Edel - IT The Next Big Leap

SECTOR UPDATE
INFORMATION TECHNOLOGY
The next big leap
India Equity Research| IT
We reiterate our conviction that IT revenue growth in FY14 will surpass that in FY13. This out performance, in our view, will be driven largely by retail, energy, transport and manufacturing verticals, alongwith new technologies. The recent upsurge in data, driven by social media platforms, can be utilised to interpret consumer behaviour and patterns. This augurs well for the Social Media, Mobility, Analytics and Cloud (SMAC) space, which according to Nasscom will be an USD1tn opportunity by FY20. In our view, these four technologies have the quintessential potential to support incremental 2-3% growth for leading players in FY15, on a conservative basis. We also strongly believe that SMAC will be the next growth driver and leading IT companies, by virtue of their early investments in this space, will be able to take the next big leap. We maintain our bullish stance on the sector and prefer Wipro, HCL Tech (HCL) and Infosys, in that order. We have a HOLD on Tata Consultancy Services (TCS) due to limited upside from current levels. Our preference for HCL stems from its robust deal pipeline and improving margins. Wipro and Infosys find favour due to scope for margin improvement driven by lower utilisation levels.
Growth engine: SMAC, Non linearity and consultancy to fuel surge

We believe social media and big data analytics will be key drivers for retail. While ERP implementation along with cloud will drive growth in manufacturing space, data analytics will be the wind beneath energy verticals wings. We also believe emerging output-based models will make businesses more skill-based versus volume centric, and will sharpen focus on non-linear business and high-end consultancy projects.
Selective spurt: Margins, realisations set to roll

Infosys and Wipros margins will improve once volume growth flows in on back of significant improvement in utilisation levels. Similarly, we expect higher contribution from consultancy business and higher automation in BPO and other commoditised space to improve realisations of Infosys, TCS and Wipro.
Outlook and valuations: Optimism reigns supreme

We maintain our three-year CAGR of 3.9% for Global IT industry. We also maintain higher organic growth estimates for HCL and TCS due to their significant deal wins in the past and higher investments in the S&M space. We continue to be bullish on Wipro (TP INR515) and upgrade HCL (TP INR898) and Infosys (TP INR3,361) to BUY from HOLD based on better strong pipeline and expected margin turnaround, respectively, and continue to maintain HOLD on TCS (TP INR1,587) due to limited upside. We recommend Wipro, HCL Tech and Infosys in that order of preference.
Edelweiss EdelweissResearch Researchis isalso alsoavailable availableon onwww.edelresearch.com, www.edelresearch.com, Bloomberg BloombergEDEL EDEL<GO>, <GO>,Thomson ThomsonFirst FirstCall, Call,Reuters Reutersand andFactset. Factset.
Sandip Agarwal
+91 22 6623 3474 sandip.agarwal@edelweissfin.com
Click on image to view video Omkar Hadkar

+91 22 6620 3147 omkar.hadkar@edelweissfin.com
March 5, 2013 Edelweiss Securities Limited
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Contents
At a glance.............................................................................................................................. 3 Indian IT prospects ................................................................................................................. 4 Emerging technologies, geographies to boost growth .......................................................... 9 Margins, realisations to improve selectively ........................................................................ 17 Company Section HCL Technologies ................................................................................................................. 23 Infosys .................................................................................................................................. 28 TCS ....................................................................................................................................... 34 Wipro ................................................................................................................................... 40
Edelweiss Securities Limited
At a glance
Year FY12 FY13E FY14E FY15E 13.0 FY12 FY13E FY14E FY15E 18.4 15.6 17.5 17.5 FY12 FY13E FY14E FY15E 7.1 10.8 FY12 FY13E FY14E FY15E 210 256 290 326 40 55 58 63 19.1 21.6 20.1 19.4 24 36 39 43 34.6 50.0 54.1 59.8 372 378 421 457 71 80 89 96 19.1 21.2 21.1 21.1 56 64 73 81 22.7 25.9 29.8 32.9 489 630 735 811 144 181 204 223 29.5 28.7 27.8 27.5 106 140 153 173 54.4 71.3 78.3 88.2 28.3 21.6 19.7 17.5 20.3 15.9 13.7 12.2 EPS
Rating Absolute Relative SP Price Market Cap (INR) (USD mn) 2,921 30,592 Revenue (INRbn) 337 406 463 502 6.0 4.6 3.8 3.3
INFO IN
Infosys
BUY
Financials EBITDA EBITDA PAT (INRbn) margin(%) (INRbn) 107 31.8 83 119 29.4 94 140 30.2 107 150 29.9 120
CAGR (%) (FY12-FY15E) EPS Revenue EBITDA PAT (INR) 145.5 164.2 187.0 210.1 14.1 11.9 13.0
Valuations (x) P/E EV/ EV/ EBITDA Revenues 20.1 13.6 4.3 17.8 12.0 3.5 15.6 9.9 3.0 13.9 8.8 2.6
TCS IN
TCS
HOLP
SP
1,540
54,972
WPRO IN Wipro
BUY
SO
433
19,450
13.2
13.1
19.1 16.7 14.5 13.2
14.5 12.3 10.8 9.5
2.7 2.6 2.2 2.0
HCLT IN
HCL Tech
BUY
SO
746
9,450
15.7
16.2
20.6
20.0
21.5 14.9 13.8 12.5
12.9 8.9 8.2 7.4
2.5 1.9 1.7 1.4
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Indian IT prospects
Worldwide IT spend to post three-year CAGR of ~3.9%
Pent up demand and new technologies to lead better IT spend in FY14 versus FY13 We expect worldwide IT spend to post better growth in FY14E vs. FY13 and largely led by pent up demand in developed markets and driven by new technologies like Cloud , Social media and Big data analytics. India has been a global sourcing leader, but the total global sourcing (IT+ BPM) market of USD 124-130bn accounts for only a little over 10% of global ITBPM spend thus providing a large untapped market opportunity. Nasscom has projected total revenues (domestic + exports; excludes hardware) to grow by about 13-15% to reach USD 106-111bn; and exports are likely to be about USD 84-87bn, a growth of about 12-14%. We believe Indian IT-BPM vendors can grab a larger pie of the global tech spend and have clearly started to make investments in developing new capabilities and expanding focus to new services, technologies, verticals and geographies. However, for the Indian IT industry to continue on the growth path, it will have to meander itself across the challenges of emerging alternative outsourcing destinations as well as macro and operational challenges. While mature verticals like BFSI, manufacturing and telecom have seen a moderation in growth rates over the last couple of years, they remain critical for Indian IT vendors because of their sheer contribution to revenues. For the top 4 Indian IT vendors contribution of these verticals stands in the range of 60%-65%. While BFSI, is seeing initial signs of pick up, reflected through the contracts awarded in America (refer chart 4), manufacturing has seen contract-awards rise in America and EMEA. Telecom, we believe, is still not out of the woods and demand in this vertical is expected to remain muted. Currently these verticals are focused on adopting enterprise applications, upgrading legacy infrastructure and implementing security solutions, going forward, the trend will be towards implementing cloud computing and mobility. On the other hand, upcoming verticals retail, healthcare, media and utilities are seeing strong traction particularly led by new technologies Social, Mobility, Analytics and Cloud (SMAC). Emerging technologies like SMAC will fuel the next leg of growth along with demand from new verticals. Of the worldwide technology spend of ~USD1.9tn in 2012, software products, IT and BPO services contributed ~USD1tn or 58% while hardware accounted for the balance 42% (or ~USD797bn). Global sourcing grew 9% (vs ~4.8% growth in overall technology spend). We expect the worldwide IT spend to post a three-year CAGR of 3.9% over FY1215E.
SMAC technologies to fuel demand in coming years
Table 1: Vertical-wise breakup (Global spend) Vertical wise global spend 2009 BFSI 221 Telecom & media 178 Manufacturing 238 Retail 110 Healthcare 46 Travel &transport 37 Const. & utilities 56 Others 516 Total 1,402
2010 225 184 245 112 49 38 58 545 1,456
2011 236 195 259 118 53 40 61 587 1,550
2012 247 204 273 123 56 42 64 629 1,640
2013E 254 214 283 129 60 44 68 648 1,701
2014E 263 222 296 136 64 47 73 668 1,769
2015E 271 230 310 145 69 50 78 688 1,840
(USD bn) 3Yr-CAGR 3.2% 4.0% 4.3% 5.5% 7.0% 6.0% 6.5% 3.0% 3.9%
Source: Nasscom, Edelweiss research

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The next big leap: The 3-pronged approach
Creating value.. the new mantra Demand shifting from made to order to compose to business needs While growth so far, was driven by commoditized services (Application Development & Maintenance (ADM)) and price arbitrage model, post the 2008 downturn, the Indian IT sector has been at crossroads with consumer demand seeing a paradigm shift from buildto-order to compose-to-business needs. The earlier demand was driven from a process improvement and cost reduction approach, whereas the new model lays emphasis on creating value for businesses i.e. increase revenues and increase ROIs along with cost optimization.
Fig. 1: Three way approach for growth adopted by Indian IT vendors

ADM and relatively newer services like IS sourcing and testing for cost optimisation
Deepening cost-saving proposition
Consulting and system integration Moving up the value chain
Products,platforms,software assets,solution accelarators Focusing on non-linearity
Source: Edelweiss research
Deepening cost-saving proposition

Services like IS sourcing and testing aiding the traditional cost savings proposition for Indian IT vendors With rising competition and an increase in offshore delivery centres, not only the traditional ADM space has been optimized by Indian IT vendors but also new streams and capabilities, which can extend this cost saving proposition, have been added. For instance IS outsourcing and testing (which have seen significant growth over the past few years particularly the IS outsourcing) have been added few years back and the primary reason for growth of these services has been that these can be delivered from the multitude of Tier II/III delivery centers in India (leading to higher off-shoring). These services also allow vendors to broaden employee pyramid thereby help offset wage inflation. We believe the next step is the nonlinear model and the shift up in the value chain, in our view, is happening at least for the large players.
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Table 2: Revenue, contribution, growth of Top4 for Traditional IT services Technology FY09 FY10 FY11 FY12 Q1FY13 Q2FY13 Q3FY13 ADM Infosys Revenue (USD mn) 1,977 1,982 2,352 2,689 666 690 684 Contribution(%) 42.4 41.3 38.9 38.5 38.0 38.4 35.8 Growth(%) 0.6 0.3 18.6 14.4 (0.5) 3.6 (0.9) TCS Revenue (USD mn) 2,913 3,089 3,797 4,556 1,184 1,230 1,250 Contribution(%) 48.4 48.7 46.4 44.8 43.4 43.1 42.4 Growth(%) 6.9 6.0 22.9 20.0 0.7 3.9 1.7 Wipro Revenue (USD mn) 1,833 1,727 1,285 1,408 341 341 339 Contribution(%) 42.4 39.3 24.6 23.8 22.5 22.1 21.5 Growth(%) 9.4 (5.8) NA 9.5 (6.0) (0.1) (0.4) Infra Management Infosys Revenue (USD mn) 292 345 379 420 116 122 132 Contribution(%) 6.3 7.2 6.3 6.0 6.6 6.8 6.9 Growth(%) 47.6 18.0 10.0 10.7 5.3 5.7 7.9 TCS Revenue (USD mn) 478 530 774 1,021 289 325 345 Contribution(%) 7.9 8.4 9.5 10.0 10.6 11.4 11.7 Growth(%) 29.9 10.9 46.1 31.9 5.0 12.5 6.0 HCLT Revenue (USD mn) 356 571 826 1,005 268 296 328 Contribution(%) 16.3 21.1 23.3 24.2 24.8 26.6 28.4 Growth(%) 26.1 60.6 44.6 21.6 6.5 10.7 10.6 Wipro Revenue (USD mn) 847 927 1,111 1,304 345 358 374 Contribution(%) 19.6 21.1 21.3 22.0 22.8 23.2 23.7 Growth(%) 35.4 9.5 NA 17.4 (0.5) 3.5 4.5 Testing Infosys Revenue (USD mn) 317 307 450 549 145 155 161 Contribution(%) 6.8 6.4 7.5 7.9 8.3 8.6 8.4 Growth(%) 1.8 (3.3) 46.8 22.0 5.3 6.3 3.9 Wipro Revenue (USD mn) 489 519 579 NA NA NA NA Contribution(%) 11.3 11.8 11.1 NA NA NA NA Growth(%) 27.3 6.0 11.5 NA NA NA NA BPM Infosys Revenue (USD mn) 280 293 340 349 86 84 99 Contribution(%) 6.0 6.1 5.6 5.0 4.9 4.7 5.2 Growth(%) 18.7 4.8 15.9 2.7 1.0 (1.6) 17.7
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Table 2: Revenue, contribution, growth of Top4 for Traditional IT services (contd.) Technology FY09 FY10 FY11 FY12 Q1FY13 Q2FY13 Q3FY13 TCS Revenue (USD mn) 429 732 924 1,122 355 359 366 Contribution(%) 7.1 11.5 11.3 11.0 13.0 12.6 12.4 Growth(%) 22.2 70.5 26.2 21.4 16.5 1.4 1.7 HCLT Revenue (USD mn) 236 214 195 189 48 49 51 Contribution(%) 10.8 7.9 5.5 4.5 4.4 4.4 4.4 Growth(%) 6.2 (9.4) (8.7) (3.2) (3.5) 3.2 3.6 Wipro Revenue (USD mn) 404 463 509 514 127 134 139 Contribution(%) 9.3 10.5 9.7 8.7 8.4 8.7 8.8 Growth(%) 30.8 14.5 NA 1.1 1.1 5.4 3.5
Source: Companies
Moving up the value chain

