Will worsening macro indicators start reflecting in commentary? We expect Tier 1 IT (information technology) (incl. Cognizant Technology) aggregate USD CC (constant currency) revenues to grow marginally below Q1 at 3.4% q-o-q (quarter on quarter) in Q2F (vs 3.7% q-o-q in Q1) and overall USD revenue growth to decelerate to 9.5% y-o-y (seventh quarter of deceleration from a peak of 15.4% y-o-y). Cross currency moves will again hit USD revenues by 80-100bps across tier 1 IT (ex Cognizant). In CC terms, TCS and Infosys will likely lead growth (4% q-o-q), followed by HCL Technologies (3.3% q-o-q) and Cognizant/Wipro (2.7% q-o-q). Tech Mahindra will lag with 2% q-o-q in CC terms, in our view. The key to watch is whether there is any tempering of growth expectations going forward, given contrasts of positive demand commentary and weakening macro indicators. Also of interest would be: (i) trends in US/BFSI/Retail/ADM/EAS, which have been laggards; (ii) commentary on challenged segments Energy/Telecom; and (iii) continuation of strong momentum in Europe/IMS/BPO/Engineering services/Mfg/Healthcare.

Will larger segments – US/BFSI/Retail – rebound?

We believe there has been some worsening of macro demand indicators (US PMI down to a 12-month low in Aug-15, private jobs data being weaker than last year, and client financials seeing deterioration over the last three-four quarters). This seems to have weighed on US growth for Indian IT, in addition to sector-specific issues in energy/telecom. Recovery in the US is crucial for stock performance and we believe those hopes could see some tempering going into 2H as the weaker macro feeds into demand. Commentary on (i) BFSI/Retail, which have been the key contributors to US drag, and (ii) Continuation of traction in Europe will be keenly watched.

Will pricing stabilise and INR depreciation benefits be retained?

Historically in sharp rupee depreciation periods, margin impacts have been between one-fifth to half of theoretical impacts, and whether rupee depreciation gains will be retained this time around will be key to countering any growth moderation. The answer to that would lie in pricing trends, which we think might continue to be soft. Our view is that while Q2 will see margin increases driven by INR depreciation, these benefits are unlikely to be retained going forward. We expect Ebit margins at HCL Tech to be up 60bps q-q, TCS/Infosys up ~90bps q-o-q and Tech Mahindra up ~200bps q-o-q. At Wipro, we expect flattish margin trends as USD-INR realisations in Q1 were high at 64.7. The aggregate earnings growth for Tier-1 IT is likely to be at ~12.5% y-o-y in Q2FY16F (forecast), on our estimates.

Key things to watch:

Infosys: We expect Infosys to retain its FY16F USD CC revenue growth guidance of 10-12%. Key to watch would be (i) Pricing trends and any stability (after ~700bp CC offshore pricing decline over last four quarters), (ii) deal flow and deal win commentary, and (iii) Sustenance of Q1 performance in Consulting & SI and improvement in ADM (together ~two-thirds of Infosys revenues), will be a trigger for re-rating. Any moderation in commentary on margins, or back-ended growth indications, might be taken negatively. We believe that while near-term growth expectations might not be at risk, there is a chance of a disappointment with respect to Street Ebit margin expectations.

TCS: TCS for the past four quarters has come in below consensus revenue growth expectations, driven by segment-specific weakness in energy/telecom /insurance or geographical weakness in Japan/LATAM/India, and this has led to the stock underperforming the Nifty by 2% LTM (last twelve months). We believe an in line or better result is crucial in Q2 for stock performance, even though we consider TCS to be fundamentally stronger than Infosys/Wipro.

Wipro: We expect Wipro to guide for 1.5-3.5% q-o-q USD revenue growth in Q3FY16F. The key catalyst for Wipro would be better growth in Europe (which has dragged at -4% y-o-y in LTM vs ~4% y-o-y for tier 1 IT aggregate), the rebound in Healthcare (seen two quarters of softness after growing strongly) and any signs of stabilisation in Energy & Utilities. Commentary on Energy & Utilities (Wipro’s area of strength) and possible second half recovery, as indicated by the company earlier, would be keenly watched.

