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All rights reserved. Standard Chartered Bank 2010IMPORTANT DISCLOSURES CAN BE FOUND IN THE
DISCLOSURES APPENDIX. http://research.standardchartered.comTHIS REPORT MAY NOT BE DISTRIBUTED INTO THE UNITED STATES
Pankaj Kapoorpankaj.kapoor@sc.com
+91 22 6751 5804
Apoorva Ozaapoorva.oza@sc.com
+91 22 6787 2504
India | Technology EQUITY RESEARCH
16 December 2010
India IT ServicesDribbling into the big league
We expect market share gains from incumbent local/global SIs in the annuity-based outsourcing deals due for renewal
could be the next volume growth driver for Indian offshore players. We estimate a pipeline of at least 980 such IT deals
worth over US$204bn over 2011-15.
We believe scale players can absorb margin headwinds a 10% INR appreciation and a 10-12% annual wage hike
over 2H FY11-FY13, as realization growth picks up and manpower-cost structure normalises.
Structural demand shift should drive the sector polarisation. We would avoid a long-range play on mid-caps as a basket;
but we do not discount trading opportunities.
Infosys is our top pick to play the multiple earnings upgrade cycle theme for the tier 1 players. We find the risk-reward
profile attractive for Wipro and HCLT, but elevated expectations pose a risk to TCS.
BB Rec Mkt cap Price PT Impl. PE EPS (Rs) EPS CAGR PE (x)
Code (US$bn) (Rs) (Rs) FY12E FY11E FY12E FY10-13E FY11E FY12E
Infosys INFO IN OP 40.7 3,203 3,610 23.9 122.7 151.2 18.8 26.1 21.2
TCS TCS IN IL 48.1 1,104 1,150 22.9 43.2 50.1 18.4 25.5 22.0
Wipro WPRO IN OP 24.9 458 510 20.7 21.9 24.7 15.4 20.9 18.6
HCL Tech* HCLT IN OP 7.1 448 495 17.3 24.4 28.5 24.9 18.4 15.7
Patni* PATNI IN IL 1.4 483 480 13.4 40.6 35.9 4.9 11.9 13.5
Satyam SCS IN IL 1.7 66 64 17.1 2.0 3.7 20.2 32.3 17.6
Tech M TECHM IN UP 1.9 667 603 11.3 56.6 53.4 -0.1 11.8 12.5
Note: OP = OUTPERFORM, UP = UNDERPERFORM, IL = IN-LINE; Prices as at 15 Dec 2010, *Consolidated figures, year ending December 31 for Patni, June 30 for HCL TechSource: Company, Bloomberg, Standard Chartered Research estimates, For Patni EPS CAGR is over FY10-12
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Contents
Investment summary 3Fundamentals in place for 25% revenue CAGR 5Structural shifts in end-user markets could impact IT spends 5Upcoming deal renewals open up an US$22bn opportunity 6What could it mean for the mid-range volume growth? 9We do not see margin management as a challenge 12Valuation: Stay safe, get richer 13Valuation methodology 14Company Valuation 18Industry Annexures 19Company updates
Infosys 24
TCS 33
Wipro 44
HCL Tech 54
Patni 63
Satyam 69
Tech Mahindra 76
Company Annexures 84
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Investment summary
The large deal renewal pipeline could be the next volume growth driver for Indian offshore
players, in our view. We also see realization growth picking up, though at a modest pace,
and a normalised manpower-cost structure with recalibrated hiring mix, falling attrition
and absolute bench management. Infosys (O/P; 13% upside) is our top pick to play the
multiple earnings upgrade cycle theme for the tier 1 players. We find the risk-reward
profile attractive for Wipro (O/P; 11%) and HCL Tech (O/P; 10%), but see elevated
expectations as a risk for TCS (I/L; 4%). Despite the recent correction, we do not see near-
term triggers for our mid-cap coverage and have IN-LINE ratings on Satyam and Patni, and
UNDERPERFORM rating for Tech Mahindra.
We expect revenues for tier 1 players to grow at 23-26% CAGR over FY11-13. The next
volume growth driver for Indian offshore players, in our view, will be the renewal pipeline of
earlier-signed annuity-based outsourcing deals with local/global players that may have used
limited offshoring. We estimate at least 980 IT deals worth ~US$204bn are due for renewal over2011-15 and could translate into an US$22.3bn opportunity for offshore players on our base case
assumptions, with US$50-250m TCV deals as the sweet spot.
