IT Services

India I Equities
Sector Update

11 October 2010

India IT Services Nifty: 6145

Sensex: 20250
Sep ’10 preview – Recovery still to be volume-led

 Sep ’10 quarter preview. We expect the top-6 IT Services

companies to register 7.5% qoq rise in revenue (4-8% in US dollar Naushil Shah
terms) and 6.7% rise in net profit. Margins would be flattish +9122 6626 6708
sequentially, with a 10-bps dip (mixed trend for our top-6 naushilshah@rathi.com
coverage universe), primarily owing to wage hikes for HCL Tech Atul Thakkar
and Wipro as well as promotions for TCS. For the Sep-ending +9122 6626 6724
quarter, the average rupee/US dollar conversion rate stood at 46.5 atulthakkar@rathi.com
versus 45.7 in Jun-ending quarter. Tech Mahindra would gain the
most owing to its greater billing in the GBP and Euro.
 Key trends for Sep-ending quarter. We believe pricing stability
would sustain, with upward bias due to favourable cross-currency
Company Target (`) Rating
movements. Volumes for the quarter would be robust, with 4-7%
TCS 920 Hold
sequential volume increase for the top-6 IT Services companies.
Infosys 2930 Hold
We expect Infosys’ FY11 (US dollar) revenue guidance to be
Wipro 510 Buy
upgraded to 21-23%; it is likely to raise its FY11 EPS guidance to HCL Tech 425 Buy
`116-120/share. MphasiS 780 Buy
 Expect optimistic outlook. We expect IT Services companies to Tech Mahindra 800 Hold
Patni 550 Hold
be optimistic as regards macro environment. Focus would be on
Core Projects 325 Buy
IT discretionary spending trends and supply-side management
Rolta India 220 Hold
(hiring, laterals and attrition).
Infotech Enterprises 175 Sell
 Factors to watch. Increased focus on fixed-price contracts, Polaris Software 235 Buy
pricing pressure, client additions, client mining, revenues from Persistent 515 Hold
IMS and BPO and cost-curtailment measures, besides other P&L Allied Digital 325 Buy
items. Source: Anand Rathi Research

IT Sector, Sep '10 quarter forecasts

Company Sales (`m) YoY chg (%) QoQ chg (%) Net profit (`m) YoY chg (%) QoQ chg (%) BSE IT vs Sensex
TCS 88,944 19.6 8.2 20,057 23.5 8.8
Infosys 67,929 21.6 9.6 17,271 12.2 16.1
Wipro 77,420 11.9 7.0 13,193 10.4 0.1 150
HCL Tech 35,718 17.8 4.3 3,117 (2.6) (8.8) 140
MphasiS 13,314 17.6 4.1 2,525 3.1 (6.9)
130
Tech Mahindra BSE IT
12,103 6.0 6.8 1,518 (10.2) 5.1
120
IT sector (top six) 295,429 17.0 7.5 57,680 13.3 6.7
110
Patni 8,109 0.9 4.3 1,243 (27.5) (15.6)
100
Core Projects 2,664 32.7 21.1 531 43.7 22.7 Sensex
90
Rolta India 4,233 20.8 2.7 642 14.5 (7.1)
Mar-10
Apr-10
May-10
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10

Jun-10
Jul-10
Aug-10
Sep-10
Oct-10

Infotech Enterprises 2,697 13.6 6.7 336 (4.8) 2.2

Polaris Software 3,821 12.9 6.0 489 38.8 4.8
Persistent 1,896 4.7 327 (5.4)
Allied Digital 2,154 29.4 6.3 354 41.1 6.8 Source: Capitaline
Source: Anand Rathi Research

Anand Rathi Financial Services, its affiliates and subsidiaries, do and seek to do business with companies covered in its research reports. Thus, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making
their investment decision. Disclosures and analyst certifications are located in Appendix 1.

