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CEO departure, A Hangover in the medium term

Tata Consultancy Services

January 12, 2017

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to important disclosures and disclaimers at the end of the report

Q3FY17 Result Update

Madhu Babu [email protected] +91‐22‐66322300

Rating Accumulate

Price Rs2,343

Target Price Rs2,600

Implied Upside 11.0%

Sensex 27,247

Nifty 8,407

(Prices as on January 12, 2017)

Trading data

Market Cap. (Rs bn) 4,586.3

Shares o/s (m) 1,957.2

3M Avg. Daily value (Rs m) 2734

Major shareholders

Promoters 73.90%

Foreign 16.95%

Domestic Inst. 4.69%

Public & Other 4.46%

Stock Performance

(%) 1M 6M 12M

Absolute 6.2 (4.8) 0.8

Relative 3.5 (2.8) (9.6)

How we differ from Consensus

EPS (Rs) PL Cons. % Diff.

2018 145.4 143.3 1.5

2019 157.9 159.0 ‐0.7

Price Performance (RIC: TCS.BO, BB: TCS IN)

Source: Bloomberg

0

500

1,000

1,500

2,000

2,500

3,000

Jan‐16

Mar‐16

May‐16

Jul‐16

Sep‐16

Nov‐16

Jan‐17

(Rs)

TCS delivered a steady set of results for Q3FY17 with USD revenues and PAT

beating our expectations. Growth beat in Q3 was driven by traction in emerging

markets (Latin America and India). Notably, Equipment and software sales aided

most of the incremental revenue growth for the quarter. BFSI vertical (40.4% of

total revenues) which was an area of concern in 1H has delivered a steady growth

of 2.1% cc in 3QFY17 and offers comfort. TCS announced that Mr Chandra would

step down as the CEO of TCS effective Feb 21, 2017 to take over a new role as the

Chairman of Tata Sons. Mr Rajesh Gopinath (current CFO) has been named the CEO

designate.

Post building Q3 financials, we expect TCS to deliver 6.5% USD revenue growth for

FY17E (v/s 7.1/15/16.2% USD revenue growth delivered in FY16/FY15/FY14). Cross‐

currency woes are hurting the reported USD revenues by a wide margin for the

second consecutive year in row. TCS retained its EBIT margin guidance at 26‐28%

despite scope for increased regulatory challenges over the coming period. We

model TCS to deliver 6.5/9.5% USD revenue growth for FY17/FY18E. Our EPS

estimates are retained at Rs145/158/sh. Comforting growth outlook and moderate

valuations (16x FY18E EPS) leads us to retain “Accumulate” stance (17x Sep18E

EPS).

Revenues beat estimates: Revenues were at US$4,387m, up 0.3% QoQ and

above our estimates (US$4,374m). Constant currency growth for the quarter

stood at 2% and above our estimates (PLe: 1.3%). Volume growth came at 1.0%

QoQ. However, we note that equipment sales (traded revenues) have aided

most of the growth. As per our calculation, equipment revenues would be

~US$138m for Q3FY17 (v/s US$73m in Q2FY17). TCS guided that Q4FY17E would

remain a “steady quarter” on the growth front.

