SECTOR UPDATE 16 FEB 2017

IT sector
Company
TCS
Reco
NEU
TP
2,500
Growth convergence
Infosys BUY 1,200 We met the management of Infosys, Wipro, the past five years as compared to IHA biggies (IBM,
Wipro NEU 514 Mphasis, Mindtree and sector experts - Mohandas HPE, Accenture).
HCL Tech BUY 945 Pai and V Bala (former Board Members & CFO, IMS and engineering services (lesser penetration and
TECHM BUY 532 Infosys) in Bangalore, to gauge sector trends and lower impact of digital disruption) have provided the
company perspectives spanning technological growth lead among service-lines growing at 2x and
Mphasis BUY 640 disruptions, immigration fix and competitive 1.3x the overall growth rate, while (1) Increased
dynamics. Discussions ranged across corporate competition from GICs, (2) Scale challenges in top
Mindtree SELL 430
governance discord to structural risks/opportunity accounts, (3) GBP/EUR depreciation of >20% in last 3
Hexaware NEU 215
for the sector/companies. years have mitigated growth.
eClerx SELL 1,240
Cyient NEU 510 Based on, (1) Convergence of Indian-ITs growth With maturity in growth of Indian IT, the imperative
Persistent BUY 775 multiplier to global IT services (4.3x to 2x), (2) to return excess cash to shareholders is high. We
believe that there is scope to optimise capital
Zensar BUY 1,210 Imperative for optimal capital allocation (growth
allocation, especially the buyback route with
KPIT NEU 130 maturity, valuations and global benchmarking valuations also at historical lows. Accentures payout
Sonata BUY 244 Accenture, Cognizant), (3) Rising immigration policy (dividend and buyback) to shareholders is twice the
Intellect BUY 226 risk, (4) Undemanding valuations (~20% off peak rate of Indian IT at 106% (payout to FCF) as compared
Majesco BUY 573 and 3-10% below median), we draw a non-binary to 54% for Indian IT; Cognizants recent change in
inference on the sector; prefer HCLT, TECHM, INFY capital allocation policy is in congruence to the
in large-cap and Mphasis, Persistent, Zensar, maturing dynamics of the sector from 49% to 75%.
Sonata among mid-caps. While the ongoing policy changes on immigration
We believe that growth trends for Indian-IT will risks the delivery engine for NorthAm, we believe
converge with global peers as well as with industry on that the threat to US local jobs is over played, based
renewal compression, and yet manage a higher on (1) labour supply/distribution shortage/mismatch
growth multiplier (outsource/agile proposition); tier- (supply shortage US has maximum jobs that are not
Apurva Prasad 1 Indian IT expected to grow at ~2x global IT services filled beyond 60 days), (2) negligible job composition
apurva.prasad@hdfcsec.com /Accenture growth as compared to a multiplier of via immigration (annual H1-B fills are 0.07% of US
+91-22-6171-7327 4.3x/2.1x over industry and Accenture, historically. labour and top-8 Indian IT companies have <18% H1-
Revenue-share gain of Indian-IT is expected to B allocations). We believe that the value proposition
continue; revenue-share of TWICH (TCS, Wipro, INFY, of Indian IT to deliver mission-critical and complex IT
Amit Chandra
Cognizant, HCLT) has increased from 20% to 34% in functions are significant.
amit.chandra@hdfcsec.com
+91-22-6171-7345

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

Revenue-share In FY11 (US$bn) Revenue-share In FY16 (US$bn)

