IT-Services Emkay 080515

8/21/2019 IT-Services Emkay 080515

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1Earnings at RiskEarnings at Risk

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Your success is our success

Emkay India Equity Research | IT Services

May 4, 2015

Sector Report

Downside risks to modest growthexpectations?

IT Services

Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY, Reuters and DOWJONES. Emkay Global Financial Services Ltd.


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Table of contents

Index Slide No.

Indian IT: Positive macro but growth challenges 3

Downside risks to the modest growth expectations 4

Global peers seem better placed to cater to the “Front end Digital’ Demand 9

On-shoring of ‘offshore Indian IT’ 11

Margins headwinds ahead in our view 15

Valuations are cheap relative to historical multiples however 18

Recommendation Summary 21

Company Section

Tata Consultancy Services 23

Infosys 28

Wipro Ltd 32

HCL Technologies 37

Tech Mahindra 42Mindtree Ltd 47

Hexaware 54

Mphasis 58

Persistent 62

eClerx Ltd 68

NIIT Technologies 73


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Indian IT: Positive macro but growth challenges for the sector

While the overall macro environment remains positive (positive macro data points from US, Europe continuing

to open up for outsourcing), we reckon growth challenges for the IT Services Sector and thereby believe that

there is downside risks to the modest revenue growth assumptions as well.

We highlight below that over the past several quarters (street including us) have been cutting our revenue

growth estimates for each of the Tier I names. (refer table on the slide below). Contrary to street expectations of

acceleration in revenue growth, we have seen the YoY revenue growth trajectory slow down for the offshore IT

Services players in recent quarters.

While the ‘offshoring/outsourcing penetration ‘led traction in Europe continues, the revenue growth from US

continues to be in low teens YoY revenue growth trajectory. We do not see any acceleration in terms of revenuegrowth from US ahead.

Industry checks indicate that deal closures taking longer than usual with the Automation, Robotics and Cloud

(ARC) effect making a broad based and rapid impact on pricing in the traditional business. Besides the global

vendors seem better placed than the offshore players in capturing the ‘Digital’ Demand. We see increased

captive sourcing as another risk for the Indian offshore players and our initial channel checks seem to

corroborate that

Valuations at ~12.5x-15.5x FY17E P/E are cheap relative to historical multiples however need to be seen in the

context of downside risks to revenue/earnings assumptions. TCS and HCL Tech remain our preferred bets in

the Tier I IT Services space while Hexaware and eClerx remain our positive rated stocks in the Tier II coverage


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Downside risks to the modest revenue growth expectations

YoY Co wide revenue growth trajectory picking up… YoY revenue growth trajectory from US also increasing…

While the overall revenue growth expectations have been moderated to ‘mid single digits to low double digits’

growth’ expectations for FY16E (refer table below) for the Tier I IT Services companies, we highlight that the

asking rates still imply a similar/higher asking rated for companies to achieve the growth numbers Growth in key geographies like US and verticals like Financial Services and Retail has been moderating in

recent quarters. Infact it is worth highlighting that the revenue growth from US has remained in the low teens

trajectory through several quarters even in the backdrop of positive macro data from US through the past 2

years.

Industry research pointing out to significant pricing pressure on renewals (~20-30% in some cases as compared

to ther usual 3-5% that vendors would be happy with). ARC effect making a broad based and rapid impact on

pricing on the traditional/commoditized business. (nfosys’s offshore revenue productivity has declined in 4 of the

last 6 quarters in constant currency terms)

Global peers much better placed to capture the front end nature of the digital demand vis-à-vis offshore tech

players. Captive capacity build out poses near term risks to growth for offshore vendors as some of the work is

moving in-house

Source: Companies, Emkay Research Source: Companies, Emkay Research

US$ revenue FY16E TCS Infosys Wipro HCL Tech

Consensus as on Apr'14 18,716 10,709 9,274 7,224

Consensus as on Jun'14 18,250 10,086 8,892 7,036

Consensus as on Sep'14 18,081 9,720 8,575 6,825

Consensus as on Dec'14 17,611 9,560 8,335 6,516

Consensus as on Mar'15 17,561 9,690 8,317 6,803


US$ revenue FY17E TCS Infosys Wipro HCL Tech

Consensus as on Apr'14 20,720 11,869 - -

Consensus as on Jun'14 21,022 11,304 10,079 -

Consensus as on Sep'14 20,847 10,933 9,643 7,817

Consensus as on Dec'14 20,252 10,856 9,311 7,409

Consensus as on Mar'15 20,175 10,993 9,261 7,740



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Downside risks to revenue growth expectations…(Contd)

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Revenue growth from Europe, YoY %

Infosys TCS Wipro HCL Tech

The Overall YoY revenue growth trajectory for the Tier I players has been moderating through recent quarters..

Revenue growth from US has remained in the low teens trajectory through a long time despite street’s hope of

acceleration aided by a positive macro..

Revenue growth from Europe continues to be strong despite the cross currency headwinds and will remain strongin our view

Source: Companies, Emkay Research


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Downside risks to modest revenue growth estimates… (cont)


Growth from key verticals has been slowing down through recentquarters

Infosys’s offshore revenue productivity has declined in 4 of the past6 quarters on a constant currency basis and is the lowest ever

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Revenues from Retail, YoY %


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Per-capita billed revenue productivity for offshore (IT Services and Consulting)

YoY growth, % (RHS)


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Channel checks continue to confirm that captives are ramping up their headcount aggressively in recent

months. This trend is confirmed by media reports as well (refer table below for some initial indication to the

effect). Discussions with industry participants indicate that a pick up in Captive activity is seen across verticals and is

driven both by the next Generation of Outsourcers (e.g Cargil, Baxter International) as well as players who

understand offshoring well (e.g AstraZenaeca, Banking players).

Our sense/checks indicate that insourcing/captive activity in Banking and Financial Services is on the rise

because of Anti-incumbency, client’s desire to have more control over their IT functions (having outsourced

heavily to 3rd

party players),nature of spend(e.g Customer Analytics, Risk reporting, Regulatory Compliance)and the regulatory pressure around it ( what is the level of offshoring at your level etc?).

• We reckon that in the near /medium term, the ramp up in activity in Global In house Centres /Captives canimpair revenue growth for Indian IT given that our market share in the traditional spend areas remain high.