Anand Rathi Research India Equities

11 October 2010 IT Services: Sep ’10 preview – Recovery still to be volume-led

Fig 1 – IT sector: Sep ’10 quarter preview

Company Bloomberg code Price* (`) Market cap (US$m) Sales (`m) YoY (%) QoQ (%) EBITDA margin (%) YoY (bps) QoQ (bps) PAT (`m) YoY (%) QoQ (%) Result date
TCS TCS IN Equity 942 41,572 88,944 19.6 8.2 29.1 38 (23) 20,057 23.5 8.8 21-Oct
Infosys INFO IN Equity 3,077 39,817 67,929 21.6 9.6 33.3 (132) 163 17,271 12.2 16.1 15-Oct
Wipro WPRO IN Equity 462 25,516 77,420 11.9 7.0 22.0 (10) (65) 13,193 10.4 0.1 22-Oct
HCL Tech HCLT IN Equity 433 6,627 35,718 17.8 4.3 16.5 (622) (212) 3,117 (2.6) (8.8) 20-Oct
MphasiS MPHL IN Equity 660 3,123 13,314 17.6 4.1 23.4 (260) (128) 2,525 3.1 (6.9) 22-Nov
rd
Tech Mahindra TECHM IN Equity 766 2,143 12,103 6.0 6.8 19.1 (653) 32 1,518 (10.2) 5.1 3 week of Oct
Patni PATNI IN Equity 438 1,283 8,109 0.9 4.3 18.8 (118) (1) 1,243 (27.5) (15.6) 27-Oct
Core Projects CPTL IN Equity 294 802 2,664 32.7 21.1 32.2 42 (410) 531 43.7 22.7 Last week of Oct
Rolta India RLTA IN Equity 169 614 4,233 20.8 2.7 36.8 100 (205) 642 14.5 (7.1) 25-Oct
Infotech Enterprises INFTC IN Equity 165 413 2,697 13.6 6.7 17.5 (419) 151 336 (4.8) 2.2 14-Oct
Polaris Software POL IN Equity 172 388 3,821 12.9 6.0 15.5 (42) 213 489 38.8 4.8 19-Oct
Persistent PSYS IN Equity 433 391 1,896 4.7 19.8 83 327 (5.4) 21-Oct
Allied Digital ALDS IN Equity 243 263 2,154 29.4 6.3 22.0 173 120 354 41.1 6.8 Last week of Oct
IT Sector** 319,108 16.7 7.4 25.8 (113) (10) 61,275 12.4 6.0
IT Sector (Top 6) 295,429 17.0 7.5 26.0 (121) (10) 57,680 13.3 6.7
*Prices as on 8 Oct ’10 **calculation does not include Persistent
Source: Bloomberg, Anand Rathi Research

Anand Rathi Research 2

11 October 2010 IT Services: Sep ’10 preview – Recovery still to be volume-led

Quarterly preview
Pricing is likely to be stable, with a positive bias on account of
favourable cross-currency movements. After their robust 1QFY11
earnings, IT companies’ volume growth would be 4-7%. Our top-six IT
companies are expected to post a 7.5% rise in revenues sequentially,
with net profit increasing 6.7%.

Pricing – Stable; favourable cross-currency movements

We expect flattish pricing over the previous quarter. In line with this
expectation, we have factored in a flattish pricing-rate assumption across the
board, with a slight uptick to account for the favourable sequential cross-
currency movements. We await management comments on the issue before
re-visiting our pricing views.
Volumes – To lead the path to recovery
On the volume front, we have factored in sequential increases for Infosys,
TCS and Wipro due to better traction among their present and new clients,
HCL Tech (due to aggressive pricing) and MphasiS (strong pipeline support
from parent and other clients). Our view is that volume growth would lead
the demand-recovery cycle. Further, traction from existing clients has
improved.
Guidance expectations for Infosys
We expect Infosys to upgrade its FY11e US$ revenue guidance to 21-23%
(from 19-21% given during 1QFY11 results). Further, for the September
quarter, the rupee averaged `46.5 to the US dollar (at end-quarter, it was
`44.95). FY11 rupee-based guidance would now be based on the rupee
conversion rate at end-quarter (3.2% rupee appreciation from end-June) and
we expect Infosys to raise its FY11e EPS guidance to `116-120.