Key financials (Y/e March) 2016 2017 2018E 2019E

Revenues (Rs m) 1,086,462 1,186,766 1,293,244 1,400,711

Growth (%) 14.8 9.2 9.0 8.3

EBITDA (Rs m) 306,776 326,160 356,902 385,195

PAT (Rs m) 242,147 263,723 286,440 311,120

EPS (Rs) 122.9 133.8 145.4 157.9

Growth (%) 30.7 8.9 8.6 8.6

Net DPS (Rs) 38.0 49.5 53.8 58.4

Profitability & Valuation 2016 2017 2018E 2019E

EBITDA margin (%) 28.2 27.5 27.6 27.5

RoE (%) 36.7 32.5 29.6 27.4

RoCE (%) 35.7 31.8 29.0 26.8

EV / sales (x) 4.0 3.6 3.2 2.8

EV / EBITDA (x) 14.1 12.9 11.4 10.2

PE (x) 19.1 17.5 16.1 14.8

P / BV (x) 6.3 5.2 4.4 3.8

Net dividend yield (%) 1.6 2.1 2.3 2.5

Source: Company Data; PL Research

January 12, 2017 2


Mr Chandra’s Departure would be a key Negative

TCS has announced that Mr Chandra’s has been appointed as the Chairman of

Tata Sons. Hence, Mr Chandra would depart from TCS to take over the role as

the chairman of Tata Sons effective February 21 2017. However, Mr Chandra

would continue to remain on the board of TCS.

We believe that Mr Chandra’s departure from TCS would be a negative. Mr

Chandra has led in transformation of the company into a growth and margin

leader in the sector (post he took over as the CEO in October 2009).

For a prolonged period of FY10‐FY15, TCS outperformed Infosys on revenue

growth by a wide margin. TCS has also achieved margin leadership in the sector

post Mr Chandra taking over as the CEO of the company ( please see exhibits

below).

However, this growth outperformance by TCS has been reversed over FY16‐

FY17E as Dr Vishal Sikka took over as the CEO of Infosys.

Since Mr Chandra’s take over as the CEO, TCS stock has generated a whopping

319% return over the past seven years and was a major wealth creator. This

represents a whopping 23% CAGR over the period. Over this period, Nifty

returned 8% CAGR. Hence, TCS has delivered tremendous outperformance over

this period.

Exhibit 1: Consolidated USD revenues and Growth ( TCS vs Infosys)

Revenues ( USD mn) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E

TCS 6,016 6,339 8,186 10,171 11,568 13,443 15,454 16,544 17,620

Growth (%) 6.80% 5.40% 29.10% 24.20% 13.70% 16.20% 15.00% 7.1% 6.5%

Infosys 4,663 4,804 6,041 6,994 7,398 8,249 8,711 9,501 10,273

Growth (%) 11.70% 3.00% 25.70% 15.80% 5.80% 11.50% 5.60% 9.1% 7.7%

Source: Company Data, PL Research

Exhibit 2: EBIDTA margin Trajectory (TCS vs Infosys)

Margin FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E

TCS 25.8% 29.0% 29.9% 29.5% 28.6% 30.7% 28.8% 28.2% 27.5%

Infosys 33.2% 34.5% 32.6% 31.8% 28.6% 27.2% 28.0% 27.4% 27.0%


Succession plan: TCS has announced that Mr Rajesh Gopinath would take over

as the CEO of TCS. We note that Mr Rajesh Gopinath is currently the CFO of the

company. We believe that Mr Rajesh Gopinath would have a tough time to fill

the vacuum created by Mr Chandra. Considering that huge technology shifts in

the industry, Mr Rajesh Gopinath would have to compete with strong leadership

among larger IT peer set. We note that Mr Vishal Sikka of Infosys, Mr Abid Ali of

Wipro and Mr Vijay Kumar of HCL Tech have all risen to top positions but had a

much higher Technology and Sales Back ground in their earlier roles.

January 12, 2017 3


Profile of the New CEO : Mr Rajesh Gopinathan started his professional career

with Tata Consultancy Services in 2001. He was appointed as Chief Financial

Officer of the company in February 2013. Prior to becoming the CFO, Rajesh was

the Vice President ‐ Business Finance. In this role, he was responsible for the financial management of the company’s individual operating units. His

responsibilities include financial planning and control as well as revenue

assurance and margin management. Rajesh Gopinathan joined TCS from Tata

Industries and worked to drive TCS’ e‐business unit in the United States. He was also involved in the design, structure and implementation of the new

organizational structure and operating model of the company. An electrical and

electronic engineer from REC Trichy (now NIT, Trichy), Rajesh graduated in 1994,

before pursuing his Post‐Graduate Diploma in Management from IIM,

Ahmedabad.

