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SECTOR UPDATE 27 AUG 2019

IT Sector Update

Indian IT: first among equals Indian IT has achieved early success in transitioning its business model (pivot to digital), evident in its growth leadership vs. global peers. Despite improving pricing power (digital, supply constraints) and growing addressable market, global macros turning adverse will create ‘first among equals’ in the sector. Indian IT ex-TCS/INFY trades at a discount to its historical valuations (TCS/INFY at ~20% premium) and we maintain our stock selective stance, preferring names that have strong durability and stable core business.

In this note we ‘hit refresh’ and recount the hits and misses of 1QFY20. IT sector revenue growth in 1Q was 8.5% YoY (vs. 8.6% in FY19) contributed by Tier-1 IT at 8.5% YoY (fastest in 5 qtrs) and Tier-2 IT at 8.9% YoY (slowest in 8 qtrs). HCLT/INFY outperformed while Tier-2 IT disappointed (growth converging with Tier-1).

We have reviewed the performance and outlook of large global enterprises (top clients of Indian IT) which indicates that near term growth will be modest (lower discretionary spend). We have also run margin sensitivity on onsite cost/INR and analysed the onsite supply scenario (increasing H-1B challenges), which indicates that higher offshoring is only a partial offset.

IT sector valuations (10% premium to avg & benchmark) are supported by (1) Growth outlook (9.5% CAGR over FY19-22E), (2) Strong cash generation (~70% OCF/EBITDA & FCF/APAT) and payout (~70% of OCF). Prefer TCS (scale/durability, Europe, core verticals) and HCLT (organic uptick, valuations) from Tier-1 and Mphasis (growth visibility), LTTS (ER&D leadership), Zensar (organic acceleration) and Sonata (Dynamics 365) from Tier-2. Upgrade TechM to NEUTRAL (limited downside).

HIGHLIGHTS

HCLT and INFY were the growth leaders in 1Q. Within Tier-1 IT, HCLT/Wipro delivered beat/miss even as aggregate Tier-1 IT was in-line. Guidance was a mixed bag with INFY/Accenture upping outlook, HCLT/Capgemini maintaining and DXC/Hexaware/LTTS cutting guidance.

Margins have moderated by ~200bps over the past 2 qtrs (~50% impact from INR appreciation). 1Q headwinds included INR hardening, wage increases, rising visa costs, and cross currency impacts, while the sector exhibited wide performance divergence (bigger dents in midcaps). In Tier-2 IT, Intellect, Tata Elxsi, Mastek, Cyient and Mindtree missed est. revenue/margins. LTTS and Zensar delivered margin beats while Hexaware/Zensar delivered strongest growth (INR has reversed, watch this space!).

Deal wins were steady led by strong bookings by INFY, while TCS continued to outpace (higher book-to-bill and in absolute terms) Accenture (outsourcing slice) in bookings. Share gains in digital continues vs. global peers (Tier-1 IT outpaced Tier-2, for a change).

Enterprise discretionary spend has moderated and we notice mixed trends across key verticals of BFSI, Retail & CPG and Healthcare. BFS spend has decelerated with lower investments and tighter cost control amid macro challenges particularly within Capital market sub-segment and European Banking (in-sourcing). TCS/INFY/Wipro outpaced large global peers Accenture/Cognizant.

Company CMP (Rs) RECO TP

(Rs)

TCS 2,276 BUY 2,420 Infosys 803 NEU 770 Wipro 249 SELL 220 HCL Tech 1,093 BUY 1,250 TechM 691 NEU 620 LTI 1,611 BUY 2,115 Mphasis 985 BUY 1,310 LTTS 1,580 BUY 1,955 Mindtree 706 NEU 705 Hexaware 388 BUY 445 Cyient 439 NEU 510 Zensar 225 BUY 265 Persistent 530 NEU 615 Sonata 316 BUY 421 Intellect 217 BUY 300 eClerx 451 SELL 465 Majesco 420 BUY 685 Mastek 322 BUY 618

Apurva Prasad [email protected] +91-22-6171-7327

Amit Chandra [email protected] +91-22-6171-7345

Akshay Ramnani [email protected] +91-22-6171-7334

Top picks: TCS, Mphasis, L&T Tech, Zensar and Sonata

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

IT : SECTOR UPDATE

IT Sector Valuation Universe

Company

MCap (Rs bn)

CMP (Rs)

TP (Rs)

RECO

EPS (Rs) P/E (x) RoE (%) EPS CAGR% FY19-21 FY18 FY19 FY20E FY21E FY18 FY19 FY20E FY21E FY18 FY19 FY20E FY21E

TCS 8,542 2,276 2,420 BUY 68.8 83.9 87.9 98.4 33.1 27.1 25.9 23.1 30.1 36.1 36.1 38.5 8.3 Infosys 3,458 803 770 NEU 34.2 36.7 36.9 41.5 23.5 21.9 21.8 19.4 22.0 24.4 24.8 27.2 6.3 Wipro 1,420 249 220 SELL 14.0 15.8 16.6 17.7 17.7 15.8 15.0 14.1 16.5 17.3 16.9 16.9 5.8 HCL Tech 1,482 1,093 1,250 BUY 64.7 74.6 74.7 86.0 16.9 14.6 14.6 12.7 25.3 26.0 23.1 23.6 7.4 TechM 608 691 620 NEU 43.2 48.9 45.7 50.2 16.0 14.1 15.1 13.8 21.5 22.0 19.5 19.7 1.4 Tier-1 IT Median 17.7 15.8 15.1 14.1 22.0 24.4 23.1 23.6 6.3

LTI 279 1,611 2,115 BUY 66.9 87.3 85.8 101.2 24.1 18.4 18.8 15.9 33.2 34.6 28.0 28.2 7.6 Mphasis 184 985 1,310 BUY 45.4 57.6 59.4 70.2 21.7 17.1 16.6 14.0 14.6 20.0 20.0 21.1 10.4 LTTS 164 1,580 1,955 BUY 45.5 68.0 73.2 93.3 34.7 23.2 21.6 16.9 27.7 32.0 28.1 30.0 17.1 Mindtree 116 706 705 NEU 32.3 44.2 36.5 48.1 21.8 16.0 19.3 14.7 21.4 24.9 17.3 23.0 4.3 Hexaware * 116 388 445 BUY 16.8 19.6 20.4 25.9 23.2 19.8 19.0 15.0 26.6 26.5 23.5 25.5 15.0 Cyient 49 439 510 NEU 38.6 43.6 42.7 45.8 11.4 10.1 10.3 9.6 18.1 19.5 17.7 17.2 2.4 Zensar 51 225 265 BUY 10.6 14.1 15.2 18.2 21.2 16.0 14.8 12.4 15.1 17.3 16.3 17.1 13.8 Persistent 41 530 615 NEU 42.0 47.5 42.5 45.7 12.6 11.2 12.5 11.6 16.0 15.7 13.6 14.2 (1.9) Tata Elxsi 40 647 635 NR 38.5 46.6 33.0 39.5 16.8 13.9 19.6 16.4 37.0 34.5 20.4 21.4 (7.9) Sonata 33 316 421 BUY 18.6 24.0 25.9 29.1 17.0 13.2 12.2 10.8 31.0 35.1 33.0 33.0 10.2 Intellect 29 217 300 BUY 3.5 7.7 8.0 11.7 NM 28.3 27.2 18.5 6.7 11.1 9.8 12.8 23.7 eClerx 17 451 465 SELL 74.0 61.7 50.7 51.9 6.1 7.3 8.9 8.7 24.1 17.6 14.0 14.3 (8.3) Majesco 12 420 685 BUY (1.5) 18.3 22.6 30.6 NM 22.9 18.6 13.7 NM 8.4 9.0 11.1 29.1 HGS 12 561 755 NR 96.5 84.6 84.1 101.4 5.8 6.6 6.7 5.5 10.5 8.5 11.5 12.1 9.5 Mastek 8 322 618 BUY 27.7 40.4 42.1 47.6 11.6 8.0 7.6 6.8 13.7 16.1 14.1 14.3 8.6 Tier-2 IT Median 17.0 16.0 16.6 13.7 19.8 19.5 17.3 17.2 9.5

Company

MCap (USD bn)

CMP USD

TP

RECO

EPS (Rs) P/E (x) RoE (%) EPS CAGR% FY19-21

FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E Accenture 130 193 NA NR 5.6 6.5 7.3 8.0 34.7 29.8 26.2 24.1 41.7 42.0 42.0 42.0 11.3 Cognizant 33 60 NA NR 2.5 3.6 4.0 4.3 23.6 16.6 15.2 14.0 14.1 19.0 19.0 20.4 8.9 Capgemini^ 20 106 NA NR 4.9 4.4 6.5 7.2 21.7 24.3 16.2 14.8 11.5 10.1 13.4 13.7 27.9 Global IT Median 23.6 24.3 16.2 14.8 14.1 19.0 19.0 20.4 11.3 Source: HDFC sec Inst Research, Bloomberg, *Dec YE, ^CMP and EPS in EUR terms

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IT : SECTOR UPDATE

IT Sector P/E and EPS Growth Matrix

Source: HDFC sec Inst Research, Note: Size of Bubble represents M-cap

Infosys

Wipro

HCLT

TechM

L&T Infotech

Mphasis

Hexaware*Mindtree

L&T Tech

Cyient

TCS

PersistentZensar

Sonata

Mastek

56789

1011121314151617181920212223242526

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

FY 2

1E P

/E

EPS CAGR FY19-22E

Top picks include TCS, Mphasis, L&T Tech, Zensar and Sonata

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IT : SECTOR UPDATE

Stock Performance (%) Stock 1M 3M 6M 1Y 3Y CAGR 5Y CAGR Nifty (2.0) (6.6) 2.1 (4.3) 8.9 6.9 Nifty IT 3.5 2.1 (0.6) 4.1 14.7 8.3

TCS 7.9 11.1 11.7 11.4 21.7 12.4 Infosys 2.0 13.2 8.1 17.1 16.8 12.4 Wipro (5.5) (11.9) (14.3) 13.7 10.7 3.8 HCL Tech 9.1 2.5 3.2 6.8 12.0 6.4 Tech Mahindra 7.4 (6.1) (17.1) (3.8) 14.5 3.5 L&T Infotech 7.6 (8.2) (5.2) (12.5) NA NA Mphasis 6.0 3.7 (4.1) (21.5) 21.0 17.8 L&T Technology 9.1 (8.6) 5.4 (0.8) NA NA Mindtree 2.4 (26.3) (20.4) (28.7) 8.4 6.2 Hexaware 8.5 10.6 9.7 (8.9) 23.1 19.6 Cyient (6.9) (20.4) (30.1) (39.1) (5.5) 1.3 Tata Elxsi^ 0.3 (25.0) (26.6) (54.4) (7.0) 16.5 Zensar 4.3 (8.2) 8.6 (29.7) 0.6 20.7 Persistent (6.0) (11.6) (15.9) (38.6) (5.6) (3.9) eClerx (22.8) (51.2) (56.1) (58.9) (34.8) (14.1) Sonata (4.4) (6.1) (7.9) (10.0) 27.9 25.2 Intellect (5.8) (13.7) 22.6 (10.4) 7.4 NA Majesco (12.9) (18.3) (8.2) (16.0) (6.2) NA HGS^ (7.6) (10.5) (7.3) (27.3) 0.2 (1.9) Mastek (16.2) (32.5) (12.9) (40.0) 35.3 37.8 Global Peers* Accenture (2.1) 7.8 19.5 16.2 18.7 18.8 Cognizant (9.6) (3.0) (16.7) (20.9) 1.2 5.6 Capgemini (5.9) 3.9 2.9 (4.1) 6.9 14.2 Source: Bloomberg, HDFC sec Inst Research, *USD/Local currency terms, ^ Not Rated

IT Index outperformed the benchmark by ~8% over past 3M/12M 3M positive returns a concentrated performance with TCS, INFY, HCLT, Mphasis and Hexaware in positive

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IT : SECTOR UPDATE

Contents 1QFY20 Performance and Deal Trends ...................................................................................................................................... 6

Enterprise study: Divergent trends ................................................................................................................................ 8

Digital Trends & Guidance ........................................................................................................................................... 11

Operating Metrics ....................................................................................................................................................... 13

Onsite Wage Inflation – Margin Deterrent ................................................................................................................... 15

Hiring and Supply Metrics ........................................................................................................................................... 17

Performance Dashboard ............................................................................................................................................. 22

Vertical Performance Dashboard ................................................................................................................................. 27

Services Performance Dashboard ................................................................................................................................ 30

Geography Performance Dashboard ............................................................................................................................ 32

Highlights In Charts ..................................................................................................................................................... 34

Valuation Charts ......................................................................................................................................................... 45

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IT : SECTOR UPDATE

1Q Performance and Deal Trends 1Q in a nutshell Revenue growth for the sector (coverage universe)

was +1.2/8.5% QoQ/YoY (vs. 8.6% in FY19) which was contributed by Tier-1 IT at +1.3/8.5% QoQ/YoY and Tier-2 IT at +0.3/8.9% QoQ/YoY. Within Tier-1 IT, HCLT and INFY led the QoQ/YoY growth at 3.8/15.0% and 2.3/10.6%, respectively. Wipro and TechM were the laggards at -1.8/+2.5% and -1.6/+1.9% QoQ/YoY, respectively.

Operating performance for the sector was muted with EBIT decline of 139/126bps QoQ/YoY (vs. +54bps in FY19). Within Tier-1 IT, TechM and HCLT had the steepest decline in EBIT% at -390bps and -190bps QoQ.

Within Tier-2 IT, Hexaware (including inorganic) and Zensar delivered the strongest revenue growth, while Tata Elxsi, Intellect, Cyient and Mastek registered sequential decline in revenue. Tier-2 EBIT% declined a steep 190/140bps QoQ YoY (vs. +140bps in FY19) with only LTTS and Majesco registering sequential growth.

