Technology - Motilal Oswal Group · Mindtree came to the fore earlier in FY15, and continues to lead the industry. 2. ... Overall industry growth has been decelerating after a brief

16 February 2016 1

Technology | Big changes being ushered by Digital

What has Digital Changed?... …dynamics of sales growth, prospects for tier-II and way we look at margins

Three trends simultaneously playing out in the era of new technologies from Indian IT Services perspective: The rush for Digital up-skill – whether build or buy The waning traction in traditional – as deal values get hit by discounting, cloud,

automation and some amount of in-sourcing, and The thrust on Automation to keep up / stay ahead of ever increasing productivity

expectations of customers.

As these exert their influence on the industry’s performance, we take a look at the consequent changes in the industry’s revenue growth, outperformers, competitive landscape and margins outlook. In summary for IT Services, the Digital era has changed: 1. The dynamics of revenue growth: Overall revenue growth continues to

decelerate as the clear edge of offshore is not manifested in the case of Digital Transformation just yet. That said, the growth order has gradually been changing, with INFO assuming leadership in tier-I growing the fastest in YoY CC terms in 4QCY15, at the expense of TCS and HCLT. Among the smaller payers, Mindtree came to the fore earlier in FY15, and continues to lead the industry.

2. Competitiveness of tier-II IT: IMS never really scaled for tier-II, for want ofreferences, which made the segment a virtuous cycle for the big. However, withthe advent of cloud, migration is a big opportunity, even if it is not “Digital” incharacter. Additionally, companies with sub-scale SI in Enterprise solutions havea high growth opportunity on platforms of the likes of Salesforce, Workday,Appian, SAP HANA etc. MTCL, NITEC, PSYS and KPIT are all demonstrating thatthrough organic or inorganic endeavors.

3. The way clients look at IT budgets: Softness in CY16 budgets has been alludedto in form or the other by vendors like INFO, CTSH and WPRO and also thirdparty advisors like ISG-one. even if there is thrust on discretionary spend inDigital, the need to expand budgets to make room for the same maybe limited,given the savings on offer from cloud, automation initiatives and vendordiscounting amid intense competition.

4. Currency-margin correlation – The lever that once was! While the currencydepreciated from INR60/USD to INR66/USD, margins have fallen across theboard (TCS, INFO, WPRO, HCLT and MTCL). With the hunger for Digitalinvestments, competitive intensity in traditional, there is more than justreinvestment of gains.

5. Blunting traditional services: ACN, TCS and MTCL report revenue proportionfrom Digital, from which contribution to incremental revenues is significantlyhigher than revenue proportion from Digital.

a. ACN’s growth remains weak in traditional services (mid-single digits),b. TCS’ traditional business grew ~2% in a seasonally strong 2Q and declined in 3Q.c. MTCL’s LTM organic growth in traditional is ~2.5%, compared to ~26% organic

growth in Digital

Technology Sector Update |16 February 2016

Ashish Chopra ([email protected]); +91 22 3982 5424 Sagar Lele ([email protected]); +91 22 3982 5585 Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Shift away from RTB spend gathering momentum

76% 69% 67%

24% 31% 33%

2006 2015 2016

New projects / DiscretionaryKeep lights on' spend

Shift away from RTB spend gathering momentum

15% 10%

60%

20%

Tran

sfor

mat

iona

l

Non

-line

ar

Ope

ratio

nal

Mun

dane

IOP market share (2015)

Please click here for Video Link

http://www.motilaloswal.com/Videos9.html

16 February 2016 2


6. The outlook and how we prefer to play the sector With growth falling well below historical average at TCS, our price target now

discounts forward earnings by 17x (v/s 18x earlier). Lowering traction in Engineering Services drives a similarly slight de-rating at

HCLT too, where our price target now discounts forwards earnings by 15x (v/s16x earlier).

Our growth prospects are much improved for INFO in tier-I, which continues tobe on course for industry leading growth in FY17; and CYL and MTCL in tier-II.

We prefer INFO and HCLT in tier-I IT. In tier-II, we prefer the businessfundamentals of MTCL, and would be buyers in any correction in the name, andof CYL given its long term growth strategy.