TCS has also appointed Mr NG Subramanium as the Chief Operating Officer of

the Company.

January 12, 2017 4


Result Analysis

Equipment Sales aid in Revenue beat: Revenues were at US$4,387m, up 0.3%

QoQ and above our estimates (US$4,374m). Constant currency growth for the

quarter stood at 2% and above our estimates (PLe: 1.3%). Volume growth came

at 1.0% QoQ. Pricing is up 1% QoQ in constant currency. However, we note that

equipment sales (traded revenues) have aided most of the growth. As per our

calculation, equipment revenues would be ~US$138m for Q3FY17 (v/s US$73m

in Q2FY17).

Exhibit 3: Q3FY17: Consolidated P&L

(Rs m) 3QFY17 2QFY17 QoQ Growth 3QFY16 YoY Growth PL EstimatesVariance(PL VS

ACTUAL)

Total Operating Income (USD) 4,387 4,374 0.3% 4,145 5.8% 4,374 0.3%

Total Operating Income 297,350 292,840 1.5% 273,640 8.7% 294,808 0.9%

EBITDA 82,290 81,110 1.5% 77,469 6.2% 82,546 ‐0.3%

EBITDA Margins 27.7% 27.7% ‐2 bps 28.3% ‐64 bps 28.0% ‐33 bps

Pre ‐Tax Income 89,180 86,690 2.9% 79,752 11.8% 87,593 1.8%

Tax 21,040 20,660 1.8% 18,501 13.7% 21,022 0.1%

Tax‐ Rate 23.6% 23.8% ‐24 bps 23.2% 39 bps 24.0% ‐41 bps

PAT 67,780 65,860 2.9% 61,094 10.9% 66,381 2.1%

EPS 34.4 33.4 2.9% 31.0 10.9% 33.7 2.1%


Higher Other Income aids in PAT beat: EBITDA margins remained steady for the

quarter. EBITDA margins came in at 27.7%, flat QoQ and marginally below our

estimates (28.0%). We note that Q2FY17 had one‐off exceptional costs (US$26m

related to law suit settlement). This was reflected in the other expenses. Hence,

if we exclude these one‐off charges and compared the margins, EBITDA margins

would have dropped 60bps QoQ on a adjusted basis. We note a sharp spurt in

equipment sales during the quarter (3.2% of total revenues for Q3FY17 v/s 1.7%

of total revenues in Q2FY17) has led to the drop in adjusted EBIDTA margin. EBIT

margin for the quarter stood at 26%, flat QoQ and marginally below our

estimates (26.3%). Management retained its EBIT margin guidance band of 26‐

28% despite scope for higher regulatory challenges in the USA. We model EBIT

margin at 25.8/26% for FY17/FY18E, respectively, which is towards the lower

end of its stated EBIT margin band. Among other metrics, Attrition continued to

moderate for the fourth straight quarter which is positive.

View: We model TCS’ USD revenues to grow 6.5%/9.5% for FY17/18E. While

growth momentum of TCS has slowed, it is marginally higher than global peer

Accenture. Accenture (Annual revenues of US$33bn) is has guided for 5‐8% local

currency growth for FY17E (this includes Inorganic component). TCS’ stock has

de‐rated substantially over the past two years. Stock currently trades at 15.2x

one‐year forward earnings (v/s 19.1x traded two years ago). We believe

valuations are reasonable and hence, retain “Accumulate”.

January 12, 2017 5


Key Metrics for the quarter

TCS has delivered 2% cc growth in Q3FY17 which is above our expectations (PLe:

1.3%). BFSI (up 2.1% QoQ in cc), Retail (up 1.9% QoQ in cc), Manufacturing (up

2.1% in cc), others (up 30.6% in cc) drove growth for the quarter. TCS guided

that Q4FY17E would be a “steady quarter”. We note that TCS delivered 2.1% cc

growth in Q4FY16. Hence, we see scope for TCS to deliver 2‐3% cc growth in

Q4FY17E as well.