Performance vs. estimates IT sector performance had divergent trends in 1Q

with Tier-1 IT (aggregate) delivering in-line performance (-0.7/+2.5% rev/PAT variance) while Tier-2 IT missed estimates (-2.0/-6.7% rev/PAT variance). Within Tier-1 IT, HCLT delivered a beat whereas Wipro was the laggard. Tier-2 included a large list of revenue/margin underperformers.

Within Tier-2 IT, Intellect, Tata Elxsi, Mastek, Cyient and Mindtree missed on revenue/margins. LTTS and Zensar delivered margin beat.

Steady Deal trends Deal trends were steady in 1Q and were led by strong

bookings by INFY. Indian IT continued to gain share in deal bookings vs. large global peers.

TCS’ deal booking were healthy (on a YoY basis) with TCV of USD 5.7bn, +16% YoY with book-to-bill at 1.04x. Deal bookings were broad-based supported by core verticals with BFSI clocking TCV of USD 2bn in 1Q and Retail & CPG deal bookings at USD 1bn.

“Our deal pipeline continues to be very healthy and well distributed across verticals and geographies, and that is what is giving us the confidence that we are participating in these transformation initiatives of our customers.” – Rajesh Gopinathan, TCS 1QFY20. TCS’ deal bookings has outpaced Accenture deal bookings (outsourcing), Accenture’s outsourcing book-to-bill at 0.95x and consulting book-to-bill at 0.96x. INFY’s large deal wins was impressive with TCV at USD 2.7bn (all-time high), but a large part of the TCV included renewals and contribution from the Stater deal.

HCLT booked 12 transformational/large deals in 1Q following a strong FY19 with 78 transformational deals. Some of the large deals such as Xerox, Nokia, Broadcom have supported HCLT’s uptick in organic growth trajectory. TechM’s deal bookings accelerated to USD 475mn in 1Q vs. 400mn and was led by the enterprise segment (deal pipeline has higher share of telecom including 5G, network services).

HCLT and INFY were growth leaders in Tier-1 IT with HCLT/Wipro delivering revenue beat/miss, aggregate IT rev performance in-line Margins moderated by 200bps over the past 2 qtrs impacted by INR appreciation of ~3.5% over the period (~100bps impact), recent INR trends to provide relief Midcaps delivered weak performance with big misses led by Intellect, Tata Elxsi, Mastek, Cyient and Mindtree

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IT : SECTOR UPDATE

Deal Trends (continued…) Mphasis’ deal wins (EN+NN) in Direct International

were steady at USD 151mn (80% being in new-gen/digital) +15.3/-1.3% QoQ/YoY. Mindtree’s deal win TCV surged to an all-time high at USD 324mn, 6% YoY, but it was driven largely by the renewal cycle. Net-new deal wins for Hexaware was flat at USD 36mn from 5 new logos and the company lost a large

portion of the USD 100mn NN deal won 2 qtrs back, impacted by change in its client’s decision to outsource (automate instead).

Within larger IT peers, Capgemini’s deal bookings accelerated 8% YoY to EUR 3.7bn in Jun-qtr (book-to-bill of 1.05x). DXC’s deal bookings was soft with book-to-bill at 0.86x dragged by Infra services.

~80% of Mphasis’ deal wins in new-gen/digital services Mixed deal trends from larger peers with Capgemini registering strong growth and DXC registering softness in wins

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IT : SECTOR UPDATE

Enterprise study: Divergent trends We have reviewed growth trends of large enterprise

tech buyers (particularly in BFSI) that are among the top clients of Indian IT and have a high count of H-1B workforce (based on dataset from USCIS). The empirical study suggests convergence of IT services’ (aggregate of TCS, INFY, Wipro, Accenture, Cognizant, Capgemini) growth to the revenue growth of enterprises (n=58), following a slowdown over the past few qtrs.

The reduction of discretionary spend and tighter non-discretionary spend can be corroborated from the fact that growth premium in IT services (5-6% premium till mid CY18) has converged (to ~1%) with enterprise growth, enterprise growth rate having moderated from ~9% YoY to 5% and IT services revenue growth moderating from ~13% to ~5% YoY.

We observe divergent trends within BFSI, Retail & CPG and Healthcare verticals. IT sector BFSI revenue has decelerated over the past three quarters and has reached parity with growth in enterprise. Weakness

in capital market segment as well as European banking has contributed to the slowdown in the BFSI vertical. TCS, INFY and Wipro have gained revenue market share in BFSI as compared to peers including Accenture, Cognizant and HCLT. INFY led the BFSI growth in 1Q (supported by Stater acquisition).

While Retail & CPG vertical has remained weak, IT spend in the vertical continues to outperform indicative of increase in discretionary spend towards digital. IT modernisation and CX is driving the spend in the vertical. TCS/INFY outperformed sequential performance in Retail & CPG vertical as compared to HCLT/Wipro.

IT services’ spend in Healthcare vertical has decelerated despite steady growth in industry growth which reflects conservatism in IT spend. Spend in Healthcare segment is impacted by consolidation in healthcare Payer market. TCS has led the growth in this segment with 17.5% YoY in 1Q, while Cognizant and Wipro have lagged.

Enterprise discretionary spend has moderated over the past few quarters as revenue growth decelerated

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IT : SECTOR UPDATE

Enterprise Rev Growth Vs. IT Services Rev Growth (% YoY)

BFSI Rev Growth: Enterprise Vs. IT Services (% YoY)

Source: Bloomberg, Company, HDFC sec Inst Research, IT services include TCS, INFY, Wipro, Accenture, Cognizant, Capgemini

Source: Bloomberg, Company, HDFC sec Inst Research, IT services include TCS, INFY, Wipro, HCLT, Accenture, Cognizant

Retail & CPG Rev Growth: Enterprise Vs. IT Services (% YoY)

Healthcare Rev Growth: Enterprise Vs. IT Services (% YoY)

Source: Bloomberg, Company, HDFC sec Inst Research, IT services include TCS, INFY, Wipro, HCLT

Source: Bloomberg, Company, HDFC sec Inst Research, IT services include TCS, INFY, Wipro, HCLT, Accenture, Cognizant

Growth premium of IT services companies has reached parity with enterprise revenue growth following the deceleration in recent quarters IT services’ BFSI revenue growth has converged with BFSI growth, TCS/INFY/Wipro gaining share from peers Growth trends indicate higher discretionary spend in Retail & CPG, TCS/INFY outperform peers Healthcare IT services spend reflects conservatism, TCS has led growth in the segment while Cognizant/Wipro have lagged

-4%-2%0%2%4%6%8%

10%12%14%16%

Q1

2016

Q2

2016

Q3

2016

Q4

2016

Q1

2017

Q2

2017

Q3

2017

Q4

2017

Q1

2018

Q2

2018

Q3

2018

Q4

2018

Q1

2019

Q2

2019

Enterprise Rev Growth IT Services Rev Growth

8.0%9.3%

7.5%

11.1%10.4%

10.5%9.7%

6.8%

5.2%4.0%

0%

2%

4%

6%

8%

10%

12%

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

Healthcare Rev GrowthIT services Healthcare Rev Growth

6.5%

4.5%

6.1%

1.6%0.9%

6.4%

9.2%

6.5%5.4%

7.0%

0%

2%

4%

6%

8%

10%

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

Enterprise Retail & CPG Rev GrowthIT services Retail & CPG Growth

3.0% 3.4%2.6%

2.0%2.8%

9.4%

5.2%

3.5%

2.1%2.8%

0%

2%

4%

6%

8%

10%

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

Enterprise BFSI Rev Growth IT services BFSI Rev Growth

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IT : SECTOR UPDATE

BFS Highlights BFS vertical has slowed its investment growth and

tightened its focus on cost amid change in interest rate cycle, macro risks including trade tensions between US-China and Brexit uncertainties. We have analysed the post result commentary of the largest US banks (JPM, BofA, Wells Fargo and Citigroup) that is estimated to have a combined tech budget of ~USD 38bn.

JP Morgan has planned tech spend to remain flat over the next year (USD 11.5bn annual rate) as compared to slight growth over the past year by increasing efficiency of tech spend. JPM’s legacy platforms that run 6,000-7,000 applications will get gradually re-factored to cloud, currently ~50% of spend on IT maintenance and remaining on innovations/digital.

Bank of America has planned increased technology investments in 2HCY19 (vs. 1H) and spends ~30% of its budget towards technology initiative investment spend.

Citigroup’s investments in tech to digitise and improve on-boarding process and enhance its customer facing platforms is being facilitated by productivity gains (USD 300mn in 1H and USD 500mn planned in CY19) from technology spend (USD 3.44bn in 1H, -3.1% YoY).

At Wells Fargo, appointment of new Head of Technology may lead to change in sourcing strategy. It had a strong growth in tech spend at ~10% in CY18 aggregating USD 9bn (including USD 800mn in cybersecurity).

UBS continues its in-sourcing of technology headcount and has reduced its IT outsourcing cost by USD 200mn annual rate (cut of 25% or ~5500 FTEs). Cognizant has been impacted most from this as compared to other services vendors. Despite cut in spend, investments in building platforms (IB division) continues to increase.

Healthcare, Retail & CPG and Communications Highlights Healthcare: Leading health insurer Humana’s

technology investments are driven towards building enterprise platform to integrate health record of members across disparate systems. The company also increased its full year revenue and EPS guidance. Anthem also increased its full year earnings guidance post Jun-qtr.

Retail & CPG: Kohl expects higher technology expenses in 2H. Walmart (maintained its CY19 growth of 3% CC/35% for rev/e-Comm) is experimenting with emerging technologies to improve store operations and reduce customer friction. The company has recently hired a new CTO/CDO (former Google, Amazon) and may lead to change in sourcing strategy.

Communications: 5G roll outs are still in early stages and expected to gather momentum beyond 2020. AT&T has planned nationwide (US) coverage of 5G hardware installation for public services by 1H20. Verizon has completed 5G fiber deployment in 60 cities and T-Mobile plans coverage in 97% of US cities in 3 years.

JPM’s tech budget (~50% spend on IT maintenance) to remain flat over next year BofA has planned increase in tech investments in 2H (~30% spend in new initiatives) Citigroup funding its investments in digital by productivity gains from the run-the-business, tech spend in 1H lower by 3% to USD 3.4bn facilitated by productivity gains of USD 0.3bn in 1H (USD 0.5bn planned for CY19) In-sourcing trends at UBS continues with 25% reduction in external FTEs (Cognizant most impacted)

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IT : SECTOR UPDATE

Digital Trends & Guidance Digital Performance Growth in digital services was led by tier-1 IT as

compared to tier-2 IT. For tier-1 IT digital grew at a robust 37-40% YoY, led by TCS and INFY. For tier-2 IT digital grew at 19-31% YoY led by Zensar. Decline in legacy services was the highest in Wipro and TechM at 5.7/4.4% QoQ respectively.

TCS’ digital revenue (32.2% of rev) grew 42% CC (48% in FY19) and has crossed USD 7bn annualised rate (2.5x in last 3 years). INFY’s digital (35.7% of rev and at USD 4.5bn annual rate) grew 8.1% QoQ while legacy/core declined 0.6% QoQ. Growth in INFY’s digital revenue was driven by Retail, BFSI and Life-sciences verticals which grew 10.9/9.8/13.0% QoQ respectively.

Wipro’s digital growth was healthy at 5.6% QoQ, but the pressure on legacy business is higher (-5.7% QoQ). TechM’s digital (36% of rev, +37% YoY) remains the key strength while legacy was down 4.4% QoQ. HCL Tech has augmented its digital transformation capabilities in its Mode-2 services with the acquisition of Strong Bridge Envision.

In 1Q, HCLT’s Mode-2 business (18.8% of rev) grew at a modest 3.6% QoQ CC (8.4% CQGR TTM). Deal wins

in digital services/Mode-2 included in Banking (Europe), Manufacturing (Europe), Utilities and Pharma. TechM’s digital (36% of rev) grew 3.9/8.3% QoQ/YoY.

LTI’s digital (38.9% of rev) grew 3.4/27.5% QoQ/YoY while legacy was flat at -0.9%/3.2% QoQ/YoY. Mindtree’s digital (re-classified) grew at a modest 3.6/19.1% QoQ/YoY supported by Interactive (~24% of rev), Data science & Engg. (~10% of rev) and Cloud services (~3% of rev).

Cognizant’s digital (35% of rev) accelerated to ~25% YoY. Capgemini’s digital (50% of revenue) continues to grow >20% YoY with 40% growth in Cloud and 70% growth in AI sub-segments. For Accenture, Digital, Cloud & security services constituted 65% of bookings and contributed 60% to the revenue (USD 26bn annual rate) continuing with ‘strong’ double-digit growth.

Tier-1 Indian IT continues to increase its market share in digital vs. global peers. Even the tier-1 Indian IT laggards are growing their digital portfolio faster than global peers.

Tier-1 IT led the growth in Digital ahead of Tier-2 IT Tier-1 Indian IT (including growth laggards) continue to gain share in digital vs. global peers TCS’ digital has crossed USD 7bn annual rate and INFY’s digital crossed USD 4.5bn rate INFY’s digital growth led by its Retail, BFSI and Life-sciences verticals Wipro/TechM has the steepest decline in legacy at 5.7 and 4.4% QoQ respectively

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IT : SECTOR UPDATE

Guidance: a mixed bag

INFY increased its revenue guidance to 8.5 to 10.0% for FY20E vs. 7.5 to 9.5% earlier and maintained its margin guidance of 21 to 23%. HCLT maintained its revenue guidance of 14 to 16% CC growth for FY20 and EBIT margin guidance at 18.5 to 19.5%.

Wipro guided for 0 to 2% QoQ CC growth for 2QFY20 which builds in slowdown in BFSI, delays in client decision making and completion of large projects. LTI maintained its PAT margin guidance of 14 to 15%, while Mphasis increased its margin guidance (lower band) to 15.5 to 17.0% (vs. 15 to 17% earlier).

