it-services emkay 080515
TRANSCRIPT
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©
Your success is our success
Emkay India Equity Research | IT Services
May 4, 2015
Sector Report
Downside risks to modest growthexpectations?
IT Services
Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY, Reuters and DOWJONES. Emkay Global Financial Services Ltd.
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Table of contents
Index Slide No.
Indian IT: Positive macro but growth challenges 3
Downside risks to the modest growth expectations 4
Global peers seem better placed to cater to the “Front end Digital’ Demand 9
On-shoring of ‘offshore Indian IT’ 11
Margins headwinds ahead in our view 15
Valuations are cheap relative to historical multiples however 18
Recommendation Summary 21
Company Section
Tata Consultancy Services 23
Infosys 28
Wipro Ltd 32
HCL Technologies 37
Tech Mahindra 42Mindtree Ltd 47
Hexaware 54
Mphasis 58
Persistent 62
eClerx Ltd 68
NIIT Technologies 73
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Indian IT: Positive macro but growth challenges for the sector
While the overall macro environment remains positive (positive macro data points from US, Europe continuing
to open up for outsourcing), we reckon growth challenges for the IT Services Sector and thereby believe that
there is downside risks to the modest revenue growth assumptions as well.
We highlight below that over the past several quarters (street including us) have been cutting our revenue
growth estimates for each of the Tier I names. (refer table on the slide below). Contrary to street expectations of
acceleration in revenue growth, we have seen the YoY revenue growth trajectory slow down for the offshore IT
Services players in recent quarters.
While the ‘offshoring/outsourcing penetration ‘led traction in Europe continues, the revenue growth from US
continues to be in low teens YoY revenue growth trajectory. We do not see any acceleration in terms of revenuegrowth from US ahead.
Industry checks indicate that deal closures taking longer than usual with the Automation, Robotics and Cloud
(ARC) effect making a broad based and rapid impact on pricing in the traditional business. Besides the global
vendors seem better placed than the offshore players in capturing the ‘Digital’ Demand. We see increased
captive sourcing as another risk for the Indian offshore players and our initial channel checks seem to
corroborate that
Valuations at ~12.5x-15.5x FY17E P/E are cheap relative to historical multiples however need to be seen in the
context of downside risks to revenue/earnings assumptions. TCS and HCL Tech remain our preferred bets in
the Tier I IT Services space while Hexaware and eClerx remain our positive rated stocks in the Tier II coverage
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Downside risks to the modest revenue growth expectations
YoY Co wide revenue growth trajectory picking up… YoY revenue growth trajectory from US also increasing…
While the overall revenue growth expectations have been moderated to ‘mid single digits to low double digits’
growth’ expectations for FY16E (refer table below) for the Tier I IT Services companies, we highlight that the
asking rates still imply a similar/higher asking rated for companies to achieve the growth numbers Growth in key geographies like US and verticals like Financial Services and Retail has been moderating in
recent quarters. Infact it is worth highlighting that the revenue growth from US has remained in the low teens
trajectory through several quarters even in the backdrop of positive macro data from US through the past 2
years.
Industry research pointing out to significant pricing pressure on renewals (~20-30% in some cases as compared
to ther usual 3-5% that vendors would be happy with). ARC effect making a broad based and rapid impact on
pricing on the traditional/commoditized business. (nfosys’s offshore revenue productivity has declined in 4 of the
last 6 quarters in constant currency terms)
Global peers much better placed to capture the front end nature of the digital demand vis-à-vis offshore tech
players. Captive capacity build out poses near term risks to growth for offshore vendors as some of the work is
moving in-house
Source: Companies, Emkay Research Source: Companies, Emkay Research
US$ revenue FY16E TCS Infosys Wipro HCL Tech
Consensus as on Apr'14 18,716 10,709 9,274 7,224
Consensus as on Jun'14 18,250 10,086 8,892 7,036
Consensus as on Sep'14 18,081 9,720 8,575 6,825
Consensus as on Dec'14 17,611 9,560 8,335 6,516
Consensus as on Mar'15 17,561 9,690 8,317 6,803
Consensus as on Apr'15 16,947 9,260 7,956 6,561
US$ revenue FY17E TCS Infosys Wipro HCL Tech
Consensus as on Apr'14 20,720 11,869 - -
Consensus as on Jun'14 21,022 11,304 10,079 -
Consensus as on Sep'14 20,847 10,933 9,643 7,817
Consensus as on Dec'14 20,252 10,856 9,311 7,409
Consensus as on Mar'15 20,175 10,993 9,261 7,740
Consensus as on Apr'15 19,384 10,441 8,785 7,471
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Downside risks to revenue growth expectations…(Contd)
0%
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US$ revenue, YoY %
Infosys TCS Wipro HCL Tech Cognizant
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Revenue growth from US YoY, %
Infosys TCS Cognizant Wipro HCL Tech
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Revenue growth from Europe, YoY %
Infosys TCS Wipro HCL Tech
The Overall YoY revenue growth trajectory for the Tier I players has been moderating through recent quarters..
Revenue growth from US has remained in the low teens trajectory through a long time despite street’s hope of
acceleration aided by a positive macro..
Revenue growth from Europe continues to be strong despite the cross currency headwinds and will remain strongin our view
Source: Companies, Emkay Research
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Downside risks to modest revenue growth estimates… (cont)
Source: Companies, Emkay Research
Growth from key verticals has been slowing down through recentquarters
Infosys’s offshore revenue productivity has declined in 4 of the past6 quarters on a constant currency basis and is the lowest ever
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Revenues from BFSI, YoY %
Infosys TCS Wipro HCL Tech
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Revenues from Retail, YoY %
Infosys TCS Cognizant Wipro HCL Tech
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44,000 46,000 48,000 50,000 52,000 54,000 56,000 58,000
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Per-capita billed revenue productivity for offshore (IT Services and Consulting)
YoY growth, % (RHS)
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Downside risks to modest revenue growth estimates… (cont)
Source: Companies, Emkay Research
Channel checks continue to confirm that captives are ramping up their headcount aggressively in recent
months. This trend is confirmed by media reports as well (refer table below for some initial indication to the
effect). Discussions with industry participants indicate that a pick up in Captive activity is seen across verticals and is
driven both by the next Generation of Outsourcers (e.g Cargil, Baxter International) as well as players who
understand offshoring well (e.g AstraZenaeca, Banking players).
Our sense/checks indicate that insourcing/captive activity in Banking and Financial Services is on the rise
because of Anti-incumbency, client’s desire to have more control over their IT functions (having outsourced
heavily to 3rd
party players),nature of spend(e.g Customer Analytics, Risk reporting, Regulatory Compliance)and the regulatory pressure around it ( what is the level of offshoring at your level etc?).
• We reckon that in the near /medium term, the ramp up in activity in Global In house Centres /Captives canimpair revenue growth for Indian IT given that our market share in the traditional spend areas remain high.
Besides captives and Global peers are better placed to capture the Front End nature of ‘Digital Spend’ on
account of their early investments in the space. For e.g Digital accounts for ~20% of Accenture’s overall
revenues at US$ 6 bn with company highlighting that it is growing at 20% YoY in recent times).
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Downside risks to modest revenue growth estimates… (cont)
Company Name ertical Remark
AstraZeneca HealthcareIn CY14 pharmaceuticals giant AstraZeneca opened an IT delivery centre in Chennai. This is part of itsplan to reduce the amount of IT it outsources to Indian suppliers, yet it is retaining the advantages of theoffshore delivery model through a captive centre in India.
Cargill Retail (Food)Cargill Inc, one of the world’s biggest privately held organizations that clocked revenues of $134.9 billion in2014, opened its largest captive business services centre with 650 seats in Bengaluru in Jan'14. Thecompany target to save $250 million for the company annually in five years
Lowes RetailIn early 2014 Lowes (the $50-billion home improvement and hardware store chain ) had indicated plans toset up GICs in Bangalore. For Lowe's, the centre will be a strategic outpost to do high-end technologywork.
