2

INDEX

Executive Summary

Overview

• Evolution of Indian IT Industry

• Current Industry Size

• Domestics Industry vs. Exports (FY2013)

• Industry Growth Drivers

• IT Exports

• Domestic IT Industry

• Porter’s Five Force Analysis

Takeover Track

• Acquisitions to play a key role in growth

• Key Acquisitions by Indian IT Player

SMAC as a game changer

Common Stock Comparison

3

Despite the economic uncertainty around the globe, the Indian IT-BPM (Information Technology –

Business Process Management) sector has maintained its growth with a CAGR of 11.5% over the

last five years. 2012 was a land mark year for the Indian IT-BPM sector with revenues crossing the

US$ 100 billion mark

The Indian IT-BPM sector remains a high impact sector and has played an important role in putting

India on the global map. It accounts for 8% of India’s GDP and gives employment to 9.5 million

people

The first $100 billion revenues were achieved due to India’s arbitrage advantage and the linear model

for revenue generation, the next phase however will be different

Exports accounted for more than 70% of revenues in 2012 and the US remained the favorite

outsourcing destination for the Indian IT sector. Exports to US accounts for 61.60% of the total

exports, followed by Europe which account for 28.50% of the exports. Banking and Financial Service

is a biggest segment for the exports and accounts for 41% of the total exports

Going forward, as the linearity in the industry diminishes, the Indian IT companies will have to move

up the value chain and provide their clients with quality solutions in addition to the low cost

advantage. The companies need to shift from standard ‘lift and shift’ enterprise services to enterprise

solutions which impacts not only the cost, but also revenues, profit margins and cash flows

Solutions incorporating SMAC ( Social, Mobile, Analytics & Cloud) are driving this change

According to a recent survey by Gartner, Analytics, Mobile technologies and Cloud computing have

become the three top most priorities of CIOs world over and these services are set to change the

face of the global IT-BPM market drastically over the course of the next few years

The Indian IT players need to capitalize on their well established IT/BPM market presence by

increasing their service portfolio beyond the standard enterprise services to SMAC services

EXECUTIVE SUMMARY

4

By early 90s, US based companies began to outsource work due to low cost and skilled talent pool of India

IT Industry starts to mature with increased investment in R&D and infrastructure

India seen as product development destination

Number of Indian firms grow in size and start offering complex services like product management, go-to market strategies etc.

Western firms set up captive units in India

Indian firms become Multi National Companies with delivery centers across the globe

Indian firms make global acquisitions

Industry employs 3 million people directly and gives indirect employment to ~9.5 million

OVERVIEWEvolution of Indian IT Industry

Pre -1995

1995-2000

2000-2005

2005 onwards

5

OVERVIEWCurrent Industry Size

The Indian IT industry has played a vital role in putting India on the global map. It has evolved dramatically over the

last decade it terms of its scale, key service offerings and value provided to its customers. Having grown at a CAGR

of 25% during FY2000-13, the sector has become one of the dominating forces in the global IT-BPM market

As per NASSCOM (widely acknowledge as the go to Industry body for IT), the industry touched revenues of US$ 108

million in FY13 with exports at US$ 76 billion, accounting for more than 70% of the total revenues

IT-BPM is a high impact sector in India as is accounts for ~8% of the countries GDP and ~24% of the total exports of

the country

The Indian IT industry can be segregated into IT Services, Business Process Management, Engineering and R&D

& Software Products and Hardware with each having the following share in the total industry :-

62.9 69.3 74.288.5

100.9 108.4

0.0

20.0

40.0

60.0

80.0

100.0

120.0

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013E

US

D in

Bil

lio

ns

Indian IT-BPM Industry (FY2008-13E)

CAGR - 11.5%

IT Services52%

BPM19%

Software products

and ER&D17%

Hardware12%

Total Industry Size ~ $108 billion

Indian IT-BPM Break-up (FY2013E)

6

OVERVIEWDomestic Industry vs. Exports (FY2013)

Source: NASSCOM

0.4

14.1

17.8

43.9

12.9

3.8

3.1

12.4

20.0 10.0 0.0 10.0 20.0 30.0 40.0 50.0

USD in billions

Domestic Exports

Indian IT Industry

(US$ 108 billion)

IT Services

(US$ 56 billion)

