Indian IT Services - Sector Report 6mar09

SECTOR OUTLOOK
NEGATIVE
IT Services: Sector Report

Macro headwinds: no respite in sight
March 2009 Anurag Purohit Hitesh Punjabi

(91-22) 6766 3446 (91-22) 6766 3445
anurag.purohit@religare.in hitesh.punjabi@religare.in
Indian IT Services Sector Report 06 March 2009
Indian IT Services
Recommendation snapshot
Company CMP Target Rating
Macro headwinds: no respite in sight
Infosys Technologies 1,195 1,173 HOLD
Demand environment worsening: The Indian IT services sector is facing an Tata Consultancy Services 465 452 SELL
escalation in near-term uncertainty due to further deterioration in the Wipro 206 193 SELL
macroeconomic environment in developed countries. In a repeat of 2008, clients HCL Technologies 96 93 SELL
are taking longer than usual to firm up their IT spending budgets. More Tech Mahindra 250 290 HOLD
importantly, budgets in 2009 could be just “intend to spend” and would be MindTree 207 184 SELL
realigned according to the changing macroeconomic situation, further adding to Patni 96 93 SELL
short-term uncertainty for vendors.
Increasing protectionism adding fuel to the fire: As developed countries witness

spiralling unemployment rates, they are resorting to protectionist measures in Infosys financial snapshot
order to prevent job migration to developing economies. Though these measures Rs mn FY08 FY09E FY10E
are unlikely to have a significant impact on the prospects of offshoring in the Revenues 166,920 215,518 215,073
long term, it could fan indecision in the minds of clients in the short term. YoY growth (%) 20.1 29.1 (0.2)
EBITDA margin 31.4 32.9 31.5
Volume growth expected to stagnate in FY10: With protracted budget cycles
FDEPS (Rs) 79.1 100.5 96.7
and delayed contract awards, the ramp up in new projects has not sufficed to
YoY growth (%) 23.3 27.1 (3.8)
compensate for scheduled or unscheduled project closures during the year. We
expect the trend to continue in Q4FY09 and Q1FY10, with players witnessing
negative volume growth. Thereafter, we anticipate a marginal uptick in volumes
TCS financial snapshot
of 1.5–3% in the remaining quarters of FY10, leading to a 0–4% YoY growth.
Rs mn FY08 FY09E FY10E
Players caving in to pricing pressures: Recent results and management Revenues 228,614 279,697 285,615
comments indicate that earlier expectations of stable billing rates by companies YoY growth (%) 22.7 22.3 2.1
were largely optimistic. Instances of service providers giving discounts in the EBITDA margin 26.0 25.8 22.9
range of 5% to 20% to maintain or increase volumes are now coming to the fore.
FDEPS (Rs) 51.7 54.3 50.2
On a like-to-like basis, we expect pricing to decline by 6–8% for companies
YoY growth (%) 23.1 4.9 (7.4)
under our coverage.
Estimates downgraded; expect earnings de-growth in FY10: With expectations of

lower volume growth and a higher decline in pricing, we have revised our FY10 Wipro financial snapshot
revenue and earnings estimates for companies downwards by 2–4% and 5–8% Rs mn FY08 FY09E FY10E
respectively. We expect earnings to contract by 3–10% YoY, with core earnings Revenues 197,428 254,944 266,451
(excluding other income) dropping at a faster rate of 10–19%. YoY growth (%) 32.1 29.1 4.5
Rupee could act as a silver lining: Recent rupee depreciation to Rs 52/US$ has
raised some hopes for the sector. Our analysis suggests that if the rupee FDEPS (Rs) 21.9 23.5 22.9
depreciates to Rs 53/US$ and remains at this level for FY10, companies could YoY growth (%) 10.4 7.0 (2.6)
end up with 4–15% earnings growth despite a decline in dollar revenues. Infosys
would derive the maximum benefit due to its limited forex hedges and absence
of cash flow hedging. For every Re 1 of depreciation against the dollar, we HCL Tech financial snapshot*
expect Infosys’ FY10 EPS to increase by Rs 3.5. Rs mn FY08 FY09E FY10E
Revenues 76,398 104,062 108,537

Reducing target prices; maintain negative outlook: We maintain our negative
YoY growth (%) 26.6 36.2 4.3
outlook on the Indian IT services sector due to near-term pressure on earnings.
Accordingly, we have reduced our target P/E multiple for stocks under our
FDEPS (Rs) 16.5 20.5 18.4
coverage. Consequent to our estimate downgrade and reduced valuation
multiples, we are lowering our one-year target prices of all the companies under YoY growth (%) (17.1) 23.7 (10.1)
our coverage. We maintain Infosys and Tech Mahindra as our preferred picks in *Y/E June
the tier-1 and tier-2 categories respectively.
RHH Research is also available on Bloomberg FTIS <GO> and Thomson First Call
1
Contents
Section Page No.
Sector snapshot 3
Key changes in estimates 6
Macro blues: from bad to worse 7
FY10: a rough year for Indian IT services 13
Valuation 25
Companies
Infosys Technologies 31
Tata Consultancy Services 37
Wipro 44
HCL Technologies 50
Tech Mahindra 55
MindTree 60
Patni Computer Systems 65
2
Sector snapshot
Fig 1 - Tech spending cuts getting deeper…. Fig 2 - …with recovery not expected before Q4CY09
Overall IT Spending (L) Nom. GDP growth (R) Total IT spending (L) YoY growth (R) (%)
(US$ bn)
(%) (%)
135 15
20 8
130 10
15 6
125
5
10 4
120
--
5 2 115
(5)
-- -- 110
105 (10)
(5) (2)
100 (15)
(10) (4)
Q4CY04 Q4CY05 Q4CY06 Q4CY07 Q4CY08E Q4CY09E Q4CY10E
CY93 CY95 CY97 CY99 CY01 CY03 CY05 CY07 CY09E
Source: RHH, BEA Source: RHH
Fig 3 - Recovery for Indian players could lag 2–3 quarters… Fig 4 - …putting pressure on FY09 volume growth*
(%) Infosys (L) Cognizant (L) S&P EPS (R) (%) Infosys TCS Wipro HCL Tech
(%)
110 100
40
75
90
50 30
70 25
20
50 --
(25) 10
30
(50)
--
10 (75) FY07 FY08 FY09E FY10E FY11E
Q1CY00 Q4CY00 Q3CY01 Q2CY02 Q1CY03 Q4CY03 (10)
Source: RHH Source: RHH *Organic volume growth for Wipro and TCS
Fig 5 - Margins expected to decline sharply in FY10… Fig 6 - …resulting in negative core earnings growth
(%) Infosys EBIT margin (%) Infosys TCS Wipro HCL Tech
30
60
29 29.7
29.4 40
28.7
28
20
28.0
27.9 27.9 27.8
27 --
27.1 26.9
26 (20)
FY03 FY04 FY05 FY06 FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E
Source: RHH Source: RHH
3
Since our last IT Sector Report in November 2008, global economic news has been
singularly dismal. With the US and Europe set to witness a deeper, wider recession in
2009, the outlook on technology spending has deteriorated even further. The question is
no longer whether technology spending will decline in 2009, but instead how long and
deep the slowdown will be. Earlier expectations that IT budgets were unlikely to drop to
the levels seen in 2001 are being thoroughly scrutinised, especially in light of the rapid
downturn in macroeconomic activity.
Deepening recession across geographies

Downcycle in IT spending has only GDP growth in the US and Europe witnessed a sharp decline of 1.6% and 1.5% QoQ
just begun respectively in Q4CY08. Economic forecasts point to a deepening recession and a
continued pattern of negative GDP growth for these geographies over the next 2–3
quarters. Considering the strong correlation of technology spending with GDP growth
and corporate profits, the outlook for the technology sector remains bleak in 2009.
IT spending cuts to be more painful

We expect technology spending to decline for five consecutive quarters in the US and
Europe, starting from Q4CY08. Overall, we estimate that IT spending in these
geographies would decline by 7.1% and 7.5% YoY respectively driven by cuts in
hardware and discretionary IT service budgets.
Indian players at greater risk as compared to 2001

Indian IT players more exposed to We expect the current slowdown to have a much more profound impact on the growth
global downturn as compared to 2001 rate of Indian players as compared to the dot-com bust of 2001. Leveraging their cost
advantage in the offshoring business, Indian players now account for ~11% of US IT
services spending as compared to just 2% in the year 2000. Their wallet share in client
IT budgets has also gone up substantially, which implies that the downturn will hit
Indian players that much harder.
Leading indicators still a long way off from signalling recovery

Our analysis of a traditional slowdown cycle (framed in the context of technology)
suggests that we are still in the initial stages of a slowdown. Leading macroeconomic
indicators such as GDP growth, unemployment and credit availability indicate that the
slowdown would be more prolonged than earlier anticipated. Recovery, though
expected in Q4CY09, would largely depend on stability in these macroeconomic
indicators.
Recovery in Indian IT services could lag behind overall bounce back

High share in discretionary projects Past trends show that discretionary IT spending lags behind overall recovery in client
would delay recovery of Indian players budgets by 2–3 quarters. Due to their relatively higher dependence on discretionary IT
spending (~50% of revenues), we believe that the recovery of Indian players would trail
behind the pick-up in overall technology spending.
Bellwether Infosys likely to offer conservative guidance

We believe the Infosys management would deviate from its 70:30 rule (70% visibility
and 30% expectations) while extending its guidance for FY10. We anticipate a highly
conservative guidance, especially after the expected 14% dollar revenue growth
(constant currency) in FY09 as against 20% guided at the beginning of the year. The
guidance is unlikely to be back-ended in nature as was the case in FY09, with the
management now liable to adopt a ‘deliver and raise’ approach. We expect the
management to guide towards a -2% to 0% growth in dollar revenues.
4
Fig 7 - Indian/Global IT valuation

Mkt Cap Year P/E(x) EV/EBITDA(x) P/BV (x)
Company CMP
(US$ mn) End FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E
Indian IT Services
Infosys 13,321 1,195 Mar 15.1 11.9 12.4 11.2 8.2 8.6 4.9 3.7 3.0
TCS 8,743 465 Mar 9.0 8.6 9.3 7.2 5.9 6.5 3.6 2.9 2.5
Wipro 5,848 206 Mar 9.4 8.8 9.0 7.9 6.3 6.6 2.3 2.0 1.7
HCL Tech 1,235 96 Jun 5.8 4.7 5.2 4.4 3.4 3.7 1.2 1.1 1.0
Tech Mahindra 592 250 Mar 4.2 3.5 3.7 2.9 2.0 2.1 2.4 1.4 1.0
MindTree 151 207 Mar 7.8 9.4 5.5 7.1 2.7 3.4 1.4 1.0 0.8
Patni Computers 237 96 Dec 3.5 4.3 4.5 1.3 1.6 1.8 0.5 0.4 0.4
Sector Average - - - 11.5 9.8 10.2 8.8 6.8 7.1 3.8 2.9 2.5
Global IT Companies
Cognizant 5,071 17 Dec 11.8 10.8 10.0 7.4 7.0 6.0 2.7 2.2 1.8
Accenture 20,685 28 June 10.5 9.9 9.2 5.4 5.1 4.9 7.3 6.0 5.8
Atos Origin 1,613 23 Dec 7.9 9.0 7.6 4.1 4.4 4.1 0.7 0.7 0.7
CISCO 83,586 14 July 9.3 11.4 12.0 4.9 6.0 6.5 2.5 2.2 2.0
Intel 68,468 12 Dec 11.5 28.8 14.8 4.3 7.6 5.4 1.8 1.8 1.7
Oracle 76,702 15 May 12.0 10.7 9.8 7.7 6.9 6.7 3.5 3.1 2.6
SAP 38,844 32 Dec 12.2 12.5 11.3 11.8 10.2 9.2 5.4 4.8 3.9
IBM 119,476 89 Dec 8.7 9.1 9.9 6.3 6.6 6.3 4.1 3.9 3.2
HP 67,823 28 Oct 7.8 7.6 7.0 5.1 4.7 4.6 1.8 1.6 1.4
Genpact 1,717 8 Dec 13.1 12.8 10.8 6.8 6.6 5.7 1.4 1.6 1.4
WNS 153 4 Mar 7.4 3.5 2.7 8.2 4.5 3.7 0.7 0.7 0.6
Syntel 751 18 Dec 9.5 9.5 9.0 5.8 5.5 5.3 2.8 2.5 2.0
ACS 4,400 45 June 12.8 12.2 10.7 5.9 5.6 5.1 2.2 2.1 1.6
Capgemini 4,036 28 Dec 6.6 8.3 8.2 3.0 3.4 3.5 0.8 0.8 0.7
Average - - - 10.0 12.6 10.6 6.2 6.6 6.2 3.3 3.0 2.5
Source: RHH, Bloomberg
5
Key changes in estimates
Fig 8 - Infosys Technologies

Particulars FY09 FY10 FY09E FY10E
Key parameters
Exchange rate (Rs/US$) 46.2 47.8 Old New % Chg Old New % Chg
Volume growth (%) 17.8 3.6 Revenue (Rs mn) 216,475 215,518 (0.4) 224,299 215,073 (4.1)
Pricing (%) (5.1) (6.9) EBITDA margin (%) 33.1 32.9 (17bps) 32.3 31.5 (84bps)
Revenues (US$ mn) 4,668 4,502 Adj net profit (Rs mn) 58,238 57,615.3 (1.1) 60,301 55,444.3 (8.1)
Growth YoY (%) 11.8 (3.6) FDEPS (Rs) 101.6 100.5 (1.1) 105.2 96.7 (8.1)
Fig 9 - Tata Consultancy Services

Key parameters
Pricing (%) (10.2) (10.8) EBITDA margin (%) 25.5 25.8 29bps 23.6 22.9 (66bps)
Revenues (US$ mn) 6,090 6,027 Adj net profit (Rs mn) 52,948 53,101 0.3 54,026 49,169 (9.0)
Growth YoY (%) 8.1 (1.0) EPS (Rs) 54.1 54.3 0.3 55.2 50.2 (9.0)
Wipro – Global IT Services Fig 10 - Wipro

Key parameters
Pricing (%) 2.0 (6.2) EBITDA margin (%) 19.7 19.6 (13bps) 19.2 17.8 (142bps)
Revenues (US$ mn) 3,635 3,482 Adj net profit (Rs mn) 34,590 34,180 (1.2) 36,264 33,308 (8.2)
Growth YoY (%) 17.8 (4.2) FDEPS (Rs) 23.8 23.5 (1.4) 24.9 22.9 (8.1)
Fig 11 - HCL Tech

Key parameters
Pricing (%) (4.5) (5.9) EBITDA margin (%) 21.7 21.2 (50bps) 19.4 18.6 (76bps)
Revenues (US$ mn) 2,190 2,372 Adj net profit (Rs mn) 14,288 13,758 (3.7) 13,583 12,330 (9.2)
Growth YoY (%) 16.6 8.3 FDEPS (Rs) 21.2 20.5 (3.5) 20.3 18.4 (9.4)
6
Macro blues: from bad to worse

Global recessionary trends deepening
GDP growth in the US and Europe witnessed a sharp decline of 1.6% and 1.5% QoQ
respectively in Q4CY08 after a 0.2% decline each in Q3CY08. Economic forecasts point
to a deepening recession and a continued pattern of negative GDP growth for these
geographies over the next 2–3 quarters. The IMF has lowered its GDP estimates for the
US and Europe and now expects shrinkages of 1.6% and 2% respectively in 2009 from
0.9% and 1.5% earlier.
Considering the strong correlation of technology spending (Hardware + IT services +

Software) with GDP growth and corporate profits, the outlook for the technology sector
remains bleak in 2009. The fourth quarter of CY08 is expected to be the first quarter in
the recession where technology spending in the US and Europe would witness a YoY
decline.
Fig 12 - US GDP growth vs IT spending
Overall IT Spending (L) Nom. GDP growth (R)

(%) (%)
20 8
Deepening US recession spells trouble 15 6
for technology spending
10 4
5 2
-- --
(5) (2)
(10) (4)
CY93 CY95 CY97 CY99 CY01 CY03 CY05 CY07 CY09E
Source: RHH, BEA
Our analysis of technology spends uses the dot-com crash of 2001–02 as a proxy for
expected trends in 2009. Similarly, US technology budgets are used as a proxy for that
of Europe and the rest of the world. Geographies other than the US and Europe may
witness only a reduced growth in technology spending as compared to the latter’s de-
growth. However, we believe that the trend in these two key markets has a greater
bearing on Indian players considering their share of 80–85% in Indian IT service
revenues.
Leading indicators clearly negative

GDP growth, corporate profits and As against the 2001 bust which was induced by over-exuberance in technology
business and consumer confidence key spending, the current slowdown stems from a severe tightening of credit and lower
to IT budget trends business confidence. We therefore believe that macroeconomic indicators would play a
crucial role in determining the direction going forward.
We will be closely watching the following indicators for signs of a further deterioration
or revival in technology spending: 1) GDP growth, 2) corporate profits, 3) TED spreads –
a measure of liquidity and credit risk in an economy, 4) business and consumer
confidence in the US and Europe, 5) IT service contracts signed, 6) comments on
outlook by leading hardware/software/IT service vendors. Currently, the indication from
these metrics is largely negative.
7
Fig 13 - US and EU real GDP growth (annualised) Fig 14 - S&P 500 LTM earnings
(%) US EU EPS before XO YoY growth
($) (%)
6 85 100
3 75
70
50
1
55 25
(2) --
40
(5) (25)
25 (50)
(7)
Q4CY03
Q4CY04
Q4CY05
Q4CY06
Q4CY07
Q4CY08
Q4CY08
Q1CY04
Q4CY04
Q3CY05
Q2CY06
Q1CY07
Q4CY07
Q3CY08
Source: BEA, Bloomberg Source: BEA
Fig 15 - TED spread Fig 16 - US unemployment rate (%)
TED spread (bps) 120-day MAVG (bps) 8

500
7
400
6
300
5
200
100 4
0 3
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Source: Bloomberg Source: Bloomberg
Fig 17 - US consumer confidence index Fig 18 - US business confidence index
80
150
70
120 60
90 50
40
60
30
30
20
0 10
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Source: Bloomberg Source: Bloomberg
8
Fig 19 - TPI: Total contract value
(US$ bn) Non-mega deal Mega deal

60
50
TPI’s total contract value for H2CY08 40

one of the lowest on record 30
20
10
--
H1CY00
H2CY00
H1CY01
H2CY01
H1CY02
H2CY02
H1CY03
H2CY03
H1CY04
H2CY04
H1CY05
H2CY05
H1CY06
H2CY06
H1CY07
H2CY07
H1CY08
H2CY08
Source: TPI
Technology slowdown has only just begun…

Analysis of traditional technology Our analysis of a traditional slowdown cycle (framed in the context of technology)
slowdown cycle reveals that we are but suggests that we are still in the initial stages of a slowdown. Early caution from IT
in the early stages vendors turns into pessimism as the outlook becomes bleaker and uncertain. Caution on
recruitment by companies turns into lay-offs as cost-cutting sets in. Pricing power and
profit margins fall victim next before a bottom is reached. Overall, an improvement in
business activity leads to a recovery in technology spending and discretionary projects
are back on the table.
Fig 20 - Traditional slowdown cycle

1. Business cycle peaks
3 2. Companies become cautious; go slow on spending
2 4
3. Corporate profits dip; brakes on H/w and discretionary IT spending
1 5
4. IT vendors cautious on recruitment
6
5. Restructuring of IT budgets; pricing pressure mounts on vendors
10
6. IT vendors go on cost cutting mode; job lay-offs announced as
7 margins under pressure
8 7. Business cycle bottoms

9 8. Corporate profits see uptick
9. Companies restart evaluating discretionary IT spending
10 Spending levels resume slowly
Source: RHH
IT spending forecasts …bottom expected in Q4CY09

(%) Start of 2008 Nov ’08 Now We expect technology spending to witness a YoY decline starting in Q4CY08 and
Gartner continuing till end-2009. The likelihood of five quarters of consecutive de-growth is in
WW 5.8 2.3 0.5 line with the trend witnessed during the last slowdown. Overall, we expect technology
N. America 5.3 0.5 0.1 spending to contract by 6.7% in the US and 7.5% in Europe. Expenditure on the
IDC hardware and discretionary portion of IT services would be hit the hardest with drops of
WW 5.9 2.6 0.5 14.4% and 8.5% respectively. The spending on IT services in the US is expected to
N. America 4.2 0.9 0.1 decline by 5.3% in 2009 due to the fall in discretionary spending. The performance in
Source: RHH, Gartner, IDC Europe is likely to be worse due to appreciation of the US dollar against major European
currencies.
9
Fig 21 - US IT spending
Total IT spending (L) YoY growth (R) (%)

(US$ bn)
135 15
130 10
125
5
Bottom seen only in Q4CY09
120
--
115
(5)
110
105 (10)
100 (15)
Q4CY04 Q4CY05 Q4CY06 Q4CY07 Q4CY08E Q4CY09E Q4CY10E
Source: RHH
In 2010, subject to economic stability, we expect a recovery to set in as far as

technology budgets are concerned. We expect the recovery to be a J-Curve: a trend
which was also witnessed during the 2001 recovery phase.
Fig 22 - Recovery to be a J-Curve
IT Spending (Indexed)
1,700
J-curve recovery from 2010 – similar to

1,550
2001 pick-up
1,400
1,250
1,100
950
CY97 CY99 CY01 CY03 CY05 CY07 CY09E CY11E
Source: RHH
Indian players could see a lag of 2–3 quarters in recovery

High reliance on discretionary IT Due to their relatively higher dependence on discretionary IT spending (~50% of
projects to delay recovery of Indian revenues), we believe that the recovery of Indian players would lag behind the pick up
players in overall technology spending. Project-based services such as custom application
development, IT consulting, testing and system integration are generally considered
discretionary in nature. Expenditure on such services is highly dependent on corporate
profits for funding and is strictly curtailed in the event of an earnings decline.
Past trends show that discretionary IT spending tends to be resilient in the early phases
of an economic downturn, but can decline sharply during a prolonged recessionary
period. A similar lag also marks the recovery path, as evidenced in the revenue trends of
offshore players such as Infosys, Wipro and Cognizant.
10
Fig 23 - India’s exposure to discretionary spending still high
(US$ bn) Projected Oriented Outsourcing Support & Training
30
2
Discretionary projects account for close 25
to 50% of Indian IT service revenues 2
20 11
2
9
15
1 7
10 4 14
12
10
8
5
FY06 FY07 FY08 FY09E
Source: RHH, Nasscom - Strategic Review 2009
Fig 24 - Corporate profits vs discretionary IT spending

(US$ bn) Custom app devp (L) Corporate profits (R) (US$ bn)
95 1,100
Discretionary IT spends lags behind 85 950

corporate profits in fall and recovery
75 800
65 650
55 500
45 350
CY99 CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07
Source: RHH, BEA
Fig 25 - S&P earnings growth vs Infosys & Cognizant revenue growth