HCL Tech: We expect strong momentum in IMS and BPO at HCL Technologies, although engineering services could possibly take a breather after ~23% y-o-y growth in FY15 (though we remain positive on longer-term prospects). We expect positive margin progression despite partial salary hikes in Q1, which should give comfort on management guidance of FY16F Ebit margins between 21% and 22%. Growth comfort and reasonable valuations should continue to be the drivers for stock performance.

Cognizant: We expect Cognizant Technology to marginally raise its FY15F guidance to 20.5%+ (vs 20.1% earlier). Strength in healthcare and near-term impacts of M&A in this space, coupled with share gains in BFSI, would be key to watch. We believe Cognizant is well-placed on growth given ~ 50% revenue contribution from manufacturing and healthcare, market share gains in BFSI, and strong Digital Capabilities.

Tech Mahindra: Tech Mahindra would be the weakest result on growth among tier 1 information technology in Q2, on our calculation. However, margin trajectory should start to improve, the slope of which along with the outlook on telecom/enterprise segments and deal flow will be keenly watched. Play selective; back growth comfort; top Buys HCL Tech and Cognizant.

Mix is becoming important in choosing stocks as contrasting forces are at play (i) US demand has not seen improvement, while Europe is strong at constant currency growth of 16% y-o-y for tier 1 IT; (ii) traditional services (ADM/EAS) are sluggish, while underpenetrated services (IMS/BPO/Engineering services) are strong; (iii) BFSI/Retail are decelerating while healthcare are growing

Given the importance of mix, we prefer HCL Tech (IMS, Engg. Services, BPO ~60% of revenues) and Cognizant (Healthcare/Mfg ~50% of revenues, strong Digital capabilities and market share gains in BFSI) as our key absolute Buys in the space.

Within TCS/Infosys we prefer TCS from a longer-term perspective on a relative basis on better portfolio mix and stronger fundamentals. Though on near-term commentary, Infosys is sounding more confident than TCS.

At the end of the week, Infosys commanded a market valuation of Rs 2,69,489.03 crore. This was Rs 432.68 crore more than HDFC Bank’s m-cap of Rs 2,69,056.35 crore. (Reuters)

IT major Infosys has surpassed private sector lender HDFC Bank, becoming the third most valued Indian firm in terms of market valuation, with TCS leading the top 10 companies chart, followed by Reliance Industries (RIL).

A rally in the stock market past week saw the combined market valuation of top eight Sensex companies surge by Rs 50,464.51 crore.

HDFC Bank came behind Infosys in the ranking of top-10 companies last week.

At the end of the week, Infosys commanded a market valuation of Rs 2,69,489.03 crore. This was Rs 432.68 crore more than HDFC Bank’s m-cap of Rs 2,69,056.35 crore.

During the past week, the market valuation of Infosys surged by Rs 7,315.77 crore to Rs 2,69,489.03 crore and HDFC Bank added Rs 4,570.52 crore to Rs 2,69,056.35 crore.

Shares of Infosys touched its one-year high level of Rs 1,197 apiece on Thursday.

TCS emerged as the biggest gainer among the top 10 firms, with its valuation soaring by Rs 12,555.44 crore to Rs 5,17,045.42 crore.

The m-cap of RIL zoomed by Rs 7,901.76 crore to Rs 2,79,249.60 crore and CIL added Rs 6,063.71 crore to Rs 2,07,303.08 crore.

ITC’s valuation climbed Rs 4,936.3 crore to Rs 2,63,911.16 crore.

Similarly, the market valuation of ONGC went up by Rs 4,192.19 crore to Rs 1,98,744.04 crore and that of HDFC rose by Rs 2,928.82 crore to Rs 1,89,203.10 crore.

Two companies that suffered losses in their m-cap were SBI and Sun Pharma.

SBI’s valuation dipped by Rs 2,837.34 crore to Rs 1,78,108.76 crore and Sun Pharma lost Rs 132.36 crore to Rs 2,14,353.31 crore.

TCS continued to rule the top 10 list, followed by RIL, Infosys, HDFC Bank, ITC, Sun Pharma, CIL, ONGC, HDFC and SBI.

The benchmark Sensex gained 1.38 per cent to settle at 26,220.95 over the past week.

FPIs have withdrawn a net of Rs 6,475 crore from equities in September, according to depositories data for this month. (Reuters)

Foreign investors have pulled out close to Rs 6,500 crore from stock markets in September amid worries over a global economic slowdown, making it the second consecutive monthly outflow.