Mercedes Benz Manufacturing Mercedes Benz Research and Development Centre will hire 800 staff to take its strength to over 2,000 by
2015.
Grant Thornton Auditing The world's fifth largest audit and accounting firm Grant Thornton would hire at least 3,000 people to make
Bangalore its tax and IT support hub for its global clients in the next five years.
Flextronics Manufacturing electronics design and contract manufacturing firm Flextronics 2,000 in the next two to three years.
Victoria’s Secret Retail In 2014 VS had sought the nod of the Foreign Investment Promotion Board to set up the technology centre
(its first GIC) in Bangalore for analytics capabilities.
Baxter International Healthcare The $14-billion healthcare company Baxter International had mentioned to be close to setting up GICs in
Bangalore in early 2014.
Danske Bank BFSI
Danske Bank intend to set up a delivery center in India with ~1,000 people capacity in CY2015. TheDanish bank has an established offshore IT delivery relationship with Indian IT services firm ITC Infotech,which is the internal IT department at Indian conglomerate ITC as well as a service provider to other companies, but wants to take more control of the IT activities in India.
Volkswagen (VW) ManufacturingIn Nov'15 Volkswagen (VW) opened an IT-development centre in Pune, India, to keep IT knowledge in-house while benefiting from the offshore delivery model. Company plan to eventually have 1,000 engineersand provide support to all VW’s global operations.
Network International Network International Llc, a payment solutions provider based in the United Arab Emirates (UAE), is
setting up a centre in India, making it one of the first companies from the Middle East to do soSource: Media reports
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US$ revenue, YoY %
Infosys TCS Wipro HCL Tech Accenture Cognizant
Global peers seem better placed to cater to the “Front endDigital’ Demand
YoY US$ revenue growth for Accenture and WITCH as well as constant currency revenue growth
Global peers are much better placed than heritage offshore players to cater to the client spending in Digital
areas due to their early investments.
Digital accounts for 20% of Accenture’s revenues at US$ 6 bn p.a and is growing at ~20% YoY as per
company’s recent commentary.
Offshore players are talking of increased investments in building up their digital strengths/capabilities, however
this requires a different approach/mindset as compared to the ‘costs savings led’ value proposition of the
offshore players.
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June'13 Sep'13 Dec'13 Mar'14 June'14 Sep'14 Dec'14 Mar'15
Constant currency revenue growth%, YoY
Accenture Infosys TCS
Global peers seem better placed to cater to the “Front endDigital’ Demand (cont)
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‘Onshoring of Offshore IT’ is here to stay
Indian IT companies saw stupendous growth through 2000-10, as clients offshored legacy applications to
reduce costs. Given high penetration rates in the legacy ADM work, offshoring certainly has slowed down with
only two offshore service lines, BPO and IMS, seeing strong growth.
Onsite intensity for Indian IT companies is increasing, as clients are increasingly prioritizing spending in areas
of regulatory requirements, risk and compliance, and improving customer centricity. This is evident from the
fact that over the past few quarters as well as through FY11-15 onsite revenues and onsite volumes have
grown faster than offshore revenues and offshore volumes, respectively (unlike the 2000-10 decade).
Onsite proportion of revenues have continued to inch up for Tier-I companies through several quarters now…
Source: Companies, Emkay Research
46%
48%
50%
52%
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Onsite revenue mix
Infosys TCS Wipro
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Onsite revenues growing faster than offshore revenues
Source: Companies, Emkay Research
Onsite Revenues( in US$ mn) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Infosys ,% 48.2 46.5 45.8 48.2 48.8 49.5 50.3 49.6
Infosys 2,012 2,169 2,203 2,909 3,415 3,664 4,152 4,317YoY grow th , % 30.5 7.8 1.5 32.1 17.4 7.3 13.3 4.0
TCS, % 48.7 47.7 39.6 39.9 41.2 43.2 46.7 48.2
TCS 2,785 2,868 2,512 3,270 4,187 4,997 6,272 7,447
YoY grow th , % 3 -12.4 30.2 28.1 19.3 26% 19%
Wipro, % 54.5 53.1 49.8 51.7 53.8 53.6 54.1 54.0
Wipro 1,572 1,763 1,623 1,996 2,388 2,524 2,715 2,803
YoY grow th , % - 12.2 (7.9) 23.0 19.6 5.7 7.6 3.2
Combined Revenues of Top 3 players 6,368 6,800 6,338 8,175 9,990 11,185 13,140 14,567
YoY grow th , % 6.8 (6.8) 29.0 22.2 12.0 17.5 10.9
Offshore Revenues( in US$ mn)
Infosys ,% 51.8 53.5 54.2 51.8 51.2 50.5 49.7 50.4
Infosys 2,164 2,494 2,601 3,132 3,579 3,734 4,097 4,394
YoY grow th , % 15.2 4.3 20.4 14.3 4.3 9.7 7.3
TCS, % 45.9 48.3 56.7 56.0 54.9 55.7 53.3 51.8
TCS 2,385 2,675 3,292 4,162 5,102 5,940 7,171 8,007
YoY growth, % 12% 23% 26% 23% 16% 21% 12%
Wipro, % 56.9 59.2 63 61.8 59.7 59.4 45.9 46.0
Wipro 2,075 2,560 2,768 3,225 3,533 3,694 2,306 2,385
YoY grow th , % 23.4 8.1 16.5 9.5 4.6 5.5 3.4
Combined Revenues of Top 3 players 7,159 8,193 9,183 11,208 13,019 13,890 13,573 14,786
YoY grow th , % 14.4 12.1 22.1 16.2 6.7 (2.3) 8.9
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Earnings at RiskEarnings at Risk
-10%
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Onsite IT Services Offshore IT Services Overall IT Services
Infosys YoY volume growth
-20%
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J u n e ' 0 7
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Onsite IT Services Offshore IT Services Overall IT Services
Infosys YoY rev gr owth
Case in Point ─ Infosys
Offshore YoY volume growth trajectory has remained at 10-12% YoY over several quarters now..
Improvement in co wide revenue growth aided by pick-up in onsite revenue growth
Source: Company, Emkay Research
Source: Company, Emkay Research
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Earnings at RiskEarnings at Risk
71.6 69.8 66.4 62.4 58.2 54.3
28.4 30.2 33.6 37.6 41.8 45.7
0
20
40
60
80
100
120
FY10 FY11 FY12 FY13 FY14 FY15
Offs hore, % Onsi te, %
-
10.0
20.0
30.0
40.0
50.0
60.0 70.0
80.0
June'10 Sep'10 Dec'10 Mar'11 June'11 Sep'11 Dec'11 Mar'12 Sep'13 Dec'13 Mar'14 June'14 Sep'14 Dec'14 Mar'15
Onsite % of revenue Offshore % of revenue
Case in Point II ─ Mindtree
Source: Company, Emkay Research Source: Company, Emkay Research
Onsite revenue growth surpass offshore revenue growth… Share of onsite revenue in top-line increasing…
Source: Company, Emkay Research
Onsite % of revenues has increased by 1700 bps+ over the past 20 quarters
29.8
38.1
21.227.7 27.4
1917.9
1.67.5 8.5
051015202530354045
050
100150200250
300350
FY10 FY11 FY12 FY13 FY14 FY15
Onsite Revenue s (in US $ mn) (LHS) Offshore Revenue s (in US$ mn ) (LHS)
Onsite YoY growth,% (RHS) offshore YoY growth,% (RHS)
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Earnings at RiskEarnings at Risk
Margins headwinds ahead in our view
Indian offshore companies have benefitted from favorable currency tailwinds over the past 4 years
(A 33%+ INR depreciation over FY11-15 has provided ~800-1000 bps tailwind to margins) which helped
them protect margins in a narrow range despite headwinds from higher onshoring and the investmentsin business.
