Information Technology: of Non-Linearity, Scale and Profitability

Please refer to the disclaimer towards the end of the document.
Institutional Equities

S
e
c
t
o
r

U
p
d
a
t
e

Information Technology
Of Non-Linearity, Scale And Profitability
Top-tier Indian information technology (IT) companies have witnessed higher
revenue/employee (RPE) over the past two quarters on revenue leverage, increased
scale, employee utilisation and just-in-time hiring due to favourable supply. We believe,
going forward, that increased scale and revenue productivity are critical, given
structural cost headwinds. In this regard, we like HCL Technologies (HCLT) and Tata
Consultancy Services (TCS), the former for industry-leading RPE and margin
management, and the latter for scale and ability to manage margins via broad-based
revenue growth, higher utilisation and SG&A leverage. While the rupee movement has
been a strong tailwind of late, it can be a double-edged sword and so it is vital to focus
on sustainable margin levers like growth leverage, revenue productivity, scale and
employee utilisation. We believe it is critical for IT companies to focus on higher
revenue productivity in order to cut the dependence on headcount-led growth. Deals
are also becoming more complex and do not necessarily depend on the number of
persons working on a project. From a stock-wise perspective, we have retained our
Buy ratings on HCLT and Infosys, while we have upgraded TCS to Buy from Hold.
Strong revenue growth witnessed in 1HFY14, RPE on the rise: Top-tier Indian IT
companies, barring Wipro, posted decent US dollar revenue growth in 1HFY14. Excluding
Wipro, US dollar revenue growth stood at a healthy 15.3% YoY, while including Wipro it stood
at 13.2%. Given the slower headcount addition versus revenue growth, revenue productivity
witnessed an improvement in 1QFY14 as well as in 2QFY14, with the same in 2QFY14
rising 3.7% QoQ in case of TCS, for Infosys 2.6% QoQ, for HCLT 1.8% QoQ and for
Wipro 2.2% QoQ. On YoY basis also, RPE for TCS rose 3.4%, for Infosys by over 10%, for
HCLT by as much as 12% and for Wipro a marginal 0.3%. In our view, it is clearly scale
advantages that are playing out. IT companies have also raised their employee
utilisation levels without exception.
HCLT best performer on RPE, margin management: HCLT has been the best performer
on revenue productivity. The IT majors RPE rose for seven successive quarters QoQ. Its
focus on complex, large multi-service outsourcing deals and higher employee utilisation rate
aided RPE. HCLTs lateral hiring percentage has also been consistently higher than its peers,
another data point reflecting its revenue productivity focus. On the margin front, strong
revenue growth, higher RPE and employee utilisation apart from a weak rupee led to
outperformance versus peers, leading to nine successive quarters of YoY increase.
Non-linearity, scale key for margin defence in the face of structural cost headwinds:
Key cost pressures, namely wage inflation and higher visa and onsite wage costs post
passage of the US Immigration Bill are likely to impact Indian IT companies going forward.
Traditional price-volume equations are falling in relevance, with deals becoming more
complex and cost headwinds rendering continued dependence on linear growth a risk. We
therefore believe it is critical for IT companies to focus on scale and revenue
productivity as margin defence measures. In this regard, we like TCS and HCLT, the
former owing to sheer scale and the latter owing to superior revenue productivity.
Retain Buy on HCLT and Infosys, upgrade TCS to Buy: We have retained Buy ratings
on HCLT and Infosys, the former owing to consistent revenue growth, industry-leading RPE,
impressive margin management and a healthy 26% EPS CAGR over FY13-FY15E. We like
Infosys, given its improving revenue growth trajectory, renewed focus on bread-and-butter
business, potential for margin expansion and a healthy 18% EPS CAGR over FY13-FY15E.
We upgrade TCS to Buy from Hold following stock price decline post 2QFY14 results
and believe its sheer growth consistency should drive upside.

View: Positive

Harit Shah
harit.shah@nirmalbang.com
+91-22-3926 8068

One Year Indexed Stock Performance

Price Performance (%)

1 M 6 M 1 Yr
IT Index (1.2) 35.7 39.2
Nifty Index (1.4) (0.4) 5.8
Source: Bloomberg
60
80
100
120
140
160
Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13
NSE CNX IT NIFTY INDEX NSE CNX NIFTY INDEX
28 November 2013

Market cap. CMP Target Upside

EPS (Rs)

P/E (x)

RoE (%)

Company Rating Rsbn US$bn (Rs) Price (%) FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E
TCS Buy 3,905 62.6 1,980 2,370 20 71.2 95.4 112.8 27.8 20.8 17.6 37.9 39.7 36.7
Infosys Buy 1,904 30.5 3,300 4,030 22 164.9 188.6 230.2 20.0 17.5 14.3 25.7 24.7 25.3
Wipro Hold 1,171 18.8 470 483 3 25.0 31.1 34.5 18.8 15.1 13.6 23.3 24.5 22.9
HCL Tech. Buy 740 11.9 1,057 1,380 31 58.2 77.9 92.0 18.2 13.6 11.5 32.8 33.4 30.7
Source: Company, Nirmal Bang Institutional Equities Research

2
IT Sector

Table of Contents
Good revenue growth in 1HFY14, RPE on the rise..3
HCLT best performer in terms of revenue productivity, margins5
Non-linearity, scale key for margin defence in the face of multiple headwinds...7
TCS versus Infosys Contrasting strategies, differing outcomes...10
Stock performance TCS, HCLT outperform Infosys, Wipro..13
Importance of non-linear growth: Infosys versus Accenture....14
Our stock picks Prefer HCLT, Infosys within top-tier pack, upgrade TCS to Buy..15
Companies
Tata Consultancy Services........19
Infosys.......23
HCL Technologies.......27
Wipro..31

3
IT Sector
Good revenue growth in 1HFY14, RPE on the rise
Top-tier Indian IT companies, barring Wipro, posted decent US dollar revenue growth in 1HFY14. Excluding
Wipro, US dollar revenue growth stood at a healthy 15.3% YoY, while including Wipro it was at 13.2%
YoY. TCS was the outperformer, clocking a 16.5% YoY growth, despite its considerably larger size.
Infosys reported the second-fastest growth of 14.3% YoY, reflecting resurgence after a disappointing past
several quarters of revenue growth. HCLT reported a 13.9% YoY growth; while slower than Infosys, it should
be noted that it comes on a higher growth base, with the growth in the previous half (1HFY13) at over 11%
YoY, while Infosys growth in 1HFY13 was just 3.9% YoY. For like-to-like comparison, we have taken the
same quarters for all companies, even though HCLT has a June-ending financial year.
Exhibit 1: 1HFY14 revenue growth Healthy double-digit growth barring Wipro
(US$mn) 1HFY13 1HFY14 YoY (%)
TCS 5,581 6,502 16.5
Infosys 3,549 4,057 14.3
Wipro 3,056 3,219 5.4
HCL Technologies 2,193 2,498 13.9
Total 14,379 16,276 13.2
Source: Respective companies, Nirmal Bang Institutional Equities Research;
While revenue growth was encouraging, an interesting feature was subdued growth in headcount. TCS
gross and net employee additions in 1QFY14 at 10,611 and 1,390, respectively, were at their lowest
levels since the past 15 quarters (since 2QFY10), even as quarterly revenue hit at an all-time high and
sequential revenue addition was at its fourth-highest ever level (US$125mn). Infosys net addition, at
a mere 575, was its lowest since the past 16 quarters (since 1QFY10) when there was a net decline. For
HCLT, net addition stood at just 1,102 (1.3% of March 2013 employee base) and lower net addition has been
the case for the past several quarters; the previous occasion when HCLTs gross addition was above
10,000 and net addition higher than 5,000 was in 1QFY11, 11 quarters ago.
Exhibit 2: TCS gross, net employee addition Exhibit 3: Infosys gross, net employee addition

Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 4: HCLT gross, net employee addition Exhibit 5: TCS staff addition as % of previous quarters base


0
2,600
5,200
7,800
10,400
13,000
7,500
10,500
13,500
16,500
19,500
22,500
2QFY13 3QFY13 4QFY13 1QFY14 2QFY14
Gross addition Net addition (RHS)
(Nos.) (Nos.)
0
600
1,200
1,800
2,400
3,000
5,000
6,500
8,000
9,500
11,000
12,500
(Nos.) (Nos.)
(1,000)
(300)
400
1,100
1,800
2,500
3,500
4,500
5,500
6,500
7,500
8,500
(Nos.) (Nos.)
0
2
4
6
8
10
Gross adds % of PQ headcount Net adds % of PQ headcount
(%)

4
IT Sector
Exhibit 6: Infosys staff adds as % of previous quarters base Exhibit 7: HCLTs staff adds as % of previous quarters base

Source: Company, Nirmal Bang Institutional Equities Research Note: HCL Technologies financial year ends in June; thus, 2QFY13=1QFY13 and
2QFY14=1QFY14; Source: Company, Nirmal Bang Institutional Equities
Research
While gross and net additions witnessed a rise in 2QFY14, this was partly owing to campus hires joining the
companies. To cite an example, TCS added nearly 6,300 trainees during the quarter as against just over 750
in 1QFY14. Consequently, given the slower headcount addition in relation to revenue growth, revenue
productivity witnessed an improvement, with RPE in 1QFY14 for TCS up 1.5% QoQ, for Infosys up
2.2% QoQ and for HCLT up 2.9% QoQ. Only Wipro posted a decline of 1.3% QoQ in this metric, owing to
poor revenue growth. On a YoY basis too, RPE for TCS was up 1%, for Infosys up 9% and for HCLT up
nearly 12%, with Wipro being the only exception (RPE down 1.8% YoY). In fact, in 2QFY14, RPE rose
sequentially for all top four IT firms including Wipro, with the same for TCS up 3.7% QoQ, for Infosys
up 2.6% QoQ, for HCLT up 1.8% QoQ and for Wipro up 2.2% QoQ. On a YoY basis, RPE for TCS rose
3.4%, for Infosys by as much as 10.4%, for HCLT by as much as 12.0% and for Wipro by a marginal
0.3%.
Exhibit 8: TCS revenue/employee trend Exhibit 9: Infosys revenue/employee trend


Exhibit 10: Wipros revenue/employee trend Exhibit 11: HCLTs revenue/employee trend

Source: Company, Nirmal Bang Institutional Equities Research Note: HCL Technologies financial year ends in June; thus, 2QFY13=1QFY13
and 2QFY14=1QFY14; Source: Company, Nirmal Bang Institutional Equities
Research
0
2
4
6
8
10
(%)
(3)
0
3
6
9
12
(%)
(4)
(2)
0
2
4
6
40,000
42,000
44,000
46,000
48,000
50,000
Annualised revenue/employee QoQ change (RHS)
(US$) (%)
(4)
(2)
0
2
4
6
45,000
47,000
49,000
51,000
53,000
55,000
(US$) (%)
(2)
(1)
0
1
2
3
42,500
43,000
43,500
44,000
44,500
45,000
(US$) (%)
0
1
2
3
4
5
50,000
52,000
54,000
56,000
58,000
60,000
(US$) (%)