(%) Infosys (L) Cognizant (L) S&P EPS (R) (%)
110 100
75
90
50
Recovery of Indian IT to lag overall
macroeconomic recovery by 2–3 70 25
quarters
50 --
(25)
30
(50)
10 (75)
Q1CY00 Q4CY00 Q3CY01 Q2CY02 Q1CY03 Q4CY03
Source: RHH, Company, Bloomberg
11
Revival in key client accounts vital

Top 10 clients typically bring in a bulk For Indian IT players, a key determinant of growth lies in the budget trend across their
of incremental growth, but not in respective top 10 clients. Despite diversification into a wider customer base over the
9MFY09 years, incremental growth from this set of clients over FY03-FY08 has been faster than
the rest of the client base. In five out of the last six financial years, the growth in
revenues per client has been higher for the top 10 group as compared to the others. In
9MFY09, however, the top 10 clients have fallen behind the rest, dragging down the
overall growth of IT players.
Fig 26 - Infosys revenue per client (indexed)
Top 10 Rest of clients

7,000
6,000
5,000
4,000
3,000
2,000
1,000
--
FY02 FY03 FY04 FY05 FY06 FY07 FY08 9MFY09
Source: RHH, Company
Increasing protectionism could hamper recovery

Protectionist measures by the US and As developed countries witness spiraling unemployment rates, they are resorting to
UK could curb offshoring in the protectionist measures in order to prevent job migration to developing economies.
near term Ironically the most stringent steps have been taken by the US and UK, among the first
proponents of offshored outsourcing.
Recently, the US Senate approved limits on H-1B visas for entities receiving TARP
funding while the UK further tightened its points system to restrict entry to ‘highly
skilled’ foreign workers. Also, recent comments by President Obama indicate additional
measures by the US government to curtail tax benefits to companies that outsource jobs.
Though we do not expect these measures to have a significant impact on the prospects
of offshoring in the long term, it could fan indecision in the minds of clients in the
short term.
12
FY10 – a rough year for Indian IT services

Indian players more vulnerable as compared to 2001
Higher share of Indian companies in US We expect the current slowdown to have a much deeper impact on the growth rate of
IT services implies sharper hit from Indian players as compared to the last one. During the 2001 downturn, Indian
slowdown companies were relatively less affected by the downswing in IT budgets due to their
limited penetration (~2% of overall IT spending in the US). Despite a CAGR decline of
2.8% in US IT services spending over CY01-CY03, Indian IT exports to the US grew at a
34% CAGR. Leading companies such as Infosys registered a higher CAGR of 40%
during this period, with the slowest growth seen in CY02 at 28.8% YoY.
However, leveraging the cost advantage of offshoring, Indian players now account for
~11% of US IT services spending. Their wallet share in client IT budgets has also gone
up substantially. For example, the revenue per top-10 client for Infosys has increased to
US$ 132.2mn in FY08 from US$ 16.2mn in FY01, a CAGR of 35%.
Fig 27 - Market share of India in US IT services spend Fig 28 - Infosys revenue per client – Top 10 clients
IT services exports (L) Market share (R) (US$ '000) Revenue per client YoY growth (%)
(US$ mn) (%)
30,000 12 160,000 80
25,000 10
120,000 60
20,000 8
15,000 6 80,000 40
10,000 4
40,000 20
5,000 2
-- -- -- --
CY98 CY99 CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09E
Source: RHH, Nasscom, BEA Source: RHH, Company
Near-term uncertainty remains high

No clear fix on IT budgets yet; In a repeat of 2008, clients are taking longer than usual to firm up their IT budgets for
contraction of 10–15% likely for 2009 2009 and are expected to complete the process only by March. Going by the indications
of leading service vendors, budgets are likely to decline by 10–15% for 2009. Though
offshore spending may be spared steep cuts, it is far from immune. The BFSI sector in
particular is expected to aggressively cut spends due to bankruptcies and mergers in the
industry, rendering some of the existing projects redundant.
However, in the current scenario, we believe that even after budgets are firmed up post
March, they cannot be considered as a true indicator of spending for 2009 as clients
would continue to realign them according to the changing macroeconomic
environment.
Ambiguity reflected in volume growth of Indian players

Volume growth of 2–2.5% in Q3FY09, Indian IT services players witnessed a meagre 2–2.5% growth in volumes for Q3FY09,
among the lowest growth rates ever one of the lowest growth rates in history. Although this did exceed expectations of flat to
negative growth, the near-term outlook on volumes remains murky. A primary reason for
the muted volumes is that the ramp up in new projects has not been able to compensate
for scheduled project closures during the year. An elongated budget cycle in the
beginning of 2008 led to slower new deal flows and delays or cancellations of awarded
deals, affecting new project ramp-ups.
13
The important question now is whether these players would witness negative year-on-
year volume growth in FY10. In our base case scenario, we do not foresee such a
possibility for the top 4 players. We expect volumes to witness a QoQ decline in
Q4FY09 and Q1FY10 considering the fluid nature of IT budgets. Thereafter, we
anticipate marginal volume growth of 1.5–3% in the remaining quarters of FY10,
leading to a 0–4% YoY growth. For TCS and Wipro we expect volumes to grow at 2.7%
and decline by 1.9% respectively on an organic basis.
However, we do not rule out the possibility of negative YoY volume growth if spending
decisions are delayed beyond March or budget cuts are steeper than anticipated. Our
worst case scenario factors in these possibilities and accordingly projects a volume drop
of 0.2%–1.9% for tier-1 players in FY10.
Fig 29 - Volume growth expectations*

We estimate 0–4% YoY volume growth
(%) Infosys TCS Wipro HCL Tech
in FY10 though de-growth cannot be
ruled out 40
30
20
10
--
FY07 FY08 FY09E FY10E FY11E
(10)
Source: RHH, Company *Organic growth for Wipro and TCS
Players submit to pricing pressures

Pricing power back with clients; expect Of late, news flow on pricing has been largely negative. Recent results and management
price dips of 6–8% for our IT universe comments indicate that earlier expectations of stable billing by companies were largely
optimistic. Not surprisingly, the pricing power witnessed by service providers in the last
two years has now migrated back to the customers. Service providers are being
compelled to offer price discounts in order to maintain current volumes on existing
engagements.
In new deals too, players are offering discounts such as free transitioning and materially
lower pricing during the initial years of the project. On a like-to-like basis, the discounts
vary from 5% to 20%. Existing T&M engagements are also being renegotiated to fixed
price projects, under which the profitability risk is transferred to vendors. Our estimates
assume a pricing decline of 6–8% on a like-to-like basis for all companies under our
coverage in FY10, based on the following: 1) volume discounts offered to clients,
2) rising competitive pressures in the now scarce deal flows, 3) higher offshoring opted
for by clients to reduce costs, and 4) cross currency headwinds. For companies like TCS
and Wipro, the downshift would be sharper due to the consolidation of key clients –
Citigroup Global Services and Citigroup Technology Services, respectively.
Guidance – a tough nut to crack

Macro headwinds fuel earnings Globally, the list of companies shying away from giving guidance for 2009 has grown
volatility, making guidance a tricky manifold during the recent quarterly results. Considering the severity of the downturn
prospect since September ’08 and rising cross currency headwinds, giving as well as achieving
guidance has turned tricky for Indian companies as well. Uncertainties in the demand
environment are directly reflected in their guidance, with the spread between the lower
and upper end of projected growth rates being significantly higher than the historical
trend.
14
Fig 30 - Infosys dollar revenue guidance spread
(US$ mn) Guidance spread (L) as % of lower end (R) (%)
50 5
Rising spread between upper and lower
40 4
ends of guidance
30 3
20 2
10 1
-- --
Q1FY07
Q2FY07
Q3FY07
Q4FY07
Q1FY08
Q2FY08
Q3FY08
Q4FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09G
Cognizant guides towards 10% revenue growth in CY09…

Cognizant guidance of 10% growth in Cognizant has begun the year on a relatively positive note, guiding for at least 10%
CY09 appears overly optimistic revenue growth in CY09, in line with consensus expectations. For Q1CY09 however,
the company has guided towards a 2.4% QoQ decline in revenues, citing project delays
owing to protracted client budget cycles and an expected reduction in budgets of BFSI
clients (45.6% of revenues in CY08). This implies that the management expects a CQGR
of 3.5% over Q2CY09 to Q4CY09. While the management believes the guidance has
room for a worsening economic scenario, it continues to anticipate a modest pick-up in
demand from Q2CY09 onwards.
…which could prove unrealistic

With a “not-so-bad” guidance from Cognizant for CY09, questions are being raised over
whether the company has been overly aggressive in this regard, especially after
considering the 32% YoY growth delivered in CY08 as against 38% guided at the
beginning of the year. Though there are some positives in favour of Cognizant achieving
its guidance, we believe the concerns are equally valid.
Guidance backed by deals but delayed ramp-ups could play spoilsport: Cognizant
has added 21 new strategic clients and 61 clients overall on net basis in 2008.
According to the management, new deals are expected to contribute incremental
revenues sufficient to compensate for project closures as well as to fund the
incremental 10% growth. However, delays or cancellations of these projects could
put the guidance at risk.
Pricing pressure not completely factored in: The management indicated that it has
witnessed a softening of pricing in Q1CY09 so far, as clients have begun to ask for
price discounts. However, the company maintains that it does not foresee pricing as
a major threat to guidance; something we believe could be challenging in the
current scenario.
Too early to expect recovery in Q2CY09: One of the assumptions behind the 10%
growth guidance is a recovery in demand from Q2CY09 onwards. As discussed
earlier, we believe that the leading indicators are still some distance away from
signalling a recovery. Already in 2008 we have seen companies decreasing
guidance forecasts that were earlier dependent on recovery in H2CY08.
15
So where does that leave Infosys?

Expect conservative FY10 guidance of For Infosys, we have examined two possible scenarios for dollar revenue growth
-2–0% dollar revenue growth guidance: 1) a cautious guidance of -2–0%, and 2) an optimistic guidance of 3–4%. The
first scenario is based on a conservative outlook, with revenues dipping 1–1.5% in the
first quarter of FY10 and modest growth of 2–2.5% in the remaining quarters. In
comparison, the optimistic scenario is largely dependent on a revival in the demand
environment post-Q2FY10. The implied CQGR for Q2 to Q4 in this case would be 3.7–
4.7% (after a flat Q1), which is higher than the average revenue growth of 3.3%
witnessed by the company in the first three quarters of FY09. We believe the first
scenario is more probable considering the challenges in the macroeconomic
environment.
Fig 31 - Infosys FY10 guidance scenarios

Lower Upper Lower Upper
Scenario 1 Key assumptions Scenario 2 Key assumptions
end (%) end (%) end (%) end (%)
Q1 growth guidance (2.0) (1.0) Volume growth of Q1 growth guidance 0.0 0.5 Volume growth of
FY10 growth guidance (2.0) 0.0 2–4% and pricing FY10 growth guidance 3.0 4.0 5–8% and pricing
Implied Q2-Q4 CQGR 2.1 2.7 decline of 4–5% YoY Implied Q2-Q4 CQGR 3.7 4.7 decline of 3–4% YoY
Source: RHH
Hiring trends suggest players gearing up for a prolonged slowdown

Emphasis on lower-salaried campus In tandem with the slump in volume growth, hiring too has slowed considerably. For
recruits players like Wipro, employee addition has entered into negative territory in Q3FY09.
This apart, additions have been highly skewed towards freshers as compared to lateral
recruits as companies make an effort to fulfill commitments towards campus offers,
while freezing other hiring plans. The trend is expected to continue in FY10 with
Infosys, TCS and Wipro making 18,000, 24,900 and 8,000 campus offers respectively.
Traditionally, campus hiring is viewed as a leading indicator of demand growth for the
following year. However, in our opinion, the same inference may not be valid for FY10
considering the flexibility available with companies to defer the joining of campus
recruits. For FY10, we expect gross additions to just suffice to replace voluntary and
involuntary attrition – in other words, there would be minimal net additions.
Fig 32 - QoQ employee net additions

Negative employee additions for Wipro
Infosys TCS Wipro HCL Tech
in Q3FY09
10,000
8,000
6,000
4,000
2,000
--
(2,000)
Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09
16
Fig 33 - FY10 employee addition forecast

Gross Net Employees YoY growth
Company
additions additions EoY (%)
Infosys 16,000 2,393 105,825 2.3
TCS 21,000 3,044 141,013 2.2
Minimal net additions expected in FY10 Wipro (Global IT) 6,000 (651) 60,558 (1.1)
HCL Tech 12,700 810 55232 1.5
Tech Mahindra 4,800 1,762 26,831 7.0
CTSH 15,000 6,344 65,722 10.7
Patni 3,500 1,035 16,077 6.9
MindTree 900 137 6,078 2.3
Source: RHH
Rising involuntary attrition – a potential margin lever?

Typically, involuntary attrition in Indian IT companies has been between 0.2–0.5%,
though there has been a sharp uptick seen over the last two quarters. Media reports
Process of weeding out non-performers suggest that involuntary attrition would remain high in the coming quarters as well.
has begun in earnest Companies are tightening up their performance appraisal processes to weed out non-
performers. Generally, these would be employees with around three years of experience
who have been on the bench for a prolonged period of time or have delivered below-
par performance on their projects.
These employees have already had wage hikes in the last two years when times were
favourable and are also getting variable pay. Involuntary attrition of these employees
can be replaced by fresher recruits whose employee cost is 15% lower on a like-to-like
basis. Our analysis suggests that margin benefits from involuntary attrition would largely
depend on the magnitude of attrition and percentage of attrition being replaced by
freshers.
Fig 34 - Wipro – voluntary vs involuntary attrition
(%) Voluntary Involuntary

20
18.8
16
16.6 15.8
Sharp rise in involuntary attrition over 15.1 14.7
past two quarters 12
11.0 11.9
8
4 2.5 2.0
0.3 0.3 0.6 0.8 0.5
--
17
Fig 35 - Involuntary attrition – impact on margins

Parameter Value
Total employees (No.) 90,000
Cost per employee (Rs/year) 450,000
% of offshore employees (%) 80
Involuntary attrition (%) 5%
Replacement of non-performers with
campus recruits would lend fillip to % replaced by freshers (%) 100%
margins Revenues (Rs mn) 220,800
Original employee cost (Rs mn) 32,400
Cost of freshers (Rs mn) 1,440
Salary cost of non-performers (Rs mn) 1,695
Restructured employee cost (Rs mn) 32,145
Savings (%) (0.8)
Gross margin improvement (bps) 12bps
Source: RHH
Fig 36 - Sensitivity analysis of attrition and recruitment mix on margins (bps)

Scenario of >5% attrition and <50% % Replaced by freshers
replacement may not be realistic 0 25 50 100
2.5 38 30 22 6
attrition (%)
Involuntary
5.0 77 60 44 12
7.5 115 91 66 17
10.0 154 121 88 23
Source: RHH
Margins to decline in FY10

Indian players are more confident of maintaining profit margins in FY10 as compared to
the last slowdown due to greater flexibility in their operating models. Variables such as
performance-linked pay, a recruitment freeze, employee mix and a depreciating rupee
are being leveraged to maintain margins in a narrow band in FY10, in the event of
volume and pricing declines.
Decline in profit margins inevitable as Infosys has indicated that it is capable of sustaining a 4–5% pricing shock and still
pricing and volumes take a hit maintaining margins at ~32% through a cut in performance-linked bonuses (~5% of
revenues) and a weak rupee. Despite the confidence, we believe a contraction in
margins is inevitable considering our scenario of a 6–8% pricing decline and a 0–4%
volume growth across all players. We expect EBIT margins to decline by 230–350bps
across our coverage.
18
Fig 37 - Infosys – EBIT margin trend

EBIT margins to fall 230–350bps across (%)
our coverage 30
29 29.7
29.4
28.7
28
28.0 27.9 27.9 27.8
27
27.1 26.9
26
FY03 FY04 FY05 FY06 FY07 FY08 FY09E FY10E FY11E
Rupee depreciation may offer some succour

The recent sharp depreciation of the rupee has provided some silver lining to the
otherwise bleak outlook for the sector. In the quarter to date, the rupee has depreciated
by 7% to Rs 52/US$. This trend is expected to continue in the near term with the rupee
possibly breaching Rs 55/US$. We have anticipated a YoY earnings de-growth for the
sector in FY10, based on our assumption of rupee appreciation to Rs 47/US$ by the end
of March 2010. If current exchange levels are maintained, however, it could have a
material positive impact on earnings growth.
Recent rupee depreciation could turn Our analysis indicates that, for Infosys, every Re 1 of depreciation against the dollar
earnings growth positive in FY10 leads to incremental earnings of ~Rs 3.5 per share. The positive impact would be lower
for TCS, Wipro and HCL Tech due to their higher quantum of forex hedges and
divergent hedging policies. In our opinion, Infosys is best placed whereas HCL Tech is at
the biggest disadvantage.
19
Fig 38 - Infosys currency sensitivity Fig 39 - TCS currency sensitivity

If Rs @ 53/$ If Rs @ 53/$
Base Case Change (%) TCS Base Case Change (%)
in FY10 in FY10
Exchange (Rs/US$) 47.8 53.0 11.0 Exchange (Rs/US$) 47.4 52.6 11.0
Revenues (Rs mn) 215,073 238,627 11.0 Revenues (Rs mn) 285,615 316,889 10.9
YoY growth (%) (0.2) 10.7 - YoY growth (%) 2.1 13.3 -
EBITDA margin (%) 31.5 33.3 181bps EBITDA margin (%) 22.9 25.1 213bps
EBIT margin (%) 27.1 29.3 225bps EBIT margin (%) 20.3 22.7 237bps
FDEPS (Rs) 96.7 115.2 19.1 FDEPS (Rs) 50.2 59.2 17.8
YoY growth (%) (3.8) 14.6 - YoY growth (%) (7.4) 9.1 -
Fig 40 - Wipro currency sensitivity Fig 41 - HCL Tech currency sensitivity

If Rs @ 53/$ If Rs @ 53/$
Wipro Base Case Change (%) HCL Tech Base Case Change (%)
in FY10 in FY10
Exchange (Rs/US$) 46.8 49.1 4.9 Exchange (Rs/US$) 45.5 51.2 12.8
Revenues (Rs mn) 266,451 275,998 3.6 Revenues (Rs mn) 108,537 123,956 14.2
YoY growth (%) 4.5 8.3 - YoY growth (%) 4.3 15.2 -
EBITDA margin (%) 17.8 18.7 91 EBITDA margin (%) 18.6 21.7 306
EBIT margin (%) 13.9 15.0 104 EBIT margin (%) 13.5 17.5 395
FDEPS (Rs) 22.9 25.5 11.3 FDEPS (Rs) 18.4 22.1 20.2
YoY growth (%) (2.6) 8.5 - YoY growth (%) (10.1) 3.6 -
Forex overhang to continue in FY10 – advantage Infosys

Considering the sharp rupee appreciation in FY08 followed by depreciation in FY09,
companies have been caught on the wrong foot over foreign currency hedges. Increased
hedging in FY08 driven by caution over further rupee appreciation is suppressing profits
in FY09 as the currency has witnessed sharp depreciation.
Assuming the rupee remains below Rs 47/US$, the overhang of forex losses is expected
to continue for companies that undertake cash flow hedging. Infosys is better positioned
as compared to its peers due to its limited hedging activity and MTM provisioning every
quarter in the income statement as compared to accumulation in ‘other comprehensive
income’ in the balance sheet for TCS, Wipro and HCL Tech.
Fig 42 - Forex gain/(loss) as percentage of EBIT

Infosys’ limited hedging and MTM
provisioning would lessen the forex
20
overhang
15
10
--
(5)
(10)
(15)
20
Fig 43 - Forex hedge position

Company At start of FY09 At end of Q3FY09 Accumulated OCI
Infosys 760 576 -
TCS 2,000 1,370 (4,351)
Wipro 2,000 1,580 (9,628)
HCL Tech 3,500 1,800 (10,105)
Earnings to fall YoY in FY10

Expect an earnings decline of 3–10% Earnings of all the companies under our coverage are expected to decline by 3% to 10%
across our coverage universe in FY10 (except MindTree due to the absence of forex losses). The magnitude of the fall
is significantly higher when core earnings are considered, i.e. excluding other income.
Core earnings are projected to decline by 10–20% in FY10 due to slower revenue
growth and a fall in operating profit margins.
Fig 44 - Core earnings growth

60
40
20
--
(20)
FY07 FY08 FY09E FY10E
Source: RHH
Fig 45 - Core earnings profile

Infosys
Other income 3,730 7,018 4,206 8,540
as % of PBT 8.8 13.2 6.2 12.8
Reported net income 38,269 46,514 58,488 55,444
Core adj net income 35,770 41,812 55,670 49,723
TCS
Other income 2,181 7,198 (3,716) 680
as % of PBT 4.5 12.4 (6.0) 1.1
Wipro
Other income 2,879 3,208 1,156 3,455
as % of PBT 8.8 8.9 2.9 8.8
HCL Tech
Other income 4,259 (1,370) (1,668) 9
as % of PBT 28.2 (10.9) (10.4) 0.1
21
FCFF generation to improve in FY09 and FY10

FCFF profile to improve on rupee We expect the free cash flow (FCFF) profile of most companies under our coverage to
depreciation and lower capex improve in FY09 and FY10 (except for TCS and Wipro where acquisition costs would
suppress FCFF). Higher FCFF generation in FY09 would be aided by rupee depreciation
during the year. For FY10, we expect the reinvestment rates to drop as companies go
slow on capex. (Working capital investment is expected to continue in FY10 as DSO
deteriorates).
Fig 46 - Free cash flow profile

FY09E FY10E
Company FCFF Reinvestment FCFF/NOPAT FCFF/Sales FCFF Reinvestment FCFF/NOPAT FCFF/Sales
(Rs mn) rate (%) (%) (%) (Rs mn) rate (%) (%) (%)
Infosys 39,925 41 73 19 39,693 37 82 19
TCS 16,749 70 30 6 37,387 26 74 13
Wipro 20,771 42 58 8 16,160 49 51 6
HCL TECH (784) 105 (5) (1) 1,987 84 16 2
Tech Mahindra 5,231 58 94 12 8,288 22 94 18
Patni 1,841 68 69 6 1,751 69 79 6
MindTree 1,865 45 80 15 791 100 52 6
Source: RHH
Introducing our FY11 estimates

FY11 estimates based on a revival in Our FY11 estimates are based on a revival in the demand environment in early 2010.
demand in early 2010 We expect volume growth to be back on track with 3–3.5% QoQ growth in FY11,
resulting in 6–12% YoY growth for the year. Pricing is projected to remain stable with a
marginal positive bias. Profit margins too are expected to recover marginally after the
decline witnessed in FY10, as headwinds related to volume, pricing and cross-currency
movement subsides. Our earnings estimates assume that STPI tax benefits would expire
in FY10, leading to a sudden jump of 5–7% in effective tax rates. Consequent to this we
expect earnings to have flat to negative growth in FY11.
Fig 47 - FY11 financial estimates