Exhibit 1: The big changes being ushered in by Digital?

Source: MOSL

Revenue growth dynamics The way clients look at

IT Services budgets

Competitiveness of tier-II

Correlation of currency with margins

Blunting traditional

services

Pricing pressure More voices joining the

chorus

16 February 2016 3


#1: The dynamics of revenue growth Industry growth decelerates as demand dynamics change… Overall industry growth has been decelerating after a brief pickup from pent up

demand post the downturn. That trend is unlikely to change, with 11% growthin exports in FY16E likely to be followed by similar or lower growth in FY17E.

Exhibit 2: Expect continued growth deceleration in the changing demand dynamics

Source: NASSCOM, MOSL

… as shift away from “light-on” gathers momentum… “Lights-on” or “Run-the-business (RTB)” traditional IT spending dominated the overall IT Services budgets. It took 9 years for the share of RTB to come down from 76% to 69% - a 7pp shift. In 2016 alone, RTB spend could come down by 2pp to 67%, and this momentum should continue going forward – as allocation to new projects / discretionary budgets increases.

Exhibit 3: Shift away from RTB spend gathering momentum

Source: Offshore Insights, MOSL

… where India Origin Providers do not control the market, yet… Excellence in operational processes when it comes to Global Delivery Network Model has meant dominant market share for India-origin providers – controlling 60%+ of the sourcing market. However, the market share in newer, transformational services is significantly lesser. That implies deceleration in the share gain game for India Origin Providers (IOPs), weighing naturally on the overall sector growth.

6 8 10 13 18 24 31 40

47

50

59

69 76 87

98 109

120

24 25

34 37

33 32 30

17

6

19 17 11

15 12 11 10

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

e

FY17

e

IT Exports (USD b) YoY (%)

76% 74% 69% 67%

24% 26% 31% 33%

2006 2010 2015 2016

Keep lights on' spend New projects / Discretionary

16 February 2016 4


Exhibit 4: Lesser market share in non-linear and transformational services

Source: Offshore Insights, MOSL

…and hence growth leadership is changing hands in favor of fast adopters Deceleration of growth is evident at TCS, WPRO and HCLT. Contrary to the

trend, INFO has accelerated its growth through CY15, and for the 1st time in4QCY15, emerged as the company with highest YoY CC revenue growth

As long as tier-II IT is concerned, MTCL has raced ahead with superior growth,which coincides with 36% of its business coming from Digital – more than anyother pure play IT Services model in India.

If we assume that these trends will continue to play out beyond an year, thevaluation multiples of growth leaders such as INFO and MTCL suddenly startlooking relatively reasonable!

Exhibit 5: Accelerating trend at INFO v/s decelerating at peers

Source: MOSL, Company

Exhibit 6: Growth at MTCL superior to peers


15% 10%

60%

20%

Transformational Non-linear Operational Mundane

IOP market share (2015)

14.5

7.8

9.6

15.9

14.2

7.8

8.4

15.7

12.8

10.8

8.3

15.8

12.0

13.0

8.4

13.9

9.8

11.3

6.7

8.8

TCS INFO WPRO HCLT

3QFY15 4QFY15 1QFY16 2QFY16 3QFY16

13.7

14.4

15.3

16.2

-9.6

10.2

19.9

7.7 11

.3

-9.5

8.2

18.9

2.7

9.6

-5.8

8.7 13

.7

-0.3

22.7

-1.4

12.7

10.3

-2.5

24.8

0.9

Persistent Systems Hexaware KPIT Tech. Mindtree Mphasis

3QFY15 4QFY15 1QFY16 2QFY16 3QFY16

16 February 2016 5


#2: The way clients look at IT budgets CY16 budgets may not expand, but then do they need to? Cloud, discounting in commoditized services, Automation are all allowing clients to save budgets to redeploy in areas like Digital. So even if there is thrust on discretionary spend in Digital, the need to expand budgets to make room for the same maybe limited. Budget commentary from INFO, WPRO, CTSH suggest and outlook by ISG-one ties in with the same.

