Valuation Pulse IT and ITeS industry...Manish Saxena Partner Grant Thornton Bharat LLP E: [email protected] We are pleased to present Valuation Pulse for the first quarter ending

©2020 Grant Thornton Bharat LLP. All rights reserved.

Q1 FY 21

Valuation Pulse –

IT and ITeS industry


Foreword

2

Manish Saxena

Partner

Grant Thornton Bharat LLP

E: [email protected]

We are pleased to present Valuation Pulse for the first quarter ending Financial Year 2021 (Q1 FY 21).

The COVID-19 pandemic has created major economic crisis all over the world but parallelly paved way for

new opportunities for certain industries. One among those is the IT and ITeS industry.

Accelerated demand, along with liquidity and general positive outlook has led to a v-shaped recovery of

valuations for all IT companies globally and in India. The valuations of global tech companies have now

exceeded pre-covid levels with the S&P 500 IT index increasing by approximately 24% between now and 31

December 2019 vs. 4.4% increase in S&P 500 index. The valuations of Indian IT and ITeS industry have

also exceeded pre-covid levels and have outperformed the overall market indices. Nifty IT is up by 15.7%

since 31 December 2019 while Nifty is down by 7.1%.

During the quarter, some key trends observed in the industry include:

• Despite decline in revenues due to lockdown, IT companies saw a robust pipeline, on account of demand

for cloud migration/infrastructure, digital solutions, cyber security solutions, etc. as the pandemic

accelerated digital transformation projects of clients.

• Despite witnessing a decline in revenue, most companies managed to either maintain Q4 FY 20 margins

or marginally improve the margins on account of one-time reduction in travel costs and significant cost

control measures taken by the managements either by freezing the hiring, cutting down on SG&A

expenses, etc.

• The supply constraints faced during the beginning of the quarter were quickly addressed through work

from home model.

• Increasing trend of vendor consolidation by clients for cost optimisation has helped IT companies win

more deals.

On the transactions front [mergers and acquisitions (M&A) and funding], IT and ITeS industry witnessed

lowest level of transaction volumes among last four quarters mainly due to disruption caused by the

pandemic in Q1 FY 21 and same is reflected in the muted transaction activity in April and May 2020.

However, the transaction activity in June and July 2020 have shown signs of recovery both in value and

volume terms indicating return of near-normal transaction activity. The current pandemic has increased the

reliance on technology and the same is reflected in increased transaction activity in automation software, big

data analytics, cloud communication and infrastructure segments that is expected to gather pace in future.

We hope you will find this publication insightful and informative.

Note: Data in this publication has been updated till 13 August 2020


Executive summary – market indices

3

*Closing prices have been presented till 13 August 2020 in order to capture the results of Q1 FY 21.

#Refer Appendix 1 to 3 for the list of IT companies considered for our analysis in each of the segment

Market

Index

31 December

19 to 30 June

2020

31 December

19 to 13

August 2020

S&P 500 -4.0% 4.4%

S&P 500 IT 14.2% 24.3%

NIFTY 50 -15.3% -7.1%

NIFTY IT -5.7% 15.7%

% change in market indices

Segments

31 December

2019 to 30

June 2020

31 December

2019 to 13

August 2020

Global IT

Services-4.9% 3.0%

Global Tech 23.6% 25.8%

Large Cap IT

Services-4.4% 12.4%

Mid Cap IT

Services0.4% 27.8%

Small Cap IT

Services-9.5% 16.7%

IT

Engineering-11.8% 8.9%

Software 3.1% 17.1%

% change in market cap of segments

S&P 500* S&P 500 IT*

NIFTY 50* NIFTY IT*

6000

8000

10000

12000

14000

10000

12000

14000

16000

18000

20000

500

1000

1500

2000

2500

1000

1500

2000

2500

3000

3500

4000


Executive summary – global IT services and global

technology

4

EV/revenue* EV/EBITDA*

HighLow FairMedian - EV/revenuesEV/revenues

Glo

ba

l IT

se

rvic

es

Median - EV/EBITDAEV/EBITDA

Glo

ba

l te

ch

co

mp

an

ies

*Multiples have been presented till 13 August 2020 in order to capture the results of Q1 FY 21.