INFY Wipro HCLT Wipro HCLT
6.0 5.2 3.5 INFY 7.3 6.2
9.5
Cognizant
4.6 IBM
49.2
TCS
IBM Cognizant
8.2
56.4 12.4
TWICH (TCS, Wipro, INFY,
Cognizant, HCLT) have added
US$32bn incremental TCS
HPE
revenue in last 7 years as 26.3 16.5
compared to US$4bn revenue
decline of IHA (IBM, HPE,
Accenture HPE Accenture
Accenture) with Accenture 25.5 18.9 32.9
contributing US$11.3bn and
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
IBM/HPE declining by
US$15.3bn
Historical Disparity In Growth (FY13-16 Revenue Growth Convergence Ahead (FY16-19E Revenue
CAGR %) CAGR%)
19.1% 20%
20%
15%
10.1%
10% 15%
4.8%
5% 2.3%
0% 9.2%
10% 8.5%
-5%
-10% -5.8%
-7.8% 4.8%
5% 4.1%
IBM

Accenture

Cognizant
Tier-1 IT
Global IT services*
HPE

0%
Global IT services Accenture Tier-1 IT Cognizant

Source: Company, Gartner, HDFC sec Inst Research, * cc terms Source: Bloomberg, Gartner, HDFC sec Inst Research

Page | 2
 IT : SECTOR UPDATE

Scope To Optimise Capital Allocation (Dividend And Increase In Cash as % of FCF

Share Buyback % of FCF)
120% 60%
106%
Cognizant has revised its 100% 50% 47% 47% 48%
capital allocation policy to 42%
80% 40%
return US$3.4bn in FY17/18 62%
59%
(~110% FY16 FCF) and to 60% 49% 30%
43% 23%
return 75% of FCF from FY19 36%
40% 20%
20%
10%
0%
0%

INFY

HCLT
Wipro
Accenture

Cognizant
TCS

INFY

HCLT
Wipro

Cognizant
TCS
Accentures payout (dividend
and buyback) to
shareholders is twice the rate Source: Company, HDFC sec Inst Research, Over FY13-16 Source: Company, HDFC sec Inst Research, Over FY13-16
of Indian IT at 106% (payout
to FCF) as compared to 54%
for Indian IT Cash as % of Market Capitalisation Accentures Valuation Premium Over Indian IT
25% P/E TCS INFY Wipro
25 HCLT Accenture
20%
20%

14% 14%
15% 20
11%
10%
10%
6% 6%
15
5%

0%
10
TECHM

Wipro
Cognizant

INFY
TCS

HCLT
Accenture

Feb-12

Feb-13

Feb-14

Feb-15

Feb-16

Feb-17
Aug-12

Aug-13

Aug-14

Aug-15

Aug-16
Source: Company, HDFC sec Inst Research Source: Bloomberg

Page | 3
 IT : SECTOR UPDATE

NorthAm Quarterly Revenue Trend NorthAm Annual Revenue Trend

(US$ mn) TCS Infosys Wipro HCLT TECHM (US$ mn) TCS Infosys Wipro HCLT TECHM
7,000 30,000
NorthAm revenue for tier-1 IT 6,000 479 505 513 516
494 485 25,000 2,013
has grown at 9.5% CAGR in 472 1,013 1,066 1,080
907 955 992 1,930
5,000 901 4,151
the last 3 years with TCS, 1,033 1,059 1,066 20,000
1,740 3,755
4,000 942 971 971 988 1,402 3,284
INFY, Wipro, HCLT, TECHM 1,156 2,932 3,871 4,146
growing 3,000 1,504 1,514 1,551 1,591 1,582 15,000 2,583 3,610
1,426 1,514 3,299
3,152 5,958 6,237
9.6/7.6/7.9/12.3/12.8%, 2,000 10,000 5,357
5,004
respectively 1,000 2,131 2,190 2,218 2,272 2,334 2,362 2,413
4,598
5,000 8,811 9,380
6,161 7,128 8,016
-
-