Besides captives and Global peers are better placed to capture the Front End nature of ‘Digital Spend’ on

account of their early investments in the space. For e.g Digital accounts for ~20% of Accenture’s overall

revenues at US$ 6 bn with company highlighting that it is growing at 20% YoY in recent times).




Company Name ertical Remark

AstraZeneca HealthcareIn CY14 pharmaceuticals giant AstraZeneca opened an IT delivery centre in Chennai. This is part of itsplan to reduce the amount of IT it outsources to Indian suppliers, yet it is retaining the advantages of theoffshore delivery model through a captive centre in India.

Cargill Retail (Food)Cargill Inc, one of the world’s biggest privately held organizations that clocked revenues of $134.9 billion in2014, opened its largest captive business services centre with 650 seats in Bengaluru in Jan'14. Thecompany target to save $250 million for the company annually in five years

Lowes RetailIn early 2014 Lowes (the $50-billion home improvement and hardware store chain ) had indicated plans toset up GICs in Bangalore. For Lowe's, the centre will be a strategic outpost to do high-end technologywork.

Mercedes Benz Manufacturing Mercedes Benz Research and Development Centre will hire 800 staff to take its strength to over 2,000 by

2015.

Grant Thornton Auditing The world's fifth largest audit and accounting firm Grant Thornton would hire at least 3,000 people to make

Bangalore its tax and IT support hub for its global clients in the next five years.

Flextronics Manufacturing electronics design and contract manufacturing firm Flextronics 2,000 in the next two to three years.

Victoria’s Secret Retail In 2014 VS had sought the nod of the Foreign Investment Promotion Board to set up the technology centre

(its first GIC) in Bangalore for analytics capabilities.

Baxter International Healthcare The $14-billion healthcare company Baxter International had mentioned to be close to setting up GICs in

Bangalore in early 2014.

Danske Bank BFSI

Danske Bank intend to set up a delivery center in India with ~1,000 people capacity in CY2015. TheDanish bank has an established offshore IT delivery relationship with Indian IT services firm ITC Infotech,which is the internal IT department at Indian conglomerate ITC as well as a service provider to other companies, but wants to take more control of the IT activities in India.

Volkswagen (VW) ManufacturingIn Nov'15 Volkswagen (VW) opened an IT-development centre in Pune, India, to keep IT knowledge in-house while benefiting from the offshore delivery model. Company plan to eventually have 1,000 engineersand provide support to all VW’s global operations.

Network International Network International Llc, a payment solutions provider based in the United Arab Emirates (UAE), is

setting up a centre in India, making it one of the first companies from the Middle East to do soSource: Media reports



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US$ revenue, YoY %

Infosys TCS Wipro HCL Tech Accenture Cognizant

Global peers seem better placed to cater to the “Front endDigital’ Demand

YoY US$ revenue growth for Accenture and WITCH as well as constant currency revenue growth

Global peers are much better placed than heritage offshore players to cater to the client spending in Digital

areas due to their early investments.

Digital accounts for 20% of Accenture’s revenues at US$ 6 bn p.a and is growing at ~20% YoY as per

company’s recent commentary.

Offshore players are talking of increased investments in building up their digital strengths/capabilities, however

this requires a different approach/mindset as compared to the ‘costs savings led’ value proposition of the

offshore players.



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Constant currency revenue growth%, YoY

Accenture Infosys TCS

Global peers seem better placed to cater to the “Front endDigital’ Demand (cont)



‘Onshoring of Offshore IT’ is here to stay

Indian IT companies saw stupendous growth through 2000-10, as clients offshored legacy applications to

reduce costs. Given high penetration rates in the legacy ADM work, offshoring certainly has slowed down with

only two offshore service lines, BPO and IMS, seeing strong growth.

Onsite intensity for Indian IT companies is increasing, as clients are increasingly prioritizing spending in areas

of regulatory requirements, risk and compliance, and improving customer centricity. This is evident from the

fact that over the past few quarters as well as through FY11-15 onsite revenues and onsite volumes have

grown faster than offshore revenues and offshore volumes, respectively (unlike the 2000-10 decade).

Onsite proportion of revenues have continued to inch up for Tier-I companies through several quarters now…


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Onsite revenue mix

Infosys TCS Wipro



Onsite revenues growing faster than offshore revenues


Onsite Revenues( in US$ mn) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Infosys ,% 48.2 46.5 45.8 48.2 48.8 49.5 50.3 49.6

Infosys 2,012 2,169 2,203 2,909 3,415 3,664 4,152 4,317YoY grow th , % 30.5 7.8 1.5 32.1 17.4 7.3 13.3 4.0

TCS, % 48.7 47.7 39.6 39.9 41.2 43.2 46.7 48.2

TCS 2,785 2,868 2,512 3,270 4,187 4,997 6,272 7,447

YoY grow th , % 3 -12.4 30.2 28.1 19.3 26% 19%

Wipro, % 54.5 53.1 49.8 51.7 53.8 53.6 54.1 54.0

Wipro 1,572 1,763 1,623 1,996 2,388 2,524 2,715 2,803

YoY grow th , % - 12.2 (7.9) 23.0 19.6 5.7 7.6 3.2

Combined Revenues of Top 3 players 6,368 6,800 6,338 8,175 9,990 11,185 13,140 14,567

YoY grow th , % 6.8 (6.8) 29.0 22.2 12.0 17.5 10.9

Offshore Revenues( in US$ mn)

Infosys ,% 51.8 53.5 54.2 51.8 51.2 50.5 49.7 50.4

Infosys 2,164 2,494 2,601 3,132 3,579 3,734 4,097 4,394

YoY grow th , % 15.2 4.3 20.4 14.3 4.3 9.7 7.3

TCS, % 45.9 48.3 56.7 56.0 54.9 55.7 53.3 51.8

TCS 2,385 2,675 3,292 4,162 5,102 5,940 7,171 8,007

YoY growth, % 12% 23% 26% 23% 16% 21% 12%

Wipro, % 56.9 59.2 63 61.8 59.7 59.4 45.9 46.0

Wipro 2,075 2,560 2,768 3,225 3,533 3,694 2,306 2,385

YoY grow th , % 23.4 8.1 16.5 9.5 4.6 5.5 3.4

Combined Revenues of Top 3 players 7,159 8,193 9,183 11,208 13,019 13,890 13,573 14,786

YoY grow th , % 14.4 12.1 22.1 16.2 6.7 (2.3) 8.9


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Earnings at RiskEarnings at Risk

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Onsite IT Services Offshore IT Services Overall IT Services

Infosys YoY volume growth

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Onsite IT Services Offshore IT Services Overall IT Services

Infosys YoY rev gr owth

Case in Point ─ Infosys

Offshore YoY volume growth trajectory has remained at 10-12% YoY over several quarters now..