Exhibit 4: CC Growth trend (QoQ)

4.8%

2.5%3.5%

0.5%

3.1%2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

CC growth (QoQ)


Exhibit 5: CC Growth trend (YoY)

16.0%14.5%

12.7%

9.8% 10.1%8.6%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

CC Growth (YoY)


Exhibit 6: USD revenue growth (YoY)

0.0%

5.0%

10.0%

15.0%

20.0%

2700290031003300350037003900410043004500

Revenue (USD) Growth (YoY)


January 12, 2017 6


Exhibit 7: Volume Growth (QoQ)

6.1%

7.3%

1.8%2.6%

5.7%6.1%

0.4%

1.4%

4.8% 4.9%

0.4%

3.2% 3.4%

1.3% 1%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Volume Growth


TCS delivered a slightly lower‐than‐expected EBIT margin for the quarter. EBIT

margin came in at 26%, flat QoQ. TCS retained its EBIT margin guidance at 26‐

28% on an annual basis. We note that Q2FY17 had one‐off expense (US$26m)

related to a law suit settlement. Hence, owing to the absence of the same this

quarter, we expected a margin expansion. However, EBIT margin was flat on a

sequential basis.

TCS cited that it has already increased local hiring in USA and cited confidence in

managing the cost headwinds. We believe that company could continue to focus

on other operational initiatives (increased offshore and focus on automation

initiatives) to maintain margin momentum.

Exhibit 8: EBIT Margin vs. Average exchange rate

26.0%

67.8

54.0

56.0

58.0

60.0

62.0

64.0

66.0

68.0

70.0

24.0%

25.0%

26.0%

27.0%

28.0%

29.0%

30.0%

31.0%

EBIT margin Average Exchange Rate (RHS)


Volume growth stood at 1% QoQ. We note

that Q3 is usually softer on the volume

growth front owing to seasonality

January 12, 2017 7


Key Highlights from the Management Call:

Increased focus on balancing the pyramid in Onsite locations : TCS guided that

it has already increased focus on local hiring in the USA. For FY17, TCS has

applied for a much lesser number of visas (1/3 rd of the number of visas applied

in FY16). Management indicated that it would continue to focus on campus

hiring in the USA. This would enable the company maintain a better pyramid

structure in onsite locations.

Growth opportunities remain intact: TCS cited that growth opportunities are

driven by both Consolidation of Traditional business as well as Digital. Within

Traditional business, TCS has increased focus on robotic automation, Cognitive

Technologies to improve delivery efficiency. With most Enterprises focusing on

Digital transformation, decision making has shifted to the CEO levels (from CIO’s

currently). TCS believe that Enterprises are investing in Digital in three areas

(Real time Data, Data Analytics and Response Initiatives). TCS believes it is well

positioned to capture the opportunities from Digital.

Momentum intact for FY18: TCS believes that headwinds in core verticals are

behind and company is well poised to tap demand opportunities in FY18.

Company sees steady momentum in BFSI and Retail verticals.

Deal wins: Company has won 9 deals during the quarter. These are well spread

across verticals and Geographies. (3 deals in BFSI, 2 in Retail, 1 each in

Manufacturing, Utilities and Transport)

Other Metrics: Company paid Rs 6.5/sh dividend for the quarter. DSO for the

quarter stood at 75 days (vs. 80 days in previous quarter). Net cash on balance

sheet stood at 431bn (Rs 218/sh which is 9.2% of Mcap).

January 12, 2017 8


Valuations and Key risks

TCS has moderated substantially on the valuation front over the past few quarters.

TCS trades at 15.2x one‐year forward Earnings (v/s 16.4/19.1x traded one year and

two years ago). TCS currently trades at 11.5% premium to Infosys.