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

FY13

FY14

FY15

FY16

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

Europe Quarterly Revenue Trend GBP/EUR impact; Europe Annual Revenue Trend
(US$ mn) TCS Infosys Wipro HCLT TECHM (US$ mn) TCS Infosys Wipro HCLT TECHM
Europe has grown at 4.5% 3,500 14,000
CAGR in the last three years 3,000 292 12,000
impacted by GBP/Euro 291 296 293 291 316 325 1,130 1,172 1,224
2,500 531
depreciation with ~20% 467 490 468 451 505 517 10,000 980
1,862 1,876 2,003
depreciation in both 2,000 490 464 895 1,591
459 462 456 482 453 8,000 1,889
1,286 1,970 1,859
currencies since FY14 1,500 548 558 572 575 582
1,945
505 566 6,000 1,778 2,097 2,184 2,296
1,000 2,016
4,000 1,712
500 1,094 1,130 1,111 1,098 1,147 1,120 1,070
2,000 3,850 4,367 4,433 4,435
- 3,073
-
1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

FY13

FY14

FY15

FY16

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

Page | 4
 IT : SECTOR UPDATE

Indian-IT M&A In Last 2 Years

Acquirer Target Deal Value (US$ mn) Segment
Infosys Panaya 200 Cloud ERP
Infosys Kallidus Inc (Skava) 120 Digital solutions (Retail)
Infosys Noah Consulting 70 Oil & Gas consulting
Infosys Total 390
Wipro has led the M&A while HCL Tech Volvo's external IT 138 Infra services
TCS hasnt done a single HCL Tech PowerObjects 46 CRM
acquisition in over 2 years; HCL Tech Geometric 190 ER&D
Accenture has spent US$1.7bn HCL Tech Butler Aerospace 85 ER&D
in the last 2 years on M&A HCL Tech Total 459
Wipro Designit 30 Design Consulting
Wipro cellent AG 78 IT services & consulting
Wipro Viteos Group 130 BPaas
Wipro HealthPlan Services 460 BPaas
Wipro Appirio 500 SaaS
Wipro Total 1,198
Tech Mahindra SofGen Services 30 BFSI
Tech Mahindra Target Group 164 BPaas
Tech Mahindra Pininfarina 17 Engg design consulting
Tech Mahindra Bio Agency 57 Design solutions
Tech Mahindra Total 268
Total Tier-1 IT 2,315
Accenture 1,730
Source: Company, HDFC sec Inst Research

Page | 5
 IT : SECTOR UPDATE

IMS Quarterly Revenue Trend IMS Annual Revenue Trend

(US$ mn) TCS Infosys Wipro HCLT (US$ mn) TCS Infosys Wipro HCLT
IMS and engineering services 2,500 9,000
have provided the growth 8,000
2,000
lead among service-lines 695 695 7,000 2,637
673 2,215
growing at 2x and 1.3x the 542 556 575 6,000
1,500 2,006
overall growth rate over the 540
5,000
1,721 2,167
544 539 545 2,076
past three years 1,000 513 517 4,000 1,248 1,893
208 217 219 973 840
208 181 196 3,000 1,601 772
500 1,465 699
737 2,000 1,305 584
611 630 639 676 687 509
420 2,135 2,474 2,739
1,000 1,603
- 1,027 1,330
-

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

FY12

FY13

FY14

FY15

FY16

TTM
IMS growth leadership has
been a secular trend driven by Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
increased adoption of cloud,
mitigating the shrinkage of
legacy business ER&D Quarterly Revenue Trend ER&D Annual Revenue Trend
(US$ mn) TCS Infosys Wipro HCLT (US$ mn) TCS Infosys Wipro HCLT
1,000 3,500
900
3,000
800
700 2,500
1,227
600 299 307 325 1,172
297 291 297 2,000 1,028
288
500 866
809
Relative under-penetration of 400
137 141 138 1,500 745 567
138 145 147 151 508 580
ER&D services and lesser 300
88 96 99 1,000 492 478
366
200 79 79 82 83 493 343 323
disruptive digital impact has 284 270
100 182 187 187 198 209 210 215 500 238
supported growth in the 473 535 632 699 753 832
-
segment -
1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