The need to make the necessary investments in Digital capabilities, Automation etc will hurt margins in
the backdrop of client focus to spend in digital areas and funding that through reducing IT spends to
traditional areas.
Traditional levels like Utilization (companies have already optimized their offshore delivery
meaningfully through recent quarters), broadening of employee pyramid might be of limited use (Casein point the employee mix has only deteriorated across companies in recent years)
Attrition moving up (possibly some involuntary attrition, reports of TCS/Igate seeing involuntary
attrition could be true…moves to reduce costs/defend margins as other levers are maxing out)
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EBITDA margins could be under pressure in our view
In absence of rupee depreciation tailwind Tier I players defended margins better than Tier II players thought FY15
EBITDA Margin June'12 Sep'12 Dec'12 Mar'13 June'13 Sep'13 Dec'13 Mar'14 June'14 Sep'14 Dec'14 Mar'15
Tier I Companies
Infosys 30.6% 29.1% 28.5% 26.5% 26.5% 26.1% 27.8% 27.8% 26.9% 28.3% 28.7% 27.8%
TCS 29.1% 28.4% 29.0% 28.4% 28.6% 31.6% 31.4% 30.9% 28.8% 28.6% 28.8% 29.2%
ipro 24.0% 23.9% 23.8% 23.2% 22.8% 25.1% 25.8% 27.3% 25.6% 24.8% 24.6% 24.8%
HCL Tech 21.6% 21.8% 22.2% 22.0% 23.1% 26.2% 25.9% 26.6% 26.2% 25.1% 25.0% 22.5%
Tech Mahindra 21.9% 21.5% 21.7% 20.5% 21.1% 23.3% 23.2% 21.2% 18.1% 20.0% 20.2% 17.4%
Tier II companies
Mindtree 20.9% 22.1% 20.4% 17.6% 17.0% 19.6% 18.3% 20.4% 18.8% 18.6% 20.5% 19.5%
Persistent 26.8% 27.2% 24.7% 24.9% 21.7% 25.9% 27.7% 27.0% 21.8% 20.6% 20.1% 20.2%
Hexaware 22.9% 21.6% 16.9% 19.3% 23.7% 23.8% 22.5% 19.2% 16.7% 18.0% 19.9% 17.8%
NIIT Tech* 16.0% 17.0% 15.8% 16.5% 14.4% 15.1% 16.3% 15.1% 13.8% 14.3% 14.9% 3.3%
*Note: NIIT Tech’s oper at in g ma rg i n s i n Mar’ 15 quar te r w i ll b e a ff ec t ed by US$14mn char ge f o r unb il le d r ev enue d i spu te .We use Emkay es timat es f o r T ec hM and N IIT Tec h f o r
Mar’ 15 quar te r EB ITDA ma rg i n s as bo t h t he c ompan i es a re y et t o r epo r t r es u lt s.
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Earnings at RiskEarnings at Risk
EBITDA margins could be under pressure in our view(cont)
June'11 Sep'11 Dec'11 Mar'12 June'12 Sep'12 Dec'12 Mar'13 June'13 Sep'13 Dec'13 Mar'14June'14 Sep'14 Dec'14 Mar'15
Employee mix
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18Earnings at RiskEarnings at Risk
Valuations are cheap relative to historical multiples however..
Tier I techs are trading at ~12.5x-15x FY17E P/E ( barring TCS which trades at ~18x FY17E P/E), lower relative
to historical valuation multiples
However we believe that valuation multiples need to be seen in the context of lower revenue/earnings growth
and possible downside risks to growth assumptions on account of factors discussed earlier( also refer table on
the next slide)
Street( including us) has been moderating revenue growth assumptions lower through the past several quarters.
Current growth assumptions also assume similar to a mild acceleration in sequential growth rates over the next
4 quarters as compared to the sequential growth seen in the past 4/6 quarters.
HCL Tech ( ACCUMULATE, TP Rs 1,025) and TCS( ACCUMULATE, TP Rs 2,730) appear relatively better
placed as compared to Infosys and Wipro given better positioning and investments in key markets/services
lines. Our order of preference within Tier I IT is HCL Tech, TCS, Infosys and Wipro in that order.
.eClerx and Hexaware remain our preferred picks in the Tier II space where we have higher confidence on
revenue /earnings visibility unlike other Tier II names where we see downside risk to growth /margin
assumptions. Hexaware could be the fastest growing company in the sector in CY15/16E, however a 40%
+upmove in CY15YTD and rich valuations leave limited absolute upsides in the name.
Any Sharp currency depreciation remains a risk to our thesis. Our current estimates factor in US$/INR at 63/$
for FY16/17 respectively.
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19Earnings at RiskEarnings at Risk
0
100
200300
400
500
600
700
800
900
1000
A pr / 0 4
O c t / 0 4
A pr / 0 5
O c t / 0 5
A pr / 0 6
O c t / 0 6
A pr / 0 7
O c t / 0 7
A pr / 0 8
O c t / 0 8
A pr / 0 9
O c t / 0 9
A pr / 1 0
O c t / 1 0
A pr / 1 1
O c t / 1 1
A pr / 1 2
O c t / 1 2
A pr / 1 3
O c t / 1 3
A pr / 1 4
O c t / 1 4
A pr / 1 5
Wipro: 12m rolling forward PE
12x
16x
20x
24x
0
200
400
600
800
1000
1200
A p r - 0 5
O c t - 0 5
A p r - 0 6
O c t - 0 6
A p r - 0 7
O c t - 0 7
A p r - 0 8
O c t - 0 8
A p r - 0 9
O c t - 0 9
A p r - 1 0
O c t - 1 0
A p r - 1 1
O c t - 1 1
A p r - 1 2
O c t - 1 2
A p r - 1 3
O c t - 1 3
A p r - 1 4
O c t - 1 4
A p r - 1 5
HCL Tech: 12m rolling forward PE
6x
10x
14x
0
500
1000
1500
2000
2500
3000
A p r /
0 4
O c
t / 0 4
A p r /
0 5
O c
t / 0 5
A p r /
0 6
O c
t / 0 6
A p r /
0 7
O c
t / 0 7
A p r /
0 8
O c
t / 0 8
A p r /
0 9
O c
t / 0 9
A p r /
1 0
O c
t / 1 0
A p r /
1 1
O c
t / 1 1
A p r /
1 2
O c
t / 1 2
A p r /
1 3
O c
t / 1 3
A p r /
1 4
O c
t / 1 4
A p r /
1 5
Infosys: 12m rolling forward PE24x
20x
16x
12x
0
500
1000
1500
2000
2500
3000
O c t / 0 4
A p r / 0 5
O c t / 0 5
A p r / 0 6
O c t / 0 6
A p r / 0 7
O c t / 0 7
A p r / 0 8
O c t / 0 8
A p r / 0 9
O c t / 0 9
A p r / 1 0
O c t / 1 0
A p r / 1 1
O c t / 1 1
A p r / 1 2
O c t / 1 2
A p r / 1 3
O c t / 1 3
A p r / 1 4
O c t / 1 4
A p r / 1 5
( R s )
TCS: 12m rolling forward PE 21x
11
18x
15x
12x
Valuations are cheap relative to historical multiples however..