** Please refer Appendix 3 for the list of companies considered

1.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

12.1

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

7.1

4.0

6.0

8.0

10.0

26.8

12.0

16.0

20.0

24.0

28.0

32.0

36.0

40.0

44.0


Executive summary – large, mid and small cap

IT services

5


Median - EV/revenuesEV/revenues

* Multiples have been presented till 13 August 2020 in order to capture the results of Q1 FY 21.

La

rge

ca

pM

id c

ap

Sm

all

ca

p

Median - EV/EBITDAEV/EBITDAHighLow Fair

2.4

1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7

10.6

5.5

7.0

8.5

10.0

11.5

13.0

14.5

16.0

1.9

1.0

1.5

2.0

2.5

3.0

12.2

6.0

8.0

10.0

12.0

14.0

16.0

18.0

0.9

- 0.2 0.4 0.6 0.8 1.0 1.2 1.4

6.9

1.0

3.0

5.0

7.0

9.0

11.0

13.0


Executive summary – other IT and ITeS segments

6


HighLow FairMedian - EV/revenuesEV/revenues

* Multiples have been presented till 13 August 2020 in order to capture the results of Q1 FY 21.

En

gin

ee

rin

g s

erv

ice

sS

oft

wa

re p

rod

uc

ts

Median - EV/EBITDAEV/EBITDA

2.6

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

14.0

7.0 9.0

11.0 13.0 15.0 17.0 19.0 21.0 23.0

5.3

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

EV/rev Median EV/Rev

14.7

3.0

9.0

15.0

21.0

27.0

EV/EBITDA Median EV/EBITDA


Executive summary – transactions

7

• Overall transaction values (M&A and PE) have decreased from USD 1,571 million in Q4 FY 20 to USD 420 million in Q1 FY 21

with volumes dropping from 29 to 19 transactions during the same period.

• However, the recent trends are encouraging and both value and volume of transactions increased in July compared to the

previous three months.

• The July month saw two large transactions i.e, Thoma Bravo’s acquisition of Majesco and The Carlyle Group’s investment in

Nxtra Data

• In Q1 FY 21, IT Companies focused on acquiring technologies like automated software platform and predictive analysis for better

management of their businesses and effectively deal with the uncertainties.

Quarterly transaction values and volumes

1,168

651 363

1,571

420

30

36

2629

19

0

5

10

15

20

25

30

35

40

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Q1 FY20 Q2 FY20 Q3 FY20 Q4 FY20 Q1 FY21

Values USD mn Volumes

Monthly transaction values and volumes

694

53 421 209 62 76 282

747

13

7

10

14

4

9

6

11

0

2

4

6

8

10

12

14

16

-

100

200

300

400

500

600

700

800

April May June July

2019 Deal Value 2020 Deal Value

2019 Deal Volume 2020 Deal Volume


Large cap – revenue and EBITDA margin trend

• On a sequential basis, the revenues decreased from INR 1,083.7 billion (USD 14.3 billion) in Q4 FY 20 to INR 1,037.1 billion (USD 13.7

billion) in Q1 FY 21 at a rate of -4.3%. However, for the same period, the EBITDA margins remained flattish at 22.9%.

• On a year-on-year (y-o-y) basis, the revenues increased from INR 994.1 billion (USD 13.2 billion) in Q1 FY 20 to INR 1,037.1 billion (USD

13.7 billion) in Q1 FY 21 at a growth rate of 4.3%. Further, the EBITDA margins increased from 21.7% to 22.9% during the same period.

• In Q1 FY21, all large cap companies witnessed a degrowth in revenue due to the impact of COVID-19 on majority of their business

segments, such as banking and financial services (BFSI), retail, manufacturing, coupled with supply side constraints. Further, the decrease in

volume was further fueled by pricing discounts/concessions to customers in stressed verticals.

• On margins front, large cap companies continued to be resilient either by showing slight improvement or maintaining Q4 FY 20 margins

despite witnessing a dip in revenue during the quarter. Same was on account of factors, such as taking significant cost management

measures, changing onshore-offshore mix, favourable forex gains and one-time reduction of SG&A expenditure due to lockdowns.