Business Process Management

(US$ 21 billion)

ER&D & Software

(US$ 18 billion)

Hardware

(US$ 13 billion)

7

OVERVIEWIndustry Growth Drivers

Source: NASSCOM

Components Growth Drivers

• Project based services

• IT outsourcing

• Support & training

• Applications and services built

around social, mobile, cloud &

analytics

• Customer Care

• HR

• F&A

• Procurement

• Platform solutions, bundling

BPM with analytics, mobile

engagement of business

processes

• Application development and engineering/design

• Software as a

service, technological

advances, low cost consumer

preferences

• Personal computers

• Servers

• Network equipment

• Storage and security

• Printers

• New users from rising

lower/middle class

Indian IT Industry

(US$ 108 billion)

IT Services

(US$ 56 billion)

Business Process Management

(US$ 21 billion)

ER&D & Software

(US$ 18 billion)

Hardware

(US$ 13 billion)

OVERVIEWIT Exports

Source: NASSCOM and Broker Research Reports in FY 2012-13

US61.50%

UK17.10%

Continental Europe11.40%

Hardware12%

ROW2.20%

Region Wise Exports (FY2013E)

Total Exports – $76.2 billion

BFSI41.00%

Telecom18.00%

Manufacturing16.00%

Hardware12%

Other15.00%

Vertical Wise Exports (FY2013E)

Total Exports – $76.2 billion

40.947.5 50.1

59.469.2

76.2

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013E

US

D in

bil

lio

ns

CAGR - 13%

Indian IT-BPM Exports

IT Services58%BPM

23%

Software products and

ER&D19%

Hardware1%

Category Wise Exports (FY2013E)

Total Exports – $76.2 billion

8

OVERVIEWDomestic IT Industry

22.0 21.9 24.129.0

31.7 32.2

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013E

US

D in

bil

lio

ns

CAGR - 8%

Indian IT-BPM ExportsIndian IT-BPM Domestic Industry

IT Services39%

BPM10%

Software products and

ER&D12%

Hardware1%

Category Wise Domestic Industry (FY2013E)

Large Enterprises

47%

Consumers12%

Government15%

SMB26%

Region Wise Exports (FY2013E)

Total Domestic Industry – $32.2 billion

Total Domestic Industry – $32.2 billion

84% 84%

32%

16% 16%

68%

Hardware Software Products IT Services

Foreign Indian

Domestic IT-BPM market by Ownership (FY2013E)

Source: NASSCOM and Broker Research Reports in FY 2012-13

9

OVERVIEWPorter’s Five Forces Analysis

ENTRANTS RIVALS BUYER POWER SUBSTITUTES SUPPLIERS

Threat of New Entrants Degree

Capital Requirement Low

Support of Government Policy Medium

Expected Retaliation High

Switching Cost

-Small Clients High

- Large Clients Low

Entering into the industry is not difficult and this is evident from the large number of players in the industry

Liberalized FDI policies, tax exemptions, basic infrastructure, subsidies etc. from the government has definitely

given a boost to the establishment of the industry in India

Government spending polices are also promoting the growth of the sector. The expected government spending on

IT is expected to be $4.78 billion in FY13-14

Venture Capitalists have also shown a keen interest in the Indian tech startups which have unique products/ideas or

are working on disruptive technologies such as Social, mobile, cloud and analytics, thus providing them with the

required capital in order to expand their businesses

Threats of new entrants is HIGH

162

335400

450

2005 2009 2011 2012

IT start-ups in India

10

OVERVIEWPorter’s Five Forces Analysis

ENTRANTS RIVALS BUYER POWER SUBSTITUTES SUPPLIERS

Rivalry Degree

Industry Concentration High

Industry Growth High

Diversity of Rivals High

Intermittent Over Capacity Medium

Product Differences Low

Fixed Cost Medium

Entry Barriers Low

9%

6%5% 6%

4%

Market Share of Top 5 Players (FY2012)1

With large number of small and medium players together with a few big domestic as well as international players, the

industry is marked with high competition

Top five* companies account for ~33% of the total industry revenues

With decreasing margins, increasing number of firms and the ever changing requirements of clients, the present

industry participants need to be at their innovative best in order to survive and grow

Degree of rivalry in the industry is HIGH

1. Angel Broking Research Report

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OVERVIEWPorter’s Five Forces Analysis

