&A (ii) Continued

depreciation of INR vs. USD can help margins on the potential upside

HCL (XHCLF)

Our PO of INR 1,440 is based on a PE of 20x for the 12 months ending Mar-27E. For the

current phase, we think that valuations are best compared with the phase of FY16-20

when industry was in a similar situation and trying to regain visibility from enhanced

adoption of cloud and digital services. Our target multiple for HCL of 20x is at a 45%

premium to the FY16-20 average (or at parity to our multiple for peers TCS & Infosys)

as we bake in (1) a 10% premium for stronger cash return approach, (2) a 25% premium

to phase of FY16-20 on account of pivoting to a well-rounded business model across key

services vs. being mainly an infrastructure services led play earlier and (3) another 10%

for stable execution.

Downside risks to our PO are 1) persistent macro uncertainty 2) increased competitive

intensity in infrastructure services.

Upside risks to our PO are 1) faster than expected pick-up in the software business & 2)

Faster depreciation of INR vs. USD.

Infosys (INFYF)

Our PO of INR 1,570 (USD 17.1) is based on a PE of 20x for the 12 months ending Mar-

27E.