Sector Update midcap final 123 - Spark Capital

Midcap re- rating is here to stayMid-cap valuations have improved over the last 12 months on the back of predictable performance and inlineindustry revenue growth. The PE discount to sector leader (TCS) has reduced from ~50%-60% to 40%-50%discount. We expect this re rating in P/E range would sustain as mid-caps revenue growth would be broadlyinline with industry with a possibility of few companies outperforming the industry in the coming years. In thisnote, we relook at mid-caps under our coverage and also initiate coverage on KPIT Technologies, NIITTechnologies and Polaris. Our analysis suggests that the strategies of mid-cap companies are convergingaround: i) Focus on select vertical/ micro vertical with deep domain knowledge ii) Improve sales effectiveness toincrease client mining and add “must have accounts” and iii) Work closely with third party advisors such as ISG,Everest etc. Though strategies are similar, firms are various phases of execution with Mindtree leading the pack.We prefer to give a higher P/E multiple to firms which are already showing strong performance and a slightdiscount to other mid cap firms. Our preferred mid-cap picks are Cyient, NIIT Tech and Polaris given favourablerisk-reward.

US$ revenue growth rates are converging: Across the industry, we are seeing convergence in revenue growthexpectations in FY15/FY16E. Though companies such as TCS and Mindtree would continue to outperform the industrygrowth the gap between them and others are narrowing. This trend in our view is owing to similarity in strategies, good

Date July 1st , 2014

Market Data

SENSEX 25414

Nifty 7611

CNX IT 9912

Relative performance

Sector outlook

Sector UpdatePositive

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Stock performance (%)

1m 3m 12m

CNXIT 10.5 6.6 49.4

Sensex 4.9 13.5 31.0

growth the gap between them and others are narrowing. This trend in our view is owing to similarity in strategies, gooddemand environment especially in “Run the Business” offerings such as application and infrastructure outsourcing andthe increasing role of third party advisors in vendor selection. First time offshoring companies, especially in ContinentalEurope, are taking the services of third party advisors. These advisors with their strong understanding of vendor deliverycapabilities and cost structure understanding are playing a crucial role in contract negotiation.

Initiate coverage on KPIT, NIIT Tech and reinitiate on Polaris:

We like KPIT’s focused approach in its chosen vertical especially Auto and Manufacturing. However given our concernson the broader professional services market around enterprise applications such as SAP and Oracle we believe KPIT’sgrowth could be below industry growth on an organic basis. Initiate with a Reduce rating with TP of Rs. 170.

NIIT Tech recent reorganization and renewed Go-To-Market strategy would result in improved revenue growth from keytarget markets. Further improvement in margins and DSO would result in a sharp increase in cash generation, whichcould drive stock returns. Initiate with a Buy rating and TP of Rs. 520

The demerger of Polaris products business into a separate listed entity would unlock as the services business profitabilitywould not be impacted by that of products. We expect the services business to lag industry growth owing torevenue mix. Products business would have better growth in FY15/16E. Initiate with a Buy rating and TP of Rs.280

Find Spark research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset

Srivathsan Ramachandran, [email protected]+91 44 4344 0039

Aishwariya [email protected]+91 44 4344 0040

-20%

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Sensex Index CNXIT Index

Company FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E

eClerx 8,410 9,387 10,349 3,535 3,651 3,672 83.7 88.5 90.0

Firstsource 31,059 33,188 36,691 3,621 4,266 5,038 2.8 4.0 5.3

HCL Tech*** 329,062 359,665 397,069 86,544 90,208 97,740 88.3 95.7 105.7

Hexaware** 24,101 26,029 29,029 4,957 5,312 5,945 12.2 13.7 15.5

Infosys 501,330 544,194 591,850 134,150 149,431 161,166 186.3 207.1 222.4

Infotech 22,064 26,112 28,648 4,101 4,713 5,092 23.9 31.9 35.6

Mindtree 30,316 34,942 38,801 6,100 6,902 7,534 53.8 58.4 61.4

Sales (Rs. Mn) EBITDA (Rs. Mn) EPS

Company financials Sector outlook Positive

Sector Update

2

Mindtree 30,316 34,942 38,801 6,100 6,902 7,534 53.8 58.4 61.4

MphasiS* 26,326 62,241 64,530 4,483 10,758 11,362 14.4 39.3 40.7

Persistent 16,692 18,974 21,402 4,199 4,718 5,119 62.3 76.7 87.5

TCS 818,094 952,165 1,077,977 251,322 273,464 300,280 97.6 108.3 121.5

Tech Mahindra 186,581 212,353 236,323 40,104 45,133 48,261 118.7 147.1 162.1

Wipro 437,118 469,395 506,990 99,948 113,558 121,134 31.7 36.1 39.0

NIIT Tech 23,294 24,557 26,973 3,760 3,920 4,474 37.9 43.9 51.8

KPIT 26,940 29,770 32,361 4,233 4,818 5,255 12.5 15.4 17.6

Polaris 24,991 26,173 27,362 3,497 3,461 3,467 20.0 24.4 24.7

*Mphasis has 5 months FY14, *** June year end, ** December year end, NIIT Tech Revenues and EBITDA are adjusted for forex losses

P/E EV/EBITDA EV/Sales

Company CMP TP Rating FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E

eClerx 1,160 900 Sell 13.9 13.1 12.9 10.7 10.6 10.8 4.5 4.1 3.8

Firstsource 41 36 Buy 14.5 10.4 7.7 10.3 8.2 6.4 1.2 1.1 0.9

HCL Tech 1,500 1,400 Reduce 17.0 15.7 14.2 11.7 10.8 9.5 3.1 2.7 2.3

Hexaware** 158 150 Reduce 12.5 13.0 11.5 8.0 8.7 7.9 1.8 1.8 1.6

Infosys 3,255 3,900 Buy 17.5 15.7 14.6 12.2 10.7 9.5 3.3 2.9 2.6

Cyient 353 390 Add 14.8 11.1 9.9 8.2 6.8 6.2 1.5 1.2 1.1

Mindtree 881 680 Sell 16.4 15.1 14.4 11.2 9.8 8.9 2.3 1.9 1.7

Mphasis* 426 360 Reduce 29.6 10.8 10.5 15.7 6.7 6.0 2.7 1.2 1.1

Valuation of IT coverage universe Sector outlook Positive

Sector Update

3

Mphasis* 426 360 Reduce 29.6 10.8 10.5 15.7 6.7 6.0 2.7 1.2 1.1

Persistent 1,081 970 Sell 17.3 14.1 12.4 9.2 7.8 6.9 2.3 1.9 1.6

TCS 2,425 2,430 Add 24.8 22.4 20.0 18.4 16.7 14.8 5.7 4.8 4.1

Tech Mahindra 2,152 2,270 Buy 18.1 14.6 13.3 12.1 10.6 9.6 2.6 2.2 2.0

Wipro 546 580 Add 17.2 15.1 14.0 12.6 10.9 9.8 2.9 2.6 2.3

NIIT Tech 443 520 Buy 11.7 10.1 8.5 6.6 6.3 5.5 1.1 1.0 0.9

KPIT 172 170 Reduce 13.8 11.2 9.8 7.9 7.3 6.3 1.2 1.2 1.0

Polaris 210 280 Buy 10.5 8.6 8.5 5.0 4.3 4.0 0.7 0.6 0.5

Source: Spark Capital, Mphasis has 5 months FY14, *** June year end, ** December year end,Note: We have increased the PE multiple for Mindtree , Cyient & Persistent to 11x and TechM to 14x from 10x and 13x previously

0%

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40%

45%

50%

FY11 FY12 FY13 FY14 FY15E FY16E

TCS Infosys Wipro HCLT Tech Mahindra Mindtree Hexaware NIIT Tech Persistent Cyient eClerx KPIT

US$ revenues growth range across the entire sector have narrowed to a limited band when compared to history

Source: Company, Spark Capital Research, includes acquisitions, TechM growth is available from FY14 with Satyam consolidation

Revenue growth convergence

US$ revenues growth across companies is expected to converge Sector outlook Positive

Sector Update

Revenue growth outlook are narrowing across companies in the sector

• FY15E US$ revenue growth is expected to be a better than FY14 for the entire sector led by US recovery, pocket of improvement in discretionaryspending, increased acceptance of offshoring in Continental Europe and improving demand for SMAC offerings

• In Mar-14 quarter, US was weak for most companies owing to extreme climates. Retail sales in last two months and Accenture results suggest bounceback in US economy. Additionally, BFS spends are posed to increase with better economic growth and Telecom is also experiencing strong traction ledby increasing spends in Mobility and new network rollout.

• With increasing cost pressures and leniency in labour laws, Continental Europe has become more open to the concept of offshoring especially inGermany, Benelux and Scandinavian countries. Accounting for around ~36% of the total IT spending and contributing only 10% of the Indian IT exports,C.Europe is > US$ 225 bn opportunity. We believe FY15E Continental Europe growth would be better than US growth.

• Proliferation of SMAC over the last three years is making significant changes in the overall client spends. Most Indian IT vendors have been investingsignificant investments in this space either by building their own products and platforms or by entering strategic alliances with cloud based enterpriseswhich should bear fruits in the coming years.

• We believe US$ revenue growth for FY15E would be in range with industry growth expectations (12-14%) across our IT coverage universe with theexception of Infosys, Polaris, Hexaware, Mphasis and Wipro (due to company specific issues).