Cognizant revised its CY19 revenue growth guidance to 3.9 to 4.9% CC (vs. 3.6 to 5.1% earlier) similar at midpoint, client budgets in legacy continue to be under pressure. Capgemini maintained its revenue growth guidance of 5.5 to 8.0% CC for CY19 and EBIT% of 12.3 to 12.6%. Accenture in its 3QFY19

increased its full year guidance to 8 to 9% CC (vs. 6.5 to 8.5% earlier) including organic growth at 6 to 7%.

Hexaware lowered its revenue guidance to 19% for CY19 (vs. 20% earlier) and maintained EBIT% outlook of similar margins as FY19. LTTS lowered its revenue growth guidance to 12 to 14% for FY20 (14 to 16% earlier), impacted by slowdown in its semiconductor segment.

DXC cut its FY20 revenue growth guidance to -2.7 to -0.3% YoY or USD 20.2bn to USD 20.7bn (vs. -0.3 to +2.2% earlier or USD 20.7 to USD 21.2bn) and also cut its EPS guidance by ~10% impacted by (1) Acceleration in cloud migration resulting in bigger cut in legacy, (2) Delayed deal closure, (3) Slippage on large transformational deal milestones and (4) Delays in cost reduction measures (high cost onsite).

INFY increased its rev guidance to 8.5 to 10.0% CC for FY20 as compared to 7.5 to 9.5% earlier, HCLT maintained its growth guidance of 14 to 16%, Hexaware lowered by ~1% to 19% for CY19 (including Mobiquity) Accenture increased rev guidance, Cognizant and Capgemini maintained, DXC cut its rev guidance INFY, HCLT maintained their EBIT% guidance of 21 to 23% and 18.5 to 19.5% respectively for FY20, Mphasis increased the lower band of EBIT% to 15.5 to 17.0% DXC Technologies delivered the weakest result and cut its guidance by ~2.5% on growth and ~10% on EPS

Page | 12

IT : SECTOR UPDATE

Operating Metrics Margin

Margin divergence played out in 1Q which included headwinds such as wage increase, visa cost, INR appreciation and operating de-leverage. Within tier-1 IT, TECHM and HCLT had the steepest decline in EBIT margin at -390bps and 190bps respectively with TECHM impacted by lower profitability of subsidiary, wage cost and lower utilisation.

Within tier-2 IT, Tata Elxsi, eClerx, Mindtree (adj. for one-time payout) and Cyient had the steepest decline in margins at 620bps, 480bps, 390bps and 360bps QoQ. LTTS and Zensar outperformed on operational metrics with +60bps QoQ and flat sequential performance supported by better business mix.

TCS’ 1Q margin (24.2%, -94bps QoQ) was impacted by wage increase, INR depreciation and increase in sub-contracting (-30bps impact). INFY’s EBIT% at 20.5%, -93bps QoQ impacted by wage increase (-60bps), sub-con (-10bps) and Stater (-20bps), offset by utilisation & efficiencies (+70bps) and realisation (+20bps).

Wipro’s IT services EBIT margin stood at 18.5% (-77bps QoQ) was impacted by wage hike (one month), currency and visa cost. HCLT’s margin (17.1%) contracted 193bps QoQ impacted by onsite heavy ER&D, investments to build HCL Software front-end and INR/visa cost impact (fall in Mode-1 margin vs. flat Mode-2/3 margins).

TechM’s margin slumped to a seven-quarter low at 11.5%, declining 391bps QoQ with wage increase, visa cost, lower utilisation, lower profitability of subsidiaries and INR impact. LTI’s EBIT margin at 16% (-173bps QoQ) was impacted by higher onsite, lower offshore realisation, visa cost and higher S&M spend.

LTTS’ EBIT margin improved by 62bps QoQ to 17.1% on better business-mix and higher offshore mix. Hexaware’s EBIT% at 13.3% was impacted by -43bps QoQ on acquisition-related cost, visa cost and INR.

Geo trends

TCS’ growth continued to be led by UK/Europe geo at 16/15% YoY CC. However, NorthAm decelerated to 7.7% YoY CC (vs. 9.9% in 4Q) impacted by slowdown in BFSI/Retail verticals. INFY’s NorthAm geo grew 3% QoQ largely driven by the Communication (ramp-up of Verizon deal) and E&U, while growth in Europe was driven by Stater acquisition.

Wipro’s muted performance in Europe impacted by BFSI and Manufacturing (Auto) softness. HCLT’s Europe performance was soft impacted by projects reaching steady state, while Americas led its growth following ramp-up of large deals.

TechM’s muted performance in Europe was impacted by weakness in Manufacturing segment. Accenture’s NorthAm (46% of rev) accelerated to 9% YoY CC, while Europe (34% of rev) decelerated to 4% YoY.

Client metrics

INFY had strong client additions in the >USD 100mn bucket which increased to 27 (vs. 25 in 4Q). In comparison, TCS’ large bucket was flat sequentially. Cognizant continues to face challenges in 3 of its top-5 banking accounts.

Top account (Citi) impacted LTI in 1Q on budget cuts and 2Q also likely to be soft exacerbated by large SA Bank. Large BFSI account (within T-5) for Hexaware also witnessing softness based on cut in outsourcing spend, deceleration in Mindtree’s T-1.

IT sector 1Q margin impacted by INR, wage increase, visa cost and negative cross currency, recent INR trend to provide tailwind LTTS and Zensar outperformed on margin performance vs. peers INFY’s NorthAm growth driven by ramp-up of large communication deal and growth in Europe supported by Stater acquisition Weak Europe geo performance by Wipro/TechM impacted by Manufacturing (Auto) contrasts strong performance by TCS in UK/Europe LTI, Hexaware, Mindtree impacted by volatility in some top accounts (Tier-2 higher concentration vs. Tier-1), Mphasis was the exception

Page | 13

IT : SECTOR UPDATE

Vertical performance

TCS’ BFSI and Retail verticals grew 9.2/7.9% YoY respectively and recovery is expected in Retail vertical. BFSI (30.8% of rev) growth was soft at 1.3% QoQ impacted by some challenges in NorthAm Capital markets and European Banks. Manufacturing posted 3.7% QoQ backed by strong demand from US, offset by weak Auto sector in Europe.

While Wipro was leading peers in BFSI growth, its growth has come off with challenges in Capital market segment and European banking. Client specific issues in HCLT’s BFSI improved even as one large banking client facing challenges (vs. 2 earlier).

Telecom (ex-Comviva) and Enterprise were both flat sequentially for TechM, but Enterprise segment has been decelerating. Softness in BFSI vertical (35.6% of rev) and Healthcare vertical (27.4% of rev) has impacted revenue growth of Cognizant.

Accenture’s Financial services (20% of rev) accelerated to 4% YoY CC (vs. 2% in 2Q), Communication, Media & Tech decelerated to 7% YoY CC (vs. 12% in 2Q). Accenture’s uptick in financial services was supported by double-digit growth in insurance and recovery in its banking segment. Cognizant’s BFSI grew 1.7% YoY CC (vs. 0.2% in 1Q) and Healthcare declined 1.5% YoY CC.

For Mindtree, Travel & Hospitality vertical led the growth at 3.6% QoQ in 1Q, while new logo wins were in Retail & BFSI verticals. Telecom & Hi-tech vertical witnessed slowdown for LTTS, largely led by the semiconductor segment. Within ER&D, LTTS’ performance in Transportation vertical stood out vs. peers that are experiencing slowdown in their automotive portfolio (TELX).

Service line trends Analytics, AI & Cognitive led growth among services

lines for LTI. Mphasis’ growth was led by App. Dev. service-line (7.5% QoQ).

Cognizant has renewed its focus in Software product development (USD 800mn rev, 11,0000 employees currently) following its acquisition of Softvision. Investments in ER&D have accelerated by large IT services companies to tap the higher growth segment.

Capgemini’s acquisition of Altran and HCL Tech’s acquisition of IBM products are investments to align focus towards ER&D and products & platforms. The increase in software penetration is leading to demand for testing, product development and support services.

Rise in on-site cost has impacted margins for Indian IT. Lack of talent and H-1B issues are the major areas of concern The sensitivity analysis suggest that 1% US wage hike will have ~27-39bps impact on operating margins Margin Impact of US wage hike for Tier-2 IT is ~12bps higher than Tier-2, due to higher onsite presence and lower margin structure Off-shoring requirement is high for Tier-2 IT. As per our analysis dependence on off-shoring as a margin expansion tool is not a valid strategy Indian IT companies have gradually broadening the on-site pyramid, hiring locally to achieve balance in cost and utilisation

Wipro was leading peers in BFSI earlier, but has now decelerated impacted by challenges in Capital market and European banking segment Accenture had slight uptick in BFSI supported by recovery in banking and double-digit growth in Insurance, stronger recovery expected in its 2H Telecom & Hi-tech slowdown in LTTS impacted by slowdown in semiconductor segment

Page | 14

IT : SECTOR UPDATE

Onsite wage inflation – Margin deterrent Rise in onsite digital projects, talent crunch, H-1B

issues, local hiring and drop in onsite utilisation have caused an increase in on-site cost structure. Indian IT companies have increased subcontracting, localisation, but it is cost inflationary. These factors have led to pressure on margins as highlighted in our IT Sector report (‘Margin trifecta indents growth playbook’).

To dig further, we have done a study to quantify the impact of onsite wage hike on operating margins for Tier-1 and Tier-2 IT companies. Our analysis suggest that for every 1% increase in US cost, the impact on operating margins is -27/39bps for Tier-1/Tier-2 IT. We have also done a sensitivity analysis by varying wage hike and US revenue mix.

The impact on operating margins for Tier-2 IT is greater due to higher onsite presence and lower on-site margins. The ability to attract talent locally is also low for Tier-2 Indian IT companies (vs. Tier-1) and they depend more on sub-contracting. This impact is visible in rising subcontracting expenses for most of the Tier-2 IT companies.

Offshoring- A (limited) margin lever

As a general convention, offshoring is considered as a margin lever and an important tool to increase margin. We have quantified the offshoring impact on

margin and tried to understand the viability of this aspect.

We assess that for every 1% offshoring the operating margin expands by 15bps (at constant currency). If we take into consideration the benefit of INR depreciation, EBIT% expands by 40bps for every 1% offshoring + 1% INR depreciation. We have also done a sensitivity analysis and tabulated the margin impact from offshoring and currency depreciation.

To off-set the margin impact of 1% onsite cost increase, ~177/258bps increase in offshoring is required for Tier1/Tier-2 IT. Considering the standard wage inflation of 2%, the implied margin pressure is ~53bps. To off-set this 354bps of offshoring is required, which is a high ask by itself in our view.

This offshoring requirement comes down to an achievable range when we consider currency depreciation. For the same scenario the offshoring required is 59bps when we take 3% currency depreciation.

Offshoring of the onsite digital work, when it becomes steady state, is going to happen, but there is a risk of pricing cut. In the long-term, Indian IT industry will have to build an onsite pyramid. Hiring locally from campuses and training them so that they can be deployed into projects, at a competitive cost will drive equilibrium.

Rise in on-site cost, tech supply crunch and H-1B limitations have impacted margins for Indian IT 1% US wage hike has ~27-39bps impact on operating margins 1% increase in offshoring results in 15bps margin expansion (on cc basis) Indian IT companies have been gradually building on-site pyramids, hiring locally to achieve balance in cost and utilisation, as offshoring has limitations as margin lever

Page | 15

https://www.hdfcsec.com/hsl.docs/IT%20Sector%20-%20Update%20-%20Apr19%20-%20HDFC%20sec-201904011030494037645.pdf

https://www.hdfcsec.com/hsl.docs/IT%20Sector%20-%20Update%20-%20Apr19%20-%20HDFC%20sec-201904011030494037645.pdf

IT : SECTOR UPDATE

Margin Sensitivity To US Wage Hike (Tier-1 IT) Margin Sensitivity To US Wage Hike (Tier-2 IT)

EBIT Margin impact (bps)

US Wage hike (%) 1% 2% 3% 4% 5%

USD Rev (%)

55% -26 -51 -77 -102 -128 56% -26 -52 -78 -104 -130 57% -27 -53 -80 -106 -133 58% -27 -54 -81 -108 -135 59% -27 -55 -82 -110 -137


US Wage hike (%) 1% 2% 3% 4% 5%

USD Rev (%)

63% -37 -75 -112 -150 -187 64% -38 -76 -114 -152 -190 65% -39 -77 -116 -155 -193 66% -39 -79 -118 -157 -196 67% -40 -80 -120 -159 -199

Source: HDFC sec Inst Research Source: HDFC sec Inst Research

Margin Sensitivity To Offshoring Offshoring Required To Offset Onsite Cost (Tier-1)


Offshoring Change (% of Rev) 0% 1% 2% 3% 4%

Currency Depreciation

(%)

0% 0 15 30 45 60 1% 25 40 55 70 85 2% 50 65 80 95 110 3% 75 90 105 120 135 4% 100 115 130 145 160

Offshoring (bps) US Wage hike (%)

1% 2% 3% 4% 5%


(%)

0% 177 354 530 707 884 1% 66 133 199 265 331 2% 41 82 122 163 204 3% 29 59 88 118 147 4% 23 46 69 92 115

Source: HDFC sec Inst Research Source: HDFC sec Inst Research

Offshoring Required To Offset Onsite Cost (Tier-2) Margin Sensitivity To USD-INR

Offshoring (bps) US Wage hike (%)

1% 2% 3% 4% 5%


(%)

0% 258 516 773 1031 1289 1% 97 193 290 387 483 2% 60 119 179 238 298 3% 43 86 129 172 215 4% 34 67 101 135 168


USD-INR 70.6 (1%)

71.3 (2%)

72.0 (3%)

72.7 (4%)

73.4 (5%)

USD Rev (%)

51% 28 56 83 109 135 52% 27 54 80 106 131 53% 26 52 77 102 127 54% 25 50 75 99 122 55% 25 49 72 96 118

Source: HDFC sec Inst Research Source: HDFC sec Inst Research, Current USD INR estimate at Rs 70

The offshoring required to off-set the impact of 1% wage hike is 177/258bps for Tier1/Tier-2 IT The offshoring requirement becomes realistic if we assume 2% currency depreciation Operating margins have 26bps impact for every 1% INR depreciation

Page | 16

IT : SECTOR UPDATE

Hiring and Supply metrics TCS’ hiring momentum improved (indicative of

medium-term demand outlook) with highest net addition in last five years. TCS has stable and industry best attrition at 11.5% vs. 18% for Accenture. HCLT’s attrition moderated to 17.3% (vs. 17.7% in 4Q).