However, debt markets have seen an inflow of Rs 692 crore during the period under review.

Analysts are now optimistic about capital inflows after the Reserve Bank lowered the key lending rate by 50 basis points, which they expect may provide a positive momentum to the markets.

The latest pull-out follows a record net outflow of Rs 17,428 crore from equities last month. That was the highest net outflow by foreign portfolio investors (FPIs) in a single month since 1997.

The segregated data prior to 1997 was not available.

FPIs have withdrawn a net of Rs 6,475 crore from equities in September, according to depositories data for this month.

Market experts attributed huge outflows to sustained global risk-off trend along with concerns over economic slowdown and currency devaluation in China.

Besides, liquidity problems in the gulf countries due to prolonged slump in crude prices has prompted these nations to withdrew large chunk of their sovereign wealth fund from capital markets globally.

Since the beginning of the year, FPIs have made a net investment of Rs 21,047 crore in equities and Rs 39,395 crore in debt markets.

A lot of PE firms tend to remain invested in portfolio companies for a period of five to eight years and exit these investments at a premium at the end of this tenure. (Express archive)

The current calendar year has seen private equity investments to the tune of $11.8 billion, which is higher that $11.1 billion for the whole of calendar 2014. As per data sourced from Venture Intelligence, PE exits during the current calendar have also touched a record high at $6.8 billion, which is nearly double of $3.9 billion recorded in 2014, and, in fact, the best so far for PE exits.

Data analysis indicates a five-fold jump in exits via strategic sales, which stood at $483.49 million in 2014 versus $2.5 billion in CY2015 (year-to-date), while exits via the secondary route climbed to $1.6 billion in CY2015 YTD from $349.12 million in CY2014. PE exits via the buyback option gained momentum and stood at $434.49 million in CY2015 YTD versus $137.95 million in CY2014. Exits via IPO totalled $2.2 billion in comparison to $2.8 billion in CY 2014.

While the record exits can be explained by the investment cycle — with the end of five-seven years, PE firms make an exit — higher investment is attributed to better investor confidence. “This year may be the best ever. I think I can close north of $15 billion. The good part is the PE exit-to-entry ratio of 35 to 40, which is a fairly good ratio at this point of time,” noted Akhil Awasthi, managing partner, Tata Capital Growth Fund.

Among the top five PE exits, iGate’s strategic stake sale to Capgemini, pegged at over $1 billion, allowed Apax Partners to exit its holding in the company. Likewise, Baring Asia exited its investment in Lafarge India via the buyback route in a deal valued at around $300 million.

PE exits in CY 2015 also include stake sale via open market transactions by investment firms including Chrys Capital, KKR, Tiger Global, Apollo Management and GIC that had invested in sectors like banking, telecom, IT, media and FMCG.

For example, Chrys Capital offloaded its stake in ING Vysya Bank for $137 million, returning 3.6 times to investors. PE giant Tiger Global had partly exited Just Dial by selling 3.41% stake in it for $50 million, giving a return of 14 times to investors. Singapore’s sovereign wealth fund GIC exited investment in FMCG company Marico, with a return multiple of 1.95 times, at $34 million.

Similarly, KKR marked its first exit in the country by selling its entire holding of 2.5% in telecom tower company Bharti Infratel for $136 million. KKR had invested in Bharti Infratel in 2008 and this was its second investment in India. Apollo Global Management partly exited its investment in media and entertainment company Dish TV by selling 3% stake for $41 million, securing a return multiple of 2.06 times.

American PE firms KKR and Apollo Global Management, counted amongst the largest PE firms in the world, made their maiden investments in the country during 2006 and 2009, respectively.

A lot of PE firms tend to remain invested in portfolio companies for a period of five to eight years and exit these investments at a premium at the end of this tenure. PE funds invested around $19 billion in India in 2007, the highest quantum of PE investment made into the country in a single year ever. This was followed by investments of around $10 billion in 2008.

“Promoter buyback and secondary sales will be the preferred options for most PE players, since there is a bit of inertia in the IPO market with the experience of investors not being very positive,” said Harish HV, partner at Grant Thornton India, adding, “However, a few good IPOs can revive investor appetite.”