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20Earnings at RiskEarnings at Risk
Tier I companies have done a better job at defending margins ascompared to Tier II techs
2 7 . 7
%
2 8 . 8
%
2 9 . 0
%
2 8 . 6
%
2 7 . 5
%
2 7 . 1
%
2 7 . 5
%
2 7 . 3
%
2 6 . 0
%
2 6 . 1
%
2 7 . 9
%
2 7 . 0
%
2 6 . 8
%
2 6 . 2
%
2 6 . 3
%
2 5 . 4
%
2 5 . 7
% 2 7 . 8
%
2 8 . 1
%
2 8 . 1
%
2 6 . 5
%
2 6 . 6
%
2 6 . 7
%
2 6 . 0
%
1 9 . 5
% 2 2 . 5
%
2 0 . 5
%
1 7 . 9
%
1
3 . 8
%
1 4 . 4
%
1 5 . 6
%
1
5 . 6
%
1 5 . 2
%
1 6 . 7
% 2 0 . 3
%
2 0 . 8
%
2 1 . 1
%
2 1 . 5
%
1 9 . 0
% 1 9 . 0
%
1 9 . 0
%
2 0 . 8
%
2 0 . 6
%
2 0 . 1
%
1 7 . 7
%
1 7 . 9
%
1 9 . 1
%
1 5 . 7
%
12%14%16%
18%20%22%24%26%28%30%
J u n ' 0 9
S e p ' 0 9
D e c ' 0 9
M a r ' 1 0
J u n ' 1 0
S e p ' 1 0
D e c ' 1 0
M a r ' 1 1
J u n e ' 1 1
S e p ' 1 1
D e c ' 1 1
M a r ' 1 2
J u n e ' 1 2
S e p ' 1 2
D e c ' 1 2
M a r ' 1 3
J u n e ' 1 3
S e p ' 1 3
D e c ' 1 3
M a r ' 1 4
J u n e ' 1 4
S e p ' 1 4
D e c ' 1 4
M a r ' 1 5
Weighted average EBITDA margin
Tie r I Comp anies Tie r II co mpan ies
Note: We use Emkay estimates for TechM and NIIT Tech for Mar’15 quarter EBITDA margins as both the companies are yet to repor t results.
Tier I companies inc lude TCS, Infy, HCLT and TechM w hile Tier II com panies inclu de Hexaware,Persist ent, Mindtree and NIIT Tech.
0%
5%
10%
15%
20%
25%
30%
35%
J u n ' 0 9
S e p ' 0 9
D e c ' 0 9
M a r ' 1 0
J u n ' 1 0
S e p ' 1 0
D e c ' 1 0
M a r ' 1 1
J u n e ' 1 1
S e p ' 1 1
D e c ' 1 1
M a r ' 1 2
J u n e ' 1 2
S e p ' 1 2
D e c ' 1 2
M a r ' 1 3
J u n e ' 1 3
S e p ' 1 3
D e c ' 1 3
M a r ' 1 4
J u n e ' 1 4
S e p ' 1 4
D e c ' 1 4
YoY US$ Revenue growth
Tie r I Comp anies Tie r II co mpan ies
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21Earnings at RiskEarnings at Risk
IT Services valuation summary
Co Name CMP Recco.Target
Price
EPS P/E EV/EBIT ROE
FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E
Infosys 1,942 Hold 2,050 108 114 128 18.0 17.0 15.2 13.7 12.2 10.7 24.1 22.7 23.1
TCS 2,464 Accumulate 2,730 114 117 136 21.6 21.0 18.1 18.1 15.7 13.6 39.5 36.1 34.8
Wipro 539 Hold 600 35 39 43 15.3 14.0 12.5 12.3 10.7 15.3 23.0 21.8 39.6
HCL Tech** 881 Accumulate 1,025 51 58 67 17.1 15.1 13.2 14.3 12.2 10.7 34.2 33.0 32.4
Tech Mahindra 621 Hold 660 33 41 46 18.8 15.3 13.6 14.7 11.6 9.9 27.7 27.5 25.4
Mindtree 1,219 Reduce 1,150 64 68 80 19.1 18.0 15.3 15.3 13.0 10.5 29.4 23.6 21.1
eClerx 1,566 Accumulate 1,750 77 96 109 20.3 16.4 14.5 15.6 12.2 10.0 37.0 38.2 36.4
Hexaware* 282 Accumulate 270 11 14 17 26.0 19.5 16.7 18.4 15.3 13.6 26.3 33.0 37.0
Persistent Systems 706 Sell 640 36 39 44 19.4 18.1 16.0 16.3 13.4 10.6 18.6 18.7 20.4
NIIT Tech 351 Hold 400 21 35 40 16.7 10.0 8.7 10.9 6.1 5.0 9.9 15.4 15.9
Mphasis 388 Hold 385 35 32 33 11.2 12.5 11.9 6.9 8.0 7.3 14.8 13.1 12.7
Firstsource 29 Accumulate 45 3.5 4.6 5.2 8.4 6.4 5.7 8.5 6.1 5.0 10.4 12.3 12.2
* Note FY15 refers to FYDec'14 for Hexaware and so on, ** FY15 refers to FY ending Jun e'15 for HCL Tech and s o on.
Source: Bloom berg, Companies, Emkay
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Company Section
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23Earnings at RiskEarnings at Risk
Tata Consultancy Services
ACCUMULATE, TP Rs 2,730 Well oiled engine despite the recent hiccups
TCS’s reported performance has missed expectations in recent quarters, however remains the most well
oiled engine: While TCS’s operating performance has missed the strong expectations through recent quarters
(also impacted adversely by cross currency headwinds), TCS remains the most well oiled engine with it’s
leadership across key verticals/markets/ service lines
Solid executions continues to reflect in client metrics: TCS’s solid and flawless execution continued to reflect
in strong upward migration of clients to higher revenue buckets. TCS added 5 US$ 100 mn+ and 15 US$ 50 mn+
clients during FY15 to take the number of US$ 100 mn+/US$ 50 mn+ client count to 29/68 respectively( clientmigration to US$ 50 mn+/US$ 20 mn+ buckets was better in FY15 V/s FY14)
Attrition , the sole worry per us: TCS’s attrition has been lower than peers for a considerable amount of time
however has been worsening through recent quarters with both quarterly annualized attrition/LTM attrition highest
since June’11 quarter. We believe TCS needs to keep this under check with one time bonuses expected to help
Premium valuations justified , though the room to surprise positively is limited: TCS’s operating performance
through recent quarters has missed investor expectations (unlike the beat that the street has got accustomed to
through FY09-14). We believe this is largely a factor of high expectations / base effect for TCS. However TCS’s
premium valuations are justified given it’s solid execution track record and leadership in key verticals/geos and
service lines
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24Earnings at RiskEarnings at Risk
-5%
0%
5%10%
15%20%
25%
30%
35%40%
J u n
e ' 1 0
S e
p ' 1 0
D e
c ' 1 0
M a r ' 1 1
J u n
e ' 1 1
S e
p ' 1 1
D e
c ' 1 1
M a r ' 1 2
J u n
e ' 1 2
S e
p ' 1 2
D e
c ' 1 2
M a r ' 1 3
J u n
e ' 1 3
S e
p ' 1 3
D e
c ' 1 3
M a r ' 1 4
J u n
e ' 1 4
S e
p ' 1 4
D e
c ' 1 4
M a r ' 1 5
J u n
' 1 5 E
S e p
' 1 5 E
D e c
' 1 5 E
M a r
' 1 6 E
US$ Revenue growth QoQ US$ Revenue growth YoY
TCS (contd )
Source: Companies, Emkay Research
TCS’s US$ revenue growth trajectory has slowed down in the recent past, however crosscurrency headwinds also to blame for the same
Source: Companies, Bloomberg, Emkay Research. Prices as on 26th Mar 2014.