Volume Pricing chg Revenues Revenues YoY EBITDA FDEPS YoY chg
Company
growth (%) (%) (US$ mn) (Rs mn) chg (%) margin (%) (Rs) (%)
Infosys 12.1 0.3 5,064 229,718 6.8 31.8 97.1 0.4
TCS 7.7 0.5 6,520 293,428 2.7 24.8 55.7 8.0
Wipro - Global IT 9.2 (0.7) 4,544 285,970 7.3 18.8 24.0 5.1
HCL Tech# 3.9 (1.0) 2,523 110,361 1.7 17.0 18.9 3.0
Tech Mahindra 9.2 0.3 1,078 47,966 4.8 23.2 59.6 (11.9)
MindTree 6.3 1.2 285 12,940 0.8 21.5 40.1 5.9
Patni* 7.8 1.1 666 29,177 4.7 12.9 21.8 4.8
Source: RHH #Y/E June *Y/E Dec
Risk of further earnings downgrade not yet ruled out

Earnings estimates for Indian IT service companies have seen a steady downward
revision over the past one year. Our FY09 and FY10 revenue estimates for Infosys have
been slashed by 1% and 12% respectively from their peaks. Earnings for these years
have been scaled back by 2.9% and 17% respectively from highs in July 2008.
Consensus too has been downsizing estimates.
Earnings downgrades could derail stock Further downgrades to earnings cannot be ruled out if the demand environment worsens
performance in FY10 or recovery is delayed. Our worst case scenario assumes flat volume growth in FY10
with a 7–9% decline in blended pricing for Infosys, TCS and Wipro. Revenue and
earnings estimates in this scenario are lower by 2.3–3.8% and 6.8–7.6% respectively
than our current scenario. In our opinion, downgrades to earnings remain the highest
risk for stock performance in FY10.
22
Fig 48 - Our earnings revision for Infosys Fig 49 - Consensus earnings revision for Infosys
(Rs) FY09E FY10E (Rs) FY09E FY10E
120 120
115 115
110 110
105 105
100 100
95 95
90 90
Oct-07
Aug-08
Dec-07
Feb-08
Apr-08
Jun-08
Oct-08
Dec-08
Feb-09
Oct-07
Dec-07
Feb-08
Apr-08
Jun-08
Oct-08
Dec-08
Aug-08
Feb-09
Source: RHH Source: Bloomberg
Worst case scenario suggests 14–22% downside in stock prices

Our worst case analysis is based on the assumption that tier-1 customers slash budgets
by 20–25% and spending post-March remains fluid with limited long-term visibility. In
this scenario, we expect companies to witness a volume decline of 0.2–1.9%. Pricing is
expected to contract by 7–8% with a drop in utilisation rates despite limited hiring. Our
worst case earnings estimates are lower by 5–10% as compared to base case, and
expected stock returns are negative 14–22%.
On the other hand, the best case scenario assumes a quick recovery post-Q2FY10 with
volumes rising 4% QoQ and pricing pressure limited to 5% in FY10. Profit margins
would remain steady YoY as companies are able to maintain high utilisation rates.
Fig 50 - Infosys scenario analysis

Worst case Base case Best case
Assumptions
Volume growth (%) (0.2) 3.6 8.2
Blended pricing change (%) (7.9) (6.9) (5.6)
Net additions 481 2,393 6,216
Net utilisaiton (%) 72.5 74.6 76.6
Financials
Revenues (US$ mn) 4,291 4,502 4,771
YoY growth (%) (8.1) (3.6) 2.2
Revenues (Rs mn) 205,014 215,073 227,832
YoY growth (%) (4.9) (0.2) 5.7
EBIT margin (%) 25.7 27.1 28.6
FDEPS (Rs) 88.0 96.7 107.5
YoY growth (%) (12.4) (3.8) 7.0
Target P/E (x) 11.0 12.1 13.5
Target price (Rs) 968 1,173 1,451
Upside/downside (%) (19.2) (2.1) 21.0
Source: RHH
23
Fig 51 - TCS scenario analysis

Assumptions
Volume growth (%) 8.2 11.0 15.2
Net additions 888 3,044 7,734
Financials
Revenues (US$ mn) 5,807 6,027 6,351
YoY growth (%) (4.7) (1.0) 4.3
Revenues (Rs mn) 275,191 285,615 300,918
YoY growth (%) (1.6) 2.1 7.6
EBIT margin (%) 20.1 20.3 23.1
FDEPS (Rs) 47.8 50.2 57.6
YoY growth (%) (11.9) (7.4) 6.2
Target P/E (x) 8.3 9.0 10.1
Target price (Rs) 394 452 584
Upside/downside (%) (11.4) 1.6 31.2
Source: RHH
Fig 52 - Wipro scenario analysis

Assumptions - Global IT Services
Volume growth (%) (0.6) 1.5 3.5
Net additions (1,813) (651) 1,285
Financials
Revenues (US$ mn) - Global IT 3,379 3,482 3,577
YoY growth (%) (0.1) (4.2) (1.5)
Revenues (US$ mn) - Overall 5,571 5,691 5,791
YoY growth (%) (2.6) (0.6) 1.3
Revenues (Rs mn) 260,897 266,451 271,150
YoY growth (%) 0.0 4.5 6.4
EBIT margin (%) 12.7 13.9 14.2
FDEPS (Rs) 20.5 22.9 23.7
YoY growth (%) (12.4) (2.6) 1.4
Target P/E (x) 7.8 8.4 9.5
Target price (Rs) 159 197 226
Upside/downside (%) (20.8) (4.0) 12.5
Source: RHH
24
Valuation
IT remains market performer; Infosys and TCS outperform
Stock performance reveals investor In the year to date, returns from the BSE IT index have been more or less in line with the
preference for large companies with broader market performance. However, we find a significant divergence in returns from
relative resilience to the downturn individual stocks. Infosys and TCS have outperformed the overall sector whereas HCL
Tech and Patni remain the underperformers. In our opinion, investors prefer companies
with a large scale of operations, limited de-growth in FY10, and the ability to bounce
back the fastest in a recovery phase.
Fig 53 - YTD stock performance

(%) YTD 3-mnth 6-mnth 1-year
Sensex (11.0) (1.9) (43.0) (48.5)
BSE IT (8.5) (15.1) (49.9) (44.8)
Infosys 7.8 4.0 (32.3) (17.2)
TCS (3.1) (13.4) (45.5) (45.7)
Wipro (12.6) (8.3) (54.7) (51.3)
HCL Tech (17.1) (20.5) (61.7) (64.9)
Tech Mahindra (0.5) (0.2) (67.6) (63.8)
MindTree (14.9) (14.6) (42.8) (40.1)
Patni (25.0) (26.6) (58.4) (58.4)
Cognizant (3.8) (7.4) (41.2) (42.1)
Current valuations are at historic lows

Current IT valuations at a nadir – below Valuations of Indian IT players have been consistently falling in the last two years; first
the troughs seen in May/June ’03 due to the rupee’s sharp appreciation and thereafter due to the earnings slowdown
resulting from a weak demand environment. Current valuations are at historical lows
and are below the trough valuation seen in May/June ’03. During the last slowdown, the
lowest one-year forward P/E multiple recorded by Infosys was 13x as compared to 11x
in December ’08.
Fig 54 - Infosys 1-year fwd P/E chart
32
28
24
20
16
12
8
Sep-03
Feb-04
Jul-04
Oct-05
Jan-07
Jun-07
Sep-08
Feb-09
Apr-03
Dec-04
May-05
Mar-06
Aug-06
Nov-07
Apr-08
Source: RHH
25
FCFF yields currently at peak levels

2003 recovery matched peaking in FCFF With the drop in valuations and improvement in FCFF profile in FY10, current one-year
yields but premature to say the same forward FCFF yields are at historic highs. The last time similar yields were witnessed was
now in May/June ’03 when valuations bottomed out and started to recover. Though it may be
too early to judge whether a bottom has been reached this time around, we do believe
that the downside from current valuations could be limited.
Fig 55 - Infosys FCFF yield chart

(%)
--
Jul-04
Apr-05
Jan-06
Jul-07
Apr-08
Jan-09
Oct-06
Apr-99
Jan-00
Jul-01
Apr-02
Jan-03
Oct-00
Oct-03
Source: RHH
Fig 56 - FCFF yield

FY09E FY10E
Mkt Cap
Company (Rs mn) FCFF FCFF yield FCFF FCFF yield
(Rs mn) (%) (Rs mn) (%)
Infosys 688,248 39,925 5.8 39,693 5.8
TCS 452,999 16,749 3.7 37,387 8.3
Wipro 299,437 20,771 6.9 16,160 5.4
HCL Tech 63,846 (784) (1.2) 1,987 3.1
Tech Mahindra 29,855 5,231 17.5 8,288 27.8
Patni 12,176 1,841 15.1 1,751 14.4
MindTree 7,626 1,865 24.5 791 10.4
Source: RHH
But lower valuations expected to continue in FY10

Economic slowdown and termination of Empirical evidence suggests that expectations regarding future growth weigh heavily on
STPI tax benefits to mute IT sector the P/E multiples of Indian IT stocks. These companies enjoyed premium valuations over
valuations the broader market as well as global players due to their higher earnings growth, better
margins, strong return ratios and robust cash reserves. However, with growth slowing
down significantly over FY07-FY09, the premium too has shrunk substantially.
As growth decelerates further in FY10 and FY11 due to the economic slowdown and
termination of STPI tax benefits respectively, we expect the lower double-digit
valuations to continue in FY10. Infosys is likely to trade within an upper and lower band
of 13x and 9x one-year forward P/E respectively in FY10.
26
Fig 57 - Infosys – 1yr fwd P/E vs earnings growth
P/E (x) EPS growth (%)

130
110
90
70
50
30
10
Apr-99
Jan-00
Oct-00
Jul-01
Apr-02
Jan-03
Oct-03
Jul-04
Apr-05
Jan-06
Oct-06
Jul-07
Apr-08
Jan-09
Source: RHH
Fig 58 - Infosys premium over Sensex (%) Fig 59 - Infosys premium over Accenture (%)
100 100
80 80
60
60
40
40
20
20
--
(20) 0
(40) (20)
Jan-06
Apr-06
Jul-06
Oct-06
Jul-07
Oct-07
Jul-08
Oct-08
Jan-07
Apr-07
Jan-08
Apr-08
Jan-09
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
Source: RHH, Bloomberg Source: RHH, Bloomberg
Target P/E multiples scaled back across our coverage

We downgrade valuations of our Considering the expectations of an earnings decline both on core as well as reported
universe on expected downshift in basis, we are decreasing our target P/E multiples for all companies. We now value
earnings Infosys at 12.1x its FY10E earnings, with TCS and Wipro being valued at a discount to
Infosys. Other companies under our coverage have been valued on a P/E basis at a
discount to our target multiple for TCS.
Fig 60 - Revised target P/E multiple

New tgt Old tgt Change Target
Company Year end
multiple (x) multiple (x) (%) based on
Infosys March 12.1 12.5 (3.2) FY10
TCS March 9.0 10.0 (10.0) FY10
Wipro March 8.5 9.4 (9.6) FY10
HCL Tech June 5.0 6.0 (16.7) FY10
Tech Mahindra March 4.3 5.2 (17.3) FY10
MindTree March 4.9 5.5 (10.9) FY10
Patni December 4.5 - - CY09
Source: RHH
27
Fig 61 - Indian/Global IT valuation

Mkt Cap Year P/E(x) EV/EBIDTA(x) P/BV
CMP
(US$ mn) End FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E
Indian IT Services
Infosys 13,321 1,195 Mar 15.1 11.9 12.4 11.2 8.2 8.6 4.9 3.7 3.0
TCS 8,743 465 Mar 9.0 8.6 9.3 7.1 5.9 6.5 3.6 2.9 2.5
Wipro 5,848 206 Mar 9.4 8.8 9.0 7.9 6.3 6.6 2.3 2.0 1.7
HCL Tech 1,235 96 Jun 5.8 4.7 5.2 4.4 3.4 3.7 1.2 1.1 1.0
Tech Mahindra 592 250 Mar 4.2 3.5 3.7 2.9 2.0 2.1 2.4 1.4 1.0
MindTree 151 207 Mar 7.8 9.4 5.5 7.1 2.7 3.4 1.4 1.0 0.8
Patni Computers 237 96 Dec 3.5 4.3 4.5 1.3 1.6 1.8 0.5 0.4 0.4
Sector Average - - - 11.5 9.8 10.2 8.8 6.8 7.1 3.8 2.9 2.5
Global IT Companies
Cognizant 5,071 17 Dec 11.8 10.8 10.0 7.4 7.0 6.0 2.7 2.2 1.8
Accenture 20,685 28 June 10.5 9.9 9.2 5.4 5.1 4.9 7.3 6.0 5.8
Atos Origin 1,613 23 Dec 7.9 9.0 7.6 4.1 4.4 4.1 0.7 0.7 0.7
CISCO 83,586 14 July 9.3 11.4 12.0 4.9 6.0 6.5 2.5 2.2 2.0
Intel 68,468 12 Dec 11.5 28.8 14.8 4.3 7.6 5.4 1.8 1.8 1.7
Oracle 76,702 15 May 12.0 10.7 9.8 7.7 6.9 6.7 3.5 3.1 2.6
SAP 38,844 32 Dec 12.2 12.5 11.3 11.8 10.2 9.2 5.4 4.8 3.9
IBM 119,476 89 Dec 8.7 9.1 9.9 6.3 6.6 6.3 4.1 3.9 3.2
HP 67,823 28 Oct 7.8 7.6 7.0 5.1 4.7 4.6 1.8 1.6 1.4
Genpact 1,717 8 Dec 13.1 12.8 10.8 6.8 6.6 5.7 1.4 1.6 1.4
WNS 153 4 Mar 7.4 3.5 2.7 8.2 4.5 3.7 0.7 0.7 0.6
Syntel 751 18 Dec 9.5 9.5 9.0 5.8 5.5 5.3 2.8 2.5 2.0
ACS 4,400 45 June 12.8 12.2 10.7 5.9 5.6 5.1 2.2 2.1 1.6
Capgemini 4,036 28 Dec 6.6 8.3 8.2 3.0 3.4 3.5 0.8 0.8 0.7
Average - - - 10.0 12.6 10.6 6.2 6.6 6.2 3.3 3.0 2.5
Infosys still perceived as a safe haven

Premium valuations for ‘safe bet’ Amongst Indian players, Infosys has always commanded premium valuations over its
Infosys to continue in FY10 peers. Since the beginning of the slowdown, however, the disparity between valuations
has increased considerably. We attribute this phenomenon to the perception of Infosys
as a safer bet during the downturn due to its cushion of cash reserves and ability to
maintain margins and ratios in a narrow band. And with stronger growth expectations
from Infosys vis-à-vis peers, we expect premium valuations to continue in FY10 as well.
28
Fig 62 - TCS 1-yr fwd P/E discount to Infosys Fig 63 - Wipro 1-yr fwd P/E discount to Infosys
30 40.0
20 30.0
10 20.0
0 10.0
(10) 0.0
(20) (10.0)
(30) (20.0)
(40) (30.0)
Jul-07
Nov-07
Apr-07
Jul-07
Oct-07
Jul-08
Oct-08
Jan-07
Mar-07
May-07
Sep-07
Jan-08
Mar-08
Jul-08
Nov-08
May-08
Sep-08
Jan-09
Jan-07
Jan-08
Apr-08
Jan-09
Fig 64 - HCL Tech 1-yr fwd P/E discount to Infosys Fig 65 - Tech Mahindra 1-yr fwd P/E discount to Infosys
20.0
Oct-07
Oct-08
Apr-07
Apr-08
Jan-07
Jan-08
Jan-09
Jul-07
Jul-08
0.0
0.0
(10.0) (20.0)
(20.0) (40.0)
(30.0)
(60.0)
(40.0)
(80.0)
(50.0)
Jan-07
Apr-07
Jul-07
Oct-07
Jul-08
Oct-08
Jan-08
Apr-08
Jan-09
(60.0)
Fig 66 - MindTree 1-yr fwd P/E discount to Infosys Fig 67 - Patni 1-yr fwd P/E discount to Infosys
50.0
Oct-07
Oct-08
Apr-07
Apr-08
Jan-07
Jan-08
Jan-09
Jul-07
Jul-08
25.0
0.0
0.0
(15.0)
(25.0)
(30.0)
(50.0) (45.0)
(75.0) (60.0)
Mar-07
Jul-07
Nov-07
Jul-08
Nov-08
May-07
Sep-07
Jan-08
Mar-08
May-08
Sep-08
Jan-09
(75.0)
29
Companies
30
Infosys Technologies Company Update 06 March 2009
Infosys Technologies What’s New? Target Rating Estimates
Outlook bleak; we downgrade estimates

During its recent investor interaction, the Infosys management indicated that CMP TARGET RATING RISK
the demand environment has deteriorated further in Q4FY09. Prevailing Rs 1,195 Rs 1,173 HOLD HIGH
uncertainties in the economic environment are leading to elongated budget
cycles and delays in new project ramp-ups. Key clients are expected to cut IT
spending budgets by 8–10%; especially the ones that have undergone M&A
BSE NSE BLOOMBERG
activity or bankruptcy. Instances of clients pushing for price negotiations have
increased during the quarter. With expectations of a recovery no sooner than 500209 INFOSYSTCH INFO IN
Q4FY10, we are reducing our volume growth, pricing and earnings estimates
for FY10. Company data
Market cap (Rs mn / US$ mn) 683,899 / 13,986
Volumes to remain sluggish till Q1FY10
Outstanding equity shares (mn) 573
Considering the uncertainties over client budget cycles and the resultant flux in
Free float (%) 82.4
spending, we expect Infosys’ volume growth to remain sluggish in both Q4FY09
and Q1FY10. We are building in volume drop of 1.7% and flat volume growth in Dividend yield (%) 1.8
these quarters with a marginal recovery from Q2FY10 onwards. For FY10, we 52-week high/low (Rs) 2,047 / 1,040
expect Infosys to record an overall volume growth of 3.6%. 2-month average daily volume 1,688,738
Pricing squeeze to continue Stock performance

Blended pricing for Infosys declined by 1.8% QoQ in constant currency terms.
Returns (%) CMP 1-mth 3-mth 6-mth
We expect the downward pressure on pricing to continue for the next 3–4
Infosys 1,195 (6.4) 0.6 (33.0)
quarters as price discounts offered by the company in order to sustain volumes
BSE IT 2,033 (7.4) (17.5) (50.2)
are fully reflected in the financials. On a like-to-like basis, we expect blended
Sensex 8,446 (8.2) (8.5) (43.3)
pricing to decline by 6.5% YoY in FY10.
Fig 1 - Infosys QoQ volume growth (%) P/E comparison

12 (x) Infosys Industry
20 15.1
10 12.4
15 11.5 11.9 10.2
9.8
8 10
6 5
0
4 FY08 FY09E FY10E
2
--
Valuation matrix
(2)
(x) FY08 FY09E FY10E FY11E
Q1FY07
Q2FY07
Q3FY07
Q4FY07
Q1FY08
Q2FY08
Q3FY08
Q4FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09E
Q1FY10E
Q2FY10E
Q3FY10E
Q4FY10E
P/E @ CMP 15.1 11.9 12.4 12.3

P/E @ Target 14.8 11.7 12.1 12.1
EV/EBITDA @ CMP 11.1 8.2 8.6 8.0
Financial highlights Profitability and return ratios

(Rs mn) FY08 FY09E FY10E FY11E (%) FY08 FY09E FY10E FY11E
Revenue 166,920 215,518 215,073 229,718 EBITDA margin 31.4 32.9 31.5 31.8
Growth (%) 20.1 29.1 (0.2) 6.8 EBIT margin 27.8 29.4 27.1 26.9
Adj net income 45,340 57,615 55,444 55,658 Adj PAT margin 27.2 26.7 25.8 24.2
Growth (%) 24.1 27.1 (3.8) 0.4 ROE 36.2 35.8 27.2 23.0
FDEPS (Rs) 79.1 100.5 96.7 97.1 ROIC 59.6 64.5 49.5 44.6
Growth (%) 23.3 27.1 (3.8) 0.4 ROCE 36.2 35.8 27.2 23.0
31
Guidance likely to be conservative

Expect -2% to 0% growth guidance for We believe the Infosys management would deviate from its 70:30 rule (70% visibility
FY10 dollar revenues and 30% expectations) while extending guidance for FY10. We anticipate a highly
conservative guidance, especially after the 14% dollar revenue growth (constant
currency) in FY09 as against 20% guided at the beginning of the year. The guidance is
unlikely to be back-ended in nature as was the case in FY09, with the management now
liable to adopt a ‘deliver and raise’ approach. We expect the management to guide
towards a -2% to 0% growth in dollar revenues.
Fig 68 - Infosys - guidance vs performance

(%) Guidance Actual
60
50
50 44
41
40 35 35
31 30 30 30
28
30
20
20 14
10
0
FY04 FY05 FY06 FY07 FY08 FY09E
Guidance overhang could impact stock performance

Pre-guidance investor pessimism may We do not rule out extreme investor pessimism as we await Infosys’ guidance in April.
hamper stock performance This could induce caution among investors, creating an overhang on the stock
performance. Historically too Infosys’ price return has been rather subdued for a couple
of months before April when it gives out its full-year guidance.
Fig 69 - Infosys stock performance – pre/post guidance

US$ revenue
(%) 40 days before 30 days before 15 days before 10 days after 20 days after
growth guidance
Apr-03 (2.1) 1.7 (5.6) 28 10.5 9.8
Apr-04 (4.4) 1.3 1.1 31 (4.4) (4.6)
Apr-05 (2.9) (2.9) (4.8) 30 (2.6) 5.3
Apr-06 16.3 11.2 11.7 30 (3.5) (3.9)
Apr-07 (11.2) (1.5) (2.3) 30 (5.8) (7.3)
Apr-08 (8.0) (12.2) 4.5 20 9.6 18.3
Expect profit margins to decline in FY10

EBIT margins to decline by 290bps YoY Despite the management’s confidence in its ability to maintain margins in the face of
to 27.1% in FY10 – the lowest ever for falling volumes and pricing, we believe this would prove a challenging task. Though
Infosys rupee depreciation and a possible cut in variable pay would comfort margins in FY10,
these measures would be insufficient to compensate for the negative impact of poorer
pricing, a volume slowdown and the hit on utilisation due to project ramp-downs and
slower new project ramp-ups. We expect EBIT margins to decline by 290bps YoY to
27.1% in FY10; the lowest in the company’s history.
32
Fig 70 - Infosys profit margin trend