5
IT Sector
In our view, it is clearly scale advantages that are playing out as regards the improving RPE
witnessed so far in 1QFY14 and 2QFY14. Apart from the benefits of revenue growth leverage, IT
companies have also pushed up employee utilisation levels almost without exception, with Infosys
utilisation rate excluding trainees in 2QFY14 at its highest level since 3QFY11 and utilisation
including trainees at its highest level since 2QFY11. HCLTs utilisation rate hovered around its
highest-ever level as well, while TCS has maintained ex-trainee utilisation rate above 80% for the past
16 successive quarters. A favourable supply situation in the industry also implies more just-in-time hiring
based on business needs as against taking on hoards of employees on board ahead of growth coming
through, leading to a beneficial impact on the margin profile.
Going forward, we believe, along with increasing scale, IT majors will be able to maintain a
structurally higher employee utilisation rate, closer to the 80%-85% mark, and possibly even higher in
case of companies like TCS. We believe Infosys will be able to achieve over 80% utilisation rate
excluding trainees, as it was the case in 2QFY11 and 3QFY11. The utilisation rate achieved in 2QFY11
and 3QFY11 was because of a sudden surge in demand post 2008-09 financial crisis, leading to pushing up
of capacity utilisation of existing employees and incremental hiring. In the current environment, we believe
a greater proportion of just-in-time hires and a judicious use of existing employees on the bench can
get the IT major back to the 80%-plus utilisation rate.
Exhibit 12: IT companies utilisation rates excluding trainees scale enables higher level sustenance

Note: HCL Technologies financial year ends in June; thus, 2QFY13=1QFY13 and 2QFY14=1QFY14.
Source: Respective companies, Nirmal Bang Institutional Equities Research
HCLT best performer in terms of revenue productivity, margins
HCLT has been by far the best performer on the revenue productivity front. The IT majors RPE rose for
seven successive quarters sequentially and is by far, the highest among top-tier IT companies, at
US$58,844 for the September 2013 quarter (1QFY14, June-ending financial year). This is 13% higher
than the second-highest RPE of US$52,058 enjoyed by Infosys and is 24% and 33% higher than TCS
and Wipros RPEs, respectively.
Exhibit 13: Annualised RPE HCLT leads Exhibit 14: HCLT RPE % versus peers well ahead

Note: HCL Technologies financial year ends in June; thus, 2QFY13=1QFY13 and
2QFY14=1QFY14; Source: Company, Nirmal Bang Institutional Equities Research
65
69
73
77
81
85
TCS Infosys Wipro HCLT
(%)
35,000
40,000
45,000
50,000
55,000
60,000
HCLT TCS Infosys Wipro
(US$)
100
108
116
124
132
140
HCLT/TCS HCLT/Infosys HCLT/Wipro
(%)

6
IT Sector
The IT major has focused significantly on the revenue productivity aspect and has outperformed its peers on
this front, as seen by its industry-leading RPE. Its strategy of focusing on complex, multi-year, multi-
service outsourcing deals in the re-bid market, which could be initially margin-dilutive, has aided
revenue productivity. HCLTs lateral hiring, as a percentage of total hires, has also been consistently
higher than its peers, another data point reflecting its focus on revenue productivity. Typically, lateral
hires become billable from Day 1 and earn much higher RPE compared with freshers/campus graduates. As
execution of these large deals takes place, the IT major uses scale and efficiency to shore up its margins.
Exhibit 15: Lateral hires HCLT among peers Exhibit 16: Lateral hires as % of gross hires - HCLT leads

Note: HCL Technologies financial year ends in June; thus 2QFY13=1QFY13 and 2QFY14=1QFY14. HCLT stopped giving out this data w.e.f. 2QFY14 (1QFY14 for
the company).; Source: Company, Nirmal Bang Institutional Equities Research
On the margin front, the IT major has been by far the best performer over the past few quarters
compared with its peers. HCLT witnessed a robust 411bps YoY EBITDA margin expansion in the
September 2013 quarter compared with a 322bps rise in case of TCS, 299bps decline for Infosys and
139bps rise for Wipro (IT service margins). In fact, on YoY basis, HCLT has witnessed margin
expansion in each of the past nine successive quarters. In absolute terms, EBITDA was up nearly 55%
YoY in the September 2013 quarter, compared with a nearly 50% rise for TCS, 18% increase for Infosys and
27% growth for Wipro.
HCLT won deals worth over US$4bn over the past one year (85% of FY13 revenue), providing good revenue
visibility going forward. The IT major has used scale and efficiency gains to raise margins post the initial
phase of lower-than-average margins in its deal wins. A key data point bearing out this trend can be seen
from the share of fixed price projects/managed services in total revenue, which rose from 50.2% in
1QFY13 to 54.7% in 1QFY14. If we take a longer time frame, it rose from 44.0% in 1QFY12 to 54.7% in
1QFY14, a rise of nearly 1,100bps. Over the same time frame, EBITDA margin increased by as much
as 920bps, from 17.1% in 1QFY12 to 26.3% in 1QFY14, with EBITDA in absolute terms up by an
extraordinary 163.3% (over 2.6x) over the period, implying an exceptional CQGR of 12.9%. Fixed price
projects tend to be more profitable than traditional effort-based time and material contracts, if executed
efficiently and HCLT appears to have been able to achieve this successfully. This, apart from a weak rupee
and higher employee utilisation rate, has been key margin driver.
Exhibit 17: YoY EBITDA margin performance HCLT consistently the best performer

0
1,600
3,200
4,800
6,400
8,000
HCLT* TCS Infosys
(Nos.)
0
20
40
60
80
100
HCLT* TCS Infosys
(%)
(650)
(410)
(170)
70
310
550
HCLT TCS Infosys Wipro
(YoY bps chg)

7
IT Sector
Exhibit 18: HCLTs fixed-price projects (FPP) as % of revenue a driver for margin expansion

Revenue versus margin trade-off opts for revenue growth, margin management through levers
In a highly competitive market for IT services, IT companies best choice clearly is to opt for revenue
growth, often at lower profitability, rather than focusing on higher profitability. The latter situation
implies that the vendor has a choice to accept or reject a deal if it does not fall under its profitability criteria.
Clearly, such a scenario is a relic of the past and in todays competitive environment, it is clear that IT
companies do not have much bargaining power with respect to deal pricing and profitability.
Margins can be managed through various levers that IT companies have at their disposal such as employee
utilisation rate, fixed-price project proportion and higher productivity. This is clearly the strategy followed
by HCLT over the past few quarters. The IT major opted for complex, multi-year re-bid deals involving
multiple service lines, which typically involve lower initial margins. Thus, the IT major focused on
raising employee productivity through hiring a greater proportion of laterals and higher utilisation,
while managing margins through levers like utilisation and higher fixed-price projects, as we have
stated above. A weak rupee also helped the margin profile.
Non-linearity, scale key for margin defence in the face of multiple headwinds
Going forward, in the wake of key cost pressures, mainly wage cost inflation and likely higher visa
and onsite wage costs post passage of the US Immigration Bill, we believe it is critical for Indian IT
companies to focus on scale and improving revenue productivity as key measures for margin
defence. The highly competitive environment and price taker status of IT vendors is unlikely to lead to any
meaningful like-to-like billing rate hike, while rupee movement can be a double-edged sword, thus ruling out
the sustainability of these factors as margin defence levers. Consequently, going forward, key margin
levers for Indian IT companies are improvement in scale, employee utilisation, revenue growth
leverage and higher revenue productivity through business mix change - away from commoditised
services and/or increasing element of non-linearity in the business model.
Traditional price-volume equations becoming increasingly irrelevant
Traditional price-volume equations are becoming increasingly irrelevant, with increased focus on
other forms of pricing such as device-based pricing, and focus on products and platforms, which do
not lend themselves to traditional revenue metrics. Clients themselves are demanding differentiated
pricing models, such as output or outcome-based pricing. Large deals, typically involving multiple services to
be delivered to the client, are integrated deals that are not always well-represented by a simple price-volume
equation and involve an element of non-linearity. Companies themselves have started to move away
from disclosing traditional price-volume metrics, with Wipro having stopped giving out this data from
1QFY14 (June 2013 quarter) and HCLT also stopping this data in its IT services business from
1QFY14 (September 2013 quarter).
Thus, this is a reflection of the rising importance that non-linearity is beginning to have for IT
companies. Details regarding order book size, time frame of execution, total contract value (TCV) and so on
would help in getting a better understanding of the changing business model. This is another indication of
the importance of non-linearity and revenue productivity in protecting margins for IT companies.
15
18
21
24
27
30
40
43
46
49
52
55
FPP % EBITDA margin (RHS)
(%) (%)

8
IT Sector
So far, growth has been largely linear, HCLT the notable exception, following steadily improving RPE
The Indian IT sector has grown at a decent pace, with IT and business process outsourcing (BPO) exports
clocking a 13.8% revenue CAGR over FY08-13 (US$77bn in FY13). The top four IT majors - TCS, Infosys,
Wipro and HCLT - posted 15.5%, 12.1%, 11.3% and 20.3% CAGRs, respectively, in US dollar revenue
terms over the same period - a clear reflection of superior performance of TCS and HCLT. The growth so far
has been largely linear, which is based on employee addition. The employee/headcount CAGRs for these
four companies over this period have been 19.9%, 11.4%, 12.1% and 11%, respectively. Thus, with the
notable exception of HCLT, the employee CAGR over the same period has tracked revenue CAGR
with a slight variation, implying no major improvement in revenue productivity per employee and
lack of meaningful non-linearity. RPE, in absolute terms, for all companies barring HCLT declined
over the same period.
Exhibit 19: Revenue/employee CAGR HCLT leads Exhibit 20: RPE HCLT is best performer

Note: Wipros revenue/employee CAGRs and RPEs are for its combined IT services business and exclude non-IT businesses; Source: Company, Nirmal Bang
Institutional Equities Research
Structural margin headwinds ahead, continued dependence on linear model a risk
Going forward, in the wake of several margin headwinds, we believe it will not be an easy task for IT
companies to sustain growth purely based on a linear model. Top-tier IT companies have a
significantly large employee base and the top four cumulatively employ nearly 680,000 people, with
TCS having over 285,000 employees, Infosys over 160,000, Wipro over 147,000 and HCL Technologies
over 87,000 (as of 30 September 2013). Consequently, continued dependence on the linear growth
model could lead to significant challenges in terms of managing such a large employee base.
In our view, the key margin headwinds going forward for Indian IT companies are sustained wage
cost inflation of 6%-8% per annum, consistent investments in sales & marketing (S&M) and newer
products & platforms, as well as higher visa and onsite wage costs owing to the US Immigration Bill.
Wage inflation typically tends to have a 250-300bps impact on margins, which can be offset through revenue
growth, operational efficiency, higher employee utilisation, offshoring and revenue productivity. S&M
investments typically get recouped over a period of time, as revenue flows through in subsequent quarters
from these investments. Higher visa and onsite wage costs because of increased local hires and higher
wages for H1B/L1 visa-holders could also have around 300bps margin impact, with some of it getting
passed on to clients.
Exhibit 21: Likely impact of key US Immigration Bill proposals
Proposal Impact
Outplacement
Negative - will have revenue as well as cost impact, as Indian IT companies will have to replace
H1B visa holders stationed at client sites with local technology workers, which would raise the cost
of delivery. Given that the supply situation is scarce in the US technology sector, with
unemployment in low single digits, it is likely to have an impact on margins
Higher H1B visa
worker wages
Negative - will lead to higher salaries to be paid to H1B workers, which will lead to lower margins
given the fact that wages paid currently to H1B/L1 visa holders are lower compared to local wages
50:50 rule
Negative - this will lead to a scaling up of local worker proportion in the US to 50% by FY17 (25%
in FY15 and 35% in FY16), which will lead to higher onsite wage costs and margin pressure
Source: Nirmal Bang Institutional Equities Research

0
5
10
15
20
25
Revenue CAGR Employee CAGR
(%)
35,000
40,000
45,000
50,000
55,000
60,000
FY08 FY09 FY10 FY11 FY12 FY13
(US$/annum)

