Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Equity Analyst with 15+ years of experience as a Buy Side analyst covering companies in the Emerging and Developed markets.
Fundamental and Quantitative analysis on companies in the Internet, Telecommunication, Media, Technology, IT Services, Healthcare, Pharmaceutical and other Industrial sectors.
Idea generation focussed on Quality stocks, trading below their intrinsic Value, with sound Corporate Governance.

Global Emerging Market Equities

Smartkarma Webinar | Indian IT Services: Picks and Pans

Indian IT Services: Is a Multi-Year Hyper-Growth Scenario Priced In?

Indian IT Services: Medium-Term Outlook Unattractive as Growth Slows, on Premium Valuation Levels

Indian IT Services: COVID-19 Revenue Impact Troughed, Recovery Already Priced In?

How Indian Buyback Offers Work - The Wipro Example

Tata Consultancy Share Buyback Offer - The Numbers Are Interesting

Thematic (Sector/Industry)

India It services / Thematic (Sector/Industry)

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