Cognizant’s attrition remains elevated at 23% even as the company is undergoing leadership changes. Accenture’s attrition spiked to 18% (vs. 15% in the prior quarter). LTI’s attrition increased to 18.3%, +80bps QoQ.

Denial rates of H-1B petitions (both initial and continuing) have increased significantly. The denials in initial petitions have surged considerable in the last three years. It is currently at the highest level of 32% vs. 7-8% earlier. There is similar trend in the continuous H-1B petitions that have surged to an all-

time high of 18% vs. 3-4% earlier. Over the past two years, compliance and scrutiny of the H-1B petitions have increased following the executive clampdown.

Indian IT companies have been investing in localisation to reduce dependency on H-1B. Also broad basing the delivery function mitigates against the risk of increase in visa rejection and higher cost of compliance.

Wipro and HCLT have reached substantially high localisation in US with the localisation mix at 65% and 70% respectively.

Based on data from USCIS, we assess that Infosys has the highest concentration of H-1B employees onsite for their large accounts as compared to peers that have higher dependence of locals and offshoring for their large accounts.

Denials In Initial H-1B Petitions Denials In Continuous H-1B Petitions

Source: USCIS, HDFC sec Inst Research Source: USCIS, HDFC sec Inst Research

15%

8% 7%5%

7% 8%6%

10%13%

24%

32%

0%

5%

10%

15%

20%

25%

30%

35%

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

6%5%

3% 3% 3% 3% 3%4%

5%

12%

18%

0%2%4%6%8%

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

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

TCS had industry best attrition at 11.5% vs. Accenture at 18%, Cognizant at 23%, INFY at 21%, Wipro at 18.5% Denial rates of H-1B petitions and scrutiny (RFE) have increased significantly over the last three years

Page | 17

IT : SECTOR UPDATE

H-1B Visa Filings By Nationality : Indians & Chinese Account For 85%

YoY Drop in H-1B Visas Issued (Initial + Continuous) to Tier-1 IT Services Companies

Source: USCIS, HDFC sec Inst Research Source: USCIS, HDFC sec Inst Research 3-Y CAGR of H-1B Visas Issued (Initial + Continuous) to IT Services Companies

YoY Growth in H-1B Visas Issued (Initial + Continuous) to Global Tech Companies


-68%

-56%-53%-50%-47%-44%-41%-40%

-24%-22%

-10%-6%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

Cogn

izan

t

Info

sys

Wip

ro

Tech

M HCL

Indi

an IT TCS

Acce

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LTI

LTTS

Mph

asis

Min

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e

-20%-18%-16%

-9%-4% -3% -1%

3% 4%7%

12%

26%

-30%

-20%

-10%

0%

10%

20%

30%

Wip

ro

Acce

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e

Cogn

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t

Info

sys

Indi

an IT HCL

Tech

M TCS

LTI

Min

dtre

e

Mph

asis

LTTS

-19%-19%-12%

4% 7% 7% 10% 12%23%

43%51%

58%

-30%-20%-10%

0%10%20%30%40%50%60%70%

E&Y

Inte

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Delo

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Cisc

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Ora

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IBM

Cor

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AWS

Goo

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JP M

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Face

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Tier-1 IT H-1B issuance have dropped by 38% YoY (avg.) due to increase in denial rate and lower applications Trend differs for US Tech companies where H-1B issuance has grown by 14% YoY, and highlights local tech crunch High localisation in Wipro, HCLT and INFY

India75%

China10%

Canada1%

Philippines1%

S Korea1%

Others12%

Page | 18

IT : SECTOR UPDATE

Tier 1 IT Services: H-1B Average Salary Tier 1 IT Services: Rise In Avg. H-1B Salary (3Y)

Source: USCIS, HDFC sec Inst Research Source: USCIS, HDFC sec Inst Research Global Tech: H-1B Average Salary Global Enterprises: Onsite 3Y Salary Hike


70.072.0

75.079.4 81.0 81.1

83.084.9 85.0 86.7

89.9 90.0

60.0

65.0

70.0

75.0

80.0

85.0

90.0

95.0

LTTS

Indi

an IT

…

TCS

Tech

M

Min

dtre

e

Info

sys

Acce

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e

LTI

Mph

asis

Cogn

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t

HCL

Capg

emin

i

USD '000

-0.4%

1.7%

2.6% 2.7% 2.7% 2.9% 2.9%3.2% 3.4% 3.4%

4.3%

-1%

0%

1%

2%

3%

4%

5%

Info

sys

Cogn

izan

t

Tech

M TCS

Indi

an IT

Avg

Acce

ntur

e

Mph

asis

Min

dtre

e

LTI

HCL

LTTS

96107 107

115120

126 128 131140

145150

60.070.080.090.0

100.0110.0120.0130.0140.0150.0160.0

E&Y

Delo

itte

Inte

l

JP M

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IBM

Ora

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Cisc

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Goo

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Appl

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USD '000

1.7% 1.8% 2.0%2.3% 2.3% 2.4%

2.7% 2.7% 2.8%

3.3%

0%

1%

1%

2%

2%

3%

3%

4%

JP M

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Inte

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IBM

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Avg. H-1B salary for IT services companies is USD 81K and has grown at a CAGR of 2.7% over the last three years Avg. H-1B salary for Global Tech companies is ~USD 125K USD and has increased at a CAGR of 3% over the last three years

Page | 19

IT : SECTOR UPDATE

Top Clients by H-1B Count SR No. TCS Infosys Wipro Accenture Cognizant Capgemini

1 Apple Inc Apple Inc State Street Bank AT&T American Express Discover Financial

2 Citigroup American Express Capital One Services Travelers Corp Metropolitan Life Morgan Stanley

3 Cisco Aetna Life Apple Inc Marriott International Kaiser Permanente Synchrony Financial

4 United Services Charles Schwab Charles Schwab Best Buy Centene Corp Citigroup

5 Humana The Capital Group Fedex Duke Energy Hartford State Farm Insurance

6 J&J Southern California Citigroup Pfizer Wells Fargo HSBC

7 CVS Health Citigroup Cisco Bristol Myers Aetna Life Moog Medical

8 Money Services Cisco US Bank National Anthem Travelers GE Healthcare & Aviation

9 Stryker Corp AT&T Mastercard Kaiser Permanente Health Care Services Farmers Insurance

10 Comcast BP Change Healthcare Merck JP Morgan Chase CNA Financial Corp

11 Eli Lilly Wells Fargo Cigna Cargill The Northern Trust Wells Fargo

12 Home Depot Comcast HP Inc Dupont Voya Services AIG

13 Fiat Chrysler PWC Nike Express Scripts World Bank Group MUFG Union Bank

14 State Farm Citizens Bank Microsoft HP Keybank National Chubb

15 United Airlines Suntrust Bank Inc HPE 3M First Data Cox Communication

16 Kaiser Allstate Insurance UBS Cigna Ford Motor Hartford Financial

17 NA Metropolitan Life Inovant Dow Chemical Anthem Inc McDonalds

18 NA Fidelity Investments Kohls Aetna Aetna Barclays

19 NA UBS NA NA Capital One Abbott

20 NA GAP NA NA Discover Financial NA Source: USCIS, redbus2us.com, HDFC sec Inst Research

List of enterprises in descending order of H-1B FTEs INFY and Capgemini have higher concentration of H-1B FTEs for their large accounts

Page | 20

IT : SECTOR UPDATE

Tech Skill Demand/Supply Category High gap in demand-supply Low demand-supply gap Supply exceeds demand Programming Language

JavaScript, SQL, Java, C#, Objective C, Perl, MATLAB C, Cobol, HTML5 C++, PHP

Ruby, Go, R, NoSQL, Python

Database Technologies Qlikview, Apache, Spark, Hadoop, Teradata MongoDB

Microsoft SQL Server, SAP Sybase ASE, MySQL, Microsoft Access

Tools/Products/Frameworks

React, Riverbed, AppDynamics, RPA tools, Workday

Oracle, jQuery, Internet Information services, Sharepoint

HPE Unified Functional Testing, Tomcat, SAP

Selenium, Angular JS, Node JS

Infrastructure services VMWare, AWS, Azure

Cisco, Windows server, EMC, call center/helpdesk, ServiceNow, Avaya, Tivoli, Office 365, Citrix

Unix server, Linux server, HP security

Agile/DevOps Ansible, Chef, Puppet, Docker, Jenkins Github

Source: Everest, Note: Bold denotes specialised skills Change In Estimate

Change in Estimate Earlier Revised Change %

FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E Tech Mahindra Revenue (USD mn) 5,198 5,570 5,990 5,198 5,574 6,004 0.0% 0.1% 0.2% EBIT Margin % 12.7 12.9 13.1 12.7 13.4 13.9 0bps 50bps 83bps EPS 45.7 48.5 52.8 45.7 50.2 56.0 0.0% 3.6% 6.0% Eclerx Revenue (USD mn) 209 223 236 208.3 219.1 228.3 -0.4% -1.9% -3.2% EBIT Margin % 15.1 15.4 15.1 14.9 14.5 14.0 (22)bps (96)bps (105)bps EPS 51.6 55.9 57.6 50.7 51.9 52.6 -1.6% -7.1% -8.7% Source: Company, HDFC sec Inst Research

Recent rise in in-voluntary attrition consists of FTEs that are unable to upskill in newer technologies We increase EPS estimate by 3.6/6.0% for FY21/22E for TechM. Based on improving outlook in Telecom, scope for margin improvement and attractive valuations (3% lower than 5Y average) we upgrade Tech Mahindra to Neutral from SELL We cut EPS est. for eClerx by ~7% on lower revenue visibility due to challenging macro environment and lower quality revenue mix which would impact margins, Maintain SELL

Page | 21

IT : SECTOR UPDATE

Performance Dashboard IT Sector Revenue Performance

Company 1QFY20 Revenue (USD mn)

1QFY20 QoQ (%)

1QFY20 YoY (%)

FY19 YoY (%)

TCS 5,485 1.6% 8.6% 9.6% INFY 3,131 2.3% 10.6% 7.9% Wipro 2,039 -1.8% 2.5% 2.9% HCLT 2,364 3.8% 15.0% 10.1% TechM 1,247 -1.6% 1.9% 4.2% Tier-1 IT 14,265 1.3% 8.5% 7.7%

LTI 357 0.8% 11.4% 19.1% Mphasis 297 1.8% 10.5% 13.1% Hexaware 189 4.7% 12.0% 11.3% Mindtree 264 0.8% 9.4% 18.3% L&T Tech 194 1.4% 14.8% 24.6% Cyient 157 -5.2% -2.6% 8.6% Tata Elxsi 52 -10.1% -8.7% 6.5% Persistent 120 1.1% -3.2% 2.2% eClerx 51 -0.6% 3.5% 1.0% Zensar 153 3.1% 16.4% 16.6% Sonata* 44 1.8% 17.2% 12.0% HGS 185 1.1% 12.9% 15.1% Intellect 49 -12.5% 10.7% 23.6% Majesco 37 1.2% 11.2% 13.7% Mastek 36 -6.1% -2.3% 16.5% Tier-2 IT 2,184 0.3% 8.9% 14.5% IT sector Aggregate 16,450 1.2% 8.5% 8.6%

Source: Company, HDFC sec Inst Research , * IITS, 2QCY19 for Hexaware

HCLT led growth among large caps on ramp up of large deal and 0.5% from Strong-Bridge Envision

Intellect de-grew on high base, seasonality and deferral of license booking

Hexaware posted strong organic growth of 3.2% QoQ CC and inorganic of ~1.8% (Mobiquity)

Tata Elxsi was impacted by absence of IP revenue and de-growth in top account

Page | 22

IT : SECTOR UPDATE

IT Sector EBIT Margin Performance

Company 1QFY20 EBIT Margin %

1QFY20 QoQ (bps)

1QFY20 YoY (bps)

FY19 YoY (bps)

TCS 24.2 (94) (88) 79 INFY 20.5 (93) (321) (148) Wipro 16.2 (78) 187 61 HCLT 17.1 (193) (259) (19) TechM 11.5 (391) (153) 321 Tier-1 IT 19.9 (131) (122) 47

LTI 16.0 (171) (171) 427 Mphasis 15.5 (34) (112) 99 Hexaware 13.3 (43) (67) (63) Mindtree 6.4 (652) (526) 241 L&T Tech 17.1 62 230 297 Cyient 9.2 (361) (34) 21 Tata Elxsi 16.4 (623) (986) 129 Persistent 9.8 (88) (218) 235 eClerx 13.8 (480) (538) (515) Zensar 10.7 (7) (138) 54 Sonata 9.2 (88) (101) 527 HGS 5.8 (67) 237 (242) Intellect -1.3 (1,104) (252) 195 Majesco 7.2 219 45 685 Mastek 11.5 (8) 44 127 Tier-2 IT 11.7 (193) (143) 141 IT sector Aggregate 18.8 (139) (126) 54

Source: Company, HDFC sec Inst Research, 2QCY19 for Hexaware

L&T Tech led margin performance within services. Margins were supported by lower operating expenses, better business-mix and higher offshoring

Zensar reported margin resilience but margin structure continues to remain low

Mindtree’s EBIT was impacted by one time payout to employees (-260bps), wage increase (-190 bps) and higher sub-contracting cost (-120bps)

TechM’s margin was at seven quarter low. Headwinds to margin include wage hike, visa cost, currency and lower utilisation

Page | 23

IT : SECTOR UPDATE

Digital Revenue Performance

Company 1QFY20 Revenue (USD mn) QoQ (%) 4-qtr CQGR (%) YoY (%)