9
IT Sector
Currency movement only one possible margin lever, can be a double-edged sword
Much has been said about the likely boost to margins from a weak rupee. However, while there have been
margin benefits in the odd quarter, to state that the impact has been consistently favourable over a
long period of time would be incorrect. There are several other factors that influence margins apart from
currency movement such as employee utilisation rate (HCLT scores here too, as does TCS), pricing, onsite-
offshore mix, SG&A leverage and, above all, revenue growth leverage. Thus, in our view, while a weak
rupee aids margins in the odd quarter, expectations of a sustained weak rupee should not imply that
this will be a strong lever for margin defence against the numerous headwinds we have stated above.
It is not a sustainable lever based on available evidence, and we believe companies that focus on
sustainable levers such as revenue productivity, like HCLT, are in better position to defend margins.
Exhibit 22: Rupee movement, EBITDA margin Not a secular correlation

Source: Respective companies, Bloomberg, Nirmal Bang Institutional Equities Research
Scale another determinant of margin management TCS is the best example of this
Apart from key margin levers like revenue productivity, employee utilisation rate and operational efficiency,
we believe scale is another important factor that can be a margin lever. TCS is the best example of this. The
IT major has used scale advantages to keep employee utilisation at a higher level for many quarters now. Its
employee utilisation rate, excluding trainees, has been over 80% for the past 16 quarters in a row,
with the last occasion when it was below 80% being as far ago as 2QFY10. Clearly, this has been a
major margin lever for TCS over the past several quarters, apart from healthy revenue growth (excellent 5%
US dollar revenue CQGR over 2QFY10-2QFY14) and currency tailwinds. The IT majors significant size is
also another factor TCS had 285,250 employees at the end of 2QFY14, and a 75% employee utilisation
rate, including trainees, implies over 71,000 employees on the bench - a significant pool of resources to staff
projects as and when required, based on business needs. This gives TCS the ability to staff incremental
projects and a surge in demand at short notice.
Exhibit 23: TCS employee utilisation rate, EBITDA margin reflection of scale, a key margin lever

40
45
50
55
60
65
15
19
23
27
31
35
TCS Infosys Wipro HCLT INR-USD average (RHS)
(%) (Rs)
27
28
29
30
31
32
80
81
82
83
84
85
Utilisation rate ex-trainees EBITDA margin (RHS)
(%) (%)

10
IT Sector
HCLT best performer on EBITDA/employee front
HCLT has not only been the best performer in terms of RPE, it has also outperformed peers handsomely on
the EBITDA/employee (EPE) front. In fact, HCLTs EPE is the only one that is higher in FY13 than in
FY08, while all its peers have registered lower EPE in FY13 compared with FY08.
Exhibit 24: EBITDA/employee HCLT best performer on this metric too

Clearly, HCLTs improving revenue productivity, higher employee utilisation rate and a weak rupee to some
extent have led to this sterling performance on EBITDA margin and EPE fronts. This is a clear example of
the need to consistently improve revenue productivity in the face of margin headwinds we have
stated above. We believe improving revenue productivity will be a key factor in margin defence for
Indian IT companies, and HCLT has clearly been an outperformer in this regard over the past few
years. Its strategy of driving revenue through complex, large, multi-service deals, greater focus on hiring
laterals compared with competitors and improving employee utilisation rate have led to this impressive
performance on RPE as well as EPE fronts, while its top-tier peers have registered lower RPE and EPE in
FY13 versus FY08.
TCS versus Infosys Contrasting strategies, differing outcomes
An interesting comparison between TCS and Infosys strategies over the past eight quarters reflects TCS
spectacular success against Infosys loss of market share over this period. Infosys excessive focus on its
Infosys 3.0 strategy focus on generating a greater proportion of revenue from higher-end services
like consulting, products and platforms, which generate higher revenue productivity to the
detriment of its bread-and-butter business operations services (BOS) - led to a slowdown in revenue
growth, with its products and platforms business not quite growing to a significant scale to move the needle
on revenue and offset slower growth in BOS (61.4% of revenue in 2QFY14). A spate of senior management
exits, poor employee morale and higher employee attrition rate also played their part in the IT majors poor
performance.
Infosys total revenue clocked just a 2.1% CQGR over 2QFY12-2QFY14. Service-wise, BOS clocked a
mere 1.7% CQGR over the same period and was primarily responsible for poor overall revenue
growth. On the other hand, higher-end/non-linear services like consulting and systems integration
(CSI) showed a higher 3% CQGR, even as products, platforms and solutions (PPS) grew by just a
marginally higher pace than company average, at 2.4% CQGR. Clearly, the higher pace of growth of CSI
and PPS was not enough to offset poor BOS growth. It should be noted that within BOS, infrastructure
management services (IMS), which has an element of non-linearity owing to the use of standardised
tools, processes and pay-per-use model of billing, grew by a healthy 4.9% CQGR over the period.
Excluding IMS, BOS grew by a mere 1.3% CQGR over the period.
We believe the intent behind Infosys 3.0 was admirable - to transform the company and focus on
delivering higher-end business solutions to the client - also taking on some business risk, as
opposed to being merely involved in IT-related activities and not taking on business risk. Basically,
the focus was on becoming a business consultant and taking on accountability for business outcomes
versus the earlier model of effort-based billing and no accountability for business outcomes.
5,000
7,000
9,000
11,000
13,000
15,000
FY08 FY09 FY10 FY11 FY12 FY13
(US$/annum)

11
IT Sector
However, it was execution of the strategy that left much to be desired, and the complete shift of
focus away from BOS - its bread-and-butter business - was a strategic blunder. Also, numerous
senior management exits and higher attrition rate because of falling employee morale led to poor
financial performances by the company and loss of market share to peers like TCS and HCLT.
Exhibit 25: Infosys service line revenue De-focus on BOS proves costly

Exhibit 26: Excluding IMS, BOS revenue growth even worse

TCS, on the other hand, concentrated on gradually increasing the non-linear proportion of its
business while maintaining the focus on its scalable bread-and-butter businesses, driving scale to
manage margins in commoditised services like application development and maintenance (ADM).
Clearly, the IT majors strategy can be summed up by the statement, If it isnt broken, dont fix it.
The company has achieved strong revenue growth through focus on project execution, driving broad-based
growth across service lines, with higher growth registered in higher-end/non-linear services.
Even as its overall revenue growth has been a healthy 3.5% CQGR over 2QFY12-2QFY14 (well above
Infosys 2.1% CQGR), its ADM CQGR has been at a decent 2.7%, above Infosys 1.7% BOS CQGR,
while higher-end/non-linear services like global consulting (6.7% CQGR) and infrastructure services
(6.3% CQGR) grew at a faster pace than the company average. In fact, enterprise solutions, global
consulting and infrastructure services accounted for over 38% of TCS incremental revenue over
2QFY12-2QFY14, while their total contribution to revenue rose from 28.0% to 30.5% over the same
period. Thus, while TCS continued to execute well on current projects for its clients and not lose focus on its
key ADM business, it also steadily increased its focus on non-linear services.

0
450
900
1,350
1,800
2,250
Total revenue BOS CSI PPS
(US$mn)
2.1%
CQGR
1.7%
CQGR
3%
CQGR
2.4%
CQGR
0
240
480
720
960
1,200
BOS ex-IMS IMS
(US$mn)
1.3%
CQGR
4.9%
CQGR

12
IT Sector
Exhibit 27: TCS revenue More evenly spread growth, with some focus on non-linear growth

Note: For commoditised services with lower RPE, we have taken ADM, assurance services (AS) and business process outsourcing
(BPO), while for higher-end services with higher RPE, we included enterrpise solutions (ES), engineering and industrial services
(EIS), infrastructure services (IS), global consulting (GC) and asset leveraged solutions (ALS, products).
Exhibit 28: Top 5 IT companies revenue Cognizant, TCS outperform, Infosys a laggard
Revenue 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 CQGR (%)
TCS 2,525 2,586 2,648 2,728 2,853 2,948 3,040 3,165 3,337 3.5
Infosys 1,746 1,806 1,771 1,752 1,797 1,911 1,938 1,991 2,066 2.1
Wipro* 1,473 1,506 1,536 1,515 1,541 1,577 1,585 1,588 1,631 1.3
HCLT# 1,002 1,022 1,048 1,080 1,114 1,154 1,191 1,228 1,270 3.0
Cognizant$ 1,601 1,664 1,711 1,795 1,892 1,948 2,021 2,161 2,306 4.7
Total 8,347 8,583 8,714 8,870 9,196 9,539 9,774 10,133 10,610 3.0
* IT services revenue for Wipro, excludes IT products.
# HCLTs financial year ends in June. Thus, 2QFY12=1QFY12 and 2QFY14=1QFY14.
$ Cognizants financial year ends in December. Thus, 2QFY12=3QCY11 and 2QFY14=3QCY13.
Exhibit 29: Top-5 IT companies revenue market share Cognizant, TCS gain, Infosys, Wipro lose
RMS (%) 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 Chg (Bps)
TCS 30.3 30.1 30.4 30.8 31.0 30.9 31.1 31.2 31.5 120
Infosys 20.9 21.0 20.3 19.8 19.5 20.0 19.8 19.6 19.5 (145)
Wipro* 17.6 17.5 17.6 17.1 16.8 16.5 16.2 15.7 15.4 (227)
HCLT# 12.0 11.9 12.0 12.2 12.1 12.1 12.2 12.1 12.0 (3)
Cognizant$ 19.2 19.4 19.6 20.2 20.6 20.4 20.7 21.3 21.7 255
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 -
* IT services revenue, excludes IT products.
# HCLTs financial year ends in June. Thus, 2QFY12=1QFY12 and 2QFY14=1QFY14.
$ Cognizants financial year ends in December. Thus, 2QFY12=3QCY11 and 2QFY14=3QCY13.
As can be seen in Exhibits 28 and 29, Infosys poor execution of its strategy, along with other factors we
have stated above led to its revenue growth significantly trailing behind those of its peers TCS, HCLT and
Cognizant. As a result, it consistently lost revenue market share (RMS), which fell from nearly 21% in
2QFY12 to 19.5% in 2QFY14, a decline of 145bps over the period. From an incremental RMS perspective,
Infosys share was just 14.1% over the same period. TCS, on the other hand, gained 120bps in RMS over
the period, which rose from 30.3% to 31.5%, and the IT majors incremental RMS was nearly 36%, over 2.5x
that of Infosys.
In our view, while we appreciate the idea behind Infosys 3.0 strategy, we believe defocusing on the BOS
segment was clearly a strategic blunder by the company, given that it has always accounted for over 60% of
revenue. We believe TCS strategy of gradually increasing non-linear proportion of revenue, while at
0
700
1,400
2,100
2,800
3,500
Total revenue ADM, AS, BPO ES, EIS, IS, GC, ALS
(US$mn)
3.5%
CQGR
3.3%
CQGR
3.9%
CQGR

13
IT Sector
the same time not losing focus on its bread-and-butter businesses, is appropriate and one that can
enable the IT major to deliver on the streets quarterly revenue expectations and at the same time,
ensure that it makes the right investments to drive long-term growth - in accordance with changing
business realities and client expectations.
An encouraging factor as regards Infosys is its renewed focus on BOS recently, with the segment
growing at 4.4% QoQ in 2QFY14, above the company average of 3.8% QoQ. With the founder Mr NR
Narayana Murthy, back at the helm, we expect the IT major to return to above-industry revenue
growth and also start showing margin expansion from 2HFY14 and FY15 on an improved revenue
growth trajectory and cost rationalisation.
Stock performance TCS, HCLT outperform Infosys, Wipro
Stock-wise, TCS and HCLT have handsomely outperformed Infosys and Wipro. Over the past two years,
TCS stock rose by an impressive 84%, while over the past one year it rose by as much as 54%. This
compares with a 64% and 24% rise in trailing 12-month (TTM) net profit over the past two years and one
year, respectively. Thus, the stocks P/E multiple has been re-rated owing to its consistent financial
performances. HCLTs stock price, on the other hand, rose by as much as 168% and 65% over the past two
years and one year, respectively, compared with a 146% and 58% rise in TTM net profit, respectively, again
signifying a P/E multiple re-rating, owing to its impressive financial performance on revenue growth as well as
margin expansion fronts. On the other hand, Infosys stock price rose by just 23% over the past two years
while it increased by a strong 34% over the past one year, compared with a 32% and 2% rise in TTM net
profit , respectively, over the same periods. Both TCS and HCLT comfortably outperformed the BSE IT Index,
which gained 50% and 39% over two-year and one-year timeframes, respectively.
Exhibit 30: Stock performances TCS, HCLT handsomely outperform BSE IT Index