Indian IT players gradually moving from being just service providers to solution providers as well The Indian IT vendors have been steadily and stealthily moving towards providing higher end technology services like consulting and system integrationeven as the pace of growth has not picked up as anticipated. The need for these services arises from the fact that clients now dont expect IT vendors to be just service providers but expect them to be solution providers as well. These services cannot be serviced through an offshore `only model and thus necessitates a right blend of onshore-offshore mix. This can be difficult in a protectionist environment but for getting a slice of the next pie, it becomes extremely important to be part of the high-end requirements which is becoming key to decision making incrementally. A few large Indian players like Infosys, TCS, Wipro and HCL Tech have foreseen this opportunity and are making necessary investments in terms of technology and manpower towards building a strong portfolio of these services. Moving up the value chain is a gradual process due to the erratic project flows resulting in extremely low utilization levels, but Indian players continuous endeavour in the consultancy space makes us optimistic on both growth and margin sustainability in coming years.
Contribution of high-end services rising gradually
Table 3: Revenue, contribution, growth of Top4 IT companies for Consulting and SI Technology FY09 FY10 FY11 FY12 Q1FY13 Q2FY13 Q3FY13 Consulting and SI Infosys(Cons+SI) Revenue (USD mn) 1,327 1,375 1,879 2,178 524 539 623 Contribution(%) 28.5 28.6 31.1 31.1 29.9 30.0 32.6 Growth(%) 33.2 3.6 36.7 15.9 (4.9) 2.9 15.6 TCS (Consulting) Revenue (USD mn) 164 122 176 263 76 86 94 Contribution(%) 2.7 1.9 2.2 2.6 2.8 3.0 3.2 Growth(%) (15.1) (25.5) 44.6 49.0 6.8 12.1 10.2 Wipro(Consulting) Revenue (USD mn) 100 103 147 179 38 37 38 Contribution(%) 2.3 2.3 2.8 3.0 2.5 2.4 2.4 Growth(%) 19.8 3.0 43.0 22.0 (15.0) (2.3) 2.3
Source: Companies
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Focusing on non-linearity
Non-linearity to help growth and improve margins Post the downturn in 2008, Indian IT vendors have been hit on two fronts, clients demanding more for less and the rising costs. The above resulted in vendors moving towards re-usable assets, creating a significant and enduring non-linearity play. While these are modular and repeatable streams allowing vendors to deliver more with each new implementation, it will also result in a change in the old pricing model from Time & Material (T&M) to outcome based/usage based/license fee based models. Though the contribution of non-linear business has been minimal (4-8%) for top players, off late there has been increased awareness to develop the requisite products/platforms and IP-related products to compensate for margin decline in the linear model.
Table 4: Revenue, contribution, growth of Top4 IT companies (Non Linear Products) Technology FY09 FY10 FY11 FY12 Q1FY13 Q2FY13 Q3FY13 Products, platforms & solutions (PPS) Infosys(PPS) Revenue (USD mn) 366 396 322 380 107 99 105 Contribution(%) 7.8 8.2 5.3 5.4 6.1 5.5 5.5 Growth(%) (8.9) 8.4 (18.7) 17.9 (2.7) (7.5) 6.3 TCS Revenue (USD mn) 180 207 301 389 76 77 83 Contribution(%) 3.0 3.3 3.7 3.8 2.8 2.7 2.8 Growth(%) (11.2) 15.4 45.1 29.3 (26.0) 0.8 7.2 Wipro(Prod Eng) Revenue (USD mn) 246 183 443 493 129 126 118 Contribution(%) 5.7 4.2 8.5 8.3 8.5 8.2 7.5 Growth(%) 7.1 (25.5) 142.2 11.2 2.3 (1.9) (6.4)
Both Infosys and TCS were in neck-to-neck competition in developing IP-related business in the past few years. While Infosys has been successful in developing platform-based solutions other than Finacle (CBS) like ShoppingTrip360, iEngage, iTransform and Flypp, TCS has build a significant client base around its SMB solutions like BANCS, Cloud, Ion etc.
Chart 1: Number of patent applications pending for approval 1,026

834 641 449 256 64 FY07 FY08 FY09 Infosys FY10 TCS FY11 FY12
Chart 2: Comparison of number of patents granted 87

73 59 44 30 16 FY07 FY08 FY09 Infosys FY10 TCS FY11 FY12
(Nos.)
(Nos.)
Source: Companies
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Emerging technologies, geographies to boost growth

Social media, Mobility, Analytics and Cloud (SMAC) to drive IT Industry
Smart phones to initiate new wave of data flows There has been a significant shift in client preferences where customers want competitive solutions with minimum investments and expect IT companies to design solutions to improve operational efficiencies with minimum capital expenditure; thus implying a major shift towards pay-as-you-go model. The IT Industry is gradually moving away from providing enterprise services to enterprise solutions. These enterprise solutions not only contain costs but also improve client profits and cash flows. SMAC provides a platform for IT companies to offer new solutions to the dynamic client-needs using creativity and innovation in place of traditional IT services. These enterprising solutions are able to create client impact on not only costs, but also boost revenues, profit margins and cash flows. Analysis of consumer behavior, availability of humongous un-interpreted data, global connectivity via smart phones and other smart devices have brought about a convergence of four powerful forces in SMAC.
Convergence of SMAC
Convergence of emerging technologies in SMAC has brought about new unique opportunities for IT players. Such technologies have the potential to change the whole dynamics of the business models and approach to customers. IT players that combine two or more of these disruptive technologies can create innovative ways to serve the market. We believe these technologies provide IT players with a good opportunity to utilize their expertise and provide value additions to businesses. Social networks have moved on from being an online pool of people to a place of marketing and e-commerce. It throws up large volumes of consumer centric data that can be interpreted to gain knowledge of customer needs and expectations. Popular social networking sites Facebook, Twitter & Linkedin all have developed mobile applications to stay in touch with their users real time. These sites can help in identifying not only the potential client base and their needs but also to develop strategies to penetrate the market and satisfy consumer needs. Indian IT players have also adapted to these new realities and are working closely with their clients to build solutions based on the mobility cloud to handle and analyze this huge chunk of data into information. Mobility cloud enhances capabilities of mobile devices and also helps mitigate data security risks as the enterprise data remains on the cloud. Analytics provide unknown correlations and insights which help improving decision-making and operational efficiencies as well as enable organizations to deploy their resources strategically to exploit new found intelligence on consumer needs and behavior. As per Nasscom, SMAC is a potential USD1Tn opportunity by 2020 with cloud expected to provide ~70% of the opportunity.
Social networking sites key source of customer centric data
Table 5: Expected revenue, CAGR (%) for SMAC technologies Global Market Emerging Technologies Technologies Year Expected revenue (USD bn) Expected CAGR (%) Big Data 2015 25 45.0 Mobility 2020 140 15.0 Cloud 2020 650-700 32.0 Social Media 2020 235 40.0
Source: Nasscom
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Mobility
Recent burst in sales of smart phones and tablets has resulted in people getting access to digital data on the go. Continuously evolving new applications which make information available on these gadgets and provide convenient ways to transact through them has changed the way people behave and has provided a new medium for clients to approach their customers. As mobility gains momentum, demand for system integration and consulting services is on the up as enterprises look to integrate and develop their strategies. Mobility helps enterprises engage customers and provides real-time connectivity across functions. In our view the Indian market is throwing up plenty of opportunities in the consulting, application development, system integration and mobile infrastructure space. The mobile application market is rapidly growing and India is considered as the third fastest growing application market in the world. Mobile banking has emerged as one of the most innovative products in the financial services industry. Therefore, Indian players are expected to build significant scale in-house or by acquisition to capture market share. Clients not only need support for growing requirement on mobility enabled solutions but also require productivity improvement, transparency in data security, new avenues for revenue streams and expected return on their investments. Enterprise mobility market is estimated to reach USD140bn, a CAGR of 15% till 2020. North America is expected to remain the largest market while APAC is expected to grow at ~21%.
Increasing affordability of smartphones to increase IT spend in mobility
Fig.2: Number of application downloads has grown multi-fold across regions
Source: Company reports
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Big data/Analytics
Organization of large data quantities and its interpretation has enabled organizations discover hidden correlations and unknown patterns that help understand sentiments of not only customers but also suppliers and partners. Analytics help identifying new opportunities and better decision making that leads to increased sales and competitive advantage for an organization. Humongous interpretable data lying dormant provides a huge opportunity for IT companies to organize, understand data and convert them into meaningful strategies for organizations to improve decision making and identify new opportunities in new business segments. Big data analytics help organizations closely monitor their ecosystem, discover new emerging trends and decide how the most can be made in altered environments. It also enables them to predict change, which is crucial in this competitive business environment and enables them to stay ahead of competition. Indias big data outsourcing opportunity has grown by ~110-115% in 2012 to USD 200205mn. Organizations are ramping up to acquire complete set of capabilities to service clients for big data implementation. Indian players are likely to build capabilities across the entire spectrum of the big data ecosystem development of infrastructure, implementation, delivery, build big data end-user applications, develop big data management and storage service portfolios. Big data/analytics present a USD25bn opportunity by 2015, a CAGR of 45%. Indian Big data Industry is expected to grow from ~USD200mn in 2012 to ~USD1bn in 2015 (CAGR of ~83%). Big data technology implementation (data collection, integration, and designing of architecture and analytical tools) is expected to account for 82-84% of this growth projection, while the big data analytics services is likely to account for 16-18%.
Humungous interpretable data lying dormant provides huge opportunity
Examples of Big data in various verticals/services

Healthcare: Case 1: As a patient interacts with the hospital thru multiple touch points Nurse touch point, Doctors touch point, Diagnostic touch point etc. At each touch point encounter there is a lot of semi structured information regarding the patients conditions which is captured- for example a CAT scan report would have preliminary interpretation regarding the state of the nerves and blood flow conditions of the brain. This unstructured text from a doctor, diagnostic lab or nurses observations contains a rich gold mine of intelligence regarding the patients condition which can influence a patients outcome, however this rich source of information regarding a patients condition is also untapped. A text mining process can be used to harvest this intelligence into an Clinical Disease Repository (CDR). The Clinical Disease Repository can contain early warning signals regarding co-relation frequency of occurrence of specific words in the unstructured text and the clinical outcome. Case 2: A range of new solutions within hospitals have RFID chips which are embedded to patients card or doctors card or nurse which can relay the location information of the patient/doctor in real time. This location data is a real new data pool with huge implications for effectively managing patients experience and optimising resource within a hospital. For example we can create a simple vectors like nurse/patient ratio, nurse mobility index etc. We can also create models to see the strength of the
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relationships between patient satisfaction index and nurse/patient ratio. We can then define optimal nurse/patient ratios for different sections of the hospital OPD/cardiology/paediatric wards for example may need higher nurse/patient ratios than say for example dental department. Once set anytime this goes crosses a threshold an alert can be send to the head nurse to alleviate the risk of a under serviced patient. Smartphones : Siri the talking, question-answering application in iPhones, which Apple introduced in 2010, and kept feeding it more data. Now, with people supplying millions of questions, Siri is becoming an increasingly adept personal assistant, offering reminders, weather reports, restaurant suggestions and answers to an expanding universe of questions. Retail : Google searches, Facebook posts and Twitter messages, for example, make it possible to measure behavior and sentiment in fine detail and as and when it happens. Retailers, like Walmart and Kohls, analyze sales, pricing and economic, demographic and weather data to tailor product selections at particular stores and determine the timing of price markdowns. Transport and Logistics: Shipping companies, like U.P.S., mine data on truck delivery times and traffic patterns to fine-tune routing. Online Portals: Online dating services, like Match.com, constantly sift through their Web listings of personal characteristics, reactions and communications to improve the algorithms for matching men and women on dates. Security Agencies: Police departments across the country, led by New Yorks, use computerized mapping and analysis of variables like historical arrest patterns, paydays, sporting events, rainfall and holidays to try to predict likely crime hot spots and deploy officers there in advance.
Cloud
Cloud, with its scalable potential, significant reduction in costs and overheads, is having a transformational impact. Cloud is driving IT services, with companies inclined to reduce fixed IT costs as they prefer opex model to capex model. Cloud is transforming the industry landscape with clients requiring different hardware, software and IT services depending upon the availability of solutions. Clients are expected to require consulting as well as implementation services in order to migrate to cloud. System integrators are required to handle migration complexities for integrating cloud functions with on-premise IT deployments. The primary objective of cloud till now is to deliver significant cost savings for clients. However, as more and more organizations move towards cloud-based solutions, Indian providers have the potential to leverage other characteristics of cloud to enhance their revenue generating potential by developing new products and services to offer to clients and by modifying their business and operating models to leverage maximum synergies from cloud.
Cloud the key revenue growth contributor in SMAC
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Out of all the SMAC technologies, the largest opportunity of nearly USD700 billion is expected in cloud. The global cloud market is estimated to grow at over 30% CAGR till 2020. Cloud strategy, cloud integration with on-premise IT, migration of applications, custom development of cloud applications, real-time analytics are some of the emerging opportunities.
Social analytics
Social analytics provides an effective gauge of customer opinion and sentiment which can be used to derive actionable strategies to improve revenue streams and profitability of an organization. Communication and interaction across social channels give a unique insight into consumer sentiment. This can be leveraged to improve efficiencies, guide decisions, predict the next wave of consumer expectations and enable organizations to position themselves appropriately in order to benefit from the same. With millions of individuals logging on to many social networks daily, there is a huge pile up of data that can be used to interpret customer sentiments that lies scattered across various online sources. As individuals use these networks to choose products and places to buy, it provides an opportunity for business to evaluate patterns and consumer behaviors to transform massive information into actionable strategies. The enterprise social software market is maturing rapidly with firms investing heavily to study the online behavior of customers and co-relate it with revenue streams. Firms are using social media as a communication and collaboration tool to increase brand awareness, sales and feedback channels. As social media gains traction, IT players are providing consulting and integration services to clients to enhance business effectiveness. Social media is growing at a CAGR 40% and is expected to reach USD235bn by 2020. The paradigm of social networking completely changed after Facebook opened memberships to everyone. People indulge in activities like chatting, playing games, updating status and use varied applications to find and express themselves in the online space. Games have become an important activity on social networking sites. Facebook has the population size of worlds third largest country with an active user base of 955mn (July 2011), up from 305mn in Sept, 2009.
Social analytics provides unique insight into consumer sentiments and behaviour patterns
Chart 3: Growth in Facebook subscribers (Mn)