4

Source: Company, Spark Capital Research, includes acquisitions, TechM growth is available from FY14 with Satyam consolidation

2008 2009 2010 2011 2012 2013 2014

Hexaware

Mindtree

Cyient Limited

• Heavy focus on Top 10 accounts• Hired 16 sales guys from Tier1 to increase client

mining, paid upfront in large deals to build in RIMcapabilities

• Fresher hiring to cater to future pent up demand

•Top client issues• Downgrade of revenue & reduction in revenue pipeline

• Acquisition by Baring• Company undergoing transitoryphase , with complete overhaul of front end activities

• Kyocera Acquisition of US$ 6 was not only adrag on cash flows but MTCL wasn't able tomake revenues from designing any mobilehandsets. MTCL exited Kyocera in 2010 withhuge restructuring costs

• Subroto Bagchi took over as chairman• Specialisation in focus areas–Manufacturing & BFS verticals• Identifying strategic a/cs for deepclient mining

• Movement of PES as a vertical• Creating Global Sales teamfor hunting new logos

• Delineation of hunting & farming teams and separate BDMs

• Efforts continue to improvesales efforts by establishingcountry heads & improvingrelationships with third party consultants etc.

• Acquisition of Daxco & Wellscoto increase presence out side Aero

• Identifying key strategic a/cs and deep client mining

•Client specific issues led to flat growth

• Rechristened as Cyient• Realignment of sales by

Strategic initiatives taken by Mid cap companies over time Sector outlook Positive

Sector Update

5

Polaris

NIIT Tech

KPIT Cummins

Persistent

to increase presence out side Aero a/cs and deep client mining• Delineation of hunting & farming, separate BDMs

to flat growth • Realignment of sales by geo & delivery by service line• Global sales team• Softential acquisition

• Split between the product &service business to increasethe marketability of both

• Demerger & separate listingof product business• Management changes & increase in S&M spends

• Identifying 40 strategic a/cs &improving client mining• Taking ROOM to US & increase RIM in US thereby reducing India business• Increase BDM, delineation hunters & farmersand hiring third party consultants

•Identifying 50 strategic a/cs& improving client mining•Delineation hunters & farmers• Creating IBU for cross selling• Vertical based structure• Hired third party consultants

• Created IP as a service line •Increased focus on SMAC & created Platform services• 20% of revenues from IP

• Identifying strategic a/cs & separate BDMs• Focus from hi-tech to Enterprise

• Carved out products as separate entity - Accelerite

Expanded into Enterprise application with string of acquisitions from 2002-2014

Specialising in key focus verticals and building differentiation positioning

BFSI Manufacturing Retail & CPG Telecom E&U HealthcareTravel &

TransportationHi-tech Govt.

Tech Mahindra

Mindtree

Polaris

Hexaware

NIIT Tech

Persistent

Cyient Aero

KPIT Auto

- Strong presence

Mid caps increasing differentiation in key focus areas Sector outlook Positive

Sector Update

6

Source: Company, Spark Capital Research

Focus verticals CAGR growth with company CAGR growth

Source: Spark Capital Research, CAGR for 6 yrs except Hexaware 4 yrs ,KPIT & Cyient 3 yrs

Mid caps focus offerings and strong positioning points:

• Overtime, Mid caps have learned that sprinkled presence acrossverticals would not help them compete against large caps and havemade increased investments to strengthen their presence in keyverticals where - 1) they have strong client relationships and 2) couldposition themselves with niche offerings.

• Eg. TechM has been making investments in managed services, whereno Indian IT vendor has significant presence. The KPN deal is alandmark managed services deal and TechM has successfullycompleted the phase one of the project.

• Analysing focus vertical CAGR with company CAGR, most of the midcaps have been successful with their strategy especially Mindtree,Hexaware and KPIT.

Fin

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Health

care

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nsport

Infr

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Auto

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Mindtree Hexaware NIIT Tech Persistent KPIT Cyient

Vertical CAGR Company CAGR

Top 10 client mining has led to revenue growth across Mid caps:

Started by Hexaware in 2009, identification of top 10 – 20 strategicaccounts and mining those accounts have led to revenue growth acrossall mid caps. Today, the early birds – Hexaware and Mindtree – haveextended the same to their top 30-50 clients while the laggards (KPIT,Polaris & NIIT Tech) are making huge investments to move up the curvein a short span of time.

Other strategic initiatives undertaken include:

1. Delineation of hunting and farming activities. Incentivising andchanging variable pay structures for both.

2. Establishing separate BDMs for key accounts

3. Realignment of sales by verticals/ geographies than service lines

Growth in the Top 10 clients has led to superior revenue growth

Source: Company, Spark Capital Research, CAGR – 6 yrs except Hexaware (4 yrs)

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Mindtree Hexaware NIIT Tech Persistent Cyient

Top 5 clients 5-10 clients Other clients Company CAGR

Sector outlook PositiveInvestments made in Sales & marketing

Sector Update

7

Source: Company, Spark Capital Research, CAGR – 6 yrs except Hexaware (4 yrs)

Improvement in client account size led by strong client mining


• Strong farming activities has improved client account sizes across allmid caps. Notable among them is Mindtree, which improved its > thanUS$ 10 mn and US$ 20 mn clients from 2 and none in FY09 to 13 and6 respectively in FY14.

• Most of mid caps are making sizeable investments in hiring seniorsales domain personnel from Tier 1 companies to improve their huntingand account mining capabilities. Eg. Mindtree hired Paul Gottesgenfrom Infosys as CMO and also doubled its hunting team in 18 months.

• NIIT Technologies and KPIT Technologies have delineated theirhunting and farming activities last year and established separatecountry sales heads for key geographies.

• Further mid-caps are creating investment funds to work on conceptproof to showcase and highlight their capabilities to their keycustomers

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2012 2014 2012 2014 2012 2014 2012 2014

Mindtree Hexaware NIIT Tech Cyient

$ 5 mn $ 10 mn $ 20 mn

ACV of outsourcing deals (IT + BPO) awarded across geographies from 2004 – 2013

Decline in deal size

Sector outlook PositiveDeal size reduction in outsourcing deals

Sector Update

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Asia/Pacific Europe Middle East & Africa North America South America

8

Source: Bloomberg, Spark Capital Research

Changes in the industry dynamics which are positive for mid caps:

• Having tasted outsourcing and affected by cost pressures, companies today across the world are more likely to go for more vendors rather than awardingthe entire IT infrastructure to one vendor which was the case 6-7 years back. This has led to break up of > US$ one bn dollar deals into small componentsmostly in the US$ 25 – US$ 50 mn or US$ 50 – US$ 100 mn range. For mid caps companies, which generally operate around sweet spot deal of US$ 20– 50 mn TCV, the reduction in deal size has been boon.

• With most of the large outsourcing contracts, which was awarded in 2004-2008,coming for renewal in the next few quarters, Mid caps are positioned wellto garner these rebid opportunities of approx. US$ 200 – US$ 300 bn (most of them in RIM & BPO space) over the next few years.

• Clients inspite of vendor consolidation want one or two mid-cap providers amongst the vendors to ensure price and service discipline from Tier-1 players.Further in select micro-verticals, mid-caps have built strong value proposition providing a strong case for mid-caps to have client mining and market share

• Today, with increasing vendor consolidation & number of first-time outsourcers, the role of a third party consultant like Gartner, IDC or ISG has becomevery crucial. Companies, especially in Continental Europe prefer to close deals with the help of a third party consultant rather than structuring the dealsthemselves. Last couple of years, most mid caps (Mindtree, KPIT, NIIT Tech) have hired or extended their relationships with third party consultants toenable them to be invited to these deals and highlight their value proposition.

Growth areas – RIM, BPO and Continental Europe:

• RIM has been the propeller of growth for Indian IT in the last few yearsled by number of the rebid deals having huge component of RIM. Firmsthat invested in RIM capabilities early-on, such as HCL Tech, TCS andMindtree have benefitted substantially from this growth

• BPO growth over the last few years have been disappointing for theentire sector barring TCS. We believe growth trajectory could improvein next two years with increase bundling with RIM.

• Continental Europe has become more open to the concept of offshoringespecially in Germany, Benelux and Scandinavian countries.Accounting for around ~36% of the total IT spending and contributingonly 10% of the Indian IT exports, C.Europe is > US$ 225 bnopportunity. We expect Europe to grow ahead of market over next fewyears.

RIM CAGR vs. Company CAGR across companies

Source: Company, Spark Capital Research, 6 yrs period

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TCS Infosys Wipro HCLT Mindtree Hexaware

RIM CAGR Company CAGR

Sector outlook PositivePositioning in key areas of growth – RIM, BPO and C.Europe

Sector Update

9

Source: Company, Spark Capital Research, 6 yrs period

BPO CAGR vs. Company CAGR across companies

Source: Spark Capital Research, 6 yrs period

Europe CAGR vs. Company CAGR across companies

Source: Spark Capital Research, 6 yrs period

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TCS Infosys Wipro HCLT Hexaware

BPO CAGR Company CAGR

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TCS Infosys Wipro HCLT Hexaware NIIT Tech Mindtree

Europe CAGR Company CAGR

Utilisation could be improved to aid margin expansion


Margin levers – Going Ahead:

• Ability of mid-caps to manage margins have improved substantiallyowing to focused efforts to maintain / rationalise pyramid, increasefixed price projects, drive non-linear revenues and higher utilisation.