A benign pricing outlook our channel checks suggest there is easing and limited reversals
on rate-card discounts given over FY09-10 (12-15% on prevailing offshore rates, as per our
estimates). Long range, we believe the growing penetration around clients core IT applications
could help the scale players gain a larger pie of the discretionary spend going forward, at least in
the development and integration components. Our forecasts build in 2.2-5.7% blended realization
for the top 3 players over 2H FY11-FY13E.
should help margin management. We believe scale players can absorb margin headwinds
~ 10% INR appreciation (as forecast by our economist) and a 10-12% annual wage hike over2H FY11-FY13. Effective per-capita employee costs should normalize as players revert to
fresher-heavy recruitment mix and realization growth comes back as a mid-range lever.
Resumption of campus wage hikes that could have a spiral impact on the sectors cost structure
is a risk; however, our checks indicate a broad discipline among scale players so far in the
ongoing recruitment season (for FY12 hiring).
Stay safe, get richer. Structural demand shift should drive sector polarisation. While overall IT
budgets are projected to see only modest growth over 2011-15, with a likely return of a hardware
refresh cycle, we believe discretionary IT spend will be primarily funded through cost savings in
non-discretionary spend. This could affect mid-scale players with high ADM exposure and client
dependence even as their limited service portfolio restricts new client generation. Thus, we would
avoid a long-range play on mid-caps as a basket; but we do not discount trading opportunities.
Infosys is our best buy idea. We expect the pace of realization growth will be faster and higher
for Infosys and could sustain a multiple earnings upgrade cycle. We also see concurrent earnings
upgrade/valuation expansion stories in Wipro (margin disappointment could reverse) and HCL
Tech (strong volume momentum). We believe TCS will continue to be a major beneficiary of the
renewal deal pipeline given its strong execution track record and willingness to explore alternate
pricing model. However, the elevated expectations pose a near-term risk to the stock, in our view.
We see no attractive long-range play among mid-caps. Despite the sharp correction (10-28%
over the past three months), we do not see near-term triggers for our mid-cap coverage. We are
IN-LINE on Satyam (muted revenue growth will keep margin management a challenge) and Patni
(speculation on ownership change could affect the revenue growth recovery). We have an
UNDERPERFORM on Tech Mahindra given the muted BT business outlook (45% of revenue).
At least 192 dealswith US$40bn TCVare up for renewal in2011
Average per-capita
manpower cost hasgrown at 0.3% CAGRfor the top 3 playersover FY06-10
The next phase ofvendor consolidationcould affect mid-sizedoffshore players
Earnings upgradecycle not yet over forlarge caps, in our view
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Fig 1 Valuation snapshot
Implied P/E EPS (Rs) Cash/share (Rs) P/E EV/EBITD
Price (Rs) PT (Rs) FY12E Rating FY11E FY12E FY11E FY12E FY11E FY12E FY11E F
Infosys 3,203 3,610 23.9 O/P 122.7 151.2 340.6 409.7 26.1 21.2 18.2
TCS 1,104 1,150 22.9 IL 43.2 50.1 46.4 72.2 25.5 22.0 19.2
Wipro 458 510 20.7 O/P 21.9 24.7 15.9 25.0 20.9 18.6 16.2
HCL Tech 448 495 17.3 O/P 24.4 28.5 4.3 16.6 18.4 15.7 11.3
Patni 483 480 13.4 IL 40.6 35.9 114.8 139.4 11.9 13.5 7.9
Satyam 66 64 17.1 IL 2.0 3.7 25.5 29.7 32.3 17.6 15.0
Tech Mahindra 667 603 11.3 U/P 56.6 53.4 -49.7 -22.3 11.8 12.5 9.3
Source: Bloomberg, Standard Chartered Research estimates
Fig 2 Financial performance snapshotUS$ sales growth (%) EBITDA margin (%) PBT growth (%)
FY11E FY12E FY11E FY12E FY11E
Infosys 27.2 25.3 33.3 33.1 20.0
TCS 27.8 21.9 30.0 29.7 28.2
Wipro 19.5 22.2 21.6 21.9 15.4
HCL Tech 30.6 23.6 17.8 17.3 52.8
Tech Mahindra 15.6 1.1 20.9 20.3 6.9
Patni 6.8 17.4 22.4 19.2 14.8
Mahindra Satyam -6.0 14.3 6.5 10.3 1.2
Source: Standard Chartered Research estimates
Fig 3 Recent market performance
Mcap Free float 52-wk 52-wk Price performan
(US$m) (%) High (Rs) Diff (%) Low (Rs) Diff (%) 1M abs 1M rel
Infosys 40,721 84.0 3,209 0 2,306 39 5.7 9.0TCS 48,058 26.0 1,113 -1 676 63 3.5 6.8
Wipro 24,943 20.6 500 -8 372 23 5.8 9.1
HCL Tech 7,076 34.8 456 -2 318 41 10.9 14.2
Tech Mahindra 1,933 27.2 1,158 -42 598 11 -7.9 -4.6
Patni 1,439 54.1 552 -13 382 27 -0.1 3.2
Mahindra Satyam 1,730 57.3 121 -45 59 12 -21.7 -18.4
Source: Standard Chartered Research estimates
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Fundamentals in place for 25% revenue CAGR
We believe market share gains by Indian offshore players in multi-million, multi-year deals
will be the next growth engine, especially as at least 980 deals with over US$200bn total
contract value come up for renewal over the next five years, according to our analysis.