FY12

FY13

FY14

FY15

FY16

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

Page | 6
 IT : SECTOR UPDATE

BFSI Vertical Quarterly Revenue Trend BFSI Vertical Annual Revenue Trend
(US$ mn) TCS Infosys Wipro HCLT TECHM (US$ mn) TCS Infosys Wipro HCLT TECHM
4,000
99 117 122 145 16,000
97 108 492
3,500 99
399 415 424 14,000 356 404
400 403 406 397
3,000 296 1,605 1,635
478 494 493 490 12,000
481 489 482 1,589
2,500 290 1,349 1,930 1,955
820 856 849 10,000 1,121 1,857
BFSI has been impacted by 2,000 747 785 806 802 1,744
1,654 3,140 3,328
8,000 2,894
multiple geopolitical changes 1,500 2,765
6,000 2,508
(e.g. RBS-Infosys), higher 1,000
1,639 1,683 1,683 1,721 1,762 1,767 1,772
regulatory spend, in-sourcing 4,000
500 6,303 6,725 7,022
4,984 5,770
as well as due to large scale -
2,000
of operations within tier-1 -

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17
vendors, grown at 6.6%

FY13

FY14

FY15

FY16

TTM
CAGR; an uptick in the vertical
can accelerate growth for the Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
sector

BPM Services Quarterly Revenue Trend BPM Services Annual Revenue Trend
(US$ mn) TCS Infosys Wipro HCLT (US$ mn) TCS Infosys Wipro HCLT
1,000 4,000
900 69 70 71
3,500 292
86 83
800 79 82 330
249 259 256 3,000 292
700 180 199 963
167 180 224 726
600 2,500 669
122 123 127 125 200 591
BPM services is among the 500 113 117 118
470 497
2,000 190 541 459
highest prone to automation, 400 515 433
1,500 332
yet has posted 9.5% CAGR 300
489 488 502 512 509 322
200 464 474
over past 3 years 1,000
1,614 1,808 1,915 2,010
100 1,444
500 1,122
-
-
1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

FY12

FY13

FY14

FY15

FY16

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

Page | 7
 IT : SECTOR UPDATE

Top-10 Accounts Quarterly Revenue Trend Top-10 Accounts Annual Revenue Trend
(US$ mn) Infosys Wipro HCLT (US$ mn) Infosys Wipro HCLT
1,400 6,000
1,200
5,000
334 338 340 346 369 372
1,000 379
1,237 1,322 1,358 1,465
4,000
800 1,105
361 363 355 343 340 338 980
325 3,000
Tier-IT evidently has growth 600 1,504 1,503 1,421 1,345
1,161 1,355
challenges within the top 400 2,000
545 544 533 555 564
accounts as it has reached 200
519 513
1,000 1,822 1,967 1,979 2,141 2,165
considerable scale; average -
1,723
account size for tier-1 top-10 -

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17
accounts is at US$165mn

FY12

FY13

FY14

FY15

FY16

TTM
which has increased 30% since
the last five years despite flat Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
growth in the last three years.

Active Clients Quarterly Trend (no.s) Active Clients Annual Trend (no.s)
INFY Wipro TECHM INFY Wipro TECHM
3,500 3,500
3,000 3,000
807 818 825 837 837
2,500 801 807
770 788 2,500
767
2,000 629
2,000 516
1,223 1,208 1,180 1,259 1,259
1,500 1,071 1,100 1,105 1,223
1,500 1,054
978 986
1,000
1,000
500 987 1,011 1,045 1,092 1,126 1,136 1,152
500 950 1,092 1,152
- 798 890
1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