1,000 800
(mn)
600 400 200 0
Sep 09
Sep 10
Mar 10
Mar 11
Sep 11
June 10
June 11
Mar 12
Dec 09
Dec 10
Dec 11
Facebook Subscribers(Mn)
Source: Company
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Next growth phase Emerging geographies present new opportunities
Emerging geographies to fuel next growth wave
Of the worldwide technology spend of ~USD1.9tn in 2012, software products, IT and BPM services contributed over USD1tn or 58% while hardware accounted for the balance 42% (or ~USD797bn). Global sourcing grew ~9% to USD124-130bn. APAC spend grew 6% (~1.6x faster than mature geographies), Americas remained steady at 5% and EMEA recorded a minimal growth of 1% due to fewer contracting activity. Average Contract Value (ACV), deals greater than USD5mn, remained fairly steady at USD 21 billion largely due to a number of mega deals in BPM. APAC was the sole region to register significant growth of 55%. EMEA contracts declined 13% while the Americas declined ~3%.
Table 6: Emerging geographies' global sourcing potential

IT Spend Indian Geographies (USD bn) pentration (%) Mexico 29 4.0 Brazil 47 2.0 Key segments IT outsourcing,BPM Low level application management,software engineering and design,artifical intelligence,R & D Procurment outsourcing,infrastructure software,CAD CRM,ERP,sales automation,SI Software outsourcing, R & D IT outsourcing,BPM,IS outsourcing,CAD IT outsourcing,SI Enterprise applications,cyber security,healthcare,IT Firms present HCL, HP, IBM, Infosys, TCS HCL, Google, IBM, TCS
Australia Japan China Europe* Spain Canada
48 235 105 230 26 63
4.0 <1.0 <1.0 <1.5 <1.5 1.5
Aegis, AXA, BirlaSoft, Honeywell, Infosys, TCS, Zensar HCL, Infosys, Mindtree, TCS GE, Google, HCL, IBM, Microsoft, Oracle, TCS, TechM, Wipro HCL, Hexaware, Infosys, Infotech, Mindtree, TCS Accenture, IBM, Infosys, NIIT Tech, TCS ABMinacs, HCL, IBM, Infosys, Honeywell, Infotech, Microsoft, Mphasis, SAP, Syntel, TCS, Wipro
Source: Forrester, Company Websites, Nasscom Note:*Germany, France, Italy, Netherlands
India accounts for the largest share (52%) in global IT-BPM sourcing market, this represents only 10% of total global IT-BPM spend. Boost in economic activity in new geographies such as Brazil, China & Japan, amongst others, provides a good opportunity for Indian players to penetrate further in these geographies that could help drive growth. Penetration levels in these countries at is way below the penetration levels in mature geographies and provides Indian IT players with a room for further penetration in the geographies as their IT spends continue to grow at a quick pace. This along with untapped markets of the developed world is expected to drive the next growth phase for Indian IT-BPM players. While TCS derives 47.4% of revenue from non-US regions, Infosys receives 39% and Wipro 50.1% We believe these players enjoy a clear edge in growing geographies; hence, a focused approach along with more S&M investments (in these regions) will enable them to post robust revenue growth.
Table 7: Penetration of IT &BPM exports by Indian IT Companies across geographies Penetration (%) 2008 2009 2010 2011 2012 Americas 8.4 8.6 9.6 10.3 11.7 EMEA 4.6 5.8 5.5 6.5 7.4 APAC 3.1 2.7 2.9 3.0 3.2
Source: Nasscom
14 Edelweiss Securities Limited
IT
Table 8: Geography wise revenue for Top 5 Indian IT players (USD mn) US FY07 FY08 FY09 FY10 TCS 2,335 3,111 3,368 3,650 Growth YoY (%) 38.6 33.2 8.3 8.4 Infosys 1,957 2,589 2,950 3,164 Growth YoY (%) 40.3 32.3 13.9 7.2 Wipro 1,579 2,172 2,591 2,543 Growth YoY (%) 33.6 37.5 19.3 (1.8) HCLT 780 1,042 1,297 1,608 Growth YoY (%) 33.3 33.6 24.5 23.9 Cognizant 1,228 1,769 2,228 2,594 Growth YoY (%) 58.9 44.1 26.0 16.4
Europe TCS Growth YoY (%) Infosys Growth YoY (%) Wipro Growth YoY (%) HCLT Growth YoY (%) Cognizant Growth YoY (%) APAC TCS Growth YoY (%) Infosys Growth YoY (%) Wipro Growth YoY (%) HCLT Growth YoY (%) Cognizant Growth YoY (%) India TCS Growth YoY (%) Infosys Growth YoY (%) Wipro Growth YoY (%) HCLT Growth YoY (%) FY07 1,115 68.0 815 54.2 760 38.2 413 70.3 184 77.3 FY07 270 57.5 269 40.6 121 45.8 131 (12.1) 13 36.5 FY07 443 32.8 49 29.4 66 (12.1) FY08 1,633 46.4 1,172 43.7 1,012 33.3 557 35.0 343 86.4 FY08 386 42.9 363 34.8 463 283.2 181 38.3 24 87.2 FY08 505 13.9 52 6.3 91 38.3 FY09 1,779 9.0 1,228 4.8 1,140 12.6 612 10.0 541 57.8 FY09 288 (25.4) 422 16.1 268 (42.1) 185 2.1 47 95.9 FY09 474 (6.2) 63 20.8 325 93 2.1 FY10 1,686 (5.2) 1,106 (9.9) 1,149 0.8 734 19.8 607 12.2 FY10 333 15.4 477 13.1 328 22.5 242 30.6 78 66.0 FY10 548 15.7 57 (9.5) 371 13.9 121 30.6 FY11 4,702 28.8 3,944 24.7 2,884 13.4 1,980 23.2 3,584 38.2 FY11 2,032 20.5 1,301 17.6 1,415 23.2 952 29.8 855 40.8 FY11 540 62.2 663 38.9 452 37.8 409 68.8 153 97.5 FY11 751 37.0 133 133.2 469 26.4 204 68.8 FY12 5,735 22.0 4,468 13.3 3,097 7.4 2,365 19.5 4,798 33.9 FY12 2,576 26.8 1,531 17.7 1,676 18.4 1,124 18.1 1,109 29.8 FY12 766 41.9 839 26.6 599 32.4 439 7.4 215 39.9 FY12 876 16.7 155 17.0 548 16.9 220 7.4 Q1FY13 1,550 3.2 1,123 1.6 782 (2.3) 611 2.9 1,435 5.5 Q1FY13 726 9.6 375 (8.4) 426 0.1 295 1.9 283 (0.5) Q1FY13 202 (1.0) 219 (1.1) 174 7.0 114 3.7 78 16.2 Q1FY13 194 (13.9) 35 (1.1) 133 (9.6) 57 3.7 Q2FY13 1,603 3.5 1,148 2.2 794 1.5 635 3.9 1,505 4.9 Q2FY13 759 4.6 394 5.0 435 2.1 311 5.4 303 7.1 Q2FY13 217 7.4 226 3.4 180 3.5 112 (1.4) 84 8.7 Q2FY13 214 10.5 29 (17.9) 133 (0.6) 56 (1.4) Q3FY13 1,657 3.3 1,166 1.5 787 (0.8) 657 3.5 1,536 2.1 Q3FY13 784 3.3 459 16.5 467 7.4 329 5.9 326 7.8 Q3FY13 221 2.0 245 8.0 185 2.3 112 0.2 86 2.1 Q3FY13 224 4.7 42 46.2 139 4.7 56 0.2
Source: Companies
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IT
While APAC region posted revenue growth of 6%, America & EMEA posted growths of 5% and 1% respectively. The total IT spend (IT services + BPM) rose from USD783bn in FY11 to USD812bn in FY12. Going forward, we expect high growth in EMEA and APAC region to result in high growth in global sourcing as outsourcing is expected to increase as more and more clients start outsourcing their IT spends (lower penetration levels in EMEA & APAC). Also, these regions provide huge opportunity as clients look to upgrade their outdated systems. Manufacturing & Financial Services vertical is also seeing good traction in Europe and we expect this to provide further growth impetus.
Chart 4: Average contract value vertical wise in US and EMEA (USD bn)
Travel,Transport,Leisure Energy Retail Healthcare and Pharma Business Services Telecom and Media Financial Services Manufacturing 0.0 0.8 1.6 2.4 3.2 4.0 0.0 ACV (2012) ACV (Prior 5 Years Avg) ACV (2012) 1.0 2.0 3.0 4.0 5.0 ACV (Prior 5 Years Avg)
Source: TPI Index
Travel,Transport,Leisure Energy Retail Healthcare and Pharma Business Services Telecom and Media Financial Services Manufacturing
Even as the IT spend growth in EMEA is marginally lower than in US, the penetration levels are also significantly lower as compared to US. While average penetration level in Americas is ~ 11.7%, the levels are as low as ~7.4% and ~3.2% in EMEA and APAC. Lower penetration levels in EMEA and APAC to provide opportunity to derive revenue Also, based on average contract value (ACV) data published by Nasscom, of the total ACV of USD21bn in FY12, EMEA contributed 48% of the total deals while Americas and APAC contributed 37% and 15% respectively. We expect number of contracts to pick up in EMEA and APAC as more and more first time outsourcers start entering the market.
Table 9: Geography wise average contract value Country America EMEA APAC
ACV (USD bn) 7.9 10.2 3.1

Source: TPI Index
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IT
Margins, realisations to improve selectively

Pricing witnessing a paradigm shift
Over the years, the Indian IT-BPM industry has been following the standard time and material (T&M) and fixed price model, which are linked to headcount and effort involved. But over the past few years the industry is moving towards high end services with vendors being seen as strategic partners rather than mere service providers. This has resulted in emergence of new pricing models. Customers are re-assessing existing and new contracts with vendors, who are moving to high-value service offerings like consulting, system integration that demands different pricing models. This has led to emergence of non-linear pricing models, linking pricing to their business outcome or usage based.
Pricing moving from linear models to non-linear models based on outcome and productivity
Fig. 3: Change in pricing models
Alternative business models have greater emphasis on driving non linearity
Linear Pricing Model
Non Linear Pricing Model
T & M / Fixed
Outcome Linked
Effort
Productivity
Non Linear Pricing Models
Outcome Based Usage Based Licence fee based
Charges based on business results achieved "Pay per use", "Pay as you go" or transaction based IP/Product based changing on licence metric
Source: Nasscom
As the proportion of high end services, products and platforms increases we will see a change in the price realisations (not necessary in pricing). These pricing models benefit the vendors too as they can scale up with the current headcount, de-risk from commoditisation, increase value for clients and improve revenue productivity per employee.
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Table 10: CAGR (%) of revenue, employee, revenue per employee For Top 4 Indian IT players FY08 FY12 Revenue(USD mn) Employee Revenue(USD mn) Employee Revenue CAGR(%)
TCS Infosys Wipro HCLT Total 5,634 4,176 3,647 1,872 15,329 111,407 91,187 95,567 50,741 348,902 10,171 6,994 5,921 4,152 27,237 238,583 149,994 135,920 81,365 605,862 15.9 13.8 12.9 22.0 15.5
Employee CAGR(%) 21.0 13.2 9.2 12.5 14.8

Source: Companies
Chart 5: Revenue per employee (FY08-12) 55 51 46 47 43 44

(USD '000)
33 22 11 0 TCS Infosys FY08
51 44 38 37
Wipro FY12
HCLT
Source: Companies
However in the short term, we believe this could impart volatility to reported pricing as the proportion of revenues from high end services, products and platforms can fluctuate or tend to be lumpy in nature.
Table 11: Revenue contribution from CS and SI Company name FY08 FY09 FY10 Infosys 23.8 28.5 28.6 Wipro 2.3 2.3 2.3
(%) FY11 Q1FY13 Q2FY13 Q3FY13 31.0 29.9 30.0 32.6 2.8 2.5 2.4 2.4
Source: Companies
Table 12: Pricing growth Company name Infosys Wipro
FY08 5.4 NA
FY09 (2.9) 2.2
FY10 (4.0) (6.9)
(%) FY11 Q1FY13 Q2FY13 Q3FY13 1.7 (3.7) (0.2) 3.7 (0.8) (1.2) 0.6 2.9
Source: Companies
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IT
Emerging pricing models
Outcome-based pricing model: In this model of pricing vendors guarantee pricing levels when pre-decided specific criteria or milestones regarding service performance are attained. Typically this model is offered to clients with whom vendors have long-standing relationships and where the project/service level has reached a stage where the outcome can be clearly judged or envisaged. Outcomebased models cover service offerings like products, consulting, infrastructure management and customisation. Usage-based model: This type of pricing model, largely used in platform-based services, has arguably seen the highest level of adoption across the industry. Typically pricing is based on pay- per- use, pay- as-you-go or transaction based. All major Indian firms are either focusing on acquisitions that offer scalable reusable platforms or convert their traditional offerings into a platform. While TCS and Infosys have so far focused on developing a majority of their offerings in-house, Wipro and HCL Tech have a higher number of acquired platforms. Wipro also offers testing services under both usage-based and outcome-based pricing models. License fee-based model: In this method pricing is linked to the number of licenses used by the client. In license feebased models, the universal banking products developed by Infosys (Finacle), TCS (BaNCS) and Oracle Financial Services and Software (Flexcube) qualify.
New pricing models are based on outcome, usage and benefits derived by clients
Fig. 4: Types of pricing models