Improvement in co wide revenue growth aided by pick-up in onsite revenue growth

Source: Company, Emkay Research



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71.6 69.8 66.4 62.4 58.2 54.3

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Onsite % of revenue Offshore % of revenue

Case in Point II ─ Mindtree

Source: Company, Emkay Research Source: Company, Emkay Research

Onsite revenue growth surpass offshore revenue growth… Share of onsite revenue in top-line increasing…


Onsite % of revenues has increased by 1700 bps+ over the past 20 quarters

29.8

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Onsite Revenue s (in US $ mn) (LHS) Offshore Revenue s (in US$ mn ) (LHS)

Onsite YoY growth,% (RHS) offshore YoY growth,% (RHS)


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Margins headwinds ahead in our view

Indian offshore companies have benefitted from favorable currency tailwinds over the past 4 years

(A 33%+ INR depreciation over FY11-15 has provided ~800-1000 bps tailwind to margins) which helped

them protect margins in a narrow range despite headwinds from higher onshoring and the investmentsin business.

The need to make the necessary investments in Digital capabilities, Automation etc will hurt margins in

the backdrop of client focus to spend in digital areas and funding that through reducing IT spends to

traditional areas.

Traditional levels like Utilization (companies have already optimized their offshore delivery

meaningfully through recent quarters), broadening of employee pyramid might be of limited use (Casein point the employee mix has only deteriorated across companies in recent years)

Attrition moving up (possibly some involuntary attrition, reports of TCS/Igate seeing involuntary

attrition could be true…moves to reduce costs/defend margins as other levers are maxing out)


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EBITDA margins could be under pressure in our view

In absence of rupee depreciation tailwind Tier I players defended margins better than Tier II players thought FY15

EBITDA Margin June'12 Sep'12 Dec'12 Mar'13 June'13 Sep'13 Dec'13 Mar'14 June'14 Sep'14 Dec'14 Mar'15

Tier I Companies

Infosys 30.6% 29.1% 28.5% 26.5% 26.5% 26.1% 27.8% 27.8% 26.9% 28.3% 28.7% 27.8%

TCS 29.1% 28.4% 29.0% 28.4% 28.6% 31.6% 31.4% 30.9% 28.8% 28.6% 28.8% 29.2%

ipro 24.0% 23.9% 23.8% 23.2% 22.8% 25.1% 25.8% 27.3% 25.6% 24.8% 24.6% 24.8%

HCL Tech 21.6% 21.8% 22.2% 22.0% 23.1% 26.2% 25.9% 26.6% 26.2% 25.1% 25.0% 22.5%

Tech Mahindra 21.9% 21.5% 21.7% 20.5% 21.1% 23.3% 23.2% 21.2% 18.1% 20.0% 20.2% 17.4%

Tier II companies

Mindtree 20.9% 22.1% 20.4% 17.6% 17.0% 19.6% 18.3% 20.4% 18.8% 18.6% 20.5% 19.5%

Persistent 26.8% 27.2% 24.7% 24.9% 21.7% 25.9% 27.7% 27.0% 21.8% 20.6% 20.1% 20.2%

Hexaware 22.9% 21.6% 16.9% 19.3% 23.7% 23.8% 22.5% 19.2% 16.7% 18.0% 19.9% 17.8%

NIIT Tech* 16.0% 17.0% 15.8% 16.5% 14.4% 15.1% 16.3% 15.1% 13.8% 14.3% 14.9% 3.3%

*Note: NIIT Tech’s oper at in g ma rg i n s i n Mar’ 15 quar te r w i ll b e a ff ec t ed by US$14mn char ge f o r unb il le d r ev enue d i spu te .We use Emkay es timat es f o r T ec hM and N IIT Tec h f o r

Mar’ 15 quar te r EB ITDA ma rg i n s as bo t h t he c ompan i es a re y et t o r epo r t r es u lt s.


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EBITDA margins could be under pressure in our view(cont)

June'11 Sep'11 Dec'11 Mar'12 June'12 Sep'12 Dec'12 Mar'13 June'13 Sep'13 Dec'13 Mar'14June'14 Sep'14 Dec'14 Mar'15

Employee mix


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Valuations are cheap relative to historical multiples however..

Tier I techs are trading at ~12.5x-15x FY17E P/E ( barring TCS which trades at ~18x FY17E P/E), lower relative

to historical valuation multiples

However we believe that valuation multiples need to be seen in the context of lower revenue/earnings growth

and possible downside risks to growth assumptions on account of factors discussed earlier( also refer table on

the next slide)

Street( including us) has been moderating revenue growth assumptions lower through the past several quarters.

Current growth assumptions also assume similar to a mild acceleration in sequential growth rates over the next

4 quarters as compared to the sequential growth seen in the past 4/6 quarters.

HCL Tech ( ACCUMULATE, TP Rs 1,025) and TCS( ACCUMULATE, TP Rs 2,730) appear relatively better

placed as compared to Infosys and Wipro given better positioning and investments in key markets/services

lines. Our order of preference within Tier I IT is HCL Tech, TCS, Infosys and Wipro in that order.

.eClerx and Hexaware remain our preferred picks in the Tier II space where we have higher confidence on

revenue /earnings visibility unlike other Tier II names where we see downside risk to growth /margin

assumptions. Hexaware could be the fastest growing company in the sector in CY15/16E, however a 40%

+upmove in CY15YTD and rich valuations leave limited absolute upsides in the name.

Any Sharp currency depreciation remains a risk to our thesis. Our current estimates factor in US$/INR at 63/$

for FY16/17 respectively.