8

QoQ revenue (INR billion) QoQ EBITDA margins (%)

750.0

800.0

850.0

900.0

950.0

1,000.0

1,050.0

1,100.0

Revenue

22.9%

20.0%

22.5%

25.0%

27.5%

EBITDA Margins Median EBITDA Margins


Large cap – historical multiples

9

The valuation multiples witnessed a v-shape recovery in Q1 FY 21. In

fact, the restored multiples are trading at a level higher than the

December 2019 valuation multiples indicating new opportunities

thrown at IT industry by the global pandemic.

Increasing shift to online services, need for digital solutions, such as

digital workplace solutions, cloud migration and vendor consolidation

by clients for cost-optimisation, have become a boon to IT

companies. Recovery in demand was mainly seen from clients not

operating under stressed verticals, such as life sciences, hi-tech, e-

commerce. However, IT companies who are exposed to clients

operating in stressed industries, such as manufacturing, travel and

hospitality, have witnessed pricing pressure and steep cut in budgets.

The strong pipeline won by large cap companies indicates a positive

environment for the IT industry in future, which is reflected in the

recent uptick in market cap of these companies.

EV/Revenue EV/EBITDA

Market cap (INR billion)

* Market cap and multiples have been presented till 13 August 2020 in order to capture the

reported results of Q1 FY 21.

** Please refer Appendix 1 for the list of companies considered.

2.4

1.3

1.5

1.7

1.9

2.1

2.3

2.5

2.7

EV/ Rev Median-EV/Rev

10.6

5.5

7.0

8.5

10.0

11.5

13.0

14.5

16.0

EV/ EBITDA Median-EV/EBITDA

7,500.0

8,500.0

9,500.0

10,500.0

11,500.0

12,500.0

13,500.0

14,500.0

15,500.0

16,500.0

17,500.0


Mid cap – revenue and EBITDA margin trend

10

• On a sequential basis, the revenues decreased from INR 131.2 billion (USD 1.74 billion) in Q4 FY 20 to INR 126.0 billion in Q1

FY 21 (USD 1.67 billion) at a rate of -3.9%. However, the EBITDA margins increased marginally from 17.3% to 17.4% in the same

period.

• On a y-o-y basis, the revenues increased from INR 114.3 billion (USD 1.5 billion) in Q1 FY 20 to INR 126 billion in Q1 FY 21

(USD 1.7 billion) at a growth rate of 10.3%. Further, the EBITDA margins increased from 16.0% to 17.4% for the same period.

• It has been a mixed bag quarter for mid cap segment where significant degrowth in revenue of certain companies is offset by

growth in revenue reported by other companies (Persistent, Hexaware). Despite prevailing COVID-19, the growth in revenue for

few companies is mainly on account of their less exposure to stressed verticals.

• On a sequential basis, margins for most companies in this segment remained flattish in Q1 of FY 21 compared with Q4 of FY 20.

Like large cap companies, mid cap companies have also taken strict cost control measures, such as reduction in travel, tightening

of SG&A, which helped them maintain the margins despite decline in revenue.


60.0

80.0

100.0

120.0

140.0

Revenue

16.8%

14.0%

16.0%

18.0%

20.0%



Mid cap – historical multiples

11

• Like large cap companies, mid cap companies have also

witnessed a v-shape recovery on the back of positive outlook.

• The positive outlook is primarily due to an increase in deal

wins by these companies indicating more visibility on revenue

in the upcoming quarters, mainly from clients operating in life

sciences, healthcare, hi-tech etc. However, companies with

major exposure to retail, travel and hospitality, or similar

industries beaten down by the pandemic, may continue to

face revenue growth and margin pressures.


Market cap (INR billion)*

* Market cap has been presented from Q2 FY 17 considering that L&T Infotech is listed from that quarter.