ENTRANTS RIVALS BUYER POWER SUBSTITUTES SUPPLIERS

Bargaining Power of Customers Degree

Switching Cost

-Small Clients High

-Large Clients Low

Differentiation of Outputs Low

Presence of Substitutes Medium

Industry Concentration relative to

buyer concentration High

Customers in the IT sector have a distinct edge relative to other industries given the numerous high quality options

available to them

Large customers have a comparative advantage in relation to small customers in terms of switching cost (no player

wants to lose a sizable contract given their long nature and visibility of revenue)

Increasingly competition is shifting the power towards the buyer making it difficult for the companies to survive

without a good strategy and differentiated product / service offering

Bargaining Power of Buyers is MEDIUM

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OVERVIEWPorter’s Five Forces Analysis

ENTRANTS RIVALS BUYER POWER SUBSTITUTES SUPPLIERS

Threat of Substitutes Degree

Relative Price Performance

of Substitutes High

Switching Cost Medium

Buyer Propensity to Substitute Medium

Information Complexity Low

Countries such as China, Philippines, South Africa, Vietnam, Korea, Eastern Europe and Israel are growing in the

field of IT outsourcing and are increasingly posing a threat to the Indian IT Sector (global outsourcing pie $400bn)

The Indian IT Sector needs to innovate constantly to have an edge over these countries

Threat of substitutes is MEDIUM

39

32

31

26

22

20

0 10 20 30 40 50

Beijing

Bangkok

Buenos Aires

Metro Manila

Bengaluru

Pune

Operating Cost per FTE for IT Services

(USD '000/per annum)

- Comparative cost advantage

13

OVERVIEWPorter’s Five Forces Analysis

ENTRANTS RIVALS BUYER POWER SUBSTITUTES SUPPLIERS

Bargaining Power of Suppliers Degree

Differentiation of Inputs Low

Supplier Concentration relative to

the Industry High

Substitute Product High

Quality human resources is the largest requirement for the IT sector and low-cost availability of human capital has

been the reason that the Indian IT companies have been able to provide quality services to their clients

India’s talent base is expanding rapidly with an annual addition of nearly 4.74 million graduates and post graduates

The industry has now entered a non-linear phase, which means addition of new talent does not mean increase in

revenues

As competition intensifies for skilled professionals, employee costs could rise rapidly in the next few years (body

shopping cannot be the only play)

Threat of substitutes is Low

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TAKEOVER TRACKAcquisitions to play a key role in growth

• Over the past decade, India’s top software companies have

acquired foreign and domestic firms to increase their local

presence in the US and Europe, their main markets, or to acquire

employees with a specific skill set or strengthen their capability in a

particular sector

• Most acquisitions by Indian IT companies have not been very

expensive on a multiples basis and have been targeted at

penetrating new geographies, especially Europe

• Another driver of acquisitions by Indian IT firms is the large pile of

cash that many IT companies have been sitting on. At the end of

2012, Tier 1 Indian IT providers such as Wipro, Infosys and TCS

were sitting on billions of dollars each. With that much cash and an

improving macroeconomic environment, these firms will continue to

spend some of their reserves to buy companies that drive growth

as a way of delivering more value to their shareholders

• For instance TCS’s recently announced the acquisition of French

technology services company, Alti SA, for $97 million (Rs. 530 Cr.)

which is expected to provide TCS with an extra edge in the

European market. Through the acquisition TCS has brought in

1,200 employees and reputed clients such as Banque De

France( French Central Bank), BNP Paribas, Credit Agricole, and

Societe Generale among its clients in banking sector besides

others such as Air France, L'Oreal and telecom company Orange

• We will continue to see a rising wave of M&A in FY2013-14 in the

sector both on the domestic and overseas front

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TAKEOVER TRACKKey Acquisitions by Indian IT Players

Co. Name Recent Acquisitions

TCS

Infosys

Wipro

HCL

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Common Stock ComparisonUSD in millions

Source : Company Filings, Bombay Stock Exchange (Exceptional items have not been adjusted)

Note : 1. Market Data as of 30th April 2013 (Except for HCL which has a June end. Market data taken as of 30th June 2012)