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0 7

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0 9

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1 0

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t / 1 2

A p r /

1 3

O c

t / 1 3

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t / 1 4

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Infosys: 12m rolling forward PE24x

20x

16x

12x

0

500

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3000

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A p r / 1 3

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A p r / 1 4

O c t / 1 4

A p r / 1 5

( R s )

TCS: 12m rolling forward PE 21x

11

18x

15x

12x

Valuations are cheap relative to historical multiples however..


20/77


Tier I companies have done a better job at defending margins ascompared to Tier II techs

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12%14%16%

18%20%22%24%26%28%30%

J u n ' 0 9

S e p ' 0 9

D e c ' 0 9

M a r ' 1 0

J u n ' 1 0

S e p ' 1 0

D e c ' 1 0

M a r ' 1 1

J u n e ' 1 1

S e p ' 1 1

D e c ' 1 1

M a r ' 1 2

J u n e ' 1 2

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M a r ' 1 3

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S e p ' 1 3

D e c ' 1 3

M a r ' 1 4

J u n e ' 1 4

S e p ' 1 4

D e c ' 1 4

M a r ' 1 5

Weighted average EBITDA margin

Tie r I Comp anies Tie r II co mpan ies

Note: We use Emkay estimates for TechM and NIIT Tech for Mar’15 quarter EBITDA margins as both the companies are yet to repor t results.

Tier I companies inc lude TCS, Infy, HCLT and TechM w hile Tier II com panies inclu de Hexaware,Persist ent, Mindtree and NIIT Tech.

0%

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J u n ' 0 9

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J u n e ' 1 1

S e p ' 1 1

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M a r ' 1 2

J u n e ' 1 2

S e p ' 1 2

D e c ' 1 2

M a r ' 1 3

J u n e ' 1 3

S e p ' 1 3

D e c ' 1 3

M a r ' 1 4

J u n e ' 1 4

S e p ' 1 4

D e c ' 1 4

YoY US$ Revenue growth

Tie r I Comp anies Tie r II co mpan ies


21/77


IT Services valuation summary

Co Name CMP Recco.Target

Price

EPS P/E EV/EBIT ROE

FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E

Infosys 1,942 Hold 2,050 108 114 128 18.0 17.0 15.2 13.7 12.2 10.7 24.1 22.7 23.1

TCS 2,464 Accumulate 2,730 114 117 136 21.6 21.0 18.1 18.1 15.7 13.6 39.5 36.1 34.8

Wipro 539 Hold 600 35 39 43 15.3 14.0 12.5 12.3 10.7 15.3 23.0 21.8 39.6

HCL Tech** 881 Accumulate 1,025 51 58 67 17.1 15.1 13.2 14.3 12.2 10.7 34.2 33.0 32.4

Tech Mahindra 621 Hold 660 33 41 46 18.8 15.3 13.6 14.7 11.6 9.9 27.7 27.5 25.4

Mindtree 1,219 Reduce 1,150 64 68 80 19.1 18.0 15.3 15.3 13.0 10.5 29.4 23.6 21.1

eClerx 1,566 Accumulate 1,750 77 96 109 20.3 16.4 14.5 15.6 12.2 10.0 37.0 38.2 36.4

Hexaware* 282 Accumulate 270 11 14 17 26.0 19.5 16.7 18.4 15.3 13.6 26.3 33.0 37.0

Persistent Systems 706 Sell 640 36 39 44 19.4 18.1 16.0 16.3 13.4 10.6 18.6 18.7 20.4

NIIT Tech 351 Hold 400 21 35 40 16.7 10.0 8.7 10.9 6.1 5.0 9.9 15.4 15.9

Mphasis 388 Hold 385 35 32 33 11.2 12.5 11.9 6.9 8.0 7.3 14.8 13.1 12.7

Firstsource 29 Accumulate 45 3.5 4.6 5.2 8.4 6.4 5.7 8.5 6.1 5.0 10.4 12.3 12.2

* Note FY15 refers to FYDec'14 for Hexaware and so on, ** FY15 refers to FY ending Jun e'15 for HCL Tech and s o on.

Source: Bloom berg, Companies, Emkay


22/77


Company Section


23/77


Tata Consultancy Services

ACCUMULATE, TP Rs 2,730 Well oiled engine despite the recent hiccups

TCS’s reported performance has missed expectations in recent quarters, however remains the most well

oiled engine: While TCS’s operating performance has missed the strong expectations through recent quarters

(also impacted adversely by cross currency headwinds), TCS remains the most well oiled engine with it’s

leadership across key verticals/markets/ service lines

Solid executions continues to reflect in client metrics: TCS’s solid and flawless execution continued to reflect

in strong upward migration of clients to higher revenue buckets. TCS added 5 US$ 100 mn+ and 15 US$ 50 mn+

clients during FY15 to take the number of US$ 100 mn+/US$ 50 mn+ client count to 29/68 respectively( clientmigration to US$ 50 mn+/US$ 20 mn+ buckets was better in FY15 V/s FY14)

Attrition , the sole worry per us: TCS’s attrition has been lower than peers for a considerable amount of time

however has been worsening through recent quarters with both quarterly annualized attrition/LTM attrition highest

since June’11 quarter. We believe TCS needs to keep this under check with one time bonuses expected to help

Premium valuations justified , though the room to surprise positively is limited: TCS’s operating performance

through recent quarters has missed investor expectations (unlike the beat that the street has got accustomed to

through FY09-14). We believe this is largely a factor of high expectations / base effect for TCS. However TCS’s

premium valuations are justified given it’s solid execution track record and leadership in key verticals/geos and

service lines


24/77


-5%

0%

5%10%

15%20%

25%

30%

35%40%

J u n

e ' 1 0

S e

p ' 1 0

D e

c ' 1 0

M a r ' 1 1

J u n

e ' 1 1

S e

p ' 1 1

D e

c ' 1 1

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e ' 1 2

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p ' 1 2

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c ' 1 2

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p ' 1 3

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c ' 1 3

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e ' 1 4

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p ' 1 4

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c ' 1 4

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J u n

' 1 5 E

S e p

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D e c

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M a r

' 1 6 E

US$ Revenue growth QoQ US$ Revenue growth YoY

TCS (contd )


TCS’s US$ revenue growth trajectory has slowed down in the recent past, however crosscurrency headwinds also to blame for the same

Source: Companies, Bloomberg, Emkay Research. Prices as on 26th Mar 2014.