• Mid caps generally sit on lower utilisation which could be scaled up to77-79%. However high utilisation would also mean ability to capturegrowth surprise is limited

• Traditional IT services mid-cap firms have not been able to driveoffshore mix as high as large-caps. With focus on increasing revenueper client, we expect offshoring to gradually increase

• Fixed price / outcome based projects would help to drive better marginsover the tenure of a project. Mid-caps have shown increasedwillingness to invest and build capabilities. Most RIM deals are woneither on fixed price or divide based pricing is an ideal example

60%

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80%

90%

Mindtree Hexaware NIIT Tech Persistent KPIT Cyient Polaris

FY11 FY14

Sector outlook PositiveOperating margin levers would help in mitigating rupee headwinds

Sector Update

10


Offshore shift could help in margin expansion

Source: Company,Spark Capital Research

Fixed price projects (%) increase could play saviour against pricing pressures and also would help margin improvement


20%

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Mindtree NIIT Tech KPIT Polaris

FY11 FY14

70%

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85%

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95%

Mindtree Persistent KPIT Polaris

FY11 FY14

CFO (trailing three years) across mid caps


CFO/ EBITDA (trailing three years) across mid caps


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Cyient Hexaware Mindtree NIIT Tech Polaris Persistent KPIT Cummins

3,000

4,000

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Cyient HexawareMindtree NIIT Tech Polaris Persistent KPIT Cummins

Rs. m

n

Sector outlook PositiveCash metrics across mid caps – MTCL, Persistent and Hexaware outperform others

Sector Update

11

Source: Company,Spark Capital Research Source: Company,Spark Capital Research

FCFF (trailing three years) across mid caps


FCFF/EBITDA (trailing three years) across mid caps


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Cyient HexawareMindtree NIIT Tech Polaris Persistent KPIT Cummins

Rs. m

n

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Net cash/market cap across companies


ROIC (median three yrs) across companies


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Cyient Hexaware Mindtree Polaris Persistent KPIT NIIT Tech

15%

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Sector outlook PositiveReturn ratios better for Hexaware, Mindtree and Persistent

Sector Update

12

Source: Company, Spark Capital Research Source: Company, Spark Capital Research

ROE (median three years) across companies


• Mindtree and Hexaware have generated better free cash flow thanpeers with their FCFF/EBITDA (three years trailing) standing at 44%and 35% compared to the peer group average of 23%

• Persistent has been improving its free cash flows and return ratios overthe last 3 years and its FCFF/EBITDA and ROIC (three years trailing)stands at 32% each vs. Peer average of 23% and 30% respectively.

• Cyient has shown the maximum increase in both FCF / EBITDA andRoE in the last three years. We believe this is due to concentratedefforts by the management in reducing capex spends and DSO

• We believe all three companies we are initiating in this report have toreduce their DSO to be inline with industry. Improvement in cashgeneration and return ratios would be the key driver of P/E expansion.

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Company Section

13

NIIT Tech (NITEC) is in the midst of reorganisation with focus to achieve industry level revenue growth in thecoming years. FY15E is a crucial year as the strength of execution would come to the forefront & delivery on thesame would lead to virtuous growth cycle. We believe the growth strategies outlined by the firm last year are thebuilding blocks for robust financial performance. Currently, NITEC is trading at 8.5x, 35% discount to its othermid-cap peers (11.5x). With return of growth and improvement in margins, PE discount would substantiallynarrow in the coming years. Initiating coverage on NITEC with a Buy rating and price target of Rs. 520, arrived byattaching 10x to our FY16E EPS.

Reorganisation underway: NITEC is in the midst of reorganisation for which Mr. Sudhir Chaturvedi has been thecatalyst. Key strategic initiatives include: i) Shift in focus to Western markets especially Americas and reduce focus inIndian market ii) Strengthening sales and marketing effectiveness to drive client mining (by cross-selling) and improvinglarge deal wins iii) Assigning separate account managers to “must have” accounts to increase client mining iv) Expandingthe reach of existing IP’s iv) Achieve leadership in Travel & Transportation vertical. With 83% of FY14 order book comingfrom western markets, we believe some of the changes are already being reflected in performance. Also,the decision tospin IMS into a separate SBU with specialist sales team is a welcome move as it would enable better domain led sales.

Predictability of financials: NITEC financial performance over the last years has lagged peers both in revenues/marginsand cash flows. With strategic initiatives bearing fruits, we expect revenues to grow in line with industry in the coming

Date July 1st 2014

Market Data

SENSEX 25414

Nifty 7611

Bloomberg NITEC IN

Shares o/s 61mn

Market Cap Rs. 27bn

52-wk High-Low Rs. 480-234

3m Avg. Daily Vol Rs. 61mn

Index member BSE Midcap

Latest shareholding (%)

Initiating coverage

Internal restructuring shows initial signs of success

NIIT Technologies CMP

Rs. 443

Target

Rs. 520

Rating

BUY

14


1m 3m 12m

NITEC 13% 10% 63%

Sensex 5% 14% 31%

CNXIT 11% 7% 49%

and cash flows. With strategic initiatives bearing fruits, we expect revenues to grow in line with industry in the comingyears. Additionally, increased focus in western geographies and reduction in India business contribution over the next 12months should result in improved margins and better cash generation. Reduction in hardware pass-through, increase inoffshore mix and better revenue growth would be additional margin levers. Notably, reported margins would be higherowing to forex hedges tailwinds.

Initiate with a buy: We initiate coverage on NITEC with a Buy rating and TP of Rs. 520 arrived by attaching 10x to ourFY16E EPS. Improvement in revenue growth, increase in order book by more than 15%, margin expansion on a constantcurrency basis and increase in cash generation are the key premise of our constructive view. Also, at 443, NITEC tradesat 8.5x FY16E, attractive in our view. Sustained improvement in revenue growth trajectory and financial performancecould lead to higher multiples over the next three years.

Financial summary

Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x)

FY14P 23,294 3,760 2,307 37.9 11.7 7.0

FY15E 24,557 3,920 2,668 43.9 10.1 6.3

FY16E 26,973 4,474 3,151 51.8 8.5 5.2



Promoters 31.1

Institutions 49.2

Public 19.7



Company Description:

• NIIT Technologies (NITEC) was established in 2004 with spinoff from parent entity, NIIT Ltd, the erstwhile computer education company, which currentlyowns ~24% of NIIT Technologies through Scantech Evaluation Services Ltd.

• NITEC offers ADM, BPO, RIM services to clients across Travel, Manufacturing, Financial services and Government verticals with very strong foothold inTravel and Transportation. As of FY14, the company has US$ revenues of 362 mn (ex hardware) and 16% adjusted EBITDA margins.

• IP assets contribute around 9% of total revenues. The largest among them are ROOM Solutions, used in the UK P&C insurance market segment

• Within the travel & transportation space, the company is more focussed on Airports and Airlines with limited presence in the Rail and Logistics segment.

• Insurance is a key focus market. The company is a key player in the Lloyds insurance market with the IP Room Solutions

• In Aug-13 NITEC hired Mr. Sudhir Chaturvedi (Head of US Financial Services for Infosys) as its COO and embarked on a restructuring exercise to drivebetter predictable performance

Company Overview

CMP

Rs. 443

Target

Rs. 520

Rating

BUY

NIIT Technologies

15

Acquisitions over time

Year Target Companies Rationale

2006 ROOMS Solutions IP assets in UK insurance market

2008 NIIT Airlines To strengthen presence in Airline

2010 PreferrElectronic health records & referral management platform , Healthcare foray

2011 Morris - JVCreating presence in Media by providing high end advertising

2011 ProyectaExpand Travel & financial offerings to S.Western Europe & Latin America

2012Philippines Development center

BPO arm of Sabre Holdings


Subsidiary financials

Subsidiary Particulars FY13 FY14

ROOM Revenue 1461 1567

EBITDA margins (%) 20% 16%

Proyecta Revenue 564 727


Morris Revenue 1123 1429


GIS Revenue 920 999



Transportation contributes most of the revenues for NITEC Top 10 client growth has been muted in FY14 with client specific issues in Aero (Transport)

Banking & financial services

17%

Insurance18%

Transportation37%

Manfacturing and Retail

7%

Govt.5%

Others16%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

FY08 FY09 FY10 FY11 FY12 FY13 FY14

Top 5 clients 5- 10 clients

Business Overview

CMP

Rs. 443

Target

Rs. 520

Rating

BUY

NIIT Technologies

16


NITEC has been making conscious efforts to move out of loss making government projects in India


Across service line, ADM contributed most of the revenues (64%) followed by RIM


0%

10%

20%

30%

40%

50%

60%

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

America Europe ROW

SI & PI10%

IP Asset based9%

Managed Services

13%

ADM64%

BPO4%

Strategic initiatives taken by NIIT Technologies in FY14:

Early last year, Mr. Sudhir Chaturvedi was appointed as the COO of NIIT Technologies. Since then significant internal restructuring efforts are underway tobring in more predictable and sustainable performance. Noteworthy among them include:

• Carving out RIM as a separate vertical with specialist sales team to enable better domain led sales.

• Identification of top 40 strategic accounts and increase in client mining efforts in all these accounts, which has been the key initiative that has driven salesin other mid caps like Mindtree and Hexaware

• Delineation of hunting and farming activities to increase focus in both activities. Appointing third party advisors to help Travel & BFS verticals andContinental Europe penetration

• Taking ROOM offerings, (which is primarily used in UK Lloyds market) to US and Middle East markets. NITEC has won few large deals in both US andMiddle East in the last two quarters.

• Increase presence in BFS space (especially US) which is currently under penetrated at (19%) compared to other IT peers, thereby increasing focus inwestern geographies. This would bring down the negative impact of Indian government on revenues and cash flows.