Outcome Based Usage Based Licence fee based Charges based on business results achieved "Pay per use", "Pay as you go" or transaction based IP/Product based changing on licence metric
Source: Nasscom
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IT
Margins to improve selectively (ex-currency)
So how does this changing demand and pricing model impact the margin and profitability of the top 4 Indian IT vendors? Even as the revenue side of the equation is fairly strong and growth vectors in place to sustain ~15% plus growth for the next two-three years, we expect margins to remain stable or decline marginally (ex-currency) for the top 4 Indian IT vendors. While pricing remains the most potent force for profitability we do expect the pricing to remain stable on a like-to-like basis. Though we envisage realizations to improve owing to higher end services, this does not necessarily result in margin benefits as higher value-added services also require high cost resources and hence, profitability may be in line or below the company average. However, we believe the Indian IT players have enough levers at their disposal to offset the rising wage inflation which has been a perpetual concern for Indian IT vendors.
Utilisation
Utilisation to trend upwards as growth bounces back Historically, most big IT firms have operated in the 68-72% utilization range (including freshers/trainees), which has now shifted to over 75%, for players like TCS due to increasing base. As growth bounces back and with the changing business mix, the requirement of absolute bench strength does not increase in the same proportion and hence leading to higher utilisation. Accenture has consistently operated at 85% utilisation level. Thus, we believe the ex-trainee utilisation level of ~80% is achievable and sustainable. We believe, as growth returns, improvement in utilisation will benefit Infosys and Wipro, amongst the top 4 players, the most as utilisation is at low levels, partly explained by the dip in volumes. While for TCS, we expect it to operate in the current range of 82-84% as the absolute bench size has remained constant on an ex-trainee basis, indicating that bench strength need not increase in line with overall employee growth. Further the impact of utilisation will also be dependent on the type of service where the employee has been deployed for instance if consultancy works increase the utilization levels may remain at depressed levels due to erratic flow of projects.
Chart 6: Trend of utilisation including trainees

84.0 78.0 72.0
Chart 7: Trend of utilisation excluding trainees

87.4 82.8 78.2
(%)
(%)
66.0 60.0 54.0
73.6 69.0 64.4
Q311
Q411
Q112
Q212
Q312
Q412
Q113
Q213
Q313
Q311
Q411
Q112
Q212
Q312
Q412
Q113
Q213
TCS
Infosys
Wipro
HCLT
TCS
Infosys
Wipro
HCLT
Source: Companies
20
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IT
Offshoring
Offshoring continues to be a potential lever for the Indian IT vendors. It is a well-known fact that since off-shore profitability is higher than onsite; companies have always strived to increase the off-shore proportion of their businesses. While earlier, Indian IT vendors thrived on the traditional IT services being off-shored, going ahead, off-shoring will be dependent on the business mix as the high end services are onsite dominant while cost saving services like IS sourcing and testing can be increasingly off-shored. However, the endeavour of the Indian IT vendors will be to increase the off-shore proportion. While we do not see off-shoring to be a significant lever in FY14 as the deals won by the players, will initially have a higher onsite component but we expect off-shoring to pick up from H2FY14 and to be a margin lever in FY15.
Offshoring to pickup from H2FY14 and provide margin comfort in FY15
Chart 8: Offshore as a % of total revenues 55.0

52.0 49.0
(%)
46.0 43.0 40.0
Q410
Q111
Q211
Q311
Q411
Q112
Q212
Q312
Q412
Q113
Q213
Infosys
TCS
Wipro
Source: Companies
Visa
FY12 and 9MFY13 was plagued by stricter visa norms and high visa cost for the Indian IT industry. While per say, the impact of visa cost is very less i.e. ~30bps (it can change by ~10bps depending upon the rejection rate), stricter visa norms have led to higher local onsite hiring which has impacted margins of the Indian IT vendors. However, post the US elections there have been increasing instances of visa norms being relaxed which will eventually lead to higher employees being shifted onsite rather than local hiring. This would ease the pressure on margins for Indian IT vendors. Post the US elections there have been increasingly positive news flow regarding relaxation of US visa norms like the Bill of "Immigration Innovation Act of 2013" which will greatly improve the H1B visa program. The Bill has been warmly welcomed by US corporations who want the visa quota allocation to be aligned with their employment needs for H1B visa workers. It will benefit foreign nationals, who would get increased numbers and availability of H1B visas. 1) Increase the cap on the 65,000 Regular H1B's - to 115,000 availability 2) Remove the cap on the 20,000 ADE H1B's - so that it is Unlimited
Proposed relaxation of visa norms to ease pressure on margins
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3) Establish a market-based demand H1B visa quota escalator system, so that the cap can adjust to meet the demands of US businesses and the economy (includes a 300,000 visa allocation ceiling) 4) Authorize employment for dependent spouses of H1B visa holder.
Chart 9: Subcontracting cost as a % of total revenue

6.0 4.8 3.6
(%)
2.4 1.2
Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q412 Q1FY13 Q2FY13 Q3FY13
0.0
INFOSYS
TCS
Source: Companies TCS represents fees to external consultants
Table 13: Currency sensitivity to EPS

Currency Impact USD Revenues Net USD Receivables Net USD Receivables as % of total revenues EPS estimate @ INR/USD 54 (FY14) and 52 (FY15) Hedging Policy Hedging Impact Tax rate Restated EPS 47 48 49 50 51 52 53 54 55 56 57 58 59 60 Infosys FY14E FY15E 8,576 9,646 2,573 2,894 0.3 0.3 187.0 210.1 6 mths 6 mths 0.5 1.0 0.3 0.3 175.5 177.1 178.8 180.4 182.0 183.7 185.3 187.0 188.6 190.3 191.9 193.5 195.2 196.8 191.3 195.1 198.8 202.6 206.3 210.1 213.8 217.6 221.3 225.1 228.8 232.6 236.3 240.0 TCS FY14E FY15E 13,617 15,603 3,404 3,901 0.3 0.3 78.3 88.2 6 mths 6 mths 0.5 1.0 0.2 0.2 73.7 74.3 75.0 75.6 76.3 77.0 77.6 78.3 78.9 79.6 80.3 80.9 81.6 82.3 80.5 82.0 83.6 85.1 86.6 88.2 89.7 91.2 92.8 94.3 95.8 97.4 98.9 100.4 Wipro FY14E FY15E 7,800 8,783 1,950 2,196 0.3 0.3 29.8 32.9 na na 0.5 0.5 0.2 0.2 27.6 27.9 28.2 28.5 28.8 29.1 29.5 29.8 30.1 30.4 30.7 31.0 31.4 31.7 HCL Tech FY14E FY15E 5,423 6,264 1,356 1,566 0.3 0.3 54.1 59.8 na na 0.5 0.5 0.2 0.2
31.1 49.1 55.6 31.4 49.8 56.5 31.8 50.5 57.3 32.1 51.2 58.2 32.5 52.0 59.0 32.9 52.7 59.8 33.2 53.4 60.7 33.6 54.1 61.5 33.9 54.8 62.4 34.3 55.6 63.2 34.6 56.3 64.0 35.0 57.0 64.9 35.4 57.7 65.7 35.7 58.4 66.6 Source: Edelweiss research
22
COMPANY UPDATE
IT
HCL TECHNOLOGIES
Stellar performance to continue
HCL Technologies (HCLT) robust margin performance in the last three quarters and revenue out performances over Infosys and Wipro in the past few years is a reflection of its strong execution capabilities. We expect the revenue growth outperformance to continue over the next couple of years as it ramps up significant deals won over the last eighteen months. Its improved margin trajectory in the last three quarters reduces investor concerns. We expect margins to remain in the 20-21% range (ex currency) plus range as it executes the deals. The improved margin profile and 15.1% and 15.5% USD revenue growth for FY14E and FY15E gives us the confidence to upgrade HCLT to BUY from HOLD with TP of INR898 (15x FY15E EPS of INR59.8).
EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market BUY Outperformer High Underweight
MARKET DATA (R: HCLT.BO, B: HCLT IN) CMP Target Price 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : INR 746 : INR 898 : 749 / 441 : 694.9 : 518/ 9,450
Revenue momentum to continue; abating margin concerns

HCLTs continued deal wins (USD1bn in Q2FY13) along with ramp up of the >USD2.5bn worth deals won in FY12 gives us the confidence of building ~15% growth in FY14 and FY15. Further, as the demand improves particularly led by discretionary spend uptick in BFSI and the continued traction in IMS, HCLT is well poised to outperform peers. This coupled with improved margin performance over the last three quarters reduces investor concerns of HCLT being a discounted price provider. We, expect HCLTs margin to dip in the near term as it transitions the new deals won, however, expect it to operate in 20-21% range (ex-currency) over the next two years.
Avg. Daily Vol.BSE/NSE(000) : 1,333.6 SHARE HOLDING PATTERN (%) Current Q2FY13 Promoters * MF's, FI's & BKs FII's Others 62.1 8.4 21.8 7.7
:
Q1FY13 62.2 9.5 20.0 8.3

NIL
62.2 9.3 20.3 8.2
* Promoters pledged shares (% of share in issue)
IMS driving growth and margins

IMS practice has scaled up significantly over FY09-Q2FY13 from 16% to 28%. With increasing proportion of deals having IMS component, HCLT stands to benefit from the same. The rising contribution from IMS gives us the margin comfort as it will enable higher fresher intakes in future which will help margins stay firm.
PRICE PERFORMANCE (%) Stock 1 month 3 months 12 months 4.9 10.4 48.5 Nifty (4.8) (3.2) 6.3 EW Technology Index (4.0) 3.9 23.9
Outlook and valuations: Robust demand; upgrade to BUY