However TCS’s solid execution reflects in client metrics, TCS added more US$ 20 mn+/US$ 50 mn + clients in FY15V/s FY14

Mar'12 Jun'12 Sep'12 Dec'12 Mar'13 Jun'13 Sep'13 Dec'13 Mar'14 Jun'14 Sep'14 Dec'14 Mar'15Mar'15-Mar'14

Mar'14-Mar'13

Mar'13-Mar'12

No of US$ 1 mn+ clients 522 527 538 551 638 657 687 711 714 724 743 764 791 77 76 116



No fo US$ 20 mn+clients 99 105 108 114 121 124 125 129 136 144 153 159 162 26 15 22




25/77


TCS (Contd)

TCS’s worsening attrition remains the sole worry point according to us,TCS needs to keep this under check

6%8%

10%12%14%16%18%20%22%

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S e p ' 0 9

D e c ' 0 9

M a r ' 1 0

J u n e ' 1 0

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M a r ' 1 1

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J u n e ' 1 2

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S e p ' 1 3

D e c ' 1 3

M a r ' 1 4

J u n e ' 1 4

S e p ' 1 4

D e c ' 1 4

M a r ' 1 5

Attrition(LTM), % Quaterly annualised attrition rate, %


CFO ( US$ mn) 1,625 1,531 1,562 2,266 2,613 3,462

CFO % of EBITDA 88.6 62.3 52.1 68.2 63.3 77.7

CFO % of Revenue 25.6 18.7 15.4 19.6 19.4 22.4

TCS’s Cash Generation improved in FY15 (was the best in over 5 years)


26/77


Financials


Key Financials (Consolidated)

Income Statement

Y/E Ma r (Rs mn) FY13 FY14 FY15 FY16E FY17E

Net Sales 629,894 818,094 946,484 1,085,891 1,233,847

Expenditure 448,982 566,772 673,543 777,251 887,027

EBITDA 180,912 251,322 272,941 308,640 346,821

Depreciation 10,792 13,243 18,698 20,159 20,819

EBIT 170,120 238,079 254,243 288,481 326,001

Other Income 11,175 15,809 31,396 15,300 27,200

Interest expenses 0 0 0 0 0

PBT 181,295 253,888 285,639 303,781 353,201

Tax 40,344 60,712 60,828 72,907 84,768

Extraordinary Items 0 0 0 0 0

Minority Int./Income from Assoc. (1,494) (2,089) (2,049) (1,600) (1,600)

Reported Net Income 139,457 191,087 222,762 229,273 266,833

Adjusted PAT 139,457 191,087 222,762 229,273 266,833

Balance Sheet


Equity share capital 1,957 1,959 1,959 1,959 1,959

Reserves & surplus 408,602 551,393 572,808 694,791 836,757

Net worth 410,560 553,352 574,767 696,750 838,716

Minority Interest 6,561 6,905 9,136 10,736 12,336

Loan Funds 2,323 2,969 3,577 3,577 3,577

Net deferred tax liability (16,667) (17,504) (24,818) (24,818) (24,818)

Total Liabilities 402,775 545,722 562,661 686,244 829,810Net block 117,006 145,212 155,023 154,864 154,045

Investment 94,369 219,303 213,515 213,515 213,515

Current Assets 287,711 290,262 356,181 451,742 614,368

Cash & bank balance 18,432 14,688 18,622 79,862 191,818

Other Current Assets 96,913 53,214 94,889 80,326 91,271

Current liabilities & Provision 96,311 109,056 162,057 133,877 152,118

Net current assets 191,400 181,207 194,123 317,865 462,250

Misc. exp 0 0 0 0 0

Total Assets 402,776 545,722 562,661 686,244 829,810

Cash Flow

Y/E Mar (Rs mn) FY13 FY14 FY15 FY16E FY17E

PBT (Ex-Other income) (NI+Dep) 170,120 238,079 254,243 288,481 326,001

Other Non-Cash items 0 0 0 0 0

Chg in working cap (75,324) 5,614 (16,298) (62,502) (32,429)Operating Cashflow 65,729 196,224 195,815 173,231 229,624

Capital expenditure (28,321) (41,449) (28,509) (20,000) (20,000)

Free Cash Flow 37,408 154,775 167,306 153,231 209,624

Investments (373) (124,934) 5,788 0 0

Other Investing Cash Flow 0 0 0 0 0

Investing Cashflow (17,519) (150,574) 8,675 (4,700) 7,200

Equity Capital Raised 1,012 6 0 0 0

Loans Taken / (Repaid) 1,169 646 608 0 0

Dividend paid (incl tax) (50,332) (70,630) (226,683) (107,291) (124,867)

Other Financing Cash Flow (1,464) 20,585 25,518 0 0

Financing Cashflow (49,615) (49,394) (200,557) (107,291) (124,867)

Net chg in cash (1,405) (3,743) 3,933 61,240 111,956

Opening cash position 19,836 18,432 14,688 18,622 79,862

Closing cash position 18,431 14 ,688 18 ,622 79, 862 191,818

Key Ratios

Profitability (%) FY13 FY14 FY15 FY16E FY17E

EBITDA Margin 28.7 30.7 28.8 28.4 28.1

EBIT Margin 27.0 29.1 26.9 26.6 26.4

Effective Tax Rate 22.3 23.9 21.3 24.0 24.0

Net Margin 22.4 23.6 23.8 21.3 21.8ROCE 50.6 53.5 51.5 48.6 46.6

ROE 38.1 39.6 39.5 36.1 34.8

RoIC 69.3 79.1 79.2 79.8 79.8


27/77


Financials


Per Share Data (Rs) FY13 FY14 FY15 FY16E FY17E

EPS 71.3 97.6 113.8 117.1 136.3

CEPS 76.8 104.4 123.4 127.4 147.0

BVPS 209.8 282.7 293.7 356.0 428.5

DPS 22.0 32.0 99.0 46.9 54.5

Valuations (x) FY13 FY14 FY15 FY16E FY17E

PER 34.6 25.2 21.6 21.0 18.1

P/CEPS 32.1 23.6 20.0 19.3 16.8

P/BV 11.7 8.7 8.4 6.9 5.7

EV / Sales 7.5 5.6 4.9 4.2 3.6

EV / EBITDA 26.0 18.3 16.8 14.7 12.7

Dividend Yield (%) 0.9 1.3 4.0 1.9 2.2

Gearing Ratio (x) FY13 FY14 FY15 FY16E FY17E

Net Debt/ Equity (0.3) (0.4) (0.4) (0.4) (0.5)