We believe some of the changes are already being reflected in performance with 83% of FY14 order book coming from western markets - the highest in thehistory of NITEC.

Strategic initiatives taken in FY14 – the key premise of our constructive view

CMP

Rs. 443

Target

Rs. 520

Rating

BUY

NIIT Technologies

17

Hardware pass through revenues have had a detrimental effect on both revenues and margins


Increasing efforts have aided to reduce India Govt. Business to 5% in 4QFY14 vs. 11% in 4QFY13


400

600

800

1000

1200

1400

1600

FY11 FY12 FY13 FY14

Rs. m

n

Hardware costs Hardware revenues

0%

10%

20%

30%

40%

Finance,Insurance & Banking

Transportation Manfacturing and Retail

Govt.

Q4FY13 Q4FY14

The quality of executable order book has significantly improved -

• One of the main concerns of street on NITEC has been its inability toconvert the order book growth into revenue growth. The book to billratio increased from 44% in FY07 to 70% in FY14. The key reasonswere high concentration of India Government business with high passthrough revenues and postponement of commencement in most ofthese contracts. Notably, excluding pass through revenues, book to billratio looks better at 67% in FY14.

• In FY14, with conscious efforts taken by the management to move outof loss making India Government business and increasing USpenetration, 62% of the total fresh order intake has been from US andIndian orders have been reduced to 17% from 57% in FY10.

To conclude, the executable order book of US$ 290 mn is way healthierthan history with lower hardware revenues and better margin profile.

US$ revenues growth have been slower than growth in executable order book

40%

45%

50%

55%

60%

65%

70%

75%

80%

50

100

150

200

250

300

350

400


US

$ m

Executable order book Revenues Book to bill

Order Book - best in history

CMP

Rs. 443

Target

Rs. 520

Rating

BUY

NIIT Technologies

18


Book to bill looks a notch better excluding hardware revenues


Fresh order intake in FY14 is more concentrated to western geographies, highest in NITEC history


0

20

40

60

80

100


US

$ m

n

USA Europe ROW

40%

45%

50%

55%

60%

65%

70%

50

100

150

200

250

300

350

400


US

$ m

order book (ex hardware) Revenue (ex hardware) Book to bill

Travel & Transport: NITEC’s strong foothold

• Travel & Transport (TTL) is a strong vertical for NITEC, which hasalways outperformed company growth except in FY14 due to clientspecific issues. NIIT Tech works with all the major airlines in the world,enables more than 10% of worldwide e-commerce business and aidscargo handling in important airports around the world.

• NITEC focus on being a leader is travel and transportation vertical iscredible and concentrated efforts are underway by the management.Key growth efforts are to expand service offerings with existingclientele, add clients in contiguous markets like Rail and Logistics

• We expect travel would return back to its ahead of company growthtrajectory. Further, analysis reveals that Vertical leader growth outstripspeer’s growth. Case in point being Tech Mahindra in Telecom andWipro in Energy & Utilities

Growth in TTL growth has outperformed company growth except in FY14 with client specific issues


-10%

0%

10%

20%

30%

40%

50%


NIIT Tech growth TTL growth

Travel and Transport – Aiming for vertical leadership

CMP

Rs. 443

Target

Rs. 520

Rating

BUY

NIIT Technologies

19


TTL growth in NITEC vs growth in peers

Source: Company, Spark Capital Research,

TechM has seen a strong growth in Telecom over years, while it has been a drag on revenues for all other IT vendors


-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

FY10 FY11 FY12 FY13 FY14

TechM TCS Infosys

-10%

10%

30%

50%

70%

90%

110%

130%

FY12 FY13 FY14

NIIT Tech TCS Hexaware Mindtree

Non linear growth and Managed Services:

• NIIT Tech earns more than 14% of revenues from non linear offeringsout of which IP contributes 9% of the total revenues and remaining 5%is contributed by BPaaS.

• ROOM applications (7% of total revenues & majority of IP revenues)are used in the property & casualty segment of Lloyds markets.However, with low insurance transactions, ROOM had been sluggishfor last two years. Currently efforts are underway to sell ROOMproducts outside the UK market. NITEC has won few deals in US &Middle East & we believe ROOM would do better in the coming yearswith these cross selling efforts & insurance spending pickup in H2FY15.

• Last year, NITEC carved out RIM as a separate SBU to drive growthwith specific focus on cross selling to existing clientele & also work withadvisory firms to improve their position in large deals RIM is deliveredon a managed services basis driving stickiness and better margins overthe course of the contract

IPs held by NITEC

Verticals IP held

Logistics, Surface Transport e-Procurement

Property & Casualty Exact

Acumen

Subscribe

Ipf3

Capital Markets Enterprise Data Mgmt

Banking Risk management & Compliance

Automobile industry, Cement industry Enterprise Mobility Application

Procure Easy


Focus on non-linear revenues

CMP

Rs. 443

Target

Rs. 520

Rating

BUY

NIIT Technologies

20

ROOM has been weak last two years led by decline in P&Ctransactions in UK Lloyds market


RIM has been flat over the last two years


the course of the contract

10%

15%

20%

25%

30%

300

340

380

420

460

1Q

FY

12

2Q

FY

12

3Q

FY

12

4Q

FY

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13

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FY

14

2Q

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14

3Q

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14

4Q

FY

14

Rs. m

n

Revenues Margins


9

10

11

12

13

14

15

1Q

FY

13

2Q

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13

3Q

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13

4Q

FY

13

1Q

FY

14

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FY

14

3Q

FY

14

4Q

FY

14

US

$ m

n

Margins and Return ratios is expected to improve:

• Despite favorable forex in FY13 and FY14, NITEC adjusted EBITDAmargins (adjusted for forex loss in revenues) declined 90 bps in FY13and improved only by 70 bps in FY14. This was mainly due to costoverruns in domestic contracts and decline in ROOM solution margins.

• With cost overruns done with and change in mix (higher revenues fromwestern markets), margins are set to improve in the coming years.

• Additionally, NITEC could benefit from increasing utilisation (77.3% asof 4QFY14) and offshore movement. However, FY15E EBITDA marginswould be flat with currency headwinds while FY16E should improvewith growth in ROOM revenues led by cross selling and improvement inUK insurance market.

• ROIC and Cash metrics would improve with return of growth, marginsand reduction in DSO days with write down of Indian Govt. Business.

Operational efficiencies would offset forex headwinds and adjusted EBITDA margins would be flat for FY15E


12%

14%

16%

18%

20%

22%

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E

EBITDA margins levers

CMP

Rs. 443

Target

Rs. 520

Rating

BUY

NIIT Technologies

21


Utilisation are at historical lows


DSO would improve henceforth with write down in India business


75%

77%

79%

81%

83%

85%


50

60

70

80

90

100

110

1Q

FY

12

2Q

FY

12

3Q

FY

12

4Q

FY

12

1Q

FY

13

2Q

FY

13

3Q

FY

13

4Q

FY

13

1Q

FY

14

2Q

FY

14

3Q

FY

14

4Q

FY

14

With capex rationalisation and reduction in DSOs FCFF/EBITDA…


Financial overview

… & ROIC is expected to improve


0%

10%

20%

30%

40%

50%

60%

70%

FY11 FY12 FY13 FY14 FY15E FY16E 25%

30%

35%

40%

45%

FY11 FY12 FY13 FY14 FY15E FY16E

CMP

Rs. 443

Target

Rs. 520

Rating

BUY

NIIT Technologies


22


1 year forward P/E chart


PE frequency bands

P/E Multiple range

No. of days traded

% of of no. of days Cumulative

traded no. of days

%of Cumulative no. of days

Under 3 176 5% 176 5%

3 - 5x 314 10% 490 15%

5 - 7x 1209 37% 1699 52%

7 - 9x 1043 32% 2742 84%

9 - 11x 277 8% 3019 93%

11 - 13x 212 7% 3231 99%


0

2

4

6

8

10

12

14

16

Sep

-05

Mar-

06

Sep

-06

Mar-

07

Sep

-07

Mar-

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-08

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Mar-

10

Sep

-10

Mar-

11

Sep

-11

Mar-

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-12

Mar-

13

Sep

-13

Mar-

14

P/E

12m fwd P/E Average P/E

Rs.mn. FY13 FY14 FY15E FY16E FY13 FY14 FY15E FY16E

Profit & Loss Cash flow s

Gross revenues 20,001 23,294 24,557 26,973 Cash from operating 2,351 1,453 3,441 3,562

Personnel expenses 13,159 15,166 16,094 17,712 Cash from investing -1,133 -997 -1,181 -469

Adjusted gross profit 6,842 8,128 8,463 9,261 Cash from f inancing -914 -526 -781 -924

S,G&A expenses 3,759 4,368 4,543 4,787 Free cash f low 1,433 70 1,941 2,662

Adjusted EBITDA 3,083 3,760 3,920 4,474 Key ratios (%)

Depreciation and amortisation 567 619 630 715 Net Revenue grow th 27.9% 16.5% 5.4% 9.8%