We expect HCLT to be one of the key beneficiaries of the demand pickup in the next two years and have built in 15.1% and 15.5% growth for FY14 and FY15. Based on this and an improved margin profile we upgrade the stock to BUY from HOLD as we roll over to FY15 estimates with a revised target price of INR898 (15x FY15 EPS of INR59.8).
Financials Year to June Revenues (INR mn) Revenue growth (%) EBITDA (INR mn) Net profit (INR mn) Diluted EPS (INR) EPS growth (%) Diluted P/E (x) EV/EBITDA (x) ROAE (%)
FY12 210,312 31.2 40,251 24,474 34.6 49.8 21.5 12.9 25.7
FY13E 255,534 21.5 55,316 35,893 50.0 44.5 14.9 8.9 30.2
FY14E 290,151 13.5 58,278 38,831 54.1 8.2 13.8 8.2 26.4
FY15E 325,735 12.3 63,114 42,941 59.8 10.6 12.5 7.4 24.2
Sandip Agarwal
Omkar Hadkar
March 5, 2013 Edelweiss Securities Limited Edelweiss Securities Limited
Edelweiss Research is also available 23 on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
IT
Company Description
HCLT is Indias fourth-largest IT services company. It provides software-led IT solutions, remote infrastructure management, and BPO services, focused mainly on transformational outsourcing. The company leverages its extensive offshore infrastructure and global network of offices in 26 countries to deliver solutions across select verticals, including financial services, retail and consumer, life sciences aerospace, automotive, semiconductors, telecom and media publishing, and entertainment. The companys employee force stands at 85,194 and its revenues for the past twelve months stood at INR235bn (USD4.4bn).
Investment Theme
Industry revenues are forecasted to grow 12.2% over FY12-15E, and as a scale player HCLT is expected to gradually increase its share of the total pie largely through its rapidly growing infrastructure management practice. HCLT has been aggressively pursuing large deals in the past few quarters. Some of the largest deals announced recently by HCLT in the Indian IT space are Xerox, Sony Corporation, Nokia Corporation, Dr Pepper Snapple Group, The Linde Group, Agilent Technologies, which provides long-term revenue visibility. Its wellestablished infrastructure management practice, combined with its EAS practice, provides significant cross-selling opportunity, which could help HCLT win some of the large size deals. Although we believe it will post better growth versus Infosys and Wipro.
Key Risks
Key risks to our investment theme include: (a) sustained slowdown in the US; (b) failure in maintaining margins at current levels, while pursuing large deals; (c) higher wage inflation and other costs resulting in significant margin dilution and (d) appreciation of the INR against the USD, EUR and GBP.
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IT
Financial Statements
Key Assumptions Year to June Macro GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Company Efforts billed Offshore* Volume growth (%) - Offshore Efforts billed Onsite* Volume growth (%) - Onsite Billing rate Offshore* Pricing growth (%) - Offshore Billing rate Onsite* Pricing growth (%) - Onsite IMS USD rev. growth BPO USD rev. growth Cost assumptions Direct cost (% of revenue) SGA cost (% of revenue) Financial assumptions Depreciation Yield on cash & cash equivalents (%) Tax rate as % of PBT Debtor days *core software 2.7 2.7 24.5 75 2.8 2.9 24.0 74 2.9 4.2 24.0 69 2.8 4.4 23.0 70 Common size metrics Year to June Gross margin SG&A expenses EBITDA margins EBIT margins Net profit margins Growth ratios (%) Year to June Revenues EBITDA EBIT Net profit EPS FY12 31.2 46.4 53.7 47.7 49.8 FY13E 21.5 37.4 39.5 45.4 44.5 FY14E 13.5 5.4 3.5 8.1 8.2 FY15E 12.3 8.3 7.8 10.6 10.6 FY12 33.2 14.0 19.1 16.5 12.0 FY13E 35.2 13.5 21.6 18.9 14.4 FY14E 33.6 13.5 20.1 17.2 13.7 FY15E 32.6 13.2 19.4 16.5 13.5 66.8 14.0 64.8 13.5 66.4 13.5 67.4 13.2 341,082 376,655 425,620 476,694 16.5 13.4 21.1 1.8 77.1 2.4 21.5 (2.7) 10.4 4.7 21.1 (0.1) 77.0 (0.1) 34.4 9.4 13.0 13.0 21.1 77.0 20.0 8.0 12.0 12.0 21.1 77.0 24.0 10.0 124,795 130,678 147,666 165,386 6.5 8.8 8.5 47.9 5.0 7.8 7.5 54.5 6.5 6.0 6.8 54.0 7.0 6.0 6.0 52.0 FY12 FY13E FY14E FY15E Income statement Year to June Net revenue Cost of revenues Gross profit Total SG&A expenses EBITDA Depreciation & Amortization EBIT Other income Foreign exchange gain/(loss) Profit before tax Provision for tax Net profit Profit After Tax Minority int. and others Profit after minority interest Shares outstanding (mn) Diluted EPS (INR) Dividend per share (INR) Dividend payout (%) FY12 210,312 140,558 69,754 29,503 40,251 5,641 34,610 706 (1,876) 33,440 8,180 25,260 25,260 786 24,474 707 34.6 13.9 39.4 FY13E 255,534 165,635 89,899 34,582 55,316 7,051 48,265 1,050 (1,000) 48,315 11,596 36,719 36,719 826 35,893 718 50.0 13.3 26.0 FY14E 290,151 192,638 97,513 39,235 58,278 8,316 49,962 2,279 52,241 12,538 39,703 39,703 872 38,831 718 54.1 13.7 25.0 (INR mn) FY15E 325,735 219,516 106,219 43,105 63,114 9,277 53,837 3,199 57,036 13,118 43,918 43,918 977 42,941 718 59.8 15.0 25.0
25
IT
Balance sheet As on 30th June Equity capital Reserves & surplus Shareholders funds Borrowings Sources of funds Gross block Accumulated depreciation Net block Goodwill Investments Cash and equivalents Sundry debtors Other current assets Total current assets Total CL & provisions Net current assets Uses of funds Book value per share (INR) Profitability & efficiency ratios Year to June ROAE (%) ROACE (%) Debtors days Current ratio FY12 25.7 33.1 75 1.8 FY13E 30.2 40.6 74 1.4 FY14E 26.4 37.2 69 1.5 FY15E 24.2 33.2 70 1.5 FY12 1,386 104,370 105,756 32,097 137,854 53,753 29,338 24,416 48,689 21,406 6,574 52,664 32,783 85,447 48,678 36,769 137,854 152.6 FY13E 1,407 130,931 132,338 13,238 145,576 64,878 36,389 28,490 48,311 24,406 21,180 50,407 31,989 82,395 59,205 23,190 145,576 188.1 FY14E 1,421 160,054 161,475 13,323 174,798 77,378 44,705 32,673 47,857 27,406 36,576 58,825 36,586 95,411 65,126 30,285 174,798 227.2 (INR mn) FY15E 1,435 192,260 193,695 13,408 207,103 92,378 53,982 38,397 47,421 30,406 52,576 66,039 43,904 109,943 71,639 38,304 207,103 269.9 Valuation parameters Year to June Diluted EPS (INR) Y-o-Y growth (%) CEPS (INR) Diluted PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward Dividend yield (%) FY12 34.6 49.8 43.4 21.5 4.9 2.5 12.9 9.4 1.9 FY13E 50.0 44.5 61.0 14.9 4.0 1.9 8.9 8.4 1.8 FY14E 54.1 8.2 66.3 13.8 3.3 1.7 8.2 7.6 1.8 FY15E 59.8 10.6 72.8 12.5 2.8 1.4 7.4 2.0 Operating ratios Year to June Total asset turnover Fixed asset turnover Equity turnover FY12 0.4 9.0 2.2 FY13E 0.5 9.7 2.1 FY14E 0.5 9.5 2.0 FY15E 0.4 9.2 1.8
Peer comparison valuation Name HCL Technologies CMC eClerx Services Infosys Infotech Enterprises Persistent Systems Tata Consultancy Services Wipro Median AVERAGE Market cap (USD mn) 9,590 743 339 31,122 346 406 55,757 19,859 Diluted PE (X) FY14E FY15E 13.8 11.9 8.5 15.6 7.8 9.6 19.7 14.5 12.8 13.1 12.5 10.0 8.0 13.9 7.5 8.9 17.5 13.2 10.0 11.0 EV/EBITDA (X) FY14E FY15E 8.2 7.5 4.9 9.9 3.0 3.8 13.7 10.6 8.4 8.3 7.4 5.9 4.4 8.8 2.7 3.1 12.2 9.3 5.9 6.4 ROAE (%) FY14E 26.4 33.1 44.2 25.2 17.0 21.3 34.5 20.4 25.8 27.4 FY15E 24.2 31.1 38.1 24.0 15.6 19.3 31.3 19.3 24.2 25.4
26
IT
Additional Data
Directors Data
Mr.Shiv Nadar Ms. Robin Abrams Mr. Amal Ganguli Mr. Sudhindar Krishan Khanna Mr. Sosale Shankara Sastry Chairman & Chief Strategy Officer Non- Executive Director Non- Executive Director Non- Executive Director Non- Executive Director Mr.Vineet Nayar Mr. Subroto Bhattacharya Mr. R. Srinivasan Mr. Drikant Madhav Datar Vice Chairman & CEO Non- Executive Director Non- Executive Director Non- Executive Director
Auditors - S.R.Batliboi & Co., Chartered Accountants

*as per last annual report
Holding - Top10
Perc. Holding Life Insurance Corp. of India First State Investment Management (UK) Ltd. Capital International, Inc. Reliance Capital Asset Management Ltd. Birla Sun Life Asset Management Co. Ltd. 4.28 1.40 1.05 0.79 0.49 HSBC Global Asset Management (Singapore) Ltd. HSBC Global Asset Management (Hong Kong) Ltd. SBI Funds Management Pvt Ltd. The Vanguard Group, Inc. Eastspring Investments (Singapore) Ltd. Perc. Holding 2.13 1.19 0.91 0.75 0.39
*as per last available data
Bulk Deals
Data 04 May 2012 04 May 2012 Acquired / Seller The Rbos Plc Slocum Investments (Delhi) Pvt Limted B/S Buy Sell Qty Traded 8119140 10000000 Price 500.00 500.15
*in last one year
Insider Trades
Reporting Data 05 Mar 2012 05 Mar 2012 06 Mar 2012 23 Mar 2012 Acquired / Seller Shiv Nadar Foundation HCL Holedings Private Limited Shiv Nadar Foundation Shiv Nadar Foundation B/S Sell Sell Sell Sell Qty Traded 17957.00 285094.00 146910.00 17957.00
*in last one year
27
COMPANY UPDATE
INFOSYS
Value pick
Infosys has underperformed its peers (ex- Wipro) on the revenue growth front in FY12 and 9MFY13. This was primarily on account of lower growth in BFSI and telecom. While we expect growth to be lower than TCS, CTSH and HCLT in FY14 & FY15, the gap is likely to narrow down considerably. We maintain our FY14 revenue growth of 15% (incl. Lodestone) but have revised our FY15E growth to 12.5% vs. the earlier 10.1% to factor in the uptick in demand particularly on the discretionary side. As volume growth picks up in FY14, we expect significant expansion in margins driven by improvement in utilization levels. We upgrade the stock to BUY with a revised target price of INR3,361 (16x FY15E EPS).
EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market BUY Performer Low Underweight
MARKET DATA (R: INFY.BO, B: INFO IN) CMP Target Price 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : INR 2,921 : INR 3,361 : 2,970 / 2,061 : 574.2 : 1,678/ 30,592
Discretionary spend, BFSI recovery to fuel growth

While FY12 and H1FY13 growth was lower compared to peers owing to subdued growth in BFSI (~35% of revenue) and telecom vertical, Q3FY13 provided the initial signs of uptick in demand particularly on the discretionary side. Continued traction in large deals (won 16 in last two quarters) further strengthens our confidence that the company is gaining traction. As the deal momentum picks up in FY14, Infosys will benefit from the same, and hence we have revised our FY15 revenue growth assumption to 12.5% vs. 10.1% earlier leading to a 8.4% revision in our FY15 EPS.
:
Q1FY13 16.0 18.3 37.9 27.8

NIL
16.0 18.3 39.4 26.2
Margin expansion beckons

Infosys utilisation (ex-trainee) declined ~420bps over the last 4 quarters, primarily due to lack of volume support. As it ramps up the deals won, utilisation will witness a significant uptick giving a kicker to margins. Also, fresher offers for FY14 have been limited to 6,000 (23,000 last year), providing cushion for utilisation improvement. We expect margin to improve 80bps in FY14.
PRICE PERFORMANCE (%) Stock 1 month 4.9 19.1 2.0 Nifty (4.8) (3.2) 6.3 EW Technology Index (4.0) 3.9 23.9
Outlook and valuation: Growth the key; upgrade to BUY

