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HDFC Securities Report
We maintain our positive outlook on the sector despite the sector recently re-rating to +2 standard deviation valuations.
The centre of gravity is expanding beyond just the tier-1s, as mid-tiers are showing symmetry in balance sheet metrics (and reverting to growth premium).
Core strengths across the sector include:
- Low cyclicality supported by high-annuity/client longevity, diversified industry verticals, growth drivers across cycles and large total available market.
- Strong cash generation and capital allocation.
In this note, we have assessed the sector's capital allocation and used multiple scenarios (growth-time, payout, and work-from-home) to deconstruct value.
We believe that the sector is poised for higher multiples, led by:
- The longevity of high-growth period (current valuations imply approximately 5% 10-year compound annual growth rate) with ‘multi-year' growth tailwind from the economic crisis.
- The continuity of high (increasing) payouts.
- Global ‘best in class metrics' across growth, free cash generation, and balance sheet strength.
We reckon that the sector (including mid-tier) can command multiples higher than historical averages, supported by the sector's resilience and growth longevity (in some cases anti-fragility).
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