Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Thematic (Sector/Industry)

The earnings momentum behind the sector is currently extraordinarily strong, with all four companies reporting an acceleration in revenue growth rates, record operating margins and a continued strong medium-term demand outlook, driven by accelerated cloud adoption and digitalisation, across many verticals and geographies. These companies are also set to record strong y/y growth numbers over the next two quarters given the low base from last year’s pandemic-hit fiscal 4Q20 and 1Q21. However, following phenomenal share price performance from its March-2020 lows, this has been reflected in valuations as these companies now trade at record valuation multiples, on based on significantly upgraded earnings growth expectations. In this insight, after a brief overview of the recent reporting season and the outlook for the industry, I look at what long-term growth expectations are implied by current valuation levels, based on the Justified PE calculation. I also compare this to other high-quality Indian companies.

The earnings momentum behind the sector is currently extraordinarily strong, with all four companies reporting an acceleration in revenue growth rates, record operating margins and a continued strong medium-term demand outlook, driven by accelerated cloud adoption and digitalisation, across many verticals and geographies. These companies are also set to record strong y/y growth numbers over the next two quarters given the low base from last year’s pandemic-hit fiscal 4Q20 and 1Q21. However, following phenomenal share price performance from its March-2020 lows, this has been reflected in valuations as these companies now trade at record valuation multiples, on based on significantly upgraded earnings growth expectations. In this insight, after a brief overview of the recent reporting season and the outlook for the industry, I look at what long-term growth expectations are implied by current valuation levels, based on the Justified PE calculation. I also compare this to other high-quality Indian companies.

Indian IT Services: What Justified PE Ratios Tell Us About Sustainable Growth Expectations

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

Apollo Hospitals Enterprise / Equity Capital Markets

<div>
<a href="https://www.smartkarma.com/entities/apollo-hospitals-enterprise" target="_blank" data-smartkarma-citation="entities:880:1" rel="noopener">Apollo Hospitals Enterprise (APHS IN)</a> plans to raise around US$140m via a QIP which was launched last night.
I have covered various aspects of the deal in my earlier note,  <a href="https://www.smartkarma.com/insights/apollo-hospital-placement-qip-early-look-this-time-it-s-different" target="_blank" rel="noopener">Apollo Hospital Placement/​QIP Early Look - This Time It’s Different</a>.
</div>
<div>
In this insight, I'll run the deal through our ECM framework and talk about recent updates.
</div>


Apollo Hospitals Enterprise (APHS IN) plans to raise around US$140m via a QIP which was launched last night.
I have covered various aspects of the deal in my earlier note,  Apollo Hospital Placement/​QIP Early Look - This Time It’s Different.


In this insight, I'll run the deal through our ECM framework and talk about recent updates.


Apollo Hospital Placement/​​QIP - Well Flagged Deal with Well Planned Use of Proceeds

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Tata Consultancy Svcs / Technical Analysis

The IT services industry continues to benefit from secular tailwinds, and below we lay out what we believe is a compelling case to add exposure to Indian IT consulting stocks at current levels. In today’s report we highlight the following actionable names which display bullish price and RS trends: Tata Consultancy Services Limited (532540-IN), Infosys Limited (500209-IN), and Wipro Limited (507685-IN). Add exposure..

The IT services industry continues to benefit from secular tailwinds, and below we lay out what we believe is a compelling case to add exposure to Indian IT consulting stocks at current levels. In today’s report we highlight the following actionable names which display bullish price and RS trends: Tata Consultancy Services Limited (532540-IN), Infosys Limited (500209-IN), and Wipro Limited (507685-IN). Add exposure..