Exhibit 9: TCS one‐year forward P/E Chart

10

12

14

16

18

20

22

Jan

-12

Jun

-12

No

v-12

Ap

r-13

Sep

-13

Feb

-14

Jul-

14

Dec

-14

May

-15

Oct

-15

Mar

-16

Aug

-16

Jan

-17

P/E MeanMean + Std Dev Mean - Std Dev


Exhibit 10: Infosys discount to TCS one year forward P/E Chart

‐30.0%

‐10.0%

10.0%

30.0%

50.0%

Jan‐12

Jun‐12

Nov‐12

Apr‐13

Sep‐13

Feb‐14

Jul‐14

Dec‐14

May‐15

Oct‐15

Mar‐16

Aug

‐16

Jan‐17

TCS vs Infosys Discount/Premium


Exhibit 11: Comparative valuation Table

CMP Mcap Adj. EPS dil. (Rs) P/E (x) EV/EBITDA (x) ROE(%)

FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E

TCS 2346 4624.0 123.2 133.8 145.3 157.8 19.0 17.5 16.1 14.9 14.0 12.8 11.4 10.1 37.1 32.7 29.8 27.5

Infosys 1000 2285.0 59.0 62.5 68.9 74.6 16.9 16.0 14.5 13.4 11.5 10.3 9.2 8.2 23.2 21.8 21.5 20.9

Wipro 482 1183.3 36.1 34.6 39.1 42.5 13.4 13.9 12.3 11.3 10.0 9.4 8.2 7.0 20.5 17.3 17.5 16.9

HCL Tech 846 1192.9 40.3 57.5 63.4 69.6 21.0 14.7 13.4 12.1 11.9 10.4 9.3 9.3 28.7 26.6 24.9 23.5


January 12, 2017 9


Exhibit 12: Geography Mix of revenues

Geographical mix 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17

North America 52.2% 51.0% 51.9% 52.4% 52.8% 52.7% 53.5% 54.0% 53.5% 54.0% 55.0%

Latin America 2.2% 1.9% 2.1% 2.1% 1.9% 1.8% 2.1% 2.0% 2.0% 2.0% 2.2%

UK 17.7% 17.1% 16.1% 15.9% 16.1% 16.4% 15.9% 14.9% 14.8% 13.8% 13.3%

Continental Europe 12.0% 11.5% 11.7% 11.1% 11.0% 10.8% 10.9% 11.2% 11.5% 11.8% 11.1%

India 6.3% 6.5% 6.5% 6.6% 6.4% 6.5% 6.0% 5.9% 6.2% 5.8% 6.3%

APAC 7.6% 10.1% 9.7% 9.8% 9.6% 9.4% 9.4% 9.6% 9.6% 10.2% 9.6%

MEA 2.0% 1.9% 2.0% 2.1% 2.2% 2.4% 2.2% 2.4% 2.4% 2.4% 2.5%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%


Exhibit 13: Geographical Revenue growth

(USD mn) 3QFY17 2QFY17 QoQ Growth 3QFY16 YoY Growth

North America 2413 2362 2.2% 2218 8.8%

Latin America 97 87 10.3% 87 10.9%

UK 583 604 ‐3.3% 659 ‐11.5%

Continental Europe 487 516 ‐5.7% 452 7.8%

India 276 254 8.9% 249 11.1%

APAC 421 446 ‐5.6% 390 8.1%

MEA 110 105 4.5% 91 20.3%

Total Revenues 4387 4374 0.3% 4145 5.8%


Exhibit 14: Vertical‐wise Revenue mix

Vertical Mix 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17

BFSI 41.7% 40.4% 40.5% 40.6% 40.6% 40.5% 40.5% 40.9% 40.4% 40.4% 40.4%

Manufacturing 8.6% 10.1% 10.1% 10.2% 9.9% 9.8% 9.9% 10.4% 10.4% 10.7% 10.6%

Telecom 9.4% 8.9% 8.9% 8.1% 8.6% 8.4% 8.4% 8.3% 8.8% 8.9% 8.1%

Life science and health care 6.3% 6.3% 6.4% 6.7% 6.9% 7.0% 7.3% 7.3% 7.3% 7.6% 7.4%