That said, net new spend will always see light of day in the healthy time. But more pertinently, growth at IOPs has been a function of market share shift rather than budget upticks. That shift will be a function of capabilities in the transformative tasks rather than offshore.

ISG: “Volume of work will not drop off. But value will continue to come down –as more enterprises are sourcing than ever before. The advantage ofincumbency has been on the decline over the last few years. Service providers(incumbents) are reacting by offering attractive discounts for 2/3/4 yearextensions much before the deal is up for rebid.”

INFO: “Budgets will, in general, be either flat to marginally down. There aresome industries which are challenged, like energy probably we'll see downwardrevision in budgets.”

WPRO:” What we're seeing is that the Run budgets are under pressure. And weare typically see people taking costs out of Run budgets, which means increasedpressure on ticket prices and also on the overall deal values.”

Offshore Insights: While overall IT Services spending is growing within itsnormal band, the penetration of outsourcing / low cost sourcing has beenflattening. 23.5% of IT Services work was being sourced from low costdestinations in CY15, the same as that in CY14 (and also CY13). This compareswith movement from ~15% in early 2000s to 20%+ by 2010.

COGNIZANT: Client budgets are complete and we're seeing a soft start to theyear in banking and Financial Services, primarily due to macroeconomicconcerns and in Healthcare on the back of industry consolidation in the payerindustry. More broadly, clients continue to face a dual mandate within theiroperations.

16 February 2016 6


#3: The opportunity for tier-II to compete From small number of large deals to large number of small projects Among the most obvious changes with the advent of Digital and cloud is the shrinkage in deal sizes across the board. This is also reflected in the aggregate deal signings as reported by ISG-One. While the Total Contract Value (TCV) of deals signed has remained in a band, the number of deals contributing to that TCV has been increasing every year, implying lower size per deal on an average.

Exhibit 7: Reducing average deal sizes

Source: ISG-one, , MOSL

Amid this trend, a key imperative for the industry is to align the organization so as to flourish through executing large number of small projects, as opposed to fewer large projects. This may entail changing the way the front end teams are incentivized too. At the delivery side, as speed to market takes precedence over optimization, it will require equipping teams with a different set of capabilities.

What this implies is that the window of opportunity for tier-II is higher – if they don’t get ruled out of contention on the basis of scale and references alone. These two factors in the past have meant that tier-II’s lower scale has been offset by tier-I’s advantage of greater revenue per customer.

Exhibit 8: Revenue per customer significantly lower for tier-II IT

Source: Company, MOSL

That said, it is definitely not the sufficient condition. While the new age projects are smaller in sizes, they require capabilities in agile development, domain consulting

95 99.1 82.9 104.6 88.9 870

1006

1155 1218

1445

2011 2012 2013 2014 2015

TCV (USDb) Broader market contract counts

11.0 9.5

6.9 8.6

2.8 1.2

2.4 1.8

TCS (FY13) INFO WPRO HCLT (FY13) MTCL PSYS KPIT HEXW

Revenue per client (USD m)

16 February 2016 7


expertise and design capabilities. Companies that are geared to get there before the others will clearly emerge winners, in our view.

There is opportunity to make SI count – if on-premise is not a high base The radical shift is felt the most in Enterprise Software services, amid the as-a-service revolution. As the size of custom implementation work reduces significantly in the new software (Salesforce, Workday, and SAP and Oracle’s cloud push), growth is evidently slowing down in the segment. That said, growth at Salesforce, Workday and cloud segments of SAP and Oracle is significant. For those companies without the baggage of on-premise, there is growth to be had. This is more challenging for Tier-I, but it is an opportunity that is being targeted actively and selectively by tier-II – evidenced in the actions of players such MTCL, NITEC, PSYS and KPIT.

Mindtree acquired Bluefin Solutions, an independent consultancy specializing inSAP HANA; and Magnet360, which brings strong expertise in Salesforce Sales,Service and Marketing cloud implementations.