** Market cap and multiples have been presented till 13 August 2020 in order to capture the results of Q1 FY 21.

*** Please refer Appendix 1 for the list of companies considered.

1.9

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0


12.2

6.0

8.0

10.0

12.0

14.0

16.0

18.0


400.0

600.0

800.0

1,000.0

1,200.0

1,400.0


Small cap – revenue and EBITDA margin and multiples trend**

12


EV/revenue EV/EBITDA

Market cap (INR billion)

*Majority of small cap companies have not released their Q1 FY 21 results. Therefore, we have provided quarter-on-quarter (q-o-q) revenue and EBITDA margins till 31

March 2020. However, multiples have been considered till 13 August 2020 based on last 12-month (LTM) financial metrics as of 31 March 2020.

** Please refer Appendix 1 for the list of companies considered

0.9

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4


6.9

1.0

3.0

5.0

7.0

9.0

11.0

13.0


70.0

90.0

110.0

130.0

150.0

170.0

190.0

30.0

35.0

40.0

45.0

50.0

55.0

Revenue

12.9%

8.0%

10.0%

12.0%

14.0%

16.0%



IT engineering – revenue and EBITDA margin trend

13

• On a sequential basis, revenues decreased from INR 29.6 billion (USD 0.39 billion) in Q4 FY 20 to INR 26.9 billion (USD 0.36 billion)

in Q1 FY 21 at a rate of -9.2%. During the same period, EBITDA margins decreased from 17.3% to 14.8%.

• On an annual basis, revenues decreased from INR 28.0 billion (USD 0.37 billion) in Q1 FY 20 to INR 26.9 billion in Q1 FY 21 (USD

0.36 billion) at a rate of -4.0%. During the same period, EBITDA margins decreased from 17.4% to 14.8%.

• IT engineering companies have witnessed de-growth in revenues due to their significant exposure to verticals, such as transportation,

aerospace, especially commercial aviation, energy and utilities. As a result of the COVID-19 pandemic, the companies have

experienced delayed decision making and reprioritisation of budgets by these clients.

• On the contrary, defence vertical of the IT engineering companies has shown good traction in deal wins during the quarter as a result

of certain global geo-political issues. Further, medical devices and healthcare segments have also witnessed good growth during the

quarter that was slightly offset by delayed demand for elective surgeries with respect to hospitals. As a result of global lockdowns due

to the COVID-19, other segments, such as semiconductor, media and entertainment verticals have witnessed an increase in demand.

• Despite decline in discretionary SG&A expenses during the quarter, IT engineering companies have witnessed decline in margins

compared to flattish margins reported by IT services companies. Same is mainly on account of company specific one-time

restructuring costs and utilisation issues faced by Cyient and L&T Technology Services, respectively.


10.0

15.0

20.0

25.0

30.0

35.0

Revenue

17.4%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%



IT engineering – historical multiples

14

• Like IT services companies, IT engineering companies have

also seen a sharp recovery in valuation multiples based on

the expected positive outlook. These companies are

expecting strong demand from recovery of various sub-

verticals, such as electric vehicles, off-road and rail, rollout of

5G network.



*Market cap has been presented from Q2 FY 17 considering that L&T Technology is listed only from that quarter.

*Multiples represent weighted average multiples calculated based on the market capitalisation weights. Therefore, the multiples are affected by the large players in this

segment and may not be used for valuation of smaller companies.

*Market cap and multiples have been presented till 13 August 2020 in order to capture the financial results of Q1 FY 21.

**Please refer Appendix 2 for the list of companies considered.

2.6

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0


14.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0


100.0

150.0

200.0

250.0

300.0

350.0

©2020 Grant Thornton Bharat LLP. All rights reserved.15


EV/Revenue* EV/EBITDA*


*Majority of software companies have not released their Q1 FY 21 results. Therefore, we have provided q-o-q revenue and EBITDA margins till 31 March 2020. However,

multiples have been considered till 13 August 2020 based on LTM financial metrics as of 31 March 2020.

*Multiples represent weighted average multiples calculated based on the market capitalisation weights. Therefore, the multiples are affected by large players in this segment

and may not be used for valuation of smaller companies.

