Ambit Capital 2017 CHecmate Not Just Yet

TECHNOLOGY
November 2017
Checkmate? Not yet!!

Research Analyst:
Sudheer Guntupalli
sudheer.guntupalli@ambit.co
Tel: +91 22 3043 3203
Technology
CONTENTS
Checkmate? Not yet!! ……………………………………………………………..3
We overestimated the impact of protectionism …………………………………5
Digital & automation – Is the game over? ……………………………………..10
Problems cyclical, not structural ………………………………………………..20
Market mispricing longevity of Indian IT ……………………………………….23
COMPANIES
Infosys (BUY) ……..…………………………………………………………………29
November 23, 2017 Ambit Capital Pvt. Ltd. Page 2

Technology
NEGATIVE
THEMATIC November 23, 2017
Checkmate? Not yet!! Key Recommendations

Infosys BUY
After ~10 months of downgrading the sector over protectionism
concerns (we expected 350-730bps EBIT margin hit over FY18-20E), we Target Price: 1,111 Upside 15%
soften our negative stance. Contrary to consensus, Indian IT companies
are not at a disadvantage on digital delivery capabilities. Continued L&T Infotech BUY
adoption will drive 25-30% CAGR in revenue from SMAC and next-gen
technologies (IoT, blockchain, cybersecurity) in the medium term. Target Price: 1,100 Upside: 11%
Ceterus Paribus, adverse impact of automation would be highest for Wipro SELL
Wipro and lowest for L&T Infotech and Infosys. Given vertical and
macro-related uncertainties over FY18-20E, we remain NEGATIVE on Target Price: 260 Downside: 12%
the sector and expect soft growth (6-9%, US$). But current mispricing of
the sector is an opportunity to BUY attractive portfolios at enticing
valuations. We initiate coverage on Infosys with a TP of `1,111 (15%
Infosys witnesses highest margin
upside). Infosys and LTI are our TOP BUYs; Wipro is our TOP SELL.
upgrade (FY20E) (in bps)
We were wrong in over-estimating the impact of protectionism
410
In Feb 2017, we downgraded Indian IT on concerns that protectionist measures
will cause harm. Expecting a few anti-H1B laws to drive cost spike for ‘all onsite 380
workers’ to US$100k p.a., we cut EBIT margin for FY18-20E by 350-730bps for 330 300 290
270
our coverage. Given (1) easy to train nature of jobs (scope for hiring outside 280 230
STEM), (2) announced onsite hiring plans and (3) alternatives like IT staffing, 230 200
we moderate our margin impact estimates to 80-100bps. Infosys witnesses the 180
TechM
Infosys
highest upgrade given plan to hire 10k locals and TCS the lowest.
HCLT
TCS
LTI
Wipro
Digital, automation and next-gen – the game is not yet over!
“We are better positioned than others to leverage on digital transformation & Source: Company, Ambit Capital research
automation journey” has been the standard narrative of most companies. We
investigated the veracity of this claim and found that delivery engines across
companies (including East European digital shops) are not materially different
in terms of digital capabilities. We expect Infosys and TCS to have material
edge over Indian peers in next-gen technologies like IoT, blockchain and
cybersecurity. RPA should cause 7-12% revenue loss for Indian IT in the
medium term with LTI and Infosys being the least impacted.
Cyclical issues persist; expect softness to continue

Indian IT sector continues to face demand headwinds in key verticals like BFSI
(US) as the much awaited regulatory easing has not yet played out. Uncertainty
over Obamacare repeal, volatility in crude prices and business model
transformation in retail dent visibility of IT spend in these key verticals. Scale of
digital projects is still stagnating. So we expect growth of the sector to remain
soft (6-9% revenue CAGR, US$) over FY18-20E. We expect Infosys to
outperform and Wipro to underperform the large sized peers over this horizon
primarily because of their vertical exposures.
Market mispricing longevity of Indian IT

Despite comparable return ratios (post accelerated capital return), superior
growth and margins, Indian IT trades at a discount to Accenture as the market
foresees a disruption to business longevity. We believe the headwinds are
cyclical rather than structural. The current mispricing of the sector is untenable
given: (1) underlying strengths in the portfolios, (2) ability to pivot to next-gen
technologies, and (3) resilience to exogenous shocks. We expect select stocks to Research Analyst
benefit during the correction in valuations. Infosys and LTI are our top BUYs Sudheer Guntupalli
while Wipro is our top SELL. +91 22 3043 3203
sudheer.guntupalli@ambit.co
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Technology
Exhibit 1: Infosys and LTI are least impacted by RPA Exhibit 2: Infosys and LTI are ideally positioned on the
near impossible trinity
13% Net revenue loss (%)

12%
11%
10%
9%
8%
7%
6%
Wipro HCLT TCS Infosys LTI
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 3: Summary of our views on Indian IT services

EBIT
FY20E Margin Catalyst to watch P/E - EPS CAGR
margin - Comment Reco
upgrade (bps) out for FY19 (FY18-20E)
FY20E
Fairly priced stock. However, expect
Recovery in US BFSI and
TCS 200 24.5% disappointments in near term because of BUY 7%
retail 19
unfavourable verticals and macro
Infosys 410 23.5% Good portfolio at attractive valuations BUY Appointment of CEO 7%
14
Recovery in crude prices
Wipro 290 15.5% Poor portfolio at unsustainable valuations SELL and repeal & replacement 4%
17
of Obamacare Act
Valuation provides no room for error in its
HCLT 300 19.0% SELL Recovery in IMS 6%
aggressive IP acquisition spree. 13
Chronically low profitability, continued capital
TechM 270 12.0% SELL EBIT margin expansion 6%
misallocation at unsustainable valuations 13
Play on portfolio change and disciplined Industry leading growth in
LTI 230 14.8% BUY 8%
execution with valuation comfort FY17 11
Source: Company, Ambit Capital research

Technology
We overestimated the impact of

protectionism
As new bills calling for protectionist measures keep coming to the fore, we
are still cautious about the impact of protectionism on Indian IT. However,
after almost ten months, we relook at the flaws in our methodology for
estimating the margin impact. Our prior estimate of 350-730bps EBIT margin
hit over FY18-20E was based on the assumption that protectionist legislations
by the US government will increase the cost of all onsite workers in the US to
$100k p.a. given the bottlenecks on availability of STEM talent. However, the
lower complexity tasks (relative to consulting or software product companies)
done by Indian IT and easy to impart training programs should ease supply
side bottlenecks. In addition, onsite hiring intentions of these companies and
availability of alternatives like IT staffing companies gave us the comfort to
moderate our pessimistic stance on impact of US protectionism.
STEM bottlenecks will hit only consulting and product

firms
Indian IT companies operate at a farther lower end of the pyramid than global
consultancies and software product companies. Any big IT project usually goes
through four important phases: 1) Conceptualization, 2) Planning, 3) Implementation
and 4) Change Management, Maintenance (CMM).
Level of effort follows a bell curve with the highest effort going into implementation
and CMM phases, after which the project is handed over to the client. Despite higher
volumes, complexity of tasks in these two phases is significantly lower than those of
conceptualization and planning.
Exhibit 4: Indian vendors participate only in the last two phases
Source: Ambit Capital research
Global companies like Accenture, Capgemini, IBM Consulting, PWC and KPMG have
strong competitive advantages in conceptualization and planning phases because of
their proven consulting capabilities and client relationships. However, Indian IT
companies mostly focus on high volume, low complexity tasks within the
implementation and CMM phases.

Technology
Exhibit 5: Indian IT vendors focus more on implementation and change management phases
Change Management
Conceptualization Planning Implementation
& maintenance
TCS
CTSH
Infosys
Wipro
HCLT
TechM
Accenture
CGEMY
KPMG
PWC
Source: Ambit Capital research, channel checks Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak
The lower complexity of the implementation and CMM phases demand lower quality
talent. Beyond the higher offshore component, this is another key reason for the
lower cost structure of Indian IT companies compared to global consulting firms.
Exhibit 6: Tasks of lower complexity demand relatively lower quality talent
95%
90%
85%
80%
75%
70%
CGEMY
ACNN
Infosys
TechM
TCS
CTSH
HCLT
Wipro
Total cost of employees as % of revenue
Source: Ambit Capital research, company. Note: Above includes both direct cost on employees and indirect
cost on employees (except depreciation).
Unlike software companies which spend 14-35% of revenues on R&D that requires
high quality talent or hardware companies which spend 5-15% of revenues on R&D,
IT vendors do not even need to make significant R&D investments (0.3-0.8% of
revenues across companies).

Technology
Exhibit 7: IT companies don’t invest significantly in R&D… Exhibit 8: …like software companies do
0.9% 40%
0.8% 35%
0.7% 30%
0.6% 25%
0.5% 20%
0.4% 15%
0.3% 10%
0.2% 5%
0.1% 0%
Adobe
Microsoft
0.0%
Synopsis
Autodesk
Intuit
Symantec
Infosys
TCS
HCLT
Wipro
R&D expenditure as % of revenue R&D expenditure as % of revenue
Source: Ambit Capital research, company. Source: Ambit Capital research, company.
This focus on tasks of lower complexity implies that shortage of STEM talent should
not be a material bottleneck for Indian IT services companies as it is for consulting
companies (Accenture, Capgemini etc.), software companies (Microsoft, Oracle etc.)
or internet companies (Google, facebook etc.). Within India, most of the IT companies
hire from Tier-3 and Tier-4 engineering colleges, graduates from other streams
beyond just engineering and even from secondary schools. We expect these
companies to successfully replicate the same hiring model within the US also.
Skilling employees is not difficult
Unlike hardware or software companies which take 12-18 months for taking their
product / upgrade to market, IT companies take their human resources to market
with just 2-3 months of training. Most of the programming languages are structurally
similar with only cosmetic differences in syntaxes.
We analyzed the agenda of Initial Learning Program (ILP) of TCS (at its
Thiruvananthapuram campus) and training program of Infosys (at its Mysuru campus)
for campus hires to get a sense of the time to deploy a trainee in a particular domain.
We found technical skills are imparted to campus hires in 30-45 man days with
another 20-25 days needed for soft skill training.
Though training in digital technologies is not a part of this class room training as of
now, our channel checks suggest these trainings are imparted to employees through
online modules which can be completed in 6-10 days.
Exhibit 9: Training employees on IT skills set relatively easy
Skill Training period
Introduction to different verticals of the company 2-3 days
Business Skill improvement 20 days
SQL/MySQL/PLSQL 15-20 days
Java/JSP/Servlet 15-20 days
Dot Net 10-15 days
JCL/COBOL – Mainframes 20-25 days
SAP 20-25 days
Finacle 10 days
Open Systems (Unix etc.) 15-20 days
Digital Technologies 6-10 days
Project Implementation 20 days
Source: Ambit Capital research, company. Note: Exact training periods may differ slightly based on company,
prior background of the trainee.
Given the fact that the work is of lower complexity and the ease with which potential
employees can be trained, we do not foresee significant bottlenecks for Indian IT on
the supply side of STEM talent. Accordingly, we do not see reason why the cost of all
onsite employees should shoot up to US$100k p.a. even if some harsh protectionist
legislations are passed in the near future.