(%) Gross margin EBITDA margin EBIT margin
50
49.6
45 47.5 47.0 46.8 46.2
44.8 45.5
44.2
40
34.5
32.6 32.7 32.4 32.9
35
31.4 31.3 31.5
30
29.6 28.3 28.7 27.8 27.7 27.7 29.4
25 27.1
20
FY03 FY04 FY05 FY06 FY07 FY08 FY09E FY10E
Revising estimates downwards

Earnings growth to turn negative in Consequent to our downward revision in volume growth and pricing assumptions, we
FY10 as volumes and pricing weaken are reducing our revenue and earnings estimates for FY10. We now expect dollar
revenues to decline by 3.6% YoY as against growth of 2.5% earlier. In rupee terms,
revenues would benefit from a weak currency and remain flat YoY. Our FY10 earnings
estimates are revised downwards by 8.1% to Rs 96.7, a YoY decline of 3.8% due to
slower revenue growth and a fall in profitability. Core earnings, excluding other income,
are expected to decline by 10.7% YoY in FY10.
Fig 71 - Infosys estimate revision

FY09E FY10E
Key parameters
Old New % Chg Old New % Chg
Revenue (Rs mn) 216,475 215,518 (0.4) 224,299 215,073 (4.1)
EBITDA margin (%) 33.1 32.9 (17bps) 32.3 31.5 (84bps)
Adj Net profit (Rs mn) 58,238 57,615.3 (1.1) 60,301 55,444.3 (8.1)
EPS (Rs) 101.6 100.5 (1.1) 105.2 96.7 (8.1)
Source: RHH
Decreasing target price to Rs 1,173

Target FY10E P/E multiple cut to 12.1x We are reducing our target P/E multiple for Infosys from 12.5x earlier to 12.1x on FY10E
on earnings de-growth due to expectations of negative earnings growth in FY10. This multiple is at a 20%
premium to our Sensex target P/E multiple of 10x; in line with the current valuation
premium enjoyed by the stock. Our one-year target price for Infosys has been revised
downwards to Rs 1,173 from Rs 1,315 earlier, a decrease of 10.8%. We are moving our
recommendation to Hold from Accumulate, aligning it to our new recommendation
criteria (please refer to disclaimer).
33
Consolidated financials
Profit and Loss statement Balance sheet
Y/E March (Rs mn) FY08 FY09E FY010E FY11E Y/E March (Rs mn) FY08 FY09E FY10E FY11E
Revenues 166,920 215,518 215,073 229,718 Cash and cash eq 82,350 101,861 133,010 159,300
Growth (%) 20.1 29.1 (0.2) 6.8 Accounts receivable 32,970 37,685 37,738 44,080
EBITDA 52,380 70,975 67,660 73,154 Inventories - - - -
Growth (%) 19.3 35.5 (4.7) 8.1 Other current assets 14,860 20,669 23,091 27,530
Depreciation & amortisation 5,980 7,681 9,449 11,333 Investments 720 - - -
EBIT 46,400 63,294 58,211 61,821 Gross fixed assets 47,500 64,000 77,000 91,750
Growth (%) 19.7 36.4 (8.0) 6.2 Net fixed assets 27,640 36,607 40,035 43,328
Interest - - - - CWIP 13,240 11,240 10,240 9,240
Other income 7,040 4,229 8,540 9,848 Intangible assets 6,890 6,890 6,890 6,890
EBT 53,440 67,523 66,751 71,669 Deferred tax assets, net 1,190 1,603 1,929 2,299
Income taxes 6,850 8,977 11,307 16,011 Other assets - - - -
Effective tax rate (%) 12.8 13.3 16.9 22.3 Total assets 179,860 216,555 252,932 292,666
Extraordinary items - - - - Accounts payable 16,180 17,901 13,658 15,707
Min into / inc from associates - - - - Other current liabilities 2,940 3,502 4,017 4,411
Reported net income 46,590 58,545 55,444 55,658 Provisions 22,790 11,472 11,768 12,396
Adjustments 1,250 930 - - Debt funds - - - -
Adjusted net income 45,340 57,615 55,444 55,658 Other liabilities - - - -
Growth (%) 24.1 27.1 (3.8) 0.4 Equity capital 2,860 2,863 2,865 2,866
Shares outstanding (mn) 572.0 572.6 573.0 573.3 Reserves & surplus 135,090 180,817 220,624 257,285
FDEPS (Rs) (adj) 79.1 100.5 96.7 97.1 Shareholder's funds 137,950 183,680 223,489 260,151
Growth (%) 23.3 27.1 (3.8) 0.4 Total liabilities 179,860 216,555 252,932 292,666
DPS (Rs) 33.3 21.0 25.0 30.0 BVPS (Rs) 246.2 325.8 395.0 458.8
Cash flow statement Financial ratios

Y/E March (Rs mn) FY08 FY09E FY10E FY11E Y/E March FY08 FY09E FY10E FY11E
Net income + Depreciation 52,570 66,226 64,893 66,991 Profitability & Return ratios (%)
Non-cash adjustments (180) 243 281 (47) EBITDA margin 31.4 32.9 31.5 31.8
Changes in working capital (6,100) (8,135) (6,107) (8,197) EBIT margin 27.8 29.4 27.1 26.9
Cash flow from operations 46,290 58,334 59,067 58,747 Net profit margin 27.2 26.7 25.8 24.2
Capital expenditure (14,940) (14,500) (12,000) (13,750) ROE 36.2 35.8 27.2 23.0
Change in investments (710) 720 - - ROCE 36.2 35.8 27.2 23.0
Other investing cash flow (1,010) - - - Working Capital & Liquidity ratios
Cash flow from investing (16,660) (13,780) (12,000) (13,750) Receivables (days) 71 70 75 75
Issue of equity 580 712 480 352 Inventory (days) - - - -
Issue/repay debt - - - - Payables (days) 55 53 48 42
Dividends paid (8,350) (25,755) (16,398) (19,059) Current ratio (x) 6.8 7.5 11.0 11.5
Other financing cash flow - - - - Quick ratio (x) 5.0 1.8 2.1 2.2
Change in cash & cash eq 21,860 19,511 31,149 26,290 Turnover & Leverage ratios (x)
Closing cash & cash eq 82,350 101,861 133,010 159,300 Gross asset turnover 3.8 3.9 3.1 2.7
Economic Value Added (EVA) analysis Total asset turnover 1.1 1.1 0.9 0.8
Interest coverage ratio - - - -
Y/E March FY08 FY09E FY10E FY11E
Adjusted debt/equity - - - -
WACC (%) 14.7 15.1 15.1 15.1
Valuation ratios (x)
ROIC (%) 59.6 64.5 49.5 44.6
EV/Sales 3.5 2.7 2.7 2.5
Invested capital (Rs mn) 76,950 93,292 102,247 113,247 EV/EBITDA 11.1 8.2 8.6 8.0
EVA (Rs mn) 34,538 46,106 35,177 33,417 P/E 15.1 11.9 12.4 12.3
EVA spread (%) 44.9 49.4 34.4 29.5 P/BV 4.9 3.7 3.0 2.6
34
Quarterly trend
Particulars Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09
Revenue (Rs mn) 42,720 45,420 48,510 54,112 57,860
YoY growth (%) 16.8 20.2 28.5 31.7 35.4
QoQ growth (%) 4.0 6.3 6.8 11.5 6.9
EBITDA (Rs mn) 12,375 14,732 14,700 17,904 20,306
EBITDA margin (%) 29.0 32.4 30.3 33.1 35.1
Adj net income (Rs mn) 11,796 12,265 12,584 14,070 15,554
YoY growth (%) 20.9 20.9 22.5 28.2 31.9
QoQ growth (%) 7.5 4.0 2.6 11.8 10.6
DuPont analysis
(%) FY07 FY08 FY09E FY10E FY11E
Tax burden (Net income/PBT) 85.9 84.8 85.3 83.1 77.7
Interest burden (PBT/EBIT) 109.7 115.2 106.7 114.7 115.9
EBIT margin (EBIT/Revenues) 27.9 27.8 29.4 27.1 26.9
Asset turnover (Revenues/Avg TA) 121.9 106.3 108.7 91.6 84.2
Leverage (Avg TA/Avg equtiy) 125.1 125.3 123.3 115.3 112.8
Return on equity 40.1 36.2 35.8 27.2 23.0
Company profile Shareholding pattern
Infosys Technologies (Infosys) is the second largest Indian offshore (%) Jun-08 Sep-08 Dec-08
IT services player with annual revenues and profits of US$ 4.2bn Promoters 16.5 16.5 16.5
and US$ 1.2bn respectively. The company provides end-to-end FIIs 32.5
33.6 33.0
solutions to clients with diversified services that range from
Banks & FIs 7.9 8.4 8.6
application development and maintenance to consulting and BPO.
Being an early proponent of the Global Delivery Model (GDM), Public 42.0 42.6 41.9
Infosys delivers its services largely through offshore locations
(~75% of employee effort) such as India.
Recommendation history Stock performance

Date Event Reco price Tgt price Reco
1,800 ● Accumulate ● Hold
21-Aug-08 RHH Compendium 1,664 1,920 Accumulate
1,600
6-Oct-08 Quarterly Preview 1,391 1,596 Accumulate
13-Oct-08 Results Review 1,225 1,426 Accumulate 1,400
21-Nov-08 Sector Report 1,181 1,360 Accumulate 1,200

14-Jan-09 Results Review 1,230 1,315 Accumulate 1,000
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
6-Mar-09 Sector Report 1,195 1,173 Hold
35
Fig 72 - Infosys financial model

Q1FY09A Q2FY09A Q3FY09A Q4FY09E FY09E Q1FY10E Q2FY10E Q3FY10E Q4FY10E FY10E FY11E
Exchange rate (Rs/$) 42.0 44.5 49.4 48.9 46.2 48.7 48.1 47.5 46.9 47.8 45.4
Total Employees 94,379 100,306 103,078 103,432 103,432 102,847 104,304 104,915 105,825 105,825 115,707
Technical Employees 87,816 93,624 95,910 96,216 96,216 95,895 97,254 97,822 98,671 98,671 108,391
qoq/yoy growth (%) 3.3 6.6 2.4 0.3 13.2 (0.3) 1.1 0.6 0.9 2.6 9.9
Sales & support 6,563 6,682 7,168 7,216 7,216 6,952 7,051 7,092 7,154 7,154 7,316
Gross additions 7,182 10,117 5,997 3,704 27,000 2,880 4,800 4,000 4,320 16,000 25,000
Net additions 3,192 5,927 2,772 354 12,245 (585) 1,457 610 910 2,393 9,882
Attrition 3,990 4,190 3,225 3,350 14,755 3,465 3,343 3,390 3,410 13,607 15,118
Net utilisation (%) 72.2 73.7 74.5 74.5 73.7 74.0 75.5 74.8 74.3 74.6 75.9
Billed volumes 183,604 194,073 198,932 195,520 772,129 195,462 200,498 200,494 203,755 800,211 897,225
qoq/yoy growth (%) 1.7 5.7 2.5 (1.7) 17.8 (0.0) 2.6 (0.0) 1.6 3.6 12.1
Offshore effort mix 75.7 76.0 76.9 76.5 76.3 76.8 76.8 77.0 77.0 76.9 77.0
Billing rates ($/Man Month)
Onsite realisation 12,465 12,362 11,654 11,333 11,951 11,175 11,091 11,063 11,091 11,105 11,175
qoq/yoy growth (%) 1.6 (0.8) (5.7) (2.8) (1.6) (1.4) (0.8) (0.3) 0.3 (7.1) 0.6
Offshore realisation 4,305 4,343 4,150 4,050 4,209 4,003 3,979 3,971 3,962 3,979 3,973
qoq/yoy growth (%) (2.2) 0.9 (4.5) (2.4) (4.5) (1.2) (0.6) (0.2) (0.3) (5.5) (0.1)
Blended realisation 6,291 6,266 5,885 5,762 6,046 5,671 5,633 5,603 5,601 5,627 5,644
qoq/yoy growth (%) (0.6) (0.4) (6.1) (2.1) (5.1) (1.6) (0.7) (0.5) (0.0) (6.9) 0.3
Revenues 1,155 1,216 1,171 1,127 4,668 1,108 1,129 1,123 1,141 4,502 5,064
qoq/yoy growth (%) 1.1 5.3 (3.7) (3.8) 11.8 (1.6) 1.9 (0.5) 1.6 (3.6) 12.5
Revenues 48,510 54,112 57,860 55,036 215,518 53,973 54,302 53,321 53,477 215,073 229,718
qoq/yoy growth (%) 6.8 11.5 6.9 (4.9) 29.1 (1.9) 0.6 (1.8) 0.3 (0.2) 6.8
Gross margin (%) 43.1 46.6 46.8 45.3 45.5 43.7 44.1 44.3 44.7 44.2 4,484.5
EBITDA margin (%) 30.3 33.1 35.1 32.8 32.9 31.0 31.4 31.5 32.0 31.5 31.8
Effective tax rate 11.1 15.0 15.9 15.8 14.7 16.9 16.9 16.9 16.9 16.9 22.3
Adj net profit 12,894 14,070 16,354 15,171 58,488 13,664 13,953 13,787 14,040 55,444 55,658
qoq/yoy growth (%) 3.4 9.1 16.2 (7.2) 25.7 (9.9) 2.1 (1.2) 1.8 (5.2) 0.4
No. of shares 572 573 573 573 573 573 573 573 573 573 573
Dil no. of shares 573 573 573 573 573 573 573 573 573 573 573
Basic EPS 22.5 24.6 28.6 26.5 100.5 23.8 24.3 24.1 24.5 96.7 97.1
Diluted EPS 22.5 24.5 28.5 26.5 100.5 23.8 24.3 24.0 24.5 96.7 97.1
Source: Company, RHH
36
Tata Consultancy Services Company Update 06 March 09
Tata Consultancy Services What’s New? Target Rating Estimates
Sizable exposure to financial services prime concern

TCS has been a prominent player in India in signing large deals. In the current CMP TARGET RATING RISK
quarter too, the company has been successful in bagging two large deals from Rs 465 Rs 452 SELL HIGH
Ducati and Phone4U. Though the large-deals focus of the company during the
last 2-3 years is expected to provide revenue visibility in the current challenging
environment, we believe project ramp downs/cancellations witnessed in the last
BSE NSE BLOOMBERG
two quarters will impact growth prospects in FY10. Excluding contribution from
TCS e-Serve (earlier Citigroup Global Services), we expect volumes to grow 532540 TCS TCS IN
3.2% YoY and revenues (US$) to decline by 4.3% YoY in FY10. TCS’ 42%
exposure to customers in the financial services domain remains a principal Company data
concern. Market cap (Rs mn / US$ mn) 455,054 / 8,751
Financial services main source of revenues
Free float (%) 24
In FY08, TCS derived 43.6% of its revenues from the financial services sector,
which has been worst hit by the current economic downturn. The contribution of Dividend yield (%) 3.4
the financial services vertical to the company’s growth in FY05-08 has been the 52-week high/low (Rs) 1,057 / 415
highest with a CAGR of 43.3% as against 33.3% witnessed by the rest of the 2-month average daily volume 1,430,625
company during the period. The news flow from these clients particularly, has
been negative in the last six months. Incremental volumes from these clients Stock performance
appear to be drying up as contribution of the vertical has decreased to 42% in Returns (%) CMP 1-mth 3-mth 6-mth
9MFY09. With expectations for a 15-20% cut in IT spending budgets by financial TCS 465 (7.6) (16.2) (45.4)
players, TCS could be impacted more than its peers in the industry. With the BSE IT 2,033 (7.4) (17.5) (50.2)
consolidation of TCS e-Serve, the concentration of clients from the troubled
Sensex 8,446 (8.2) (8.5) (43.3)
vertical would only increase further.
TCS e-Serve to impact pricing and margins in Q4 P/E comparison

Due to its lower pricing as compared to overall company, the consolidation of (x) TCS Industry
TCS e-Serve in Q4FY09 is expected to bring down the average realisation by 15 11.5
9.0 8.6 9.8 9.3 10.2
6.7% QoQ. Excluding its impact, pricing is seen declining by 4% QoQ. Blended 10
pricing would decline by 10.8% YoY in FY10. EBITDA and EBIT margins of the
5
consolidated company are expected to decline by 60bps and 80bps, respectively,
in Q4FY09. 0
FY08 FY09E FY10E
Deal flow encouraging but near-term contribution may remain low
In Q4FY09, TCS has won six large contracts, which also include two deals of the
Valuation matrix
size of US$ 100mn and US$ 250mn. In current quarter too the company has
(x) FY08 FY09E FY10E FY11E
been successful in bagging two large deals so far. These deals are in
manufacturing, retail, hi-tech and healthcare verticals. Though the execution of P/E @ CMP 9.0 8.6 9.3 8.6
these deals is expected to start in the next 1-2 quarters, in our opinion it would P/E @ Target 8.8 8.3 9.0 8.4
take 3-4 quarters for these to translate into a steady stream of revenues for the EV/EBITDA @ CMP 7.2 5.9 6.5 6.0
company.

Growth (%) 22.7 22.3 2.1 2.7 EBIT margin 23.5 23.8 20.3 21.3
Growth (%) 23.1 4.9 (7.4) 7.8 ROE 47.4 38.3 29.4 27.7
FDEPS (Rs) 51.7 54.3 50.2 54.2 ROIC 52.6 48.0 35.0 34.3
Growth (%) 23.1 4.9 (7.4) 7.8 ROCE 44.9 36.8 28.5 26.9
37
Expecting organic volume growth to be 2.7% in FY10

Including TCS e-Serve, we expect volume growth for the overall company to be 11% in
Pace of revenues from financial services FY10. However, on an organic basis, we expect volume growth to be much slower at
vertical expected to stay sluggish
2.7%. Our current estimates assume that the sluggish pace of revenues from the
financial services vertical will continue, with incremental growth coming from the
ramping up of new deals.
Fig 73 - Volume growth YoY

(%)
45
41.1
40 35.2
35
28.6
30
25
20.3
20
15
11.0
10
5
FY06 FY07 FY08 FY09E FY10E
Expecting margins to decline in FY10

TCS has made 24,800 campus offers for FY10 and expects lateral recruitment to be
EBITDA and EBIT margins seen
minimal in the next year. The management has re-iterated its commitment to honour the
declining by 285bps and 348bps
offers made though the intake cycle may be longer than usual. With volume growth not
in FY10
expected to inch up during the year, it may put pressure on utilisation rates. Slower
volume growth, declining realisation and no substantial improvement in utilisation rates
are expected to put pressure on margins with EBITDA and EBIT margins declining by
285bps and 348bps in FY10.
Fig 74 - TCS profit margins

(%) Gross margin EBITDA margin EBIT margin
50
45 47.5 47.4 46.4 46.0 45.4

40 43.6
35
29.3
27.9 27.2
30 25.2 25.8
23.5
25 27.7
25.8 24.9
20 23.8
22.7
20.8
15
FY05 FY06 FY07 FY08 FY09E FY10E
38
Fig 75 - Lateral hiring as a percentage of gross addition

(%)
55
47
43
45
35
25
19
15 10
5

Consequent to our downward revision in volume growth and pricing assumptions, we
Revenue in rupee terms to remain flat
are reducing our revenue and earnings estimates for FY10. We now expect US$
YoY due to depreciation of the
revenues to decline by 4.3% YoY (excluding TCS e-Serve) as against previous estimates
currency against the US$
of flat growth. In rupee terms, revenues would benefit from a weak rupee and remain
flat YoY. Our earnings estimates are revised downwards by 9% to Rs 50.2, a YoY
decline of 7.4% due to slower revenue growth and fall in profitability. Core earnings,
excluding other income, are expected to decline by 12.3% YoY in FY10.
Fig 76 - TCS estimate revision

FY09E FY10E
Key parameters
Revenue (Rs mn) 282,343 279,697 (0.9) 300,424 285,615 (4.9)
EBITDA margin (%) 25.5 25.8 29bps 23.6 22.9 (66bps)
Adj Net profit (Rs mn) 52,948 53,101 0.3 54,026 49,169 (9.0)
EPS (Rs) 54.1 54.3 0.3 55.2 50.2 (9.0)
Source: RHH
Increase in valuation discount vis-à-vis Infosys in FY09

The valuation gap between TCS and Infosys has increased from 5-10% at the beginning
TCS’ valuation gap with Infosys expands of FY09 to ~25%, currently. The increase in valuation discount is attributed to TCS’
to more than 30%, unlikely to widen relatively aggressive accounting for depreciation and an overhang on the stock due to
further recent promoter selling. Considering the fundamentals of the company, we do not
expect the valuation gap to expand further from these levels. We note that every time
the valuation gap expands to more than 30%, the stock bounces back and offers
investors a trading opportunity.
Fig 77 - TCS-Infosys 1-year fwd P/E discount

30
20
10
(10)
(20)
(30)
(40)
Jan-07
Mar-07
Jul-07
May-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jun-08
Aug-08
Oct-08
Dec-08
Feb-09
39
Reducing target to Rs 452

We are reducing our target P/E multiple for TCS from 10x earlier to 9x its one-year
forward earnings, due to expectations of negative earnings growth in FY10. The target
P/E multiple is at a 25% discount to Infosys’ target P/E multiple, in-line with the current
valuation gap. Our one-year target price for TCS is revised downwards to Rs 452 from
Rs 545 earlier, a decrease of 17%. We maintain our negative outlook on the company.
We note that the stock is currently offering an FCFF yield of 8.3% as compared to 5.8%
of Infosys and could provide a good entry level in the event of a sharp expansion of the
valuation discount with Infosys. We are changing our recommendation to Sell from
Reduce, to align it to our new recommendation criteria (please refer to disclaimer).
40
Growth (%) 22.7 22.3 2.1 2.7 Accounts receivable 53,899 56,848 58,294 61,260
EBITDA 59,397 72,148 65,532 71,113 Inventories 424 509 586 644
Depreciation & amortisation 5,746 5,572 7,491 8,552 Investments 26,503 6,503 19,003 29,003
Interest 452 514 498 540 CWIP 9,055 7,555 5,555 6,305
Other income 4,902 (3,716) 645 4,087 Intangible assets 14,738 30,506 29,646 28,786
EBT 58,101 62,346 58,188 66,108 Deferred tax assets, net 3,552 4,262 4,901 5,391
Income taxes 7,494 9,246 9,019 13,089 Other assets 9,035 10,842 12,468 13,715
Min into / inc from associates 432 517 520 620 Other current liabilities 28,575 34,290 37,719 41,491
Adjustments (407) (513) (480) (580) Debt funds 7,098 6,814 7,414 8,014
Adjusted net income 50,598 53,101 49,169 53,018 Other liabilities 3,112 3,790 4,436 5,148
Growth (%) 23.1 4.9 (7.4) 7.8 Equity capital 979 979 979 979
DPS (Rs) 14.0 16.0 18.0 20.0 BVPS (Rs) 127.5 158.1 185.4 207.2

Non-cash adjustments (2,526) 881 1,329 1,539 EBITDA margin 26.0 25.8 22.9 24.2
Change in investments (13,792) 20,000 (12,500) (10,000) ROCE 44.9 36.8 28.5 26.9
Other investing cash flow (2,666) (23,735) - - Working Capital & Liquidity ratios
Issue of equity - (0) (0) (0) Inventory (days) 1 1 1 1
Issue/repay debt 631 (284) 600 600 Payables (days) 24 24 24 24
Change in cash & cash eq (309) 16,298 6,389 10,883 Turnover & Leverage ratios (x)
Interest coverage ratio 118.8 129.5 116.6 115.9
Adjusted debt/equity 0.1 0.0 0.0 0.0
WACC (%) 13.8 15.1 15.1 15.1
ROIC (%) 52.6 48.0 35.0 34.3
EV/Sales 1.9 1.5 1.5 1.5
EVA (Rs mn) 39,076 44,657 28,905 28,387 P/E 9.0 8.6 9.3 8.6
EVA spread (%) 38.8 33.0 19.9 19.3 P/BV 3.6 2.9 2.5 2.2
41
Quarterly trend
Revenue (Rs mn) 59,241 60,947 64,107 69,534 72,770
YoY growth (%) 21.9 18.4 23.2 23.3 24.0
QoQ growth (%) 5.0 2.9 5.2 8.5 4.7
EBITDA (Rs mn) 15,249 15,126 15,314 18,197 19,474
EBITDA margin (%) 26.0 25.0 23.9 26.2 26.8
YoY growth (%) 20.5 7.1 4.9 1.2 0.6
QoQ growth (%) 6.7 (5.6) (1.0) 1.5 7.2
DuPont analysis
Return on equity 55.5 47.4 38.3 29.4 27.7
Tata Consultancy Services (TCS) is India’s largest and oldest IT (%) Jun-08 Sep-08 Dec-08
services provider with revenues and earnings of US$ 5.7bn and Promoters 76.3 76.3 76.2
US$ 1.3bn respectively in FY08. The company has built strong FIIs 11.1 11.0 10.5
business competencies on the back of a three-pronged strategy:
Banks & FIs 6.4 6.5 7.2
a) a Global Network Delivery Model (GNDM) – offshore and near-
shore presence, b) end-to-end services, and c) strategic acquisitions Public 6.1 6.2 6.1
to expand service offerings and market reach.