Anand Rathi Research 3

11 October 2010 IT Services: Sep ’10 preview – Recovery still to be volume-led

IT Companies – Key trends for the Sep ’10 ending quarter

Fig 2 – Company-specific comments

Revenue Jun ’10 Sep ’10 QoQ (%) Expectations
(US$m)
Infosys 1,358 1,461 7.6 Pricing increase of 0.2%, volume increase of 7.3%, qoq, EBITDA
margin increase of 163bps on account of favourable currency
movement and wage hikes being completed in 1QFY11. In rupee
terms, we expect sequential increase of 9.6% in revenue.
TCS 1,794 1,913 6.6 Pricing increase of 0.3%, volume increase of 6.2% sequentially;
EBITDA margin decline of 23bps on account of promotions in the
quarter. In rupee terms, we expect sequential increase of 8.2% in
revenue
Wipro IT 1,204 1,273 5.8 Pricing increase of 0.3%, volume increase of 5.4% qoq, EBITDA
margin decrease of 60bps. In rupee terms, we expect revenue to
increase 7%. We expect the IT products business to grow 6% qoq,
while consumer care is expected to show a sequential 7% growth.
HCL Tech 738 787 6.7 Flat pricing, blended volume increase of 6.6% qoq, BPO expected to
slid 6% qoq In rupee terms, we expect revenue to increase 4.3%
Tech 251 260 3.6 EBITDA margin increase of 30bps sequentially. In rupee terms, we
Mahindra expect revenue increase of 6.8%, since ~48% of Tech Mahindra's
revenue is invoiced in GBP, which has moved favourably qoq for
Tech Mahindra this quarter.
MphasiS* 276 286 3.9 Flat pricing, 4% increase in volumes on account of healthy traction
from parent HP-EDS, non HP-EDS clients. EBITDA margin decline of
128bps In rupee terms and revenue increase of 4.1%
Patni 168 179 6.6 Pricing increase of 0.2%, 6.3% increase in volumes. EBITDA margin
to be flat. In rupee terms, we expect revenue to increase 4.3%. PAT
expected to be lower on account of lower other income (treasury)
Polaris 79 82 4.1 Flat billing rates sequentially; 37.6% yoy growth to come from the
domestic market due to consolidation of Laser Soft from Nov ’09.
Infotech 55 58 4.7 In rupee terms, we expect revenue to increase 6.7%. EBITDA margin
Enterprises expected to increase 150bps qoq due to favourable currency and
complete salary increase absorption in 1Q. We expect flat billing
rates across both the UTG and EMI segments.
Rolta India 88 93 5.2 In rupee terms, we expect revenue to increase 2.7% on account of
healthy traction in the geospatial space. EBITDA margin decline of
205bps qoq on account of salary hikes. We expect 1% billing-rates
increase qoq.
Allied Digital 2,026 2,154 6.3 US$13m is expected to come from EPGS; expect margins to be at
(`) 22% mainly due to offshoring of EPGS business.
Core Projects 2,201 2,664 21.1 EBITDA margin expected to be 32.2%, a 410-bps sequential decline.
(`)
Persistent 39 41 3.2 In rupee terms, we expect revenue to increase 4.7%. EBITDA margin
expected to increase 83bps qoq due to favourable currency and
complete salary increase absorption in 1Q. We expect flat billing
rates.
* Estimates for MphasiS are for quarters ending Jul ’10 and Oct ’10 respectively
Source: Company, Anand Rathi Research

Currency – 1.8% sequential rupee depreciation against the US dollar

For the Sep ’10-ending quarter, INR/USD conversion has averaged 46.5. For
the Jun ’10-ending quarter, average conversion rates stood at 45.6 for Infosys,
45.8 for TCS, 46.7 for Wipro, 46.4 for HCL Tech, 45.1 for Tech Mahindra,
46.4 for MphasiS (Jul ’10-ending quarter) and 46.4 for Patni.
Wipro, HCL Tech, MphasiS and Patni are likely to benefit the least, even after
sequential rupee depreciation; on the other hand, Tech Mahindra, Infosys and
TCS would gain. We have not accounted for cross-currency movements and
the hedging-book impact.

Anand Rathi Research 4

11 October 2010 IT Services: Sep ’10 preview – Recovery still to be volume-led

Cross-currency movements – Favourable for 2QFY11

In 1QFY11, IT companies were hurt 1-3% due to unfavourable cross-
currency movements. We expect 2QFY11 cross-currency movements to be
favourable for revenues in US dollar terms (1-3%), with Infosys gaining the
least and Tech Mahindra the most. Figs 3 & 4 show movements of various
currencies against the US dollar & rupee respectively and demonstrate that
Tech Mahindra, which has greater exposure to billing in GBP and Euro,
would gain the most.

Fig 3 – Quarterly average currency movements

USD/GBP USD/Euro Yen/USD USD/AUD INR/USD
30 Sep ’10 1.6 1.3 85.7 0.9 46.5
30 Jun ’10 1.5 1.3 92.0 0.9 45.7
30 Sep ’09 1.6 1.4 93.6 0.8 48.4
% change (qoq) 3.9 1.6 7.3 2.6 1.8
% change (yoy) (5.5) (9.6) 9.1 8.6 (3.9)
Source: Bloomberg

Fig 4 – Rupee movement vis-à-vis other currencies

INR/GBP INR/Euro INR/Yen INR/AUD INR/USD
30 Sep ’10 72.1 60.1 0.5 42.1 46.5
30 Jun ’10 68.2 58.1 0.5 40.3 45.7
30 Sep ’09 79.4 69.2 0.5 40.4 48.4
% change (qoq) 5.8 3.4 (8.5) 4.4 1.8
% change (yoy) (9.2) (13.1) (4.6) 4.3 (3.9)
Source: Bloomberg

Fig 5 shows currency exposure of companies. Tech Mahindra is the largest

gainer from cross-currency movements as it has most exposure to billing in
GBP terms. Infosys would gain the least on account of its lower exposure to
the GBP and the Euro.