Exhibit 9: MTCL has taken the acquisitive route amid near-insignificant presence in Enterprise Solutions (Indexed at 100)


NITEC acquired Incessant Technologies, which has a presence in digitalintegration and agile delivery of enterprise iBPM solutions like Pegasystems andAppian.

Exhibit 10: Acquisition of Incessant has helped NITEC scale the segment (indexed a 100)


100

225

350

475

600

725

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

SI / PI / EAS Overall company

100

130

160

190

220

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16


16 February 2016 8


PSYS has been seeing strong growth in the Enterprise segment, while ISV and IP-led segments struggle to grow organically. The growth in Enterprises has beenalmost entirely implementation and customization of Salesforce and Appian.

Exhibit 11: Platforms like Salesforce and Appian have been PSYS' key growth drivers


KPIT has been aggressively making the move to SuccessFactors (SF) and HANA inorder to mitigate the impact of leak from large implementation deals in its SAPpractice. It is 1st SF Consulting partner and has completed over 800 SF projects.

Exhibit 12: SAP has caught up at KPIT lately, thanks to SuccessFactors capability (Indexed at 100)


17 18 19 19 22 26

18%

9% 5%

0%

14% 16%

5% 4% 1%

-2%

6% 8%

Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15

Revenue (USDm) Enterprise (QoQ, %) Persistent (QoQ, %)

70

82

94

106

118

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

SAP Overall company

16 February 2016 9


Exhibit 13: TCS (Indexed at 100)


Exhibit 14: INFO (Indexed at 100)


Exhibit 15: HCLT (Indexed at 100)


Exhibit 16: HEXW (Indexed at 100)


Smaller sized work in Infrastructure Services amid migration to cloud Players like MTCL, ZENT, HEXW and NITEC are all between USD40-120m annualized rate in IMS, compared to top-tier’s USD800m-2500m. The relatively non-existent baggage of legacy helps the set embrace cannibalization readily. Also, the size may count for little given large number of relatively smaller migration projects on the table, where partnerships with the likes of Amazon and Microsoft may matter more. Appended below are comments from ISG, WPRO and MTCL that provide some fuel to the thought.

Exhibit 17: IMS revenues substantiate the edge enjoyed by scale so far

Source: Companies, MOSL

100

110

120

130

140

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16


100

112

124

136

148

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

Indexed at 100 SI / PI / EAS

90

100

110

120

130

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15


60

80

100

120

140

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16


2,400

751

2,027 2,155

33 117 65 84

TCS INFO WPRO HCLT HEXW MTCL NITEC ZENT

LTM IMS revenue (USD m)

16 February 2016 10


The evident disruption WPRO: “IMS is becoming more an added service utility-based business. Cloud is

fundamentally transforming that entire business. Our view is that infrastructure,especially with cloud, is going to go through significant levels of disruption. Thefocus is going to move from heavy lifting to user experience; and on the ability topublish workloads on the fly, which means that the architecture has to be verydifferent from what we've been using in the past.”

MTCL: “Huge amount of change in customer thought process – so in next 1-2years further disruption should happen there.”

ISG: “Clients have clearly moved on from buying cost savings to buying businessresults. For the providers, this is changing both how they sell and to who they sellto.”

Exhibit 18: Capturing cloud savings implies significant cannibalization for incumbents

Source: MOSL, ISG

16 February 2016 11


#4: Margin correlation with Currency – The lever that once was! As the rupee depreciated over FY13-15, it failed to drive consequent uptick in profitability for tier-I IT. As if that was not enough, the latest set of margin performances demonstrates decline in EBITDA margins despite the rupee trying its best! While the currency depreciated from INR60/USD to INR66/USD, margins have fallen across the board (TCS, INFO, WPRO, HCLT and MTCL). There are a multitude of headwinds that accompany the Digital world, which explain the phenomenon: Lowering growth rates – the single largest lever for industry’s profitability Ever-intensifying pricing situation in commoditized bread-n-butter traditional

deals Onsite-heavy nature of Digital to start with, which is gaining a fair share of

incremental revenues Necessary investments in building Digital capabilities around: [1] Consulting /

Domain, [2] Agile technology development and [3] Design

Exhibit 19: Who would say depreciation in INR is a tailwind for profitability?!