Adjusted EBIT 2,516 3,141 3,291 3,759 Adj. EBITDA grow th 20.8% 22.0% 4.3% 14.1%

Other income -7 44 319 431 PAT Grow th 8.1% 8.2% 15.7% 18.1%

PBT 2,935 3,185 3,609 4,190 Adj. EBITDA margin 15.4% 16.1% 16.0% 16.6%

Minority int. 52 75 75 75 Adj.EBIT margin 12.6% 13.5% 13.4% 13.9%

Tax 750 803 866 964 PAT margins 10.6% 10.0% 10.9% 11.7%

PAT 2,133 2,307 2,668 3,151 ROE 21.3% 19.1% 18.8% 19.4%

Financial summary

Financial Summary

CMP

Rs. 443

Target

Rs. 520

Rating

BUY

NIIT Technologies

23

PAT 2,133 2,307 2,668 3,151 ROE 21.3% 19.1% 18.8% 19.4%

EPS - Diluted 35.1 37.9 43.9 51.8 ROCE 25.1% 22.6% 21.9% 22.4%

Balance Sheet Valuation m etrics

Share capital 602 607 607 607 Shares o/s (mn) 60.0 60.4 60.4 60.4

Reserves & surplus 10,339 12,632 14,518 16,746 Fully diluted shares (mn) 60.8 60.8 60.8 60.8

Total shareholder's equity 10,941 13,239 15,125 17,353 Market cap (Rs. mn) 26,595 26,741 26,761 26,761

Long term borrow ings 60 53 53 53 EV (Rs.mn) 24,859 24,472 24,602 23,123

Other liabilities 452 499 574 649 EV/Sales (x) 1.2 1.1 1.0 0.9

Total liabilities 11,453 13,790 15,752 18,055 EV/EBITDA (x) 7.5 7.0 6.3 5.2

Fixed assets 4,661 5,820 6,690 6,875 P/E (x) 12.6 11.7 10.1 8.5

Other long term assets 491 778 778 778 EPS(E) / Current market price 0.1 0.1 0.1 0.1

Cash 2,329 2,212 3,691 5,860 Per share data (Rs.)

Total current assets 10,237 11,416 13,140 15,671 Book value 182.9 220.9 253.1 291.0

Short term borrow ings 0 0 0 0 Cash 33.7 35.9 60.3 96.2

Total current liabilities 3,935 4,224 4,857 5,269 Operating cash f low 39.2 24.1 57.0 59.0

Total Assets 11,453 13,790 15,752 18,055 Free cash f low 23.6 1.2 31.9 43.8

Polaris is a BFSI focused company with distinct service and products business. With demerger of business intotwo different listed entities underway, we expect value to emerge. The services business, would continue to bein current listed company, while products business would be demerged into a separate company christened as“Intellect Design”. We expect the services business to get back to growth trajectory in FY15/16E on the back offocused efforts. Products business is in a consolidation phase and would continue to be loss incurring or breakeven in FY15E. Polaris trades at undemanding valuation and the demerger would unlock value. Reinitiate with aBUY and price target of Rs. 280.

Services Business restructuring: Mr. Jitin Goyal was appointed a CEO of services business with the mandate to boostrevenue growth. Over last two years, services business revenues have been flat. Unlike other IT services firm, Polarisgenerates most of its revenues from application and testing work and exposure to growth service lines like RIM and BPOwere limited. Last year, management has made increased investments to focus on three sub-segments with in BFSI: i)Digital ii) Risk & Compliance and iii) Payments. Given Polaris deep domain expertise,we expect Polaris to get back togrowth trajectory in FY15/16E.

Momentum building in Products business: Intellect products business has been in a consolidation phase with lowrevenue growth owing to market factors and internal factors such as acquisition and divesture of Identrust. Polarisproducts have been highly rated by industry analysts and its modern architecture, increased reference cases and an

Demerger would result in value creation

Date July 1st, 2014

Market Data

SENSEX 25414

Nifty 7611

Bloomberg POL IN

Shares o/s 100mn

Market Cap Rs. 21bn



Index member SENSEX

Initiating coverage

CMP

Rs.210

Target

Rs. 280

Rating

BUY

Polaris Financial Technologies

24


1m 3m 12m

POL 0 9 84

Sensex 5 14 31

CNXIT 11 7 49

products have been highly rated by industry analysts and its modern architecture, increased reference cases and animproved market scenario would drive revenue growth. Moreover, the management has been keen on adding SystemIntegration partners to drive growth over the medium term. We expect the products business to continue to be ininvestment mode and could break-even in FY16E.

Reinitiate with a buy: Over the last three years, Polaris stock has been impacted by low revenue growth, loss makingproducts business and forex hedges losses. With rupee stabilising around Rs. 60/US$, we expect hedges to yield aminimal profit in FY15E and a substantial profits in FY16E. We prefer to value Polaris on a SOTP given the demerger.Services business would trade at a discount to other mid-cap peers given lower growth. We value the services businessat 8x FY16E EPS yielding a price of Rs. 185. The products business is few years away from steady state profitabilitygiven its high sales and marketing expenditure. We note that scaled up products firm such as Temenos, Sage, trade inexcess of 3x EV/Sales. We believe Intellect Design (the products business) could trade at 1x EV/Sales and arrive at ourprice target of Rs. 95. Reinitiate coverage with BUY and TP of Rs. 280.Financial summary


FY14P 24,991 3,497 1,993 20.0 10.5 5.0

FY15E 26,173 3,461 2,432 24.4 8.6 4.3

FY16E 27,362 3,467 2,464 24.7 8.5 4.0


Promoters 29.1

Institutions 30.9

Public 40.0



Services business revenue break up by service line


App Main40%

App Dev40%

Testing18%

Others2%

Company Description

• Incorporated in 1993, Polaris is an IT service company that providesservices mainly to Banking and Financial services sector (BFSI).Products contribute about 21% of revenues and services divisioncontributes about 79% of the revenues. Citibank, which holds ~20%stake in the company, is the largest client contributing ~40% ofrevenues.

• In Mar-14, company decided to demerge the products business into aseparate company called “Intellect Design Area” with mirrorshareholding. For investors not keen on holding Products businessshares, a NCD (redeemable in 3 months annual coupon of 7.75%) ofRs. 42 would be provided instead. The legal process in underway andcompany expects the process to complete by December-14.

Company Description

CMP

Rs.210

Target

Rs. 280

Rating

BUY


25

Services business US$ revenues and EBITDA margins over quarters


FY14 Services business break up


-5%

0%

5%

10%

15%

20%

25%

78

79

80

81

82

83

84

1Q

FY

13

2Q

FY

13

3Q

FY

13

4Q

FY

13

1Q

FY

14

2Q

FY

14

3Q

FY

14

4Q

FY

14

US

$ m

n

Services YoY growth (%) EBITDA margins (%)

Retail Banking15%

Corporate Banking

24%

Treasury & Capital Markets

49%

Insurance & others13%


Products business TTM revenue breakup by offerings Products business TTM revenue breakup by geography


License9%

Professional services

47%

Support42%

SI2% Americas

17%

Europe30%

India13%

RoW40%

Business Overview

CMP

Rs.210

Target

Rs. 280

Rating

BUY


26

Source: Company,Spark Capital ResearchSource: Company,Spark Capital Research

Products business is yet to break even


-16%

-12%

-8%

-4%

0%

4%

18.0

20.0

22.0

24.0

26.0

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14

Products EBIT Margins

Intellect Recent deal wins

Swedish central bank chose Intellect® Quantum CollateralManagement System to provide liquidity against a wide range of crosscurrency collaterals spread

Trade division o f a UK-based global financial services provider chosePayment product from the iGTBsuite

Vietnam Bank for Social Policies chose Intellect Core banking for its 692branches

A old-gen private sector bank in India chose Intellect Cash management

A leading Canada-based financial institution revamped its central researchportal using CANVAS Technology framework

US based payment provider chose intellect to modernise merchant relatedservices

Services business restructuring:

• Polaris services business has been growing well below industry rates in the last two years. Management hired and made Mr. Jitin Goyal as CEO of the service business with the mandate to improve growth trajectory. Last year, a number of initiatives were taken to improve growth.

• POL services business mix is a key reason for low growth as the company has limited exposure to fast growing Infrastructure services. Moreover being a pure BFSI focussed firm POL operates in a highly competitive market

• Services business Go-To-Market would be built around “High Performance Outsourcing” which guarantees high productivity on an ongoing basis. POL with its deep domain knowledge in BFSI would focus on offering expert led outsourcing than cost arbitrage

• Under Mr. Goyal, six SBU’s with respective P&L and delivery team would drive the growth with specialist solution led sales team. The three strategic focus areas for the services business would be around Digital banking, Risk & Compliance and Payments

• Further POL would become implementation partners for specialised product vendors such as Calypso, Murex, Smartstream etc, a offering they were not able to take to market owing to conflict because of their own products business

• Most of this initiatives have been rolled out in the last six to nine months and we expect some of it start repealing benefit in FY15E. However we expect POL would continue to lag Industry growth for the foreseeable future

Restructuring of service business

CMP

Rs.210

Target

Rs. 280

Rating

BUY


27

POL would continue to lag Industry growth for the foreseeable future

BFSI Revenue growth across companies


RIM revenue growth across companies


0%

20%

40%

60%

80%

100%

120%

140%

FY11 FY12 FY13 FY14

Mindtree Hexaware TCS Wipro HCLTech Infosys

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

FY11 FY12 FY13 FY14

Mindtree Hexaware NIIT Tech TCS Wipro HCLTech Infosys

Banking products offer a large and untapped market

• IT Technology in banking sector especially in western markets are stillinclined towards legacy systems. Further most large banks andfinancial institutions have used home grown applications than to buyready made packaged software. Penetration of packaged software islow owing to large companies unwillingness to undergo a rip-replaceprocedure that would impact their ser vice delivery ability

• Changes in technology and reduce time to market are forcing banks touse packaged software to modernise their IT landscape. Concepts likeSmart Legacy modernisation are helping banks to modernise their corein parts.