FY13

FY14

FY15

FY16

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

Page | 8
 IT : SECTOR UPDATE

>US$100mn Clients (no.s) Quarterly Trend >US$100mn Clients (no.s) Annual Trend
TCS Infosys Wipro HCLT TCS Infosys Wipro HCLT
70 70
7 8 8
8 8
60 7 7 9 60
7 8 9 7
9 9
50 10 9
10 50 6 11
14 17 18
With tapered growth in large 40 14 13
18
5 10 14
14 40
accounts (>US$ 100mn) INFY 4 10
15
30
has recorded acceleration in 30 7 13
>US$100mn accounts while 20 37 37 36 12
30 33 34 34 20 13 37
TCS leadership of large 10
24
29
10 17
account bucket has remained - 14
flat; total number of -

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

FY12

FY13

FY14

FY15

FY16
>US$100mn accounts for
WITH has grown at 9.3%
CAGR in last three years to 69 Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
(38 in FY12).
>US$10mn Clients (no.s) Quarterly Trend >US$10mn Clients (no.s) Annual Trend
TCS Infosys Wipro HCLT TCS Infosys Wipro HCLT
900 900
800 800
144 146 146 148 148
700 140 700 144
124 133
600 170 600 122
160 170 171 109 170
500 151 154 154 160
500 98
92 150
400 177 180 186 195 143
161 169 171 400 133 195
300 121 177
159
300 137 148
200
268 274 281 298 298 295 300 132
100 200
261 298 300
0 100 211 231
170
1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

FY12

FY13

FY14

FY15

FY16

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

Page | 9
 IT : SECTOR UPDATE

H1-B Visa Allocations

Sr.No. Employer Approved H1-B petitions FY15
1 TCS 4,674
2 Cognizant 3,812
3 Accenture 3,385
4 Wipro 3,079
Visa allocation of top-8 Indian 5 Infosys 2,830
IT companies was less than 6 IBM 1,919
18% of total allocations, as 7 Tech Mahindra 1,576
local hiring has picked up 8 HCL America 1,339
9 Deloitte 1,203
10 Amazon 1,058
11 Syntel 1,050
12 Microsoft 961
13 Google 833
14 Ernst & Young 663
15 Larsen & Toubro 649
Annual H1-B fills
16 PricewaterhouseCoopers 647
(65,000+20,000) are only 17 Intel 628
0.07% of total US workforce 18 CapGemini 548
and 3% of tech workforce 19 Apple 532
20 IGate 532
21 Oracle 493
22 Mindtree 464
23 Facebook 408
24 JPMorgan Chase 295
25 UST Global 287
Median tech jobs salary at 26 Mphasis 274
27 Cisco 267
US$74,980 is 44% higher than
28 Yahoo! 251
the median wage in the
29 Goldman Sachs 243
private sector in US 30 NTTData 220
Source: NFAP, USCIS

Page | 10
 IT : SECTOR UPDATE

Increasing Competition From Captives/GICs Revenue trend of tier-1 IT

(No.s) Tier-1 IT employees GIC employees (US$ mn) TCS Infosys Wipro HCLT TECHM
1,000,000 60,000
5,360

931,127
50,000 4,844
800,000 8,598

861,525

846,000
4,371
4,037 7,758

786,553
Ratio of employees in GICs to 40,000 3,664 6,957

746,208

745,000
8,817
600,000 3,098 5,822 6,235 8,183
employees in tier-1 IT has 30,000 2,633 5,180 7,679
increased from 50% in FY13 to 4,538 7,082 7,346 12,204

550,000
6,618
400,000 6,218 9,501 10,204 11,010
>90% in FY16 20,000
8,249
8,711

400,000
7,392
10,000 20,973
200,000 16,544 17,595 19,207
11,568 13,443 15,454
-
-

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E
FY13 FY14 FY15 FY16

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

EBIT% Quarterly Trend APAT trend of Tier-1 IT

1QFY16 2QFY16 3QFY16 (Rs bn) TCS Infosys Wipro HCLT TECHM
30% 4QFY16 1QFY17 2QFY17
3QFY17 800
42
25% 700 37
600 30 31 98
26 88
20% 81 98
500 30 74
73 82 89
400 57 89
15% 20 87 169
78 143 149
300 38 135
64 123
10% 106
200 94
243 260 272 298
100 192 219
5% 139
-

