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Nirmal Bang Report
We reinstate ratings on our coverage universe and upgrade our view to neutral with a market cap weighted upside of 10%.
We've also introduced FY23 estimates and rolled forward our valuation basis to September 2022 earning per share.
Our shift in stance (from a cautious one held for the last many years) is on the back of both, higher earnings and higher target price to earning (PE) multiples.
The earnings uplift is coming from expectation of margin expansion over the next two to four years rather than any material pick-up in organic revenue growth.
The changed view on margins has been driven by business model changes that the pandemic has induced, which we think are structurally positive.
Higher PE multiples are driven by a combination of valuation exuberance (irrational!?) in the enterprise technology space in the U.S. and constrained domestic investment choices.
It is surreal. In the backdrop of what has likely been the worst economic growth in the last many decades in the June 2020 quarter - seven in the case of the U.S., where real gross domestic product was down 9.1% YoY, since records started in 1995 for the EU, where real GDP was down 16.1% YoY - company results/commentary surprised on the upside.
There was reinstitution of guidance by Infosys Ltd., HCL Technologies Ltd. and Cognizant, indicating better demand visibility.
This was a 180 degree turn after suspension of the guidance by the trio just a few months back.
Order inflow for most firms grew YoY, pricing pressure was marginal and cashflows were at historic best.
We even had customers extending advances to vendors!! This sort of relatively free spending client behavior is quite unlike what you would see in a deep contraction (however short it may be).
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