*** Please refer Appendix 2 for the list of companies considered.

Software products – revenue and EBITDA margin and multiples

trend**

15.0

17.5

20.0

22.5

25.0

Revenue

31.5%

20.0%

25.0%

30.0%

35.0%

40.0%


5.3

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0


150.0

200.0

250.0

300.0

350.0

400.0

450.0

14.7

3.0

9.0

15.0

21.0

27.0



Transactions – IT and ITeS industry (quarterly & monthly trends)

16

Year Domestic

Merger and

internal

restructuring

Inbound Outbound PE/VC

Q1 FY 20 107 - 18 429 614

Q4 FY 20 87 - 965 345 174

Q1 FY 21 42 - 75 63 240

June 2019 - - 5 276 140

July 2019 11 - 17 17 164

April 2020 32 - - 5 25

May 2020 - - 5 6 65

June 2020 10 - 70 52 150

July 2020 3 - - 42 702

Year Domestic

Merger and

internal

restructuring

Inbound Outbound PE/VC

Q1 FY 20 4 - 3 10 13

Q4 FY 20 6 - 4 8 11

Q1 FY 21 3 - 2 6 8

June 2019 - - 1 7 2

July 2019 2 - 3 3 6

April 2020 1 - - 1 2

May 2020 - - 1 3 5

June 2020 2 - 1 2 1

July 2020 1 - - 5 5

Quarterly transactions values and volumes

Break-up of the transaction values and volumes

Transaction values (USD million) Transaction volumes

1,168

651 363

1,571

420

30

36

26

29

19

0

5

10

15

20

25

30

35

40

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Q1 FY20 Q2 FY20 Q3 FY20 Q4 FY20 Q1 FY21

Values USD mn Volumes

Monthly transaction values and volumes

694

53

421 209 62 76

282

747

13

7

10

14

4

9

6

11

0

2

4

6

8

10

12

14

16

-

100

200

300

400

500

600

700

800

April May June July

2019 Deal Value 2020 Deal Value

2019 Deal Volume 2020 Deal Volume


IT and ITeS industry transactions: Overview

17

• Overall transaction values (M&A and PE) have decreased from USD 1,571 million in Q4 FY 20 to USD 420

million in Q1 FY 21 with volumes dropping from 29 to 19 transactions during the same period. However, the

recent trends are encouraging and both value and volume of transactions increased in July compared to the

previous three months.

• M&A transaction values decreased from USD 1,397 million in Q4 FY 20 to USD 180 million in Q1 FY 21.

Further, in terms of volumes, M&A activity has seen the lowest level of activity in Q1 FY 21 due to disruption

caused by COVID-19. However, IT companies have witnessed a rebound in M&A activity in July 2020 with

volumes returning to near normal activity.

• PE transaction values increased from USD 174 million in Q4 FY 20 to USD 240 million in Q1 FY 21 primarily

led by Series C round of funding of USD 150 million in Postdot Technologies Pvt. Ltd. The PE transaction

volume declined to 8 in Q1. However, like M&A transactions, PE transactions saw a rebound in July 2020

compared to a near normal levels. Further in July 2020, July saw two big ticket transactions, i.e. Thoma

Bravo’s investment in Majesco and The Carlyle Group’s investment in Nxtra Data.

• In Q1 FY 21, IT companies focused on acquiring technologies, such as automated software platform and

predictive analysis for better management of their businesses and effectively deal with the uncertainties.

©2020 Grant Thornton Bharat LLP. All rights reserved.18

Top transactions: Q1 FY 21 and July 2020

*NA: Not applicable

Transaction

month

Acquirer Country

(Acquirer)

Target Country

(Target)

Segment Transaction

type

Transaction

value

(USD million)

July 2020 Thoma Bravo L.P USA Majesco Limited-

Majesco US

India IT Consultancy PE

investment

421.0

July 2020 The Carlyle Group USA Nxtra Data Limited India Data Centre PE

investment

235.0

June 2020 Multiple Funds NA* Postdot Technologies

Pvt. Ltd- Postman

India System Software PE

investment

150.0

June 2020 Sinch AB Sweden ACL Mobile Ltd India Enterprise Messaging

Solutions

Acquisition 70.0

June 2020 HCL Technologies Ltd India Cisco Systems Inc.’s

SON (self-optimizing

network) technology

USA Network Automation

Solution

Acquisition 49.0

May 2020 Multiple Funds NA* SirionLabs Inc. India Contract Management

Solution

PE

investment

44.0

July 2020 Multiple Funds NA* JetSynthesys Pvt. Ltd India Digital Content

Platform

PE

investment

39.5

April 2020 Tech Mahindra Ltd India Cerium Systems Pvt.