As growth bounces back in FY14 and deal activity picks up, the gap between Infosys and its peers will narrow down significantly. Based on expected uptick in growth and margin we upgrade the stock to BUY from HOLD as we roll over to FY15 estimates with a revised target price of INR 3,361 (16x FY15 EPS of INR210.1).
3 months 12 months
Financials Year to March Revenues (INR mn) Rev. growth (%) EBITDA (INR mn) Net profit (INR mn) Diluted EPS (INR) EPS growth (%) Diluted P/E (x) EV/EBITDA (x) ROAE (%)
FY12 337,340 22.7 107,130 83,159 145.5 21.9 20.1 13.6 27.4
FY13E 405,720 20.3 119,246 93,828 164.2 12.8 17.8 12.0 26.0
FY14E 463,095 14.1 139,669 106,834 187.0 13.9 15.6 9.9 25.2
FY15E 501,593 8.3 149,976 120,032 210.1 12.4 13.9 8.8 24.0
Sandip Agarwal
Omkar Hadkar
IT
Change in estimates
FY14E Net revenue EBDITA EBDITA margin (%) PAT PAT margin (%) Capex New 463,095 139,669 30.2 106,834 23.1 26,282 Old % change 462,697 0.1 139,270 30.1 106,645 23.0 25,679 2.3 0.2 0.3 New 501,593 149,976 29.9 120,032 23.9 28,910 FY15E Old % change 489,403 2.5 140,940 28.8 110,716 22.6 28,247 2.3 8.4 Higher operating profits and lower tax rate leads to higher PAT 6.4 Comments Revised FY15 USD revenue growth to 12.5% vs. earlier estimate of 10.1% Higher revenue growth leads to higher operating profits
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IT
Company Description
Infosys is the second-largest IT services company in India providing consulting and IT services to clients globally. It is also among the fastest growing IT services organization in the world and a leader in the offshore services space with a pioneer in Global delivery model. Infosys provides business consulting, application development and maintenance and engineering services to 776 active clients spread across Banking, Financial Services, Insurance, Retail, Manufacturing, and Utilities verticals and 50 countries. The company has also its own proprietary core banking software - Finacle used by some of the leading banks in India, Middle East, Africa and Europe. Infosys total employee force stands at 155,629 and the companys TTM revenues stood at INR387.5bn (USD7.2bn).
Investment Theme
Infosys, in the recent past, lost market share to peers like TCS and HCL Technologies due to lack of strong presence in Infrastructure management services, lack of presence in emerging geographies and its aversion to provide flexibility in structuring contracts and offer discounted pricing to clients. The restructuring exercise also led to some distractions which led to slower growth compared to peers. We believe, on the back of the investments made it is likely to reduce the gap in revenue growth with peers and is best placed to expand its margins due to current low level of utilization and possibility of increase in offshore execution coupled with higher contribution from non-linear business.
Key Risks
Key risks to our investment theme include slower pick up in IT spend particularly on the discretionary side, appreciation of INR against USD, Euro and GBP.
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Key Assumptions Year to March Macro GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Company Employee Addition (nos) Gross additions Freshers Added (BPO -Trainees) Employees Added (BPO - Sales and Support) Employees Added (Banking Product group) Average attrition (%) Efforts (%) IT Services - Onsite efforts IT Services - Offshore efforts Products + BPO - Onsite efforts Products + BPO - Offshore efforts Utilisation (%) IT Services - Onsite utilization IT Services - Offshore utilization Products + BPO - Onsite utilization Products + BPO - Offshore utilization Pricing change (%) Services-onsite Services-offshore Cost assumptions Salary hike Onsite (%) Salary hike Offshore (%) Travelling cost (% of revenue) Other costs (% of revenue) S&M expenses (% of revenue) G&A expenses (% of revenue) Financial assumptions Yield on cash & cash equivalents (%) Tax rate as % of PBT Capex (INR mn) Debtor days Payable days Cash conversion cycle (days) 9.6 28.8 74 41 33 9.8 27.4 77 42 35 8.6 27.0 77 43 34 8.5 26.0 78 43 35 10.2 (1.6) 2.3 5.5 5.2 7.1 6.2 1.6 2.9 4.6 5.1 6.5 0.6 3.2 2.4 5.0 5.1 6.3 1.4 1.9 2.4 5.0 5.2 6.8 Growth ratios (%) Year to March Revenues EBITDA EBIT PBT Net profit EPS FY12 22.7 19.5 20.7 25.4 21.9 21.9 FY13 20.3 11.3 9.9 10.6 12.8 12.8 FY14E 14.1 17.1 15.3 13.2 13.9 13.9 FY15E 8.3 7.4 9.2 10.8 12.4 12.4 2.2 5.1 (1.1) (4.5) 1.8 0.8 93.0 68.0 93.0 74.6 93.0 64.6 93.0 80.7 93.0 73.3 93.0 85.0 93.0 74.5 93.0 85.0 Common size metrics Year to March Cost of revenues Gross margin G&A expenses S&M expenses SG&A expenses EBITDA margins EBIT margins Net profit margins FY12 55.9 44.1 5.2 7.1 12.3 31.8 29.0 24.7 FY13 59.0 41.0 5.1 6.5 11.6 29.4 26.5 23.1 FY14E 58.4 41.6 5.1 6.3 11.4 30.2 26.8 23.1 FY15E 58.1 41.9 5.2 6.8 12.0 29.9 27.0 23.9 24.2 75.8 3.9 96.1 23.5 76.5 4.9 95.1 24.5 75.5 5.0 95.0 23.5 76.5 5.0 95.0 45,605 33,000 38,000 50,000 5,559 7,500 9,000 7,000 262 15.4 500 15.0 700 12.5 500 11.5 6,359 6,000 7,000 5,000 6.5 8.8 8.5 47.9 5.0 7.8 7.5 54.5 6.5 6.0 6.8 54.0 7.0 6.0 6.0 52.0 FY12 FY13E FY14E FY15E Income statement Year to March Net revenue Cost of revenues Gross profit Total SG&A expenses S&M expenses G&A expenses EBITDA Depreciation & Amortization EBIT Other income Profit before tax Provision for tax Net profit Profit After Tax Profit after minority interest Basic EPS (INR) Shares outstanding (mn) Diluted EPS (INR) Dividend per share (INR) Dividend payout (%) FY12 337,340 188,740 148,600 41,470 17,570 23,900 107,130 9,340 97,790 19,040 116,829 33,670 83,159 83,159 83,159 145.5 571 145.5 47.2 32.5 FY13E 405,720 239,334 166,386 47,140 20,700 26,441 119,246 11,728 107,517 21,724 129,240 35,412 93,828 93,828 93,828 164.2 571 164.2 50.0 30.4 FY14E 463,095 270,468 192,627 52,958 23,734 29,225 139,669 15,695 123,974 22,376 146,348 39,514 106,834 106,834 106,834 187.0 571 187.0 55.0 29.4 (INR mn) FY15E 501,593 291,200 210,393 60,417 26,308 34,108 149,976 14,548 135,428 26,778 162,206 42,174 120,032 120,032 120,032 210.1 571 210.1 55.0 26.2
17,310 22,861 26,282 28,910
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IT
Balance sheet As on 31st March Equity capital Share premium account Reserves & surplus Shareholders funds Deferred tax liability Other term liabilities Sources of funds Goodwill Total net fixed assets Investments Other non current assets Cash and equivalents Sundry debtors Loans and advances Total current assets Sundry creditors and others Provisions Total current liabilities & Net current assets Uses of funds Book value per share (INR) Free cash flow Year to March Net profit Depreciation Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Free cash flow FY12 83,159 9,340 2,361 94,860 12,740 82,120 17,310 64,810 FY13 93,828 11,728 (1,833) 103,723 6,103 97,621 22,861 74,759 FY14E 106,834 15,695 1 122,530 3,713 118,818 26,282 92,536 FY12 2,860 30,890 300,860 334,610 (13,410) 1,090 322,290 11,660 54,090 120 1,620 209,680 77,550 15,230 302,460 41,350 6,310 47,660 254,800 322,290 585.6 FY13 2,860 30,900 354,487 388,247 (13,880) 1,000 375,367 24,220 65,223 730 1,830 232,141 93,735 18,430 344,306 52,802 8,140 60,942 283,364 375,367 679.5 FY14E 2,860 30,900 424,553 458,313 (13,880) 1,000 445,433 24,220 75,810 730 1,830 287,908 100,911 18,430 407,249 56,266 8,140 64,406 342,843 445,433 802.1 (INR mn) FY15E 2,860 30,900 507,817 541,577 (13,880) 1,000 528,697 24,220 90,173 730 1,830 349,753 112,275 18,430 480,458 60,574 8,140 68,714 411,744 528,697 947.8 (INR mn) FY15E 120,032 14,548 1 134,581 7,056 127,525 28,910 98,614 Operating ratios Year to March Total asset turnover Fixed asset turnover Equity turnover Valuation parameters Year to March Diluted EPS (INR) Y-o-Y growth (%) CEPS (INR) Diluted PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward Dividend yield (%) FY12 145.5 21.9 161.9 20.1 5.0 4.3 13.6 12.2 1.6 FY13 164.2 12.8 184.7 17.8 4.3 3.5 12.0 10.3 1.7 FY14E 187.0 13.9 214.4 15.6 3.6 3.0 9.9 9.2 1.9 FY15E 210.1 12.4 235.5 13.9 3.1 2.6 8.8 1.9 FY12 1.2 6.6 1.1 FY13 1.2 6.8 1.1 FY14E 1.1 6.6 1.1 FY15E 1.0 6.0 1.0 Profitability & efficiency ratios Year to March ROAE (%) ROACE (%) Debtors days Payable days Cash conversion cycle (days) Current ratio FY12 27.4 33.5 74 41 33 6.3 FY13 26.0 30.9 77 42 35 5.6 FY14E 25.2 30.3 77 43 34 6.3 FY15E 24.0 27.8 78 43 35 7.0 Cash flow metrics Year to March Operating cash flow Investing cash flow Financing cash flow Net cash flow Capex Dividends paid FY12 FY13 FY14E 118,818 (26,282) (36,769) 55,766 (26,282) (36,769) FY15E 127,525 (28,910) (36,769) 61,845 (28,910) (36,769) 82,120 97,621 (20,610) (103,181) (22,260) 39,250 (17,310) (23,270) (41,858) (47,419) (33,421) (42,148)
32
IT
Additional Data
Directors Data
David L Boyles Dr Omkar Goswami Srinath Batni B G Srinivas R Seshasayee V Balakrishnan S Gopalkrishnan Ann M Fudge Independent Director Independent Director Director Director Independent Director Director and CFO Executive Co Chairman Independent Director Prof Jeffrey S Lehman Ravi Venkatesan Sridar Iyengar Ashok Vemuri Deepak M Satwalekar K V Kamath S D Shibulal Independent Director Independent Director Independent Director Director Independent Director Chairman CEO and MD
Auditors - BSR & Co., Chartered Accountants

Holding - Top10
Perc. Holding Life Insurance Corp. of India Aberdeen Asset Managers Ltd. Abu Dhabi Investment Authority (Investment Management) Templeton Asset Management Ltd. ICICI Prudential Life Insurance Co. Ltd. 7.24 3.12 2.06 1.73 1.35 OppenheimerFunds, Inc. Aberdeen Asset Management (Asia) Ltd. The Vanguard Group, Inc. HDFC Asset Management Co. Ltd. JF Asset Management Ltd. Perc. Holding 3.89 2.45 1.96 1.42 1.32
Bulk Deals
Data No Data Available Acquired / Seller B/S Qty Traded Price
*in last one year
Insider Trades
Reporting Data No Data Available Acquired / Seller B/S Qty Traded
*in last one year
33
COMPANY UPDATE
IT
TATA CONSULTANCY SERVICES

Outlook robust but priced in
Tata Consultancy Services (TCS) posted good revenue growth over the past few years despite a less-than-favorable market environment. Uptick in discretionary spend and the managements commentary of FY14 expected to be better than FY13 gives us comfort of revising our revenue growth estimates to 17.9% /14.6% for FY14E and FY15E from 15.7%/13.2% respectively. We, however, believe its rich valuation at the current level builds in all positives and leaves limited potential upside for investors. We maintain HOLD with target price of INR1,587 (18x FY15E).
EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market HOLD Performer Low Underweight
MARKET DATA (R: TCS.BO, B: TCS IN) CMP : INR 1,540 : INR 1,587 : 1,543 / 1,040 : 1,957.2 : 3,014/ 54,972 Target Price 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn)
Revenue growth to be robust

TCS has seen continued traction in deals over past few quarters (24 large deals in 9mFY13). This, along with positive commentary on easing of budgets and expected ramp up in projects gives us confidence that TCS will be able post USD revenue growth of 17.9%/14.6% for FY14E/FY15E respectively vs. earlier assumption of ~15.7%/13.2%. While TCS has done a phenomenal job by fully leveraging on margin levers like offshore shift and utilisation, we believe further upside from these levers is limited. We expect the company to maintain margins at around 27-28% levels going forward.
:
Q1FY13 74.0 6.7 14.6 4.7

5.0
74.0 6.5 14.8 4.7
On the right path

The management has maintained its positive tone on the demand outlook and expects a recovery in BFSI. The company has stated that it expects FY14 to be better year than FY13 based on a healthier pipeline and uptick seen in discretionary spend. We believe the company is well placed to reap the benefits of the investments it has made in new technologies like cloud computing, analytics, big data and expect the company to be a key beneficiary of a demand uptick in these space.
PRICE PERFORMANCE (%) Stock 1 month 3 months 12 months 11.6 16.4 25.0 Nifty (4.8) (3.2) 6.3 EW Technology Index (4.0) 3.9 23.9
Outlook and valuations: Limited upside; Maintain HOLD