Technology
Reducing reliance on H1Bs

HCLT and Wipro have strategically lowered their reliance on H1Bs by hiring locals
onsite in the United States. Though our estimates suggest companies like Infosys still
have higher reliance on H1Bs for their onsite staffing needs, we expect this to
decisively move to a lower trajectory given the strategic priority set by the company to
hire 10k American workers by FY19. Ceteris paribus, that will increase the proportion
of locals to ~70% of onsite employees.
TCS, which also has higher reliance on H1Bs at the moment, is tweaking its business
model by: (1) recruiting freshers from US universities vs. recruiting only laterals; (2)
investing in STEM education to reduce the problem of talent shortage; and (3) greater
use of near shore centers. We believe these changes have already started showing
results. For instance, the company applied for only one third of the visas in 2016 as
compared to a year earlier.
Exhibit 10: Indian IT consciously reducing reliance on H1Bs by hiring locals
120%
100%
80%
60%
40%
20%
0%
Infosys TCS TechM Wipro HCLT
H-1Bs L1s Locals
Source: Company, Ambit Capital estimates.
Alternatives like flexi staffing

The financials of Infosys corroborate the trend of structural increase in reliance of IT
companies on staffing agencies. Over the last 32 quarters, the cost of technical sub-
contractors as a percentage of revenue expanded by ~490bps to 6.2%.
Though the company does not give the split between onsite and offshore costs of
technical subcontractors, we expect a significant part of this was driven by onsite.
Besides onsite local hiring, we expect flexi staffing to be another tool to maintain the
balance between utilization, demand for services and supply of talent.
Exhibit 11: Cost of sub-contractors as a % of revenue of Infosys structurally increased in the last 8 years
6.2%
5.2%
4.2%
3.2%
2.2%
1.2%
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17

Technology
Given the above reasons, we moderate our EBIT margin impact estimates for our
coverage universe over FY18-20E.
Exhibit 12: Infosys is the biggest beneficiary of our margin estimate revisions
New estimates Old estimates
Comment
FY18 FY19 FY20 FY18 FY19 FY20
Recruiting freshers from US universities vs. recruiting only laterals,
TCS 25.3% 25.0% 24.5% 25.3% 24.0% 22.5% investing in STEM education, greater use of near shore centres to
negate the impact of increased cost of H1Bs.
Hiring 10k American workers by FY19 (increasing proportion of locals
Infosys 24.4% 24.0% 23.5% 24.1% 22.2% 19.4% to ~70% of onsite employees) and increased reliance on just-in-time
hiring to negate the impact of cost increase for H1Bs.
Higher proportion of locals among onsite employees (estimated to be
more than 50%) will limit the margin impact. Earlier, we were under
the assumption that increase in cost of H1Bs will increase the cost of
Wipro (consolidated) 16.3% 15.9% 15.5% 16.3% 15.3% 12.6%
every onsite employee to US$100k. However, as we moderate this
assumption, Wipro and HCLT benefit the most because of their higher
share of locals among onsite employees
Higher proportion of locals among onsite employees (more than 60%)
will limit the margin impact. Earlier we were under the assumption
that increase in cost of H1Bs will increase the cost of every onsite
HCLT 20.0% 19.5% 19.0% 20.0% 17.9% 16.0%
employee to US$100k. However, as we moderate this assumption,
Wipro and HCLT benefit the most because of their higher share of
locals among onsite employees
Contrary to the industry, we factor in margin expansion for TechM over
TechM 11.3% 11.9% 12.0% 11.3% 10.0% 9.3% FY18-20E given multiple levers for margin expansion because of (1)
improved profitability at LCC, and (2) utilization gains
Higher reliance on onsite and just-in-time hiring to limit margin
LTI 15.8% 15.2% 14.8% 15.8% 14.6% 12.5%
impact to a worst-case scenario of 100bps over FY18-20E

Technology
Digital & automation – Is the game over?

Digital and automation have become the most overused and overhyped
words in the Indian IT community. “We are better positioned than every
other company to leverage on digital transformation and automation
journey” has been the standard narrative of most companies. We made an
attempt to investigate this hype and propaganda in greater depth. While the
headline revenues reported from these streams are not strictly comparable
across companies, we tried to understand how well the delivery engines of
each of the companies are geared up to embrace this transformation. We
also made a first ever attempt to quantify the impact of RPA on revenue of
each of the large caps in our coverage.
Is digital significantly different in terms of delivery

capability?
From a simple app developed on mobile platforms to a payment gateway integrated
with a social media page, from setting up a simple identity and access management
mechanism to making a paperless contract… all of these are being positioned as
‘path breaking digital transformation projects’ by some India IT companies!
Our channel checks with Computer Science Engineers from Ivy League / Tier-1
engineering colleges suggest most such activities are done by them in teams of 4-6
during internships or live projects as part of their academic curriculum. This raises
questions on the entire propaganda structured around digital.
While digital revenues reported by different companies are not strictly comparable
because of differences in classification, we approach the issue from the delivery side.
Is it true that Indian IT companies are lagging global consultancies and digital shops
(like EPAM, Luxoft and Globant)? Are (can) there (be) material differences among
Indian IT companies in terms of their capabilities to deliver digital? Will it be a
herculean task to reskill the existing employee base on to digital technologies?
Sustaining, not disruptive innovation

The structural shift ‘from a programming standpoint’ brought about by digital
technologies is the migration of existing applications from traditional mainframe,
desktop, web environment to cloud and handheld platforms. We agree this shift is
disruptive in nature for end-clients and hardware and software companies.
However, from an IT services standpoint, most of the programming languages used
for application development on mobile environment are more or less the same as
those used in traditional environment. C and its family (namely, C++ and C#) have
been used for years for traditional application development.
While most applications on Android and Windows (mobile) are programmed in C++,
C# seems to offer better compatibility on the Windows platform. Apple leveraged on
basic C language to develop Objective-C (analogous to C++ which is the Object
Oriented version of C) by adding a few features related to graphics and display.
It has also leveraged on Pascal, which has been traditionally used in programming
for decades, to come up with Objective Pascal. Objective-C and Objective Pascal in
the Apple environment are complemented by Swift for added security features.

Technology
Exhibit 13: Languages used in development in the mobile environment

Programming Language Desktop Android IoS Windows
C
C++
C#
Objective-C
Java
Swift
Object Pascal
Source: Ambit Capital research. - Most Compatible, -Lower compatibility, -Limited Compatibility, -
Least compatibility
Similarities with the role of equity research analysts

To put it in simple terms, we see the role of developers in Indian IT companies similar
to those of equity research analysts. The core job of an equity research analyst is to
understand the sustainable competitive advantages of a business and see the
conduciveness of macro environment for its growth and profitability.
Similarly, the core job of a developer in IT services companies is to understand the
business problem and come up with a mathematical logic to solve it.
As research analysts switch sectors, it is predominantly the cosmetic syntax that
changes (for instance CC growth is the most tracked metric in IT vs NPA for Banks).
When developers switch domains, it is mostly the syntax of the working language that
changes rather than the process of understanding business problems and solving
them using mathematical logic.
Key capabilities demanded by digital era
Such fungibility of resources has always existed within IT services companies. It is not
uncommon to hear about developers switching between mainframe and Java and
vice versa. We see no reason why delivery of digital should be any different.
The key change demanded by digital in terms of delivery is the agility of the
environment as application development cycles now get compressed and upgrades
get more frequent. Also, sales & marketing capabilities make a key differentiation.
Effectively, we see digital technologies as disruptive innovations (as defined by
Clayton Christensen in his book, Innovator’s Dilemma) for the end-clients,
consultancies, software and hardware companies and only a sustaining innovation
from the perspective of IT vendors.
Opportunities in next-gen technologies

Emerging technologies beyond SMAC like Internet of Things (IoT), Blockchain and
Cybersecurity offer additional avenues of growth for Indian IT companies. Unlike in
the case of digital, which is already in Proof of Concept (PoC) stage, spending related
to these technologies is yet to kick off.
Internet of Things (IoT)
As the connected devices on the network proliferate, data inputs received from them
are also expected to increase multi-fold. The key to monetising this data lies in
effectively storing, managing and analyzing it to bring out the key insights.
In addition, the legacy systems in the organisations should be integrated with data
coming from the network. This gives immense scope for Information Services
providers in the world of IoT.
Indian IT has the scope to provide multiple services like: (1) development of
embedded system software for sensors, (2) cloud/data centre services, (3) IoT
application development and maintenance, (4) integrating legacy systems with IoT
applications.

Technology
Exhibit 14: Monetizing data gathered from different things on the network is the key objective
Source: Ambit Capital research
Currently, the global installed base of connected devices is 6.4bn units. NASSCOM
estimates 33% CAGR in this number to reach 27.6bn devices by 2021. As per Zinnov
estimates, global spend on IoT technology products and services by enterprises in
2016 was approximately $120bn and is expected to record 16% CAGR to reach
$253bn by 2021.
Services (advisory & consulting, product development engineering and managed
services) alone are growing at a CAGR of 17% and are expected to reach a market
size of $143bn by 2021.
Assumption of even a 12% market share (similar to the market share of Indian IT in
global IT services by 2021) for Indian IT service companies in IoT technology services
would translate into revenues of $17bn (33% of industry revenues, FY16) for Indian IT
by 2021.
Blockchain
As per a report by Greenwich Associates, financial services firms and technology
providers around the world likely spent US$1bn in 2016 to bring blockchain to capital
markets. Because this is the largest segment for blockchain, we estimate that the total
spend across industries in blockchain is less than US$2bn currently. As per our
discussions with experts, the Indian IT industry gets less than US$100mn of revenue Blockchain could contribute over
from the blockchain today. US$10bn of Indian IT/ITeS revenue
However, like digital, this spend will increase exponentially as it is adopted across by FY22E.
industry segments. If we assume that blockchain will follow the same exponential
increase in revenue as digital, it is likely that blockchain and related spend will
contribute over US$10bn of Indian IT/ITeS export revenue by FY22E.
Cybersecurity
Gartner estimated the global security market to be ~US$77bn in 2015. This is
projected to record ~10% CAGR over FY15-25 to become a US$200bn market
(US$120bn in services and US$80bn in products).
NASSCOM estimates that cybersecurity will remain one of the key growth levers for
Indian IT. Currently cybersecurity contributes 2% of Indian IT revenue. However, by
2025, the share of cybersecurity in industry revenue is projected to be 10% at
US$35bn. It also translates into employment opportunity for a million graduates
(around 26% of people currently employed in IT-BPM).

Technology
Exhibit 15: TCS and Infosys are well-positioned to capture the next-gen opportunity
Internet of
Blockchain Cybersecurity Overall Comments
Things (IoT)
Strength in IMS & ES positions it well for IoT era. Capability addition in BaNCS
places it ahead of global peers like Temenos AG, Sopra & SAP AG in terms of
TCS capabilities in blockchain. Our analysis based on Nelson Hall NEAT evaluations and
Gartner's magic quadrant suggests TCS is placed in line with global consultancies
like Capgemini in terms of delivery capabilities in Cybersecurity.
Weaker positioning relative to TCS & HCLT on both IMS & ES results in weaker
positioning in IoT. Capability addition in Finacle places it ahead of global peers like
Temenos AG, Sopra & SAP AG in terms of capabilities in blockchain. Our analysis
Infosys
based on Nelson Hall NEAT evaluations and Gartner's magic quadrant suggests
Infosys is positioned behind TCS and ahead of Wipro & HCLT in terms of delivery
capabilities in cybersecurity.
Middling positioning in most of the next gen technologies. Though the company has
Wipro often been early to enter segments promising huge potential, scalability becomes a
road block because of churn in sales staff and siloed organization structure
Strengths in IMS & ES position it well for IoT era. Weaker positioning (relative to TCS
and Infosys) in BFSI specific software products and application services in general
results in lower opening balance in terms of competitive advantages on blockchain.
HCLT
Our analysis based on Nelson Hall NEAT evaluations and Gartner's magic quadrant
suggests HCLT is positioned behind TCS, Infosys and Wipro in terms of delivery
capabilities in Cybersecurity.
Lags behind Top-4 vendors on all next generation technologies, partly because of
TechM
weaker vertical positioning (except in communications)
Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak
Robotic Process Automation (RPA)

Our primary survey
To quantify the potential impact of robotic process automation on the revenue growth
of our coverage companies, we did a primary survey of 45-50 delivery employees
working in ITOs like TCS, Cognizant, Infosys, HCLT, Oracle Financial Services
(Hyderabad), Intellect Design Arena, EXL services, Syntel and captive IT divisions of
companies like Asian Paints, Fidelity (Bengaluru), Goldman Sachs, JP Morgan
(Bengaluru) etc.
Our sample set
We ensured that our sample set covered resources working in diverse functions like
development, production support, testing, server deployment, Infrastructure
Management, Business Process and Knowledge Process Outsourcing.
The sample set comprises employees at different levels of hierarchy in organizations
like Assistant Systems Engineer, Senior Systems engineer, Project Lead, Project
Manager, Business Analyst, Associate consultant, senior consultant etc.
Methodology
Our methodology involves identifying different tasks an employee does in a day
(which is also filled in the time sheet of the organization for billing) and analyzing if
RPA can make that task more efficient or have the potential of displacing it in
entirety.
We extrapolated the effort split of each of the major IT companies based on the
revenue split across service lines and our assumption of following price points across
service lines. We assume similar pricing across IT companies since (1) they are
operating in mature markets and also (2) for ease of estimation.