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E
0%
TCS Infosys Wipro HCLT TECHM

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

Page | 11
 IT : SECTOR UPDATE

Infosys Wipro
(TP Rs 1,200, CMP Rs 982, MCap Rs 2,244bn) (TP Rs 514, CMP Rs 475, MCap Rs 1,151bn)

We are positive on Infosys based on (1) steady offshore pricing (relative to Growth engine for Wipro has been challenged with recovery taking longer
peers), (2) positive deal trends and up-scaling of top accounts, (3) stability than expected. Within Tier-1 IT, Wipro has been the most aggressive in
in utilisation and moderating attrition, (4) digital transformation progress acquiring companies (>US$1bn spent on acquisitions in last 2 years) with
measured by strong growth in PPS and automation progress. Maintain digital capabilities but its not enough to backfill the loss from legacy.
BUY with TP of Rs 1,200, 17x Dec-18E. "Good corporate governance is Focus on digital (21.7% of revenue) and automation (Holmes platform) is
about maximizing shareholder value onInfoya sustainable basis while ensuring expected to offset some headwinds of legacy business. Positives are
fairness to all stakeholders: customers, vendor partners, investors, traction in digital, growth in energy after eight quarters of decline and
employees, government and society : NR Narayana Murthy, FY16 Annual synergies from recent acquisitions. In view of sub-par growth metrics,
Report. Infosys Board has vehemently defended its governance standards absence of near-term tailwinds and margin challenges (lowest in Tier-1);
following the questions raised by founders/investors. Below are some of Maintain NEUTRAL on Wipro, with TP of Rs 514, at 13x Dec-18 EPS. Below
key takeaways from our meeting: are key takeaways from our meeting:
Multiple accounts in top-11-25 expected to scale to top-10 with an 15,500 employees in US, 50% are locals
addressability of 4x +3/4% additional scope to increase utilisation, lowering sub-contracting;
Legacy business compression of 25-30% across contract duration (~5-6% margin scope for +200bps increase
annual impact) Increased client wallet-share in energy accounts
Sales of new offerings are the limited gaps Traction in government contracts in UK, Australia, Singapore
Weakness in 3 large Hi-tech accounts Leveraging strong partnership with Salesforce (Wipro top-4 global
Restrictive H1-B may increase offshoring opportunity for the sector at partner), Workday supported by Appirio
large as H1-B wage increase will impact client budgets
Financial Summary Financial Summary
YE March (Rs bn) FY15 FY16 FY17E FY18E FY19E YE March (Rs bn) FY15 FY16 FY17E FY18E FY19E
Net Revenues 533.19 624.41 685.49 737.64 817.65 Net Revenues 469.55 512.44 550.83 586.16 630.78
EBITDA 149.01 170.79 187.35 201.91 228.71 EBITDA 104.61 108.04 109.75 117.26 128.78
APAT 123.29 134.91 143.40 148.73 168.83 APAT 86.53 88.99 82.24 88.95 98.24
Diluted EPS (Rs) 53.9 59.0 62.7 65.1 73.9 Diluted EPS (Rs) 35.1 36.1 33.9 36.7 40.5
P/B (x) 4.1 3.6 3.6 3.3 3.0 P/B (x) 2.9 2.5 2.3 2.1 1.9
P/E (x) 18.2 16.6 15.7 15.1 13.3 P/E (x) 13.6 13.2 14.0 13.0 11.8
EV / EBITDA (x) 13.0 11.2 10.7 9.7 8.3 EV / EBITDA (x) 9.8 9.7 9.1 8.1 7.0
RoE (%) 24.1 23.2 23.0 22.5 23.4 RoE (%) 23.0 20.4 16.8 16.6 16.7
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