• The combined market for various Banking products are over US$ 20bnand would entail substantial professional services too.

Banking sector has the highest cost owing to legacy systems

Source: Temenos,Spark Capital Research

0% 2% 4% 6% 8% 10% 12% 14% 16%

Banking

Insurance

Telecom

Public Sector

Healthcare

Consumer

Industrial Goods

Energy

BFS products an attractive opportunity

CMP

Rs.210

Target

Rs. 280

Rating

BUY


28

Source: Temenos,Spark Capital Research

Annual market opportunity by sub segments

Source: Spark Capital Research, Temenos

Penetration of packaged software by industry


0

2

4

6

8

10

12

14

Core banking Wealth BI Channels Payments

US

$ b

n

0%

20%

40%

60%

80%

100%

Industr

ials

Energ

y

Consum

er

Healthcare

Public

secto

r

Insura

nce

Tele

com

Bankin

g

Products growth strategy

• Products entail a initial investment in S&M spend of ~23% revenues.as they require specialist sales personnel and have a long sales cycle(as high as 18 months). Polaris has been investing in S&M for the lastfew years consistently and have increased their presence in industryconferences and forums and analyst interactions. Moreover theirRanking by Industry Analysts such as Celent have increased and hashelped in getting invited to many more deals.

• The demerger would help Intellect to add Partners to resell theirproducts and help in expanding reach. We believe addition of largeservices firm as SI’s can play a major role in driving revenue growth.

• Investments in western markets are starting to reap benefit. Westernmarket deal size are many times larger than emerging markets dealsfor similar effort and hence more profitable

Revenues from western markets are increasing


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014

Americas Europe India RoW

Product business offer a lot of promise

CMP

Rs.210

Target

Rs. 280

Rating

BUY


29


Consistent spend in SG&A


Temenos Revenues from partner ecosystem


0%

4%

8%

12%

16%

20%

2009 2010 2011 2012 2013

20%

25%

30%

35%

40%

45%

400

420

440

460

480

500

520

540

1QFY132QFY133QFY134QFY131QFY142QFY143QFY144QFY14

Rs. M

n

SG&A SG&A as % of Revenues

ROE over years have declined with decline in growth & margins


ROIC over years have improved with increase in cash balances


10%

12%

14%

16%

18%

20%

22%

FY10 FY11 FY12 FY13 FY1410%

15%

20%

25%

30%


Financial metrics

CMP

Rs.210

Target

Rs. 280

Rating

BUY


30


CFO/EBITDA over years


FCFF/EBITDA over years


0%

20%

40%

60%

80%

100%

120%

140%


-80%

-30%

20%

70%

120%


FCFF/EBITDA

SOTP valuation for Polaris

Services FY16E Products FY16E

Operating pft. 2998 Sales 6472

Other income 288 EV/Sales 1

PBT 3286 EV 6472

Tax 953 Cash (FY15E) 3115

PAT 2333 Market cap 9587

EPS 23.4

PE(x) 8x

Target price 187 Target price 96

Polaris combined entity target price - Rs. 283

Source: Spark Capital Research, Rs. Mn other than for EPS, PE and Target price, * cash flows for Products is arrived assuming products business shares are not converted to NCDs and deos

Valuation

CMP

Rs.210

Target

Rs. 280

Rating

BUY


31

Source: Spark Capital Research, Rs. Mn other than for EPS, PE and Target price, * cash flows for Products is arrived assuming products business shares are not converted to NCDs and deosnot include forex gains with PV of Rs.9/share


Source: Bloomberg,Spark Capital Research

PE frequency bands

P/E Multiple range

No. of days traded

% of of no. of days

Cumulative traded no. of

days


4 - 6x 771 43% 861 48%

6 - 8x 266 15% 1127 62%

8 - 10x 638 35% 1765 98%

10 - 12x 39 2% 1804 100%


2468

101214161820

Sep

-05

Mar-

06

Sep

-06

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Sep

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13

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Mar-

14

P/E


Rs.mn. FY13 FY14P FY15E FY16E FY13 FY14P FY15E FY16E


Revenues 23,083 24,991 26,173 27,362 Cash from operating 1,516 3,714 1,859 2,509

Personnel expenses 14,567 15,909 16,725 17,615 Cash from investing -1,227 -1,770 -55 -48

Gross prof it 8,516 9,082 9,448 9,747 Cash from f inancing -309 -1,719 -825 -942

Operating and other expenses 5,351 5,584 5,987 6,279 Free cash f low 1,088 3,925 1,339 1,909

EBITDA 3,165 3,497 3,461 3,467 Key ratios (%)

Depreciation and amortisation 537 529 548 549 Revenue grow th 12.5% 8.3% 4.7% 4.5%

EBIT 2,628 2,968 2,913 2,919 EBITDA grow th 8.9% 10.5% -1.0% 0.2%

Interest Income 147 464 465 552 PAT Grow th 14.1% -17.4% 22.0% 1.3%

Forex gain / loss -374 -1,044 0 0 EBITDA margin 13.7% 13.2% 12.7% 13.3%

Share of pft/loss in associate 63 1 0 0 EBIT margin 11.4% 11.9% 11.1% 10.7%

PBT 2,602 2,389 3,377 3,471 PAT margins 10.5% 8.0% 9.3% 9.0%

Tax 190 397 946 1,007 ROE 18.9% 13.8% 14.9% 13.8%

Financial summary

Financial Summary

CMP

Rs.210

Target

Rs. 280

Rating

BUY


32

Tax 190 397 946 1,007 ROE 18.9% 13.8% 14.9% 13.8%

PAT 2,412 1,993 2,432 2,464 ROCE 24.1% 22.9% 17.4% 16.0%

EPS - Diluted 24.2 20.0 24.4 24.7 Valuation metrics

Balance Sheet Shares o/s (mn) 99.5 99.8 99.7 99.7

Share capital 498 498 498 498 Fully diluted shares (mn) 99.7 99.8 99.7 99.7


Other long term liabilties 177 162 162 162 EV (Rs.mn) 19,857 17,400 14,957 13,968

Total liabilities 13,604 15,636 17,252 18,785 EV/Sales (x) 0.9 0.7 0.6 0.5

Fixed Assets 4,007 3,787 3,759 3,810 EV/EBITDA (x) 6.3 5.0 4.3 4.0

Other long term assets 3,780 3,692 3,692 3,692 P/E (x) 8.7 10.5 8.6 8.5

Cash 4,711 6,024 7,003 8,523 EPS(E) / Current market price 0.1 0.1 0.1 0.1

Other current assets 7,698 7,216 8,397 8,404 Per share data (Rs.)


Short term borrow ings 1,155 40 30 20 Cash 47.4 60.4 70.2 85.5


Total Assets 13,604 15,635 17,252 18,785 Free cash f low 10.9 39.3 13.4 19.1

KPIT has doubled its revenues from FY11 to FY14 on the back of acquisitions predominantly in EnterpriseApplication Services (EAS) space. Currently, EAS is undergoing a major shift with increased acceptance of SaaSand we believe this industry trend could hamper KPIT’s growth trajectory. With KPIT earning around ~65% ofrevenues derived from implementation & consulting of EAS, we expect revenue growth trajectory to beimpacted. Further with Cummins (top-client) expected to grow at mid-single digit, pressure on company revenuegrowth would increase. A combination of risky revenue profile, lower than peer cash generation and return ratiosdrive our Reduce rating. We initiate coverage on KPIT with a price target of Rs. 170 arrived by attaching 10x toour FY16E EPS.

Enterprise Application Services (EAS) has near-term headwinds: With increase acceptance of SaaS, traditional onpremise software sale has been muted for both SAP and Oracle. This trend would reduce professional services andmaintenance revenues earned from SAP and Oracle implementation. In our earlier note, we have discussed scope ofprofessional services business in SaaS implementation vs. on-premise implementation. We believe the Enterpriseapplication implementation market is in a reset mode and would have muted growth. KPIT generates ~65% of its existingrevenues from EAS implementation work and we believe there could be negative surprise

Top client worries would continue: Cummins has been shrinking its IT budget led by weak growth. Cummins ITprojects are coming for renewal in this quarter and ACVs are expected to decline further. With Cummins contributing

Enterprise application business would pose growth risks

Date July 1st, 2014

Market Data

SENSEX 25414

Nifty 7611

Bloomberg KPIT IN

Shares o/s 195mn

Market Cap Rs. 34bn



Index member -


Initiating coverage

CMP

Rs. 173

Target

Rs. 170

Rating

Reduce

KPIT Infosystems

33


1m 3m 12m

KPIT 8 7 41

Sensex 5 14 31

CNXIT 11 7 49

projects are coming for renewal in this quarter and ACVs are expected to decline further. With Cummins contributingaround ~18% of the total revenues, decline in Cummins account would further pressurize KPIT’s revenue growth.

Restructuring efforts underway: In FY14, KPIT has taken a lot of strategic initiatives to aid revenue growth 1)Identification of top 50 strategic accounts to improve client mining in these accounts 2) Aligning sales by verticals andSBU to improve cross selling efforts 3) Hiring Senior managers to increase focus by verticals and increase huntingactivities 4) Expanding into cloud offerings of both SAP and Oracle Though all these are steps in the right direction, it istoo primitive to talk about their success without improvement in the operating metrics.

Initiate with a Reduce: We remain negative on KPIT given the structural shift in the EAS space. We believe, with lowercash flows and return ratios,(given an acquisition history and higher working capital) KPIT would continue to trade at adiscount to other mid cap and attach a 10x P/E to arrive at our price target of Rs. 170.