Technology
Exhibit 16: We assume similar pricing for similar services across companies
44 Price assumption (US$/hr)

42 40
37 32
32 27 27 27 27
27
22
17 14
12
Infrastructure
Enterprise solutions
Consulting
Engineering
Development
BPO
Testing
maintenance
Management
Application
Application
Services
Services
Exhibit 17: We estimate the following effort split and displacement of human effort by RPA
Effort Split TCS Infosys Wipro HCLT LTI Comments
Application Development 11% 16% 14% 10% 18% We estimate 3%-4% of effort across companies will be displaced
We estimate 20% of effort within application maintenance will come
Application maintenance 26% 17% 14% 15% 28%
under threat
Enterprise solutions 14% 28% 13% 12% 32% We estimate 3%-4% of effort across companies will be displaced
Infrastructure Management Services 11% 6% 19% 30% 10% We foresee 25% of current effort within IMS to be displaced by RPA
Engineering Services 4% 4% 6% 21% 0% We do not factor in any material impact of RPA on human effort
BPO 23% 16% 23% 8% 0% BPO will see the highest displacement (~35% of existing effort)
Testing 9% 10% 8% 5% 12% We estimate 12% of effort in this service line will be displaced
Consulting 2% 3% 2% 0% 0% We foresee consultant and business analyst roles more or less immune
Source: Company, Ambit Capital research. Note: Some of the above companies do not report sub-segments (for instance, Application development & application
maintenance) within a particular service line segment (ADM). The sub-segment split shown above is based on our estimates.
App development and enterprise systems

implementation
This needs consultants, business analysts and programmers to understand a business
problem and solve it by writing a piece of code.
Consultants and business analysts
Consultants & business analysts need a sound understanding of the client business
processes, requirements and the systems to come up with a system design and
develop the code.
Developers
Developers need logical thinking abilities and more importantly human judgment as
each solution offered to the client is unique and highly ‘customized’. This tailor made
nature of application development and enterprise solutions makes it difficult for a
machine to learn as the current AI technologies can only automate tasks which are
repetitive and about which a lot of historical data is available.
“Based on system architecture and user requirements, even some logic which is as
simple as ‘rounding off decimal points’ needs a lot of judgment. For some currencies it
is rounded down and for some others it is rounded up based on downstream
reconciliation systems and setoff accounts. Trying to standardize and automate it across
organizations based on rules will not work as it more of a convention rather than rule”
-Former consultant of Syntel who worked on multiple capital markets project
across investment banks.

Technology
Deployment
Even within the development team there are repetitive tasks happening at periodic
intervals like server deployment. It involves deploying the code written by developers
onto servers and checking if the code is running correctly.
Our channel checks suggest at least 50-60% of this activity can be automated. The
other 40-50% will comprise scenarios where server deployment fails due to some ad
hoc issues which are not repetitive in nature.
Overall
Most of the development teams in Indian IT service companies typically have 5-7% of
the headcount allocated to server deployment. This translates into 3-4% of
application development and enterprise solutions activities (in man days) coming
under the threat of robotic process automation.
Exhibit 18: Overall revenue under threat because of RPA in Exhibit 19: Overall revenue under threat because of RPA
application development under enterprise systems implementation
0.8% 1.4%
0.7% 1.2%
0.6% 1.0%
0.5% 0.8%
0.4% 0.6%
0.3% 0.4%
Infosys Wipro LTI TCS HCLT Infosys LTI TCS Wipro HCLT
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Testing
User Acceptance Testing (UAT)
It is done by Business Analysts in co-ordination with clients and involves preparation
of logical data sets and interpersonal skills. The uniqueness of core systems within
organizations demands intuition and judgment on the part of the Business Analyst to
prepare test cases. In addition, client communication and convincing capabilities
required here make it near impossible for RPA to displace human effort.
“In BFSI clients for example, a single trade passes through at least 10-12 systems
before it is settled. Most of the times, there are differences in the conventions followed
across systems. It might be as silly as DD-MM-YY format or MM-DD-YY format. Despite
correct programming many errors can creep in because of these differences in
convention. Contemplating such cases and preparing test case data needs overall big
picture and social intelligence on the part of business analysts.”
- Former consultant at CBC
Black box testing (BBT) & White Box Testing (WBT)
This involves developing test cases to test either the functionality (BBT) or internal
structure of an application (WBT). WBT also demands knowledge of implementation
and hence is typically carried out by resources within the development team.
However, BBT involves repetitive tasks where there is headroom for automation. As
per our channel checks, 10-15% of the workforce within testing teams are employed
on the low-end activities of BBT.

Technology
Automation of these activities comes with a caveat that an algorithm without any
judgment will throw up too many false positives in testing phase that it puts
additional burden on the development team to re-check and trouble shoot the code.
This results in a trade-off between headcount in the testing and development teams.
As cost per employee is lower in the testing team, no project manager would risk
hiring additional developers to troubleshoot the false positives raised by RPA. We
estimate a worst case possibility of 12% of man hours in testing team to be replaced
by RPA.
“Sometimes during testing, connection to the server may not be established properly
and hence the test may throw up false positives. In such cases simple restarting would
resolve the issue. A human learns this from peers or because of the intuition that
‘development team cannot be wrong on so many programs’. However, a rule based AI
machine would raise alarms for all the ‘n’ pieces of code tested during the period and
escalate it to development team for resolution. This will put increased burden on the
dev team to re-troubleshoot the correct programs”
- Former member of a testing team in Wipro
Exhibit 20: Overall revenue loss because of displacement of human effort in testing
1.2%
1.1%
1.0%
0.9%
0.8%
0.7%
0.6%
0.5%
0.4%
Infosys TCS LTI Wipro HCLT
Production support and maintenance

Production support
Production support is the phase after ‘go-live’ where clients re-ask for design or code
changes. These require understanding of end-to-end system architecture and user
requirements.
The uniqueness of system architecture and user requirements makes it difficult for an
RPA-enabled machine to emulate a human as there is no repository of prior data or
patterns. We reckon a maximum of 10% of effort displacement in production support
teams.
Maintenance
Standalone issues that arise during maintenance can be automated to the tune of
30-40% of the current effort. However, when issues related to the integration
between multiple systems arise, maintenance personnel have to apply their intuition
and social intelligence.
In most instances where automation can displace humans, it is not actually adopted
because of the criticality of the processes and impact of automating these tasks on
client comfort.
We estimate approximately 40% of the maintenance effort related to standalone
issues and 10% of effort related to production support and system integration issues
are vulnerable to displacement by RPA. Overall, we reckon 20% of the effort within
this bucket can be displaced by RPA over the long term.

Technology
“Incremental automation of critical processes like EOD batch processing in the case of
BFSI clients dents the comfort levels of the clients as this has a direct impact on their
business continuity. So, even though there is a slight scope for incremental automation,
client will not accept it.”
- Ex-employee in maintenance team of Intellect Design Arena
Exhibit 21: Overall revenue loss because of displacement of human effort in
maintenance
5.1%
4.6%
4.1%
3.6%
3.1%
2.6%
TCS LTI Infosys Wipro HCLT
Infrastructure Management Services (IMS)

IMS is one of the most exposed service lines to RPA. L-1 level activity in IMS comprises
repetitive and mundane tasks typically related to Identity and Access Management
like setting up user IDs, getting access rights to applications, revoking access rights,
deleting user IDs or escalating cases where necessary.
Despite being repetitive, this job needs communication skills, social intelligence and
common sense for doing root cause analysis of a problem while coordinating with
multiple stakeholders.
For instance, a rule-based algorithm is more likely to revoke access of a trader to a
trade capture system during market hours if his registered e-mail doesn’t comply with
a 2-step verification (which may be the rule imposed by the IT administrator of the
firm).
However, a human is unlikely to do this by virtue of knowing the trader personally
and how critical his access to trade capture systems is, especially during market
hours. Criticality of infrastructure / applications compels clients to avoid replacing
some part of human effort by software robots despite it being mundane.
Our channel checks with employees working in IMS and industry experts suggest that
30-40% of the L-1 level activity and 10-15% of L-2 level activity in IMS will be at risk
of getting automated. Overall, we estimate a displacement of 25% of current human
effort within in IMS.

Technology
Exhibit 22: Overall revenue loss because of displacement of human effort in IMS
11.0%
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
HCLT Wipro TCS LTI Infosys
Business Process Outsourcing (BPO)

Business Process As a Service offering mainly comprises outsourcing of activities like
finance and accounts processing, payroll processing, order management,
procurement and knowledge services. In addition, a few of the firms also have
sizeable exposure to voice BPO. Apart from IMS, BPO is the other major segment of IT
firms which is materially exposed to threat from automation.
Exhibit 23: Different services offered by Infosys BPO
Source: Infosys BPO, Ambit capital research
We currently factor in ~35% of the effort in the BPO segment in these firms will be
under the threat of becoming redundant because of automation platforms coming
into the market.
We do not factor in any material impact on high value revenue streams like
consulting, products and engineering services.
Our analysis suggests that over the long term 10-17% of overall revenue of Indian IT
firms is under the threat of disruption because of rapid adoption of automation. LTI
(10% impact) and Infosys (12% impact) will be the least impacted while Wipro (17%
impact) and HCLT (17% impact) will be the most impacted because of automation.

Technology
Exhibit 24: LTI and Infosys will be least impacted by automation
18%
17%
16%
15%
14%
13%
12%
11%
10%
9%
At the moment, we do not have any visibility of types of new jobs created because of
automation and, accordingly, we do not factor in any revenue from incremental job
creation. However, as human effort gets displaced by automation platforms, we
expect some offset revenue because of engaging the automation platforms of Indian
IT companies.
Our channel checks suggest automation platforms across firms have more or less
similar capabilities and accordingly we estimate offset revenue of 30% coming back
because of their automation platforms.
Adjusting for this, the net revenue loss for Indian IT companies because of RPA will be
in the range of 7-12%. Wipro will be the most exposed companies (with net revenue
loss of ~12% while LTI (7% net revenue impact) and Infosys (8% net revenue impact)
will be the least impacted companies.
Exhibit 25: Net revenue loss for Indian IT because of automation
13%
12%
11%
10%
9%
8%
7%
6%

Technology
Problems cyclical, not structural

The IT sector continues to face demand headwinds within key client verticals
like BFSI (US) as the much awaited regulatory easing has not been kicked off
by the Trump administration yet. As expected by us in our note, “Can’t have
the cake and eat it too”, we expect uncertainty over Obamacare repeal will
keep healthcare clients in wait-and-watch mode at least till FY19. Volatility in
crude prices and business model transformation in retail would dent visibility
of IT spending in these verticals in the short term. Scale in digital projects is
still stagnating. With these headwinds we expect revenue growth in the
sector to remain soft (6-9%, US$ terms) over FY18-20E. We expect Infosys to
lead the IT pack while Wipro should continue underperforming peers
because of portfolio specific issues.
BFSI - Regulatory easing not yet playing out

Stock price performances of top BFSI clients of Indian IT sector, namely Deutsche
bank, RBS, UBS, Bank of America (BOA) etc, over last one year paint a gloomy picture
of their growth and profitability prospects over the next 1-2 years.
We assume an efficient market where stock prices are lead indicators of fundamental
prospects of the company. Also, all these companies operate in mature steady-state
markets, ruling out the possibility of sharp valuation correction (related to bubbles).
Exhibit 26: Stock price performance of key BFSI clients over the past year is a key
leading indicator of softness in the sector
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
Capital One
DB
UBS
Friends Provident
AIG
Amex
BOA
Citi
RBS
JPM
Source: Bloomberg, Ambit Capital research
One of the key election promises of Trump was regulatory easing in the BFSI space
(especially Dodd Frank Act) leading to expectation of improvement in growth and
profitability. In addition, rising interest rate environment was expected to result in
expansion of Net Interest Margins (NIM). However, neither of these has yet played
out casting a shadow on IT spending by the sector.