TCS 1,766 5.6% 8.7% 39.9% INFY 1,118 8.1% 8.6% 39.0% Wipro 763 5.6% 7.7% 34.4% TechM 449 3.9% 8.3% 37.4% LTI 139 3.4% 6.3% 27.5% Mindtree 100 3.6% 4.5% 19.1% Persistent 27 -5.9% 0.7% 2.7% Zensar 74 7.8% 7.1% 31.4% Sonata* 16 1.8% 6.3% 27.8%

Source: Company, HDFC sec Inst Research, 1QFY20, * IITS Legacy Revenue Performance

Company 1QFY20 Revenue (USD mn)

QoQ (%) 4-qtr CQGR (%) YoY (%)

TCS 3,719 -0.1% -0.5% -1.8% INFY 2,013 -0.6% -0.2% -0.7% Wipro 1,276 -5.7% -3.3% -12.5% TechM 798 -4.4% -2.9% -11.1% LTI 218 -0.9% 0.8% 3.2% Mindtree 164 -0.7% 1.0% 4.2% Persistent 92 3.4% -1.2% -4.8% Zensar 79 -1.1% 0.1% 0.5% Sonata* 28 1.8% 2.9% 11.9%

Source: Company, HDFC sec Inst Research, 1QFY20, * IITS

Digital growth is intact within Tier-1 IT

Wipro and TechM are impacted by steep fall in legacy revenue

TCS’ Digital portfolio is now at USD 7bn annual run rate (2.5x in last 3 years)

Persistent posted de-growth in Digital

Lower legacy decline in TCS/INFY vs. peers

Sonata’s QoQ growth was equally spread between Digital and Legacy

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IT : SECTOR UPDATE

Headcount & Productivity

Companies Headcount (Nos) Headcount Growth Revenue/employee

QoQ (%) YoY (%) QoQ (%) YoY (%)

TCS 436,641 2.9% 8.9% -1.2% -0.3% INFY 229,029 0.4% 9.1% 1.9% 1.4% Wipro 174,850 2.0% 8.7% -3.7% -7.5% HCLT 143,900 4.3% 15.9% -0.5% -0.8% TechM 125,773 3.9% 10.8% -5.3% -8.0% LTI 29,347 4.2% 16.7% -3.3% -4.5%

Mphasis 25,499 4.1% 13.0% -2.3% -2.2% Hexaware 18,294 0.0% 19.1% 4.7% -6.0% Mindtree 20,935 3.6% 10.2% -2.7% -0.8% L&T Tech 15,043 0.0% 15.0% 1.4% -0.2% Cyient 15,043 -0.3% -0.1% -4.9% -2.5%

Persistent 10,167 2.1% 14.2% -0.9% -15.3% eClerx 9,495 -0.1% 1.4% -0.5% 2.0% Zensar 10,166 0.9% 11.4% 2.0% 1.8%

Sonata 3,863 -0.6% 11.8% 2.4% 4.8% Source: Company, HDFC sec Inst Research

Strong headcount growth at Tier-1 IT and larger companies within Tier-2 IT

Headcount productivity at TechM was impacted by strong net additions and drop in revenue

Sonata had highest growth in revenue productivity driven by IP-led revenue

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IT : SECTOR UPDATE

IT Sector: Actual Vs Estimates in 1QFY20 Company

Estimates Actuals Variance (%) Revenue EBIT% APAT Revenue EBIT% APAT Revenue EBIT % (bps) APAT

TCS 5,565 23.9 77.69 5,485 24.2 81.31 (1.4) 26 4.7 Infosys 3,147 20.2 37.28 3,131 20.5 37.98 (0.5) 32 1.9 Wipro 2,072 16.2 22.81 2,039 16.2 23.87 (1.6) 3 4.7 HCLT 2,325 17.5 23.34 2,364 17.1 22.20 1.7 (42) (4.9) Tech M. 1,258 13.2 9.58 1,247 11.5 9.59 (0.9) (173) 0.1 L&T Infotech 360 15.7 3.58 357 16.0 3.56 (1.0) 27 (0.6) Mphasis 301 14.9 2.59 297 15.5 2.65 (1.4) 54 2.2 Mindtree 268 10.7 1.62 264 6.4 1.28 (1.4) (429) (21.1) Hexaware 190 13.2 1.40 189 13.3 1.51 (0.8) 17 8.0 L&T Tech 193 15.4 1.77 194 17.1 2.04 0.5 169 15.2 Cyient 166 11.6 1.27 157 9.2 0.90 (5.7) (238) (28.8) Persistent 122 11.3 0.87 120 9.8 0.90 (2.0) (153) 3.4 Zensar 154 9.4 0.81 153 10.7 0.79 (0.5) 125 (2.7) eClerx 52 17.0 0.55 51 13.8 0.40 (2.1) (317) (27.4) Sonata 45 11.1 0.66 44 9.2 0.67 (1.6) (192) 1.6 Intellect 57 7.9 0.25 49 (1.3) -0.02 (13.4) (912) (107.7) HGS 186 6.7 0.57 185 5.8 0.40 (0.3) (92) (30.6) Majesco 38 8.7 0.15 37 7.2 0.08 (1.8) (152) (43.6) Mastek 38 10.5 0.26 36 11.5 0.24 (7.1) 100 (5.8) Tata Elxsi 59 22.1 0.67 52 16.4 0.49 (11.8) (564) (27.2) IT Aggregate 16,596 19.0 187.72 16,450 18.8 190.84 (0.9) (18) 1.7 Tier-1 IT 14,367 20.0 170.70 14,265 19.9 174.96 (0.7) (7) 2.5 Tier-2 IT 2,229 12.7 17.02 2,184 11.7 15.89 (2.0) (100) (6.7)

Source: Company, HDFC sec Inst Research, 2QCY19 for Hexaware

Tier 1 IT (aggregate) posted in-line growth

Tier-2 IT missed estimates at an aggregate level

HCLT posted strong revenue growth of 3.8% QoQ which led the beat

LTTS led the beat on margins

Intellect miss was due to high base and deferment of large license booking

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IT : SECTOR UPDATE

Verticals Performance Dashboard TCS (1QFY20) % of Rev FY19 YoY% 1QFY20

YoY% USD mn

BFSI 30.8% 6.3% 7.5% 1,689 Regional Markets & Others 20.8% 27.1% 13.5% 1,141 Retail & CPG 15.0% 3.1% 5.8% 823 Manufacturing 9.8% 45.3% 4.3% 538 Technology & Services 8.8% 21.9% 6.2% 483 Life Sciences & Healthcare 7.9% 14.6% 17.5% 433 Communication & Media 6.9% 6.4% 5.5% 378 Total 100.0% 9.6% 8.6% 5,485

Infosys (1QFY20) % of Rev FY19 YoY% 1QFY20 YoY% USD mn

Financial services 31.4% 5.1% 9.3% 983 Retail 15.8% 10.0% 5.5% 495 Communication 13.8% 8.0% 20.1% 432 Energy, Utilities, Resources & Services 13.0% 15.2% 15.8% 407 Manufacturing 9.6% 12.1% 10.6% 301 Hi Tech 7.7% 11.0% 14.5% 241 Life Sciences 6.1% 1.9% 2.4% 191 Others 2.6% -8.2% -2.1% 81 Total 100.0% 7.9% 10.6% 3,131

Wipro (1QFY20) % of Rev FY19 YoY% 1QFY20 YoY% USD mn

BFSI 31.6% 13.9% 8.7% 644 Consumer Business Unit 15.6% 7.3% 4.5% 318 Health Business Unit 13.2% -5.5% -0.5% 269 Technology 13.0% -2.7% -8.1% 265 ENU and Utilities 12.8% 0.7% 3.3% 261 Manufacturing 7.9% -5.5% -3.6% 161 Communications 5.9% -8.6% 6.1% 120 Total 100.0% 2.9% 2.5% 2,039

HCLT (1QFY20) % of Rev FY19 YoY% 1QFY20 YoY% USD mn

Manufacturing 38.8% 12.0% 22.3% 917 Financial Services 20.4% -1.1% -1.4% 482 Life Sciences and Healthcare 12.8% 22.0% 15.0% 303 Public Services 10.5% 9.2% 15.0% 248 Retail & CPG 9.5% 14.0% 20.1% 225 TME 8.0% 16.8% 26.1% 189 Total 100.0% 10.2% 15.0% 2,364

Tech Mahindra (1QFY20) % of Rev FY19 YoY% 1QFY20 YoY% USD mn

Telecom (A) 42.0% -0.7% 8.1% 524 Enterprise (B) 58.0% 8.0% -2.2% 723 Manufacturing (B1) 19.4% 9.9% -1.7% 242 BFSI (B2) 12.8% 2.0% -4.1% 160 Others (B3) 11.9% 12.7% -9.5% 148 Retail, Transport & Logistics (B4) 6.3% -1.8% 5.2% 79 TME (B5) 7.6% 17.3% 7.5% 95 Total (A+B) 100.0% 4.2% 1.9% 1,247

LTI (1QFY20) % of Rev FY19 YoY% 1QFY20 YoY% USD mn

BFS 27.8% 27.3% -0.1% 99 Insurance 18.2% 8.7% 10.8% 65 Manufacturing 15.2% 12.4% 7.5% 54 High-Tech, Media & Entertainment 12.5% 28.9% 22.7% 45 CPG, Retail & Pharma 11.1% 35.3% 35.9% 40 Energy & Utilities 10.7% 8.2% 18.1% 38 Others 4.6% 14.0% 13.9% 16 Total 100.0% 19.1% 11.4% 357

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IT : SECTOR UPDATE

Mphasis (1QFY20) % of Rev FY19 YoY% 1QFY20 YoY% USD mn

Direct International 68.4% 10.4% 8.8% 203 HP channel 28.4% 21.8% 14.8% 84 Others 3.2% 3.0% 10.0% 10 Total 100.0% 13.1% 10.5% 297

LTTS (1QFY20) % of Rev FY19 YoY% 1QFY20 YoY% USD mn

Transportation 34.9% 24.9% 29.5% 68 Telecom & Hi-tech 22.3% 31.0% -11.0% 43 Industrial Products 19.6% 9.9% 10.3% 38 Process Industry 15.3% 37.6% 30.1% 30 Medical Devices 8.0% 23.2% 41.3% 16 Total 100% 24.6% 14.8% 194

Hexaware (2QCY19) % of Rev FY19 YoY% 2QCY19 YoY% USD mn

BFS 39.8% 7.0% 4.2% 75 Manufacturing, Consumer 30.9% 20.6% 19.3% 58 Insurance and Healthcare 19.2% 25.8% 25.8% 36 Travel & Transportation 10.1% -11.9% 1.9% 19 Total 100.0% 11.3% 12.0% 189

Mindtree (1QFY20) % of Rev FY19 YoY% 1QFY20 YoY% USD mn

Technology, Media and Services 39.4% 24.0% 10.9% 104 Manufacturing, CPG & Retail 22.2% 13.6% 5.4% 59 BFSI 21.6% 7.4% 5.8% 57 Travel & Transportation 16.8% 28.7% 16.6% 44 Total 100.0% 18.3% 9.4% 264

Persistent (1QFY20) % of Rev FY19 YoY% 1QFY20 YoY% USD mn

Services 45.8% -0.4% 6.8% 55 Digital 22.7% 9.0% 2.7% 27 Alliance 27.8% 7.3% -16.2% 33 Accelerite 3.7% -20.9% -28.4% 4 Total 100.0% 2.2% -3.2% 120

Cyient (1QFY20) % of Rev FY19 YoY% 1QFY20 YoY% USD mn

Aerospace and Defense 35.1% 5.0% -0.9% 48 Communications 21.6% 6.2% -12.7% 30 Transportation 12.8% 13.7% 2.2% 18 Energy & Utilities 12.3% NA 4.2% 17 Portfolio 10.4% NA -10.3% 14 Semiconductor 5.5% 42.1% -3.4% 8 Medical and Consumer 2.3% 1.2% 23.4% 3 Total 100.0% 6.3% -3.4% 138

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IT : SECTOR UPDATE

Zensar (1QFY20) % of Rev FY19 YoY% 1QFY20 YoY% USD mn

Manufacturing (A+B) 52.3% 15.8% 21.5% 80 Hi Tech (A) 39.0% 23.3% 25.9% 60 Mfg (B) 13.2% -0.6% 10.1% 20 Retail and Consumer Services (C ) 18.7% -3.9% -11.9% 29 Financial Services (D+E) 23.9% 33.2% 18.6% 37 Insurance ( D) 17.9% 43.3% 7.6% 27 Banking (E) 6.0% 5.1% 70.6% 9 Emerging (F) 5.1% 249.0% 224.4% 8 Total (A+B+C+D+E+F) 100.0% 16.6% 16.4% 153

Majesco (1QFY20) % of Rev FY19 YoY% 1QFY20 YoY% USD mn

Property & Casualty 77.2% 3.8% 18.1% 29 Life & Annuity 22.2% 51.4% -6.2% 8 Non-Insurance 0.6% -37.9% -33.1% 0 Total 100.0% 13.7% 11.2% 37

Sonata (1QFY20) % of Rev FY19 YoY% 1QFY20 YoY% USD mn

OPD 27.0% 6.1% 13.0% 12 TTL 26.0% 14.1% 12.9% 12 CPG & Retail 28.0% 14.1% 31.3% 12 Others 19.0% 15.0% 11.3% 8 Total IITS 100.0% 12.0% 17.2% 44

Mastek (1QFY20) % of Rev FY19 YoY% 1QFY20 YoY% GBP mn

Government 40.1% 32.9% 30.8% 11 Retail 37.7% 12.7% 5.3% 10 Financial Services 16.5% 12.6% -22.9% 5 Others 5.7% -2.1% -38.7% 2 Total 100.0% 18.1% 2.9% 28

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IT : SECTOR UPDATE

Services Performance Dashboard Infosys (1QFY20) % of Rev FY19

YoY% 1QFY20

YoY% USD mn

Revenue Split: Digital & Core Digital Services 35.7% 32.0% 39.0% 1,118 Core Services 64.3% -0.4% -0.7% 2,013 Revenue Split: Services & Products Services 94.3% 7.9% 9.6% 2,953 Products & platforms 5.7% 7.6% 31.3% 178 Total Revenue 100.0% 7.9% 10.6% 3,131