Promoters 22.3

Institutions 39.9

Public 37.9



Financial summary


FY14P 26,940 4,233 2,489 12.5 13.9 7.4

FY15E 29,770 4,818 3,066 15.4 11.3 6.8

FY16E 32,361 5,255 3,507 17.6 9.9 5.9

Company Description:

• Incorporated in 1999, KPIT Infosystems is a mid size IT company which provides engineering and IT services in three focus verticals namely 1)Automotive & Transportation 2) Manufacturing & 3) Energy & utilities and currently partners with more than 180+ global corporations including OEMs,semi conductor companies and Tier 1 companies.

• As of FY14, KPIT earns 25% of its total revenues from Engineering IT and the remaining 75% from Enterprise Application Services and Consulting.Across geography, KPIT earns 70% of revenues from US, 15% from Europe and 16% from ROW.

• For FY15E, KPIT has guided for 12-14% growth in US$ revenues and ~18% - 21% increase in profits in FY15.

• KPIT has grown overtime by acquiring other small companies which could enhance its capabilities to provide services across Auto and Engineeringverticals both in Enterprise Application Services and Auto solutions. KPIT looks for a cash payback period of 3 yrs in all its acquisitions. Recently, KPITacquired Icube, a US$ 10 mn revenue company which has a strong presence in PLM practise, for US$ 24.15 mn.

• In 2010, KPIT entered a JV with Bharat Forge to manufacture “Revolo” – a plug in hybrid technology product which could to fitted into any cars to improvefuel efficiency, investing capital of Rs. 50 crores. The project currents stands muted as laws for the use of Revolo are yet to be established by GOI.


Company description

CMP

Rs. 173

Target

Rs. 170

Rating

Reduce

KPIT Infosystems

34


Company Year Revenue at the time of acquisition (US$

Mn(Rationale for acquisition

Cummins Infotech 2002 1 Manufacturing vertical focus

Panex Consulting 2003 7.2 SAP practice focus

SolvCentral.com 2005 3.5 SAP Practice

Pivolis 2005 1.5 Business Intelligence practice

CG Smith Software 2006 6.3 Auto electronics domain focus

Harita TVS 2008 1 MEDS Practice

Sparta Consulting 2009 25 SAP Practice/ US geography presence

In2Soft 2010 4 Vehicle Diagnostic & Telematics Expertise

CPG 2010 11 Oracle Consulting

SYSTIME 2011 50 Oracle Consulting,JDE specialist

Icube 2014 10 PLM practise


EBITDA margins have tapered down last two years with losses in SAP SBUs


KPIT has a strong presence in Auto and Manufacturing


10%

12%

14%

16%

18%

20%

22%

24%

100

150

200

250

300

350

400

450

500


US

$ m

n

US$ revenues EBITDA margins

Manfacturing40%

Automotive35%

E&U15%

Others10%

Business overview

CMP

Rs. 173

Target

Rs. 170

Rating

Reduce

KPIT Infosystems

0

100

200

300

400

500

600

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

US

$ m

n

Lower end Actual Upper end

35

Source: Company, Spark Capital Research Source: Company,Spark Capital Research

US is the biggest market for KPIT which contributes ~70% of the total revenues


KPIT gives US$ revenue growth & EPS growth guidance at the beginning of the year and reviews the same the third quarter

Source: Spark Capital Research, highlighted region – Actuals missed the guidance

0%

10%

20%

30%

40%

50%

60%

70%

80%


US Europe ROW

Strategic initiatives taken in FY14: KPIT had taken various strategic initiatives in FY14 to aid on its path to become a US$ 1 bn company by 2017 with 18% EBITDA margins. Notable among them include:

• Identifying top 50 strategic accounts and establishing P&L responsibility to both SBU and verticals. Hunting activities would be aligned with SBUs while farming activities would be aligned with verticals

• Introduction of Business Transformational unit, under which certain clients could be sold both Engineering and Business IT services.

• Hiring of senior level for verticals and as country head. Currently, KPIT is done with most of the senior level hiring while middle level managers are being hired across verticals.

• Exploring possibilities of working with SAP and Oracle on their cloud based platforms. KPIT partnered with Success factor and is among Top 5 success factor partners in US.

• Delineation between hunting and farming activities and hired sales guys for hunting activities. KPIT currently has 150 people in Sales and marketing.

• Enhancing relationship with third party advisor or consultant to help deal wins.

Transition from SBU to IBU structure

CMP

Rs. 173

Target

Rs. 170

Rating

Reduce

KPIT Infosystems

36

Introduction of new SBU – Business Transformation group


Intergrated Enterprise Solutions

40%

Auto & engg25%

SAP25%

Business transformation

group10%

KPIT has increased its sales and marketing headcount substantially over the last two years


20

40

60

80

100

120

140

160

180


Top client growth issues:

• Currently, Cummins contributes ~ 18% of total KPIT revenues and hasbeen the biggest client for KPIT since the merger with CumminsInfotech in 2002. KPIT has 70% wallet share in Engineering IT spends& 30% of Business IT spends of Cummins.

• With Cummins reducing its IT spends worldwide amid growth concerns,the account has been declining for the last two and is expected todecline in the coming years.

• Notably, Ex Top 1,Top 1–9 have shown good growth over the yearsStrong growth in > 10 clients has been led by acquisitions.

• However, with Cummins still contributing ~18% of the total revenues, itwould continue to have a negative impact on revenues growth.

Cummins account absolute US$ revenues and its yoy growth


-40%

-20%

0%

20%

40%

60%

30

40

50

60

70

80

FY09 FY10 FY11 FY12 FY13 FY14

US

$ m

n

Top client YoY growth

Cummins – Decline in growth

CMP

Rs. 173

Target

Rs. 170

Rating

Reduce

KPIT Infosystems

37


Ex Top 1, other clients have shown good growth over the years while strong growth in > 10 clients have been led by acquisitions


KPIT added 15 clients this year while the active clients stood at 198


-10%

10%

30%

50%

70%

90%


Top 2-10 > 10 clients

10

40

70

100

130

160

190


Clients added Active client base

Top Software vendors of 2013

Rank Change Company Name US$ bn

1 ◄►Microsoft $65.7 bn

2 ▲Oracle $29.6 bn

3 ▼IBM $29.1 bn

4 ◄►SAP $ 18.5 bn

10 ▲Salesforce $ 3.8 bn

Source: Gartner, Spark Capital Research

Incremental spending in SAAS is detrimental for KPIT:

“If I take good old SAP ERP (enterprise resource planning) system, forevery dollar of license bought, it might generate $5 to $6 of services forme. So if a company spends $10 million for SAP licenses, it means $60million revenue for us. In SaaS product and system engagement services,every dollar spent might be $3 of revenue for me.” -Steve Cardell, HCLTechnologiesThere has been significant movement in Auto to cloud except materialmanagement and F&A. With Salesforce announcing a cloud solution forHealthcare vertical, we believe it would just a matter of time for the sameto happen in Auto as well. KPIT earns more than 65% of its revenuesfrom Enterprise Application services and has little exposure to cloudbased services. We believe shift to cloud could bring in negative surprisesfor KPIT.

EAS undergoing a major shift

CMP

Rs. 173

Target

Rs. 170

Rating

Reduce

KPIT Infosystems

38

SaaS subscriptions have grown at a CAGR of 35% in last 4 years


Source: Gartner, Spark Capital Research

2000

3000

4000

5000

6000

2010 2011 2012 2013

$ m

n

IES and SAP SBU provides services on SAP & Oracle applications


50

80

110

140

170

200

FY11 FY12 FY13 FY14

US

$ m

n

Intergrated Enterprise Solutions SAP

Minimal or no presence in RIM and BPO :

• RIM has been the propeller of growth for Indian IT in the last few years..Firms that invested in RIM capabilities early-on such as HCL Tech,TCS and Mindtree have benefitted substantially from this growth.

• Additionally with bundling of RIM and BPO, BPO traction has improvedsignificantly in the past one year.

• Without significant presence in both these areas, KPIT would miss theentire wave of RIM and BPO like most companies missed theHealthcare spending wave.

• Continental Europe has been fuelling growth for the Indian IT industry and is expected to outperform US growth in the coming years as well. For KPIT though Europe contributes ~14% of the total revenues, Europe CAGR growth has been very low (6%) compared the company CAGR growth of 24% during the same period (FY10- FY14)

RIM CAGR vs. Company CAGR across companies


0%

10%

20%

30%

40%

50%

60%

70%

TCS Infosys Wipro HCLT Mindtree Hexaware

RIM CAGR Company CAGR

No presence in RIM, BPO and less presence in Continental Europe

CMP

Rs. 173

Target

Rs. 170

Rating

Reduce

KPIT Infosystems

39


BPO CAGR vs. Company CAGR across companies


Europe growth has been muted for KPIT


-5%

0%

5%

10%

15%

20%

25%

30%

35%

TCS Infosys Wipro HCLT Hexaware NIIT Tech

BPO CAGR Company CAGR

0%

5%

10%

15%

20%

25%

30%

TC

S

Info

sys

Wip

ro

HC

LT

Hexaw

are

NIIT

Tech

Min

dtr

ee

KP

IT

Europe CAGR Company CAGR

Engineering IT continues to be a lucrative bet:• On a average, Auto OEMs spend 2-3% of the their total revenues in

R&D which accounts for ~US$ 120 bn (both hardware & software).Overtime, software component in the this spend has been increasingwith most of the initial stages in product development going digital.