We have built in USD revenue growth of 17.9%/14.6% for FY14E/FY15E to factor in the improved demand scenario. We value the company at 18x our FY15E EPS estimate of INR88.2, implying a target price of INR1,587 (18x FY15E EPS of INR88.2 which provides a limited upside from current level. Hence, we maintain our HOLD recommendation.
FY12 488,938 31.0 144,177 106,384 54.4 22.1 28.3 20.3 36.7
FY13E 629,506 28.7 180,906 139,606 71.3 31.2 21.6 15.9 38.8
FY14E 735,318 16.8 204,161 153,221 78.3 9.8 19.7 13.7 34.5
FY15E 811,362 10.3 222,732 172,560 88.2 12.6 17.5 12.2 31.3
Sandip Agarwal
Omkar Hadkar
March 5, 2013 Edelweiss Edelweiss Securities Securities Limited Limited
IT
Change in estimates
FY14E Net revenue New 735,318 Old % change 721,514 1.9 New 811,362 FY15E Old % change 786,642 3.1 Comments Revised FY14 and FY15 USD revenue growth to 17.9% and 14.6% from earlier estimate of 15.7% and 13.2%, respectively
EBDITA EBDITA margin (%) PAT PAT margin (%) Capex
204,161 27.8 154,817 21.1 39,878
200,228 27.8 152,079 21.1 36,748
2.0 1.8
222,732 27.5 174,156 21.5
214,195 27.2 161,598 20.5 40,423
4.0 7.8 Higher opearating profits and lower tax rate leads to higher growth in PAT for FY15
8.5
41,777
3.3
35
IT
Company Description
TCS is India's largest and one of its oldest IT companies. It commenced operations in 1968 and provides a comprehensive range of IT services to industries such as banking and financial services, insurance, manufacturing, telecommunications, retail, and transportation. With a presence in 42 countries, TCS is positioned to deliver its services seamlessly. TCS has a large diversified client base (1051 active clients), TCS employee force stands at 263,637 (including subsidiaries) and its revenues for the last twelve months (TTM) stood at INR598bn (USD11.2bn).
Investment Theme
As India's largest and most-experienced IT services firm, TCS is well-positioned to benefit from the growing demand for offshore IT services. It is a serious contender for winning large deals, as it has more experience than peers in implementing large, complex, and missioncritical projects. TCS has multiple margin levers at its disposal, which we believe, will sustain its margins, shielding it from continued pressures on account of wage increases across the industry. End-to-end full services offerings, traction in emerging markets, ability to roll up large acquisitions, improving sales and marketing prowess and willingness to take multiple big bets (different go-to-market models) are among the key rationales for TCS to sustain its long term hi-growth trajectory. We believe current rich valuations build in a robust revenue and earnings growth and leave a limited potential upside from current levels.
Key Risks
Key risks to our investment theme include (1) double dip recession in major market US and prolonged slowdown in Europe, (2) sharp cross currency movements and appreciation of rupee against USD, Euro and GBP, (3) pricing pressure and (4) a reduction in margins.
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IT
Key Assumptions Year to March Macro GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Company Employee Addition (nos) Gross additions Lateral hires (% of Gross Addition) Average attrition Efforts Onsite (%) Offshore (%) Utilisation Onsite (%) Offshore (%) Blended (%) Pricing change Onsite (%) Offshore (%) Cost of sales (% of revenue) Employees cost Travelling cost Other costs SGA cost (% of revenue) Employees cost Other cost Financial assumptions Depreciation (% of rev.) Tax rate as % of PBT Capex (INR mn) Debtor days Payable days 1.8 22.8 74 51 1.7 21.8 74 50 1.7 24.0 76 53 1.7 23.0 80 58 12.2 6.1 12.7 6.2 13.2 5.6 13.5 5.3 Growth ratios (%) Year to March Revenues EBITDA EBIT PBT Net profit EPS FY12 31.0 28.7 29.0 26.4 21.7 22.1 FY13E 28.7 25.5 26.0 29.6 31.3 31.2 FY14E 16.8 12.9 12.5 12.9 9.7 9.8 FY15E 10.3 9.1 9.0 11.0 12.5 12.6 38.4 1.4 14.3 38.2 1.4 14.5 39.7 1.5 13.9 40.6 1.5 13.3 (1.2) 2.2 (1.9) (3.0) (0.8) 2.1 Common size metrics Year to March Cost of revenues Gross margin SG&A expenses EBITDA margins EBIT margins Net profit margins FY12 52.9 47.1 17.6 29.5 27.6 22.0 FY13E 53.1 46.9 18.2 28.7 27.1 22.4 FY14E 54.0 46.0 18.2 27.8 26.1 21.1 FY15E 54.3 45.7 18.2 27.5 25.8 21.5 93.0 79.0 82.2 93.0 78.5 81.4 93.0 76.1 80.5 93.0 76.5 80.6 25.0 75.0 25.1 74.9 26.1 73.9 25.0 75.0 70,400 63,360 79,200 87,120 56.0 14.2 46.3 13.2 56.3 11.0 45.0 11.1 6.5 8.8 8.5 47.9 5.0 7.8 7.5 54.5 6.5 6.0 6.8 54.0 7.0 6.0 6.0 52.0 FY12 FY13E FY14E FY15E Income statement Year to March Net revenue Cost of revenues Gross profit Total SG&A expenses EBITDA Depreciation & Amortization EBIT Other income Profit before tax Provision for tax Net profit Profit After Tax Minority int. and others Profit after minority interest Shares outstanding (mn) Diluted EPS (INR) Dividend per share (INR) FY12 488,938 258,773 230,165 85,988 144,177 9,036 135,141 4,041 139,182 31,688 107,494 107,494 1,110 106,384 1,957 54.4 17.0 FY13E 629,506 334,176 295,329 114,424 180,906 10,563 170,343 10,011 180,354 39,236 141,118 141,118 1,512 139,606 1,957 71.3 22.0 FY14E 735,318 397,203 338,115 133,955 204,161 12,496 191,664 12,043 203,707 48,890 154,817 154,817 1,596 153,221 1,957 78.3 22.9 (INR mn) FY15E 811,362 440,971 370,391 147,659 222,732 13,789 208,943 17,234 226,177 52,021 174,156 174,156 1,596 172,560 1,957 88.2 25.8
19,906 25,727 39,878 41,777
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Balance sheet As on 31st March Equity capital Reserves & surplus Shareholders funds Minority interest (BS) Borrowings Deferred tax liability Sources of funds Net block Goodwill Investments Cash and equivalents Sundry debtors Unbilled revenue Prepaid & other current assets Total current assets Total CL & provisions Net current assets Uses of funds Book value per share (INR) Free cash flow Year to March Net profit Depreciation Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Free cash flow FY12 106,384 9,036 (7,377) 108,043 32,603 75,440 19,906 55,534 FY13E 139,606 10,563 (9,291) 140,878 17,785 123,093 25,727 97,366 FY14E 153,221 12,496 965 166,683 14,686 151,997 39,878 112,119 FY12 1,957 323,276 325,233 5,276 1,266 (13,147) 318,628 66,284 33,193 80,839 19,836 114,992 22,478 25,045 182,351 75,718 106,633 318,628 166.2 FY13E 1,957 391,983 393,940 6,210 5,121 (33,804) 371,467 82,606 33,894 146,754 10,827 140,475 31,660 14,434 197,396 95,543 101,853 371,467 201.3 FY14E 1,957 492,689 494,646 6,210 5,121 (33,804) 472,173 109,987 33,894 206,754 20,877 165,248 31,660 14,434 232,219 117,042 115,177 472,173 252.7 (INR mn) FY15E 1,957 606,241 608,199 6,210 5,121 (33,804) 585,726 137,975 33,894 266,754 44,692 189,479 31,660 14,434 280,266 139,524 140,742 585,726 310.7 (INR mn) FY15E 172,560 13,789 7,648 193,997 25,036 168,962 41,777 127,185 Valuation parameters Year to March Diluted EPS (INR) Y-o-Y growth (%) CEPS (INR) Diluted PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward Dividend yield (%) FY12 54.4 22.1 59.0 28.3 9.3 6.0 20.3 16.1 1.1 FY13E 71.3 31.2 76.7 21.6 7.7 4.6 15.9 14.0 1.4 FY14E 78.3 9.8 84.7 19.7 6.1 3.8 13.7 12.6 1.5 FY15E 88.2 12.6 95.2 17.5 5.0 3.3 12.2 1.7 Operating ratios Year to March Total asset turnover Fixed asset turnover Equity turnover FY12 1.7 8.1 1.7 FY13E 1.8 8.5 1.8 FY14E 1.7 7.6 1.7 FY15E 1.5 6.5 1.5 Profitability & efficiency ratios Year to March ROAE (%) ROACE (%) Debtors days Payable days Cash conversion cycle (days) Current ratio FY12 36.7 64.8 74 51 23 2.4 FY13E 38.8 73.7 74 50 24 2.1 FY14E 34.5 78.2 76 53 23 2.0 FY15E 31.3 71.5 80 58 22 2.0 Cash flow metrics Year to March Operating cash flow Investing cash flow Financing cash flow Net cash flow Capex Dividends paid FY12 75,440 (29,496) (41,528) 4,417 (19,906) (38,978) FY13E 123,093 (63,562) (70,066) (10,534) (25,727) (73,185) FY14E 151,997 (87,835) (54,111) 10,051 (39,878) (54,111) FY15E 168,962 (84,543) (60,604) 23,815 (41,777) (60,604)
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IT
Additional Data
Directors Data
R N Tata N Chandrasekaran V Thyagarajan Dr. Ron Sommer S Mahalingam Dr. Vijay Kelkar O. P. Bhatt Chairman CEO and MD Director Director CFO and Executive Director Director Director S Ramadorai Aman Mehta Prof. Clayton M Christensen Laura M Cha Phiroz Vandrevala Ishaat Hussain Cyrus Mistry Vice Chairman Director Director Director Director Director Director
Auditors - Deloitte Haskins & Sells

Holding - Top10
Perc. Holding Life Insurance Corp. of India Templeton Asset Management Ltd. The Vanguard Group, Inc. JF Asset Management Ltd. BlackRock Fund Advisors 3.01 1.52 0.62 0.44 0.36 Franklin Templeton Asset Management (India) Pvt Ltd. Aberdeen Asset Management (Asia) Ltd. OppenheimerFunds, Inc. Lazard Asset Management LLC FIL Investment Management (Hong Kong) Ltd. Perc. Holding 1.69 0.81 0.61 0.42 0.36
Bulk Deals
*in last one year
Insider Trades
Reporting Data 27 Mar 2012 28 Mar 2012 30 Mar 2012 02 Apr 2012 Acquired / Seller Tata AIG Life Insurance Company Limited Tata AIG Life Insurance Company Limited Tata AIG Life Insurance Company Limited Tata AIG Life Insurance company Limited B/S Buy Buy Buy Buy Qty Traded 55000.00 30000.00 30000.00 20000.00
*in last one year
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COMPANY UPDATE
IT
WIPRO
At inflection point
Wipro has been an underperforming its peers since the past few years mainly due to muted growth in retail, BFSI and telecom verticals. The management has reiterated that improvement is seen in pipeline driven by discretionary spending. As growth bounces back in FY14, the company will benefit significantly from improvement in utilisation and higher offshoring leading to an improvement in margin. We maintain our 11.8% growth for FY14E and revise up our FY15 estimate to 12.3% vs. 10.1% earlier as it will benefit from the improvement in deal activity. Maintain BUY with a revised target price of INR515.
EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market BUY Outperformer Low Underweight
MARKET DATA (R: WIPR.BO, B: WPRO IN) CMP Target Price 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : INR 433 : INR 515 : 452 / 295 : 2,462.8 : 1,067/ 19,450
Revenue growth key driver

We expect Wipro (IT services) to post revenue growth of 11.8% and 12.3% in FY14E and FY15E, respectively due to continued improvement in pipeline (1.7x compared to Q2FY13) driven by discretionary spend. The company plans to continue its investments in skill sets and sales efforts to tap future growth and tap the renewal market. This could provide an incremental fillip to outstrip our FY14 and FY15 growth assumptions.
Avg. Daily Vol.BSE/NSE(000) : 1,556.4 SHARE HOLDING PATTERN (%) Current Promoters * 78.3 3.1 7.0 11.6
:
Q2FY13 78.3 3.5 6.5 11.7
Q1FY13 78.4 3.5 6.6 11.6

NIL
Margin improvement likely as growth returns

We believe Wipro has ample scope to improve its utilisation levels (ex-trainees at 78%) to the earlier 80%-81% as seen in FY10 and FY11 and increase the off-shoring which would act as a trigger for the EBIT margin to bounce back to 22-23% from current 2021%. Also, we expect its offshore execution to expand which will further aid in improving margins.
MF's, FI's & BKs FII's Others
PRICE PERFORMANCE (%) Stock 1 month 3 months 12 months 2.8 8.1 (1.8) Nifty (4.8) (3.2) 6.3 EW Technology Index (4.0) 3.9 23.9
Outlook and valuations: Growth to return; maintain BUY