Source: C-line, Nirmal Bang Institutional Equities Research
Exhibit 31: P/E multiple TCS, HCLT witness re-rating

Source: C-line, Nirmal Bang Institutional Equities Research
75
120
165
210
255
300
28-Nov-11 28-Jul-12 28-Mar-13 26-Nov-13
TCS HCLT Infosys Wipro BSE IT Index
(Rs)
0
6
12
18
24
28-Nov-11 28-Jul-12 28-Mar-13 26-Nov-13
TCS HCLT Infosys Wipro
(x)

14
IT Sector
Going forward, we remain positive on TCS given its broad-based revenue growth, strong scale benefits and
incremental focus on improving RPE through non-linear initiatives. We expect the IT majors premium
valuation versus peers to sustain. We like HCLT given its industry-high RPE and improving profit/employee,
apart from healthy earnings growth. Growth improvement in software services could also be a trigger for P/E
multiple expansion. As regards Infosys, we believe its refocus on the key BOS segment is a positive along
with good deal wins, which should boost revenue growth. We believe its margins are likely to go up from an
all-time low in 2QFY14, aided by revenue growth leverage and higher employee utilisation rate.
Importance of non-linear growth: Infosys versus Accenture
To give a perspective regards the importance of non-linear growth, we have compared global IT consulting
major Accenture with Infosys on key operating and financial parameters like revenue, employees, revenue
per employee (RPE), cost per employee (CPE) and profitability. Accenture reported trailing TTM revenue of
US$28.6bn, which is around 3.6x Infosys (US$7.9bn). This is the case even as its employee base is only
72% higher. The significantly higher RPE enjoyed by Accenture (over 2.1x at US$107,379 versus Infosys
US$50,359) is the key reason for the gap in revenue. Accenture earns nearly 54% of its revenue from
consulting services, characterised by high revenue productivity/employee (US$150/hour in many cases,
nearly 2x onsite billing rate of US$76.3/hour for Infosys in 2QFY14). Apart from this, a major portion of
Infosys effort mix (man-hours billed) is offshore (68.7% TTM) and offshore revenue has lower productivity
compared with on-site revenue (US$ 21/hour offshore on TTM basis versus US$73.8/hour onsite).
On the other hand, an analysis of the cost side suggests that while revenue productivity is higher for
Accenture, profitability is not commensurate and in fact, Infosys is superior to the global consulting major.
While RPE for Accenture is 113% higher than Infosys, CPE is higher by 132%, indicating cost advantage
enjoyed by the latter owing to its offshoring model and bulge mix (greater proportion of freshers to laterals),
leading to lower costs per employee. Thus, Infosys EBITDA margin was 26.9% on TTM basis as compared
to 15.2% for Accenture. When viewed on an absolute basis, in terms of EBITDA per employee, Accenture
scores over Infosys with EBITDA/employee of US$16,311 compared with US$13,538 for Infosys.
However, it should be noted that even as Infosys CPE metrics are seemingly superior to
Accentures, these metrics have steadily worsened over the past several quarters To cite an example,
10 quarters ago, Accentures CPE was around 186% higher than Infosys on TTM basis, which has
now come down to 132%. Infosys CPE rose from around US$27,000 to US$31,000 on account of poor
operating cost management, while Accentures has fallen slightly from US$76,392 to US$72,100, possibly
owing to a higher proportion of its workforce based at its offshore global delivery centres. Owing to the rise in
CPE, Infosys profitability has been adversely impacted, with its EBITDA margin down at 26.9% versus
32.6% 10 quarters ago (TTM) and the difference versus Accenture has also reduced significantly, from over
1,700bps to 1,169bps currently. EBITDA/employee also declined 16% from US$16,099 to US$13,538.
Thus, partly because of changing business model and partly due to its own poor performances,
Infosys CPE and profitability metrics worsened.
Exhibit 32: Infosys CPE, profitability metrics Worsening trend

25
27
29
31
33
35
20,000
23,000
26,000
29,000
32,000
35,000
Cost/employee EBITDA margin (RHS)
(US$) (%)

15
IT Sector
Taking a futuristic view, we assume Infosys will grow to the size that Accenture is currently at in the next 10
years, implying nearly 14% revenue CAGR over this period. If we assume no improvement in revenue
productivity, Infosys needs 578,868 employees to grow to Accentures size. This is a huge employee base
(3.6x current base) and the IT major could face significant challenges, not least wage inflation, as
diminishing returns on scale begin to reflect in deteriorating quality of business model.
Going forward, given the wage inflation and structural cost inflation likely to come about from passage of the
US Immigration Bill, cost pressures are likely to become more acute, leading to an increase in average CPE.
With wage inflation, cost of revenue will increase at a faster rate than revenue growth (68.1% of revenue 10
years hence in our scenario from 61.6% on TTM basis), thereby exerting significant pressure on margins.
Even assuming a similar level of SG&A costs to sales, as is the case currently, Infosys EBITDA margin
could fall to 20.4% over this period and EBITDA/employee to just US$10,290, a decline of 24% from the
current level. Thus, for the same revenue base as Accenture 10 years hence, with no improvement in
revenue productivity, Infosys EBITDA/employee is likely to be lower by nearly 37% compared with
Accenture, despite profitability being higher in terms of margins (20.4% versus 15.2%).
Exhibit 33: A scenario 10 years hence No RPE improvement, wither margins?
Particulars Infosys Accenture % difference Infosys in 10 years
Revenue (US$ mn) 7,906 28,563 261.3 28,563
Employees (nos.) 160,227 275,000 71.6 578,868
Average revenue per employee (US$) 50,359 107,379 113.2 50,359
Cost of revenue (US$mn) 4,874 19,179 293.5 19,450
Cost of revenue (% of sales) 61.6 67.1 550bps 68.1
Average cost per employee (US$) 31,044 72,100 132.3 34,291
SG&A and other costs (US$mn) 907 5,045 456.3 3,277
EBITDA (US$mn) 2,125 4,339 104.1 5,836
EBITDA margin (%) 26.9 15.2 (1,169 bps) 20.4
EBITDA per employee (US$) 13,538 16,311 20.5 10,290
Source: Respective companies, Nirmal Bang Institutional Equities Research;
Notes: (1) Revenue, cost of revenue, SG&A and other costs and EBITDA are all on TTM basis.
(2) Infosys fiscal year ends in March and Accentures in August.
Over a long-term time-frame, we believe Infosys and other IT companies need to increasingly focus on non-
linear services like consulting and make greater investments in products and platforms, both vertical and
service line-focused. Without a doubt, these investments and recruitment of domain experts and consultants
will lead to CPE escalation. As stated earlier, passage of the US Immigration Bill will also be a structural cost
headwind. Thus, given these cost headwinds, CPE is likely to rise, making it imperative to drive higher RPE.
We therefore believe it is critical for Indian IT companies to focus on improving revenue productivity
per employee to ensure that they reduce dependence on headcount-led growth and more
importantly stay relevant to clients, who are more willing now than ever before to experiment with
new pricing models apart from the traditional effort-based model. Deals are also becoming more
complex and do not necessarily depend on the number of persons working on the project, again
making it important to focus on revenue productivity. Apart from this, increasing scale of operations
is undoubtedly another key lever for margin defence, given that IT firms can drive structurally higher
employee utilisation rates with greater scale.
Our stock picks Prefer HCLT, Infosys within top-tier pack, upgrade TCS to Buy
As regards our top picks in the top-tier IT pack, we reiterate our preference for HCLT and Infosys. Infosys is
one of our top picks in the top-tier IT pack. With the IT majors founder Mr NR Narayana Murthy back at the
helm, we expect continued uptick in revenue growth witnessed over the past two quarters. Greater
operational flexibility while bidding for contracts, as against its earlier rigid stance and excessive focus on
pricing and deal profitability, resulted in improved deal wins and revenue growth over the past two quarters.
Renewed focus on its key BOS segment, which accounts for over 61% of revenue, is another factor likely to
boost revenue growth. We also expect margins to improve in 2HFY14/FY15, aided by revenue growth, cost
rationalisation and higher employee utilisation, driving a healthy 18% EPS CAGR over FY13-FY15E. A
consistently weak rupee is also proving to be a bonus, which could boost margins above our current
expectations. Our FY15E EPS is 9% above Bloomberg consensus estimates. We have retained our
Buy rating on Infosys with a target price of Rs4,030, implying a P/E multiple of 17.5x FY15E EPS.

16
IT Sector
HCLTs consistent revenue growth (3% US dollar revenue CQGR over 1QFY12-1QFY14) and strong deal
wins over the past one year (US$4bn, 85% of FY13 revenue) drive confidence in its ability to sustain healthy
growth in FY14/FY15. Its focus on revenue productivity, operational efficiency and employee utilisation drove
EBITDA margin to an all-time high in 1QFY14, with revenue and profit/employee also at all-time high levels.
We like HCLTs industry-high revenue productivity and believe it is a key lever for margin sustenance in the
face of structural cost headwinds. In our view, EBITDA margin has moved to a higher trajectory and the gap
with peers reduced significantly. With greater scale and industry-high revenue productivity, we expect the IT
major to be able to maintain margins in the 24%-25% range for FY14E/FY15E. Higher margins also led RoE
to an all-time high in FY13; we expect over 30% RoE in FY14E/FY15E. Valuation, at 11.5x FY15E EPS is
also reasonable, in the wake of a strong 26% EPS CAGR over FY13-FY15E. We have retained our Buy
rating on HCLT with a target price of Rs1,380, implying a P/E multiple of 15x FY15E EPS.
TCS industry-leading revenue growth reflects impressive execution skills of the IT major. The company has
clocked a 3.5% US dollar revenue CQGR over 2QFY12-2QFY14, well above its peers Infosys, Wipro and
HCLT. A positive feature is the fact that growth has been broad-based, with the key BFSI vertical growing at
a 3.4% CQGR, while major growth drivers were retail and distribution (5.4% CQGR), manufacturing, and life
sciences & healthcare (both 4.5% CQGR). We believe TCS strategy of driving scale efficiencies has enabled
it to maintain healthy growth, despite an ever-increasing base. It has been able to drive a good balance
between maintaining its focus on its bread-and-butter businesses and investing in non-linear avenues. We
expect the IT major to continue to execute well on revenue growth and profitability, thereby driving a healthy
26% EPS CAGR over FY13-FY15E. The current valuation, at 17.6x FY15E EPS is reasonable following the
stock price decline after 2QFY14 results. We have upgraded TCS to Buy from Hold, with an unchanged
target price of Rs2,370.
Wipros stock has surged 25% over the past four months, aided by expectations of improving revenue growth
trajectory amid a strengthening demand environment. We believe the IT major will remain a laggard in terms
of growth versus peers, and have factored in a 9% US dollar revenue CAGR over FY13-FY15E, well below
the 17% CAGR we have factored in for TCS and a 14% CAGR for Infosys. Wipro stopping the practice of
disclosing volume and billing rate data in its quarterly metrics could also prevent a P/E multiple re-rating,
given the worsening disclosure quality and lack of alternatives provided in order to assess its business. While
a weak rupee will support financials, we do not believe this is a reason to give a higher P/E multiple to the
stock. Nonetheless, owing to the stock decline post 2QFY14 results, we upgrade Wipro to Hold from
Sell with an unchanged target price of Rs483, implying a P/E multiple of 14x FY15E EPS.