Net Debt/EBIDTA (0.6) (0.9) (0.8) (0.9) (1.2)

Working Cap Cycle (days) 100.2 74.3 67.7 80.0 80.0

Growth (%) FY13 FY14 FY15 FY16E FY17E

Revenue 28.8 29.9 15.7 14.7 13.6

EBITDA 25.5 38.9 8.6 13.1 12.4

EBIT 25.9 39.9 6.8 13.5 13.0

PAT 31.1 37.0 16.6 2.9 16.4

Quarterly (Rs mn) Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15

Revenue 215,511 221,110 238,165 245,011 242,198

EBITDA 66,534 63,670 68,087 70,531 70,653

EBITDA Margin (%) 30.9 28.8 28.6 28.8 29.2

PAT 52,967 50,578 52,883 54,440 64,861

EPS (Rs) 27.1 25.8 27.0 27.8 33.1

Shareholding Pattern (%) Mar-14 Jun-14 Sep-14 Dec-14 Mar-15

Promoters 73.9 73.9 73.9 73.9 73.9

FIIs 16.1 16.5 16.8 16.8 16.9

DIIs 5.4 5.1 4.8 4.7 4.7

Public and Others 4.6 4.5 4.5 4.6 4.5


28/77


Infosys Ltd

HOLD, TP Rs 2,050 Right initiatives, execution needs watching

Initiatives on ‘Renew and new’ in the right direction, execution needs watching: Infosys’s strategy of

‘Renew and New’ appears right , however execution on this needs watching. Improvement on some counts

has started showing up ( quarterly attrition has reduced by 800 bps in the past 3 quarters, more stability in

the account management/leadership), however growth continues to remain challenged and we reckon that

the margins expansion that one saw through FY13-15 could be behind us.

FY16 revenue guidance looks aggressive especially after the weak Mar’15 quarter execution: Infosys’s FY16

revenue guidance of 10-12% constant currency revenue growth while appears in line with street expectations ,would require an acceleration in growth(2.8/3.5% CQGR at the lower /upper end) as compared to Infosys’s 2%

constant currency CQGR through the past 4 quarters. A broad based weakness in Mar’15 quarter across

verticals/service lines( especially traditional business) with a sharp realization decline keeps the confidence on

achieving revenue guidance low.

Margin expansion seen through FY13-15 could be behind us: Infosys’s EBIT margins improved by ~200 bps

over the past 8 quarters aided by focus on cost optimization after NRN’s return ( reducing onshore costs, improvingutilization etc), We believe that margin improvement for Infosys is largely behind ( with potential downside risks

from need to step up investments in new technologies/automation etc and the pricing pressure in the traditional

/commoditized business

HOLD, TP Rs 2,050. We have a HOLD rating on Infosys with a TP Of Rs 2,050. We believe that while Infosys’s

initiatives are in the right direction, street/investors could continue to get disappointed with near term performance

both on revenue growth/margins performance.


29/77


3 1 . 6

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20%

22%

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28%

30%32%

34%

36%

J u n e ' 1 0

S e p ' 1 0

D e c ' 1 0

M a r ' 1 1

J u n e ' 1 1

S e p ' 1 1

D e c ' 1 1

M a r ' 1 2

J u n e ' 1 2

S e p ' 1 2

D e c ' 1 2

M a r ' 1 3

J u n e ' 1 3

S e p ' 1 3

D e c ' 1 3

M a r ' 1 4

J u n ' 1 4

S e p ' 1 4

D e c ' 1 4

M a r ' 1 5

J u n ' 1 5 E

S e p ' 1 5 E

D e c ' 1 5 E

M a r ' 1 6 E

EBITDA margins

Infosys (contd) ─ Right Initiatives, but a mixed bag for now

Infosys’s revenue growth has failed to pick up in recent quarters, deal wins in H2FY15 also uninspring

Infosys expanded margins by 200 bps over the past 8quarters, we believe that margins expansion is largelybehind with downside risks to margins in the near term

Attrition has been coming off but could lower variablepayouts in Mar’15 quarter could impact employee moraleahead


Source: Company, Emkay Research Source: Company, Emkay Research

-5%

0%

5%

10%

15%

20%

J u n e

' 1 2

S e p

' 1 2

D e c

' 1 2

M a r '

1 3

J u n e

' 1 3

S e p

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D e c

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M a r '

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' 1 4

S e p

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1 5

US$ revenue, YoY % US$ revenue, QoQ %

10%

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S e p ' 1 0

D e c ' 1 0

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J u n e ' 1 2

S e p ' 1 2

D e c ' 1 2

M a r ' 1 3

J u n e ' 1 3

S e p ' 1 3

D e c ' 1 3

M a r ' 1 4

J u n e ' 1 4

S e p ' 1 4

D e c ' 1 4

M a r ' 1 5

Attrition (LT M) Attrition (quart erly annualized)


30/77


Financials



Income Statement


Net Sales 403,520 501,330 533,190 593,170 667,013

Expenditure 288,001 365,630 384,190 430,257 485,727EBITDA 115,519 135,700 149,000 162,913 181,286

Depreciation 11,260 13,750 10,680 12,250 13,216

EBIT 104,259 121,950 138,320 150,663 168,070

Other Income 23,590 26,690 34,270 30,600 36,000


PBT 127,849 148,640 172,590 181,263 204,070

Tax 33,670 40,620 49,290 50,754 58,280

Extraordinary Items 0 (2,190) 0 0 0

Minority Int./Income from Assoc. 0 0 0 0 0


Adjusted PAT 94,179 108,020 123,300 130,509 145,790

Balance Sheet




Net worth 397,970 475,300 547,630 601,798 662,308

Minority Interest 0 0 0 0 0

Loan Funds 0 0 0 0 0



Investme nt 21,330 30,560 23,120 23,120 23,120

Current Assets 349,030 414,900 506,490 565,778 637,284


Other Current Assets 0 0 0 0 0



Misc. exp 0 0 0 0 0

Total Assets 392,940 468,740 542,260 596,428 656,938

Cash Flow




Chg in working cap (11,140) (14,600) (7,500) 798 (5,240)Operating Cashflow 70,709 80,480 92,210 112,958 117,765