900 ● Accumulate ● Reduce ● Sell
21-Aug-08 RHH Compendium 818 961 Accumulate
800
6-Oct-08 Quarterly Preview 657 784 Accumulate 700
24-Oct-08 Results Review 547 636 Accumulate 600
21-Nov-08 Sector Report 482 595 Reduce 500
2-Jan-09 Quarterly Preview 497 545 Reduce 400
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
16-Jan-09 Results Review 510 545 Reduce

6-Mar-09 Sector Report 465 452 Sell
42
Fig 78 - TCS financial model

Q1FY09 Q2FY09 Q3FY09 Q4FY09E FY09E Q1FY10E Q2FY10E Q3FY10E Q4FY10E FY10E FY11E
Exchange Rate (Rs/$) 42.0 44.2 49.1 48.6 45.9 48.3 47.7 47.1 46.5 47.4 45.0
Total Employees 116,308 121,610 130,343 137,869 137,869 137,193 138,009 139,429 141,013 141,013 153,920
Total Technical Employees 109,446 114,435 122,653 129,942 129,942 129,373 130,281 131,761 133,257 133,257 131,761
qoq/yoy growth (%) 4.4 4.6 7.2 5.9 24.1 (0.4) 0.7 1.1 1.1 2.6 (1.1)
Sales & support employees 6,862 7,175 7,690 7,927 7,927 7,820 7,729 7,669 7,756 7,756 8,850
Gross additions 8,982 9,682 11,773 12,063 31,500 3,780 5,250 5,880 6,090 21,000 31,000
Net additions 4,895 5,328 8,692 7,501 26,416 (701) 791 1,395 1,559 3,044 12,807
Attrition 4,087 4,354 4,273 4,562 17,276 4,481 4,459 4,485 4,531 17,956 18,193
Utilisation (Excl trainees) (%) 78.3 81.1 79.9 78.0 79.3 78.5 79.0 78.5 79.0 78.8 79.0
Utilisation (incl trainees) (%) 74.6 74.7 71.8 72.7 73.4 73.9 74.4 73.2 73.7 73.8 75.0
Billed volumes 255,000 271,403 274,316 299,044 1,099,763 300,321 304,379 305,205 310,637 1,220,543 1,314,213
qoq/yoy growth (%) 4.3 6.4 1.1 9.0 20.3 0.4 1.4 0.3 1.8 11.0 7.7
offshore effort mix (%) 68.6 71.1 71.4 73.8 71.3 73.8 73.8 73.8 73.8 73.8 73.5
Billing Rates ($/Man Month)
Onsite 11,254 11,496 10,662 10,449 10,966 10,266 10,230 10,194 10,158 10,212 10,210
qoq/yoy growth (%) (2.6) 2.2 (7.3) (2.0) (6.2) (1.8) (0.4) (0.4) (0.4) (6.9) (0.0)
Offshore 3,566 3,489 3,301 3,120 3,355 3,073 3,065 3,057 3,050 3,061 3,069
sequential growth (%) (5.9) (2.2) (5.4) (5.5) (8.9) (1.5) (0.3) (0.3) (0.3) (8.8) 0.3
Blended 5,980 5,799 5,406 5,043 5,538 4,961 4,946 4,931 4,916 4,938 4,962
qoq/yoy growth (%) (3.6) (3.0) (6.8) (6.7) (10.2) (1.0) (1.0) (1.0) (1.0) (10.8) 0.5
Revenue (US$) 1,525 1,574 1,483 1,508 6,090 1,490 1,505 1,505 1,527 6,027 6,520
qoq/yoy growth (%) 0.5 3.2 (5.8) 1.7 8.1 (1.2) 1.0 (0.0) 1.5 (1.0) 8.2
Revenues (Rs mn) 64,107 69,534 72,770 73,286 279,697 71,968 71,803 70,865 70,979 285,615 293,428
qoq/yoy growth (%) 6.0 8.5 4.7 0.7 23.6 (1.8) (0.2) (1.3) 0.2 2.1 2.7
Gross margin (%) 43.2% 47.0% 45.9% 45.3% 45.4% 42.8% 42.8% 42.9% 44.3% 43.2% 44.2
EBITDA margin (%) 23.9 26.2 26.8 26.1 25.8 22.4 22.4 22.6 24.3 22.9 24.2
Effective tax rate (%) 13.4 15.2 15.3 15.2 14.8 15.5 15.5 15.5 15.5 15.5 19.8
Adj. net income (Rs mn) 12,532 12,777 13,693 14,099 53,101 12,052 12,056 11,981 13,080 49,169 53,018
qoq/yoy growth (%) (0.1) 2.0 7.2 3.0 4.9 (14.5) 0.0 (0.6) 9.2 (7.4) 7.8
Number of shares 979 979 979 979 979 979 979 979 979 979 979
Diluted number of shares(mn) 979 979 979 979 979 979 979 979 979 979 979
Basic EPS 12.8 13.1 14.0 14.4 54.3 12.3 12.3 12.2 13.4 50.2 54.2
Diluted EPS 12.8 13.1 14.0 14.4 54.3 12.3 12.3 12.2 13.4 50.2 54.2
43
Wipro Company Update 06 March 2009
Wipro What’s New? Target Rating Estimates
Falling behind peers

After delivering a reasonable Q3FY09 performance, Wipro’s growth is once CMP TARGET RATING RISK
again expected to trail that of peers like Infosys and TCS. Wipro’s key pain Rs 206 Rs 193 SELL HIGH
points have been the hi-tech/telecom, financial services and retail verticals.
Major client Nortel’s bankruptcy suppressed profits in Q3FY09 and is expected
to impact revenue growth in Q4FY09 as well. Though we expect the Asia-
BSE NSE BLOOMBERG
Pacific IT services business to continue to witness positive growth in FY10, this
would be insufficient to arrest the decline in Global IT service revenues. In our 507685 WIPRO WPRO IN
opinion, Wipro has a higher probability of surprising negatively on the volume
front as compared to TCS and Infosys. Company data
Market cap (Rs mn / US$ mn) 301,533/5,798
Disappointing Q4FY09 guidance
Outstanding equity shares (mn) 1,464
For Q4FY09, Wipro has guided towards revenues of US$ 1,045mn for the IT
Free float (%) 26
services business, a decline of 5% QoQ and lower than Infosys’ guidance of a
flat to 3.8% QoQ dip in revenues. Excluding revenues expected from Dividend yield (%) 3.9
consolidation of Citigroup Technology Services (Citos), the decline would be 52-week high/low (Rs) 538 / 180
6.6% QoQ. We believe that the management has factored in a volume drop of 2-month average daily volume 1,566,188
4–5% due to client-specific issues arising out of Nortel’s bankruptcy and overall
softness in demand from key verticals such as hi-tech/telecom, financial services Stock performance
and retail. Returns (%) CMP 1-mth 3-mth 6-mth
Wipro 206 (8.1) (11.5) (54.0)
Volumes head south
BSE IT 2,033 (7.4) (17.5) (50.2)
We expect Wipro’s volume growth to continue to lag behind its peers in FY10,
Sensex 8,446 (8.2) (8.5) (43.3)
with a 1.5% growth in Global IT services as compared to 3.6% for Infosys and
2.7% for TCS on an organic basis. Excluding Citos, volumes are expected to
decline by 1.7% YoY. Overall, revenue in dollar terms for IT services is expected P/E comparison
to decline by 3.6% YoY, comforted by a 4.4% growth in Indian IT services. (x) Wipro Industry
15 11.5
Fig 2 - Global IT volume growth 9.4 8.8 9.8 9.0 10.2
10
(%)
35.6 5
40
31.4
0
30 FY08 FY09E FY10E
20
13.1
Valuation matrix
10
1.5 (x) FY08 FY09 FY10E FY11E
0 P/E @ CMP 9.4 8.8 9.0 8.6
FY07 FY08 FY09E FY10E P/E @ Target 8.8 8.2 8.4 8.0
EV/EBITDA @ CMP 7.9 6.3 6.6 5.8

Growth (%) 11.3 7.1 (2.6) 5.1 ROE 27.7 24.2 19.9 18.0
FDEPS (Rs) 21.9 23.5 22.9 24.0 ROIC 32.5 26.3 20.3 19.5
Growth (%) 10.4 7.0 (2.6) 5.1 ROCE 23.7 19.4 16.4 15.3
44
Employee additions to remain subdued in FY10

Only 8,000 campus offers made Employee addition in the company’s IT services segment is down 90% YoY in 9MFY09.
for FY10 For Global IT services, the employee headcount has shrunk by 1,465 in 9MFY09 as
compared to 9,431 additions in 9MFY08. We expect recruitment to remain subdued in
FY10 too, with the company making only 8,000 campus offers for the year. Overall, for
IT services, we expect the company to add 1,586 employees in FY10, an increase of
2.4% YoY.
Fig 79 - Employee additions
Global IT BPO India & MEA

14,000
12,000
10,000
8,000
6,000
4,000
2,000
--
(2,000) FY07 FY08 FY09E FY10E FY11E
Most likely to spring negative volume surprise

Highly vulnerable to pricing pressure Of the top 3 players, we believe Wipro has the highest probability of posting an upset in
and vendor consolidation terms of volume growth. Wipro scores lower on client metrics as compared to peers,
leaving it more exposed to higher pricing pressure and vendor consolidation activity.
Replacing scheduled project closures with new ones has also been a concern for the
company. In 9MFY09, Wipro has seen its total active client count drop to 882 as
compared to 901 at the beginning of the year, despite the addition of 90 new clients.
Fig 80 - Client metrics Fig 81 - Revenue per Top 10 client
Active clients Additions Attrition (US$ 000) FY08 Q3FY09 (annualised)

940 927 60
928 180,000
55
920 48
50 50
140,000
900 906
36 882 40 100,000
880
31
30 60,000
860 31
30 28
840 20 20,000
Q4FY08 Q1FY09 Q2FY09 Q3FY09 Wipro Infosys TCS
Source: RHH, Company Source: RHH, Company
Margins to decline in FY10

EBIT margin in IT services to shrink Despite the expected rise in utilisation rates and subdued employee additions in FY10,
290bps YoY to 17% in FY10 we expect the EBIT margin in the IT services segment to decline by 292bps YoY to 17%.
The decline would stem from: 1) lower volume growth, 2) a fall in pricing, and 3) higher
revenue contribution from the Asia-Pacific region which has lower margins (8% OPM as
compared to ~18–19% for Global IT services). On the whole, we expect EBIT margins to
fall by 199bps to 13.9% in FY10 as against 15.9% in FY09.
45

Consequent to our downward revision in volume growth and pricing assumptions, we
are downsizing our revenue and earnings estimates for FY10. We now expect dollar
revenues to decline by 3.6% YoY in IT services as against a decline of 2.9% earlier.
Excluding the consolidation of Citos, dollar revenues are expected to fall 5% YoY.
FY10 earnings cut 8% to Rs 22.9 on In rupee terms, revenues would benefit from a weak currency and grow by 4.5% YoY.
slower revenue growth Our earnings estimates have been revised downwards by 8.1% to Rs 22.9, a YoY
decline of 2.6% due to slower revenue growth and a fall in profitability. Core earnings,
excluding other income, are expected to decline by 18.6% YoY in FY10.
Fig 82 - Wipro estimate revision

FY09E FY10E
Key parameters
Revenue (Rs mn) 255,460 254,944 (0.2) 266,815 266,451 (0.1)
Adj Net profit (Rs mn) 34,590 34,180 (1.2) 36,264 33,308 (8.2)
EPS (Rs) 23.8 23.5 (1.4) 24.9 22.9 (8.1)
Source: RHH
Valuation discount vis-à-vis peers increasing

Trading at a discount of ~30% and ~2– Historically, Wipro has traded at valuations that are at par with Infosys and at a
5% to Infosys and TCS respectively premium to TCS. However, the stock has been an underperformer as compared to peers
in H2FY09, widening the valuation gap. At current valuations, the stock is trading at a
discount of ~30% and ~2–5% to Infosys and TCS respectively.
Fig 83 - Wipro Infosys discount Fig 84 - Wipro TCS discount
40 35
30 30
25
20 20
10 15
0 10
5
(10)
0
(20) (5)
(30) (10)
Nov-07
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Jan-08
Mar-08
May-08
Aug-08
Jan-07
Mar-07
May-07
Jul-07
Jan-08
Jun-08
Oct-08
Dec-08
Feb-09
Sep-07
Nov-07
Mar-08
May-08
Jun-08
Aug-08
Oct-08
Dec-08
Feb-09
Reducing target to Rs 193 – Sell

Underperformer vis-à-vis peers; target We are reducing our target P/E multiple for Wipro from 9.4x earlier to 8.6x its one-year
P/E multiple cut to 8.6x 1-year forward forward earnings due to expectations of negative earnings growth in FY10. The target P/E
multiple is at a discount of ~30% and 5% to our target multiples for Infosys and TCS
respectively, in line with the current valuation gap. We attribute the discount to
expectations of fundamental underperformance as against peers. Our one-year target
price for Wipro stands revised downwards to Rs 193 from Rs 233 earlier. We maintain
our negative outlook on the company. We are moving our recommendation to Sell from
Reduce, in line with our new recommendation criteria (please refer to disclaimer).
46
Y/E March (Rs mn) FY08 FY09 FY10E FY11E Y/E March (Rs mn) FY08 FY09E FY10E FY11E
EBITDA 39,547 49,884 47,364 53,621 Inventories 7,172 10,101 11,205 12,612
Depreciation & amortisation 6,028 8,496 10,306 11,994 Investments 16,506 23,706 27,706 30,706
Interest 1,064 2,015 1,558 1,547 CWIP 13,544 16,204 15,204 13,204
Other income 3,357 304 3,455 4,550 Intangible assets 51,423 62,766 61,275 59,784
EBT 35,812 39,677 38,955 44,630 Deferred tax assets, net (2,098) (894) (1,494) (2,094)
Min into / inc from associates 281 502 500 500 Other current liabilities 32,816 53,161 45,380 48,999
Adjustments 256 370 300 300 Debt funds 43,326 46,280 43,757 43,780
Adjusted net income 31,916 34,180 33,308 35,013 Other liabilities 114 212 312 412
Growth (%) 11.3 7.1 (2.6) 5.1 Equity capital 2,923 2,928 2,930 2,932
Shares outstanding (mn) 1,461.5 1,463.8 1,464.8 1,465.8 Reserves & surplus 126,431 150,709 177,927 205,197
DPS (Rs) 7.0 8.0 9.0 9.0 BVPS (Rs) 88.5 105.0 123.5 142.0

Non-cash adjustments (777) (3,392) 359 1,588 EBITDA margin 20.0 19.6 17.8 18.8
Change in investments 18,329 (7,200) (4,000) (3,000) ROCE 23.7 19.4 16.4 15.3
Issue of equity 747 394 202 202 Inventory (days) 15 18 21 22
Issue/repay debt 35,376 2,954 (2,523) 23 Payables (days) 32 33 36 37
Other financing cash flow 68 - - - Quick ratio (x) 0.8 0.7 0.8 0.8
Change in cash & cash eq 26,888 (3,802) 5,530 17,115 Turnover & Leverage ratios (x)
WACC (%) 15.0 15.1 15.1 15.1
ROIC (%) 32.5 26.3 20.3 19.5
EV/Sales 1.6 1.2 1.2 1.1
EVA (Rs mn) 21,447 16,703 8,643 7,586 P/E 9.4 8.8 9.0 8.6
EVA spread (%) 17.5 11.3 5.3 4.4 P/BV 2.3 2.0 1.7 1.5
47
Quarterly trend
Revenue (Rs mn) 52,361 55,954 59,622 64,094 65,387
YoY growth (%) 32.1 29.1 42.5 35.6 24.9
QoQ growth (%) 10.7 6.9 6.6 7.5 2.0
EBITDA (Rs mn) 10,532 11,519 11,563 12,333 12,669
EBITDA margin (%) 20.1 20.6 19.4 19.2 19.4
Adj net income (Rs mn) 8,261 8,754 8,139 8,224 8,979.0
YoY growth (%) 10.9 1.9 14.6 1.3 8.7
QoQ growth (%) 1.7 6.0 (7.0) 1.0 9.2
DuPont analysis
Return on equity 31.8 27.7 24.2 19.9 18.0
Wipro is the third largest Indian offshore IT services company with (%) Jun-08 Sep-08 Dec-08
annual revenues of US$ 4.3bn (FY08). The company is the leader in Promoters 79.4 79.4 79.4
R&D services amongst Indian vendors, particularly in the telecom FIIs 7.5 7.5 5.8
vertical, with nine of the top ten telecom OEMs on its client list.
Banks & FIs 0.5 0.5 1.8
Besides an international presence, Wipro is a leading systems
integrator in India. This division contributes 25% of consolidated IT Public 12.6 12.6 12.0
service revenues. The company is present in the Indian FMCG and
infrastructure engineering space as well (14% of FY08 revenues).

470
21-Aug-08 RHH Compendium 418 366 Sell 420 ● Reduce ● Sell
6-Oct-08 Quarterly Preview 341 329 Sell 370
320
24-Oct-08 Results Review 267 280 Reduce
270
21-Nov-08 Sector Report 231 275 Reduce 220
24-Dec-08 Company Update 243 275 Reduce 170
Jan-09
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Feb-09
Mar-09

6-Mar-09 Sector Report 206 193 Sell
48
Fig 85 - Wipro financial model

Exchange rate 41.8 42.8 45.9 47.8 44.6 47.7 47.1 46.5 45.9 46.8 44.4
Total Global IT -
61,345 61,697 60,605 61,210 61,210 60,576 59,960 60,112 60,558 60,558 70,975
Employees
qoq/yoy growth (%) 1.1 (0.2) (1.0) (0.0) 8.3 0.3 (1.0) (0.4) 0.5 (1.2) 9.6
Sales & support
5,754 5,706 5,894 5,664 5,754 5,511 5,454 5,433 5,460 5,465 5,952
employees
Gross additions 1,634 2,422 1,052 2,650 7,758 1,050 1,050 1,800 2,100 6,000 18,000
Net additions (725) 352 (1,092) 605 (860) (633) (616) 151 447 (651) 10,416
Attrition 2,359 2,070 2,144 2,045 8,618 1,683 1,666 1,649 1,653 6,651 7,584
Utilisation levels (excl
78.3 79.3 79.4 79.0 79.0 80.0 82.0 82.0 82.0 81.5 81.0
trainees)
Billed volumes 124,381 125,872 128,618 124,938 503,809 127,694 128,870 126,358 128,338 511,260 558,319
qoq/yoy growth (%) 3.0 1.2 2.2 (2.9) 13.1 2.2 0.9 (1.9) 1.6 1.5 9.2
Offshore effort mix 69.6 69.5 69.7 70.0 69.7 70.0 70.3 70.5 70.5 70.3 70.9
Billing Rates - Global IT
Onsite 11,780 11,999 11,534 11,326 11,661 11,072 10,989 10,923 10,873 10,965 10,943
qoq/yoy growth (%) 3.9 1.9 (3.9) (1.8) 2.5 (2.2) (0.7) (0.6) (0.4) (6.0) (0.2)
Offshore 4,402 4,482 4,409 4,293 4,397 4,207 4,182 4,161 4,145 4,174 4,172
qoq/yoy growth (%) 3.0 1.8 (1.6) (2.6) 3.1 (2.0) (0.6) (0.5) (0.4) (5.1) (0.0)
Blended 6,646 6,778 6,565 6,403 6,598 6,266 6,207 6,156 6,130 6,190 6,143
qoq/yoy growth (%) 3.0 2.0 (3.2) (2.5) 2.0 (2.1) (1.0) (0.8) (0.4) (6.2) (0.7)
BPO Metrics
Total BPO - Employees 20,837 21,804 21,578 21,357 21,357 21,396 21,433 21,719 21,991 21,991 24,404.3
qoq/yoy growth (%) 1.9 4.6 (1.0) (1.0) 4.5 0.2 0.2 1.3 1.3 3.0 11.0
Sales & support
1,069 909 965 966 994 908 910 917 929 916 929
employees
Gross additions 1,312 1,957 755 750 4,774 1,000 1,000 1,250 1,250 3,500 7,000
Net additions 392 967 (226) (221) 912 39 37 286 273 634 2,413
Attrition 920 990 981 971 3,862 961 963 964 977 3,866 4,587
67.9 66.8 68.8 69.0 68.1 69.0 70.0 70.0 70.0 69.8 70.0
trainees)
FTE Billed 13,280 13,581 14,279 14,146 13,821 14,123 14,353 14,461 14,648 14,396 15,615
qoq/yoy growth (%) 2.7 2.3 5.1 (0.9) 12.5 (0.2) 1.6 0.8 1.3 4.2 8.5
Revenue - Total IT
1,068 1,110 1,100 1,046 4,324 1,045 1,048 1,029 1,045 4,166 4,544
Services (US$ mn)
qoq/yoy growth (%) 3.5 4.0 (0.9) (4.9) 18.5 (0.1) 0.3 (1.8) 1.5 (3.6) 9.1
Revenues (Rs mn) 59,623 64,095 65,387 65,839 254,944 65,346 66,664 66,277 68,165 266,451 285,970
% qoq/yoy growth 6.6 7.5 2.0 0.7 29.1 (0.7) 2.0 (0.6) 2.8 4.5 7.3
Gross margin 33.1 31.9 32.2 31.8 32.2 31.5 30.6 30.2 30.2 30.6 31.1
EBITDA margin 20.6 19.8 19.2 18.7 19.6 18.4 17.7 17.5 17.5 17.8 18.8
EBIT margin 16.4 15.9 16.2 15.2 15.9 14.7 13.9 13.5 13.5 13.9 14.6
Effective tax rate 15.0 13.1 13.2 13.5 13.7 13.3 13.5 13.8 14.0 13.6 22.5
Adjusted net income 8,815 9,785 9,915 9,085 34,180 8,575 8,333 8,083 8,317 33,308 35,013
qoq/yoy growth (%) (3.4) 11.0 1.3 (8.4) 5.6 (5.6) (2.8) (3.0) 2.9 (2.6) 5.1
Number of shares 1,453 1,453 1,455 1,454 1,454 1,454 1,455 1,455 1,455 1,455 1,456
Diluted number of
1,457 1,457 1,456 1,456 1,456 1,456 1,456 1,456 1,456 1,456 1,456
shares(mn)
Basic EPS 6.1 6.7 6.8 6.2 23.5 5.9 5.7 5.6 5.7 22.9 24.0
Diluted EPS 6.1 6.7 6.8 6.2 23.5 5.9 5.7 5.6 5.7 22.9 24.0
49
HCL Technologies Company Update 06 March 2009
HCL Technologies What’s New? Target Rating Estimates
Weak demand to hit revenues, takeovers to erode margin