17

This page has been intentionally left blank

18

C
C
o
o
m
m
p
p
a
a
n
n
y
y
S
S
e
e
c
c
t
t
i
i
o
o
n
n



C
o
m
p
a
n
y

U
p
d
a
t
e

Reuters: TCS.BO; Bloomberg: TCS IN
Tata Consultancy Services
Broad-Based Growth, Scale Benefits To Drive Earnings
TCS industry-leading revenue growth reflects impressive execution skills of the IT
major. The company clocked 3.5% US dollar revenue CQGR over 2QFY12-2QFY14, well
above its peers like Infosys, Wipro and HCLT. A positive feature is that growth has been
broad-based, with the key BFSI vertical showing a 3.4% CQGR, while major growth
drivers were retail and distribution (5.4% CQGR), manufacturing, and life sciences &
healthcare (both 4.5% CQGRs). We believe TCS strategy of driving scale efficiencies
enabled it to maintain a healthy growth, despite an ever-increasing base. TCS has been
able to drive a good balance between maintaining focus on its highly scalable bread-
and-butter businesses and investing in non-linear avenues. We expect the IT major to
continue to execute well on revenue and profitability, driving a healthy 26% EPS CAGR
over FY13-FY15E. Current valuation, at 17.6x FY15E EPS is reasonable. We upgrade our
rating on TCS to Buy from Hold, keeping our target price unchanged at Rs2,370.
Broad-based revenue growth to continue on solid execution: TCS industry-leading
revenue growth, despite its considerably larger size versus peers, reflects superior execution
skills. The IT major clocked a healthy 3.5% US dollar revenue CQGR over 2QFY12-2QFY14,
well above peers like Infosys, Wipro and HCLT. A key aspect is the broad-based nature of
its revenue growth, with growth drivers being BFSI (3.4% CQGR), retail and distribution
(5.4% CQGR), manufacturing and life sciences & healthcare (both 4.5% CQGR). We
believe TCS strategy of driving scale efficiencies enabled it to maintain a healthy growth,
despite an ever-increasing base. It has driven a good balance between maintaining focus on
its highly scalable bread-and-butter businesses and investing in non-linear avenues. To cite an
example, the IT majors commoditised business, ADM, clocked a decent 2.7% US dollar
revenue CQGR over 2QFY12-2QFY14 and overall commoditised businesses showed a 3.3%
CQGR, while higher-end/non-linear services like consulting and enterprise solutions clocked a
3.9% CQGR over the same period. This enables TCS to deliver on quarterly revenue
expectations and also ensures that it makes necessary investments in non-linear avenues to
offset diminishing returns on scale, going forward. We expect the IT major to continue to
execute well and have factored in an industry-leading 17% US dollar revenue CAGR over
FY13-FY15E, led by volume growth CAGR of over 19%.
Healthy revenue growth, margin expansion to drive a healthy 26% EPS CAGR: Along
with healthy US dollar revenue CQGR, TCS also posted healthy rupee revenue CQGR over
2QFY12-2QFY14, at 7.6%, aided by a weak rupee. This, apart from revenue growth leverage,
operational efficiency and higher employee utilisation, drove a strong 8.8% EBITDA CQGR
and 8.6% net profit CQGR over the same period. We expect TCS healthy revenue growth and
higher margins to drive a healthy 26% EPS CAGR over FY13-FY15E.
Upgrade TCS to Buy, stock fall provides good opportunity: We expect TCS to maintain
healthy revenue growth on superior execution and believe its strategy of driving scale
efficiencies have enabled it to maintain healthy growth, driving a good balance between its
highly scalable bread-and-butter businesses and investing in non-linear avenues. Strong
revenue growth along with margin expansion should drive a 26% EPS CAGR over FY13-
FY15E. Its current valuation, at 17.6x FY15E EPS is reasonable. We have upgraded our
rating on TCS to Buy from Hold, keeping our TP unchanged at Rs2,370.

BUY
Sector: Information Technology
CMP: Rs1,980
Target Price: Rs2,370
Upside: 20%
Harit Shah
+91-22-3926 8068
Key Data

Current Shares O/S (mn) 1,958.7
Mkt Cap (Rsbn/US$bn) 3,905.1/62.6
52 Wk H / L (Rs) 2,259/1,197
Daily Vol. (3M NSE Avg.) 1,606,391

Shareholding (%) 4QFY13 1QFY14 2QFY14
Promoter 74.0 74.0 74.0
FII 16.1 15.7 16.1
DII 5.4 5.9 5.6
Corporate 0.3 0.3 0.3
General Public 4.2 4.2 4.0



1 M 6 M 1 Yr
TCS (3.6) 33.1 53.9
Nifty Index (1.4) (0.4) 5.8
Source: Bloomberg

Y/E March (Rsmn) FY11 FY12 FY13 FY14E FY15E
Revenues 373,245 488,938 629,895 826,750 942,968
YoY (%) 24.3 31.0 28.8 31.3 14.1
EBITDA 111,981 144,203 180,872 253,234 292,030
EBITDA (%) 30.0 29.5 28.7 30.6 31.0
Adj. PAT 87,284 106,516 139,415 186,738 220,812
YoY (%) 26.7 22.0 30.9 33.9 18.2
FDEPS (Rs) 44.6 54.4 71.2 95.4 112.8
RoE (%) 37.7 36.8 37.9 39.7 36.7
RoCE (%) 35.9 35.8 35.7 38.4 34.2
P/E (x) 44.4 36.4 27.8 20.8 17.6
EV/EBITDA (x) 34.0 26.4 21.0 14.9 12.7

80
90
100
110
120
130
140
150
160
170
180
TATA CONSULTANCY NSE CNX NIFTY INDEX
28 November 2013

20
Financials
Exhibit 1: Income statement
Net sales 373,245 488,938 629,895 826,750 942,968
% growth 24.3 31.0 28.8 31.3 14.1
Personnel costs 188,498 246,958 318,714 411,010 467,594
SG&A and other costs 72,766 97,777 130,309 162,505 183,343
Total expenditure 261,264 344,735 449,023 573,516 650,937
EBITDA 111,981 144,203 180,872 253,234 292,030
% growth 29.0 28.8 25.4 40.0 15.3
EBITDA margin (%) 30.0 29.5 28.7 30.6 31.0
Other income 6,113 4,524 11,881 9,218 20,819
Financial expenses 773 480 708 726 797
Gross profit 117,321 148,247 192,045 261,726 312,052
% growth 31.7 26.4 29.5 36.3 19.2
Depreciation. & amortisation 7,185 9,035 10,792 12,491 14,612
Profit before tax 110,136 139,212 181,253 249,236 297,440
% growth 34.6 26.4 30.2 37.5 19.3
Tax 21,662 31,585 40,345 61,005 75,134
Effective tax rate (%) 19.7 22.7 22.3 24.5 25.3
Profit after tax 88,474 107,627 140,908 188,231 222,305
% growth 27.0 21.6 30.9 33.6 18.1
Minority interest 1,190 1,111 1,493 1,493 1,493
Reported net profit 87,284 106,516 139,415 186,738 220,812
% growth 26.7 22.0 30.9 33.9 18.2
EPS (Rs) 44.6 54.4 71.2 95.4 112.8
% growth 26.7 22.0 30.9 33.9 18.2
Exhibit 3: Balance sheet
Equity capital 1,957 1,957 1,957 1,957 1,957
Additional paid-in capital 19,192 19,199 19,199 19,199 19,199
Other comprehensive income/(loss) 1,379 5,632 9,085 9,085 9,085
Reserves 231,627 298,659 379,319 500,511 643,819
Net worth 254,155 325,447 409,560 530,752 674,060
Minority interest 3,147 5,275 6,561 8,054 9,547
Other non-current liabilities 3,489 4,598 5,308 5,308 5,308
Deferred tax liability 5,714 4,331 4,982 4,982 4,982
Employee benefit obligation 1,392 2,177 3,489 3,489 3,489
Short-term loans 368 112 1,013 1,013 1,013
Long-term loans 380 1,154 1,310 1,310 1,310
Total loans 748 1,266 2,323 2,323 2,323
Mandatorily RPS with Tata Sons 1,000 1,000 1,000 1,000 1,000
Total liabilities 269,645 344,093 433,222 555,908 700,708
Goodwill 32,160 33,238 33,636 33,636 33,636
Intangible assets 1,905 1,736 1,427 1,427 1,427
Gross block 87,829 109,417 137,604 166,540 194,829
Depreciation 35,833 44,868 55,660 68,151 82,763
Net block 51,996 64,548 81,944 98,389 112,066
Investments 18,390 14,783 20,404 20,404 20,404
Deferred tax asset 11,804 17,645 21,600 21,600 21,600
Other non-current assets 46,298 57,220 56,359 56,359 56,359
Debtors 81,907 115,023 140,766 215,181 258,347
Unbilled revenue 13,489 22,478 31,601 45,301 64,587
Cash & bank balance 47,350 58,241 67,546 89,775 163,275
Other current assets 21,009 27,138 65,455 65,455 65,455
Total current assets 163,756 222,880 305,367 415,712 551,663
Sundry creditors 25,919 32,485 44,369 47,138 49,935
Other current liabilities 30,743 35,470 43,144 44,480 46,511
Total current liabilities 56,662 67,956 87,513 91,619 96,446
Net current assets 107,094 154,924 217,854 324,094 455,217
Total assets 269,645 344,093 433,222 555,908 700,708
Exhibit 2: Cash flow
EBIT 104,796 135,168 170,080 240,743 277,418
(Inc.)/dec. in working capital (43,568) (38,050) (36,190) (84,011) (57,624)
Cash flow from operations 61,228 97,118 133,890 156,732 219,794
Other income 6,113 4,524 11,881 9,218 20,819
Depreciation & amortisation 7,185 9,035 10,792 12,491 14,612
Financial expenses (773) (480) (708) (726) (797)
Tax paid (21,662) (31,585) (40,345) (61,005) (75,134)
Dividends paid (32,059) (57,249) (50,379) (65,545) (77,505)
Net cash from operations 20,031 21,364 65,131 51,165 101,789
Capital expenditure (16,796) (19,786) (27,318) (28,936) (28,289)
Net cash after capex 3,235 1,578 37,813 22,229 73,500
Inc./(dec.) in short-term borrowing (1,939) (256) 901 - -
Inc./(dec.) in long-term borrowing 2,208 1,029 (745) - -
Inc./(dec.) in borrowings 269 774 156 - -
(Inc.)/dec. in investments (2,253) 10,508 (20,988) - -
Cash from financial activities (1,984) 11,282 (20,832) - -
Others (675) (1,969) (7,675) - -
Opening cash 46,773 47,350 58,241 67,546 89,775
Closing cash 47,350 58,241 67,546 89,775 163,275
Change in cash 577 10,891 9,305 22,229 73,500
Exhibit 4: Key ratios
Return ratios
RoE (%) 37.7 36.8 37.9 39.7 36.7
RoCE (%) 35.9 35.8 35.7 38.4 34.2
Operating ratios
Personnel costs/sales (%) 50.5 50.5 50.6 49.7 49.6
SG&A & other costs/sales (%) 19.5 20.0 20.7 19.7 19.4
Dep./gross block excl. land (%) 8.2 8.3 7.8 7.5 7.5
Revenue growth (%) 24.3 31.0 28.8 31.3 14.1
EBITDA margin (%) 30.0 29.5 28.7 30.6 31.0
EBITDA growth (%) 29.0 28.8 25.4 40.0 15.3
Net profit growth (%) 26.7 22.0 30.9 33.9 18.2
Total volume growth (%) 30.6 24.0 17.3 21.0 17.4
Blended pricing growth (%) (1.1) 0.2 (3.0) (3.1) (0.5)
RPE (Rsmn) 2.08 2.24 2.45 2.89 3.06
RPE (US$ '000) 45.60 46.53 44.95 47.38 51.43
Valuation ratios
PER (x) 44.4 36.4 27.8 20.8 17.6
P/BV (x) 15.2 11.9 9.5 7.3 5.7
Price/sales (x) 10.4 7.9 6.2 4.7 4.1
EV/EBITDA (x) 34.0 26.4 21.0 14.9 12.7
Dividend payout (%) 31.4 45.9 30.9 30.0 30.0