Free Cash Flow 48,179 54,410 53,430 94,958 99,765

Investments (17,440) (9,230) 7,440 0 0


Investing Cashflow (16,380) (8,610) 2,930 12,600 18,000

Equity Capital Raised 10 0 20 0 0

Loans Taken / (Repaid) 0 0 0 0 0



Financing Cashflow (41,919) (30,690) (50,970) (76,341) (85,280)Net chg in cash 12,410 41,180 44,170 49,217 50,486


Closing cash position 218,320 259,500 303,670 352,887 403,373

Key Ratios


EBITDA Margin 28.6 27.1 27.9 27.5 27.2

EBIT Margin 25.8 24.3 25.9 25.4 25.2


Net Margin 23.3 21.5 23.1 22.0 21.9ROCE 35.3 34.5 34.1 31.8 32.6

ROE 25.7 24.7 24.1 22.7 23.1

RoIC 75.8 73.5 70.2 69.1 74.6


31/77


Financials



EPS 82.4 94.5 107.9 114.2 127.6

CEPS 92.3 106.6 117.2 124.9 139.1

BVPS 348.2 415.9 479.2 526.6 579.5

DPS 21.1 31.7 44.5 57.1 63.8


PER 23.6 20.5 18.0 17.0 15.2

P/CEPS 21.1 18.2 16.6 15.5 14.0

P/BV 5.6 4.7 4.1 3.7 3.4

EV / Sales 4.9 3.8 3.5 3.1 2.7

EV / EBITDA 17.1 14.2 12.7 11.3 9.9

Dividend Yield (%) 1.1 1.6 2.3 2.9 3.3


Net Debt/ Equity (0.6) (0.6) (0.6) (0.6) (0.6)

Net Debt/EBIDTA (2.1) (2.1) (2.2) (2.3) (2.4)



Revenue 19.6 24.2 6.4 11.2 12.4

EBITDA 7.9 17.5 9.8 9.3 11.3

EBIT 6.6 17.0 13.4 8.9 11.6

PAT 13.3 12.4 16.5 5.8 11.7


Revenue 128,750 127,700 133,420 137,960 134,110

EBITDA 35,780 34,410 37,730 39,540 37,320

EBITDA Margin (%) 27.8 26.9 28.3 28.7 27.8

PAT 29,280 28,860 30,960 32,500 30,980

EPS (Rs) 25.6 25.3 27.1 28.4 27.1


Promoters 15.9 15.9 15.9 13.1 13.1

FIIs 42.1 41.6 42.7 41.6 38.0

DIIs 13.7 14.1 14.5 15.3 15.1



32/77


Wipro Ltd

HOLD, TP Rs 600 Recovery remains elusive

Cheapest amongst Tier I companies, but rightly so: While Wipro remains the cheapest amongst the Tier I IT

Services companies ( at ~14x /12.5x FY16/17E P/E) , it is rightly so in our view given that the revenue growth has

failed to pick up with FY16E expected to mark the 4th successive year of single digit revenue growth.

Focused mining led improvement seen in top clients revenue performance seen through FY12-14 has

given way in FY15 : Wipro’s strong focus in addressing long standing issues on client mining yield some success

through FY12-14( top 5 clients grew by 18/15% in FY13/14, top 10 clients grew by 16%/10.5% in FY13/14)

however seem to have given way in FY15. While portfolio issues also partly to be blamed for the poor revenue,

mining outside of top 10 clients has failed to excite.

Growth across US /Europe remains below par: While Wipro’s revenue growth underperformance from US

remains well documented, Wipro appears to be losing out in Europe as well(competition growing by 15-20% YoY)

despite the natural tailwinds.

Retain HOLD, TP Rs 600: Wipro remains a tactical catch up trade in between periods. We downgraded Wipro to a

HOLD in July’14 after a tactical ACCUMULATE rating for 12 months prior to that. While valuations appear cheap

relative to peers, they are fair in the context of Wipro’s growth challenges/revenue recovery remaining elusive.


33/77


18.5%

1.6%

18.9%

13.4%

5.0%6.4% 7.0% 6.6%

9.3%

0%

5%

10%

15%20%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

US$ revenue growth, YoY %

US$ revenue growth, YoY %

Wipro (contd)


Wipro’s YoY US$ revenue growth is in single digits for the 4th successive year

Insert chart for the revenue growth across US and Europe for Tier I peers

-10%

0%10%20%30%40%50%

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Revenue growth from Europe, YoY %



34/77


-5%

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Top 5 clients revenue growth, % QoQ Top 10 clients revenue growth, % QoQ

CO wide Revenue growth, % QoQ

Wipro (contd)



India and Middle East have been driving growth for Wipro through H2FY15 as US and Europe performance hasdisappointed

Client progression to higher revenue buckets has been weak through FY15 after showing some progress through FY13-14

After showing significant traction in top clients mining through FY12-14, revenue performance intop 5/10 clients has been sluggish in FY15

US$ revenue, YoY growth % June'12 Sep'12 Dec'12 Mar'13 June'13 Sep'13 Dec'13 Mar'14 June'14 Sep'14 Dec'14 Mar'14

North America 4.8% 4.3% -0.4% -0.7% 1.0% 2.4% 6.4% 8.3% 9.8% 11.2% 10.2% 6.7%

Europe 5.7% 2.5% 10.0% 6.2% 8.2% 8.5% 6.4% 14.2% 11.8% 4.5% -0.3% -9.6%

India and Middle East 5.2% -3.2% 1.3% 1.1% 4.9% 2.2% 2.8% 1.6% 13.3% 20.4% 20.8% 25.4%

RoW 31.7% 20.1% 20.2% 16.9% 14.0% 17.6% 9.2% 1.3% 0.8% 0.3% 1.6% 4.1%

Customer size

distribution Mar'12 June'12 Sep'12 Dec'12 Mar'13 June'13 Sep'13 Dec'13 Mar'14 Jun'14 Sep'14 Dec'14 Mar'15