Indian IT Consulting Stocks Resuming Uptrends; Buy Tata Consultancy Svcs, Infosys, & Wipro

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Index Rebalance

Dr. Reddy's Laboratories / Index Rebalance

<div>The S&amp;P BSE Sensex is the flagship index of the Bombay Stock Exchange (BSE). The index has 30 stocks and is a free float market cap weighted index. The next rebalance will be effective after the close of trading on 18 December.</div><div>
The December review uses the market cap and turnover data from 1 May to 31 October to determine the stocks to be included and excluded from the index, and the announcement of the changes is done 4 weeks before the rebalance effective date.
<a href="https://www.smartkarma.com/entities/dr-reddy-s-laboratories-ltd" target="_blank" data-smartkarma-citation="entities:16406:1" rel="noopener">Dr. Reddy's Laboratories (DRRD IN)</a> continues to remain a high probability inclusion, and <a href="https://www.smartkarma.com/entities/oil-natural-gas-corp-ltd" target="_blank" data-smartkarma-citation="entities:3456:1" rel="noopener">Oil &amp; Natural Gas Corp (ONGC IN)</a> is the corresponding deletion candidate. There is a lower probability of <a href="https://www.smartkarma.com/entities/britannia-industries-ltd" target="_blank" data-smartkarma-citation="entities:16495:1" rel="noopener">Britannia Industries (BRIT IN)</a> being included in the Sensex, in which case <a href="https://www.smartkarma.com/entities/tata-steel-ltd" target="_blank" data-smartkarma-citation="entities:20934:1" rel="noopener">Tata Steel Ltd (TATA IN)</a> would be deleted.
Since we published our first Insight at the beginning of September, <a href="https://www.smartkarma.com/entities/dr-reddy-s-laboratories-ltd" target="_blank" data-smartkarma-citation="entities:16406:1" rel="noopener">Dr. Reddy's Laboratories (DRRD IN)</a> has outperformed <a href="https://www.smartkarma.com/entities/divi-s-laboratories-ltd" target="_blank" data-smartkarma-citation="entities:4871:1" rel="noopener">Divi'S Laboratories (DIVI IN)</a> by 20% and <a href="https://www.smartkarma.com/entities/torrent-pharmaceuticals-ltd" target="_blank" data-smartkarma-citation="entities:15762:1" rel="noopener">Torrent Pharmaceuticals (TRP IN)</a> by 24%. We would take off the positions and wait for a reversal before re-entering the trade.
The ratio of <a href="https://www.smartkarma.com/entities/oil-natural-gas-corp-ltd" target="_blank" data-smartkarma-citation="entities:3456:1" rel="noopener">Oil &amp; Natural Gas Corp (ONGC IN)</a> to <a href="https://www.smartkarma.com/entities/oil-india-ltd" target="_blank" data-smartkarma-citation="entities:20751:1" rel="noopener">Oil India Ltd (OINL IN)</a> is trading close to its lows providing an entry point into a long ONGC/ short Oil India trade.
This Insight is marked as bearish due to Dr Reddy's recent outperformance versus its peers that could revert in the near future.
</div>

The S&amp;P BSE Sensex is the flagship index of the Bombay Stock Exchange (BSE). The index has 30 stocks and is a free float market cap weighted index. The next rebalance will be effective after the close of trading on 18 December.
The December review uses the market cap and turnover data from 1 May to 31 October to determine the stocks to be included and excluded from the index, and the announcement of the changes is done 4 weeks before the rebalance effective date.
Dr. Reddy's Laboratories (DRRD IN) continues to remain a high probability inclusion, and Oil &amp; Natural Gas Corp (ONGC IN) is the corresponding deletion candidate. There is a lower probability of Britannia Industries (BRIT IN) being included in the Sensex, in which case Tata Steel Ltd (TATA IN) would be deleted.
Since we published our first Insight at the beginning of September, Dr. Reddy's Laboratories (DRRD IN) has outperformed Divi'S Laboratories (DIVI IN) by 20% and Torrent Pharmaceuticals (TRP IN) by 24%. We would take off the positions and wait for a reversal before re-entering the trade.
The ratio of Oil &amp; Natural Gas Corp (ONGC IN) to Oil India Ltd (OINL IN) is trading close to its lows providing an entry point into a long ONGC/ short Oil India trade.
This Insight is marked as bearish due to Dr Reddy's recent outperformance versus its peers that could revert in the near future.