Ltd

India Circuit Design

Services

Controlling

stake

32.1

April 2020 Multiple Funds NA* RoboticWares Pvt. Ltd India Workforce

Management Platform

PE

investment

24.5

July 2020 Wipro Ltd India IVIA Serviços de

Informática Ltda

Brazil IT Consultancy Acquisition 22.4


Company-specific analysis of large cap companies

19

Company Two-year CAGR (%)Two-year median

margins (%)

TCS 5.8% 26.5%

Infosys 10.3% 21.9%

HCL 12.5% 23.4%

Wipro 3.3% 17.1%

Tech Mahindra 4.9% 16.4%

Q-o-q revenue growth (%) Quarter wise EBITDA margins (%)

• Infosys recorded the lowest revenue de-growth in Q1 FY 21

(in reported rupee terms) followed by Tech Mahindra. HCL

recorded the highest de-growth in revenue in the quarter.

-10.0%

-7.0%

-4.0%

-1.0%

2.0%

5.0%

8.0%

11.0%

Revenue Growth -TCS Revenue Growth-Infy

Revenue Growth-Wipro Revenue Growth-HCL

Revenue Growth-Tech Mah

10.0%

14.0%

18.0%

22.0%

26.0%

30.0%

EBITDA Margin -TCS EBITDA Margin -Infy

EBITDA Margin -Wipro EBITDA Margin -HCL

EBITDA Margin -Tech Mah


Company-specific analysis of large cap companies (contd.)

20

Five-year

median

EV/

revenue

Premium/

(discount) on

2.4x

EV/LTM

revenue

EV/one-

year

forward

revenue

EV/Two-year

forward

revenue

Five-year

median

EV/EBITDA

Premium/

(discount) on

10.6x

EV/LTM

EBITDA

EV/LTM one-

year forward

EBITDA

EV/LTM two-year

forward EBITDA

Large cap

companies 2.4x 10.6x

TCS 4.5x 91.5% 5.2x 5.0x 4.6x 16.9x 58.8% 20.0x 18.6x 16.7x

Infosys 3.1x 32.7% 3.9x 3.8x 3.4x 12.3x 15.5% 16.1x 14.8x 13.5x

HCL 2.4x 0.0% 2.6x 2.6x 2.3x 10.5x (1.4)% 10.5x 10.3x 9.6x

Wipro 2.0x (16.5)% 2.1x 2.1x 2.0x 9.8x (7.9)% 10.9x 10.2x 9.8x

Tech Mahindra 1.4x (38.8)% 1.5x 1.5x 1.3x 8.8x (17.2)% 10.9x 9.2x 8.0x

* Multiples have been presented till 13 August 2020 in order to capture the results of Q1 FY21.

EV/Revenue EV/EBITDA

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

EV/Revenue-TCS EV/Revenue-Infy

EV/Revenue-Wipro EV/Revenue-HCL

EV/Revenue-Tech Mah EV/Revenue-Industry

0.0

5.0

10.0

15.0

20.0

25.0

EV/EBITDA-TCS EV/EBITDA-InfyEV/EBITDA-Wipro EV/EBITDA-HCLEV/EBITDA-Tech Mah EV/EBITDA-Industry


26%

24%

21% 21%

15%

27%

24%25%

20%

14%

26% 26% 26%

21%

14%

0%

5%

10%

15%

20%

25%

30%

TCS Infosys HCL Wipro Tech Mahindra

Q1 FY 20 Q4 FY 20 Q1 FY 21

Company-specific analysis of large

cap companies (contd.)

21

Company Contract value won in Q1 FY 20 Contract value won in Q4 FY 20 Contract value won in Q1 FY 21

TCS USD 5.7 billion USD 8.9 billion USD 6.9 billion

Infosys USD 2.7 billion USD 1.7 billion USD 1.7 billion

HCL 12 transformational deals signed in Q1 FY 20* 14 transformational deals signed in Q4 FY 20*11 transformational deals signed in Q1

FY 21*

Wipro -* -* -*

Tech Mahindra USD 0.5 billion USD 0.5 billion USD 0.3 billion

Quarter-wise EBITDA margins (%)

* Amount not disclosed by the company in the earnings call.