Exhibit 20: When margins have consistently moved the other way


61.5

59.9 60.6

62.2 62.1

63.6

65.4 66.1

1QCY14 2QCY14 3QCY14 4QCY14 1QCY15 2QCY15 3QCY15 4QCY15

INR/USD

31

28

24

27

22

29

27

23

26

20

29

28

21

25

20

29

29

22

25

20

29

28

23

23

19

28

26

21

21

18

29

28

22

22

19

28

27

21

22

18

TCS INFO WPRO HCLT MTCL

1QCY14 2QCY14 3QCY14 4QCY14 1QCY15 2QCY15 3QCY15 4QCY15

16 February 2016 12


#5: Blunting traditional services Looking at the trends in companies disclosing revenues from Digital ACN, TCS and MTCL report revenue proportion from Digital, from which contribution to incremental revenues is significantly higher than revenue proportion from Digital – implying marginal growth in non-Digital business.

1. TCS: Digital contributed 13% to revenues in 2QFY16 and 13.7% in 3QFY16. But itcontributed 25% to incremental business in 2QFY16 and 100%+ to incrementalrevenues in 3QFY16 – implying weak growth in traditional business in aseasonally strong 2QFY16 and decline in 3QFY16.

2. ACCENTURE: At Accenture, the growth accelerated from low to mid-single digits(5% in FY14) to double digits (11% in FY15). In FY15, Digital-related services grew35% CC YoY to USD7b; this would imply 6% CC YoY growth in non-Digitalrevenue, or no improvement in momentum on that segment, with the uptickbeing led entirely by Digital.

3. MINDTREE: Digital was 32% of revenues 8 quarters ago, but has contributed49% to incremental revenues on an LTM basis. Excluding the inorganiccontribution, while LTM revenue growth in Digital is ~26%, that in the remainingbusiness is a mere ~2.5%.

Exhibit 21: But for Digital, growth at Accenture would not have accelerated growth


Pricing pressure in traditional: More voices joining the chorus Where earlier INFO and WPRO were vocal in calling out the pressure, even MTCL alluded to pricing pressure in renewal of traditional services and HEXW wants to play the disruptor. Among MNCs, IBM and ACN continue to make mentions sporadically

ISG: “The economics of service delivery has changed. As deals come on the tablefor renewal, they are being signed in a different shape and form. The pressure onthe absolute value of the deal comes from all sides: [1] Some discounting, [2]new technology that costs less – including cloud / automation and [3] someamount of in-sourcing.”

INFO: “There is clearly a larger scale structural downward trend here that is atplay. There are seasonal fluctuations in this. But generally, there is no doubt thatthere is a declining pricing pressure. Today, when you look at the business and IToperation side of things, there is tremendous pressure on cost, clients are

35%

6%

Digital revenue growth (YoY, CC, %) Non-Digital revenue growth (YoY, CC, %)

FY15

16 February 2016 13


typically looking at 15%, 20% savings for doing similar thing. When the deal comes up for renewal whenever it's a competitive bid, there's aggressive pricing because of the competitive nature of the deal and clients clearly expect 30%-35% savings.”

WPRO: “The large deal wins are highly competitive with higher pricing pressure,as has been the case over the last several quarters.”

MTCL: “Pricing compression is visible in renewal of traditional deals. Expectationin renewals of more competition on price. Price competitiveness in BFS isparticularly strong.”

Exhibit 22: Constant Currency Realization indexed at 100


100

102

104 103 102 103

100

98

96

98

96

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

16 February 2016 14


#6: The outlook and how we prefer to play the sector

Exhibit 23: Three most recent changes embedded in our view

1: Target multiple moderation at TCS / HCLT TCS: We expect USD revenue CAGR of 12% over FY15-17E and earnings CAGR of

13.7% during this period (EPS CAGR is led by our depreciating INR assumption ofINR67/USD in FY17 and INR69/USD in FY18). Our revenue growth assumptionimplies 3.1% CQGR in FY17 and 2.9% CQGR in FY18 – this compares with 2.7%CQGR in FY16E in constant currency. While the historical average multiple forthe stock has been 18x, continuous deceleration in growth has meant growthestimates are now well below historical average too – comparable toAccenture’s 10% and below Cognizant’s mid-teens. Accenture trades at 17.5xFY17E consensus earnings and Cognizant traces at 17x CY16E EPS. We don’t seeTCS merit a premium to these companies amid current growth momentum. Ourtarget price now discounts forward earnings by 17x.