However TCS’s solid execution reflects in client metrics, TCS added more US$ 20 mn+/US$ 50 mn + clients in FY15V/s FY14
Mar'12 Jun'12 Sep'12 Dec'12 Mar'13 Jun'13 Sep'13 Dec'13 Mar'14 Jun'14 Sep'14 Dec'14 Mar'15Mar'15-Mar'14
Mar'14-Mar'13
Mar'13-Mar'12
No of US$ 1 mn+ clients 522 527 538 551 638 657 687 711 714 724 743 764 791 77 76 116
No of US$ 5 mn+ clients 245 259 269 273 290 309 318 333 354 359 367 387 389 35 64 45
No of US$ 10 mn+ clients 170 175 182 185 211 216 224 224 231 244 247 249 261 30 20 41
No fo US$ 20 mn+clients 99 105 108 114 121 124 125 129 136 144 153 159 162 26 15 22
No fo US$ 50 mn+clients 43 46 45 47 52 53 53 55 53 58 62 65 68 15 1 9
No fo US$ 100 mn+clients 14 14 14 16 17 19 22 22 24 24 24 25 29 5 7 3
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25Earnings at RiskEarnings at Risk
TCS (Contd)
TCS’s worsening attrition remains the sole worry point according to us,TCS needs to keep this under check
6%8%
10%12%14%16%18%20%22%
J u n e ' 0 9
S e p ' 0 9
D e c ' 0 9
M a r ' 1 0
J u n e ' 1 0
S e p ' 1 0
D e c ' 1 0
M a r ' 1 1
J u n e ' 1 1
S e p ' 1 1
D e c ' 1 1
M a r ' 1 2
J u n e ' 1 2
S e p ' 1 2
D e c ' 1 2
M a r ' 1 3
J u n e ' 1 3
S e p ' 1 3
D e c ' 1 3
M a r ' 1 4
J u n e ' 1 4
S e p ' 1 4
D e c ' 1 4
M a r ' 1 5
Attrition(LTM), % Quaterly annualised attrition rate, %
FY10 FY11 FY12 FY13 FY14 FY15
CFO ( US$ mn) 1,625 1,531 1,562 2,266 2,613 3,462
CFO % of EBITDA 88.6 62.3 52.1 68.2 63.3 77.7
CFO % of Revenue 25.6 18.7 15.4 19.6 19.4 22.4
TCS’s Cash Generation improved in FY15 (was the best in over 5 years)
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26Earnings at RiskEarnings at Risk
Financials
Source: Company, Emkay Research
Key Financials (Consolidated)
Income Statement
Y/E Ma r (Rs mn) FY13 FY14 FY15 FY16E FY17E
Net Sales 629,894 818,094 946,484 1,085,891 1,233,847
Expenditure 448,982 566,772 673,543 777,251 887,027
EBITDA 180,912 251,322 272,941 308,640 346,821
Depreciation 10,792 13,243 18,698 20,159 20,819
EBIT 170,120 238,079 254,243 288,481 326,001
Other Income 11,175 15,809 31,396 15,300 27,200
Interest expenses 0 0 0 0 0
PBT 181,295 253,888 285,639 303,781 353,201
Tax 40,344 60,712 60,828 72,907 84,768
Extraordinary Items 0 0 0 0 0
Minority Int./Income from Assoc. (1,494) (2,089) (2,049) (1,600) (1,600)
Reported Net Income 139,457 191,087 222,762 229,273 266,833
Adjusted PAT 139,457 191,087 222,762 229,273 266,833
Balance Sheet
Y/E Ma r (Rs mn) FY13 FY14 FY15 FY16E FY17E
Equity share capital 1,957 1,959 1,959 1,959 1,959
Reserves & surplus 408,602 551,393 572,808 694,791 836,757
Net worth 410,560 553,352 574,767 696,750 838,716
Minority Interest 6,561 6,905 9,136 10,736 12,336
Loan Funds 2,323 2,969 3,577 3,577 3,577
Net deferred tax liability (16,667) (17,504) (24,818) (24,818) (24,818)
Total Liabilities 402,775 545,722 562,661 686,244 829,810Net block 117,006 145,212 155,023 154,864 154,045
Investment 94,369 219,303 213,515 213,515 213,515
Current Assets 287,711 290,262 356,181 451,742 614,368
Cash & bank balance 18,432 14,688 18,622 79,862 191,818
Other Current Assets 96,913 53,214 94,889 80,326 91,271
Current liabilities & Provision 96,311 109,056 162,057 133,877 152,118
Net current assets 191,400 181,207 194,123 317,865 462,250
Misc. exp 0 0 0 0 0
Total Assets 402,776 545,722 562,661 686,244 829,810
Cash Flow
Y/E Mar (Rs mn) FY13 FY14 FY15 FY16E FY17E
PBT (Ex-Other income) (NI+Dep) 170,120 238,079 254,243 288,481 326,001
Other Non-Cash items 0 0 0 0 0
Chg in working cap (75,324) 5,614 (16,298) (62,502) (32,429)Operating Cashflow 65,729 196,224 195,815 173,231 229,624
Capital expenditure (28,321) (41,449) (28,509) (20,000) (20,000)
Free Cash Flow 37,408 154,775 167,306 153,231 209,624
Investments (373) (124,934) 5,788 0 0
Other Investing Cash Flow 0 0 0 0 0
Investing Cashflow (17,519) (150,574) 8,675 (4,700) 7,200
Equity Capital Raised 1,012 6 0 0 0
Loans Taken / (Repaid) 1,169 646 608 0 0
Dividend paid (incl tax) (50,332) (70,630) (226,683) (107,291) (124,867)
Other Financing Cash Flow (1,464) 20,585 25,518 0 0
Financing Cashflow (49,615) (49,394) (200,557) (107,291) (124,867)
Net chg in cash (1,405) (3,743) 3,933 61,240 111,956
Opening cash position 19,836 18,432 14,688 18,622 79,862
Closing cash position 18,431 14 ,688 18 ,622 79, 862 191,818
Key Ratios
Profitability (%) FY13 FY14 FY15 FY16E FY17E
EBITDA Margin 28.7 30.7 28.8 28.4 28.1
EBIT Margin 27.0 29.1 26.9 26.6 26.4
Effective Tax Rate 22.3 23.9 21.3 24.0 24.0
Net Margin 22.4 23.6 23.8 21.3 21.8ROCE 50.6 53.5 51.5 48.6 46.6
ROE 38.1 39.6 39.5 36.1 34.8
RoIC 69.3 79.1 79.2 79.8 79.8
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Financials
Source: Company, Emkay Research
Per Share Data (Rs) FY13 FY14 FY15 FY16E FY17E
EPS 71.3 97.6 113.8 117.1 136.3
CEPS 76.8 104.4 123.4 127.4 147.0
BVPS 209.8 282.7 293.7 356.0 428.5
DPS 22.0 32.0 99.0 46.9 54.5
Valuations (x) FY13 FY14 FY15 FY16E FY17E
PER 34.6 25.2 21.6 21.0 18.1
P/CEPS 32.1 23.6 20.0 19.3 16.8
P/BV 11.7 8.7 8.4 6.9 5.7
EV / Sales 7.5 5.6 4.9 4.2 3.6
EV / EBITDA 26.0 18.3 16.8 14.7 12.7
Dividend Yield (%) 0.9 1.3 4.0 1.9 2.2
Gearing Ratio (x) FY13 FY14 FY15 FY16E FY17E
Net Debt/ Equity (0.3) (0.4) (0.4) (0.4) (0.5)
Net Debt/EBIDTA (0.6) (0.9) (0.8) (0.9) (1.2)
Working Cap Cycle (days) 100.2 74.3 67.7 80.0 80.0
Growth (%) FY13 FY14 FY15 FY16E FY17E
Revenue 28.8 29.9 15.7 14.7 13.6
EBITDA 25.5 38.9 8.6 13.1 12.4
EBIT 25.9 39.9 6.8 13.5 13.0
PAT 31.1 37.0 16.6 2.9 16.4
Quarterly (Rs mn) Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15
Revenue 215,511 221,110 238,165 245,011 242,198
EBITDA 66,534 63,670 68,087 70,531 70,653
EBITDA Margin (%) 30.9 28.8 28.6 28.8 29.2
PAT 52,967 50,578 52,883 54,440 64,861
EPS (Rs) 27.1 25.8 27.0 27.8 33.1
Shareholding Pattern (%) Mar-14 Jun-14 Sep-14 Dec-14 Mar-15
Promoters 73.9 73.9 73.9 73.9 73.9
FIIs 16.1 16.5 16.8 16.8 16.9
DIIs 5.4 5.1 4.8 4.7 4.7
Public and Others 4.6 4.5 4.5 4.6 4.5
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28Earnings at RiskEarnings at Risk
Infosys Ltd
HOLD, TP Rs 2,050 Right initiatives, execution needs watching
Initiatives on ‘Renew and new’ in the right direction, execution needs watching: Infosys’s strategy of
‘Renew and New’ appears right , however execution on this needs watching. Improvement on some counts
has started showing up ( quarterly attrition has reduced by 800 bps in the past 3 quarters, more stability in
the account management/leadership), however growth continues to remain challenged and we reckon that
the margins expansion that one saw through FY13-15 could be behind us.