Technology
Exhibit 27: Net interest margins of US banks are not yet showing signs of recovery
Avg NIM of Top-5 American banks (TTM)

3.5
3.3
3.1
2.9
2.7
2.5
2010
2010
2010
2011
2011
2011
2011
2012
2012
2012
2012
2013
2013
2013
2013
2014
2014
2014
2014
2015
2015
2015
2015
2016
2016
2016
2016
2017
2017
2017
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Source: Bloomberg, Company, Ambit Capital research. Note: Above samples set comprises JP Morgan, Bank of
America, Citi Bank, US Bancorp and Wells Fargo
Healthcare – Don’t expect Obamacare replacement till

FY19
A significant part of incremental IT spending over the two years preceding the Nov-
2016 elections was driven by Obamacare compliance. Trump promised to “repeal
and replace” Obamacare and, because of the complexity of the matter, we do not
expect any new regulation before 2019. So, we expect healthcare clients to adopt a
policy of wait-and-watch with respect to their IT spends.
“The bottom line here is the Trump administration owns Obamacare at least for the
next two years. The kind of replacement plan they are talking about is so significantly
different, you can’t just pull little pieces out of this.”
- Mr. Robert Laszewski, expert on US healthcare regulations in Dec-16
Mr. Robert Laszewski was named the Washington Post's Wonkblog "Pundit of the
Year" for 2013 for "one of the most accurate and public accounts" detailing the first
few months of the Obamacare rollout.
Energy – Crude price uncertainty to constrain CTB

spend
Volatility in crude prices and its impact on energy companies dent visibility of an
uptick in tech spending. Consensus does not see any secular trend in the crude prices
and, hence, in growth and profitability of energy companies.
Exhibit 28: Volatility in crude prices… Exhibit 29: …continue to dent visibility of an uptick in tech
spending
Nymex WTI (US$ / barrel) ICE Brent (US$ / barrel)
56.0 62.0
55.0 61.0
54.0 60.0
53.0 59.0
52.0 58.0
51.0 57.0
CY17
CY18
CY19
CY20
CY17
CY18
CY19
CY20
Spot
Spot
Q4 17
Q1 18
Q2 18
Q3 18
Q4 17
Q1 18
Q2 18
Q3 18
Source: Bloomberg consensus, Ambit Capital research Source: Bloomberg consensus, Ambit Capital research

Technology
Scale in digital projects is still elusive

“As the core systems move to the digital stack projects gain scale, benefitting Indian
IT” has been the constant narrative of the sector over the last few quarters. However,
we do not see incipient signs of digital projects gaining scale. We use the ratio of the
number of US$1mn engagements to US$5mn engagements and the ratio of US$1mn
engagements to US$10mn engagements as the closest proxies to track scale
trajectory of digital projects. We do not see any secular trend in the scale of digital
projects as evidenced in proxy metrics.
Exhibit 30: Ratio of US$1mn / US$5mn engagements not showing any secular trend…
2.3
2.2
2.2
2.1
2.1
2.0
Mar-14
Mar-15
Mar-16
Mar-17
Dec-13
Dec-14
Dec-15
Dec-16
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Source: Company, Ambit Capital research. Note: Above data corresponds to aggregate US$1mn, US$5mn client engagements for TCS, Infosys, Wipro, HCLT and
TechM
Exhibit 31: …and the same is the case with US$1mn / US$10mn engagements
3.5
3.5
3.4
3.4
3.3
3.3
3.2
3.2
3.1
3.1
Mar-14
Mar-15
Mar-16
Mar-17
Dec-13
Dec-14
Dec-15
Dec-16
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Source: Company, Ambit Capital research. Note: Above data corresponds to aggregate US$1mn, US$10mn client engagements for TCS, Infosys, Wipro, HCLT and
TechM.
Overall, we expect the sector to continue facing headwinds related to weakness in

end-verticals and scale issues related to digital projects at least for the next two years.
Hence, we believe revenue growth will remain muted.

Technology
Market mispricing longevity of Indian IT

The obituary of Indian IT is often unduly emphasized. Despite comparable
return ratios (post accelerated capital return), superior growth and margins,
Indian IT currently trades at a discount to Accenture as the market foresees a
disruption to business longevity. Contrary to consensus, we believe the
headwinds currently faced by the industry are cyclical rather than structural.
The current mispricing of the sector is untenable given: (1) improving return
ratios, (2) underlying strengths in the portfolios, (3) ability to pivot towards
next-gen technologies, and (4) resilience to exogenous shocks like
protectionism and RPA. However, we expect select stocks to benefit during
the valuation correction. Infosys (15% upside) and LTI (11% upside) are our
top BUYs while Wipro (12% downside) is our top SELL.
Exhibit 32: What’s priced in? Obituary of Indian IT is over exaggerated!!
Indian IT historically traded at premium to Accenture

Despite lower return ratios, the Indian IT sector historically commanded premium
valuations compared to global consultancy firms like Accenture because of: (1)
stickiness of demand for tasks of lower complexity and (2) better operational
efficiency. However, over the last two years, the sector started trading at a discount to
Accenture. This comes despite most of the companies stepping up their capital return
(either through dividends or buybacks) providing visibility of improved return ratios
along with superior growth rates and margins (relative to Accenture).
Exhibit 33: Unsubstantiated concerns on longevity are also reflected in valuations
30
25
20
15
10
5
Mar-09
Apr-11
Mar-14
Apr-16
Dec-07
Dec-12
Jul-07
Jan-10
Jul-12
Jan-15
Jul-17
Aug-09
Aug-14
Sep-06
Sep-11
Sep-16
Feb-07
May-08
Oct-08
Jun-10
Jun-15
Nov-10
Feb-12
May-13
Oct-13
Nov-15
Feb-17
Accenture Indian IT
Source: Company, Ambit Capital research. Note: Indian IT is represented by market cap weighted multiple
comprising Top-5 Indian companies, i.e. TCS, Infosys, Wipro, HCLT & TechM. We have excluded Cognizant from
the analysis given the restructuring going on in the company and resultant re-rating.

Technology
Headwinds faced by Indian IT are cyclical rather than structural

We view this as a mispricing by the market fuelled by concerns around longevity of
the industry, especially in light of ‘perceived’ headwinds like adoption of digital, next-
gen technologies and automation. Contrary to consensus, we believe headwinds
currently faced by the industry are cyclical rather than structural.
Underlying strength in portfolio offerings, ability to pivot to next-gen technologies
and resilience to exogenous shocks like protectionism and RPA give us the confidence
that a sector re-rating is on the cards. In addition, as most of the companies step up
their capital return, we expect uptick in RoE and re-rating of the multiples.
Expect select stocks to benefit
Within the sector, we see the divergence in valuation multiples predominantly driven
by transient and unquantifiable issues (for instance, lack of full time CEO for Infosys,
the impact of which cannot be correctly factored into earnings estimates by
consensus). As the transient issues go behind us, we expect portfolio to drive earnings
growth and multiples. Accordingly, we expect Infosys / LTI to re-rate from current
levels and Wipro to de-rate.
Exhibit 34: We expect Infosys and LTI to re-rate given their optimal positioning on
near impossible trinity
TCS – Form is temporary, class is permanent!

We like TCS for its delivery capabilities, process efficiency, capital allocation and
high-quality management team. Despite its scale (FY18E revenue of US$19bn) and
the current ticket sizes of digital projects (mostly in the bucket of US$1mn-5mn), the
company generates US$3.8bn annual revenue from digital (~2x the total revenue of
EPAM, Globant and Luxoft combined) – reflective of its agility and nimbleness.
Despite higher exposure to automation (11% of revenue vs 8% for Infosys) over the
long term, we expect the company to pivot its portfolio to high-value offerings given
this nimbleness.
As BFSI and retail (~45% of revenue combined) struggle in developed markets, we
expect the company to face near-term headwinds in terms of revenue growth. We cut
our growth acceleration trajectory over FY18-20E to reflect the same. However, we
upgrade our EBIT margin estimates over this horizon as we soften our negative stance
on protectionism.

Technology
Exhibit 35: We moderate our revenue growth assumptions over FY18-20E due to uncertainty in key verticals
New Estimates Old Estimates Change
FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E
Revenue (US$ mn) 18,936 20,462 22,210 19,094 21,180 23,605 -0.8% -3.4% -5.9%
Revenue (` bn) 1,230 1,338 1,453 1,230 1,365 1,521 -0.1% -2.0% -4.5%
YoY Growth 7.7% 8.1% 8.5% 8.6% 10.9% 11.5% -90bps -290bps -290bps
EBIT (` bn) 311 335 356 311 328 342 0% 2% 4%
EBIT margin 25.3% 25.0% 24.5% 25.3% 24.0% 22.5% 00bps 100bps 200bps
PAT 264 287 318 264 282 307 0% 2% 4%
EPS 136 148 164 136 145 158 0% 2% 4%
Source: Bloomberg, Ambit Capital research.
The stock is currently trading at a one-year forward P/E ratio of 19x, at a 3% discount
to the long-term average and a 14% discount to Accenture, a comparable franchise
with lower revenue growth. We see limited headroom for a rerating as we expect the
company to disappoint consensus over the next few quarters given the uncertainty in
end-verticals. Accordingly, we drop TCS from our TOP BUYs in the sector.
Wipro – Poor portfolio, unsustainable valuations

Wipro’s portfolio is more vulnerable to headwinds in the demand environment
because of a higher proportion of discretionary work (even its IMS segment and
digital have large parts of project-based work). The company also has higher
exposure to verticals like healthcare and energy (~28% of revenue combined) which
are facing headwinds because of regulatory or cyclical reasons. Wipro’s customer-
connect is weak as until recently its relationship managers were rotated every 18
months.
Whilst the company is taking the right steps (corrected organisational structure, focus
on building annuity-like revenues), problems of portfolio mix and culture (highly silo-
ed, does not have the DNA of vertical domain expertise which is crucial today) are
hard to change overnight.
As we upgrade our EBIT margin estimates for the sector, Wipro witnesses 1-15%
increase in EPS estimates over FY19-20E. Our target price increases to `260 (12%
downside).
Exhibit 36: We upgrade our EPS estimates over FY19-20E by 1-15%

New estimates Old estimates Change
Revenue (IT services) (US$ mn) 8,053 8,515 9,112 8,107 8,741 9,418 -0.7% -2.6% -3.3%
Revenue (` bn) 549.7 578.6 617.6 553 593 638 -0.6% -2.5% -3.1%
EBIT (` bn) 89.7 91.9 95.5 90.4 90.7 80.3 -0.7% 1.4% 18.8%
PBT 109 113 119 110 112 104 -0.6% 1.1% 14.6%
PAT 84 87 91 85 86 80 -0.6% 1.1% 14.6%
EPS 17.3 17.9 18.8 17.4 17.7 16.4 -0.6% 1.1% 14.6%
The stock is currently trading at an expensive valuation of 17X FY19E EPS for an
annualized EPS growth of 4% over FY18-20E and FY18E RoE of 16%. These
valuations are clearly unsustainable given the weak portfolio, high exposure to
verticals facing headwinds and higher risk from automation over the medium term.
Wipro continues to be our TOP SELL idea in the sector.