HCLT: We expect it to post USD revenue CAGR of 15% over FY16-18E and EPS ata CAGR of 17%, during this period. Our one-year target price discounts forwardearnings by 15x (v/s 16x previously). Lower valuation multiple embeds: [1]Relative slackening in Engineering Services activity v/s a spike in 2HCY14 (thoughthe segment should still grow above company average), and [2] Risks to IMSgrowth beyond the foreseeable future from disruption in the market throughcloud / automation / software-defined infrastructure. While these trends do notrule out HCLT’s ability to continue gaining share in the market, they dointroduce a greater element of uncertainty than before, and that HCLT isexperiencing the shift is reflected in static deal signings and drop in margins.

2: Upgrade in prospects at INFO & MTCL – sans the impact of leadership change Organically, this was the first quarter when INFO shaded YoY CC growth across

the top-tier. We believe this sets up the company nicely to meet its expectation

Target Multiple moderation at

TCS / HCLT Upgrade in prospects at MTCL – sans the impact

of leadershipchange Digital or

nothing – growth estimates skew in

favor of Digital leaders

16 February 2016 15


of industry leading revenue growth in FY17, and our estimates now build expectation of them shading it excluding acquisitions.

Exhibit 24: Estimate change in INFO Change in Estimates Revised Earlier Change

FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E INR/USD 65.3 67.0 69.0 65.2 67.0 69.0 0.1% 0.0% 0.0% USD Revenue (m) 9,509 10,767 12,188 9,414 10,586 11,968 1.0% 1.7% 1.8% USD rev. growth (%) 9.2 13.2 13.2 8.1 12.5 13.0 110bp 77bp 15bp EBIT Margin (%) 24.8 25.4 25.3 24.6 25.2 25.3 23bp 16bp -2bpEPS (INR) 58.2 68.2 76.4 56.7 67.2 74.9 2.7% 1.6% 2.0% EPS Growth (%) 8.0 17.2 11.9 5.1 18.5 11.5


Apart from INFO, MTCL too managed to put the seasonal softness behind, andlike INFO, guided for a sanguine 4QFY16 too, despite that being anotherseasonally weak quarter. Both the companies saw an upgrade in our revenueestimate during the quarter.

3: Digital or nothing – growth estimates skew in favor of Digital leaders As commentary around Digital capabilities, strategies and investments made way for execution, those with the perceived edge now show up in our estimates of revenue growth.

Exhibit 25: Estimates in favor of Digital leaders Organic Revenue (USDm) Org Revenue growth (%)

FY16E FY17E FY18E FY17E FY18E FY16-18E CAGR TCS 16,600 18,583 20,817 11.9 12.0 12.0 INFO 9,509 10,767 12,188 13.2 13.2 13.2 WPRO 7,364 8,075 8,884 9.6 10.0 9.8 HCLT 6,255 7,067 7,935 13.0 12.3 12.6 TECHM 4,058 4,464 4,956 10.0 11.0 10.5 MTCL 718 831 952 15.8 14.6 15.2


Bottom-up approach drives our preference for INFO, HCLT At 16.3x, the sector is currently trading ~6% below its 10-year average of 16.9x.

The differential has largely broadened post 2Q results. Moreover, the sector istrading at par with Sensex; at the same time last quarter, it was at a 14xpremium.

Within tier-I, our top picks are INFO (on gradual recovery in growth) and HCLT.We see INFO on course to industry average growth by FY17, with the remnantconcern of top accounts mining addressed to good effect thus far. HCLTcorrected recently after two quarters of disappointment. Its leadership inEngineering and strong demand in IMS could drive above-industry growth overthe near to medium term. We expect 1HCY16 to be materially better than2HCY15.