Sensex Index Rebalance Preview: Take Profit on Strong Outperformance

The key takeaways, from the recent reporting season, was that 1) management teams seem more upbeat about growth going forward, driven by accelerated adoption of cloud services and investments in technology solutions, which they believe could drive a multiyear growth story, 2) the significant majority of deal momentum is driven by smaller engagements (apart from maybe Infosys), and 3) companies are reinstating salary increases given confidence on the growth outlook and significant margin recovery following steep discretionary cost cuts in reaction to the COVID-19 pandemic. The sector has significantly outperformed the local index over the past 3-months, delivering over 30% local currency share price return, on average. These companies are, however, currently trading at peak valuation multiples, based on sell-side estimates which, in most cases, are already well ahead of management guidance.Given the strong share price performance and peak valuation multiple levels, based on arguably elevated earnings, I am turning bearish on the sector despite the strong medium-term growth outlook. The numbers which are currently baked-in leave truly little room for disappointment at a time when we are going into a seasonally weaker quarter, impacted by employee furloughs and possible margin headwinds. These remain extremely high-quality companies which will benefit from accelerated technology investments in the wake of the COVID-19 pandemic, but I would wait for a better entry point.<div class="content-highlight">
 Please also see previous notes on the subject:
<a href="https://www.smartkarma.com/insights/smartkarma-webinar-indian-it-services-picks-and-pans" target="_blank" data-smartkarma-citation="insights:42241" rel="noopener">Smartkarma Webinar | Indian IT Services: Picks and Pans</a> 
<a href="https://www.smartkarma.com/insights/indian-it-services-covid-19-revenue-impact-troughed-recovery-already-priced-in" target="_blank" data-smartkarma-citation="insights:41387" rel="noopener">Indian IT Services: COVID-19 Revenue Impact Troughed, Recovery Already Priced In?</a> 
<a href="https://www.smartkarma.com/insights/wipro-net-cash-equal-to-24-of-its-market-cap-deep-value-or-a-value-trap" target="_blank" data-smartkarma-citation="insights:39663" rel="noopener">Wipro: Net Cash Equal to 24% of Its Market Cap, Deep Value or a Value Trap?</a> 
<a href="https://www.smartkarma.com/insights/tata-consultancy-services-premium-at-excessive-levels-pricing-in-overly-optimistic-relative-growth" target="_blank" data-smartkarma-citation="insights:38750" rel="noopener">Tata Consultancy Services: Premium at Excessive Levels, Pricing in Overly Optimistic Relative Growth</a> 
<a href="https://www.smartkarma.com/insights/hcl-technologies-doubts-over-organic-growth-eroding-returns-drives-undeserved-discount-rating" target="_blank" data-smartkarma-citation="insights:38545" rel="noopener">HCL Technologies: Doubts over Organic Growth, Eroding Returns, Drives Undeserved Discount Rating</a> 
</div>