Page | 12
 IT : SECTOR UPDATE

Mphasis Mindtree
(TP Rs 640, CMP Rs 575, MCap Rs 121bn) (TP Rs 430, CMP Rs 458, MCap Rs 77bn)
We are positive on Mphasis based on (1) Limited onsite risks with high Mindtrees growth will be constrained by (1) deceleration in digital
offshore, (2) Steadying HP-channel and incremental IMS opportunity, (3) revenue, (2) pricing pressure in renewals, (3) lower profitability of digital
Improvement in execution with higher growth in FP and balanced delivery (high onsite), (4) growth/ profitability hurdles in BlueFin (early into new
(Digital Risk), (4) Strategic accounts-led growth visibility in direct core strategy for BlueFin), (5) limited growth visibility within large accounts.
business, and (5) Growth opportunity within Blackstone portfolio. Expect Revenue/EPS FY16-19E growth expected at 9/4.5% CAGR; Maintain SELL
US$ revenue/EPS to grow at 5/10% CAGR over FY16-19E; Maintain BUY with TP of Rs 430, 12x Dec-18E. Below are key takeaways from our
with TP Rs 640, 14x FY19E. Below are key takeaways from our meeting: meeting:
Top-5 direct-core accounts contributing 25% to direct-core revenue and Ramp-down in RTB also impacting CTB spend within those accounts; 4
strong visibility of top-10 accounts continue to face headwinds
3,000 employees in US 1,200 employees on H1-B Re-organisation within BlueFin to improve profitability
Revenue-share from new customer expected to increase from 4% 2,200 employees in US, 1,100 on H1-B; US$70-75k H1-B, total US at
currently to 6-7% US$80-85k
BFSI focus in capital markets, underwriting, and P&C within insurance Recent deal wins advisory-led and won from tier-1
70% of Digital Risks revenue driven by refinancing; competitors include Targeting 4-5% profitability of BlueFin
Accenture, TCS, Urban Lending Average deal size in digital of new deals increasing to US$0.9mn from
300 employees in Digital Risk in India 1,200 Digital Risk employees current average of US$0.6mn
(locals) in US ADM service-line has the highest composition of digital
Financial Summary Financial Summary
YE March (Rs bn) FY15 FY16 FY17E FY18E FY19E YE March (Rs bn) FY15 FY16 FY17E FY18E FY19E
Net Revenues 57.95 60.85 60.92 64.86 71.18 Net Revenues 35.62 46.73 52.13 56.32 61.94
EBITDA 8.70 9.01 9.71 11.00 12.37 EBITDA 7.09 8.21 7.17 8.60 9.72
APAT 6.78 7.21 7.99 8.70 9.57 APAT 5.36 5.53 4.46 5.50 6.25
Diluted EPS (Rs) 32.3 34.3 38.0 41.4 45.5 Diluted EPS (Rs) 32.1 32.9 25.9 32.9 37.4
P/B (x) 2.2 1.9 1.8 1.7 1.6 P/B (x) 3.8 3.2 2.9 2.7 2.5
P/E (x) 17.8 16.8 15.1 13.9 12.6 P/E (x) 14.3 13.9 17.7 13.9 12.2
EV / EBITDA (x) 11.7 11.1 10.0 8.6 7.5 EV / EBITDA (x) 9.6 8.9 9.9 8.2 7.1
RoE (%) 12.8 12.3 12.4 12.9 13.3 RoE (%) 29.4 25.0 17.7 20.1 20.9
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