Mar'15-Mar'14

Change

Mar'14-Mar'13change

Mar'13-mar'12change

>US$ 100 mn+ 7 8 9 10 10 10 10 11 10 10 10 10 11 1 0 3

> US$ 50 mn+ 25 25 25 26 26 27 27 28 29 29 30 31 31 2 3 1

>US$ 20 mn+ 75 73 71 73 76 76 78 80 82 84 85 84 86 4 6 1


35/77


Financials



Income Statement


Net Sales 403,520 501,330 533,190 593,170 667,013

Expenditure 288,001 365,630 384,190 430,257 485,727EBITDA 115,519 135,700 149,000 162,913 181,286

Depreciation 11,260 13,750 10,680 12,250 13,216

EBIT 104,259 121,950 138,320 150,663 168,070

Other Income 23,590 26,690 34,270 30,600 36,000


PBT 127,849 148,640 172,590 181,263 204,070

Tax 33,670 40,620 49,290 50,754 58,280

Extraordinary Items 0 (2,190) 0 0 0

Minority Int./Income from Assoc. 0 0 0 0 0


Adjusted PAT 94,179 108,020 123,300 130,509 145,790

Balance Sheet




Net worth 397,970 475,300 547,630 601,798 662,308

Minority Interest 0 0 0 0 0

Loan Funds 0 0 0 0 0



Investme nt 21,330 30,560 23,120 23,120 23,120

Current Assets 349,030 414,900 506,490 565,778 637,284


Other Current Assets 0 0 0 0 0



Misc. exp 0 0 0 0 0

Total Assets 392,940 468,740 542,260 596,428 656,938

Cash Flow




Chg in working cap (11,140) (14,600) (7,500) 798 (5,240)Operating Cashflow 70,709 80,480 92,210 112,958 117,765


Free Cash Flow 48,179 54,410 53,430 94,958 99,765

Investments (17,440) (9,230) 7,440 0 0


Investing Cashflow (16,380) (8,610) 2,930 12,600 18,000

Equity Capital Raised 10 0 20 0 0

Loans Taken / (Repaid) 0 0 0 0 0



Financing Cashflow (41,919) (30,690) (50,970) (76,341) (85,280)Net chg in cash 12,410 41,180 44,170 49,217 50,486


Closing cash position 218,320 259,500 303,670 352,887 403,373

Key Ratios


EBITDA Margin 28.6 27.1 27.9 27.5 27.2

EBIT Margin 25.8 24.3 25.9 25.4 25.2


Net Margin 23.3 21.5 23.1 22.0 21.9ROCE 35.3 34.5 34.1 31.8 32.6

ROE 25.7 24.7 24.1 22.7 23.1

RoIC 75.8 73.5 70.2 69.1 74.6


36/77


Financials

Source: Company Emkay Research


EPS 82.4 94.5 107.9 114.2 127.6

CEPS 92.3 106.6 117.2 124.9 139.1

BVPS 348.2 415.9 479.2 526.6 579.5

DPS 21.1 31.7 44.5 57.1 63.8


PER 23.6 20.5 18.0 17.0 15.2

P/CEPS 21.1 18.2 16.6 15.5 14.0

P/BV 5.6 4.7 4.1 3.7 3.4

EV / Sales 4.9 3.8 3.5 3.1 2.7

EV / EBITDA 17.1 14.2 12.7 11.3 9.9

Dividend Yield (%) 1.1 1.6 2.3 2.9 3.3


Net Debt/ Equity (0.6) (0.6) (0.6) (0.6) (0.6)

Net Debt/EBIDTA (2.1) (2.1) (2.2) (2.3) (2.4)



Revenue 19.6 24.2 6.4 11.2 12.4

EBITDA 7.9 17.5 9.8 9.3 11.3

EBIT 6.6 17.0 13.4 8.9 11.6

PAT 13.3 12.4 16.5 5.8 11.7


Revenue 128,750 127,700 133,420 137,960 134,110

EBITDA 35,780 34,410 37,730 39,540 37,320

EBITDA Margin (%) 27.8 26.9 28.3 28.7 27.8

PAT 29,280 28,860 30,960 32,500 30,980

EPS (Rs) 25.6 25.3 27.1 28.4 27.1


Promoters 15.9 15.9 15.9 13.1 13.1

FIIs 42.1 41.6 42.7 41.6 38.0

DIIs 13.7 14.1 14.5 15.3 15.1



37/77


HCL Technologies

ACCUMULATE, Target Price Rs2,050 On solid footing

Making the growth engine more reliable: While the growth from the Infrastructure segment has moderated in

FY15 after the strong 30%+ revenue growth seen in FY13 and FY14, HCL Tech is making the growth engine more

sustainable through investments in the Engineering Services side (HCLT amongst the largest offshore vendors in

this segment ,company has secured 5 large deals in this space over the past 12 months).

HCL Tech continues to consolidate on strong traction in Europe post-Axon acquisition: HCL Tech continues

to consolidate itself in Europe( revenue growth has been 20% YoY+ for the past 5 years). HCLT will also benefit

from vendor consolidation /cost optimization drive in the European financial services space in our view.

Underlying metrics remain strong , HCL Tech making the right progression on client metrics: HCL Tech’s

underlying business metrics remain solid (solid deal momentum) with company continuing to show healthy

migration in client metrics (no of US$ 20mn+/US$ 50 mn+ clients up by 4 /1 QoQ) along with wining new deals

(HCL Tech yet again announced 14 large deals with a TCV of US$ 1bn+ during the quarter) which was similar to

past few quarters.

HCL Tech much better placed on margins after the recent drop: HCL Tech’s EBIT margins slipped by 250 bps

sequentially in Mar’15 quarter and are now within co’s indicated range of 21-22%.We are not worried because

margin drop was largely on account of business investment (company stepped up SG&A expenses to highest in 6

quarters).

See upside risks to earnings estimates, ACCUMULATE, TP Rs 2,050: We have higher comfort in HCLT’s

financial performance. Given strength in underlying metrics, we find valuations at ~15x/13x FY16/17E earnings

attractive.


38/77


HCL Tech (contd )

HCLT has led peers on growth in revenues fromFinancial Services

Source: Companies Emkay Research

HCL Tech continues to show healthy progress on client metrics


HCL Tech has strengthened it’s prospects from Europeafter the Axon acquisition


Documents

IT-Services Emkay 080515