Tech Mahindra (1QFY20) % of Rev FY19 YoY%

1QFY20 YoY% USD mn

IT Services 90.8% 3.1% -0.1% 1,132 BPO 9.2% 17.7% 26.1% 115 Total 100.0% 4.2% 1.9% 1,247

Mphasis (1QFY20) % of Rev FY19 YoY%

1QFY20 YoY% USD mn

Application Development 33.2% 30.3% 33.3% 98 Application Maintenance & Other Services 32.1% 13.0% 17.6% 95 Infrastructure Management Services 12.2% 10.3% -9.0% 36 Service / Technical Help Desk 7.5% 16.3% 0.2% 22 Knowledge Processes 7.5% -12.6% -27.4% 22 Transaction Processing Service 6.3% 3.6% 5.8% 19 Customer Service 1.1% -14.4% 3.4% 3 License Income 0.1% -18.7% 49.1% 0 Total 100.0% 13.1% 10.5% 297

Wipro (1QFY20) % of Rev FY19 YoY%

1QFY20 YoY% USD mn

Modern Application Services (ADM) 44.6% 3.0% -2.1% 909 Cloud and Infrastructure Services (IMS) 25.7% -4.0% 0.2% 524 Digital Operations and Platforms (BPO) 14.7% 13.1% 21.5% 300 Data, Analytics and AI 7.4% 8.3% 5.4% 151 Industrial & Engineering Services (ER&D) 7.6% 4.6% 5.3% 155 Total 100.0% 2.9% 2.5% 2,039

HCLT (1QFY20) % of Rev FY19 YoY%

1QFY20 YoY% USD mn

IT and Business Services 75.3% NA 15.6% 1,779 Engineering and R&D services 16.9% NA 12.7% 400 Products & Platforms 7.8% NA 15.1% 184 Total 100.0% NA 15.0% 2,364

LTI (1QFY20) % of Rev FY19 YoY%

1QFY20 YoY% USD mn

ADM & Testing 38.2% 10.3% 0.9% 136 Enterprise Solutions 28.5% 28.7% 20.3% 101 Infrastructure Management Services 10.9% 19.2% 5.2% 39 Analytics, AI & Cognitive 11.2% 25.7% 20.6% 40 Enterprise Integration & Mobility 8.2% 36.1% 40.6% 29 Platform Based Solutions 3.1% 6.9% 11.4% 11 Total 100.0% 19.1% 11.4% 357

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IT : SECTOR UPDATE

Hexaware (2QCY19) % of Rev FY19 YoY%

2QCY19 YoY% USD mn

ADM 37.0% 8.4% 13.2% 70 Quality Assurance and Testing 17.7% 1.0% 7.7% 33 RIMS 15.6% 51.2% 26.6% 29 BIA 12.3% 8.0% 2.1% 23 Enterprise Sol 9.4% -2.2% 0.3% 18 BPO 8.0% 15.7% 24.5% 15 Total 100.0% 11.3% 12.0% 189

Cyient (1QFY20) % of Rev FY19

YoY% 1QFY20

YoY% USD mn

Services 88.1% 6.3% -3.4% 138 DLM 11.9% 29.1% 3.6% 19 Total 100.0% 8.6% -2.6% 157

Majesco (1QFY20) % of Rev FY19

YoY% 1QFY20

YoY% USD mn

Cloud 37.4% 53.9% 15.6% 14 Professional Services 31.6% -18.8% -18.7% 12 Support 20.8% 39.3% 24.7% 8 License 10.2% 66.5% 394.7% 4 Total 100.0% 13.7% 11.2% 37

Sonata (1QFY20) % of Rev FY19

YoY% 1QFY20

YoY% USD mn

ADM 24.0% 20.2% 8.2% 11 AX 26.0% 19.5% 69.3% 12 Testing 16.0% 3.0% 10.3% 7 IMS 14.0% 2.5% -3.5% 6 BI 9.0% 19.7% 31.8% 4 E-commerce 5.0% 33.1% -2.3% 2 ERP 4.0% -2.8% 17.2% 2 Rezopia/Mobility/Cloud 2.0% -10.2% -41.4% 1 Total 100.0% 12.0% 17.2% 44

Mindtree (1QFY20) % of Rev

FY19 YoY%

1QFY20 YoY% USD mn

Digital (A) 38.0% NA 19.1% 100 - Interactive (A1) 23.9% NA 20.5% 63 - Data Science & Engineering services (A2) 10.5% NA 11.5% 28 - Cloud services (A3) 3.3% NA 28.9% 9 - Others (A4) 0.3% NA 228.2% 1 Test engineering (B) 18.2% NA 5.6% 48 Package Solutions (C ) 7.4% NA -14.8% 20 Infrastructure management & Tech support (D) 23.8% NA 13.5% 63 ADM & Product engineering (E) 12.6% NA -0.1% 33 Total 100.0% NA 9.4% 264

Zensar (1QFY20) % of Rev

FY19 YoY%

1QFY20 YoY%

USD mn

Digital & Application Services (DAS) (A+B) 82.8% 18.0% 13.4% 127 Digital Services (A) 41.4% 32.8% 26.1% 63 Core Application (B) 41.4% 7.5% 2.9% 63 Cloud and Infrastructure Services (CIS) (C+D+E) 17.2% 9.7% 33.7% 26 IMS (Cloud + Core) (C ) 13.3% 13.8% 60.0% 20 Multi Vendor Support (MVS) (D) 3.9% 1.3% -14.3% 6 Total (CIS+DAS) 100.0% 16.6% 16.4% 153

Persistent (1QFY20) % of Rev

FY19 YoY%

1QFY20 YoY%

USD mn

ISV 40.6% 1.9% 1.3% 49 Enterprise 37.9% 4.5% 8.5% 45 IP driven 21.5% -0.5% -23.8% 26 Total 100.0% 2.2% -3.2% 120

Mastek (1QFY20) % of Rev

FY19 YoY%

1QFY20 YoY%

GBP mn

ADM 40.3% 17.3% -13.4% 11 Digital Commerce 25.2% 8.7% 4.7% 7 Application Support 18.1% 56.9% 69.1% 5 BI & Analytics 11.0% 19.1% 29.4% 3 Assurance & Testing 3.7% 47.8% 6.2% 1 Agile Consulting 1.7% -28.7% -56.2% 0 Total (CIS+DAS) 100.0% 18.1% 2.9% 28

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IT : SECTOR UPDATE

Geography Performance Dashboard

TCS (1QFY20) % of Rev FY19 YoY%

1QFY20 YoY% USD mn

Americas 52.4% 8.0% 7.6% 2,874 North America 50.6% 8.2% 7.7% 2,775 Latin America 1.8% 1.9% 2.9% 99 Europe 30.1% 17.3% 10.8% 1,651 UK 15.8% 19.6% 10.7% 867 Continental Europe 14.3% 14.7% 10.9% 784 India 9.4% 8.4% 6.3% 516 Asia-Pacific 6.0% -2.6% 12.3% 329 Middle East and Africa 2.1% -6.2% 3.7% 115 Total 100% 9.6% 8.6% 5,485

Infosys (1QFY20) % of Rev FY19 YoY%

1QFY20 YoY% USD mn

North America 61.6% 8.1% 13.5% 1,929 Europe 23.6% 9.7% 7.4% 739 India 2.3% -15.0% -2.2% 72 Rest of the World 12.5% 9.1% 5.5% 391 Total 100.0% 7.9% 10.6% 3,131

Tech Mahindra (1QFY20) % of Rev FY19 YoY%

1QFY20 YoY% USD mn

Americas 47.6% 5.7% 0.6% 594 Europe 27.6% 2.3% -6.3% 344 Rest of the World 24.8% 3.6% 15.9% 309 Total 100.0% 4.2% 1.9% 1,247

Mphasis (1QFY20) % of Rev FY19 YoY%

1QFY20 YoY% USD mn

Americas 78.8% 11.8% 10.1% 234 EMEA 10.7% 26.7% 3.0% 32 India 5.5% 26.4% 96.6% 16 RoW 5.0% 0.8% -13.0% 15 Total 100.0% 13.1% 10.5% 297

Hexaware (2QCY19) % of Rev FY19 YoY%

2QCY19 YoY% USD mn

Americas 76.8% 9.4% 11.7% 145 Europe 14.0% 21.8% 23.5% 26 Asia-Pacific 9.2% 13.8% 0.0% 17 Total 100.0% 11.3% 12.0% 189

Wipro (1QFY20) % of Rev FY19

YoY% 1QFY20

YoY% USD mn

Americas 58.7% 7.2% 7.5% 1,197 Europe 24.6% 0.4% -3.4% 502 APAC & Other Emerging Markets 16.7% -6.1% -4.4% 340 Total 100.0% 2.9% 2.5% 2,039

HCLT (1QFY20) % of Rev FY19 YoY%

1QFY20 YoY% USD mn

Americas 67.7% 13.4% 20.8% 1,600 Europe 26.0% 7.9% 6.4% 613 Rest of the World 6.3% -5.9% -3.4% 149 Total 100.0% 10.1% 15.0% 2,364

LTI (1QFY20) % of Rev FY19 YoY%

1QFY20 YoY% USD mn

North America 68.7% 17.0% 14.9% 245 Europe 16.0% 12.4% -0.7% 57 RoW 8.5% 60.4% 4.1% 30 India 6.9% 18.0% 20.1% 25 Total 100.0% 19.1% 11.4% 357

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IT : SECTOR UPDATE

LTTS (1QFY20) % of Rev FY19 YoY%

1QFY20 YoY% USD mn

North America 60.9% 19.5% 24.2% 118 Europe 15.6% 22.0% -3.2% 30 India 12.8% 53.4% 18.5% 25 Rest of the World 10.7% 27.9% -4.0% 21 Total 100.0% 24.6% 14.8% 194

Persistent (1QFY20) % of Rev FY19 YoY%

1QFY20 YoY% USD mn

North Americas 82.5% 0.0% 0.2% 99 Europe 8.5% 19.8% -31.4% 10 RoW 9.0% 8.4% 4.9% 11 Total 100.0% 2.2% -3.2% 120

Zensar (1QFY20) % of Rev FY19 YoY%

1QFY20 YoY% USD mn

North Americas 76.3% 20.2% 19.9% 117 Europe 15.0% 19.9% 27.4% 23 Africa 8.7% 3.8% 3.3% 13 Total 100.0% 16.6% 16.4% 153

Majesco (1QFY20) % of Rev FY19 YoY%

1QFY20 YoY% USD mn

North America 88.3% 11.2% 11.3% 33 UK 6.3% 47.9% 66.5% 2 Others 5.4% 19.8% -20.5% 2 Total 100.0% 13.7% 11.2% 37

Mastek (1QFY20) % of Rev FY19 YoY%

1QFY20 YoY% GBP mn

UK 72.9% 25.4% 5.2% 20 US 25.5% 2.2% -1.6% 7 Others 1.6% -8.7% -19.7% 0 Total 100.0% 18.1% 2.9% 28

Mindtree (1QFY20) % of Rev FY19 YoY%

1QFY20 YoY% USD mn

US 73.7% 24.8% 11.0% 195 Europe 17.8% 4.6% -2.9% 47 India 4.1% 25.9% 44.7% 11 Rest of the World 4.4% -13.7% 14.6% 12 Total 100.0% 18.3% 9.4% 264 Cyient (1QFY20) % of Rev FY19

YoY% 1QFY20

YoY% USD mn

North America 58.8% 10.4% 2.7% 81 Europe, ME, Africa 26.9% 2.3% -1.2% 37 Asia Pacific 14.3% 0.2% -24.9% 20 Total 100.0% 6.3% -3.4% 138

Eclerx (1QFY20) % of Rev FY19 YoY%

1QFY20 YoY% USD mn

North America 67.0% 1.2% 7.6% 34 Europe 27.0% -1.7% -0.9% 14 RoW 6.0% 11.3% -16.0% 3 Total 100.0% 1.0% 3.5% 51

Sonata (1QFY20) % of Rev FY19 YoY%

1QFY20 YoY% USD mn

USA 56.0% 8.6% 9.4% 25 Europe 30.0% 27.7% 21.2% 13 RoW 14.0% -3.7% 49.2% 6 Total 100.0% 12.0% 17.2% 44

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IT : SECTOR UPDATE

Revenue Growth (1QFY20 YoY % CC) BFSI Revenue Growth (1QFY20 YoY % CC)

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

NorthAm Revenue Growth (1QFY20 YoY % CC) Europe Revenue Growth (1QFY20 YoY % CC)


Significant BFSI growth leadership by INFY (Stater acquisition included), Wipro (decelerating) and TCS over peers Accenture/Cognizant/HCLT TCS maintains its lead over peers in Europe geography despite uncertainties around Brexit, Wipro the biggest laggard

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11.213.5

21.3

0

5

10

15

20

25

Cogn

izan

t

TCS

Acce

ntur

e

Wip

ro

INFY

HCL

T

%

0.0

5.06.4

11.3 11.4

15.5

02468

1012141618

Wip

ro

Acce

ntur

e

Cogn

izan

t

HCL

T

INFY TC

S

%

Page | 34

IT : SECTOR UPDATE

TCS' Deal Bookings (TCV) Trend TCS vs. Accenture Outsourcing Deal Bookings


Significant Acceleration In Infosys’ Large Deal Wins Mindtree Total Deal TCV Trend


5.8 4.7 4.3 5.1 4.6

4.9 4.9 5.9

6.2 4.9

-

2.0

4.0

6.0

8.0

10.0

12.0

1QFY19 2QFY19 3QFY19 4QFY19 1QFY20

Accenture Outsourcing TCV TCS Total TCVUSD bn

TCS’ deal booking were healthy (on a YoY basis) with TCV of USD 5.7bn, +16% YoY with book-to-bill at 1.04x TCS continued to gain market share in deal bookings as compared to Accenture (outsourcing book-to-bill of 0.95x) INFY registered significant uptick in large deal wins at USD 7.9bn in 1Q which included Stater Within peerset, Capgemini and strong deal bookings at 8% YoY to EUR 3.7bn (book-to-bill of 1.05x), while DXC Tech’s bookings were weak (0.86x book-to-bill) impacted by infra services

4.9

4.9

5.9 6.