We believe growth remains the biggest lever for the company. Expected pick up in the deal renewals will provide an incremental fillip to surpass our growth assumptions. As growth returns Wipro will reap benefits of the investments made in skill sets and technology leading to improvement in operational metrics. We maintain our BUY/SO recommendation/rating with a revised target price of INR515 (14x FY15E EPS INR32.9=460*1.12 swap ratio for Wipro Enterprise) (Refer Table 1).
FY12 371,971 19.8 70,863 55,731 22.7 5.1 19.1 14.2 21.2
FY13E* FY14E* FY15E* 377,644 421,223 456,729 1.5 11.5 8.4 80,245 89,067 96,413 63,789 73,325 80,889 25.9 29.8 32.9 14.3 14.8 10.3 16.7 14.5 13.2 12.0 10.6 9.3 20.7 20.4 19.3 *Financials excl. non-IT businesses
Sandip Agarwal
Omkar Hadkar
IT
Table 1: Target price calculation
Existing Shares WEL* Shares Exchange ratio WEL and WL# Shares swap to forgo non-IT stake FY14 EPS (IT services + IT products) (INR) P/E multiple (x) Price (A) Swap ratio for minortity (B) Target price (INR) 100 20 1:1.65 12 32.9 14.0 460 1.12 515
*WEL - Wipro Enterprise Limited #WL- Wipro Limited Source: Edelweiss research
Change in estimates
FY14E Net revenue EBITDA EBITDA margin (%) PAT PAT margin (%) Capex New 421,223 89,067 21.1 73,325 17.4 19,561 Old % change New 421,223 (0.0) 456,729 89,067 21.1 73,325 17.4 19,561 (0.0) (0.0) (0.0) 96,413 21.1 80,889 17.7 19,121 FY15E Old % change 448,566 1.8 92,269 20.6 76,949 17.2 19,121 0.0 5.1 4.5 Comments Revised FY15E USD revenue growth rate to 12.3% vs earlier estimate of 10.1%
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IT
Company Description
Wipro is a leading Indian company with business interests in export of IT & BPO services, domestic hardware, consumer lighting, and consumer care. It has the widest range of services, including systems integration, IT-enabled services, package implementation, software application development & maintenance, and R&D services. Wipro is the first P CMM Level 5 and SEI CMM Level 5-certified IT services company in the world. It has more than 919 clients spanning the BFSI, manufacturing, retail, utilities, and telecom verticals. Wipro has over 142,905 employees. The companys revenues for the past twelve months stood at INR 364bn (USD6.2bn).
Investment Theme
Wipro undertook a restructuring exercise with the appointment of new CEO, T K Kurien. It realigned client facing profiles and is focusing on mining strategic accounts to grow its business. While the client mining efforts will ensure that Wipros revenue growth improves, it needs to win new large clients to catch up on growth with peers. It needs to improve its large deal market share to deliver on its guidance of reporting revenue growth at par with that of peers. As growth bounces back it will lead to a significant margin expansion owing to current lower utilisation levels which will get a kicker as volume growth increases.
Key Risks
Key risks to our investment theme include double dip recession in major market US and prolonged slowdown in Europe, sharp cross currency movements and appreciation of rupee against USD, Euro and GBP and low bench strength may impact the ability to cater to rapid increase in volume.
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Key Assumptions Year to March Macro GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Company Efforts billed - Offshore Volume growth (%) - Offshore Efforts billed - Onsite Volume growth (%) - Onsite Billing rate - Offshore Pricing growth (%) - Offshore Billing rate - Onsite Pricing growth (%) - Onsite IT products (USD mn) IT products Growth (%) S&M expenses (% of revenue) G&A expenses (% of revenue) Cost of revenues (% of revenue) Financial assumptions Depreciation (as % of revenue) Yield on cash & cash equivalents (%) Tax rate as % of PBT Capex (INR mn) Debtor days Payable days Cash conversion cycle (days) 2.7 7.5 19.8 20,123 70 45 25 2.5 8.5 22.0 16,909 76 49 27 2.3 7.5 20.0 19,561 71 51 20 2.4 8.2 20.0 19,121 72 54 18 Common size metrics Year to March Cost of revenues Gross margin SG&A expenses EBITDA margins Net profit margins Growth ratios (%) Year to March Revenues EBITDA Net profit EPS *Financials excl. non-IT FY12 19.8 8.3 5.2 5.1 FY13 1.5 13.2 14.5 14.3 FY14E 11.5 11.0 14.9 14.8 FY15E 8.4 8.2 10.3 10.3 FY12 70.8 29.2 10.2 19.1 15.0 FY13 69.1 30.9 9.7 21.2 17.1 FY14E 69.2 30.8 9.7 21.1 17.4 FY15E 69.3 30.7 9.6 21.1 17.6 464,913 487,820 543,920 603,751 9.4 17.0 4,418.5 0.7 2.3 804 (1.9) 7.5 5.5 70.8 4.9 2.8 4,506.7 2.0 4.0 711 (11.6) 6.4 5.8 69.1 11.5 11.5 4,529.3 0.5 0.5 797 12.0 6.5 5.5 69.2 11.0 11.0 4,551.9 0.5 0.5 916 15.0 6.5 5.5 69.3 197,184 202,637 225,940 250,793 6.5 8.8 8.5 47.9 5.0 7.8 7.5 54.5 6.5 6.0 6.8 54.0 7.0 6.0 6.0 52.0 FY12 FY13E FY14E FY15E Income statement Year to March Net revenue Cost of revenues Gross profit Total SG&A expenses EBITDA Depreciation & Amortization EBIT Other income Foreign exchange gain/(loss) Profit before tax Provision for tax Net profit# Profit After Tax Minority int. and others Profit after minority interest Shares outstanding (mn) Diluted EPS (INR) Dividend per share (INR) Dividend payout (%) FY12 371,971 263,174 108,797 37,934 70,863 10,128 60,735 5,404 3,277 69,416 13,762 55,654 55,654 (77) 55,731 2,456 22.7 6.0 26.5 FY13E* 377,644 260,844 116,800 36,555 80,245 9,484 70,761 9,252 2,580 82,593 18,193 64,400 64,400 611 63,789 2,458 25.9 6.0 23.1 FY14E* 421,223 291,297 129,925 40,859 89,067 9,688 79,379 12,027 91,406 18,281 73,125 73,125 (200) 73,325 2,462 29.8 6.0 20.1 (INR mn) FY15E* 456,729 316,469 140,259 43,846 96,413 10,961 85,452 15,034 100,486 20,097 80,389 80,389 (500) 80,889 2,462 32.9 6.0 18.3
12,106.1 12,584.9 12,647.8 12,711.1
*Financials excl. non-IT business #Tax rate assumed same as reported tax rate
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Balance sheet As on 31st March Equity capital Share premium account Reserves & surplus Shareholders funds Minority interest (BS) Borrowings Sources of funds Gross block Accumulated depreciation Net block Capital work in progress Deferred tax asset Goodwill Investments Cash and equivalents Inventories Sundry debtors Unbilled revenue Loans and advances Total current assets (ex-cash) Sundry creditors and others Others current liabilities Total cur. liabilities & provisions Net current assets (ex-cash) Uses of funds Book value per share (INR) Free cash flow Year to March Net profit Depreciation Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Free cash flow Peer comparison valuation Name HCL Technologies CMC eClerx Services Infosys Infotech Enterprises Persistent Systems Tata Consultancy Services Wipro Median AVERAGE Market cap (USD mn) 9,590 743 339 31,122 346 406 55,757 19,859 Diluted PE (X) FY14E FY15E 13.8 11.9 8.5 15.6 7.8 9.6 19.7 14.5 12.8 13.1 12.5 10.0 8.0 13.9 7.5 8.9 17.5 13.2 10.0 11.0 EV/EBITDA (X) FY14E FY15E 8.2 7.5 4.9 9.9 3.0 3.8 13.7 10.6 8.4 8.3 7.4 5.9 4.4 8.8 2.7 3.1 12.2 9.3 5.9 6.4 ROAE (%) FY14E 26.4 33.1 44.2 25.2 17.0 21.3 34.5 20.4 25.8 27.4 FY15E 24.2 31.1 38.1 24.0 15.6 19.3 31.3 19.3 24.2 25.4 FY12 55,731 10,128 (6,301) 59,558 19,482 40,076 20,123 19,953 FY13 63,789 9,484 341 73,614 (1,193) 74,807 16,909 57,898 FY14E 73,325 9,688 300 83,313 21,372 61,941 19,561 42,381 FY12 4,917 29,915 250,482 285,314 849 68,248 354,411 109,736 56,207 53,529 5,459 7,879 72,166 45,193 77,666 10,662 80,328 30,025 52,741 173,756 47,258 33,979 81,237 92,519 354,411 116.5 FY13 4,916 29,915 297,074 331,904 1,190 51,811 384,906 126,099 65,691 60,408 6,005 7,879 72,166 3,878 147,889 77,598 33,028 58,015 168,641 54,347 27,613 81,960 86,681 384,906 135.0 FY14E 4,924 29,915 353,173 388,012 1,490 40,056 429,558 144,459 75,379 69,079 7,206 7,879 72,166 4,654 162,843 86,553 37,982 63,817 188,351 62,499 20,122 82,621 105,730 429,558 157.6 (INR mn) FY15E 4,924 29,915 416,894 451,733 1,490 31,348 484,571 162,139 86,341 75,798 8,647 7,879 72,166 5,585 195,652 93,848 43,679 70,198 207,725 71,874 17,008 88,882 118,844 484,571 183.5 (INR mn) FY15E 80,889 10,961 91,850 14,275 77,575 19,121 58,454 Valuation parameters Year to March Diluted EPS (INR) Y-o-Y growth (%) CEPS (INR) Diluted PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward Dividend yield (%) FY12 22.7 5.1 26.9 19.1 3.7 2.7 14.2 12.6 1.4 FY13 25.9 14.3 29.8 16.7 3.2 2.6 12.0 10.8 1.4 FY14E 29.8 14.8 33.7 14.5 2.7 2.2 10.6 9.8 1.4 FY15E 32.9 10.3 37.3 13.2 2.4 2.0 9.3 1.4 Operating ratios Year to March Total asset turnover Fixed asset turnover Equity turnover FY12 1.1 7.3 1.4 FY13 1.0 6.6 1.2 FY14E 1.0 6.5 1.2 FY15E 1.0 6.3 1.1 Profitability & efficiency ratios Year to March ROAE (%) ROACE (%) Debtors days Payable days Cash conversion cycle (days) Current ratio FY12 21.2 21.7 70 45 25 2.1 FY13 20.7 20.5 76 49 27 2.1 FY14E 20.4 19.7 71 51 20 2.3 FY15E 19.3 18.9 72 54 18 2.3 Cash flow metrics Year to March Operating cash flow Investing cash flow Financing cash flow Net cash flow Capex Dividends paid FY12 40,076 (8,056) (17,397) 14,623 (20,123) (17,229) FY13 74,807 24,406 (28,990) 70,223 (16,909) (17,197) FY14E 61,941 (20,337) (26,650) 14,954 (19,561) (17,225) FY15E 77,575 (20,052) (24,715) 32,809 (19,121) (17,168)
Source: Edelweiss research 44 Edelweiss Securities Limited
IT
Additional Data
Directors Data
Ashok S. Ganguly Jagdish N. Sheth Dr Henning Kagermann Priya Mohan Sinha Narayanan Vaghul T. K. Kurien Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director CEO and Executive Director William Arthur Owens Azim H. Premji B. C. Prabhakar Suresh C Senapaty M. K. Sharma Shyam Saran Independent Non-Executive Director Chairman , CEO , MD Independent Non-Executive Director CFO and Executive Director Independent Non-Executive Director Independent Non-Executive Director
Auditors - BSR & Co., Chartered Accountants

Holding - Top10
Perc. Holding Life Insurance Corp. of India T. Rowe Price Hong Kong Ltd. HSBC Global Asset Management (Singapore) Ltd. The Vanguard Group, Inc. Eastspring Investments (Singapore) Ltd. 1.67 0.46 0.43 0.27 0.19 ICICI Prudential Asset Management Co. Ltd. JF Asset Management Ltd. ICICI Prudential Life Insurance Co. Ltd. DSP BlackRock Investment Managers Pvt Ltd. First State Investment Management (UK) Ltd. Perc. Holding 0.47 0.43 0.40 0.22 0.17
Bulk Deals
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
*in last one year
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IT
RATING & INTERPRETATION
Company
CMC HCL Technologies Info Edge Infotech Enterprises Persistent Systems Tech Mahindra
Absolute reco
BUY BUY REDUCE BUY BUY BUY
Relative reco
SO SO SU SO SO SO
Relative risk
L H M H L M
Company
ECLERX SERVICES Hexaware Technologies Infosys Mphasis Tata Consultancy Services Wipro
Absolute reco
BUY BUY BUY HOLD HOLD BUY
Relative reco
SO SO SP SP SP SO
Relative Risk
M M L M L L
ABSOLUTE RATING
Ratings Buy Hold Reduce Expected absolute returns over 12 months More than 15% Between 15% and - 5% Less than -5%
RELATIVE RETURNS RATING

Ratings Sector Outperformer (SO) Sector Performer (SP) Criteria Stock return > 1.25 x Sector return Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING

Ratings Low (L) Medium (M) High (H) Criteria Bottom 1/3rd percentile in the sector Middle 1/3rd percentile in the sector Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Overweight (OW) Equalweight (EW) Criteria Sector return > 1.25 x Nifty return Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return Underweight (UW) Sector return < 0.75 x Nifty return
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IT
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098. Board: (91-22) 4009 4400, Email: research@edelcap.com
Vikas Khemani Nischal Maheshwari Nirav Sheth Head Institutional Equities Co-Head Institutional Equities & Head Research Head Sales vikas.khemani@edelweissfin.com +91 22 2286 4206
nischal.maheshwari@edelweissfin.com +91 22 4063 5476 nirav.sheth@edelweissfin.com +91 22 4040 7499
Coverage group(s) of stocks by primary analyst(s): IT

eClerx Services, HCL Technologies, Hexaware Technologies, Infosys Technologies, Info Edge, Infotech Enterprises, Mphasis, Patni Computer Systems, Rolta India, Tata Consultancy Services, Wipro
Recent Research Date 11-Feb-13 07-Feb-13 Company Title Price (INR) 84 Recos Buy
Hexaware Growth to be gradual; Technologies Result Update Cognizant Early signs of recovery visible; Result Update
06-Feb-13 Tech Mahindra Gathering pace; Result Update
980
Buy
Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Rating Distribution* * 0 stocks under review > 50bn Market Cap (INR) 118 120 Hold 49 Reduce 17 Total 186 < 10bn 12 Reduce depreciate more than 5% over a 12-month period Rating Interpretation Rating Buy Hold Between 10bn and 50 bn 56 Expected to appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period
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Edel - IT The Next Big Leap

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Edel - IT The Next Big Leap

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SECTOR UPDATE

Growth engine: SMAC, Non linearity and consultancy to fuel surge

Selective spurt: Margins, realisations set to roll

Outlook and valuations: Optimism reigns supreme

Click on image to view video Omkar Hadkar

March 5, 2013 Edelweiss Securities Limited

Edelweiss Securities Limited

19.1 16.7 14.5 13.2

14.5 12.3 10.8 9.5

2.7 2.6 2.2 2.0

21.5 14.9 13.8 12.5

12.9 8.9 8.2 7.4

2.5 1.9 1.7 1.4

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SMAC technologies to fuel demand in coming years

2010 225 184 245 112 49 38 58 545 1,456

2011 236 195 259 118 53 40 61 587 1,550

2012 247 204 273 123 56 42 64 629 1,640

2013E 254 214 283 129 60 44 68 648 1,701

2014E 263 222 296 136 64 47 73 668 1,769

2015E 271 230 310 145 69 50 78 688 1,840

Source: Nasscom, Edelweiss research

Edelweiss Securities Limited

Fig. 1: Three way approach for growth adopted by Indian IT vendors

Deepening cost-saving proposition

Consulting and system integration Moving up the value chain

Products,platforms,software assets,solution accelarators Focusing on non-linearity

Source: Edelweiss research

Deepening cost-saving proposition

Edelweiss Securities Limited

Edelweiss Securities Limited

Moving up the value chain

Contribution of high-end services rising gradually

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Chart 1: Number of patent applications pending for approval 1,026

Chart 2: Comparison of number of patents granted 87

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Emerging technologies, geographies to boost growth

Social networking sites key source of customer centric data

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Increasing affordability of smartphones to increase IT spend in mobility

Fig.2: Number of application downloads has grown multi-fold across regions

Source: Company reports

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Humungous interpretable data lying dormant provides huge opportunity

Examples of Big data in various verticals/services

Cloud the key revenue growth contributor in SMAC

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Chart 3: Growth in Facebook subscribers (Mn)

600 400 200 0

Table 6: Emerging geographies' global sourcing potential

Australia Japan China Europe* Spain Canada

48 235 105 230 26 63

4.0 <1.0 <1.0 <1.5 <1.5 1.5

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ACV (USD bn) 7.9 10.2 3.1

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Margins, realisations to improve selectively

Fig. 3: Change in pricing models

Alternative business models have greater emphasis on driving non linearity

Linear Pricing Model

Non Linear Pricing Model

Non Linear Pricing Models