Retail and distribution 13.8% 13.5% 13.4% 13.6% 13.8% 13.8% 13.8% 14.1% 14.0% 13.4% 13.5%

Transportation 3.6% 3.5% 3.5% 3.4% 3.5% 3.6% 3.6% 3.7% 3.9% 3.9% 3.8%

Energy &Utilities 3.9% 4.3% 4.2% 3.9% 4.0% 4.0% 4.1% 4.1% 4.2% 4.3% 4.5%

Media and entertainment 2.7% 2.7% 2.7% 2.7% 2.5% 2.4% 2.5% 2.5% 2.5% 2.5% 2.5%

Hi‐tech 5.5% 5.7% 5.9% 6.0% 5.8% 5.9% 6.0% 5.6% 5.4% 5.4% 5.4%

Others 4.5% 4.6% 4.4% 4.8% 4.4% 4.6% 3.9% 3.1% 3.1% 2.9% 3.8%


India delivered a strong bounce back as

guided in Q2FY17 concall. UK grew by

1.7% QoQ in cc. However, reported USD

revenues declined owing to cross‐currency

woes. Continental Europe declined by 1.1%

in constant currency

January 12, 2017 10


Exhibit 15: Vertical Revenue growth

(USD mn) 3QFY17 2QFY17 QoQ

Growth 3QFY16

YoY Growth

BFSI 1772 1767 0.3% 1679 5.3%

Manufacturing 465 468 ‐0.6% 410 14.1%

Communication and Media 465 499 ‐6.7% 452 10.4%

Life science and health care 325 332 ‐2.3% 303 9.9%

Retail and distribution 592 586 1.0% 572 2.5%

Hi‐tech 237 236 0.3% 249 ‐5.0%

Transportation 167 171 ‐2.3% 149 14.3%

Energy &Utilities 197 188 5.0% 170 10.7%

Others 167 127 31.4% 162 ‐21.5%

Total Revenues 4387 4374 0.3% 4145 5.5%


Exhibit 16: Service‐wise Revenue Mix

Service Mix 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17

ADM 40.8% 40.5% 39.5% 40.1% 40.3% 40.0% 39.7% 39.4% 38.5% 38.4% 37.2%

Engineering design 4.5% 4.6% 4.5% 4.5% 4.5% 4.5% 4.5% 4.7% 4.8% 4.8% 4.9%

Infrastructure services 12.6% 13.8% 14.3% 14.5% 14.7% 14.7% 15.2% 15.2% 15.5% 15.7% 16.8%

Enterprise Solutions 15.9% 15.6% 15.4% 15.4% 15.1% 15.0% 17.4% 17.1% 17.7% 17.8% 17.5%

Global Consulting 3.2% 3.2% 3.7% 3.2% 2.9% 2.5%

Asset Leverage Solutions 2.5% 2.3% 2.4% 2.3% 2.5% 3.2% 2.8% 3.2% 3.2% 2.6% 3.0%

Assurance Services 8.6% 8.4% 8.5% 8.4% 8.5% 8.7% 8.6% 8.8% 8.8% 9.0% 9.0%

BPO 11.9% 11.6% 11.7% 11.6% 11.5% 11.4% 11.8% 11.6% 11.5% 11.7% 11.6%


Exhibit 17: Employee Details

Employee Details 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17

Total number of employee’s 305,431 313,757 318,625 319,656 324,935 335,620 344,691 353,843 362,079 371,519 378,497

Gross additions 15,817 20,350 16,561 14,395 20,302 25,186 22,118 22,576 17,792 22,655 18,362

Net additions 4,967 8,326 4,868 1,031 5,279 10,685 9,071 9,152 8,236 9,440 6,978

Attrition 11.0% 12.8% 13.4% 13.8% 15.1% 15.5% 15.3% 14.7% 13.6% 12.9% 11.3%


Exhibit 18: Client Details

Client Bucket 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17

USD 1mn 724 743 764 791 804 819 838 829 847 859 880

USD 5mn 359 367 387 389 391 404 413 429 439 449 454

USD10 mn 244 247 249 261 268 274 281 298 298 295 300

USD20 mn 144 153 159 162 172 171 173 173 179 185 186

USD50 mn 58 62 65 68 69 65 65 73 77 78 80

USD100 mn 24 24 25 29 30 33 34 37 37 36 34


The other vertical (up 31% QoQ) delivered

most of the incremental revenue growth

Attrition continued to moderate in 3QFY17

which is another positive.