2

4.9

1.0 0.9

1.11.1

0.9

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5


TCS' Deal Bookings (TCV) Book to Bill - RHSUSD bn x

3.9 3.5

3.1

6.3

7.9

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

FY16 FY17 FY18 FY19 TTM

USD bn

886 9261011

1075 1093

0.7

0.8

0.8

0.9

0.9

1.0

0

200

400

600

800

1,000

1,200

FY16 FY17 FY18 FY19 TTM

Mindtree's Deal Bookings (TCV) Book to Bill - RHSUSD mn

Page | 35

IT : SECTOR UPDATE

IT Services Market And Growth Global ACV Has Grown At A 8-Qtr CQGR of 4.5%

Source: Gartner, HDFC sec Inst Research Source: ISG, HDFC sec Inst Research

IT Sector QoQ USD Revenue Growth Trend IT Sector YoY USD Revenue Growth Trend


Gartner has pegged IT services (~USD 1trn) growth at 3.8% for CY19 and expects acceleration to 5.5% over CY20-21 Global ACV decelerated to 5% YoY (vs. 12.5% in 1Q) impacted by lower growth in Digital/As-a-service at 14% YoY (25% in 1Q) and decline in Legacy at 3% YoY (vs. +2.9% in 1Q), as per ISG data ISG lowered its CY19 forecast of ACV to 22% (vs. 25% earlier) impacted by some in-sourcing IT sector (coverage universe) growth accelerated to 8.5% YoY (vs. 8.2% in 4Q)

931 994 1,0321,089 1,148 1,211

1,277

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

0

200

400

600

800

1,000

1,200

1,400

CY17

CY18

CY19

E

CY20

E

CY21

E

CY22

E

CY23

E

IT services Growth % - RHSUSD bn

9.2 9.510.8

9.6 10.110.912.0

13.112.1

12.713.513.7

-20%

-10%

0%

10%

20%

30%

40%

0.02.04.06.08.0

10.012.014.016.0

3QCY

16

4QCY

16

1QCY

17

2QCY

17

3QCY

17

4QCY

17

1QCY

18

2QCY

18

3QCY

18

4QCY

18

1QCY

19

2QCY

19

Global ACV (USD bn) YoY % - RHSUSD bn

2.4%

3.1%

1.7%

3.1%

0.8%

2.4%2.2%

2.5%

1.2%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

6.1%

7.8%

9.3%

10.6%

9.0%8.3%

8.9%8.2% 8.5%

3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%11.0%12.0%

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

Page | 36

IT : SECTOR UPDATE

Tier-1 IT QoQ USD Revenue Growth Trend Tier-1 IT YoY USD Revenue Growth Trend


Tier-2 IT QoQ USD Revenue Growth Trend Tier-2 IT YoY USD Revenue Growth Trend


Tier-1 IT grew at the fastest YoY growth in 5 quarters supported by strong beat in HCLT Tier-2 IT sequential growth was lower than Tier-1 sequential growth after 9 quarters Tier-2 IT YoY growth has decelerated significantly from 17.4% YoY in 1QFY19 to 8.9% YoY in 1QFY20

2.3%

2.8%

1.3%

2.9%

0.5%

2.4%2.1%

2.4%

1.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

5.9%

7.5%

8.6%

9.7%

7.8%7.3%

8.1%7.6%

8.5%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

2.9%

4.6%

4.1%

4.9%

2.8% 2.7% 2.8% 2.8%

0.3%

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

7.5%

10.4%

14.0%

17.6% 17.4%

15.4%13.9%

11.7%

8.9%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

Page | 37

IT : SECTOR UPDATE

IT Sector Margin Trend (%) EBIT Margin Performance in 1QFY20 (QoQ bps)


IT Sector Margin Performance Trend (QoQ bps) IT Sector Margin Performance Trend (YoY bps)


EBIT% trajectory at a multi-period low and dipped by -200bps over the past 2 qtrs (~50% impact from INR appreciation over last 2 qtrs) LTTS and Zensar had strongest operational performance in 1Q supported by better business mix, Ind AS 116

19.3

20.3 20.1 20.2 20.0 20.8 20.9

20.2

18.8

15.0

17.0

19.0

21.0

23.0

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

%

(652

)(4

80) (391

)(3

61)

(193

)(1

71) (9

4)(9

3)(8

8)(8

6)(7

8) (43)

(34) (8

)(7

)62

(700)(600)(500)(400)(300)(200)(100)

-100

Min

dtre

eeC

lerx

Tech

MCy

ient

HCL

T LTI

TCS

INFY

Pers

iste

ntSo

nata

Wip

roH

exaw

are

Mph

asis

Mas

tek

Zens

arL&

T Te

ch

(59)

94

(18)

11

(14)

76

12

(75)

(139)(200)

(150)

(100)

(50)

-

50

100

150

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

bps

(107)

(48)(79)

28

73 55

86

(1)

(126)(150)

(100)

(50)

-

50

100

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

bps

Page | 38

IT : SECTOR UPDATE

INR Appreciation In Last two Quarters Has Impacted Margins

Simultaneous Depreciation of GBP and EUR against USD


NorthAm Revenue Mix (%) Europe Revenue Mix (% of Rev)

Source: Company, HDFC sec Inst Research, 1QFY20 Source: Company, HDFC sec Inst Research, 1QFY20

1.28 1.31 1.33

1.39 1.35

1.30 1.29 1.30 1.29

1.10

1.17 1.18 1.23

1.19 1.16

1.14 1.14 1.12

1.00 1.05 1.10 1.15 1.20 1.25 1.30 1.35 1.40 1.45

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

GBP-USD EUR-USDUSD

1Q impacted by unfavourable mix of USD-INR and cross currency impact of GBP/EUR, cross currency impact expected to aggravate in 2Q offset by reversal in USD-INR INR has depreciated from 68.5 in mid-July to 71.70 over the past month, our estimates at USD-INR 70 High Europe-mix increases susceptibility to Brexit, most Tier-2 IT (ex-Mastek) have lower Europe concentration

64.5 64.3 64.7 64.3

67.0

70.0

72.1 70.5

69.6

-5%-4%-3%-2%-1%0%1%2%3%4%5%6%

60.0

62.0

64.0

66.0

68.0

70.0

72.0

74.0

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

USD-INR QoQ % - RHSRs

25.5

%47

.6%

52.4

%56

.0%

58.7

%58

.8%

60.9

%61

.6%

67.0

%67

.7%

68.7

%73

.7%

76.3

%76

.8%

78.8

%82

.5%

0%10%20%30%40%50%60%70%80%90%

Mas

tek

Tech

MTC

SSo

nata

Wip

roCy

ient

LTTS

INFY

eCle

rxH

CLT

LTI

Min

dtre

eZe

nsar

Hex

awar

eM

phas

isPe

rsis

tent

8.5% 10

.7%

14.0

%15

.0%

15.6

%16

.0%

17.8

%23

.6%

24.6

%26

.0%

26.9

%27

.0%

27.6

%30

.0%

30.1

%72

.9%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Pers

iste

ntM

phas

isH

exaw

are

Zens

arLT

TS LTI

Min

dtre

eIN

FYW

ipro

HCL

TCy

ient

eCle

rxTe

chM

Sona

taTC

SM

aste

k

Page | 39

IT : SECTOR UPDATE

Tier-1 IT NorthAm Performance 4-Qtr CQGR (%) Tier-2 IT NorthAm Performance 4-Qtr CQGR (%)


Tier-1 IT Europe Performance 4-Qtr CQGR (%) Tier-2 IT Europe Performance 4-Qtr CQGR (%)


NorthAm growth led by HCLT within Tier-1 IT and by LTTS/Zensar within Tier-2 IT Europe growth has been led by TCS within Tier-1 IT and Zensar/Hexaware from Tier-2 IT

0.2%

1.8%

1.8%

3.2%

4.8%

0%

1%

2%

3%

4%

5%

6%

Tech

M

Wip

ro

TCS

Info

sys

HCL

T

-0.4

%

0.0% 0.

7%

1.8% 2.

3% 2.4% 2.6% 2.8% 3.

5%

4.6%

5.6%

-1%

0%

1%

2%

3%

4%

5%

6%

Mas

tek

Pers

iste

nt

Cyie

nt

eCle

rx

Sona

ta

Mph

asis

Min

dtre

e

Hex

awar

e

LTI

Zens

ar

LTTS

-1.6%

-0.9%

1.6%1.8%

2.6%

-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%

Tech

M

Wip

ro

HCL

T

INFY TC

S -9.0%

-0.8%-0.7%-0.3%-0.2%-0.2%

0.7% 1.3%

4.9% 5.4% 6.3%

-10.0%-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%

Pers

iste

nt

LTTS

Min

dtre

e

Cyie

nt

eCle

rx LTI

Mph

asis

Mas

tek

Sona

ta

Hex

awar

e

Zens

ar

Page | 40

IT : SECTOR UPDATE

USD 100mn+ Client Metrics USD 100mn+ Client Nos. Growth (4-Qtr CQGR %)

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research, 1QFY20

USD 10mn+ Client Metrics USD 10mn+ Client Nos. Growth (4-Qtr CQGR %)

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research, 1QFY20

>USD 100mn client bucket was unchanged for TCS, as compared to additions for INFY, Wipro, HCLT. Wipro’s strategy of account mining is yielding results Growth in >USD 10mn client bucket (segment of high concentration of deals) was led by TCS and INFY

40 44 45 44 44

24 23 23 25 278 9 10 10 139 9 10 10

12

-

20

40

60

80

100

120


TCS INFY Wipro HCLTNos

2.4% 3.0%

12.9%

7.5%

4.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

TCS

INFY

Wip

ro

HCL

T

Aggr

egat

e

355 365 370 371 384

200 205 214 222 228

171 177 171 172 166162 165 164 166 17286 86 88 83 81

-

200

400

600

800

1,000


TCS INFY Wipro HCLT TechMNos

2.0%

3.3%

-0.7%

1.5%

-1.5%-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

TCS

INFY

Wip

ro

HCL

T

Tech

M

Page | 41

IT : SECTOR UPDATE

BFSI 4-Qtr CQGR (%) Retail & CPG Vertical 4-Qtr CQGR (%)


ER&D 4-Qtr CQGR Performance (%) IMS 4-Qtr CQGR Performance (%)


ER&D growth led by LTTS and HCLT (inorganic included), IMS growth led by Hexaware, Mindtree LTTS maintains growth lead in ER&D services and Hexaware maintains growth lead in IMS

-1.0

%

-0.4

%

1.8% 2.

1% 2.3%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Tech

M

HCL

T

TCS

Wip

ro

INFY

1.1% 1.3% 1.3% 1.4%

4.7%

0%1%1%2%2%3%3%4%4%5%5%

Wip

ro

Tech

M

INFY TC

S

HCL

T

-2.3%

-0.7%

1.3%

3.0%3.5%

-3%

-2%

-1%

0%

1%

2%

3%

4%

Tata

Elx

si

Cyie

nt

Wip

ro

HCL

T

LTTS

-2.3% 0.0%

1.3%

3.2%

6.1%

-3%-2%-1%0%1%2%3%4%5%6%7%

Mph

asis

Wip

ro LTI

Min

dtre

e

Hex

awar

e

Page | 42

IT : SECTOR UPDATE

Utilisation Trend (%) Sub-contracting Expense/Revenue: Tier-1 IT (%)

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research, Note: Aggregate of TCS, INFY, Wipro, TECHM

Attrition Trend: Tier-1 IT (%) Attrition Trend: Tier-2 IT (%)


Utilisation is trending higher and is at near peak levels for most of the companies Limited tech talent has led to increase in sub-contracting expense, +4.4% CQGR in past 6 Qtrs Attrition is trending higher for Indian IT caused by supply side constraints

5

7

9

11

13

15

17

19

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

TCS INFY Wipro

TechM Aggregate%

72

74

76

78

80

82

84

86

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

INFY Wipro TechM

LTI Mindtree Hexaware%

10

12

14

16

18

20

22

24

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

TCS INFY Wipro

HCLT TECHM%

10

12

14

16

18

20

22

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

LTI MindtreeL&T Tech CyientPersistent Zensar

%

Page | 43

IT : SECTOR UPDATE

IT Sector: Steady Cash Generation Trend IT Sector: Efficient Capital Allocation (% of OCF)


OCF/EBITDA Across IT Sector FCF/APAT Across IT Sector


Steady cash generation in the sector with OCF/EBITDA and FCF/APAT at ~70%, efficient capital allocation with ~70% of OCF as payout (dividend + buyback) and ~20% towards Capex Wipro, LTTS and TCS among the highest FCF/APAT generation

76% 74% 73% 72%74% 76%

66%

84%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

FY18 FY19 FY20E FY21E

OCF/EBITDA FCF/APAT

31%

52%

54%

57%

59% 64

% 69%

71%

72%

72%

74%

74%

74%

75% 79

% 88%

110%

0%

20%

40%

60%

80%

100%

120%

Zens

arTa

ta E

lxsi

Mas

tek

Cyie

ntM

indt

ree

HCL

Tec

hIn

fosy

sTe

chM

Mph

asis

TCS

Aggr

egat

eLT

IPe

rsis

tent

Hex

awar

eeC

lerx

L&T

Tech

Wip

ro

26% 40

% 45%

62%

63%

65% 75

%76

% 81%

83%

84%

84%

84% 10

1% 106% 11

4%

0%

20%

40%

60%

80%

100%

120%

HCL

Tec

hM

aste

kCy

ient

Min

dtre

eTa

ta E

lxsi

Mph

asis

Info

sys

Aggr

egat

eLT

ITe

chM

Hex

awar

eTC

SeC

lerx

L&T

Tech

Pers

iste

ntW

ipro

Capex21%

Payout (Dividend + Buyback)

71%

Cash8%

Page | 44

IT : SECTOR UPDATE

Valuation Charts NIFTY IT Index Valuation Trend (P/E 1-yr fwd) IT Index Valuation Trend vs NIFTY

Source: Bloomberg, HDFC sec Inst Research Source: Bloomberg, HDFC sec Inst Research

IT Index Valuation and Earnings Growth Trend Indian IT Valuations Trend vs. Accenture (P/E 1-yr fwd)


NIFTY IT index at 10% premium to historical avg. and vs. NIFTY IT sector valuations ex-TCS/INFY are at discount to its historical avg.