With Energy woes easing, WPRO’s performance may finally revive. At 12.7x one-year forward earnings, WPRO could see some near-term upside if itdemonstrates stable performance in the Energy segment. However, the jury will

December 2015 Results Preview | Sector: Technology

16 February 2016 16


be out on the recent leadership change as flux in senior management could cause further delay in growth recovery.

While TECHM has corrected significantly, concerns in the Telecom vertical keepvisibility on growth recovery low; growth recovery remains critical for re-rating.

In tier-II, we have a Buy on Cyient for its differentiated positioning, well definedniche and long-term strategy. We also prefer the business models of MTCL andPSYS.

Exhibit 26: Comparative valuation Company Mcap Rating TP Upside EPS (INR) P/E (x) RoE (%) FY16-18E CAGR (%)

USDb INR (%) FY17E FY18E FY17E FY18E FY17E FY18E USD rev. EPS TCS 66.9 Neutral 2575 13.4 136.3 157.1 16.6 14.4 35.6 33.3 12.0 13.7 Infosys 37.1 Buy 1350 25.0 68.2 76.4 15.8 14.1 25.2 24.8 13.2 14.5 Wipro 19.5 Neutral 630 19.5 41.6 46.9 12.7 11.2 20.8 20.6 9.8 13.2 HCL Tech 17.5 Buy 1000 21.2 61.6 69.7 13.4 11.8 28.1 26.5 14.5 14.8 TechM 6.2 Neutral 550 28.5 37.1 43.4 11.6 9.9 20.9 18.6 10.5 14.3 Cognizant 31.9 Not Rated 3.0 3.4 17.5 15.3 17.8 17.2 12.5 13.3 Tier-I Agg 179.1 14.6 12.8 24.7 23.5 Mphasis 1.3 Neutral 520 25.9 38.5 42.3 10.7 9.8 13.6 14.2 6.6 10.6 Mindtree 1.8 Neutral 1600 13.7 89.2 110.4 15.8 12.7 28.3 28.6 17.7 23.0 KPIT Tech 0.4 Neutral 165 36.4 14.9 17.3 8.1 7.0 17.1 16.7 6.6 12.8 Cyient 0.7 Buy 550 31.3 37.8 42.7 11.1 9.8 17.7 17.5 11.8 13.6 Hexaware 1.0 Neutral 250 10.1 14.9 17.4 15.3 13.1 30.5 33.4 14.8 15.9 NIIT Tech 0.5 Neutral 610 22.7 51.4 57.4 9.7 8.7 18.5 18.0 7.8 12.4 Persistent Sys. 0.7 Neutral 700 14.8 43.3 51.7 14.1 11.8 20.2 22.0 16.4 17.3 Tier-II Agg 6.4 12.1 10.4 20.8 21.5


UPDATES

COMPANIES

SECTOR UPDATES

IT GALLERY

http://institution.motilaloswal.com/emailer/Research/AUTO-20150902-MOSL-DB-PG026.pdf

http://institution.motilaloswal.com/emailer/Research/TECHKNOW-SAAS-20150612-MOSL-PG010.pdf

http://institution.motilaloswal.com/emailer/Research/ECOM-20150313-MOSL-ES-PG006.pdf

http://institution.motilaloswal.com/emailer/Research/IT-ECOM-20141104-MOSL-SU-PG106.pdf

http://institution.motilaloswal.com/emailer/Research/MCX-20150819-MOSL-IC-PG024.pdf

http://institution.motilaloswal.com/emailer/Research/INFO-20140916-MOSL-CU-PG042.pdf

http://institution.motilaloswal.com/emailer/Research/MPHL-20150618-MOSL-CU-PG014.pdf

http://institution.motilaloswal.com/emailer/Research/IT-CTSH-20160208-MOSL-SU-PG006.pdf

http://institution.motilaloswal.com/emailer/Research/TechKnow-20160129-MOSL-PG016.pdf

http://institution.motilaloswal.com/emailer/Research/IT-20160106-MOSL-RP-PG020.pdf

16 February 2016 18


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