Technology
HCLT – Into uncharted territories

We remain SELLers on the stock given rising risks from: (i) service-line-centric
structure making it vulnerable in the digital era; and (ii) sudden spree of acquisitions.
Unlike Axon which brought in CXO connects, these acquisitions were either
unrequired or brought in end-of-life products or easy-to-build capabilities.
As we upgrade our EBIT margin estimates for the sector, HCLT witnesses 7-13%
increase in EPS estimates over FY19-20E.
New Old Change
Revenue (US$ mn) 7,747 8,312 8,979 7,775 8,492 9,431 0% -2% -5%
Revenue growth (YoY) 11.1% 7.3% 8.0% 11.5% 9.2% 11.1% -40bps -190bps -300bps
EBIT (` bn) 100.7 105.9 111.3 100.3 98.1 97.4 0% 8% 14%
PBT 110 116 124 110 108 109 0% 7% 13%
PAT 88 92 99 88 86 87 0% 7% 13%
The stock trades at an expensive valuation of 13x one-year forward EPS leaving no
room for error for failed integrations related to IP acquisitions. Our DCF-based target
price of `800 implies 12x Oct-19E EPS. Incipient signs of re-organisation and more
enticing valuations could make us reconsider our stance.
TechM – Going with the flow

We are worried about the chronically low profitability, continued capital misallocation
through value destructive acquisitions and slowdown in non-telecom segments. With
more evidence of TechM's "growth only" culture, we lost faith in the management's
ability to bridge the gap vs peers with respect to operating metrics (320bps margin
headroom).
Further, risks of another failed acquisition remain high. Finally, most revenues in the
non-telecom segments are project-based and TechM lags peers with respect to
domain expertise and client relationships. So TechM will likely take price cuts in the
face of increasing competitive intensity.
New Old Change
Revenues (US$ mn) 4,727 5,085 5,568 4,727 5,058 5,550 0% 1% 0%
YoY growth 9% 8% 10% 9% 7% 10% 00bps 60bps -20bps
USD/INR 65.0 65.4 65.4 65.0 65.4 65.4 0% 0% 0%
EBIT (` bn) 34.6 39.7 43.6 34.6 33.2 33.7 0% 19% 29%
PBT 43.1 44.1 48.4 43.1 37.6 38.5 0% 17% 26%
PAT 31.9 32.7 35.9 31.9 27.8 28.6 0% 17% 26%
EPS 35.9 36.7 40.4 35.9 31.3 32.1 0% 17% 26%
Valuations are expensive at 13x FY19E EPS, for annualized EPS growth of 6% over
FY18-20E and RoE of 16%. We remain SELLers on the stock and our DCF-based
target price of `470 (3% downside) implies 13x FY19E EPS.

Technology
L&T Infotech – Ride the portfolio change

We like LTI for the following reasons:
 marquee client base (similar to that of peers multiple times its size),
 demonstrated client mining capabilities – top-10 clients contributed average
revenues of US$50mn in FY17 vs US$47mn in FY16, well ahead of all mid-sized
peers and even Infosys/Wipro when they were of similar scale; and
 recent initiatives by management like verticalised organisation structure.
Over the last 1-2 years, the company strengthened its portfolio by making significant
inroads into digital and automation. Digital now accounts for 32% of its revenues vs
42% for Mindtree, 23% for Infosys/Wipro and 20% for TCS. The company has no
exposure to BPO, which is witnessing a huge disruption from adoption of automation.
Among our large size coverage universe (> US$1bn revenues), LTI is the company
which is the least impacted because of automation.
LTI is trading at an attractive valuation of 12x FY19E EPS, at a 30% discount to Wipro
which is struggling with poor service line mix and significant headwinds in key
verticals like healthcare (estimated to be 20% of overall revenues) because of macro
uncertainty. For LTI, we expect revenue CAGR of 12% (USD) over FY18-20E vs 9%
over FY15-17. Over the last five years, LTI has delivered average pre-tax
CFO/EBITDA of 100%+ and average RoE of 42%.
Exhibit 39: We have upgraded our EPS estimates by 14-26% for FY18-20E
Total revenue (USD mn) 1,084 1,210 1,356 1,084 1,210 1,356 0.0% 0.0% 0.0%
Growth YoY 11.7% 11.7% 12.0% 11.7% 11.7% 12.0% 0bps 0bps 0bps
USD/INR 64.9 65.4 65.4 64.3 64.3 64.3 0.9% 1.7% 1.7%
Revenue (` mn) 70,329 79,160 88,662 69,716 77,828 87,171 0.9% 1.7% 1.7%
EBITDA 12,756 13,883 15,172 12,637 13,192 12,949 0.9% 5.2% 17.2%
EBIT 11,102 12,021 13,086 10,997 11,361 10,898 1.0% 5.8% 20.1%
Net income 10,744 11,671 12,491 10,663 10,239 9,882 0.8% 14.0% 26.4%
Exhibit 40: Beware of valuations which are not justified by inherent strength in portfolios
Rev Revenue
Mcap EV/Sales EV/EBITDA Consensus P/E Consensus EPS RoE
CAGR Growth
Company
US$ US$
FY18 FY19 FY18 FY19 FY18 FY19 FY18 FY19 FY18 FY19 FY13-17 FY17
mn FY13-17
Indian Largecaps
Cognizant 42,396 16.4% 9.8% 9.3% 2.6 2.4 11.6 10.2 21.1 18.5 3.41 3.88 20.3 15.5
HCL Tech 18,421 11.3% 11.6% 12.0% 2.2 2.0 10.3 10.2 13.4 12.6 62 66 31.0 27.1
Infosys 34,202 8.4% 7.0% 9.0% 2.6 2.4 9.9 10.0 15.1 13.9 64 69 23.9 22.0
TCS 78,850 9.3% 11.0% 11.5% 3.5 3.1 13.4 12.8 19.8 18.0 135 149 32.3 27.8
TechM 7,431 13.4% 5.9% 8.1% 1.5 1.4 10.3 10.7 13.8 13.2 36 37 20.3 13.4
Wipro 22,049 5.5% 4.5% 8.2% 2.3 2.1 10.8 10.7 16.3 15.0 18 20 17.7 12.8
Indian Midcaps
Cyient 967 11.6% 8.7% 14.0% 1.4 1.2 10.0 8.5 15.3 13.5 36 41 18.4 17.1
Hexaware 1,563 9.6% 15.7% 10.1% 2.5 2.2 14.7 13.3 19.8 18.8 17 18 28.4 26.5
KPIT 525 NA NA 9.5% 0.9 0.8 8.7 7.3 14.3 12.1 12 14 20.0 16.1
L&T Infotech 2,604 8.2% 8.9% 12.3% 2.2 2.0 12.6 10.7 15.6 14.5 63 68 45.9 36.8
Mindtree 1,316 15.7% 9.0% 11.0% 1.5 1.3 9.7 9.3 17.7 15.4 29 33 26.5 16.8
Mphasis 2,355 -4.0% 5.9% 9.4% 2.1 1.9 13.8 12.2 17.8 15.8 41 46 13.2 12.7
NIIT Tech 603 3.0% 5.4% 9.0% 1.1 1.0 6.8 6.1 14.4 12.3 44 52 16.6 15.3
Persistent 805 15.9% 9.8% 8.4% 1.5 1.4 9.2 8.7 15.8 13.6 41 48 20.3 19.5
Global IT Services Companies
Accenture 94,169 5.8% -0.4% 9.7% 2.6 2.4 15.4 13.9 26.9 22.4 5.5 6.5 60.5 60.1
Capgemini 19,897 2.7% 1.7% 3.1% 1.5 1.4 10.8 10.1 20.7 18.5 5 5 12.4 13.0
IBM 139,341 -6.5% -1.6% 0.1% 2.2 2.2 9.0 8.7 12.6 12.3 12 12 81.5 73.0

Technology
Risks and catalysts

Risks
Recent upgrade of India’s sovereign rating by Moody’s investor services from Baa3 to
Baa2 increased confidence and demand for INR in global currency markets. Any
strong appreciation of INR against US$ will negatively impact EBIT margins (25-40bps
for 1% change in currency) of Indian IT companies.
Catalysts
Regulatory easing in US BFSI (including repeal of Dodd Frank Act) and interest rate
hike are expected to improve the profitability of US BFSI firms, which will in turn
translate into higher Change The Business (CTB) IT spend. Quick repeal and
replacement of Obamacare and stability in crude prices will create demand for IT
services among clients in these sectors.

Infosys
BUY
INITIATING COVERAGE INFO IN EQUITY November 23, 2017
Look at the queen, not the king! Technology
While the market is holding its breath to hear the name of the new Recommendation
king, we are more excited about the queen. Like in chess, the queen’s Mcap (bn): `2,220/US$34
ability to pivot in every direction (products, platforms, next-gen 6M ADV (mn): `5,750/US$89
technologies etc.) is the key winning strategy in the industry today. With CMP: `966
a strong portfolio, Infosys is better prepared than its large peers to TP (12 mths): `1,111
enter the next-gen and automation era. As most transient risks Upside (%): 15
(corporate governance etc.) highlighted in our previous reports recede,
we turn positive on the stock. Under the chairmanship of Nilekani, we
Flags
believe Infosys will build a strong and stable leadership this time.
Combination of robust portfolio and contemporary strategy imparts Accounting: GREEN
confidence of industry leading revenue growth (9%, US$) over FY18- Predictability: AMBER
20E. This along with valuation comfort makes Infosys our TOP BUY. Earnings Momentum: GREEN
Competitive position: STRONG Changes to this position: STABLE Catalysts

Key risks recede; no significant concerns ahead  Board and CEO succession
We were worried about continued promoter interference when we suspended  Regulatory easing within US BFSI
coverage (read “Storm after the calm”). But recent reports and investor
interaction schedule show broader shareholder outreach and consensus
building progressing impressively. With major concerns over corporate Performance (%)
governance and long-term strategy waning, we see no material risks ahead. 150
New CEO – To be born with a silver spoon! 100
As the name of the new CEO remains a million dollar question for the market,
50
we believe optimal portfolio (elaborated in our thematic, Checkmate),
productised services strategy, and strong account relationships provide a 0 Nov-16
Dec-16
Mar-17
May-17
Sep-17
Nov-17
Jan-17
Feb-17
Apr-17
Jun-17
Jul-17
Aug-17
Oct-17
decent opening balance for the transition. Also, presence of Nilekani and
lessons from leadership weakness and instability during the prior two CEO
tenures should ensure no error in leadership building this time.
Strong portfolio + strategy = Minimal impact due to cyclical headwinds Sensex Infosys
Despite no material differences in digital delivery capabilities across Indian IT,
Infosys scores over Wipro, HCLT and TechM in next-gen technologies like IoT, Source: Bloomberg, Ambit Capital Research
blockchain and cybersecurity given: (1) early capability addition (in products like
Finacle) and (2) high exposure to verticals (BFSI + manufacturing) which will
aggressively adopt these offerings. Also, the portfolio is least exposed to
Robotic Process Automation (RPA; 8% revenue impact).
Exploit the valuation arbitrage; initiate coverage with a BUY
Notwithstanding superior positioning on convergence of capital allocation,
operational efficiency and business longevity, Infosys trades at 14x 1-year
forward P/E, at 16% discount to our largecap universe. With transient issues
(CEO succession) over and evidence emerging on portfolio resilience in cruising
cyclical headwinds, the stock should rerate to 15x. Key risk: INR appreciation.
Key financials
Year to March FY16 FY17 FY18E FY19E FY20E
Net Revenues (` mn) 624,410 684,850 712,149 775,448 848,839
Operating Profits (` mn) 156,190 169,020 173,742 186,295 199,405
Net Profits (` mn) 134,920 143,830 148,555 158,635 169,555
Diluted EPS (`) 59 63 65 69 74 Research Analyst
RoE (%) 23% 22% 22% 21% 19% Sudheer Guntupalli
P/E (x) 17 16 15 14 13 91 22 3043 3203
P/B (x) 4 3 3 3 3 sudheer.guntupalli@ambit.co
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Infosys
Snapshot of Company Financials