• Out of the total Auto R&D, more than 80% of the market is owned byOEM captives. Increasing cost pressures coupled by need to driveinnovation - especially in the areas of design, Infotainment - there hasbeen an tremendous shift towards outsourcing. This shift would lead tofaster growth in outsourcing (8.5% CAGR growth in the coming years)than the overall R&D spends (6.4% CAGR).

• Within Auto, Power train and Infotainment are expected to outperformthan other practises growing at 11% and 12% CAGR for the next twoyears . Power train and Infotainment are the largest practises in KPITAuto SBU.

Outsourced spends in Auto are expected to grow faster (8.5% CAGR) vs. 6.4% increase in the overall R&D spends

Source: Company, Thomson Financials,Market interviews, Roland berger analysis,Spark

Capital Research

0

20

40

60

80

100

120

140

160

2010 2011 2012 2013 2014 2015 2016

$ bn

OEM Captive Outsourced

Engineering IT continues to be a large an attractive opportunity

CMP

Rs. 173

Target

Rs. 170

Rating

Reduce

KPIT Infosystems

40

Capital Research

Within Auto, Power train and Infotainment are the highest growth spends which are the biggest practises in KPIT Auto SBU

Source: Company, Thomson Financials,Market interviews, Roland berger analysis,Spark

Capital Research,

Auto SBU would continue to show strong growth with increase in global Auto R&D offshoring

Source: Spark Capital Research, * FY11 had a reclassification from LOB to SBU

0

5

10

15

20

2010 2011 2012 2013 2014 2015 2016

US

$ b

n

Powertrain Infotainment Body/exterior Interior Full vehicle Chassis Others

-40%

-20%

0%

20%

40%

60%

80%

100%

30

50

70

90

110

130

FY09 FY10 FY11* FY12 FY13 FY14

US

$ m

n

Auto SBU YoY growth

Margins would improve with SAP SBU turning EBITDA positive:

In FY14, KPIT margins declined 59 bps yoy to 15.7% from 16.3% despiterupee depreciation. This was due to the decline in SAP SBU margins from4-5% in FY13 to negative 5%-6% in FY14,led by cost overruns and delayin commencement of some contracts. In FY15, company margins areexpected to improve with return of margins in SAP SBU offsetting rupeeheadwinds. We are modelling margins to improve by 50 bps in FY15E.Other levers which could aid margin improvement are:

1. Subcontracting costs – KPIT spends around 18% in subcontracting,the highest among peers. With the return of growth, replacing subcontractors with regular employees would help in marginimprovement.

2. Offshore mix in enterprise application would increase with increase inprocess and implementation maturity

Revenue & EBITDA margins across various SBU

US$ mn EBITDA margins

SAP SBU 177.6 -5% to -6%

Auto SBU 110.0 22% to 23%

BTU 44.4 19% to 20%

IES SBU 109.9 18% to 19%


Turnaround in SAP SBU would drive margin improvement

CMP

Rs. 173

Target

Rs. 170

Rating

Reduce

KPIT Infosystems

41

Offshore mix in enterprise application would increase with increase in process and implementation maturity


Subcontracting costs at 18% are the highest among peers


10%

12%

14%

16%

18%

20%

22%

2QFY13 3QFY13 4QFY1 1QFY14 2QFY14 3QFY14 4QFY1481%

82%

83%

84%

85%

86%

87%

88%

89%


Financial overview

ROIC would improve with better margins and cash flows


FCFF/EBITDA over the years


0%

10%

20%

30%

40%

50%

60%

70%

FY10 FY11 FY12 FY13 FY14 FY15E FY16E

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

FY10 FY11 FY12 FY13 FY14 FY15E FY16E

CMP

Rs. 173

Target

Rs. 170

Rating

Reduce

KPIT Infosystems

42





PE frequency bands

P/E Multiple range

No. of days traded

% of of no. of days

Cumulative traded no. of

days


4 - 6x 41 2% 46 3%

6 - 8x 124 7% 170 9%

8 - 10x 908 50% 1078 59%

10 - 12x 627 34% 1705 93%

12 - 14x 110 6% 1815 99%

14 - 16x 10 1% 1825 100%


0

5

10

15

20

25

Sep

-05

Mar-

06

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

P/E


Rs.mn. FY13 FY14P FY15E FY16E FY13 FY14P FY15E FY16E


Revenues 22,386 26,940 29,770 32,361 Cash from operating 1,203 1,415 3,915 3,088

Personnel expenses 14,640 18,180 20,443 22,301 Cash from investing -3,503 -2,245 -1,322 -419

Gross prof it 7,746 8,760 9,327 10,060 Cash from f inancing 2,722 651 -1,662 -1,239

S,G&A expenses 4,096 4,528 4,509 4,805 Free cash f low -613 -756 2,295 2,256

EBITDA 3,650 4,233 4,818 5,255 Key ratios (%)

Depreciation and amortisation 466 540 578 584 Revenue grow th 49.2% 20.3% 10.5% 8.7%

EBIT 3,184 3,693 4,240 4,672 EBITDA grow th 16.3% 15.7% 16.2% 16.2%

Interest costs 154 287 280 214 PAT Grow th 8.9% 9.2% 10.3% 10.8%

Other income -170 -74 298 413 EBITDA margin 16.3% 15.7% 16.2% 16.2%

PBT 2,860 3,332 4,258 4,871 EBIT margin 14.2% 13.7% 14.2% 14.4%

Minority int. 86 0 0 0 PAT margins 8.9% 9.2% 10.3% 10.8%

Tax 766 941 1,192 1,364 ROE 22.8% 21.5% 21.7% 20.5%

Financial summary

Financial overview

CMP

Rs. 173

Target

Rs. 170

Rating

Reduce

KPIT Infosystems

43

ROE 22.8% 21.5% 21.7% 20.5%

PAT 1,990 2,489 3,066 3,507 ROCE 25.6% 22.9% 22.3% 20.8%

EPS - Diluted 10.5 12.5 15.4 17.6 Valuation metrics

Balance Sheet Shares o/s (mn) 183.2 185.2 185.2 185.2

Share capital 386 371 371 371 Fully diluted shares (mn) 188.7 199.0 199.0 199.0


Long term borrow ings 1,459 1,301 1,001 701 EV (Rs.mn) 32,253 31,479 32,963 30,932

Other liabilities 413 233 233 233 EV/Sales (x) 1.4 1.2 1.1 1.0

Total liabilities 12,235 14,285 16,769 19,651 EV/EBITDA (x) 8.8 7.4 6.8 5.9

Fixed assets 2,006 2,161 2,183 2,199 P/E (x) 16.5 13.9 11.3 9.9

Other long term assets 5,797 7,176 8,196 8,428 EPS(E) / Current market price 0.1 0.1 0.1 0.1

Cash 1,921 1,908 2,839 4,269 Per share data (Rs.)


Short term borrow ings 1,753 3,089 2,289 1,889 Cash 21.0 18.3 23.0 30.2


Total Assets 12,234 14,285 16,769 19,651 Free cash f low -3.3 -3.8 11.5 11.3

Spark Disclaimer

Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities. Spark Capital is registered withSEBI as a Stock Broker and Category 1 Merchant Banker.

This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. This document isprovided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should be construed as investment orfinancial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document.

Absolute Rating Interpretation

Buy Stock expected to provide positive returns of >15% over a 1-year horizon

Add Stock expected to provide positive returns of >5% – <15% over a 1-year horizon

Reduce Stock expected to provide returns of <5% – -10% over a 1-year horizon

Sell Stock expected to fall >10% over a 1-year horizon

Sector UpdateSector outlook Positive

financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document.

Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in thisdocument (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This document is being supplied to you solelyfor your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is notdirected or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution,publication, availability or use would be contrary to law, regulation or which would subject Spark Capital and/or its affiliates to any registration or licensing requirement within such jurisdiction.The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this document may come are required toinform themselves of and to observe such applicable restrictions. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdictionwhere such an offer or solicitation would be illegal.

Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this document. Spark Capital ,its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for thesecurities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any companyreferred to in this report.

This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark Capital. While wewould endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information. Also, there may be regulatory,compliance or other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective directors, employees, agents or representativesshall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents or any errors or discrepancies herein or for any decisions oractions taken in reliance on the report or the inability to use or access our service in this report or for any loss or damages whether direct or indirect, incidental, special or consequentialincluding without limitation loss of revenue or profits that may arise from or in connection with the use of or reliance on this report.

Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:

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The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the researchanalyst’s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.

Additional Disclaimer for US Institutional Investors

This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 15a-6 under the SecuritiesExchange Act of 1934, as amended) only by Decker & Co, LLC, a broker-dealer registered in the US (registered under Section 15 of Securities Exchange Act of 1934, as amended). Decker &Co accepts responsibility on the research reports and US Institutional Investors wishing to effect transaction in the securities discussed in the research material may do so through Decker & Co.All responsibility for the distribution of this report by Decker & Co, LLC in the US shall be borne by Decker & Co, LLC. All resulting transactions by a US person or entity should be effectedthrough a registered broker-dealer in the US. This report is not directed at you if Spark Capital Advisors (India) Private Limited or Decker & Co, LLC is prohibited or restricted by any legislationor regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Decker & Co, LLC and Spark Capital Advisors (India) Private Limited arepermitted to provide research material concerning investment to you under relevant legislation and regulations;

Sector UpdateSector outlook Positive

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Sector Update midcap final 123 - Spark Capital