FY16 revenue guidance looks aggressive especially after the weak Mar’15 quarter execution: Infosys’s FY16
revenue guidance of 10-12% constant currency revenue growth while appears in line with street expectations ,would require an acceleration in growth(2.8/3.5% CQGR at the lower /upper end) as compared to Infosys’s 2%
constant currency CQGR through the past 4 quarters. A broad based weakness in Mar’15 quarter across
verticals/service lines( especially traditional business) with a sharp realization decline keeps the confidence on
achieving revenue guidance low.
Margin expansion seen through FY13-15 could be behind us: Infosys’s EBIT margins improved by ~200 bps
over the past 8 quarters aided by focus on cost optimization after NRN’s return ( reducing onshore costs, improvingutilization etc), We believe that margin improvement for Infosys is largely behind ( with potential downside risks
from need to step up investments in new technologies/automation etc and the pricing pressure in the traditional
/commoditized business
HOLD, TP Rs 2,050. We have a HOLD rating on Infosys with a TP Of Rs 2,050. We believe that while Infosys’s
initiatives are in the right direction, street/investors could continue to get disappointed with near term performance
both on revenue growth/margins performance.
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29Earnings at RiskEarnings at Risk
3 1 . 6
%
3 3 . 3
%
3 3 . 2
%
3 2 . 0
%
2 9 . 0
% 3 1 . 0
% 3 3 . 7
%
3 2 . 6
%
3 0 . 6
%
2 9 . 1
%
2 8 . 5
%
2 6 . 5
%
2 6 . 5
%
2 6 . 1
% 2 7 . 8
%
2 7 . 8
%
2 6 . 9
% 2 8 . 3
%
2 8 . 7 %
2 7 . 8
%
2 7 . 2
%
2 7 . 4 %
2 7 . 7 %
2 7 . 5 %
20%
22%
24%
26%
28%
30%32%
34%
36%
J u n e ' 1 0
S e p ' 1 0
D e c ' 1 0
M a r ' 1 1
J u n e ' 1 1
S e p ' 1 1
D e c ' 1 1
M a r ' 1 2
J u n e ' 1 2
S e p ' 1 2
D e c ' 1 2
M a r ' 1 3
J u n e ' 1 3
S e p ' 1 3
D e c ' 1 3
M a r ' 1 4
J u n ' 1 4
S e p ' 1 4
D e c ' 1 4
M a r ' 1 5
J u n ' 1 5 E
S e p ' 1 5 E
D e c ' 1 5 E
M a r ' 1 6 E
EBITDA margins
Infosys (contd) ─ Right Initiatives, but a mixed bag for now
Infosys’s revenue growth has failed to pick up in recent quarters, deal wins in H2FY15 also uninspring
Infosys expanded margins by 200 bps over the past 8quarters, we believe that margins expansion is largelybehind with downside risks to margins in the near term
Attrition has been coming off but could lower variablepayouts in Mar’15 quarter could impact employee moraleahead
Source: Company, Emkay Research
Source: Company, Emkay Research Source: Company, Emkay Research
-5%
0%
5%
10%
15%
20%
J u n e
' 1 2
S e p
' 1 2
D e c
' 1 2
M a r '
1 3
J u n e
' 1 3
S e p
' 1 3
D e c
' 1 3
M a r '
1 4
J u n
' 1 4
S e p
' 1 4
D e c
' 1 4
M a r '
1 5
US$ revenue, YoY % US$ revenue, QoQ %
10%
15%
20%
25%
30%
S e p ' 1 0
D e c ' 1 0
M a r ' 1 1
J u n e ' 1 1
S e p ' 1 1
D e c ' 1 1
M a r ' 1 2
J u n e ' 1 2
S e p ' 1 2
D e c ' 1 2
M a r ' 1 3
J u n e ' 1 3
S e p ' 1 3
D e c ' 1 3
M a r ' 1 4
J u n e ' 1 4
S e p ' 1 4
D e c ' 1 4
M a r ' 1 5
Attrition (LT M) Attrition (quart erly annualized)
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30Earnings at RiskEarnings at Risk
Financials
Source: Company, Emkay Research
Key Financials (Consolidated)
Income Statement
Y/E Ma r (Rs mn) FY13 FY14 FY15 FY16E FY17E
Net Sales 403,520 501,330 533,190 593,170 667,013
Expenditure 288,001 365,630 384,190 430,257 485,727EBITDA 115,519 135,700 149,000 162,913 181,286
Depreciation 11,260 13,750 10,680 12,250 13,216
EBIT 104,259 121,950 138,320 150,663 168,070
Other Income 23,590 26,690 34,270 30,600 36,000
Interest expenses 0 0 0 0 0
PBT 127,849 148,640 172,590 181,263 204,070
Tax 33,670 40,620 49,290 50,754 58,280
Extraordinary Items 0 (2,190) 0 0 0
Minority Int./Income from Assoc. 0 0 0 0 0
Reported Net Income 94,179 105,830 123,300 130,509 145,790
Adjusted PAT 94,179 108,020 123,300 130,509 145,790
Balance Sheet
Y/E Ma r (Rs mn) FY13 FY14 FY15 FY16E FY17E
Equity share capital 2,860 2,860 5,720 5,720 5,720
Reserves & surplus 395,110 472,440 541,910 596,078 656,588
Net worth 397,970 475,300 547,630 601,798 662,308
Minority Interest 0 0 0 0 0
Loan Funds 0 0 0 0 0
Net deferred tax liability (5,030) (6,560) (5,370) (5,370) (5,370)
Total Liabilities 392,940 468,740 542,260 596,428 656,938Net block 88,120 100,440 128,540 134,290 139,074
Investme nt 21,330 30,560 23,120 23,120 23,120
Current Assets 349,030 414,900 506,490 565,778 637,284
Cash & bank balance 218,320 259,500 303,670 352,887 403,373
Other Current Assets 0 0 0 0 0
Current liabilities & Provision 65,540 77,160 115,890 126,760 142,540
Net current assets 283,490 337,740 390,600 439,019 494,745
Misc. exp 0 0 0 0 0
Total Assets 392,940 468,740 542,260 596,428 656,938
Cash Flow
Y/E Mar (Rs mn) FY13 FY14 FY15 FY16E FY17E
PBT (Ex-Other income) (NI+Dep) 104,259 121,950 138,320 150,663 168,070
Other Non-Cash items 0 0 0 0 0
Chg in working cap (11,140) (14,600) (7,500) 798 (5,240)Operating Cashflow 70,709 80,480 92,210 112,958 117,765
Capital expenditure (22,530) (26,070) (38,780) (18,000) (18,000)
Free Cash Flow 48,179 54,410 53,430 94,958 99,765
Investments (17,440) (9,230) 7,440 0 0
Other Investing Cash Flow 0 0 0 0 0
Investing Cashflow (16,380) (8,610) 2,930 12,600 18,000
Equity Capital Raised 10 0 20 0 0
Loans Taken / (Repaid) 0 0 0 0 0
Dividend paid (incl tax) (28,150) (42,330) (59,498) (76,341) (85,280)
Other Financing Cash Flow (13,779) 11,640 8,508 0 0
Financing Cashflow (41,919) (30,690) (50,970) (76,341) (85,280)Net chg in cash 12,410 41,180 44,170 49,217 50,486
Opening cash position 205,910 218,320 259,500 303,670 352,887
Closing cash position 218,320 259,500 303,670 352,887 403,373
Key Ratios
Profitability (%) FY13 FY14 FY15 FY16E FY17E
EBITDA Margin 28.6 27.1 27.9 27.5 27.2
EBIT Margin 25.8 24.3 25.9 25.4 25.2
Effective Tax Rate 26.3 27.3 28.6 28.0 28.6
Net Margin 23.3 21.5 23.1 22.0 21.9ROCE 35.3 34.5 34.1 31.8 32.6
ROE 25.7 24.7 24.1 22.7 23.1