Profit and Loss Company Background
` bn FY18E FY19E FY20E
Infosys is the third largest Indian IT services company
Revenue (US$ mn) 10,971 11,857 12,979 (behind TCS and Cognizant) with FY17 revenue of
Revenue 712 775 849 US$10bn. The company provides services like consulting
Cost of goods sold 460 511 565 and systems integration (33% of revenue), Application
SG&A expanses 79 78 85
development (16% of revenue), Application maintenance
(16% of revenue), testing (9% of revenue), IMS (9% of
EBITDA 192 205 219
revenue), BPO (5% of revenue) and Engineering Services
Depreciation 18 19 19 (4% of revenue) etc. to global companies in multiple
EBIT 174 186 199 verticals like BFSI, manufacturing etc.
EBIT Margin 24.4% 24.0% 23.5%
Nandan Nilekani, one of the six promoters, is currently the
Other Income 32 33 35 non-executive chairman of the company and UB Pravin Rao,
PBT 206 219 235 a long time veteran and COO, is the interim CEO. Infosys is
Reported PAT 149 159 170 currently on a look out for permanent CEO.
Diluted Adj EPS 65 69 74
DPS 42 27 25
Balance Sheet Cash flow

` bn FY18E FY19E FY20E ` bn FY18E FY19E FY20E
Net Worth 683 769 872 Net Operating CF 165 166 172
Other Liabilities 3 3 3 Net Purchase of FA (22) (23) (25)
Capital Employed 686 772 875 Acquisitions (5) - -
Net Block 127 131 136
Net Cash from Invest. (26) (23) (25)
Other Non current Assets 139 139 139
Proceeds from Equity & other - - -
Curr. Assets 545 641 756
Dividend Payments (112) (73) (66)
Debtors 138 151 165
Others (43) - -
Unbilled revenues 43 46 51
Cash Flow from Fin. (156) (73) (66)
Cash & Bank Balance 310 385 476
Other Current Assets 54 59 64 Free Cash Flow 143 144 148
Current Liab. & Prov 163 177 194 Opening cash balance 326 310 385
Net Current Assets 382 464 562 Net Cash Flow (16) 71 81
Application of Funds 686 772 875 Closing Cash Balance 310 385 476
Favorable positioning on next-gen technologies… …and lowest exposure to Robotic Process Automation (RPA)
Internet of
Blockchain Cybersecurity Overall 13%
Things (IoT)
12%
TCS 12%
11% 11%
11%
Infosys
10%
9%
Wipro 8%
8%
HCLT 7%
7%
6%
TechM

Infosys
Market is overly fixated on CEO name

It is true that fundamental performance and valuation multiples of the
company historically showed strong sensitivity towards the profile and
performance of the CEO. This is also an outcome of a large proportion of
revenue coming from Top-30 accounts (estimated to be over 50%) where
relationships are directly managed by the CEO. Accordingly, Infosys is
trading at a 16% discount to our largecap IT coverage universe (TCS, Wipro,
HCLT and TechM weighted by their market caps) notwithstanding its superior
positioning in terms of convergence of capital allocation, operational
efficiency and business longevity. Consensus is currently factoring in CEO
appointment as the only key value driver.
How it is now at where it is

In Jan-2010, Infosys stock was trading at one-year forward P/E of 23x, at an 8-10%
premium to comparable franchises like TCS and Cognizant. Gopalakrishnan and
Frank were established CEOs of Infosys and Cognizant while Chandra had just taken
over at TCS.
While leadership teams at TCS and Cognizant remained strong and stable over the
last ~8 years, Infosys had already witnessed two CEO changes over this period and
staring at another one.
Financial and operational performance (vs industry and the company’s own guidance
in the relevant period) suggest that the CEO’s office was perceived to be weak during
the tenure of Shibulal (Aug’11 – Aug’14) and strong during Sikka’s term (Aug’ 14-
Aug’17).
We use P/E multiple as a close proxy for market’s approval / disapproval of the CEO
(as fundamentals across time periods are not comparable because of business
cyclicality).
We examine the P/E multiple trajectory of Infosys over a two-year period (an year
prior to CEO appointment and an year after appointment) during these two
transitions (Gopalakrishnan to Shibulal and Shibulal to Sikka). The rationale for
taking a two-year consideration period is to adjust for the actual timing of
announcements and minimize the impact of noise in the data.
Our analysis suggests while the P/E multiple de-rated by ~34% over the observation
period during first transition, it re-rated by ~15% over the observation period during
second transition.
Exhibit 1: Multiples de-rated by ~34% due to weak Exhibit 2: Multiples re-rated by ~15% due to strong
leadership leadership
20
24
19
22
18
20
18 17
16 16
14 15
12 14
Nov-10
Feb-11
May-11
Nov-11
Feb-12
May-12
Nov-13
Feb-14
May-14
Nov-14
Feb-15
May-15
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Infosys P/E Infosys P/E
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research

Infosys
Market is in a wait and watch mode

Taking cues from the sensitivity of the P/E multiple to the profile and performance of
the CEO, the market is currently in wait and watch mode despite most of the
uncertainties surrounding the company 3 months back having receded.
Exhibit 3: Key risks and uncertainties receding
Key risk(s) 14th Aug 2017 21st Aug 2017 28th Aug 2017 25th Oct 2017 23rd Nov 2017
Sector related uncertainty     
Corporate governance     
Class action law suits     
Board & CEO Succession     
Long term strategy     
Title holder attrition     
Promoter interference     
Downgrade from BUY to
Our View UNDER REVIEW UNDER REVIEW SUSPEND COVERAGE INITIATE with BUY
UNDER REVIEW
Link to our note Link Link Link Link
Source: Company, Ambit Capital research,  - Existent,  - Non existent

Infosys
This time it will be different

In the legacy services era, IT companies predominantly played on the theme
of low cost leadership employing levers like: (1) offshoring and (2)
pyramiding. By the very nature of the business, in commoditized services
(like application maintenance, BPO etc.) the environment, account
relationships and skill of the sales person (including CEO) matter more than
the deliverable. However, as the industry is shifting towards less
commoditized and niche service offerings like SMAC, next-gen technologies
(IoT, blockchain and cybersecurity) and RPA, account relationships become
stickier with the service offering more than the salesperson. Accordingly, the
portfolio, ability to pivot towards new technologies and continuity of strategy
should matter more for investors than the CEO.
Queen is more important than king!!

Like in chess, in the current IT services industry, portfolio is becoming more important
and stickier than CEO relationships. This hypothesis was corroborated by the recent
market reaction during CEO changes at TCS and HCLT.
Again, we use P/E multiple to get a sense of the market’s approval / disapproval of
the CEO as fundamentals are not exactly comparable across time periods and
companies because of differences in portfolio compositions and geographical
exposures.
In Jan-2017, TCS announced elevation of Rajesh Gopinathan (then CFO of the
company) as the CEO. Despite being a TCS veteran, Gopinathan had no prior
experience in sales and lacked strong client connects. However, multiples of TCS
remained range-bound, indicating the shift in the stickiness quotient from CEO to
portfolio.
In Oct-2016, HCLT announced the elevation of C. Vijaya Kumar (then COO of the
company) as the CEO. Despite being an HCLT veteran, Kumar had no strong track
record in sales. However, multiples of HCLT remained range-bound, again indicating
the shift of the stickiness quotient from CEO to portfolio.
Exhibit 4: P/E multiple of TCS has not de-rated despite CEO Exhibit 5: …as also the multiple of HCLT after CEO change
change in Jan-2017… in Oct-2016
20 15.0
19 14.5
18 14.0
17 13.5
16 13.0
15 12.5
14 12.0
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Oct-17
Sep-17
Nov-17
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Jul-17
Sep-17
Nov-17
Source: Bloomberg, Company, Ambit Capital research Source: Bloomberg, Company, Ambit Capital research
Low room for error in leadership building

As the name of the new CEO remains a million dollar question for the market, we are
of the view that an optimal portfolio, productised services strategy and strong account
relationships provide a decent opening balance for the transition. In addition, the
presence of Nilekani and lessons learnt from leadership weakness and instability
during the prior two stints should ensure no error in leadership building this time.

Infosys
Portfolio with the highest longevity

With plans announced for hiring 10k locals (estimated at ~70% of onsite
headcount) in the US by FY19, Infosys will become one of the companies most
immune to the threat of protectionism. The company has the second most
favorable vertical exposure among large Indian IT players given lower
exposure (55% of revenue vs 61% for TCS and 68% for Wipro) to troubled
verticals like BFSI, ENU, healthcare and retail. We do not see material
differences in delivery capabilities of large Indian IT players across the
digital stack. However, in next-gen technologies like IoT, blockchain and
cybersecurity, Infosys is positioned second only to TCS. Our quantitative
analysis on the impact of RPA on the revenues of Indian IT suggests Infosys is
the least exposed large IT company (8% of revenue over the medium term).
Reducing reliance on H1B

Though our estimates suggest Infosys is currently very dependent on H1Bs for onsite
staffing needs (~76% of onsite headcount), we expect this to decisively move to a
lower trajectory given the strategic priority set by the company to hire 10k American
workers by FY19. Ceteris paribus, that will increase the proportion of locals to ~70%
of onsite employees.
Accordingly, Infosys has become the biggest beneficiary of our EBIT margin upgrade
as detailed in our thematic.
Exhibit 6: Infosys is the biggest beneficiary of our margin estimate revisions
New estimates Old estimates
Comment
FY18 FY19 FY20 FY18 FY19 FY20
Recruiting freshers from US universities vs. recruiting only
TCS 25.3% 25.0% 24.5% 25.3% 24.0% 22.5% laterals, investing in STEM education, greater use of near shore
centres to negate the impact of increased cost of H1Bs.
Hiring 10k American workers by FY19 (increasing proportion of
Infosys 24.4% 24.0% 23.5% 24.1% 22.2% 19.4% locals to ~70% of onsite employees) and increased reliance on
Just in Time hiring to negate the impact of cost increase for H1Bs
Higher proportion of locals among onsite employees (more than
50%) will limit the margin impact. Earlier we were under the
Wipro assumption that increase in cost of H1Bs will increase the cost of
16.3% 15.9% 15.5% 16.3% 15.3% 12.6%
(consolidated) every onsite employee to US$100k. However, as we moderate
this assumption, Wipro and HCLT benefit the most because of
their higher share of local among onsite employees
Higher proportion of locals among onsite employees (more than
60%) will limit the margin impact. Earlier we were under the
assumption that increase in cost of H1Bs will increase the cost of
HCLT 20.0% 19.5% 19.0% 20.0% 17.9% 16.0%
every onsite employee to US$100k. However, as we moderate
this assumption, Wipro and HCLT benefit the most because of
their higher share of local among onsite employees
Contrary to the industry, we factor in margin expansion for
TechM over FY18-20E, given multiple leavers for margin
TechM 11.3% 11.9% 12.0% 11.3% 10.0% 9.3%
expansion because of (1) improved profitability at LCC, (2)
utilizations etc.
Higher reliance on onsite and just in time hiring to limit margin
LTI 15.8% 15.2% 14.8% 15.8% 14.6% 12.5%
impact to a worst case scenario of 100bps over FY18-20E
Favorable vertical mix

Exposure to troubled verticals (BFSI, healthcare, ENU and retail) is lower for Infosys
compared to TCS and Wipro. In addition, higher exposure to manufacturing (22% of
revenue vs 11% for TCS) makes it a bigger beneficiary of upcoming exponential
adoption of IoT within the vertical.
As we also factor in near-term headwinds into the revenue growth estimates of each
of our coverage companies, we expect Infosys to lead the pack with 9% revenue
CAGR (US$) over FY18-20E vs 6-9% for large peers.