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 IT : SECTOR UPDATE

IT Sector Valuations
MCap CMP TP EPS (Rs) P/E (x) RoE (%) Rev CAGR% EPS CAGR%
Company RECO
(Rs bn) (Rs) (Rs) FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY16-19 FY16-19
TCS 4,745 2,414 2,500 NEU 131.9 138.0 151.3 18.3 17.5 16.0 35.1 32.9 31.6 8.2 7.0
Infosys 2,244 982 1,200 BUY 62.7 65.1 73.9 15.7 15.1 13.3 23.0 22.5 23.4 8.7 7.8
HCL Tech 1,172 830 945 BUY 56.9 61.4 68.9 14.6 13.5 12.1 27.8 26.5 26.6 11.3 9.7
Wipro 1,151 475 514 NEU 33.9 36.7 40.5 14.0 12.9 11.7 16.8 16.6 16.7 6.3 3.9
TechM 480 496 532 BUY 32.3 38.0 43.8 15.3 13.1 11.3 20.1 20.2 19.8 9.9 11.4
Large-cap IT AVG 15.6 14.4 12.9 24.5 23.7 23.6 8.9 8.0
Large-cap IT Median 15.3 13.5 12.1 23.0 22.5 23.4 8.7 7.8

Mphasis 121 575 640 BUY 38.0 41.4 45.5 15.1 13.9 12.6 12.4 12.9 13.3 4.7 9.8
Mindtree 77 458 430 SELL 25.9 32.9 37.4 17.7 13.9 12.2 17.7 20.1 20.9 8.9 4.4
Hexaware * 63 210 215 NEU 13.8 14.6 16.5 15.2 14.4 12.7 26.8 23.4 23.2 9.4 8.2
eClerx 58 1,399 1,240 SELL 91.9 85.3 98.9 15.2 16.4 14.1 30.2 24.4 25.9 3.2 3.7
Cyient 52 465 510 NEU 33.4 40.1 46.3 13.9 11.6 10.0 18.5 19.9 20.4 14.9 16.9
Persistent 50 622 775 BUY 39.9 43.2 54.9 15.6 14.4 11.3 18.0 16.7 18.3 16.6 13.9
Zensar 42 935 1,210 BUY 69.2 84.9 95.8 13.5 11.0 9.8 19.5 20.5 19.7 8.3 11.4
KPIT Tech 26 130 130 NEU 12.1 13.4 16.1 10.7 9.7 8.1 16.3 15.9 16.9 7.1 4.2
Sonata 20 186 244 BUY 15.4 18.0 21.1 12.0 10.3 8.8 32.7 33.7 34.3 14.0 11.8
Intellect 13 112 226 BUY (3.7) 0.4 4.9 NA 313.7 22.8 (7.3) 0.6 7.1 10.5 NA
Majesco 8 332 573 BUY 6.8 10.3 16.1 48.7 32.2 20.7 5.5 7.8 11.0 14.7 46.9
Mid-cap AVG^ 14.3 12.9 11.1 21.3 20.8 21.4 9.7 9.4
Mid-cap IT Median^ 15.1 13.9 11.3 18.5 20.1 20.4 8.9 9.8
Source: HDFC sec Inst Research, * Dec Y/E, ^ ex-Intellect, Majesco

HCLT, TECHM, INFY top picks among large-caps

Mphasis, Persistent, Zensar, Sonata top picks among midcaps

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 IT : SECTOR UPDATE

1YR PRICE HISTORY

Wipro
Infosys 700
1,500
1,400 650
1,300 600
1,200 550
1,100
500
1,000
450
900
400
800

Apr-16
Feb-16

Sep-16

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Oct-16
Apr-16

May-16

Nov-16
Feb-16

Sep-16

Feb-17
Jan-17
Mar-16

Jun-16

Dec-16

Mphasis Mindtree
650 900
600 800
550
700
500
600
450
400 500

350 400
300 300
Apr-16
Feb-16

Sep-16

Feb-17
Jun-16

Jul-16
Mar-16

Dec-16
Oct-16
Aug-16

Nov-16

Jan-17
May-16

Dec-16
Oct-16
Aug-16
Apr-16

Nov-16

Jan-17
Feb-16

Sep-16

Feb-17
May-16

Jun-16

Jul-16
Mar-16

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

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 IT : SECTOR UPDATE

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