The key takeaways, from the recent reporting season, was that 1) management teams seem more upbeat about growth going forward, driven by accelerated adoption of cloud services and investments in technology solutions, which they believe could drive a multiyear growth story, 2) the significant majority of deal momentum is driven by smaller engagements (apart from maybe Infosys), and 3) companies are reinstating salary increases given confidence on the growth outlook and significant margin recovery following steep discretionary cost cuts in reaction to the COVID-19 pandemic. The sector has significantly outperformed the local index over the past 3-months, delivering over 30% local currency share price return, on average. These companies are, however, currently trading at peak valuation multiples, based on sell-side estimates which, in most cases, are already well ahead of management guidance.Given the strong share price performance and peak valuation multiple levels, based on arguably elevated earnings, I am turning bearish on the sector despite the strong medium-term growth outlook. The numbers which are currently baked-in leave truly little room for disappointment at a time when we are going into a seasonally weaker quarter, impacted by employee furloughs and possible margin headwinds. These remain extremely high-quality companies which will benefit from accelerated technology investments in the wake of the COVID-19 pandemic, but I would wait for a better entry point.
 Please also see previous notes on the subject:
Smartkarma Webinar | Indian IT Services: Picks and Pans 
Indian IT Services: COVID-19 Revenue Impact Troughed, Recovery Already Priced In? 
Wipro: Net Cash Equal to 24% of Its Market Cap, Deep Value or a Value Trap? 
Tata Consultancy Services: Premium at Excessive Levels, Pricing in Overly Optimistic Relative Growth 
HCL Technologies: Doubts over Organic Growth, Eroding Returns, Drives Undeserved Discount Rating 


Indian IT Services: Valuation and Earnings Levels Suggest We Are Nearing the Point-Of-Peak-Optimism

India

Wipro Limited specializes in IT and computer related technologies. The Group's services encompass a number of areas, including software architecture, business intelligence systems, e-commerce, data warehousing, Internet access devices, network management, system administration, messaging systems, IT consulting and design. Wipro also has a presence in niche markets of consumer products.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Wipro Ltd (WPRO IN)

Indian IT Services: What Justified PE Ratios Tell Us About Sustainable Growth Expectations

In this insight, I look at the long-term growth expectations implied by current valuation levels, based on a Justified PE calculation. I also...

Wium Malan, CFA

Apollo Hospital Placement/QIP - Well Flagged Deal with Well Planned Use of Proceeds

Apollo Hospitals Enterprise plans to raise around US$140m via a QIP which was launched last night. I have covered various aspects of the deal in my...

Sumeet Singh

Indian IT Consulting Stocks Resuming Uptrends; Buy Tata Consultancy Svcs, Infosys, & Wipro

In today’s report we highlight the following actionable names which display bullish price and RS trends: Tata Consultancy Services Limited, Infosys...

Vermilion Research

Sensex Index Rebalance Preview: Take Profit on Strong Outperformance

With the review period for the Sensex almost complete, we still see DRRD as a high probability inclusion and ONGC as a deletion. With DRRD...

Brian Freitas

Indian IT Services: Valuation and Earnings Levels Suggest We Are Nearing the Point-Of-Peak-Optimism

Given the strong share price performance and peak valuation multiple levels, based on arguably elevated earnings, I am turning bearish on the...

Wium Malan, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Indian IT Services: What Justified PE Ratios Tell Us About Sustainable Growth Expectations

In this insight, I look at the long-term growth expectations implied by current valuation levels, based on a Justified PE calculation. I also...

Wium Malan, CFA

Apollo Hospital Placement/​​QIP - Well Flagged Deal with Well Planned Use of Proceeds

Apollo Hospitals Enterprise plans to raise around US$140m via a QIP which was launched last night. I have covered various aspects of the deal in my...

Sumeet Singh

Indian IT Consulting Stocks Resuming Uptrends; Buy Tata Consultancy Svcs, Infosys, & Wipro

In today’s report we highlight the following actionable names which display bullish price and RS trends: Tata Consultancy Services Limited, Infosys...

Vermilion Research

Sensex Index Rebalance Preview: Take Profit on Strong Outperformance

With the review period for the Sensex almost complete, we still see DRRD as a high probability inclusion and ONGC as a deletion. With DRRD...

Brian Freitas

Indian IT Services: Valuation and Earnings Levels Suggest We Are Nearing the Point-Of-Peak-Optimism

Given the strong share price performance and peak valuation multiple levels, based on arguably elevated earnings, I am turning bearish on the...

Wium Malan, CFA

Apollo Hospital Placement/QIP - Well Flagged Deal with Well Planned Use of Proceeds