Infosys
Exhibit 7: Exposure to troubled verticals is lower than that of TCS and Wipro
70% 68%
65%
61%
60%
55%
55%
50% 48%
45%
Wipro TCS Infosys HCLT
Exhibit 8: We moderate our revenue growth (due to near term headwinds) and margin hit estimates
USD/ INR 64.9 65.4 65.4 64.3 64.3 64.3 1% 2% 2%
Revenue (US$ mn) 10,971 11,857 12,979 11,129 12,121 13,374 -1% -2% -3%
YoY Growth 7.5% 8.1% 9.5% 9.0% 8.9% 10.3% -160bps -80bps -90bps
EBIT (` bn) 173.7 186.3 199.4 172.5 173.0 166.9 1% 8% 19%
PAT 148.6 158.6 169.6 143.8 140.5 138.6 3% 13% 22%
EPS (`) 65.0 69.4 74.2 62.9 61.5 60.6 3% 13% 22%
Doesn’t lag global consultancies on digital delivery

We see digital technologies as disruptive innovations (as defined by Clayton
Christensen in his book, Innovator’s Dilemma) for end-clients and software/hardware
companies and only a sustaining innovation from the perspective of Indian IT
vendors. In terms of delivery capabilities, we do not see Infosys lagging global
consultancies or boutique digital shops.

Infosys
Next only to TCS on next-gen technologies

On next-generation technologies like IoT, blockchain and cybersecurity, Infosys is
next only to TCS as elaborated in our thematic.
Exhibit 9: TCS and Infosys are well positioned to capture the next gen opportunity
Internet of
Blockchain Cybersecurity Overall Comments
Things (IoT)
Strength in IMS and ES positions it well for IoT era. Capability addition in BaNCS
places it ahead of global peers like Temenos AG, Sopra and SAP AG in terms of
TCS capabilities in blockchain. Our analysis based on Nelson Hall NEAT evaluations
and Gartner's magic quadrant suggests TCS is placed in line with global
consultancies like Capgemini in terms of delivery capabilities in Cybersecurity.
Weaker positioning relative to TCS and HCLT on both IMS and ES results in weaker
positioning in IoT. Capability addition in Finacle places it ahead of global peers
like Temenos AG, Sopra and SAP AG in terms of capabilities in blockchain. Our
Infosys
analysis based on Nelson Hall NEAT evaluations and Gartner's magic quadrant
suggests Infosys is positioned behind TCS and ahead of Wipro and HCLT in terms
of delivery capabilities in cybersecurity.
Middling positioning in most of the next gen technologies. Though the company
has often been early to enter segments promising huge potential, scalability
Wipro
becomes a road block because of churn in sales staff and siloed organization
structure
Strengths in IMS and ES position it well for IoT era. Weaker positioning (relative to
TCS and Infosys) in BFSI specific software products and application services in
general results in lower opening balance in terms of competitive advantages on
HCLT
blockchain. Our analysis based on Nelson Hall NEAT evaluations and Gartner's
magic quadrant suggests HCLT is positioned behind TCS, Infosys and Wipro in
terms of delivery capabilities in Cybersecurity.
Lags behind Top-4 vendors on all next generation technologies, partly because of
TechM
weaker vertical positioning (except in communications)
Source: Company, Ambit Capital research, Note: - Strong; - Relatively Strong; - Average; - Relatively weak.
Least vulnerable to disruption from RPA

As highlighted in our thematic, we use our survey responses to arrive at the
approximate impact on revenue from each service line for our coverage universe.
Exhibit 10: We estimate the following ‘effort categories’ and displacement of human effort by RPA in each of them
Effort split TCS Infosys Wipro HCLT LTI Comments
Application Development 11% 16% 14% 10% 18% We estimate 3%-4% of effort across companies will be displaced
We estimate 20% of effort within application maintenance will come
Application maintenance 26% 17% 14% 15% 28%
under threat
Enterprise solutions 14% 28% 13% 12% 32% We estimate 3%-4% of effort across companies will be displaced
Infrastructure Management Services 11% 6% 19% 30% 10% We foresee 25% of current effort within IMS to be displaced by RPA
Engineering Services 4% 4% 6% 21% 0% We do not factor in any material impact of RPA on human effort
BPO 23% 16% 23% 8% 0% BPO will see the highest displacement (~35% of existing effort)
Testing 9% 10% 8% 5% 12% We estimate 12% of effort in this service line will be displaced
Consulting 2% 3% 2% 0% 0% We foresee consultant and business analyst roles more or less immune
Lower exposure to service lines most vulnerable to threat from RPA like application
maintenance, IMS and BPO positions Infosys better than its large peers in terms of
revenue disruption.

Infosys
Exhibit 11: Net revenue loss for Indian IT because of automation
13%
12%
11%
10%
9%
8%
7%
6%

Infosys
Business longevity not priced in

Unlike in the recent case of peers like TCS and HCLT, market is over-
estimating the potential impact of CEO change in line with historical trends
for Infosys. However, as the company evolved from a commoditized body
shop model to productised services approach, it is the portfolio rather than
the relationship manager that determines business longevity. Infosys is
trading at a 16% discount to our IT largecap coverage universe vs long-term
premium of 5%. Our DCF-based TP of `1,111 (15% upside) implies a rerating
from 14x one-year forward P/E to 15x. Key risk: INR appreciation.
Exhibit 12: Infosys is trading at a 16% discount to our largecap coverage universe…
30.0
25.0
20.0
15.0
10.0
5.0
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Sep-16
Mar-17
Sep-17
Indian IT Infosys
Source: Company, Bloomberg, Ambit Capital research. Note: Indian IT refers to market cap weighted P/E multiple
of our large cap coverage universe, i.e. TCS, Wipro, HCLT and TechM.
Exhibit 13: …despite its superior positioning on the convergence of capital allocation,
operational efficiency and business longevity

Infosys
Our DCF-based TP is `1,111

We perform a DCF analysis using estimated FCF for the next ten years (until FY27)
and terminal growth (5%) thereafter. We use cost of equity of 14% for all largecaps
under coverage.
Exhibit 14: Summary of our DCF estimates
FY17-22E FY22-27E FY17-27E Comments
Near term headwinds because of vertical and macro uncertainty to result in soft
growth over next five years. However, pick up of IT spending in next generation
Sales (US$) 10% 12% 11%
technologies like IoT, blockchain and cybersecurity to result in growth
acceleration post that.
Near term headwinds because of vertical and macro uncertainty to result in soft
growth over next five years. However, pick up of IT spending in next generation
Sales (`) 9% 12% 10%
technologies like IoT, blockchain and cybersecurity to result in growth
acceleration post that.
EBIT 8% 12% 10%
We expect long term EBIT margins to settle down at an average of 24%. Key
EBIT margin (%) 24.0% 24.0% 24.0% margin headwinds: Protectionism. Key margin tailwinds: Change of service mix
towards digital and next gen technologies
NOPAT 9% 12% 10%
We expect Capex to be mainly of maintenance type and hence our capex
Capex as % of sales 2.2% 2.7% 2.8%
estimates are in-line with that of depreciation
Working Capital change as We expect no material changes in working capital intensity and hence to remain
10% 10% 10%
% of incremental sales range bound
FCF 13% 12% 13%
Despite upgrading our EBIT margin estimates over FY19-20E, our TP of `1,111 is 5%
below our last published TP (before we downgraded the stock to UNDER REVIEW from
BUY on 14th Aug 2017 due to corporate governance concerns). This is due to toning
down of revenue growth estimates and growth acceleration trajectory to factor in
near-term headwinds related to vertical and scale issues.
Incipient signs of a recovery in US BFSI or scale-up of IoT adoption in the
manufacturing vertical will make us reconsider our revenue growth trajectory.
Ambit vs consensus
As we soften our negative stance on US protectionism and upgrade our EBIT margin
projections, our estimates are now largely in line with that of consensus.
Exhibit 15: Our estimates are more or less in line with that of consensus
Ambit Consensus Deviation
Revenues (` mn)
FY18 712,149 706,937 1%
FY19 775,448 769,966 1%
FY20 848,839 831,052 2%
EBITDA (` mn)
FY18 191,971 190,192 1%
FY19 204,919 205,593 0%
FY20 218,528 220,329 -1%
EPS (`)
FY18 65 64 1%
FY19 69 69 0%
FY20 74 74 1%

Infosys
Exhibit 16: Our short-term estimates

FY17 FY18E FY19E FY20E Comment
Exchange Rate (INR / US$) 67 65 65 65 We factor in constant exchange rates as on 30th Sep 2017
We build in a modest US$ revenue growth over FY17-20E
Revenue (US$) 10,208 10,971 11,857 12,979 because of near term uncertainties in key verticals like BFSI
and scale issues in digital projects
We build in slower growth acceleration compared to our last
Growth (%) 7.4% 7.5% 8.1% 9.5%
published estimates because of the above mentioned reasons
Revenue (` mn) 684,850 712,149 775,448 848,839
Growth (%) 9.7% 4.0% 8.9% 9.5%
EBIT (` mn) 169,020 173,742 186,295 199,405
Growth (%) 8.2% 2.8% 7.2% 7.0%
We factor in 90bps compression (vs our previous published
EBIT margin (%) 24.7% 24.4% 24.0% 23.5% estimate of 410bps) in EBIT margins because of US
protectionism as we soften our stance on this issue
Net Income 143,830 148,555 158,635 169,555
Growth (%) 6.6% 3.3% 6.8% 6.9%
Net margin (%) 21% 21% 20% 20%
Risks and catalysts

Risks
The recent upgrade of India’s sovereign rating by Moody’s investor services from
Baa3 to Baa2 increased confidence and demand for INR in global currency markets.
Any strong appreciation of INR against US$ will negatively impact EBIT margin (25-
30bps for a 1% change in currency) for Infosys.
Catalysts
Announcements regarding Board and CEO succession would be near-term catalysts.
Regulatory easing in US BFSI (including repeal of Dodd Frank Act) and interest rate
hikes should improve profitability of US BFSI firms, which will translate into higher
Change The Business (CTB) IT spend.
Exhibit 17: Explanation of flags

Segment Score Comments
Accounting GREEN Our accounting tool HAWK places Infosys in Zone of safety (Decile D2)
Given the multiple verticals, service lines and geographies the company operates in and dependence on
Predictability AMBER
macro-economic variables like foreign exchange rates etc. dent the predictability of forward estimates.
Earnings momentum GREEN The company has not seen material earnings downgrades by consensus over the last three months

Infosys
Exhibit 18: Forensic score percentile Exhibit 19: Greatness score percentile
Source: HAWK, Ambit Capital research Source: HAWK, Ambit Capital research
Exhibit 20: Forensic score evolution Exhibit 21: Greatness score evolution
Source: HAWK, Ambit Capital research Source: HAWK, Ambit Capital research