21
Rating track
Date Rating Market price (Rs) Target price (Rs)
2 June 2011 Hold 1,175 1,224
1 July 2011 Hold 1,180 1,224
15 July 2011 Buy 1,124 1,329
12 August 2011 Hold 951 994
23 September 2011 Hold 995 1,019
30 September 2011 Sell 1,060 1,019
9 November 2011 Sell 1,123 1,008
23 November 2011 Hold 1,062 1,114
2 January 2012 Hold 1,161 1,232
18 January 2012 Hold 1,104 1,200
30 March 2012 Hold 1,143 1,200
24 April 2012 Hold 1,059 1,200
4 June 2012 Hold 1,225 1,329
29 June 2012 Hold 1,259 1,329
13 July 2012 Buy 1,236 1,444
4 October 2012 Hold 1,322 1,415
22 October 2012 Hold 1,290 1,375
7 January 2013 Hold 1,299 1,355
15 January 2013 Hold 1,334 1,400
6 April 2013 Sell 1,481 1,480
18 April 2013 Hold 1,459 1,512
9 July 2013 Hold 1,507 1,685
19 July 2013 Hold 1,660 1,713
7 October 2013 Hold 2,033 2,130
17 October 2013 Hold 2,108 2,370
5 November 2013 Hold 2,100 2,370


22




C
o
m
p
a
n
y

U
p
d
a
t
e

Reuters: INFY.BO; Bloomberg: INFO IN
Infosys
Revenue Growth Revival To Drive Margins, Earnings
Infosys is one of our top picks in the top-tier information technology (IT) pack. With the
IT majors founder Mr NR Narayana Murthy (NRN) back at the helm, we expect sustained
uptick in revenue growth, as witnessed over the past two quarters. Greater operational
flexibility while bidding for contracts, as against the companys earlier rigid stance and
excessive focus on pricing and deal profitability, led to improved deal wins and revenue
growth over the past two quarters. The renewed focus on its key BOS segment, which
accounts for over 61% of revenue, is another factor likely to boost revenue growth. We
also expect margins to improve in 2HFY14/FY15 aided by revenue growth, cost
rationalisation and higher employee utilisation, driving a healthy 18% EPS CAGR over
FY13-FY15E. Consistently weak rupee is also proving to be a bonus, which could boost
margins above our current estimate. Our FY15E EPS is 9% above Bloomberg
consensus estimates. We have retained our Buy rating on Infosys with a target price of
Rs4,030, implying a P/E multiple of 17.5x FY15E EPS.
Revenue growth uptick key to boost margins, earnings: After registering poor and
inconsistent financial performance over the past several quarters and in the process losing
RMS to peers, Infosys has been able to post improved US dollar revenue growth in 1HFY14,
at 14.3% YoY. Sequentially, the IT major posted 2.7% and 3.8% US dollar revenue growth in
1QFY14 and 2QFY14, respectively, after having registered US dollar revenue CQGR of just
2.4% over the past eight quarters. With the return of its founder NRN at the helm, we expect
sustained uptick in the revenue growth profile. Greater operational flexibility while bidding for
contracts, as against its earlier rigid stance and excessive focus on pricing and profitability, led
to improved deal wins and revenue growth over the past two quarters. We have factored in
13.1%/15.5% US dollar revenue growth for FY14E/FY15E, respectively. NRNs efforts on cost
rationalisation could also prove to be another margin lever for Infosys apart from revenue
growth and higher employee utilisation rate. Consistently weak rupee is also proving to be a
bonus, which could lead margins to rise above our estimate. We forecast ~120bps YoY margin
expansion in FY15E and expect a healthy 18% EPS CAGR over FY13-FY15E.
Renewed focus on BOS segment is a positive: Infosys renewed focus on its key BOS
segment, which accounts for over 61% of revenue, is another factor likely to boost revenue
growth. The BOS segment clocked just 2.2% US dollar revenue CQGR over 4QFY11-4QFY13
and was primarily responsible for poor overall revenue CQGR of 2.4% posted over the same
period. Excluding IMS, BOS revenue CQGR was even lower, at 2%. While CSI posted a
higher 2.8% CQGR, it was not enough to offset the slow growth in BOS. An encouraging factor
is the 4.4% BOS revenue growth in 2QFY14, above the company average of 3.8% QoQ, a
sign that the IT major is re-focusing on its bread-and-butter business. We believe this is a key
factor that will enable Infosys to continue to post stronger revenue growth going forward.
Retain Buy rating on Infosys: We expect Infosys improved revenue growth trajectory of
better-than-industry growth, along with improved margin profile, to drive a healthy 18% EPS
CAGR over FY13-FY15E. Strong demand environment and a weak rupee are twin positives.
Our FY15E EPS is 9% above Bloomberg consensus estimates. We retain our Buy rating
on Infosys with a target price of Rs4,030, implying a P/E ratio of 17.5x FY15E EPS.

BUY
CMP: Rs3,300
Upside: 22%
Harit Shah
+91-22-3926 8068
Key Data

Current Shares O/S (mn) 572.2
Mkt Cap (Rsbn/US$bn)
1,904.3/30.5
52 Wk H / L (Rs) 3,448/2,186

Promoter 16.0 16.0 15.9
FII 54.1 53.3 56.3
DII 17.5 18.3 16.2



1 M 6 M 1 Yr
Infosys (0.5) 39.8 34.2
Nifty Index (1.4) (0.4) 5.8
Source: Bloomberg

Revenues 275,010 337,340 403,520 509,080 575,181
YoY (%) 20.9 22.7 19.6 26.2 13.0
EBITDA 89,640 107,160 115,580 135,591 160,040
EBITDA (%) 32.6 31.8 28.6 26.6 27.8
Adj. PAT 68,230 83,160 94,210 107,772 131,544
YoY (%) 9.7 21.9 13.3 14.4 22.1
FDEPS (Rs) 119.4 145.5 164.9 188.6 230.2
RoE (%) 27.1 27.4 25.7 24.7 25.3
RoCE (%) 23.1 22.9 21.0 20.6 20.4
P/E (x) 27.6 22.7 20.0 17.5 14.3
EV/EBITDA (x) 19.3 15.7 14.3 11.9 9.7

60
80
100
120
140
160
INFOSYS LTD NSE CNX NIFTY INDEX
28 November 2013

Infosys
24
Financials
Net sales 275,010 337,340 403,520 509,080 575,181
% growth 20.9 22.7 19.6 26.2 13.0
Personnel costs 148,560 183,400 225,660 298,389 332,437
SG&A and other costs 36,810 46,780 62,280 75,100 82,704
EBITDA 89,640 107,160 115,580 135,591 160,040
% growth 14.2 19.5 7.9 17.3 18.0
EBITDA margin (%) 32.6 31.8 28.6 26.6 27.8
Other income 12,110 19,040 23,590 27,722 34,578
Gross profit 101,750 126,200 139,170 163,312 194,618
% growth 15.1 24.0 10.3 17.3 19.2
% growth 17.9 25.4 9.5 17.2 20.2
Tax 24,900 33,670 33,670 39,971 48,653
Profit after tax 68,230 83,160 94,210 109,962 131,544
% growth 9.7 21.9 13.3 16.7 19.6
Extraordinary items - - - (2,190) -
% growth 9.7 21.9 13.3 14.4 22.1
EPS (Rs) 119.4 145.5 164.9 188.6 230.2
% growth 9.7 21.9 13.3 14.4 22.1
Equity capital 2,860 2,860 2,860 2,860 2,860
Reserves 238,260 298,160 361,140 437,389 530,456
Share premium 30,820 30,890 30,900 30,900 30,900
Other components of equity 1,090 2,700 3,070 3,070 3,070
Net worth 273,030 334,610 397,970 474,219 567,286
Gross block 94,010 109,030 130,910 153,819 176,826
Depreciation 45,570 54,940 66,230 79,609 94,029
Net block 48,440 54,090 64,680 74,210 82,797
Investments 1,670 3,890 21,330 21,330 21,330
Debtors 46,530 58,820 70,830 97,632 118,188
Current liabilities 25,960 30,810 41,300 51,743 57,664
Provisions 10,450 16,850 21,560 24,959 29,605
Total assets 276,220 335,820 400,650 476,899 569,966
EBIT 81,020 97,790 104,290 122,212 145,620
(Inc.)/dec. in working capital (14,280) (12,870) (23,380) (23,478) (22,396)
Other income 12,110 19,040 23,590 27,722 34,578
Tax paid (28,460) (31,170) (32,910) (39,971) (48,653)
Dividends paid (36,640) (23,270) (31,230) (31,523) (38,477)
(Inc.)/dec. in investments 35,580 (3,560) (14,990) - -
Equity issue/(buyback) 240 60 10 - -
Cash from financial activities 35,820 (3,500) (14,980) - -
Others 520 1,170 8,210 (2,190) -
Opening cash 121,110 166,660 205,910 218,320 261,561
Closing cash 166,660 205,910 218,320 261,561 323,645
Change in cash 45,550 39,250 12,410 43,241 62,084

Return ratios
RoE (%) 27.1 27.4 25.7 24.7 25.3
RoCE (%) 23.1 22.9 21.0 20.6 20.4
Operating ratios
Personnel costs/sales (%) 54.0 54.4 55.9 58.6 57.8
Revenue growth (%) 20.9 22.7 19.6 26.2 13.0
EBITDA margin (%) 32.6 31.8 28.6 26.6 27.8
EBITDA growth (%) 14.2 19.5 7.9 17.3 18.0
Blended pricing growth (%) 1.8 4.8 (2.9) 0.9 0.9
RPE (Rsmn) 2.25 2.40 2.63 3.16 3.25
RPE (US$ '000) 49.40 49.81 48.25 51.90 54.64
Valuation ratios
PER (x) 27.6 22.7 20.0 17.5 14.3
P/BV (x) 6.9 5.6 4.7 4.0 3.3
Price/sales (x) 6.9 5.6 4.7 3.7 3.3
EV/EBITDA (x) 19.3 15.7 14.3 11.9 9.7
Dividend payout (%) 46.0 24.1 28.5 25.0 25.0