Given the uncertain global environment, particularly in the US where clients CMP TARGET RATING RISK
are slashing IT budgets and moving to consolidate vendors, we believe large- Rs 96 Rs 93 SELL HIGH
cap IT companies like Infosys will have an edge over HCL Tech. We expect HCL
to witness slower growth than its peers. The company is already feeling margin
pressures in the key infrastructure vertical, which is a clear indication that it
BSE NSE BLOOMBERG
will not be able to pass on the cost burden to customers. We also anticipate
major earnings erosion in FY09 and FY10 due to the company’s aggressive forex 532281 HCLTECH HCLT IN
cover policy compared to peers.
Company data
Axon acquisition–another hang in the challenging environment
Market cap (Rs mn / US$ mn) 63,846/1,227
HCL Tech may find it difficult to benefit from the acquisition of Axon because of
the worsening macroeconomic situation. The Axon acquisition seems less
Free float (%) 29
attractive post the note of caution sounded by SAP. We therefore believe Axon’s
acquisition is also likely to be a hang on HCL Tech’s stock in the near term. Dividend yield (%) 10.4
52-week high/low (Rs) 325 / 92
Consolidations to intensify margin pressure 2-month average daily volume 1,215,365
HCL Tech has been very aggressively pursuing acquisitions. Its BPO business is
experiencing margin pressure from the consolidation process of Liberata Stock performance
Financial Services (LFS) and Control Point solution (CPS). Apart from this, Axon’s
acquisition will put more pressure on operating margin of HCL Tech’s core
HCL Tech 96 (22.2) (20.8) (62.2)
software business in addition to escalating interest costs to service the fresh debt.
BSE IT 2,033 (7.4) (17.5) (50.2)
The overall operating margin outlook in FY09 and FY10 is that they will contract
Sensex 8,446 (8.2) (8.5) (43.3)
sharply compared to previous years.
Hiring remains key area of concern P/E comparison

The hiring track record of the company is a cause for concern. They have had a
(x) HCL Tech Industry
net negative addition in the BPO and core software services vertical. The 15 11.5
9.8 10.2
company justifies it by saying that it is following the just in time hiring policy.
10 5.8
However, we believe this is due to lack of visibility in work from clients. 4.7 5.2
5
Axon expected to impact EBIT margin in Q3FY09 0
Though impact of the Axon Group integration was marginal on HCL Tech’s FY08 FY09E FY10E
quarterly performance, it is expected to negatively impact EBIT margin by in
Q3FY09. Axon Group, the acquisition of which was completed during the
quarter, contributed US$ 17.8mn in revenues and US$ 2.3mn in EBIT. We Valuation matrix
expect Axon to contribute US$ 95mn in revenues and US$ 6.9mn in EBIT during (x) FY08 FY09E FY10E FY11E
Q3FY09. P/E @ CMP 5.8 4.7 5.2 5.1
P/E @ Target 5.6 4.5 5.0 4.9
EV/EBITDA @ CMP 4.4 3.4 3.7 4.0

Y/E June (Rs mn) FY08 FY09E FY10E FY11E Y/E June (%) FY08 FY09E FY10E FY11E
Growth (%) (17.2) 22.1 (10.4) 3.0 ROE 22.0 24.9 20.3 18.9
FDEPS (Rs) 16.5 20.5 18.4 18.9 ROIC 37.8 27.6 15.6 11.1
Growth (%) (17.1) 23.7 (10.1) 3.0 ROCE 22.0 19.8 13.9 13.4
50
Wins 20 deals in Q3FY09

Three deals announced in Q3FY09 are The company has announced winning about 20 deals this quarter, out of which three
in excess of US$ 100mn each and five deals are in excess of US$ 100mn each and five others are of over US$ 50mn each.
others are of over US$ 50mn each These deals span across verticals; a majority are from the media, publishing &
entertainment segment followed by manufacturing and life sciences. The management
has indicated that the deal pipeline is strong, but the sales cycles are being prolonged
because of the uncertain environment.
Forex losses to continue dampening profit

For Q2FY09, the company recorded a forex loss of Rs 1.4bn, higher than Rs 974mn
reported in Q2FY09. Forex hedges have decreased during the quarter to US$ 1.6bn in
cash flow hedges and US$ 185mn in non-cash flow hedges. However, forex losses are
expected to continue as an amount of US$ 207mn is still leftover as other
comprehensive income, which will get unwound over the next 6-7 quarters.
Lowering estimates to account for weak demand scenario, margin pressure

Benefit of depreciating rupee to be We have revised our exchange rate assumption to Rs47/$ and Rs45.5/$ for FY09 and
blunted by lower revenues, margin FY10. However, the benefit of the rupee depreciation will be washed away by the
pressure from acquisitions downward revision of revenues (US$) on account of weaker demand, declining margin
(due to acquisitions) and higher forex losses. We have therefore revised our revenue
estimates FY09 by 0.6% and FY10 earnings estimate by 3.2%.
Fig 86 - HCL estimate revision

FY09E FY10E
Key parameters
Revenue (Rs mn) 104,695.0 104,062 (0.6) 112,139.0 108,537 (3.2)
Net profit (Rs mn) 14,288.0 13,758 (3.7) 13,583.0 12,330 (9.2)
EPS (Rs) 21.2 20.5 (3.5) 20.3 18.4 (9.4)
Source: RHH
Reducing target price; maintain negative outlook

We are reducing our target P/E multiple for HCL Tech from 6x earlier to 5x on FY10E
due to expectations of negative earnings growth in FY10. Our one-year target price for
HCL Tech has been revised downwards to Rs 93 from Rs 122 earlier, a decrease of 24%.
We are moving our recommendation to Sell from Reduce, aligning it to our new
recommendation criteria (please refer to disclaimer).
51
Y/E June (Rs mn) FY08 FY09E FY10E FY11E Y/E June (Rs mn) FY08 FY09E FY10E FY11E
EBITDA 16,943 22,059 20,233 18,719 Inventories 586 645 709 780
Growth (%) 26.7 30.2 (8.3) (7.5) Other current assets 8,127 10,159 12,191 14,629
Depreciation & amortisation 3,033 4,369 5,528 6,161 Investments 101 101 101 101
Growth (%) 28.3 27.2 (16.9) (14.6) Net fixed assets 13,317 19,736 22,958 23,297
Interest - - - - CWIP - - - -
Other income (1,370) (1,668) 9 4,263 Intangible assets 9,585 34,732 28,293 28,293
EBT 12,540 16,022 14,714 16,820 Deferred tax assets, net (194) (194) (194) (194)
Min into / inc from associates (19) 14 - - Other current liabilities 20,843 16,674 14,173 12,756
Adjustments (19) 14 - - Debt funds - 28,080 28,080 28,080
Growth (%) (17.2) 22.1 (10.4) 3.0 Equity capital 1,329 1,330 1,339 1,339
Growth (%) (17.1) 23.7 (10.1) 3.0 Total liabilities 80,338 111,798 115,261 122,046
DPS (Rs) 9.0 10.0 10.0 10.0 BVPS (Rs) 78.5 87.9 94.4 105.8

Y/E June (Rs mn) FY08 FY09E FY10E FY11E Y/E June FY08 FY09E FY10E FY11E
Non-cash adjustments (335) 515 1,253 (1,596) EBITDA margin 22.2 21.2 18.6 17.0
Changes in working capital 5,515 (9,844) (7,114) (7,752) EBIT margin 18.2 17.0 13.5 11.4
Change in investments - - - - ROCE 22.0 19.8 13.9 13.4
Issue of equity 24 6,258 4,773 5,133 Inventory (days) 4 3 3 4
Issue/repay debt - 28,080 - - Payables (days) 9 8 9 9
Change in cash & cash eq 2,914 (7,458) 454 578 Turnover & Leverage ratios (x)
Y/E June FY08 FY09E FY10E FY11E
Adjusted debt/equity - 0.5 0.4 0.4
WACC (%) 76,398 104,062 108,537 110,361
ROIC (%) 26.6 36.2 4.3 1.7
EV/Sales 1.0 0.7 0.7 0.7
EVA (Rs mn) (17.2) 22.1 (10.4) 3.0 P/E 5.8 4.7 5.2 5.1
EVA spread (%) 16.5 20.5 18.4 18.9 P/BV 1.2 1.1 1.0 0.9
52
Quarterly trend
Revenue (Rs mn) 18,166 19,448 21,688 23,693 24,908
YoY growth (%) 24.0 23.3 34.5 38.6 37.1
QoQ growth (%) 6.3 7.1 11.5 9.2 5.1
EBITDA (Rs mn) 3,161 3,558 4,234 5,311 5,601
EBITDA margin (%) 17.4 18.3 19.5 22.4 22.5
YoY growth (%) 20 6 (70) 15.5 12.2
QoQ growth (%) 9 3 (56) 152.5 4.8
DuPont analysis
(%) FY06 FY07 FY08 FY09E FY10E
Return on equity 30.6 22.0 24.9 20.3 18.9
HCL Technologies (HCL) is the fifth largest IT services company in (%) Jun-08 Sep-08 Dec-08
India with more than 50,000 employees and revenues of US$ Promoters 67.4 67.5 67.5
1.9bn in FY08.It offers the entire gamut of IT services including FIIs 16.6
16.9 17.7
BPO and infrastructure management. The company focuses on
Banks & FIs 6.6 6.2 6.2
R&D outsourcing which accounts for 26.7% of total revenues.
Public 9.1 8.6 9.7

270 ● Reduce ● Sell
21-Aug-08 RHH Compendium 222 241 Reduce
220
18-Sep-08 Company Update 211 241 Reduce
170
29-Sep-08 Company Update 213 241 Reduce
6-Oct-08 Quarterly Preview 206 221 Reduce 120
17-Oct-08 Results Review 158 171 Reduce 70

Mar-09
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
2-Jan-09 Quarterly Preview 123 140 Reduce

6-Mar-09 Sector Update 96 93 Sell
53
Fig 87 - HCL Tech financial model

Exchange rate (Rs/$) 44.5 49.4 47.5 46.7 47.0 46.2 45.7 45.2 44.7 45.5 43.5
Total Employees 53,614 53,857 54,018 54,422 54,422 54,461 54,530 54,599 55,232 55,232 61,448
qoq/yoy growth (%) 2.4 1.4 0.7 0.6 13.3 0.6 0.2 0.1 0.7 2.2 6.2
Sales & support 6,034 6,397 6,267 6,269 6,242 6,053 6,030 6,035 6,060 6,044 6,435
Gross additions 5,597 3,935 3,453 3,516 16,500 3,175 2,975 2,975 3,575 12,700 19,500
Net additions 1,973 243 161 404 2,781 39 68 70 632 810 6,216
Attrition 3,624 3,692 3,291 3,111 13,719 3,136 2,907 2,905 2,943 11,890 13,284
Onsite utilisation (%) 96.5 97.4 97.0 97.0 97.0 97.0 96.5 96.5 96.0 96.5 96.0
Offshore utilization
74.7 75.0 75.0 75.5 75.0 76.0 77.0 77.5 77.0 76.9 75.7
(excling trainees) (%)
Core Software
Billed volumes 66,247 66,984 64,825 65,410 263,466 65,579 66,024 65,988 65,846 263,437 273,780
qoq/yoy growth (%) 1.0 1.1 (3.2) 0.9 7.9 0.3 0.7 (0.1) (0.2) (0.0) 3.9
Offshore effort mix (%) 74.9 75.3 75.5 75.5 75.3 75.8 75.8 75.8 75.8 75.8 76.0
Billing rate ($/Man Month)
qoq/yoy growth (%) (4.5) (4.0) (2.5) (1.8) (4.6) (0.8) (0.8) (0.8) (0.8) (1.1) 0.4
qoq/yoy growth (%) 1.5 (0.2) (2.3) (1.6) (1.6) (1.3) (1.3) (1.3) (1.3) (1.9) 0.6
Revenues(US$) 505 512 586 587 2,190 589 593 595 596 2,372 2,523
qoq/yoy growth (%) 0.1 1.4 14.7 0.2 16.6 0.3 0.6 0.3 0.2 8.3 6.4
Revenues (Rs mn) 23,693 24,908 27,856 27,605 104,062 27,406 27,278 27,051 26,802 108,537 110,361
qoq/yoy growth (%) 9.2 5.1 11.8 (0.9) 36.2 (0.7) (0.5) (0.8) (0.9) 4.3 1.7
Gross margin (%) 39.4 39.9 36.0 35.9 37.7 34.3 33.4 34.1 34.3 34.0 32.5
EBITDA margin (%) 22.4 22.5 20.1 20.1 21.2 18.7 18.0 18.8 19.0 18.6 17.0
Adjusted PAT (Rs mn) 3,548 3,734 3,236 3,240 13,758 3,089 2,942 3,117 3,182 12,330 12,699
qoq/yoy growth (%) 155.6 5.2 (13.3) 0.1 22.1 (4.7) (4.8) 6.0 2.1 (10.4) 3.0
No. of shares 667 669 669 669 669 670 670 670 670 670 670
Dil no. of shares 679 670 670 670 672 670 670 670 670 670 670
Basic EPS 5.3 5.6 4.8 4.8 20.6 4.6 4.4 4.7 4.8 18.4 19.0
Diluted EPS 5.2 5.6 4.8 4.8 20.5 4.6 4.4 4.6 4.7 18.4 18.9
54
Tech Mahindra Company Update 06 March 2009
Tech Mahindra What’s New? Target Rating Estimates
Near-term concerns; long-term visibility intact

Tech Mahindra is India’s largest IT company with strong domain expertise and CMP TARGET RATING RISK
execution experience in the telecom space – a legacy of its erstwhile parent
Rs 250 Rs 290 HOLD HIGH
British Telecom (BT). We expect the core BT account to remain under pressure in
the near-term as the telecom major has been cutting its IT expenses lately.
However, the return of the BT account to its steady state is only a function of
time. Further, a strong ramp-up in BTGS in FY10 along with commencement of BSE NSE BLOOMBERG
the £350mn, 5-year Andes project would lend an impetus to growth. The stock is 532755 TECHM TECHM IN
up 19% since posting in-line Q3FY09 results. Valuations at 3.7x FY10E remain
attractive; we recommend a Hold on the stock with a target price of Rs 290. Company data
Barcelona deal grows, legacy BT continues to decline Market cap (Rs mn / US$ mn) 30,341 / 617
The contribution from the Barcelona deal has been steady (BTGS grew 9.4% in Outstanding equity shares (mn) 121
Q3FY09 to US$ 35mn from US$ 32mn in Q2FY09), but the legacy BT business Free float (%) 29.0
has been under pressure, declining 11.8% QoQ to £59.4mn (constant currency). Dividend yield (%) 2.4
Revenues from BT decreased by 3% QoQ in constant currency terms and 7.7% 52-week high/low (Rs) 990 / 204
on a reported basis, as key programmes such as 21CN and open-reach are in the 2-month average daily volume 255,870
ramp-down mode. In Q3FY09, the management had highlighted that traditional
BT revenues had peaked and growth would be driven by the new BTGS deals. Stock performance
Expect strong BTGS ramp-up in FY10
We have modelled revenues of £75mn from BTGS for FY09. The company had Tech Mah 250 8.4 (2.3) (67.6)
billed £22mn to this account in the December ’08 quarter. It has made BSE IT 2,033 (7.4) (17.5) (50.2)
substantial investments in building capabilities to take over end-to-end Sensex 8,446 (8.2) (8.5) (43.3)
platforms/processes within BTGS. In our view, revenues will peak by FY10. This
would be accompanied by an improving margin profile from this account. P/E comparison
Andes project to generate revenues from Q1FY10 (x) Tech Mah. Industry
15 11.5
The management has indicated that the £350mn, 5-year Andes project is 9.8 10.2
expected to start generating revenues in Q1FY10. The deal is front-ended, with 10
4.2 3.5 3.7
65% of the revenues expected within the first three years of the project. We have 5
factored in £60mn of revenues from the project in our FY10 estimates. 0
FY08 FY09E FY10E
Moderate growth seen in BT core business revenue
In the near term, revenue growth from BT core will be challenging given the
telecom major’s expenditure on multiple programmes and platforms. We believe Valuation matrix
that BT may consolidate the number of vendors working on each relationship, (x) FY08 FY09E FY10E FY11E
which could lead to new end-to-end engagement wins in some cases for the P/E @ CMP 4.2 3.5 3.7 4.2
company and ramp-downs on platforms given to its competitors in a few others. P/E @ Target 6.1 4.9 4.3 4.9
Tech Mahindra is strongly positioned in a majority of BT’s platforms, but we
EV/EBITDA @ CMP 2.9 2.0 2.1 2.1
believe that pricing or margin risks could arise as several existing players
compete for end-to-end ownership of these platforms.

Growth (%) 24.4 19.0 (4.0) (11.9) ROE 70.8 53.5 34.3 23.5
FDEPS (Rs) 58.9 70.5 67.6 59.6 ROIC 57.9 62.8 49.1 40.7
Growth (%) 24.2 19.7 (4.0) (11.9) ROCE 69.9 53.0 34.3 23.5
55
Robust growth from non-BT relationships

Slower QoQ growth in non-BT revenues Tech Mahindra continues to derive strong growth from its non-BT relationships. Non-BT
in Q3FY09 was partially on account of revenues have grown substantially over the past two years. However, the company has
weakness in TEM clients seen some weakness in its TEM clients in the recent quarters (in line with other players
in the industry); the QoQ slower growth in non-BT revenues in Q3FY09 was partially on
account of TEM clients. The company needs to scale up its efforts to grow revenues from
non-BT clients over the next few years.
Fig 88 - Non-BT revenues

(Rs mn)
5,500
4,868
5,000 4,659
4,500 4,131
3,785
4,000 3,576
3,500 3,155 3,142
2,886
3,000 2,694
2,466 2,512
2,500
2,000
Q1FY07
Q2FY07
Q3FY07
Q4FY07
Q1FY08
Q2FY08
Q3FY08
Q4FY08
Q1FY09
Q2FY09
Q3FY09
Revising FY10 estimates

We are decreasing our revenue estimates for FY10 by 2.7%, to factor in depreciation of
the pound against the rupee and the dollar, and changes made to the trajectory of BTGS
revenues. We are assuming an exchange rate of Rs 78.4/£ for FY09 and Rs 70.0/£
for FY10.
Fig 89 - Tech Mahindra estimate revision

Moderating revenue growth forecast for FY09E FY10E
Key parameters
FY10 to reflect changes to BTGS growth Old New % Chg Old New % Chg
trajectory
Revenue (Rs mn) 44,689.0 44,689 - 47,028.0 45,778 (2.7)
EBITDA margin (%) 26.9 26.9 - 25.9 24.7 (120bps)
Adj Net profit (Rs mn) 9,160.0 9,160 - 9,559.0 8,791 (8.0)
EPS (Rs) 70.5 70.5 - 73.6 67.6 (8.1)
Source: RHH
Target price reduced to Rs 290 – Hold

After posting third-quarter results that were largely in line with expectations, Tech
Mahindra’s stock rose 19% (vis-à-vis a 7% drop in BSE IT). We have moderated our
revenue growth forecast to consider changes made to the trajectory of BTGS revenues.
We expect BTGS to attain steady-state revenues over the next 3–4 quarters, as indicated
by the company’s management.
We have also taken a more conservative stance on margins and are now factoring in a
120bps decline in FY10E as opposed to estimates for flat margins previously. As a result,
we have reduced our FY10E EPS to Rs 67.6 for FY10. We are valuing Tech Mahindra at
5.5x on FY10 earnings after deducting normalised amortization of upfront payments
made by the company (as compared to a one-time write-off taken by the company for
the Barcelona and Andes deal).
We are reducing our target price for the stock from Rs 380 to Rs 290, a decline of 24%
due to earnings and target P/E multiple revision. At our target price the stock would
trade at 4.3x its FY09E earnings, in line with other mid-tier IT companies. We
recommend a Hold on the stock.
56
Revenues 37,661 44,689 45,778 47,966 Cash and cash eq 976 6,732 12,336 19,037
EBITDA 8,261 12,018 11,308 11,147 Inventories 17 - - -
Growth (%) 11.2 45.5 (5.9) (1.4) Other current assets 3,604 4,295 4,950 5,340
Depreciation & amortisation 796 1,115 1,376 1,586 Investments 633 932 1,532 2,032
Growth (%) 8.0 46.1 (8.9) (3.7) Net fixed assets 3,264 4,149 4,423 3,986
Interest 62 2 - - CWIP 1,640 1,500 900 700
Other income 1,040 57 (40) 100 Intangible assets 1,092 1,092 1,092 1,092
EBT 8,443 10,958 9,892 9,661 Deferred tax assets, net 60 110 140 170
Income taxes 748 1,125 1,099 1,912 Other assets - - - -
Extraordinary items (4,401) - - - Accounts payable 5,119 5,631 4,505 4,730
Min into / inc from associates (5) (2) - - Other current liabilities 1,386 1,663 1,830 1,921
Adjustments (4,400) 675 - - Debt funds 300 - - -
Adjusted net income 7,699 9,160 8,791 7,746 Other liabilities 111 111 111 111
Growth (%) 24.4 19.0 (4.0) (11.9) Equity capital 1,214 1,218 1,219 1,223
Growth (%) 24.2 19.7 (4.0) (11.9) Total liabilities 22,251 31,968 39,189 46,450
DPS (Rs) 5.5 6.0 7.0 8.0 BVPS (Rs) 103.6 178.1 242.4 296.7