Infosys
Balance Sheet
` bn FY16 FY17 FY18E FY19E FY20E
Net Worth 618 690 683 769 872
Other Liabilities 4 4 3 3 3
Capital Employed 622 693 686 772 875
Net Block 115 125 127 131 136
Other Non current Assets 83 134 139 139 139
Curr. Assets 517 537 545 641 756
Debtors 113 123 138 151 165
Unbilled revenues 30 36 43 46 51
Cash & Bank Balance 328 326 310 385 476
Other Current Assets 46 51 54 59 64
Current Liab. & Prov 132 140 163 177 194
Net Current Assets 385 397 382 464 562
Application of Funds 622 693 686 772 875
Profit & Loss statement

Revenue (US$ mn) 9,501 10,208 10,971 11,857 12,979
Revenue 624 685 712 775 849
Cost of goods sold 391 433 460 511 565
SG&A expanses 77 83 79 78 85
EBITDA 171 186 192 205 219
Depreciation 15 17 18 19 19
EBIT 156 169 174 186 199
EBIT Margin 25.0% 24.7% 24.4% 24.0% 23.5%
Other Income 31 31 32 33 35
PBT 187 200 206 219 235
Reported PAT 135 144 149 159 170
Diluted Adj EPS 59 63 65 69 74
DPS 24 26 42 27 25
Cash Flow Statement

Net Operating CF 122 141 165 166 172
Net Purchase of FA (27) (28) (22) (23) (25)
Acquisitions (8) (0) (5) - -
Net Cash from Invest. (31) (91) (26) (23) (25)
Proceeds from Equity & other - - - - -
Dividend Payments (70) (69) (112) (73) (66)
Others (17) 2 (43) - -
Cash Flow from Fin. (86) (67) (156) (73) (66)
Free Cash Flow 95 113 143 144 148
Opening cash balance 312 328 326 310 385
Net Cash Flow 5 (17) (16) 71 81
Closing Cash Balance 328 326 310 385 476

Infosys
Ratios
FY16 FY17 FY18E FY19E FY20E
Revenue growth (US$) 9% 7% 7% 8% 9%
EBIT growth (`) 13% 8% 3% 7% 7%
EPS growth (`) 9% 7% 3% 7% 7%
Valuation (x)
P/E 17 16 15 14 13
EV/EBITDA 11 10 10 9 9
EV/Sales 3 3 3 2 2
EV/NOPAT 17 16 15 14 13
Price/Book Value 4 3 3 3 3
Dividend Yield (%) 2.5% 2.6% 4.2% 2.8% 2.5%
Return Ratios (%)
RoE 23% 22% 22% 21% 19%
RoCE 19% 19% 18% 17% 16%
Turnover Ratios
Receivable days (Days) 84 85 93 93 93
Fixed Asset Turnover (x) 6 6 6 6 6

Infosys
Institutional Equities Team

Saurabh Mukherjea, CFA CEO, Ambit Capital Private Limited (022) 30433174 saurabh.mukherjea@ambit.co
Pramod Gubbi, CFA Head of Equities (022) 30433124 pramod.gubbi@ambit.co
Research Analysts
Name Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infra / Cement / Home Building (022) 30433241 nitin.bhasin@ambit.co
Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 aadesh.mehta@ambit.co
Abhishek Ranganathan, CFA Retail / Consumer Discretionary (022) 30433085 abhishek.r@ambit.co
Aditi Singh Economy / Strategy (022) 30433284 aditi.singh@ambit.co
Anuj Bansal Consumer (022) 30433122 anuj.bansal@ambit.co
Ariha Doshi Consumer (022) 30433228 ariha.doshi@ambit.co
Ashvin Shetty, CFA Automobiles / Auto Ancillaries (022) 30433285 ashvin.shetty@ambit.co
Bhargav Buddhadev Power Utilities / Capital Goods / Small Caps (022) 30433252 bhargav.buddhadev@ambit.co
Gaurav Khandelwal, CFA Oil & Gas (022) 30433132 gaurav.khandelwal@ambit.co
Gaurav Kochar Banking / Financial Services (022) 30433246 gaurav.kochar@ambit.co
Girisha Saraf Home Building (022) 30433211 girisha.saraf@ambit.co
Karan Khanna, CFA Strategy / Small Caps (022) 30433251 karan.khanna@ambit.co
Kushagra Bhattar Agri Inputs / Chemicals (022) 30433062 kushagra.bhattar@ambit.co
Nikhil Mathur Small Caps (022) 30433220 nikhil.mathur@ambit.co
Mayank Porwal Retail / Consumer Discretionary (022) 30433214 mayank.porwal@ambit.co
Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 pankaj.agarwal@ambit.co
Prateek Maheshwari Cement / E&C / Infrastructure (022) 30433234 prateek.maheshwari@ambit.co
Prashant Mittal, CFA Strategy / Derivatives (022) 30433218 prashant.mittal@ambit.co
Rahil Shah Banking / Financial Services (022) 30433217 rahil.shah@ambit.co
Ravi Singh Banking / Financial Services (022) 30433181 ravi.singh@ambit.co
Ritesh Gupta, CFA Oil & Gas / Agri Inputs / Chemicals (022) 30433242 ritesh.gupta@ambit.co
Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 ritika.mankar@ambit.co
Sudheer Guntupalli Technology / Staffing (022) 30433203 sudheer.guntupalli@ambit.co
Sumit Shekhar Economy / Strategy (022) 30433229 sumit.shekhar@ambit.co
Utsav Mehta, CFA E&C / Infrastructure (022) 30433209 utsav.mehta@ambit.co
Vivekanand Subbaraman, CFA Media / Telecom (022) 30433261 vivekanand.s@ambit.co
Sales
Name Regions Desk-Phone E-mail
Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7886 2740 sarojini.r@ambit.co
Anmol Arya India (022) 30433079 anmol.arya@ambit.co
Dharmen Shah India / Asia (022) 30433289 dharmen.shah@ambit.co
Dipti Mehta India (022) 30433053 dipti.mehta@ambit.co
Krishnan V India / Asia (022) 30433295 krishnanv@ambit.co
Nityam Shah, CFA Europe (022) 30433259 nityam.shah@ambit.co
Punitraj Mehra, CFA India / Asia (022) 30433198 punitraj.mehra@ambit.co
Shaleen Silori India (022) 30433256 shaleen.silori@ambit.co
Singapore
Praveena Pattabiraman Singapore +65 6536 0481 praveena.pattabiraman@ambit.co
Shashank Abhisheik Singapore +65 6536 1935 shashankabhisheik@ambitpte.com
USA / Canada
Hitakshi Mehra Americas +1(646) 793 6751 hitakshi.mehra@ambitamerica.co
Achint Bhagat, CFA Americas +1(646) 793 6752 achint.bhagat@ambitamerica.co
Production
Sajid Merchant Production (022) 30433247 sajid.merchant@ambit.co
Sharoz G Hussain Production (022) 30433183 sharoz.hussain@ambit.co
Jestin George Editor (022) 30433272 jestin.george@ambit.co
Richard Mugutmal Editor (022) 30433273 richard.mugutmal@ambit.co
Nikhil Pillai Database (022) 30433265 nikhil.pillai@ambit.co

Infosys
L&T Infotech (LTI IN, BUY)
850
800
750
700
650
600
550
500
Apr-17
Mar-17
Mar-17
Dec-16
Jul-17
Jul-16
Jan-17
Jan-17
Aug-17
Aug-17
Aug-16
Sep-16
Sep-16
Jun-17
Jun-17
Oct-16
Nov-16
Nov-16
Feb-17
May-17
Larsen & Toubro Infotech Ltd
Infosys Ltd (INFO IN, BUY)
1,400
1,200
1,000
800
600
400
200
0
Mar-15
Mar-16
Mar-17
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Sep-15
Sep-16
Sep-17
Nov-14
May-15
Nov-15
May-16
Nov-16
May-17
Infosys Ltd
Wipro Ltd (WPRO IN, SELL)
400
350
300
250
200
150
100
50
0
Mar-15
Mar-16
Mar-17
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Sep-15
Sep-16
Sep-17
Nov-14
May-15
Nov-15
May-16
Nov-16
May-17
Wipro Ltd

Infosys
Explanation of Investment Rating

Investment Rating Expected return (over 12-month)
BUY >10%
SELL <10%
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events
NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock
POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
* In case the recommendation given by the Research Analyst becomes inconsistent with the rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures (like
change in stance/estimates) to make the recommendation consistent with the rating legend.
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Infosys
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Ambit Capital 2017 CHecmate Not Just Yet

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TECHNOLOGY

Checkmate? Not yet!!

We overestimated the impact of protectionism …………………………………5

Digital & automation – Is the game over? ……………………………………..10

Problems cyclical, not structural ………………………………………………..20

Market mispricing longevity of Indian IT ……………………………………….23

November 23, 2017 Ambit Capital Pvt. Ltd. Page 2

Checkmate? Not yet!! Key Recommendations

Cyclical issues persist; expect softness to continue

Market mispricing longevity of Indian IT

13% Net revenue loss (%)

Exhibit 3: Summary of our views on Indian IT services

November 23, 2017 Ambit Capital Pvt. Ltd. Page 4

We overestimated the impact of

STEM bottlenecks will hit only consulting and product

Exhibit 4: Indian vendors participate only in the last two phases

Source: Ambit Capital research

November 23, 2017 Ambit Capital Pvt. Ltd. Page 5

Total cost of employees as % of revenue

November 23, 2017 Ambit Capital Pvt. Ltd. Page 6

R&D expenditure as % of revenue R&D expenditure as % of revenue

November 23, 2017 Ambit Capital Pvt. Ltd. Page 7

Reducing reliance on H1Bs

H-1Bs L1s Locals

Source: Company, Ambit Capital estimates.

Alternatives like flexi staffing

Source: Company, Ambit Capital research

November 23, 2017 Ambit Capital Pvt. Ltd. Page 8

November 23, 2017 Ambit Capital Pvt. Ltd. Page 9

Digital & automation – Is the game over?

Is digital significantly different in terms of delivery

Sustaining, not disruptive innovation

November 23, 2017 Ambit Capital Pvt. Ltd. Page 10

Exhibit 13: Languages used in development in the mobile environment

Similarities with the role of equity research analysts

Opportunities in next-gen technologies

November 23, 2017 Ambit Capital Pvt. Ltd. Page 11

Source: Ambit Capital research

November 23, 2017 Ambit Capital Pvt. Ltd. Page 12

Robotic Process Automation (RPA)

November 23, 2017 Ambit Capital Pvt. Ltd. Page 13

44 Price assumption (US$/hr)

Source: Company, Ambit Capital research

App development and enterprise systems

November 23, 2017 Ambit Capital Pvt. Ltd. Page 14

November 23, 2017 Ambit Capital Pvt. Ltd. Page 15

Source: Company, Ambit Capital research

Production support and maintenance

November 23, 2017 Ambit Capital Pvt. Ltd. Page 16

Source: Company, Ambit Capital research

Infrastructure Management Services (IMS)

November 23, 2017 Ambit Capital Pvt. Ltd. Page 17

Source: Company, Ambit Capital research

Business Process Outsourcing (BPO)

Source: Infosys BPO, Ambit capital research

November 23, 2017 Ambit Capital Pvt. Ltd. Page 18

Exhibit 24: LTI and Infosys will be least impacted by automation

Source: Company, Ambit Capital research

Exhibit 25: Net revenue loss for Indian IT because of automation

Source: Company, Ambit Capital research

November 23, 2017 Ambit Capital Pvt. Ltd. Page 19

Problems cyclical, not structural

BFSI - Regulatory easing not yet playing out

Source: Bloomberg, Ambit Capital research