January 12, 2017 11


Income Statement (Rs m)

Y/e March 2016 2017 2018E 2019E

Net Revenue 1,086,462 1,186,766 1,293,244 1,400,711

Raw Material Expenses 595,493 655,589 719,097 784,398

Gross Profit 490,969 531,177 574,148 616,313

Employee Cost — — — —

Other Expenses 184,193 205,016 217,246 231,117

EBITDA 306,776 326,160 356,902 385,195

Depr. & Amortization 18,875 19,818 20,692 21,011

Net Interest (30,502) (41,000) (42,000) (46,500)

Other Income 30,502 41,000 42,000 46,500

Profit before Tax 318,403 347,342 378,210 410,685

Total Tax 75,027 82,829 90,770 98,564

Profit after Tax 243,376 264,513 287,440 312,120

Ex‐Od items / Min. Int. (1,229) (790) (1,000) (1,000)

Adj. PAT 242,147 263,723 286,440 311,120

Avg. Shares O/S (m) 1,970.4 1,970.4 1,970.4 1,970.4

EPS (Rs.) 122.9 133.8 145.4 157.9

Cash Flow Abstract (Rs m)

Y/e March 2016 2017 2018E 2019E

C/F from Operations 210,673 249,676 276,890 308,190

C/F from Investing (65,766) (25,000) (22,000) (22,000)

C/F from Financing (95,863) (113,766) (123,600) (134,284)

Inc. / Dec. in Cash 49,044 110,910 131,290 151,906

Opening Cash 16,652 64,983 175,894 307,184

Closing Cash 64,983 175,894 307,184 459,090

FCFF 384,459 247,804 278,682 310,301

FCFE 383,330 247,804 278,682 310,301

Key Financial Metrics

Y/e March 2016 2017 2018E 2019E

Growth

Revenue (%) 14.8 9.2 9.0 8.3

EBITDA (%) 12.4 6.3 9.4 7.9

PAT (%) 31.5 8.9 8.6 8.6

EPS (%) 30.7 8.9 8.6 8.6

Profitability

EBITDA Margin (%) 28.2 27.5 27.6 27.5

PAT Margin (%) 22.3 22.2 22.1 22.2

RoCE (%) 35.7 31.8 29.0 26.8

RoE (%) 36.7 32.5 29.6 27.4

Balance Sheet

Net Debt : Equity (0.4) (0.5) (0.5) (0.6)

Net Wrkng Cap. (days) — — — —

Valuation

PER (x) 19.1 17.5 16.1 14.8

P / B (x) 6.3 5.2 4.4 3.8

EV / EBITDA (x) 14.1 12.9 11.4 10.2

EV / Sales (x) 4.0 3.6 3.2 2.8

Earnings Quality

Eff. Tax Rate 23.6 23.8 24.0 24.0

Other Inc / PBT 9.6 11.8 11.1 11.3

Eff. Depr. Rate (%) 15.8 15.9 16.5 16.6

FCFE / PAT 158.3 94.0 97.3 99.7

Source: Company Data, PL Research.