2. Exchange Rate USD-INR = 54.38 3. Non- Operating income has been excluded from EBITDA and included in Net Income

Company

Name 2012 2013 2014E 2012 2013 2014E 2012 2013 2014E

$25.30 $49,524.91 ($1,347.25) $48,177.67 $8,989.60 $11,581.23 $13,586.75 $2,654.07 $3,316.81 $3,895.16 $1,914.62 $2,558.83 $2,985.72

41.08 23,591.07 ($4,320.52) 19,270.56 6,202.32 7,419.11 8,893.50 1,970.24 2,125.05 2,543.97 1,528.98 1,732.14 1,901.18

6.40 15,754.11 ($2,033.07) 13,721.04 5,860.47 6,881.06 9,044.33 1,271.04 1,468.76 1,821.48 1,029.38 1,226.27 1,361.81

13.26 9,228.58 ($57.62) 9,170.96 3,829.90 4,667.98 5,269.74 713.50 1,016.04 1,081.94 445.44 686.40 741.15

EV

Sales EBITDA Net Income

Share

Price Market Cap Net Debt

Company

Name 2012 2013 2014E 2012 2013 2014E 2012 2013 2014E 2012 2013 2014E 2012 2013 2014E

29.52% 28.64% 28.67% 21.30% 22.09% 21.98% 5.36x 4.16x 3.55x 18.15x 14.53x 12.37x 25.87x 19.35x 16.59x

31.77% 28.64% 28.60% 24.65% 23.35% 21.38% 3.11 2.60 2.17 9.78 9.07 7.57 15.43 13.62 12.41

21.69% 21.35% 20.14% 17.56% 17.82% 15.06% 2.34 1.99 1.52 10.80 9.34 7.53 15.30 12.85 11.57

18.63% 21.77% 20.53% 11.63% 14.70% 14.06% 2.39 1.96 1.74 12.85 9.03 8.48 20.72 13.44 12.45

Mean 25.40% 25.10% 24.49% 18.79% 19.49% 18.12% 3.30x 2.68x 2.24x 12.90x 10.49x 8.99x 19.33x 14.82x 13.25x

Median 25.61% 25.20% 24.57% 19.43% 19.96% 18.22% 2.75 2.30 1.95 11.82 9.21 8.03 18.07 13.53 12.43

Maximum 31.77% 28.64% 28.67% 24.65% 23.35% 21.98% 5.36 4.16 3.55 18.15 14.53 12.37 25.87 19.35 16.59

Minimum 18.63% 21.35% 20.14% 11.63% 14.70% 14.06% 2.34 1.96 1.52 9.78 9.03 7.53 15.30 12.85 11.57

PAT Margin EV/Sales EV/EBITDA P/E EBITDA Margin

17

SMAC as a Game ChangerOur Next Focus

Services incorporating Social, Mobility, Analytics and

Cloud (SMAC) are reshaping the traditional way the

IT-BPM industry has been providing services till now

These individual technologies and platforms which

have risen during the past few years have shown

immense potential, but are barely understood

While each of these four components have been

evolving individually, companies are beginning to

treat them as an integrated whole

The convergence on these technologies means

dismantling the traditional business design: No

longer is it required to keep people and information in

the same location or to spend big money to support

information sharing, communication and

collaboration

These provide an opportunity for the Indian IT

players to move into a higher margin business as

compared to the typical IT contracts

SMAC can turn out to be a game changer for the

$108 billion Indian IT industry and keep India ahead

of its competition.

The first $100bn of revenues in the IT Industry took

over a decade, the next might happen in a matter of

a few years if the IT players can understand, adapt

and leverage these disruptive technologies quickly

Stay tuned for our next report “ The Game Changers for the Indian IT Industry” which will highlight the impact and immense potential of these 4 disruptive technologies

18

19

How Dinodia Capital Advisors can help

With our deep understanding of the IT industry and our professional network, we can help you:

Indentify businesses to be acquired or sold

Bring strategic and financial investors into your Technology business (Domestic and International)

Help your business find the most suitable technology partners

Provide advice on any related transaction terms, valuation and pricing

Dinodia Capital Advisors Private Limited C-37, Connaught Place , New-Delhi 110001, Website - www.dinodiacapital.com

Tel No: +91 11 2341 7692, 2341 5272, Fax No: +91 11 4151 3666

Email: dinodiacapital@dinodiacapital.com

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