We believe fundamentals for strong medium-term growth remain intact for Indian offshore players,
however, the shifting profile of IT spend drive cost savings in non-discretionary spend to fund
discretionary spend will likely add to the growing polarization in sector growth towards the
larger players, in our view. The tier 1 players will likely gain from both trends.
The cost focus in non-discretionary spend could open up an US$22.3bn opportunity from the
outsourcing contracts due for renewal between 2011 and 2015. We estimate 23-26% US$
revenue CAGR for the top 4 players over FY10-13; large deal wins could contribute 19-29% to
this, even on our conservative estimates.
In addition, the growing penetration around clients core IT applications could help the Indian
vendors gain a larger pie of the discretionary spend going forward, at least in the development
and integration components. This should support realizations; we have assumed 2-7% increase
in blended realization over FY10-13E, but that is more from ease/reversal of pricing discounts
given over FY09-10.
Structural shifts in end-user markets could impact IT spends
Globally, businesses are seeing a rising interactivity with end-consumers, led by both growing IT
savviness (of population) as well as changing demographics. There are also concurrent trends of
reducing internal intermediaries, mainly for cost savings, but increasing external intermediation
with growing overlapping of sectors (mobile banking, for instance). From an IT architecture
perspective, this translates into multi-modal application interface (mobile/internet/kiosk) and
network/database design that provides for multiple internal/external interfaces.
Fig 4 Rising interactivity with end-consumers likely to influence next areas of IT spend
Source: Standard Chartered Research
We expect marketshare gains ratherthan marketexpansion, to drivevolume growth forIndian offshoreplayers going forward
Changing demographics in end-user markets
IT literacy/savviness
Declining Internal
intermediation
(though growing external
intermediation)Aging population global mobility
Growing interactivity with end-consumer
Overlap across players/verticalsDistributed infrastructureMulti touch-points
[Web/Mobile/Kiosk]
Interlink across multiple databases/apps
[intra/inter cos]Secondary/multiple data centers
Multi-modal app. interfaces Network/data securityData warehousing/mining
+ business intelligence
Implica
tionsforIT
spe
ndareas
Implicationsfor
ITarchitecture
Businesstrends
Changing demographics in end-user markets
IT literacy/savviness
Declining Internal
intermediation
(though growing external
intermediation)Aging population global mobility
Growing interactivity with end-consumer
Overlap across players/verticalsDistributed infrastructureMulti touch-points
[Web/Mobile/Kiosk]
Interlink across multiple databases/apps
[intra/inter cos]Secondary/multiple data centers
Multi-modal app. interfaces Network/data securityData warehousing/mining
+ business intelligence
Implica
tionsforIT
spe
ndareas
Implicationsfor
ITarchitecture
Businesstrends
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Growth in total IT spend likely to remain modest going forward
The most recent update from Gartner, an IT industry market research firm, forecasts global
enterprise IT spending to grow at 3.1% to US$2.5trn in 2011, versus an estimated 2.4% growth in
2010. It projects growth to remain a lacklustre 3.6% over 2009-14, as it expects key verticalssuch as manufacturing and financial services to see IT budgets recover to pre-2008 levels not
before 2012/13.
We believe even as the IT spend recovers, the hardware refresh cycle could recover faster, after
the extension over the last couple of years, thus restricting the growth upside for services spend.
We thus expect IT services budgets to focus on driving savings in traditional spend areas (read
application maintenance/migration and re-engineering) to meet funding demands for long-
ranged/discretionary spend-centric IT projects. The tier 1 offshore players will likely gain from
both trends, in our view.
Fig 5 Macro economic challenges could exert greater influence on outsourcing adoptionin 2011-13
Source: Standard Chartered Research
Upcoming deal renewals open up an US$22bn opportunity
Industry analysts and outsourcing consultants such as Gartner and TPI have been highlighting
the shift in the outsourcing pattern over the past few years from a total outsourcing model
(where the entire/bulk of non-discretionary IT services is handed over to a single system
integrator such as EDS, IBM GS or CSC) to a blended outsourcing model (where the internal IT
department hands out portions of the requirement to multiple vendors selectively). There is also a
growing realisation among clients that large all-inclusive deals have not achieved the expected
cost savings or operational efficiencies. Besides, typical contracts by global system integrators
have a high degree of rigidity and lock-ins with severe termination penalties. We expect this has
fed a trend towards smaller outsourcing agreements with specific business goals.