Infosys
25
Rating track
Date Rating Market price Target price (Rs)
2 June 2011 Hold 2,812 2,900
1 July 2011 Sell 2,907 2,900
12 July 2011 Hold 2,794 2,875
12 August 2011 Sell 2,374 2,298
23 September 2011 Sell 2,354 2,338
30 September 2011 Sell 2,550 2,354
12 October 2011 Sell 2,681 2,378
23 November 2011 Hold 2,651 2,746
21 December 2011 Hold 2,667 2,755
2 January 2012 Buy 2,765 3,210
12 January 2012 Buy 2,588 3,125
30 March 2012 Hold 2,791 3,125
13 April 2012 Hold 2,403 2,438
17 May 2012 Hold 2,371 2,464
29 June 2012 Hold 2,472 2,473
12 July 2012 Sell 2,265 2,129
10 September 2012 Sell 2,493 2,323
4 October 2012 Sell 2,579 2,363
12 October 2012 Sell 2,396 2,120
7 January 2013 Sell 2,350 2,120
11 January 2013 Sell 2,713 2,310
9 April 2013 Sell 2,833 2,685
12 April 2013 Sell 2,295 2,084
28 May 2013 Sell 2,364 2,084
3 June 2013 Sell 2,412 2,084
9 July 2013 Sell 2,468 2,400
12 July 2013 Hold 2,804 2,860
7 October 2013 Hold 3,015 3,230
11 October 2013 Buy 3,274 4,030


26




C
o
m
p
a
n
y

U
p
d
a
t
e

Reuters: HCLT.BO; Bloomberg: HCLT IN
HCL Technologies
Consistency On Revenue Growth Front, Margin Expansion Heartening
HCL Technologies (HCLT) consistent revenue growth (3% US dollar revenue CQGR
over 1QFY12-1QFY14) and strong deal wins over the past one year (US$4bn, 85% of
FY13 revenue) drive confidence in its ability to sustain healthy growth in FY14/FY15. Its
focus on revenue productivity, operational efficiency and employee utilisation drove
EBITDA margin to an all-time high in 1QFY14, with revenue and profit/employee also at
all-time high levels. We like HCLTs industry-high revenue productivity and believe it is
a key lever for sustenance of margins in the face of structural cost headwinds. In our
view, EBITDA margin has moved to a higher trajectory and the gap with peers reduced
significantly. With greater scale and industry-high revenue productivity, we expect the
IT major to be able to maintain margins in the range of 24%-25% in FY14E/FY15E.
Higher margins led RoE to an all-time high in FY13; we expect over 30% RoE in
FY14E/FY15E. Valuation, at 11.5x FY15E EPS is also reasonable, in the wake of a strong
26% EPS CAGR over FY13-FY15E. We have retained our Buy rating on HCLT with a
target price of Rs1,380, implying a P/E multiple of 15x FY15E EPS.
Consistency in revenue growth heartening, deal wins provide good visibility: HCLTs
consistent revenue growth (3% US dollar revenue CQGR over 1QFY12-1QFY14) as well as
strong deal wins (US$4bn over the past one year, 85% of FY13 revenue) drive confidence in
the IT majors ability to sustain revenue growth in FY14/FY15. It was the infrastructure
management services (IMS) business that led overall revenue growth, with the segment
clocking an excellent 6.9% CQGR over the period, accounting for as much as 65% of HCLTs
incremental revenue. HCLTs IMS business is the largest among all top-tier IT companies. As
regards profitability, the IT majors focus on revenue productivity, operational efficiency and
employee utilisation drove EBITDA margin to an all-time high in 1QFY14, with revenue and
profit/employee also at an all-time high levels. We like HCLTs industry-high revenue
productivity and believe it is a key lever for sustenance of margins in the face of structural cost
headwinds. In our view, EBITDA margin has moved to a higher trajectory and the gap with
peers has declined significantly. With greater scale and industry-high revenue productivity, we
expect the IT major to be able to maintain margins in the 24%-25% range for FY14E/FY15E.
Higher margins led RoE to an all-time high in FY13; we expect over 30% RoE in
FY14E/FY15E. HCLTs RoE is higher compared to both Infosys and Wipro.
Healthy revenue growth, margin sustenance to drive a healthy 26% EPS CAGR: We
expect the IMS business to continue to drive strong revenue growth for HCLT and also expect
a steady improvement in software services growth. This, along with higher margins, should
drive a healthy 26% EPS CAGR over FY13-FY15E.
Retain Buy rating on the stock: We expect HCLT to maintain a healthy revenue growth
trajectory over FY13-FY15E, led by IMS. Strong deal wins provide good revenue visibility and
should also boost growth in the software services business, which has hitherto been an under-
performer over the past several quarters. Healthy revenue growth along with a positive margin
trajectory should drive a strong 26% EPS CAGR over FY13-FY15E. The current valuation, at
11.5x FY15E EPS is reasonable in the wake of healthy earnings growth. We have
retained our Buy rating on HCLT with a target price of Rs1,380, implying a P/E multiple
of 15x FY15E EPS.

BUY
CMP: Rs1,057
Upside: 31%
Harit Shah
+91-22-3926 8068
Key Data

Mkt Cap (Rsbn/US$bn) 740.2/11.9
52 Wk H / L (Rs) 1,178/608

Promoter 62.0 61.9 61.8
FII 26.0 26.0 27.5
DII 6.6 6.5 5.7



1 M 6 M 1 Yr
HCL Tech. (1.8) 42.9 64.8
Nifty Index (1.4) (0.4) 5.8
Source: Bloomberg

Y/E June (Rsmn) FY11 FY12 FY13 FY14E FY15E
Revenue 160,342 210,312 257,337 325,982 375,487
YoY (%) 27.4 31.2 22.4 26.7 15.2
EBITDA 27,488 40,251 58,357 80,252 93,251
EBITDA (%) 17.1 19.1 22.7 24.6 24.8
Adj. PAT 17,095 25,260 40,989 54,879 64,853
YoY (%) 30.9 47.8 62.3 33.9 18.2
FDEPS (Rs) 24.3 35.8 58.2 77.9 92.0
RoE (%) 22.1 26.4 32.8 33.4 30.7
RoCE (%) 17.0 22.1 28.0 32.2 29.2
P/E (x) 43.6 29.5 18.2 13.6 11.5
EV/EBITDA (x) 26.4 18.0 11.8 8.3 6.7

60
80
100
120
140
160
180
200
HCL TECH LTD NSE CNX NIFTY INDEX
28 November 2013

HCL Technologies
28
Financials
Net sales 160,342 210,312 257,337 325,982 375,487
% growth 27.4 31.2 22.4 26.7 15.2
Cost of revenue 109,140 140,558 164,779 200,092 227,791
SG&A costs 23,714 29,503 34,201 45,637 54,446
EBITDA 27,488 40,251 58,357 80,252 93,251
% growth 6.6 46.4 45.0 37.5 16.2
EBITDA margin (%) 17.1 19.1 22.7 24.6 24.8
Other income 1,046 205 3,117 (573) 1,891
Financial expenses 1,608 1,374 1,546 869 681
Gross profit 26,926 39,082 59,928 78,810 94,461
% growth 31.4 45.1 53.3 31.5 19.9
Depreciation. & amortisation 4,976 5,641 6,725 8,380 9,055
% growth 41.9 52.4 59.1 32.4 21.3
Tax 4,854 8,180 12,216 15,494 20,497
Profit after tax 17,096 25,261 40,987 54,935 64,909
% growth 30.9 47.8 62.3 34.0 18.2
MI and share of equity investment (1) (1) 2 (56) (56)
% growth 30.9 47.8 62.3 33.9 18.2
EPS (Rs) 24.3 35.8 58.2 77.9 92.0
% growth 30.9 47.8 62.3 33.9 18.2
Exhibit 3: Balance Sheet
Equity capital 1,367 1,382 1,390 1,390 1,390
Reserves 82,978 105,932 141,555 184,241 236,087
Net worth 84,345 107,314 142,945 185,630 237,477
Short-term loans 188 4,089 4,089 4,089 4,089
Long-term loans 21,240 19,222 6,960 4,176 2,784
Total loans 21,428 23,311 11,049 8,265 6,873
Gross block 49,583 57,834 67,067 76,846 88,111
Depreciation 27,418 33,059 39,784 47,468 55,839
Net block 22,165 24,775 27,283 29,378 32,272
Investments 9,206 8,405 6,914 6,914 6,914
Debtors (incl. unbilled revenue) 34,065 53,440 61,767 84,845 97,730
Current liabilities & provisions 33,575 45,305 61,334 64,964 76,671
Total assets 112,660 143,971 169,145 209,046 259,501
EBIT 22,512 34,610 51,632 71,872 84,196
(Inc.)/dec. in working capital 1,858 (5,446) 3,409 (19,445) (1,175)
Other income 1,046 205 3,117 (573) 1,891
Financial expenses (1,608) (1,374) (1,546) (869) (681)
Tax paid (4,854) (8,180) (12,216) (15,494) (20,497)
Dividends paid (5,998) (9,702) (9,755) (12,193) (13,006)
Inc./(dec.) in short-term borrowing (3,591) 3,900 0 0 0
Inc./(dec.) in long-term borrowing (5,891) 4,441 (10,457) (2,784) (1,392)
Inc./(dec.) in borrowings (9,482) 8,341 (10,457) (2,784) (1,392)
(Inc.)/dec. in investments (850) (7,823) (2,412) 0 0
Equity issue/(buyback) 20 15 8 0 0
Cash from financial activities (10,312) 533 (12,861) (2,784) (1,392)
Others 912 (4,031) 4,213 (58) (58)
Opening cash 16,599 15,983 19,988 43,473 61,832
Closing cash 15,983 19,988 43,473 61,832 108,214
Change in cash (616) 4,005 23,485 18,359 46,382

Y/E June FY11 FY12 FY13 FY14E FY15E
Return ratios
RoE (%) 22.1 26.4 32.8 33.4 30.7
RoCE (%) 17.0 22.1 28.0 32.2 29.2
Operating ratios
Cost of sales/sales (%) 68.1 66.8 64.0 61.4 60.7
Revenue growth (%) 27.4 31.2 22.4 26.7 15.2
EBITDA margin (%) 17.1 19.1 22.7 24.6 24.8
EBITDA growth (%) 6.6 46.4 45.0 37.5 16.2
RPE (Rsmn) 2.26 2.61 3.03 3.71 4.06
RPE (US$ '000) 50.07 51.46 55.19 61.40 68.22
Valuation ratios
PER (x) 43.6 29.5 18.2 13.6 11.5
P/BV (x) 8.8 6.9 5.2 4.0 3.1
Price/sales (x) 4.5 3.5 2.8 2.2 1.9
EV/EBITDA (x) 26.4 18.0 11.8 8.3 6.7
Dividend payout (%) 30.0 32.8 20.3 19.0 17.1

HCL Technologies
29
Rating track
2 June 2011 Buy 514 620
1 July 2011 Buy 493 620
28 July 2011 Buy 504 603
12 August 2011 Sell 408 381
23 September 2011 Hold 382 394
30 September 2011 Sell 410 394
23 November 2011 Hold 386 437
2 January 2012 Buy 388 504
17 January 2012 Buy 425 504
30 March 2012 Hold 478 504
18 April 2012 Hold 496 515
29 June 2012 Hold 461 515
25 July 2012 Buy 514 600
4 October 2012 Hold 590 600
17 October 2012 Hold 580 647
7 January 2013 Hold 634 647
18 January 2013 Hold 703 840
9 April 2013 Hold 745 840
17 April 2013 Hold 751 840
9 July 2013 Buy 819 960
1 August 2013 Buy 938 1,107
7 October 2013 Buy 1,096 1,263
18 October 2013 Buy 1,083 1,380


