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Published on 24/12/2020 11:53:02 AM | Source: Motilal Oswal Financial Services Ltd

IT Sector Update - Large deal wins to further help accelerate the growth momentum By Motilal Oswal

Posted in Broking Firm Views - Sector Report| #IT Sector #Sector Report #Motilal Oswal Financial Services Ltd

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Large deal wins to further help accelerate the growth momentum

The large deal wins for both INFO and WPRO on 22 December 2020 reinforces our positive stance on the IT Services industry. The latter highlighted incremental growth opportunities from not just Cloud but also captive takeover. Recent captive takeover announcements have mainly come from Europe – TCS (Postbank Systems and Pramerica Systems), INFO (Rolls-Royce and Daimler) and WPRO (Metro). This presents an opportunity for Indian IT companies to increase their penetration in Continental Europe, which has historically lagged US in outsourcing adoption.

 

Deal nuances

* INFO would assist Daimler to transform its IT operating model and infrastructure landscape across workplace services, service desk, data center and networks. While INFO has not shared deal specifics, media articles (Times of India, 23 November 2020) mentioned a potential deal value of USD1.3b with an onboarding of 500-600 employees from Daimler to INFO.

* WPRO would support Metro in an USD700m, five-year deal on application development, Cloud, Engineering, and Digital infra. It will acquire the IT unit of Metro as part of the deal and on-board over 1,300 employees across India, Romania, and Germany.

 

 

Cloud and captive carve out a common theme

* Cloud adoption and migration has been the single most relevant theme for IT Service providers. Various industry reports suggest that the Cloud services market would see strong growth over the medium term, helped by increased focus on Cloud usage post the COVID-19 pandemic. We expect deal sizes to become bigger and Cloud emerging as a key growth driver for the sector.

* While the last few years saw significant expansion in in-house/captive units at large enterprises to support early Digital built-out, we expect increased captive monetization in coming years on the back of growing maturity in Digital capabilities. This trend has been further accelerated due to COVID-19 as IT Services companies are more cost efficient.

 

INFO remains our top preference in the sector

* Over the last two years, investments by INFO on its sales team has positioned it well to capture large deals with Digital components. Its TTM large deal wins have been 73% above that two years ago.

* We expect its strong deal pipeline and resilient portfolio to help deliver best of the peer group USD revenue (8.6%) and PAT (~17%) CAGR over FY20-22E, led by: 1) large deal wins, 2) high exposure to the Digital business (47% of revenue), 3) improvement in cost metrics like on-site-offshore ratio and attrition, and 4) the investment phase getting over.

* INFO’s payout ratio of 85% of FCF (over a five-year period), despite regular acquisitions, provides an attractive return opportunity to investors.

 

Valuation and view

* Despite rich valuations, we remain positive on the sector alluding to the multiyear growth cycle awaiting the sector. We remain positive on INFO and HCLT among the Tier I IT pack. We have a Neutral stance on WPRO due to its industry lagging growth performance.

 

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