5

10

15

20

25

Aug-

09

Aug-

10

Aug-

11

Aug-

12

Aug-

13

Aug-

14

Aug-

15

Aug-

16

Aug-

17

Aug-

18

NIFTY IT Index Median+1 SD -1 SD

-10%

0%

10%

20%

30%

40%

50%

5

10

15

20

25

Aug-

10Fe

b-11

Aug-

11Fe

b-12

Aug-

12Fe

b-13

Aug-

13Fe

b-14

Aug-

14Fe

b-15

Aug-

15Fe

b-16

Aug-

16Fe

b-17

Aug-

17Fe

b-18

Aug-

18Fe

b-19

Aug-

19

(P/E)

IT Index EPS Growth (%) IT Index P/E (x)AVG P/E (x) AVG EPS growth (%)

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

0

5

10

15

20

25

Aug-

09Fe

b-10

Aug-

10Fe

b-11

Aug-

11Fe

b-12

Aug-

12Fe

b-13

Aug-

13Fe

b-14

Aug-

14Fe

b-15

Aug-

15Fe

b-16

Aug-

16Fe

b-17

Aug-

17Fe

b-18

Aug-

18Fe

b-19

Aug-

19

(P/E) Prem/ (Disc) to NIFTY IT Index P/E

5

10

15

20

25

30

Aug-

09Fe

b-10

Aug-

10Fe

b-11

Aug-

11Fe

b-12

Aug-

12Fe

b-13

Aug-

13Fe

b-14

Aug-

14Fe

b-15

Aug-

15Fe

b-16

Aug-

16Fe

b-17

Aug-

17Fe

b-18

Aug-

18Fe

b-19

Aug-

19

IT Index Accenture

Page | 45

IT : SECTOR UPDATE

IT Sector EV/EBITDA (x) Trend IT Sector P/B (x) Trend

Source: Bloomberg, HDFC sec Inst Research Source: Bloomberg, HDFC sec Inst Research TCS P/E (1-yr fwd) Trend Infosys P/E (1-yr fwd) Trend


-

500

1,000

1,500

2,000

2,500

8

13

18

23

28

Aug-

14N

ov-1

4Fe

b-15

May

-15

Aug-

15N

ov-1

5Fe

b-16

May

-16

Aug -

16N

ov-1

6Fe

b -17

May

-17

Aug-

17N

ov-1

7Fe

b-18

May

-18

Aug-

18N

ov-1

8Fe

b-19

May

-19

Aug-

19

(Rs)(P/E)P/E (1-yr fwd) AVG P/E (x) Price

-100 200 300 400 500 600 700 800 900

8

10

12

14

16

18

20

22

Aug-

14N

ov-1

4Fe

b-15

May

-15

Aug-

15N

ov-1

5Fe

b-16

May

-16

Aug-

16N

ov-1

6Fe

b-17

May

-17

Aug-

17N

ov-1

7Fe

b-18

May

-18

Aug-

18N

ov-1

8Fe

b-19

May

-19

Aug-

19

(Rs)(P/E )P/E (1-yr fwd) AVG P/E (x) Price

5

7

9

11

13

15

Aug-

09Fe

b-10

Aug-

10Fe

b-11

Aug-

11Fe

b-12

Aug-

12Fe

b-13

Aug-

13Fe

b-14

Aug-

14Fe

b-15

Aug-

15Fe

b-16

Aug-

16Fe

b-17

Aug-

17Fe

b-18

Aug-

18Fe

b-19

Aug-

19

EV/EBITDA (1Yr Fwd) AVG

2

3

4

5

6

Aug-

09

Apr-

10

Dec-

10

Aug-

11

Apr-

12

Dec-

12

Aug-

13

Apr-

14

Dec-

14

Aug-

15

Apr-

16

Dec-

16

Aug-

17

Apr-

18

Dec-

18

Aug-

19

P/B (1Yr Fwd) AVG

Page | 46

IT : SECTOR UPDATE

Wipro P/E (1-yr fwd) Trend HCL Tech P/E (1-yr fwd) Trend

Source: Bloomberg, HDFC sec Inst Research Source: Bloomberg, HDFC sec Inst Research Tech Mahindra P/E (1-yr fwd) Trend L&T Infotech P/E (1-yr fwd) Trend


-

50

100

150

200

250

300

350

8

10

12

14

16

18

20

Aug-

14N

ov-1

4Fe

b-15

May

-15

Aug-

15N

ov-1

5Fe

b-16

May

-16

Aug-

16N

ov-1

6Fe

b-17

May

-17

Aug-

17N

ov-1

7Fe

b-18

May

-18

Aug-

18N

ov-1

8Fe

b-19

May

-19

Aug-

19

(Rs)(P/E) P/E (1-yr fwd) AVG P/E (x) Price

-

200

400

600

800

1,000

1,200

1,400

1,600

9101112131415161718

Aug-

14N

ov-1

4Fe

b-15

May

-15

Aug-

15N

ov-1

5Fe

b-16

May

-16

Aug-

16N

ov-1

6Fe

b-17

May

-17

Aug-

17N

ov-1

7Fe

b-18

May

-18

Aug-

18N

ov-1

8Fe

b-19

May

-19

Aug-

19


-100 200 300 400 500 600 700 800 900

8

10

12

14

16

18

20

Aug-

14N

ov-1

4Fe

b-15

May

-15

Aug-

15N

ov-1

5Fe

b-16

May

-16

Aug-

16N

ov-1

6Fe

b-17

May

-17

Aug-

17N

ov-1

7Fe

b-18

May

-18

Aug-

18N

ov-1

8Fe

b-19

May

-19

Aug-

19


-

500

1,000

1,500

2,000

2,500

10

12

14

16

18

20

22

24

Aug-

17

Oct

-17

Dec-

17

Feb-

18

Apr-

18

Jun-

18

Aug-

18

Oct

-18

Dec-

18

Feb-

19

Apr-

19

Jun-

19

Aug-

19


Page | 47

IT : SECTOR UPDATE

Mphasis P/E (1-yr fwd) Trend Mindtree P/E (1-yr fwd) Trend

Source: Bloomberg, HDFC sec Inst Research Source: Bloomberg, HDFC sec Inst Research L&T Technology P/E (1-yr fwd) Trend Hexaware P/E (1-yr fwd) Trend


-

200

400

600

800

1,000

1,200

1,400

579

11131517192123

Aug-

14N

ov-1

4Fe

b-15

May

-15

Aug-

15N

ov-1

5Fe

b-16

May

-16

Aug-

16N

ov-1

6Fe

b-17

May

-17

Aug-

17N

ov-1

7Fe

b-18

May

-18

Aug-

18N

ov-1

8Fe

b-19

May

-19

Aug-

19


-

200

400

600

800

1,000

1,200

5

10

15

20

25

30

Aug-

14N

ov-1

4Fe

b-15

May

-15

Aug-

15N

ov-1

5Fe

b-16

May

-16

Aug-

16N

ov-1

6Fe

b-17

May

-17

Aug-

17N

ov-1

7Fe

b-18

May

-18

Aug-

18N

ov-1

8Fe

b-19

May

-19

Aug-

19


-200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000

10121416182022242628

Aug-

17

Oct

-17

Dec-

17

Feb-

18

Apr-

18

Jun-

18

Aug-

18

Oct

-18

Dec-

18

Feb-

19

Apr-

19

Jun-

19

Aug-

19


-

100

200

300

400

500

600

0

5

10

15

20

25

30

Aug-

14N

ov-1

4Fe

b-15

May

-15

Aug-

15N

ov-1

5Fe

b-16

May

-16

Aug-

16N

ov-1

6Fe

b-17

May

-17

Aug-

17N

ov-1

7Fe

b-18

May

-18

Aug-

18N

ov-1

8Fe

b-19

May

-19

Aug-

19


Page | 48

IT : SECTOR UPDATE

Cyient P/E (1-yr fwd) Trend Persistent P/E (1-yr fwd) Trend

Source: Bloomberg, HDFC sec Inst Research Source: Bloomberg, HDFC sec Inst Research eClerx P/E (1-yr fwd) Trend Zensar P/E (1-yr fwd) Trend


-100 200 300 400 500 600 700 800 900 1,000

5

10

15

20

25

Aug-

14N

ov-1

4Fe

b-15

May

-15

Aug-

15N

ov-1

5Fe

b-16

May

-16

Aug-

16N

ov-1

6Fe

b-17

May

-17

Aug-

17N

ov-1

7Fe

b -18

May

-18

Aug-

18N

ov-1

8Fe

b-19

May

-19

Aug-

19


(100)

100

300

500

700

900

1,100

1,300

1,500

0

5

10

15

20

Aug-

14N

ov-1

4Fe

b-15

May

-15

Aug-

15N

ov-1

5Fe

b-16

May

-16

Aug-

16N

ov-1

6Fe

b-17

May

-17

Aug-

17N

ov-1

7Fe

b-18

May

-18

Aug-

18N

ov-1

8Fe

b-19

May

-19

Aug-

19


-200 400 600 800 1,000 1,200 1,400 1,600 1,800

579

11131517192123

Aug-

14N

ov-1

4Fe

b-15

May

-15

Aug-

15N

ov-1

5Fe

b-16

May

-16

Aug-

16N

ov-1

6Fe

b-17

May

-17

Aug-

17N

ov-1

7Fe

b-18

May

-18

Aug-

18N

ov-1

8Fe

b-19

May

-19

Aug-

19


-

50

100

150

200

250

300

350

400

0

5

10

15

20

25

Aug-

14N

ov-1

4Fe

b-15

May

-15

Aug-

15N

ov-1

5Fe

b-16

May

-16

Aug-

16N

ov-1

6Fe

b-17

May

-17

Aug-

17N

ov-1

7Fe

b-18

May

-18

Aug-

18N

ov-1

8Fe

b-19

May

-19

Aug-

19


Page | 49

IT : SECTOR UPDATE

Sonata P/E (1-yr fwd) Trend Mastek P/E (1-yr fwd) Trend

Source: Bloomberg, HDFC sec Inst Research Source: Bloomberg, HDFC sec Inst Research Intellect EV/Revenue (1-yr fwd) Trend Majesco EV/Revenue (1-yr fwd) Trend


-100 200 300 400 500 600 700 800 900

0

5

10

15

20

25

Aug-

15N

ov-1

5Fe

b-16

May

-16

Aug-

16N

ov-1

6Fe

b-17

May

-17

Aug-

17N

ov-1

7Fe

b-18

May

-18

Aug-

18N

ov-1

8Fe

b-19

May

-19

Aug-

19


-50 100 150 200 250 300 350 400 450

02468

1012141618

Aug-

15N

ov-1

5Fe

b-16

May

-16

Aug-

16N

ov-1

6Fe

b-17

May

-17

Aug-

17N

ov-1

7Fe

b-18

May

-18

Aug-

18N

ov-1

8Fe

b-19

May

-19

Aug-

19


-100 200 300 400 500 600 700 800

0.20.40.60.81.01.21.41.61.82.0

Aug-

16

Nov

-16

Feb-

17

May

-17

Aug-

17

Nov

-17

Feb-

18

May

-18

Aug-

18

Nov

-18

Feb-

19

May

-19

Aug-

19

(Rs)(EV/R)

EV/Rev (1-yr fwd) AVG EV/Rev (x) Price

-

50

100

150

200

250

300

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Aug-

15N

ov-1

5Fe

b-16

May

-16

Aug-

16N

ov-1

6Fe

b-17

May

-17

Aug-

17N

ov-1

7Fe

b-18

May

-18

Aug-

18N

ov-1

8Fe

b-19

May

-19

Aug-

19

(Rs)(EV/R)

EV/Rev (1-yr fwd) AVG EV/Rev (x) Price

Page | 50

IT : SECTOR UPDATE

Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12-month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12-month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12-month period Disclosure: We, Apurva Prasad, MBA, Amit Chandra, MBA & Akshay Ramnani, CA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock – Yes HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is solely for information of the recipient only. The report must not be used as a singular basis of any investment decision. The views herein are of a general nature and do not consider the risk appetite or the particular circumstances of an individual investor; readers are requested to take professional advice before investing. Nothing in this document should be construed as investment advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in securities of the companies referred to in this document (including merits and risks) and should consult their own advisors to determine merits and risks of such investment. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete. HSL is not obliged to update this report for such changes. HSL has the right to make changes and modifications at any time. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HSL or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently sent or has reached any person in such country, especially, United States of America, the same should be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published in whole or in part, directly or indirectly, for any purposes or in any manner. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. This document is not, and should not, be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report should not be construed as an invitation or solicitation to do business with HSL. HSL may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HSL and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HSL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. HSL and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this report. HSL or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. HSL or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from t date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction in the normal course of business. HSL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither HSL nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report. HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600 HDFC Securities Limited, SEBI Reg. No.: NSE, BSE, MSEI, MCX: INZ000186937; AMFI Reg. No. ARN: 13549; PFRDA Reg. No. POP: 11092018; IRDA Corporate Agent License No.: CA0062; SEBI Research Analyst Reg. No.: INH000002475; SEBI Investment Adviser Reg. No.: INA000011538; CIN - U67120MH2000PLC152193 Mutual Funds Investments are subject to market risk. Please read the offer and scheme related documents carefully before investing.

Page | 51

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IT : SECTOR UPDATE

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