30




C
o
m
p
a
n
y

U
p
d
a
t
e

Reuters: WIPR.BO; Bloomberg: WPRO IN
Wipro
Stock Surge Rapid, Revenue Growth To Continue To Lag Peers
Wipros stock price surged 25% over the past four months, aided by expectations of an
improving revenue growth trajectory amid a strengthening demand environment. We
believe the IT major will remain a laggard in terms of growth versus peers, and have
factored in a 9% US dollar revenue CAGR over FY13-FY15E, well below the 17% CAGR
we have factored in for TCS and a 14% CAGR for Infosys. Wipro discontinuing its
practice of disclosing volume and billing rate data in its quarterly metrics could also
prevent a P/E multiple re-rating, given the worsening disclosure quality and lack of
alternatives provided in order to assess its business. While a weak rupee will support
financials, we do not believe this is a reason to give a higher P/E multiple to the stock.
Owing only to the stock decline after 2QFY14 results, we have upgraded Wipro to Hold
from Sell with an unchanged TP of Rs483, implying a P/E multiple of 14x FY15E EPS.
Stock surge rapid, revenue growth to continue to lag peers: Wipros stock price surged
25% over the past four months, led by expectations of improving revenue growth trajectory in
a strengthening demand environment. In our view, Wipros US dollar revenue growth trajectory
will continue to lag its peers. We have factored in a 9% US dollar revenue CAGR over FY13-
FY15E, well below the 17% CAGR we have factored in for TCS and a 14% CAGR we factor in
for Infosys. While Wipros revenue growth trajectory improved in 2QFY14 (2.7% QoQ US
dollar revenue growth versus 1.5% CQGR over the previous eight quarters), we would not like
to take just one quarter as a trend. Another negative was the fact that growth was not
particularly broad-based, like TCS revenue growth has been. From a vertical perspective, it
was healthcare and life sciences that grew at a healthy 5.8% QoQ. However, the only other
vertical that grew above company average was global media and telecom (4.8% QoQ), which
has been an inconsistent performer and as an industry, continues to struggle, thus leading to
doubts regarding sustainability of this growth. Thus, we believe Wipro will continue to under-
perform its peers on revenue growth and expect the polarisation in performance to sustain.
No more billing rate, pricing data is a negative: Wipro discontinuing disclosure of volume
and pricing data in quarterly metrics could prevent P/E multiple re-rating, given the worsening
disclosure quality and lack of alternatives provided in order to assess its business. While even
HCLT does not provide these details, the IT major has been able to post considerably better
growth than Wipro led by its IMS business, while Wipros growth continues to lag those of its
peers. We would appreciate if the IT major provided some alternative operating metrics to
assess its business, such as some metrics on non-linearity, deal wins, vertical-wise break-up
of deal wins and possibly give at least some directional colour on volume and pricing.
Upgrade to Hold only owing to stock price decline: We expect Wipro to continue to
underperform its peers in terms of US dollar revenue growth trajectory, going forward. The
lack of broad-based growth is a concern, in our view, and makes it difficult to extrapolate
improved revenue growth in 2QFY14 ahead through the rest of FY14 and FY15. Lack of
volume and pricing data also implies poor disclosure quality compared with peers and this is a
factor that could prevent a re-rating of the stock. While a weak rupee will support financials, we
do not believe this is a reason to give a higher P/E multiple to the stock. Owing only to the
stock price decline post 2QFY14 results, we have upgraded Wipro to Hold from Sell
with an unchanged target price of Rs483, implying a P/E multiple of 14x FY15E EPS.

HOLD
CMP: Rs470
Target Price: Rs483
Upside: 3%
Harit Shah
+91-22-3926 8068
Key Data

Mkt Cap (Rsbn/US$bn) 1,170.8/18.8
52 Wk H / L (Rs) 520/315

Share holding (%) 4QFY13 1QFY14 2QFY14
Promoter 73.6 73.5 73.5
FII 10.6 10.3 11.8
DII 4.2 4.6 4.7



1 M 6 M 1 Yr
Wipro (1.3) 39.6 40.5
Nifty Index (1.4) (0.4) 5.8
Source: Bloomberg

Revenue 310,542 318,747 374,256 440,556 484,307
YoY (%) 14.2 2.6 17.4 17.7 9.9
EBITDA 65,433 65,803 77,259 95,541 105,516
EBITDA (%) 21.1 20.6 20.6 21.7 21.8
Adj. PAT 52,976 52,325 61,362 76,390 84,764
YoY (%) 15.3 (1.2) 17.3 24.5 11.0
FDEPS (Rs) 21.5 21.3 25.0 31.1 34.5
RoE (%) 24.3 21.2 23.3 24.5 22.9
RoCE (%) 17.5 14.3 15.3 17.5 16.8
P/E (x) 21.8 22.1 18.8 15.1 13.6
EV/EBITDA (x) 16.3 16.1 13.0 10.3 8.9

80
90
100
110
120
130
140
150
160
WIPRO LTD NSE CNX NIFTY INDEX
28 November 2013

Wipro
32
Financials
Net sales 310,542 318,747 374,256 440,556 484,307
% growth 14.2 2.6 17.4 17.7 9.9
EBITDA 65,433 65,803 77,259 95,541 105,516
% growth 8.9 0.6 17.4 23.7 10.4
EBITDA margin (%) 21.1 20.6 20.6 21.7 21.8
Other income 7,097 12,310 13,943 16,534 18,453
Financial expenses 1,933 3,371 2,693 2,467 2,466
Gross profit 70,597 74,742 88,509 109,607 121,504
% growth 12.6 5.9 18.4 23.8 10.9
% growth 13.7 5.0 20.0 26.1 11.7
Tax 9,714 12,955 16,912 22,300 25,458
Profit after tax 52,672 52,568 61,684 76,810 85,229
% growth 15.5 (0.2) 17.3 24.5 11.0
Min. int. & share of associate cos. 304 (257) (337) (420) (466)
% growth 15.3 (1.3) 17.3 24.5 11.0
Net profit from continuing ops. 52,976 52,325 61,362 76,390 84,764
% growth 15.3 (1.2) 17.3 24.5 11.0
EPS (Rs) 21.5 21.3 25.0 31.1 34.5
% growth 15.3 (1.2) 17.3 24.5 11.0
Equity capital 4,908 4,917 4,926 4,926 4,926
Reserves 203,250 241,912 259,178 315,459 375,429
Share premium 30,124 30,457 11,760 11,760 11,760
Other components of equity 1,398 8,028 7,948 7,948 7,948
Net worth 239,680 285,314 283,812 340,093 400,063
Minority interest 691 849 1,171 751 286
Deferred tax liability 301 353 846 846 846
Short-term loans 33,043 36,448 62,962 62,962 62,962
Long-term loans 19,759 22,510 854 683 512
Total loans 52,802 58,958 63,816 63,645 63,474
Goodwill 54,818 67,937 54,756 54,756 54,756
Gross block 101,802 115,195 107,621 116,432 126,118
Depreciation 46,708 56,207 57,096 67,593 78,410
Net block 55,094 58,988 50,525 48,839 47,709
Investments 49,282 41,961 69,171 69,171 69,171
Deferred tax asset 1,467 2,597 4,235 4,235 4,235
Debtors 61,627 80,328 76,635 96,560 112,784
Current liabilities 65,251 80,116 80,604 82,477 91,063
Provisions 2,324 1,121 1,174 1,364 1,497
Total assets 303,868 354,764 357,952 413,642 472,976
EBIT 57,222 56,584 67,346 85,044 94,699
(Inc.)/dec. in working capital (22,256) (19,482) 2,822 (37,412) (19,624)
Other income 6,652 8,982 11,317 13,908 15,827
Financial expenses (1,933) (3,371) (2,693) (2,467) (2,466)
Tax paid (9,714) (12,955) (16,912) (22,300) (25,458)
Dividends paid (15,585) (9,219) (9,065) (17,188) (21,191)
Inc./(dec.) in long-term borrowing 1,652 (190) 10,350 (171) (171)
Inc./(dec.) in borrowings 1,652 (190) 10,350 (171) (171)
(Inc.)/dec. in investments (20,882) 7,378 (44,683) - -
Equity issue/(buyback) 1,972 183 (4,602) - -
Cash from financial activities (17,258) 7,371 (38,935) (171) (171)
Others (1,226) 293 (2,931) 407 (366)
Opening cash 64,878 61,141 77,666 84,838 106,344
Closing cash 61,141 77,666 84,838 106,344 148,726
Change in cash (3,737) 16,525 7,172 21,506 42,381

Return ratios
RoE (%) 24.3 21.2 23.3 24.5 22.9
RoCE (%) 17.5 14.3 15.3 17.5 16.8
Operating ratios
Revenue growth (%) 14.2 2.6 17.4 17.7 9.9
EBITDA margins (%) 21.1 20.6 20.6 21.7 21.8
EBITDA growth (%) 8.9 0.6 17.4 23.7 10.4
Net profit growth (%) 15.3 (1.3) 17.3 24.5 11.0
Blended pricing growth (%) 1.7 3.2 1.7 0.5 0.8
RPE (Rsmn) 2.04 2.20 2.40 2.69 2.78
RPE (US$ '000) 45.31 45.85 44.14 44.48 46.81
Valuation ratios
PER (x) 21.8 22.1 18.8 15.1 13.6
P/BV (x) 4.8 4.0 4.1 3.4 2.9
Price/sales (x) 3.7 3.6 3.1 2.6 2.4
EV/EBITDA (x) 16.3 16.1 13.0 10.3 8.9
Dividend payout (%) 25.1 26.4 22.0 22.5 25.0

Wipro
33
Rating track
2 June 2011 Hold 448 474
1 July 2011 Hold 418 474
20 July 2011 Hold 399 450
12 August 2011 Sell 343 335
23 September 2011 Hold 341 345
30 September 2011 Sell 348 345
31 October 2011 Sell 366 345
20 January 2012 Hold 414 438
30 March 2012 Hold 435 438
25 April 2012 Sell 410 392
29 June 2012 Sell 399 392
24 July 2012 Sell 346 321
4 October 2012 Sell 381 321
18 January 2013 Hold 397 400
9 April 2013 Sell 448 400
22 April 2013 Sell 369 352
9 July 2013 Hold 356 400
29 July 2013 Hold 383 410
7 October 2013 Sell 483 468
23 October 2013 Sell 515 483


34
Disclaimer
Stock Ratings Absolute Returns
BUY > 15%
HOLD 0-15%
SELL < 0%
This report is published by Nirmal Bangs Institutional Equities Research desk. Nirmal Bang has other business units with independent research teams separated by
Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised
recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information
for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities.

We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical
information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be
subject to change from time to time without notice.

Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of
this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons
including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s
from any inadvertent error in the information contained, views and opinions expressed in this publication.

Access our reports on Bloomberg Type NBIE <GO>

Team Details:

Name Email Id Direct Line

Rahul Arora CEO rahul.arora@nirmalbang.com +91 22 3926 8098 / 99

Hemindra Hazari Head of Research hemindra.hazari@nirmalbang.com +91 22 3926 8017 / 18

Sales and Dealing:

Neha Grover AVP Sales neha.grover@nirmalbang.com +91 22 3926 8093

Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com +91 22 3926 8230, +91 22 6636 8833

Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com +91 22 3926 8100/8101, +91 22 6636 8831

Michael Pillai Dealing Desk michael.pillai@nirmalbang.com +91 22 3926 8102/8103, +91 22 6636 8830

Umesh Bharadia Dealing Desk umesh.bharadia@nirmalbang.com +91-22-39268226

Nirmal Bang Equities Pvt. Ltd.
Correspondence Address
B-2, 301/302, Marathon Innova,
Nr. Peninsula Corporate Park
Lower Parel (W), Mumbai-400013.
Board No. : 91 22 3926 8000/1
Fax. : 022 3926 8010

Information Technology: of Non-Linearity, Scale and Profitability

Încărcat de

Informații document

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Information Technology: of Non-Linearity, Scale and Profitability

Încărcat de

Drepturi de autor:

Formate disponibile

Please refer to the disclaimer towards the end of the document.

S-ar putea să vă placă și