BQ Blue's special research section collates quality and in-depth equity and economy research reports from across India's top brokerages. These reports offer BloombergQuint's subscribers an opportunity to expand their understanding of companies, sectors and the economy.
HDFC Securities Report
We maintain our positive outlook on the sector despite the sector recently rerating 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-
1. low cyclicality supported by high-annuity/client longevity, diversified industry verticals, growth drivers across cycles and large total available market and
2. 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 or WFH) to deconstruct value.
We believe that the sector is poised for higher multiples, led by
1. 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,
2. the continuity of high (increasing) payouts, and
3. 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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