Balance Sheet Abstract (Rs m)

Y/e March 2016 2017 2018E 2019E

Shareholder's Funds 735,442 885,548 1,049,132 1,225,809

Total Debt 2,448 2,448 2,448 2,448

Other Liabilities 20,169 21,469 22,769 24,069

Total Liabilities 758,059 909,465 1,074,349 1,252,326

Net Fixed Assets 119,242 124,424 125,732 126,722

Goodwill 38,120 38,120 38,120 38,120

Investments — — — —

Net Current Assets 481,503 622,968 781,400 954,147

Cash & Equivalents 295,174 406,085 537,374 689,281

Other Current Assets 340,397 379,828 411,277 442,990

Current Liabilities 154,068 162,945 167,252 178,124

Other Assets 119,194 124,194 129,194 134,194

Total Assets 758,059 909,706 1,074,446 1,253,183

Quarterly Financials (Rs m)

Y/e March Q4FY16 Q1FY17 Q2FY17 Q3FY17

Net Revenue 284,486 293,050 292,840 297,350

EBITDA 79,068 78,380 81,110 82,290

% of revenue 27.8 26.7 27.7 27.7

Depr. & Amortization 4,949 4,910 4,940 4,960

Net Interest (9,051) (9,630) (10,520) (11,850)

Other Income 9,051 9,630 10,520 11,850

Profit before Tax 83,170 83,100 86,690 89,180

Total Tax 19,702 19,920 20,660 21,040

Profit after Tax 63,412 63,170 65,860 67,780

Adj. PAT 63,412 63,170 65,860 67,780

Key Operating Metrics

Y/e March 2016 2017 2018E 2019E

Revenue (US$ m) 16,544 17,620 19,302 21,223

Growth (%) 7.1 6.5 9.1 9.8

Average Rupee Dollar rate 66 67 67 66

Source: Company Data, PL Research.

January 12, 2017 12


Prabhudas Lilladher Pvt. Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐400 018, India

Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

Rating Distribution of Research Coverage PL’s Recommendation Nomenclature

31.0%

54.0%

15.0%

0.0%0%

10%

20%

30%

40%

50%

60%

BUY Accumulate Reduce Sell

% of Total Coverage

BUY : Over 15% Outperformance to Sensex over 12‐months

Accumulate : Outperformance to Sensex over 12‐months

Reduce : Underperformance to Sensex over 12‐months

Sell : Over 15% underperformance to Sensex over 12‐months

Trading Buy : Over 10% absolute upside in 1‐month

Trading Sell : Over 10% absolute decline in 1‐month

Not Rated (NR) : No specific call on the stock

Under Review (UR) : Rating likely to change shortly

DISCLAIMER/DISCLOSURES

ANALYST CERTIFICATION

We/I, Mr. Madhu Babu, BTech & PG MBA, Research Analysts, 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. 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.

Terms & conditions and other disclosures:

Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as “PL”) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at www.plindia.com

This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security.

The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein.

Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor.

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PL may from time to time solicit or perform investment banking or other services for any company mentioned in this document.

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PL submits that no material disciplinary action has been taken on us by any Regulatory Authority impacting Equity Research Analysis activities.

PL or its research analysts or its associates or his relatives do not have any financial interest in the subject company.

PL or its research analysts or its associates or his relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.

PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report.

PL or its associates might have received compensation from the subject company in the past twelve months.

PL or its associates might have managed or co‐managed public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months.

PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.

PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months

PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report.

PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report.

It is confirmed that Mr. Madhu Babu, BTech & PG MBA, Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

The research analysts for this report has not served as an officer, director or employee of the subject company PL or its research analysts have not engaged in market making activity for the subject company

Our sales people, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest.

PL and its associates, 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 subject company 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 subject company or act as an advisor or lender/borrower to the subject company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.

DISCLAIMER/DISCLOSURES (FOR US CLIENTS)

ANALYST CERTIFICATION

The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report

Terms & conditions and other disclosures:

This research report is a product of Prabhudas Lilladher Pvt. Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker‐dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker‐dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.

This report is intended for distribution by Prabhudas Lilladher Pvt. Ltd. only to "Major Institutional Investors" as defined by Rule 15a‐6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.

In reliance on the exemption from registration provided by Rule 15a‐6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Prabhudas Lilladher Pvt. Ltd. has entered into an agreement with a U.S. registered broker‐dealer, Marco Polo Securities Inc. ("Marco Polo").

Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer.

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