RoIC 75.8 73.5 70.2 69.1 74.6
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31Earnings at RiskEarnings at Risk
Financials
Source: Company, Emkay Research
Per Share Data (Rs) FY13 FY14 FY15 FY16E FY17E
EPS 82.4 94.5 107.9 114.2 127.6
CEPS 92.3 106.6 117.2 124.9 139.1
BVPS 348.2 415.9 479.2 526.6 579.5
DPS 21.1 31.7 44.5 57.1 63.8
Valuations (x) FY13 FY14 FY15 FY16E FY17E
PER 23.6 20.5 18.0 17.0 15.2
P/CEPS 21.1 18.2 16.6 15.5 14.0
P/BV 5.6 4.7 4.1 3.7 3.4
EV / Sales 4.9 3.8 3.5 3.1 2.7
EV / EBITDA 17.1 14.2 12.7 11.3 9.9
Dividend Yield (%) 1.1 1.6 2.3 2.9 3.3
Gearing Ratio (x) FY13 FY14 FY15 FY16E FY17E
Net Debt/ Equity (0.6) (0.6) (0.6) (0.6) (0.6)
Net Debt/EBIDTA (2.1) (2.1) (2.2) (2.3) (2.4)
Working Cap Cycle (days) 58.9 57.0 59.5 53.0 50.0
Growth (%) FY13 FY14 FY15 FY16E FY17E
Revenue 19.6 24.2 6.4 11.2 12.4
EBITDA 7.9 17.5 9.8 9.3 11.3
EBIT 6.6 17.0 13.4 8.9 11.6
PAT 13.3 12.4 16.5 5.8 11.7
Quarterly (Rs mn) Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15
Revenue 128,750 127,700 133,420 137,960 134,110
EBITDA 35,780 34,410 37,730 39,540 37,320
EBITDA Margin (%) 27.8 26.9 28.3 28.7 27.8
PAT 29,280 28,860 30,960 32,500 30,980
EPS (Rs) 25.6 25.3 27.1 28.4 27.1
Shareholding Pattern (%) Mar-14 Jun-14 Sep-14 Dec-14 Mar-15
Promoters 15.9 15.9 15.9 13.1 13.1
FIIs 42.1 41.6 42.7 41.6 38.0
DIIs 13.7 14.1 14.5 15.3 15.1
Public and Others 28.3 28.4 26.9 30.1 33.9
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32Earnings at RiskEarnings at Risk
Wipro Ltd
HOLD, TP Rs 600 Recovery remains elusive
Cheapest amongst Tier I companies, but rightly so: While Wipro remains the cheapest amongst the Tier I IT
Services companies ( at ~14x /12.5x FY16/17E P/E) , it is rightly so in our view given that the revenue growth has
failed to pick up with FY16E expected to mark the 4th successive year of single digit revenue growth.
Focused mining led improvement seen in top clients revenue performance seen through FY12-14 has
given way in FY15 : Wipro’s strong focus in addressing long standing issues on client mining yield some success
through FY12-14( top 5 clients grew by 18/15% in FY13/14, top 10 clients grew by 16%/10.5% in FY13/14)
however seem to have given way in FY15. While portfolio issues also partly to be blamed for the poor revenue,
mining outside of top 10 clients has failed to excite.
Growth across US /Europe remains below par: While Wipro’s revenue growth underperformance from US
remains well documented, Wipro appears to be losing out in Europe as well(competition growing by 15-20% YoY)
despite the natural tailwinds.
Retain HOLD, TP Rs 600: Wipro remains a tactical catch up trade in between periods. We downgraded Wipro to a
HOLD in July’14 after a tactical ACCUMULATE rating for 12 months prior to that. While valuations appear cheap
relative to peers, they are fair in the context of Wipro’s growth challenges/revenue recovery remaining elusive.
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33Earnings at RiskEarnings at Risk
18.5%
1.6%
18.9%
13.4%
5.0%6.4% 7.0% 6.6%
9.3%
0%
5%
10%
15%20%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
US$ revenue growth, YoY %
US$ revenue growth, YoY %
Wipro (contd)
Source: Companies, Emkay Research
Wipro’s YoY US$ revenue growth is in single digits for the 4th successive year
Insert chart for the revenue growth across US and Europe for Tier I peers
-10%
0%10%20%30%40%50%
J u n ' 1
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Revenue growth from US YoY, %
Infosys TCS Cognizant Wipro HCL Tech
-20%
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Revenue growth from Europe, YoY %
Infosys TCS Wipro HCL Tech
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34Earnings at RiskEarnings at Risk
-5%
0%
5%
10%
J u n e ' 1 1
S e p ' 1 1
D e c ' 1 1
M a r ' 1 2
J u n e ' 1 2
S e p ' 1 2
D e c ' 1 2
M a r ' 1 3
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M a r ' 1 5
Top 5 clients revenue growth, % QoQ Top 10 clients revenue growth, % QoQ
CO wide Revenue growth, % QoQ
Wipro (contd)
Source: Company, Emkay Research
Source: Companies, Emkay Research
India and Middle East have been driving growth for Wipro through H2FY15 as US and Europe performance hasdisappointed
Client progression to higher revenue buckets has been weak through FY15 after showing some progress through FY13-14
After showing significant traction in top clients mining through FY12-14, revenue performance intop 5/10 clients has been sluggish in FY15
US$ revenue, YoY growth % June'12 Sep'12 Dec'12 Mar'13 June'13 Sep'13 Dec'13 Mar'14 June'14 Sep'14 Dec'14 Mar'14
North America 4.8% 4.3% -0.4% -0.7% 1.0% 2.4% 6.4% 8.3% 9.8% 11.2% 10.2% 6.7%
Europe 5.7% 2.5% 10.0% 6.2% 8.2% 8.5% 6.4% 14.2% 11.8% 4.5% -0.3% -9.6%
India and Middle East 5.2% -3.2% 1.3% 1.1% 4.9% 2.2% 2.8% 1.6% 13.3% 20.4% 20.8% 25.4%
RoW 31.7% 20.1% 20.2% 16.9% 14.0% 17.6% 9.2% 1.3% 0.8% 0.3% 1.6% 4.1%
Customer size
distribution Mar'12 June'12 Sep'12 Dec'12 Mar'13 June'13 Sep'13 Dec'13 Mar'14 Jun'14 Sep'14 Dec'14 Mar'15
Mar'15-Mar'14
Change
Mar'14-Mar'13change
Mar'13-mar'12change
>US$ 100 mn+ 7 8 9 10 10 10 10 11 10 10 10 10 11 1 0 3
> US$ 50 mn+ 25 25 25 26 26 27 27 28 29 29 30 31 31 2 3 1
>US$ 20 mn+ 75 73 71 73 76 76 78 80 82 84 85 84 86 4 6 1
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35Earnings at RiskEarnings at Risk
Financials
Source: Company, Emkay Research
Key Financials (Consolidated)
Income Statement
Y/E Ma r (Rs mn) FY13 FY14 FY15 FY16E FY17E
Net Sales 403,520 501,330 533,190 593,170 667,013
Expenditure 288,001 365,630 384,190 430,257 485,727EBITDA 115,519 135,700 149,000 162,913 181,286
Depreciation 11,260 13,750 10,680 12,250 13,216
EBIT 104,259 121,950 138,320 150,663 168,070
Other Income 23,590 26,690 34,270 30,600 36,000
Interest expenses 0 0 0 0 0
PBT 127,849 148,640 172,590 181,263 204,070
Tax 33,670 40,620 49,290 50,754 58,280
Extraordinary Items 0 (2,190) 0 0 0