Non-cash adjustments (546) 2,099 (1,185) 22 EBITDA margin 21.9 26.9 24.7 23.2
Changes in working capital (1,556) (3,808) (867) (264) EBIT margin 19.8 24.4 21.7 19.9
Capital expenditure (2,391) (1,860) (1,050) (950) ROE 70.8 53.5 34.3 23.5
Change in investments 389 (299) (600) (500) ROCE 69.9 53.0 34.3 23.5
Other investing cash flow 98 - - - Working Capital & Liquidity ratios
Issue of equity 11 102 40 100 Inventory (days) 0 0 - -
Issue/repay debt 153 (300) - - Payables (days) 108 74 65 55
Dividends paid - (1,128) (903) (1,043) Current ratio (x) 2.4 3.3 4.9 5.8
Change in cash & cash eq 253 5,756 5,605 6,700 Turnover & Leverage ratios (x)
Closing cash & cash eq 976 6,732 12,336 19,037 Gross asset turnover 6.5 6.1 5.0 4.5
Adjusted debt/equity 0.0 - - -
WACC (%) 17.5 17.3 17.3 17.3
ROIC (%) 57.9 62.8 49.1 40.7
EV/Sales 0.6 0.5 0.5 0.5
EVA (Rs mn) 5,706 7,744 6,029 4,376 P/E 4.2 3.5 3.7 4.2
EVA spread (%) 40.4 45.5 31.8 23.4 P/BV 2.4 1.4 1.0 0.8
57
Quarterly trend
Revenue (Rs mn) 9,704 10,218 11,164 11,648 11,322
YoY growth (%) 26.1 16.8 27.4 29.8 16.7
QoQ growth (%) 8.1 5.3 9.3 4.3 (2.8)
EBITDA (Rs mn) 1,923 1,995 2,611 2,994 2,893
EBITDA margin (%) 19.8 19.5 23.4 25.7 25.5
YoY growth (%) 20 12 53 30 12
QoQ growth (%) 10 10 18 (9) (5)
DuPont analysis
Return on equity 80.7 70.8 53.5 34.3 23.5
Tech Mahindra is India’s eighth largest IT services company with (%) Jun-08 Sep-08 Dec-08
strong domain expertise and execution experience in the telecom Promoters 83.3 83.3 83.3
space, particularly catering to telecom service providers. British FIIs 1.5 1.8 1.4
Telecom (BT) is its largest customer, accounting for 64% of
Banks & FIs 3.7 3.7 3.3
revenues in FY08, and also a strategic investor with a 31% stake.
The company has won deals worth US$ 2bn from BT and its Public 11.5 11.2 12.0
subsidiaries for a five-year period.

850 ● Accumulate ● Buy ● Hold
21-Aug-08 RHH Compendium 766 967 Buy 750
6-Oct-08 Quarterly Preview 621 762 Accumulate 650
550
22-Oct-08 Results Review 413 588 Buy 450
350
2-Jan-09 Quarterly Preview 262 380 Accumulate 250
23-Jan-09 Results Review 210 380 Buy 150
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
6-Mar-09 Sector Report 250 290 Hold
58
Fig 90 - Tech Mahindra financial model

Exchnge rate (Rs/GBP) 82.2 83.0 79.0 69.0 78.4 68.5 69.5 70.5 71.5 70.0 73.1
Total Employees 24,369 25,135 25,429 25,069 25,069 25,037 25,246 25,929 26,831 26,831 29,719
Sales & support 1,101 1,128 1,123 1,504 1,504 1,001 1,010 1,037 1,073 1,073 1,337
Gross additions 2,306 1,585 1,142 467 5,500 720 960 1,440 1,680 4,800 6,500
Net additions 1,485 766 294 (360) 2,185 (32) 209 683 902 1,762 2,888
Attrition 821 819 848 826 3,315 752 751 757 778 3,038 3,612
Net utilisation (%) 74.0 69.0 67.0 67.0 69.2 72.0 74.0 76.0 76.0 74.5 74.0
Billed volumes (MM) 50,109 48,930 48,555 48,110 195,703 51,409 53,582 56,005 57,740 218,736 238,807
qoq/yoy growth (%) 3.9 (2.4) (0.8) (0.9) 13.1 6.9 4.2 4.5 3.1 11.8 9.2
Billing rates ($/Man Month)
qoq/yoy growth (%) 2.1 1.5 (13.3) (3.5) (4.7) (0.5) (0.5) (0.5) (0.5) (10.7) 0.3
qoq/yoy growth (%) 2.9 1.5 (13.3) (3.0) (3.4) (0.5) (0.5) (0.5) (0.5) (10.1) 0.3
Blended realisation 5,426 5,510 4,776 4,561 5,073 4,538 4,515 4,493 4,470 4,503 4,516
qoq/yoy growth (%) 1.5 1.5 (13.3) (4.5) (6.1) (0.5) (0.5) (0.5) (0.5) (11.2) 0.3
Revenues 272 270 232 219 993 233 242 252 258 985 1,078
qoq/yoy growth (%) 5.5 (0.8) (14.0) (5.4) 6.2 6.3 3.7 4.0 2.6 (0.8) 9.5
Revenues 11,164 11,648 11,322 10,555 44,689 11,023 11,310 11,637 11,808 45,778 47,966
qoq/yoy growth (%) 9.3 4.3 (2.8) (6.8) 18.7 4.4 2.6 2.9 1.5 2.4 4.8
Gross margin (%) 38.9 41.1 41.9 39.7 40.4 37.9 37.6 37.7 37.2 37.6 36.5
EBITDA margin (%) 25.7 28.0 28.1 25.7 26.9 24.9 24.6 24.9 24.5 24.7 23.2
Adjusted net profit 2,587 2,354 2,227 1,994 9,160 2,150 2,166 2,253 2,226 8,791 7,746
qoq/yoy growth (%) 18.3 (9.0) (5.4) (10.4) 19.1 7.8 0.7 4.0 (1.2) (4.0) (11.9)
No. of shares 121 122 122 122 122 122 122 122 122 122 122
Dil no. of shares 130 130 130 130 130 130 130 130 130 130 122
Basic EPS 21.3 19.4 18.3 16.4 75.3 17.7 17.8 18.5 18.3 72.2 63.5
Diluted EPS 19.8 18.1 17.1 15.3 70.5 16.5 16.7 17.3 17.1 67.7 59.6
59
MindTree Company Update 06 March 2009
MindTree What’s New? Target Rating Estimates
US recession poses significant threat to growth

We maintain our negative outlook on the company considering that it draws CMP TARGET RATING RISK
50.7% of its revenues from development projects which are dependent on the Rs 207 Rs 184 SELL HIGH
customer’s discretionary spending power. This represents a significant risk to
growth given the concerns of an impending economic slowdown in the US,
which would result in a sharp curtailment of discretionary IT spends. While the
BSE NSE BLOOMBERG
management has revised its FY09 growth guidance in Q3FY09 results, we have
revised our estimates to build in our modified exchange rate assumption of 532819 MINDTREE MTCL IN
Rs 45.3/US$ for FY09 and Rs 47.8/US$ for FY10. Consequently, we are revising
our target price for the stock from Rs 265 to Rs 184 – Sell. Company data
Market cap (Rs mn / US$ mn) 7,850/151
High exposure to development revenues
In FY08, MindTree derived 81% of its revenues from Application Development
Free float (%) 42
and Maintenance (ADM) services. This contribution was much higher than for its
peers, enhancing concentration risk faced by the company. We are also Dividend yield (%) 1.1
concerned about the company’s high development revenues, at 53.5% in FY08 52-week high/low (Rs) 507 / 181
(50.7% in Q3 FY09). The likely impact of a reduction in IT spends on 2-month average daily volume 55,508
development revenues is high, since they are project-based. Thus, the company
is exposed to higher risk than its peers, given the sharp slowdown in the US. Stock performance
Margin expansion seems temporary
MindTree 207 (0.2) (14.9) (41.4)
The management expects the company’s EBITDA margin to decline in Q4FY09
BSE IT 2,033 (7.4) (17.5) (50.2)
as fresh recruits in Q3FY09 are likely to bring down utilisation rate. Surprisingly,
Sensex 8,446 (8.2) (8.5) (43.3)
the implied Q4FY09 guidance indicates that EBITDA margin will decline to 14%
from 30.5% in Q3FY09. However, we expect the EBITDA margin to decline by
600bps in the last quarter from the third, due to a fall in utilisation as well as due P/E comparison
to pricing pressures. (x) MindTree Industry
15 11.5
9.4 9.8 10.2
Billing rates trend downwards 7.8
10
MindTree is seeing a downward trend in pricing, similar to that faced by large 5.5
Indian IT players. Pricing pressure is a function of weak demand, and the 5
company by virtue of being a smaller player compared to other IT companies, 0
lacks bargaining clout. We expect pricing to be flat for FY09 and to decline by FY08 FY09E FY10E
7.4% in FY10.
Fig 3 - Billing rate trend Valuation matrix
%change Q3FY08A Q4FY08A Q1FY09A Q2FY09A Q3FY09A (x) FY08 FY09E FY10E FY11E
P/E @ CMP 7.8 9.4 5.5 5.2
Onsite 5.0 2.9 (0.7) 7.0 (5.0)
P/E @ Target 6.9 8.3 4.8 4.6
Offshore 1.0 1.6 (0.8) (0.9) (2.0)
EV/EBITDA @ CMP 7.1 2.7 3.4 3.2
Blended 2.0 0.7 0.1 0.6 (3.4)

Adj net income 1,033 851 1,459 1,545 Adj PAT margin 14.0 6.8 11.4 11.9
Growth (%) 14.7 (17.6) 71.4 5.9 ROE 21.4 13.4 17.7 15.5
FDEPS (Rs) 26.5 22.1 37.9 40.1 ROIC 26.0 50.2 27.7 22.8
Growth (%) (4.2) (16.6) 71.4 5.9 ROCE 20.0 12.9 16.2 14.4
60
Dip in utilisation going ahead

MTCL’s gross utilisation levels are lower than some of its industry peers. We also do not
expect utilisation levels to improve drastically from the current levels of 71.1% in the
short-term because of its heavy dependence on development projects. We expect the
company’s utilisation levels to be 67.3% in FY09 and 69.2% in FY10.
Forex loss to continue as the rupee depreciates

Considering the sharp rupee appreciation in FY08, followed by its depreciation in FY09,
MindTree had increased its foreign currency hedges. By being super-cautious about
further rupee appreciation, the company is suppressing profits in FY09 as the currency
has sharply depreciated instead. MindTree, currently, had US$ 190mn of hedge position
as on Q3FY09.
FY09 guidance revised downwards

The management has lowered the standalone FY09 revenue guidance to a range of
US$ 223mn-225mn from US$ 228mn-238mn earlier. EBITDA and net profit are
expected to be in the range of US$ 56mn-57.4mn and US$12.8mn-14.5mn,
respectively. The management has cited cross-currency headwinds and higher-than-
expected forex losses as a reason for the lower guidance.
Fig 91 - FY09 Guidance (standalone)

Particulars Lower end Upper end
US$ terms
Revenue (US$ mn) 223 225
PAT (US$) 12.8 14.5
Rupee terms
Revenue (Rs mn) 10,082 10.179
PAT (Rs mn) 595 677
Revising our earnings estimates

We have revised our revenue and earnings estimates(Consolidated) lower for FY09 by
0.2% and 4.1%, respectively, in order to factor in lower volume growth and a lower
margin scenario than had been expected earlier. We now expect the earnings for FY09
at Rs 22.1 and for FY10 to be Rs 37.9.
Fig 92 - Revised estimates

FY09E FY10E
Key parameters
Revenue (Rs mn) 12,468.0 12,448 (0.2) 13,379.0 12,831 (4.1)
EBIDTA margin(%) 26.5 26.4 (10)bps 21.9 20.3 (160)bps
Net profit (Rs mn) 938.0 851 (9.2) 1,876 1,459 (22.2)
EPS (Rs) 24.1 22.1 (8.2) 48.2 37.9 (21.4)
Source: RHH
Target price revised downwards

Consequently, we are also changing our target price for the stock to Rs 184 from Rs 265
earlier. We have valued the company at a P/E multiple of 4.8x to its FY10E earnings of
Rs 37.9x, considering the dim growth prospects for the company. We are moving our
recommendation from Reduce to Sell, in line with our new recommendation criteria
(please refer to disclaimer).
61
Revenues 7,398 12,448 12,831 12,940 Cash and cash eq 553 715 1,350 1,797
Depreciation & amortisation 356 588 797 807 Investments 1,395 3,972 3,220 3,244
EBIT 898 2,703 1,808 1,975 Gross fixed assets 3,474 5,120 5,770 6,420
Interest 59 166 162 87 CWIP 233 125 100 50
Other income 279 (1,552) 73 91 Intangible assets 214 214 214 214
EBT 1,118 985 1,719 1,979 Deferred tax assets, net 90 111 171 231
Income taxes 85 134 260 434 Other assets - - - -
Extraordinary items - - - - Accounts payable 201 378 285 382
Min into / inc from associates - 63 70 66 Other current liabilities 960 2,772 1,828 1,659
Reported net income 1,033 843 1,389 1,479 Provisions 231 300 360 414
Adjustments - (8) (70) (66) Debt funds 919 1,815 1,415 1,015
Adjusted net income 1,033 851 1,459 1,545 Other liabilities - - - -
Growth (%) 14.7 (17.6) 71.4 5.9 Equity capital 379 381 383 385
Growth (%) (4.2) (16.6) 71.4 5.9 Total liabilities 7,607 12,645 12,967 14,326
DPS (Rs) 2.0 2.3 2.5 2.8 BVPS (Rs) 149.7 203.7 247.0 292.0

Non-cash adjustments (218) 1,490 (332) (342) EBITDA margin 16.9 26.4 20.3 21.5
Changes in working capital (252) 479 (916) (430) EBIT margin 12.1 21.7 14.1 15.3
Cash flow from operations 938 3,401 939 1,514 Net profit margin 14.0 6.8 11.4 11.9
Capital expenditure (2,176) (1,538) (625) (600) ROE 21.4 13.4 17.7 15.5
Change in investments 845 439 752 (24) ROCE 20.0 12.9 16.2 14.4
Other investing cash flow (254) (3,016) - - Working Capital & Liquidity ratios
Cash flow from investing (1,585) (4,115) 127 (624) Receivables (days) 72 75 90 86
Issue of equity (119) 66 67 67 Inventory (days) - - - -
Issue/repay debt 639 896 (400) (400) Payables (days) 17 15 15 15
Dividends paid (88) (87) (98) (111) Current ratio (x) 2.9 1.7 2.8 3.3
Change in cash & cash eq (215) 162 634 447 Turnover & Leverage ratios (x)
Closing cash & cash eq 553 715 1,350 1,797 Gross asset turnover 3.1 2.9 2.4 2.1
WACC (%) 13.4 16.1 16.1 16.1
ROIC (%) 26.0 50.2 27.7 22.8
EV/Sales 1.2 0.7 0.7 0.7
EVA (Rs mn) 566 1,639 727 485 P/E 7.8 9.4 5.5 5.2
EVA spread (%) 12.6 34.1 11.6 6.7 P/BV 1.4 1.0 0.8 0.7
62
Quarterly trend
Revenue (Rs mn) 1,865 2,039 2,222 2,546 2,755
YoY growth (%) 28.1 30.2 37.6 39.9 47.7
QoQ growth (%) 2.5 9.3 9.0 14.6 8.2
EBITDA (Rs mn) 320 383 463 710 840
EBITDA margin (%) 17.2 18.8 20.8 27.9 30.5
Adj net income (Rs mn) 208 360 (130) 367 9
YoY growth (%) 10.4 47 (164) 35 (96)
QoQ growth (%) (23) 73 (136) (383) (97)
DuPont analysis
(%) FY06 FY07 FY08 FY09E FY10E
EBIT margin (EBIT/Revenues) 1,887 4,498 4,808 6,284 7,244
Asset turnover (Revenues/Avg TA) 734 566 1,639 727 485
Return on equity 14.8 13.4 16.1 16.1 16.1
MindTree is a mid-sized Bangalore-based company focused on (%) Jun-08 Sep-08 Dec-08

providing IT and R&D services, with consolidated annual revenues Promoters 35.0 35.0 34.7
of US$ 246mn in FY08 (including the Aztec Software acquisition). FIIs 2.0 4.6 6.2
The company provides strategic consultancy services besides
Banks & FIs 2.5 2.9 2.7
developing and maintaining enterprise solutions for business-to-
business and business-to-consumer applications. In R&D services, Public 60.5 57.5 56.4
the company is primarily focused on solutions for the storage,
automotive and telecom industries.

420 ● Buy ● Reduce ● Sell
21-Aug-08 RHH Compendium 343 472 Buy
370
6-Oct-08 Quarterly Preview 293 308 Reduce 320
2-Jan-09 Quarterly Preview 238 265 Reduce 270
20-Jan-09 Results Review 239 265 Reduce 220
6-Mar-09 Sector Report 207 184 Sell 170
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
63
Fig 93 - MindTree financial model

Exchange rate 41.0 42.9 48.6 48.8 45.3 48.7 48.1 47.5 46.9 47.8 45.4
Total Employees 5,716 5,746 5,826 6,016 6,016 5,941 6,003 5,995 6,078 6,078 6,290
qoq/yoy growth (%) 0.8 1.1 1.8 4.8 6.0 (1.0) (0.0) 0.9 1.3 1.2
Sales & support
408 421 420 433 433 416 420 420 425 425 396
employees
Gross additions 377 321 299 400 1,397 135 270 203 293 900 1,400
Net additions 76 30 80 190 300 (76) 62 (8) 83 137 154
Attrition 301 291 219 210 1,021 211 208 210 210 838 1,188
65.6 70.5 71.1 70.0 67.3 70.0 71.0 70.0 68.5 69.2 68.5
trainees) (%)
Billed volumes 1,787,641 1,937,146 1,902,957 1,928,586 7,556,330 1,920,563 1,934,913 1,914,728 1,941,305 7,711,508 8,195,633
qoq/yoy growth (%) 6.9 8.4 (1.8) 1.3 25.1 (0.4) 0.7 (1.0) 1.4 2.1 6.3
Billing Rates
($/Man Month)
Onsite 63 67 64 62 64 60 59 59 59 59 59
qoq/yoy growth (%) (0.7) 7.0 (5.0) (3.0) 6.5 (2.5) (1.5) (0.6) (0.6) (7.1) 0.1
Offshore 24 24 24 23 24 23 22 22 22 22 22
qoq/yoy growth (%) (0.8) (0.9) (2.0) (2.5) (0.6) (2.3) (1.3) (0.5) (0.5) (6.5) 0.3
Blended 29 30 29 28 29 27 27 27 26 27 27
qoq/yoy growth (%) 0.1 0.6 (3.4) (2.9) 0.2 (2.3) (1.6) (0.5) (0.6) (7.4) 1.2
Revenues (Rs mn) 2,236 3,120 3,638 3,454 12,448 3,326 3,242 3,149 3,115 12,831 12,940
qoq/yoy growth (%) 7.4 39.6 16.6 (5.1) 68.3 (3.7) (2.5) (2.8) (1.1) 3.1 0.8
Gross margin (%) 39.6 45.5 46.2 41.1 43.4 39.0 38.5 35.9 35.0 37.2 37.3
EBITDA margin (%) 21.0 27.8 30.5 24.5 26.4 22.5 22.0 18.8 17.7 20.3 21.5
Effective tax rate (%) (6.9) 12.2 26.4 7.0 13.6 15.3 15.2 15.0 14.9 15.1 21.9
Adj. net profit (Rs mn) (129) 351 103 526 851 444 415 316 284 1,459 1,545
qoq/yoy growth (%) (135.8) (372.3) (70.7) 410.7 (17.6) (15.6) (6.6) (23.9) (10.2) 71.4 5.9
Basic Number of shares 38 38 38 38 38 38 38 38 38 38 38
Diluted number of shares 39 39 38 39 39 39 39 39 39 39 39
Basic EPS (3.4) 9.3 2.7 13.9 22.5 11.6 10.9 8.3 7.4 38.2 40.2
Diluted EPS (3.3) 9.1 2.7 13.7 22.1 11.5 10.8 8.2 7.4 37.9 40.1
64
Patni Computer Systems Company Update 06 March 2009
Patni Computer Systems

Pricing under pressure; maintain Sell CMP TARGET RATING RISK
Patni Computer Systems has been a laggard among peers because of its high Rs 96 Rs 93 SELL HIGH
exposure to the sluggish ADM services vertical. While Patni’s Q4CY08 revenue
drop of 3.9% QoQ (in dollar terms) was in line with management guidance, the
low growth trajectory in its topline has persisted over the past few quarters. BSE NSE BLOOMBERG
Patni’s Q1CY09 revenue guidance of US$ 154mn–155mn implies a QoQ
532517 PATNI PATNI IN
decline of 12.1–12.7%, which pours cold water on any hopes of a revenue
pick-up in the near term. We believe that further upsides will not come in a
Company data
hurry, especially when valuations of larger, more consistently performing peers
have taken a pounding. We see limited upsides from these levels, and hence Market cap (Rs mn / US$ mn) 12,298 / 236.5
initiate coverage with a Sell rating on the stock. Outstanding equity shares (mn) 128
Free float (%) 50.1
Resource management a greater challenge Dividend yield (%) 3.1
Patni has upped its employee headcount marginally to 14,894 (net adds of just 52-week high/low (Rs) 290 / 94
193 in Q4) and we expect the net additions to be lower FOR CY09 as compared
2-month average daily volume 121,461
to CY08.While attrition has decreased 180bps QoQ to 18.6%, it is still
alarmingly high. We believe that low employee additions combined with high
Stock performance
attrition would suppress revenue growth below the industry average.
Recruitment trend Patni Comp 96 (18.9) (31.1) (59.2)
Particulars Q1CY08 Q2CY08 Q3CY08 Q4CY08 BSE IT 2,033 (7.4) (17.5) (50.2)
Onsite 2,936 3,052 3,039 2,966 Sensex 8,446 (8.2) (8.5) (43.3)
Offshore 12,216 11,992 11,662 11,928

P/E comparison
Total 15,152 15,044 14,701 14,894
Sales & Support Staff 1,516 1,496 1,511 1,563 (x) Patni Industry
15 11.5
Net Additions 207 (108) (343) 193 9.8 10.2
10
Attrition (LTM) excl BPO (%) 23.0 21.2 20.2 18.6 3.5 4.4 4.6
5
0
Pricing comes under pressure CY08 CY09E CY10E
Onsite as well as offshore billing rates witnessed a 1.6% QoQ decline in Q4CY08,
primarily due to pricing pressure from clients. The management has indicated that
the downward trend in pricing would continue in the subsequent quarters as well. Valuation matrix
We expect Patni’s blended pricing to decline 9.0% YoY in CY09. (x) CY08 CY09E CY109E CY11E
P/E @ CMP 3.5 4.4 4.6 4.4
Increase in SG&A expenditure and cost of revenues
P/E @ Target 3.5 4.3 4.5 4.3
Patni’s SG&A expenses and cost of revenues have increased at a substantially
EV/EBITDA @ CMP 1.3 1.6 1.8 1.8
higher rate than some of its industry peers. Even amid years of strong demand,
the company was unable to win new clients and increase its market share,
despite its higher spending on SG&A.