Forward estimates of large cap companies

22

LTM and forward EV/revenue LTM and forward EV/EBITDA

EV/revenue and EV/EBITDA are estimated on the following information:

• Enterprise value as on 13 August 2020

• Last 12-month (LTM) revenue and EBITDA as on 13 August 2020 (reported currency)

• One-year and two-year forward estimates of revenue and EBITDA as on 13 August 2020

5.2

3.9

2.1

2.6

1.5

5.0

3.8

2.1

2.6

1.5

4.6

3.4

2.0 2.3

1.3

-

1.0

2.0

3.0

4.0

5.0

6.0

TCS Infosys Wipro HCL Tech Mahindra

EV/ LTM Rev EV/ 1 Yr Fwd Rev EV/ 2Yr Fwd Rev

20.0

16.1

10.9 10.5 10.9

18.6

14.8

10.2 10.3 9.2

16.7

13.5

9.8 9.6 8.0

-

5.0

10.0

15.0

20.0

25.0

TCS Infosys Wipro HCL Tech Mahindra

EV/ LTM EBITDA EV/ 1 Yr Fwd EBITDA EV/ 2 Yr Fwd EBITDA


-2.4%

-7.3% -6.4%

-12.1%

-4.1%

0.1%

-9.9%

-1.8%

0.6%

-1.3%

-9.9%

-3.1%

2.2% 4.4%

-2.1%

-8.4% -7.1%

-15.5%

1.4%

-11.2%

31.5%

13.4%18.2%

14.3% 12.8%6.7%

3.1%

31.3%

7.1%

18.8%14.0%

9.6%

19.2%

28.4%

11.2%

22.5%

13.1%

6.7%9.4% 8.8%

Revenue contribution and growth (reported USD currency)

in verticals for Q1 FY 21

23

A

Large cap

Revenue contribution in verticals for Q1 FY 21

Segments: i) BFSI, ii) Communications, iii) M&T = manufacturing and technology, iv) Retail, v) E&U= energy and utilities, vi) Life sciences, vii) Others

Revenue growth in verticals for Q1 FY 21 (q-o-q%)

B

TCS

C

Infosys


-1.7%

-15.2%-11.4%

-9.2% -7.4%

1.5%

-4.3%

-8.6%

-4.2%-6.8%

-9.2%15.7%

40.0%

25.8%

7.3%11.2%

-4.3%

-12.2%

-2.6%

-10.4%

-2.3% -5.3%

30.7%

5.1%

21.6%15.9%

13.2% 13.5%

22.4%

7.6%

35.3%

10.0% 11.0%13.7%

Revenue contribution and growth (reported USD currency)

in verticals for Q1 FY 21 (contd.)

24

D

HCL Tech

Revenue contribution in verticals for Q1 FY 21

Segments: i) BFSI, ii) Communications, iii) M&T = manufacturing and technology, iv) Retail, v) E&U = energy and utilities, vi) Life sciences, vii) Others

Revenue growth in verticals for Q1 FY 21 (q-o-q%)

E

Wipro

F

Tech

Mahindra


Large cap companies: Other observations

• TCS’ five-year median EV/revenue and EV/EBITDA multiples were trading at premiums of 91.5% and 58.8%,

respectively compared with the overall large cap median multiples. It had the highest premium among all the

large cap companies.

• Life sciences, healthcare, hi-tech segments have been more resilient and shown increase in revenue during

the quarter.

• Impact on BSFI vertical has been relatively less compared to other verticals due to increase in the

transformational deals won by large cap companies.

• Major decline in revenue is witnessed in retail and manufacturing verticals that were significantly disrupted

due to lockdowns.

• Decline in oil prices has significantly impacted energy and utilities vertical.

• Despite increase in data usage due to global lockdown, communication vertical has underperformed due to

delay in 5G rollout.