Minority Int./Income from Assoc. 0 0 0 0 0
Reported Net Income 94,179 105,830 123,300 130,509 145,790
Adjusted PAT 94,179 108,020 123,300 130,509 145,790
Balance Sheet
Y/E Ma r (Rs mn) FY13 FY14 FY15 FY16E FY17E
Equity share capital 2,860 2,860 5,720 5,720 5,720
Reserves & surplus 395,110 472,440 541,910 596,078 656,588
Net worth 397,970 475,300 547,630 601,798 662,308
Minority Interest 0 0 0 0 0
Loan Funds 0 0 0 0 0
Net deferred tax liability (5,030) (6,560) (5,370) (5,370) (5,370)
Total Liabilities 392,940 468,740 542,260 596,428 656,938Net block 88,120 100,440 128,540 134,290 139,074
Investme nt 21,330 30,560 23,120 23,120 23,120
Current Assets 349,030 414,900 506,490 565,778 637,284
Cash & bank balance 218,320 259,500 303,670 352,887 403,373
Other Current Assets 0 0 0 0 0
Current liabilities & Provision 65,540 77,160 115,890 126,760 142,540
Net current assets 283,490 337,740 390,600 439,019 494,745
Misc. exp 0 0 0 0 0
Total Assets 392,940 468,740 542,260 596,428 656,938
Cash Flow
Y/E Mar (Rs mn) FY13 FY14 FY15 FY16E FY17E
PBT (Ex-Other income) (NI+Dep) 104,259 121,950 138,320 150,663 168,070
Other Non-Cash items 0 0 0 0 0
Chg in working cap (11,140) (14,600) (7,500) 798 (5,240)Operating Cashflow 70,709 80,480 92,210 112,958 117,765
Capital expenditure (22,530) (26,070) (38,780) (18,000) (18,000)
Free Cash Flow 48,179 54,410 53,430 94,958 99,765
Investments (17,440) (9,230) 7,440 0 0
Other Investing Cash Flow 0 0 0 0 0
Investing Cashflow (16,380) (8,610) 2,930 12,600 18,000
Equity Capital Raised 10 0 20 0 0
Loans Taken / (Repaid) 0 0 0 0 0
Dividend paid (incl tax) (28,150) (42,330) (59,498) (76,341) (85,280)
Other Financing Cash Flow (13,779) 11,640 8,508 0 0
Financing Cashflow (41,919) (30,690) (50,970) (76,341) (85,280)Net chg in cash 12,410 41,180 44,170 49,217 50,486
Opening cash position 205,910 218,320 259,500 303,670 352,887
Closing cash position 218,320 259,500 303,670 352,887 403,373
Key Ratios
Profitability (%) FY13 FY14 FY15 FY16E FY17E
EBITDA Margin 28.6 27.1 27.9 27.5 27.2
EBIT Margin 25.8 24.3 25.9 25.4 25.2
Effective Tax Rate 26.3 27.3 28.6 28.0 28.6
Net Margin 23.3 21.5 23.1 22.0 21.9ROCE 35.3 34.5 34.1 31.8 32.6
ROE 25.7 24.7 24.1 22.7 23.1
RoIC 75.8 73.5 70.2 69.1 74.6
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36Earnings at RiskEarnings at Risk
Financials
Source: Company Emkay Research
Per Share Data (Rs) FY13 FY14 FY15 FY16E FY17E
EPS 82.4 94.5 107.9 114.2 127.6
CEPS 92.3 106.6 117.2 124.9 139.1
BVPS 348.2 415.9 479.2 526.6 579.5
DPS 21.1 31.7 44.5 57.1 63.8
Valuations (x) FY13 FY14 FY15 FY16E FY17E
PER 23.6 20.5 18.0 17.0 15.2
P/CEPS 21.1 18.2 16.6 15.5 14.0
P/BV 5.6 4.7 4.1 3.7 3.4
EV / Sales 4.9 3.8 3.5 3.1 2.7
EV / EBITDA 17.1 14.2 12.7 11.3 9.9
Dividend Yield (%) 1.1 1.6 2.3 2.9 3.3
Gearing Ratio (x) FY13 FY14 FY15 FY16E FY17E
Net Debt/ Equity (0.6) (0.6) (0.6) (0.6) (0.6)
Net Debt/EBIDTA (2.1) (2.1) (2.2) (2.3) (2.4)
Working Cap Cycle (days) 58.9 57.0 59.5 53.0 50.0
Growth (%) FY13 FY14 FY15 FY16E FY17E
Revenue 19.6 24.2 6.4 11.2 12.4
EBITDA 7.9 17.5 9.8 9.3 11.3
EBIT 6.6 17.0 13.4 8.9 11.6
PAT 13.3 12.4 16.5 5.8 11.7
Quarterly (Rs mn) Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15
Revenue 128,750 127,700 133,420 137,960 134,110
EBITDA 35,780 34,410 37,730 39,540 37,320
EBITDA Margin (%) 27.8 26.9 28.3 28.7 27.8
PAT 29,280 28,860 30,960 32,500 30,980
EPS (Rs) 25.6 25.3 27.1 28.4 27.1
Shareholding Pattern (%) Mar-14 Jun-14 Sep-14 Dec-14 Mar-15
Promoters 15.9 15.9 15.9 13.1 13.1
FIIs 42.1 41.6 42.7 41.6 38.0
DIIs 13.7 14.1 14.5 15.3 15.1
Public and Others 28.3 28.4 26.9 30.1 33.9
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37Earnings at RiskEarnings at Risk
HCL Technologies
ACCUMULATE, Target Price Rs2,050 On solid footing
Making the growth engine more reliable: While the growth from the Infrastructure segment has moderated in
FY15 after the strong 30%+ revenue growth seen in FY13 and FY14, HCL Tech is making the growth engine more
sustainable through investments in the Engineering Services side (HCLT amongst the largest offshore vendors in
this segment ,company has secured 5 large deals in this space over the past 12 months).
HCL Tech continues to consolidate on strong traction in Europe post-Axon acquisition: HCL Tech continues
to consolidate itself in Europe( revenue growth has been 20% YoY+ for the past 5 years). HCLT will also benefit
from vendor consolidation /cost optimization drive in the European financial services space in our view.
Underlying metrics remain strong , HCL Tech making the right progression on client metrics: HCL Tech’s
underlying business metrics remain solid (solid deal momentum) with company continuing to show healthy
migration in client metrics (no of US$ 20mn+/US$ 50 mn+ clients up by 4 /1 QoQ) along with wining new deals
(HCL Tech yet again announced 14 large deals with a TCV of US$ 1bn+ during the quarter) which was similar to
past few quarters.
HCL Tech much better placed on margins after the recent drop: HCL Tech’s EBIT margins slipped by 250 bps
sequentially in Mar’15 quarter and are now within co’s indicated range of 21-22%.We are not worried because
margin drop was largely on account of business investment (company stepped up SG&A expenses to highest in 6
quarters).
See upside risks to earnings estimates, ACCUMULATE, TP Rs 2,050: We have higher comfort in HCLT’s
financial performance. Given strength in underlying metrics, we find valuations at ~15x/13x FY16/17E earnings
attractive.
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38Earnings at RiskEarnings at Risk
HCL Tech (contd )
HCLT has led peers on growth in revenues fromFinancial Services
Source: Companies Emkay Research
HCL Tech continues to show healthy progress on client metrics
Source: Companies, Emkay Research
HCL Tech has strengthened it’s prospects from Europeafter the Axon acquisition
Source: Companies, Emkay Research