(Rs mn) CY08 CY09E CY109E CY11E (%) CY08 CY09E CY109E CY11E
Growth (%) 18.7 (9.0) (4.3) 4.7 EBIT margin 12.9 10.4 9.5 8.8
Growth (%) 7.1 (18.3) (7.6) 1.2 ROE 14.1 9.8 8.6 8.5
FDEPS (Rs) 27.1 21.7 20.8 21.8 ROIC 19.3 13.4 11.2 10.7
Growth (%) (18.5) (19.9) (4.1) 4.8 ROCE 14.0 9.7 8.6 8.4
65
Growth in revenue share from existing clients seems improbable

Smaller players like Patni most Given the bleak demand environment, we believe that Patni will find it difficult to
vulnerable to IT budget cuts and vendor increase its share of revenue from existing clients. Smaller players such as Patni will be
consolidation sharply affected with expected cuts in client IT budgets for the current year and the
swelling wave of vendor consolidation. Further, Patni’s client additions have typically
been on the lower side compared to peers in the industry.
Fig 94 - Components influencing margin movement

Particulars Q1CY08 Q2CY08 Q3CY08 Q4CY08
Exchange rate (Rs/US$) 40.0 42.9 46.5 48.6
Change QoQ (%) 1.5 7.3 8.2 4.6
Operating expenses
Cost of revenues (Rs mn) 4,843 5,267 5,592 5,455
As % of revenues 68.6 67.2 65.6 63.6
G&A expenses 749 852 986 909
As % of revenues 10.6 10.9 11.6 10.6
SG&A expenses 494 593 612 642
As % of revenues 7 7.6 7.2 7.5
Utilisation
Utilisation (%) 70 72 75 73.1
Onsite: Offshore effort
Onsite (%) 29.2 29.2 28.2 28.7
Offshore (%) 70.8 70.8 71.8 71.3
Package implementation, telecom take the biggest hit

Revenue from package Revenue from package implementation fell 13.5% QoQ during Q4CY08 as the service
implementation plunges 13.5% QoQ in is considered discretionary in nature, while ADM slipped 3% and BPO increased 4%.
Q4 due to curbs on discretionary Geography-wise, EMEA declined significantly as it was impacted by depreciation of the
spending pound against the dollar, but was flat on a constant currency basis (down 3%). The
management believes manufacturing (- 4%) and insurance (+ 4%) hold the best potential
for strong performance among verticals. Telecom declined 22% QoQ, accounting for
10.1% of revenue. The drop in telecom is mainly attributed to currency fluctuation.
Fig 95 - Revenue share by services

Particulars (%) Q1CY08 Q2CY08 Q3CY08 Q4CY08
ADM 64.6 61.9 64.2 64.6
Enterprise App Systems 13.1 16.1 15.0 13.5
Embedded Tech Services 11.5 11.4 10.8 11.3
Enterprise Systems Mgmt 5.1 4.8 4.7 5.0
Others 5.7 5.8 5.2 5.6
QoQ growth
ADM 1.0 (0.9) 4.2 (3.3)
Enterprise App Systems (2.4) 27.2 (6.4) (13.5)
Embedded Tech Services (0.4) 2.6 (4.8) 0.6
Enterprise Systems Mgmt 5.5 (2.6) (1.6) 2.3
Others 15.5 5.3 (9.9) 3.5
66
Fig 96 - Revenue share by vertical

Particulars (%) Q1CY08 Q2CY08 Q3CY08 Q4CY08
Insurance 23.2 23.3 25.1 27.1
Manufacturing 24.6 24.9 25.5 25.4
Financial Services 12.9 12.8 12.5 12.9
Telecommunications 13.4 14.2 12.5 10.1
Growth Industries 9.6 9.3 9.2 8.9
Product Engineering Services 16.4 15.6 15.2 15.6
QoQ growth
Insurance (0.4) 3.9 8.3 3.8
Currency fluctuations induced a 22% Manufacturing 0.1 4.7 2.9 (4.2)

QoQ drop in the telecom vertical Financial Services (5.3) 2.7 (1.9) (0.8)
Telecommunications 5.3 9.6 (11.5) (22.3)
Growth Industries 17.2 0.2 (0.6) (7.0)
Product Engineering Services 1.3 (1.6) (2.1) (1.3)
Underperforms in top client portfolio

Despite old relationships with top clients, Patni has underperformed in this segment over
the last several quarters. In past years of buoyant demand, its peers as well as the
industry have registered growth across clients and services. However, Patni has
struggled to cultivate both its top and non top-10 client base.
Fig 97 - Client profile

Particulars Q1CY08 Q2CY08 Q3CY08 Q4CY08
Client base
No. of active clients 331 336 332 331
New clients added 34 21 27 18
Repeat business (%) 92.6 92 94.3 93.1
Top client concentration
Top client 11.1 10.4 10.5 11.0
Top 5 32.2 31.5 32.9 34.6
Meagre growth in revenues from top 10
Top 10 44.8 44.5 45.3 48.7
clients
QoQ growth (%)
Top client (10.0) (3.1) 1.5 0.7
Top 2-5 (1.5) 3.5 6.7 1.3
Top 6-10 3.8 6.7 (4.1) 9.3
Rest of clients 4.6 4.0 (0.9) (9.8)
Client distribution
US$ 1mn+ 86 87 91 92
US$ 5mn+ 30 28 30 30
US$ 10mn+ 15 18 20 19
US$ 50mn+ 2 2 2 2
To utilise cash to pursue inorganic initiatives

Plans to deploy cash to expand services Patni’s cash and cash equivalents have hovered ~US$ 300mn for the past three years
and increase exposure to Europe despite poor revenue growth. The company had recently spent US$ 50mn on share
buyback and has paid US$ 25mn on dividend payout over the last two years. It now
plans to shed its conservatism and utilise available cash to expand its portfolio of
services, and to increase its exposure to Europe, which is currently pretty low.
67
Revenue erosion continues at a disturbing pace

Disappointing 12–13% QoQ revenue Patni’s Q1CY09 revenue guidance of US$ 154mn–155mn (against our estimate of
decline implied in Patni’s Q1CY09 US$ 170mn) implies a QoQ decline of 12.1–12.7% and a YoY decline of similar
guidance proportions. A pricing drop of 2.5–3% has been factored into the guidance, with volume
de-growth accounting for the remaining downside in revenue.
This follows several quarters of muted revenue performance and underlines the weak
client profile and positioning of the company, especially amid the challenging demand
environment. High dependence on project-based application development work, lack of
a sustainable annuity business, and sharp ramp-downs from certain key clients
(execution issues partly to blame) continue to exert tremendous pressure on the
company’s revenue base.
Fig 98 - Q1CY09 Guidance muted

Particulars (US$ mn) Q1CY08 Q1CY09
Revenues 175-176 154-155
Net profit (Excl foreign exchange gain/loss) 15.5-16.0 13.5-14.5
Implied growth QoQ (%) 0.5-1.1 (12.7)-(12.1)
Revenues and earnings to decline in CY09

We expect revenue in dollar terms to decline by 15.8% in CY09. Our estimates assume a
revenue trajectory post a contraction of 12.2% in Q1CY09 to be muted, which too could
prove to be over-optimistic. The corresponding decline in rupee terms is 9% YoY. Earnings,
including expected forex losses of Rs 620mn, are projected to decline by 19.9% YoY to Rs
21.7 per share.
No valuation triggers, concerns over cash utilisation

Stock valuation attractive but absence Patni had cash and short-term investments of US$ 306mn at end-December ’08, 29.4%
of business triggers subdue outlook higher than the company’s current market capitalisation of US$ 236.5mn. The stock is
trading at a discount to cash on books and valuations are attractive, but we believe that the
stock will continue to trade on business triggers (the outlook on which remains weak). In
addition, we believe that there is an overriding concern in the market over the potential use
of cash for acquisitions.
Initiating with Sell; target price Rs 93

We have valued the company at a P/E of 4.5 its expected CY09 earnings of Rs 21.7. The
target P/E multiple is at steep discount to that for larger peers like TCS and Wipro. We
believe the steep discount is justified considering the above-expected earnings de-
growth, deteriorating profitability and return ratios, and shrinking free cash flows. We
initiate coverage on the stock with a Sell rating and a one-year target price of Rs 93.
68
Y/E Dec (Rs mn) CY08 CY09E CY10E CY11E Y/E Dec (Rs mn) CY08 CY09E CY10E CY11E
Growth (%) 18.7 (9.0) (4.3) 4.7 Accounts receivable 6,033 5,975 6,025 6,204
Growth (%) 7.1 (18.3) (7.6) 1.2 Other current assets 2,581 2,608 2,648 2,747
Depreciation & amortisation 782 1,001 1,060 1,182 Investments 10,847 10,537 9,562 8,843
Growth (%) 6.2 (27.1) (12.2) (3.0) Net fixed assets 5,146 5,287 5,909 7,299
Interest - - - - CWIP 2,186 2,405 1,747 1,174
Other income 975 155 558 797 Intangible assets 4,488 4,215 3,870 3,625
EBT 5,113 3,172 3,208 3,369 Deferred tax assets, net 14 22 30 38
Income taxes 570 384 535 568 Other assets 1,862 1,911 1,919 1,969
Extraordinary items - - - - Accounts payable 972 639 738 731
Min into / inc from associates - - - - Other current liabilities 1,968 1,991 1,969 1,987
Adjustments 868 - - - Debt funds - - - -
Growth (%) (20.7) (24.2) (4.1) 4.8 Equity capital 256 256 256 257
Growth (%) (18.5) (19.9) (4.1) 4.8 Total liabilities 35,967 38,664 40,361 42,757
DPS (Rs) 3.0 3.0 3.0 3.0 BVPS (Rs) 209.9 234.1 248.4 267.6

Y/E Dec (Rs mn) CY08 CY09E CY10E CY11E Y/E Dec CY08 CY09E CY10E CY11E
Non-cash adjustments (1,570) 965 777 746 EBITDA margin 15.4 13.8 13.3 12.9
Changes in working capital 1,924 (371) (239) (374) EBIT margin 12.9 10.4 9.5 8.8
Change in investments 178 481 457 438 ROCE 14.0 9.7 8.6 8.4
Other investing cash flow - - - - Working Capital & Liquidity ratios
Cash flow from investing (1,581) (960) (822) (1,666) Receivables (days) 65 75 79 76
Issue of equity (2,353) 0 0 0 Inventory (days) - - - -
Issue/repay debt - - - - Payables (days) 12 15 13 14
Dividends paid (509) (529) (502) (482) Current ratio (x) 3.9 5.4 6.4 7.3
Other financing cash flow (12) - - - Quick ratio (x) 3.0 4.4 5.4 6.3
Change in cash & cash eq 1,224 2,894 2,948 2,206 Turnover & Leverage ratios (x)
Y/E Dec CY08 CY09E CY10E CY11E
Adjusted debt/equity - - - -
WACC (%) 16.4 16.5 16.5 16.5
ROIC (%) 19.3 13.4 11.2 10.7
EV/Sales 0.2 0.2 0.2 0.2
Invested capital (Rs mn) 19,537 19,954 19,594 20,488
EV/EBITDA 1.3 1.6 1.8 1.8
EVA (Rs mn) 559 (613) (1,044) (1,194) P/E 3.5 4.4 4.6 4.4
EVA spread (%) 2.9 (3.1) (5.3) (5.8) P/BV 0.5 0.4 0.4 0.4
69
Quarterly trend
Particulars Q4CY07 Q1CY08 Q2CY08 Q3CY08 Q4CY08
Revenue (Rs mn) 6,862 7,061 7,837 8,523 8,570
YoY growth (%) 0.8 5.0 18.2 26.5 24.9
QoQ growth (%) 1.9 2.9 11.0 8.7 0.6
EBITDA (Rs mn) 1,065 976 1,125 1,332 1,564
EBITDA margin (%) 15.5% 13.8 14.4 15.6 18.2
Adj net income (Rs mn) 1,095 725 1,037 1,134 780
YoY growth (%) (1.1) (38.5) (15.0) (0.8) (28.8)
QoQ growth (%) (4.2) (33.8) 43.1 9.3 (31.2)
DuPont analysis
(%) CY07 CY08 CY09E CY10E CY11E
Return on equity 19.3 14.0 9.7 8.6 8.4
Patni Computer Systems provides IT consulting and software (%) Jun-08 Sep-08 Dec-08
services to global organisations in the financial services, insurance Promoters 43.8 46.8 47.6
and manufacturing industries. The company's services range from FIIs 18.7 14.1 13.5
application development, reengineering and maintenance to
Banks & FIs 4.5 3.4 2.9
business processes outsourcing and engineering services.
Public 33.0 35.7 36.0

140
6-Mar-09 Initiating Coverage 96 93 Sell ● Sell
130
120
110
100
90
Dec-08 Jan-09 Feb-09 Mar-09
70
Fig 99 - Patni financial model

Q1CY08 Q2CY08 Q3CY08 Q4CY08 CY08 Q1CY09E Q2CY09E Q3CY09E Q4CY09E CY09E CY10E
Exchange Rate 40.0 42.9 46.5 48.6 48.6 49.0 48.4 47.8 47.2 47.2 44.8
Employee Details
Total Employees 16,668 16,540 16,212 16,457 16,457 15,846 15,433 15,167 15,042 15,042 16,077
Total Technical
15,152 15,044 14,701 14,894 14,894 14,222 13,921 13,681 13,598 13,598 14,534
Employees
qoq/yoy growth (%) 1.4 (0.7) (2.3) 1.3 (0.3) (4.5) (2.1) (1.7) (0.6) (8.7) 6.9
Sales & support
1,516 1,496 1,511 1,563 1,563 1,624 1,512 1,486 1,444 1,444 1,543
employees
Gross additions 929 672 435 976 3,012 130 260 390 520 1,300 3,500
Net additions 207 (108) (343) 193 (51) (611) (413) (266) (125) (1,415) 1,035
Attrition 722 780 778 783 3,063 741 673 656 645 2,715 2,465
Utilisation Levels (%) 70.0 72.0 75.0 73.1 72.1 68.3 72.6 73.0 72.7 71.6 74.8
Billed volumes 31,602 32,612 33,463 32,451 130,128 29,835 30,663 30,213 29,727 120,438 124,722
qoq/yoy growth (%) (1.8) 3.2 2.6 (3.0) 8.9 (8.1) 2.8 (1.5) (1.6) (7.4) 3.6
Billing Rates
($/Man Month
Onsite 11,553 11,541 11,277 11,100 11,368 10,656 10,389 10,285 10,208 10,387 10,234
qoq/yoy growth (%) 4.3 (0.1) (2.3) (1.6) 1.3 (4.0) (2.5) (1.0) (0.7) (8.6) (1.5)
Offshore 3,121 3,147 3,207 3,156 3,159 3,046 2,977 2,955 2,940 2,979 2,951
qoq/yoy growth (%) 3.5 0.8 1.9 (1.6) 3.1 (3.5) (2.3) (0.7) (0.5) (5.7) (0.9)
Blended 5,583 5,598 5,483 5,436 5,524 5,203 5,012 4,940 4,949 5,026 4,894
qoq/yoy growth (%) 3.2 0.3 (2.1) (0.9) (0.4) (4.3) (3.7) (1.4) 0.2 (9.0) (2.6)
Revenue (US$) 176 183 183 176 719 155 154 149 147 605 610
qoq/yoy growth (%) 1.3 3.5 0.5 (3.9) 8.4 (12.0) (1.0) (2.9) (1.4) (15.8) 0.8
Revenues (Rs mn) 7,061 7,837 8,523 8,570 31,991 7,607 7,437 7,131 6,939 29,113 27,873
qoq/yoy growth (%) 2.9 11.0 8.7 0.6 18.7 (11.2) (2.2) (4.1) (2.7) (9.0) (4.3)
Gross margin (%) 31.4 32.8 34.4 36.4 33.9 30.2 32.8 32.7 33.3 32.2 32.4
EBITDA margin (%) 13.8 14.4 15.6 18.2 15.6 12.0 14.3 14.9 15.5 14.1 13.6
Adj. net income (Rs mn) 725 1,037 1,134 780 3,676 443 781 777 787 2,788 2,673
qoq/yoy growth (%) (33.8) 43.1 9.3 (31.2) (20.7) (43.2) 76.3 (0.5) 1.3 (24.2) (4.1)
Number of shares 139 139 136 128 136 128 128 128 128 128 128
Diluted number of shares
139 139 136 129 136 129 129 129 129 129 129
(mn)
Basic EPS 5.2 7.5 8.3 6.1 27.1 3.4 6.1 6.0 6.1 21.7 20.8
Diluted EPS 5.2 7.4 8.3 6.1 27.1 3.4 6.1 6.0 6.1 21.7 20.8
71
Coverage Profile
By recommendation By market cap (US$)
(%) (%)
45 38 45 38
38 35
35 35 27
25
25 25
15 15
5 5
-5 Buy Hold Sell -5 > $1bn $200mn - $1bn < $200mn
Recommendation interpretation
Recommendation Expected absolute returns (%) over 12 months
Buy More than 15%
Hold Between 15% and –5%
Sell Less than –5%
Recommendation structure changed with effect from March 1, 2009
Expected absolute returns are based on share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a
12-month horizon. Our target price represents the fair value of the stock based upon the analyst’s discretion. We note that future price fluctuations could lead to a temporary
mismatch between upside/downside for a stock and our recommendation.
Religare Capital Markets Ltd

th
4 Floor, GYS Infinity, Paranjpe ‘B’ Scheme, Subhash Road, Vile Parle (E), Mumbai 400 057.
Disclaimer
This document is NOT addressed to or intended for distribution to retail clients (as defined by the FSA).
This document is issued by Religare Hichens, Harrison & Co Plc (“Hichens”) in the UK, which is authorised and regulated by the Financial Services Authority in connection
with its UK distribution. Hichens is a member of the London Stock Exchange.
This material should not be construed as an offer or recommendation to buy or sell or solicitation of any offer to buy any security or other financial instrument, nor shall it, or
the fact of its distribution, form the basis of, or be relied upon in connection with, any contract relating to such action or any other matter. The material in this report is based
on information that we consider reliable and accurate at, and share prices are given as at close of business on, the date of this report but we do not warrant or represent
(expressly or impliedly) that it is accurate, complete, not misleading or as to its fitness for the purpose intended and it should not be relied upon as such. Any opinion
expressed (including estimates and forecasts) is given as of the date of this report and may be subject to change without notice.
Hichens, and any of its connected or affiliated companies or their directors or employees, may have a position in any of the securities or may have provided corporate
finance advice, other investment services in relation to any of the securities or related investments referred to in this document. Our asset management area, our proprietary
trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this briefing note.
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72

Indian IT Services - Sector Report 6mar09

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SECTOR OUTLOOK

IT Services: Sector Report

March 2009 Anurag Purohit Hitesh Punjabi

Increasing protectionism adding fuel to the fire: As developed countries witness

Estimates downgraded; expect earnings de-growth in FY10: With expectations of

Revenues 76,398 104,062 108,537

the tier-1 and tier-2 categories respectively.

Section Page No.

Key changes in estimates 6

Macro blues: from bad to worse 7

FY10: a rough year for Indian IT services 13

Tata Consultancy Services 37

Patni Computer Systems 65

Source: RHH, BEA Source: RHH

Source: RHH Source: RHH

Deepening recession across geographies

IT spending cuts to be more painful

Indian players at greater risk as compared to 2001

Leading indicators still a long way off from signalling recovery

Recovery in Indian IT services could lag behind overall bounce back

Bellwether Infosys likely to offer conservative guidance

Fig 7 - Indian/Global IT valuation

Key changes in estimates

Fig 8 - Infosys Technologies

Fig 9 - Tata Consultancy Services

Wipro – Global IT Services Fig 10 - Wipro

Fig 11 - HCL Tech

Macro blues: from bad to worse

Considering the strong correlation of technology spending (Hardware + IT services +

Fig 12 - US GDP growth vs IT spending

Overall IT Spending (L) Nom. GDP growth (R)

Source: RHH, BEA

Leading indicators clearly negative

Fig 15 - TED spread Fig 16 - US unemployment rate (%)

TED spread (bps) 120-day MAVG (bps) 8

Fig 17 - US consumer confidence index Fig 18 - US business confidence index

Source: Bloomberg Source: Bloomberg

Fig 19 - TPI: Total contract value

(US$ bn) Non-mega deal Mega deal

TPI’s total contract value for H2CY08 40

Technology slowdown has only just begun…

Fig 20 - Traditional slowdown cycle

8 7. Business cycle bottoms

IT spending forecasts …bottom expected in Q4CY09

Total IT spending (L) YoY growth (R) (%)

In 2010, subject to economic stability, we expect a recovery to set in as far as

Fig 22 - Recovery to be a J-Curve

J-curve recovery from 2010 – similar to

Indian players could see a lag of 2–3 quarters in recovery

Fig 23 - India’s exposure to discretionary spending still high

(US$ bn) Projected Oriented Outsourcing Support & Training

Source: RHH, Nasscom - Strategic Review 2009

Fig 24 - Corporate profits vs discretionary IT spending

Discretionary IT spends lags behind 85 950

Source: RHH, BEA

Fig 25 - S&P earnings growth vs Infosys & Cognizant revenue growth

Source: RHH, Company, Bloomberg

Revival in key client accounts vital

Fig 26 - Infosys revenue per client (indexed)

Top 10 Rest of clients

Source: RHH, Company

Increasing protectionism could hamper recovery