25


Appendix 1 – IT services companies

• We have analysed the valuation multiples of IT services companies and have segregated the companies into large, mid and small

cap categories based on their current market capitalisation.

26

Large cap Mid cap Small cap

• Tata Consultancy Services (TCS)

• Infosys

• Wipro

• HCL Technologies

• Tech Mahindra

• Mphasis

• WNS (holdings)

• Mindtree

• Hexaware Technologies

• Zensar Technologies Limited

• L&T Infotech Limited

• Persistent Systems

• eClerx Services

• Sonata Software

• Firstsource Solutions

• Hinduja Global Solutions

• NIIT

• Mastek

• Genesys International Corporation

• Datamatics Global Services

• Cigniti Technologies

• Kellton Tech Solutions

• Expleo Solutions

• R Systems International

• For our analysis, we have considered only those companies that were listed five years before Q1 FY 21 except for L&T Infotech

Ltd. Further, we have removed certain outlier companies based on various parameters.

• We have carried out the analysis based on the financial numbers of these companies in reported rupee currency. Further, for

comparison purposes, we have presented the corresponding dollar numbers that are converted based on the 30 June 2020

exchange rate and do not represent reported dollar financial numbers.

• Kindly note that from Q1 FY 20, all companies accounted for leases in accordance with the transition guidelines of the relevant

new accounting standard Ind AS 116/IFRS 16. This adjustment had a marginal impact on the EBITDA margins of all quarters from

Q1 FY 20 onwards. However, the same adjustments are not reflected in the previous years’ margins.


Appendix 2 – IT engineering and software product

companies

27

We have analysed the valuation multiples of listed engineering and software products companies in India over the last five years.

IT engineering companies* Software product companies*/**

• Tata Elxsi Limited

• Cyient Limited

• L&T Technology Services Limited

• ABM Knowledgeware Limited

• AurionPro Solutions Limited

• Nucleus Software Exports Limited

• Oracle Financial Services Software Limited

• 3i Infotech Limited

• Ramco Systems Limited

• Majesco Limited

* For our analysis, we have considered only those companies which were listed five years before Q1 FY 21 except for L&T

Technology Services. Further, we have removed certain outlier companies based on various parameters.

* We have carried out the analysis based on the financial numbers of these companies in reported rupee currency. Further, for

comparison purposes, we have presented the corresponding dollar numbers which are converted based on the 30 June 2020

exchange rate and do not represent reported dollar financial numbers.

* Kindly note that from Q1 FY 20, all companies accounted for leases in accordance with the transition guidelines of the relevant

new accounting standard Ind AS 116/IFRS 16. This adjustment had a marginal impact on the EBITDA margins of all quarters from

Q1 FY 20 onwards. However, the same adjustments are not reflected in the previous years’ margins.

** Companies primarily into developing software products.


Appendix 3– Global IT services and technology companies

• We have analysed the valuation multiples of following global IT services companies over the last five years:

28

• Capgemini SE

• EPAM Systems Incorporated

• CACI International Corporation

• Amdocs Limited

• Booz Allen Hamilton Holding Corporation

• Leidos Holding Incorporated

• Accenture plc

• Cognizant Technology Solutions Corporation

• DXC Technology Company

• International Business Machines (IBM) Corporation

• We have analysed the valuation multiples of following global technology companies over the last five years:

• Microsoft Corporation

• Adobe Incorporated

• Oracle Corporation

• Salesforce Incorporated

• VMware Incorporated

• Synopsys Incorporated

• ANSYS Incorporated

• Fortinet Incorporated

• Paycom Software Incorporated

• SS&C Technologies Holdings Incorporated


References

• S&P Capital IQ database

• Annual fillings of IT services companies

• Earnings call transcripts of IT services companies

• Dealtracker published by Grant Thornton in India

29


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Acknowledgements

31

Authors

Manish Saxena

Kaushik Paul

Monica Voladri

Madhav Kejriwal

For media queries, please contact

Rohit Nautiyal

E: [email protected]


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Valuation Pulse IT and ITeS industry...Manish Saxena Partner Grant Thornton Bharat LLP E: [email protected] We are pleased to present Valuation Pulse for the first quarter ending