Fig 5 – Share of invoices in various currencies, %

Cross-currency impact
USD GBP Euro Others USD reporting INR reporting
TCS 60.0 14.0 8.0 18.0 1.4 1.7
Infosys 74.8 6.8 6.0 12.4 0.7 1.2
Wipro 65.0 12.0 8.0 15.0 1.2 1.4
HCL Tech 58.0 18.5 8.5 15.0 1.5 1.8
Tech Mahindra 30.0 48.0 8.0 14.0 2.3 2.8
Only Infosys provides shares of invoices on a quarterly basis; all other figures are approximations based on discussions; others
include AUD, Yen and INR
Source: Company, Anand Rathi Research

Hedging – MTM losses to dent due to 1.8% sequential rupee depreciation

In ‘other income’ TCS and Infosys would tend to lose the least from rupee
depreciation on account of low hedges (US$653m and US$700m
respectively). Wipro (US$2.3bn), Tech Mahindra (US$1.1bn), MphasiS
(US$564m), are likely to see losses marked in their P&Ls (under ‘other
income’). Nevertheless, their losses could vary on account of the differing
rates at which such hedges have been booked.

Anand Rathi Research 5

11 October 2010 IT Services: Sep ’10 preview – Recovery still to be volume-led

Fig 6 – Hedging details

Company Hedge book Hedge rate (INR/USD) No. of quarters Comments
MphasiS US$564m 47.50-48 2.0 x 4QFY10 Increased hedges from a 1QFY08 low of
US$5m
Infosys US$700m ~42 0.5 x 2QFY11 Lowered hedges from a 2QFY08 peak of
US$1.3bn, while they increased by
US$286m in the last quarter
TCS US$653m 41-42 0.3 x 2QFY11 Lowered hedges from a 4QFY08 peak of
US$4.5bn
Wipro US$2,257m 39.50-51.50 1.3 x 2QFY11 Lowered hedges from a 4QFY08 peak of
US$3.7bn
HCL Tech US$362m 41 0.5 x 1QFY11 Lowered hedges from a 3QFY08 peak of
US$2.7bn
Tech Mahindra US$1,063m ~45 4.1 x 2QFY11 Lowered hedges from a 1QFY09 peak of
US$1.5bn
Patni US$398m ~48 2.2 x 3QFY10 Increased hedges from a 3QFY09 low of
US$287m
Source: Company, Anand Rathi Research

Key trends – Operating parameters

In our report ‘Macro meltdown blues; Initiate at Underweight; Sell INFY’ dated 17
Nov ’08, we had mentioned companies increasingly shifting from the ‘time
and material’ (T&M) model to a ‘fixed-price project’ (FPP) model (Fig 7). We
believe the trend would sustain as it provides Indian IT companies with better
margins on efficiently executed projects.

Fig 7 – Fixed-price revenue

% of revenue 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
Fixed-price revenue 35.7 37.9 39.5 39.8 40.6 41.4 42.3 42.5
Infosys 34.1 36.3 38.3 38.1 38.0 38.3 39.5 39.0
TCS 43.4 45.5 47.1 47.4 47.2 48.0 48.7 49.1
Wipro 31.6 36.0 38.1 38.4 40.3 42.5 44.3 44.6
HCL Tech 36.0 36.2 37.6 38.5 40.0 39.6 40.5 40.9
MphasiS 4.9 6.4 8.2 8.9 12.5 13.4 10.3 11.0
Patni 36.8 37.8 37.6 39.8 42.4 42.4 43.6 43.1
Source: Company, Anand Rathi Research

In our report, we had also stated that IMS revenues would grow faster than
other horizontals in these turbulent times (Fig 8); we maintain our view.

Fig 8 – IMS revenue

% of revenue 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
IMS 10.5 11.2 11.7 12.4 12.4 12.4 12.9 13.1
Infosys 5.9 6.5 7.0 6.6 7.8 7.1 7.2 6.9
TCS 7.5 8.3 8.3 9.3 8.0 7.9 8.3 8.7
Wipro 19.5 19.4 20.9 20.9 20.6 21.3 21.6 21.1
HCL Tech 15.7 16.5 15.1 17.6 19.4 20.3 22.2 22.4
MphasiS 8.0 10.2 13.3 14.4 13.7 11.4 12.8 17.9
Patni 4.7 5.0 3.5 4.7 6.0 5.3 5.0 5.4
Source: Company, Anand Rathi Research

Anand Rathi Research 6

Appendix 1
Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the
compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research
analyst(s) in this report.

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking
revenues.
Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described
in the Ratings Table below.

Ratings Guide
Buy Hold Sell
Large Caps (>US$1bn) >20% 5-20% <5%
Mid/Small Caps (<US$1bn) >30% 10-30% <10%

Anand Rathi Research Ratings Distribution (as of 20 July 10)

Buy Hold Sell
Anand Rathi Research stock coverage (114) 66% 14% 20%
% who are investment banking clients 8% 0% 0%

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