We expect the H/Wrefresh cycle to returnin 2011 IT budgets
There is a shift inannuity deals towardsmulti-vendor, smallersize and shorterduration
Shifting profile of IT spendConcerns on
globalmacroeconomicoutlook remain involvement of business/customer
facing people in apps design
Modest pace of enterprise IT spendGartner forecasts 3.6% growth over 2009-2014; 3.1% in 2011
Cost savings in non-discretionary spend
Resumption of H/W refresh cycle 2008-09 saw extension to 5/6 years
from earlier 4 year norm Stable Win7/end of mainstreamsupport for WinXP by 2010
Savings on Program management costs
Vendor consolidation offshoring in earlier outsourcing contracts
involvement of CFO/COO
Discretionary spendfunding/spend areas
Rate card cuts ADM rates have not seen increase over the last 4/5 years Clients push for 10-20% yoy savings on multi-yearmaintenance contracts
Shifting profile of IT spendConcerns on
globalmacroeconomicoutlook remain involvement of business/customer
facing people in apps design
Modest pace of enterprise IT spendGartner forecasts 3.6% growth over 2009-2014; 3.1% in 2011
Cost savings in non-discretionary spend
Resumption of H/W refresh cycle 2008-09 saw extension to 5/6 years
from earlier 4 year norm Stable Win7/end of mainstreamsupport for WinXP by 2010
Savings on Program management costs
Vendor consolidation offshoring in earlier outsourcing contracts
involvement of CFO/COO
Discretionary spendfunding/spend areas
Rate card cuts ADM rates have not seen increase over the last 4/5 years Clients push for 10-20% yoy savings on multi-yearmaintenance contracts
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Top 4 players have won large deals worth US$20bn over FY07-1H FY11
Indian offshore vendors are increasingly gaining market share in terms of large (US$50m+ multi-
year) outsourcing contracts, new scope and deal renewals. The top 4 players have announced
227 such deals during 1Q FY07-2Q FY11, including at least 66 US$100m+ deals, according toour estimates. We believe the total contract value (TCV) of these deals could be ~US$18bn. This
excludes the two mega deals US$1.2bn 10-year Nielsen deal and the US$900m UK Pension
Authority contract for TCS. Besides these, there have been non-top four wins, though few and
far in between, such as Tech Mahindras three large contracts worth US$2bn from BT and
US$100m deal with a U.S. Fortune 500 company for Hexaware, not considered in our analysis.
We have also not included multi-year deal wins of less than US$50m TCV.
Fig 6 Large deal signings by top 4 players 1Q FY07-2Q FY11
0
5
10
15
20
25
30
1QFY07
3QFY07
1QFY08
3QFY08
1QFY09
3QFY09
1QFY10
3QFY10
1QFY11
US$m
0
500
1,000
1,500
2,000
2,500
Nos
Total TCV (RHS) Total large deal wins (LHS) Source: Company data, Standard Chartered Research estimates
Fig 7 Deal wins (CY06-10) By service Fig 8 Deal wins (CY06-10) By region
Deal(Nos) % MktShare TCV(US$bn) % MktShare
ADM 82 28 10.7 43
IMS 25 6 2.0 4
Full ITO 15 9 2.5 8
Total 122 14 15 14
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.04.5
CY06
CY07
CY08
CY09
CY10
US$bn
Americas As ia-Pac ific EMEA
Source: TPI Contract Database, Standard Chartered Research Source: TPI Contract Database, Standard Chartered Research
We see the momentum in large deal wins sustaining over the medium term
Our analysis using deal-related data compiled by TPI, indicate 980 IT deals with a combined TCV
of US$22.3bn are due for renewal over 2011-15, including 420 deals/US$85.4bn TCV in 2011/12
alone. Besides, 607 BPO deals worth US$71.1bn are also up for renewal in this period.
Fig 9 Service-wise qualified renewal deal pipeline over 2011-15
CY11E CY12E CY13E CY14E CY15E Total
US$bn Deals TCV Deals TCV Deals TCV Deals TCV Deals TCV Deals TCV
App. services 43 6.8 68 6.7 51 4.3 56 5.1 29 2.7 247 25.6
Infra. services 99 19.6 103 14.2 119 23.4 80 20.0 62 8.8 463 86.0
IT outsourcing 50 13.6 57 24.5 63 26.6 63 17.4 37 10.2 270 92.4
Total 192 40.0 228 45.4 233 54.3 199 42.5 128 21.7 980 203.9
Note: The above figures exclude deals that have a Indian offshore participant
Source: TPI Contract Database
Market share of Indianoffshore players in
US$25m+ TCV dealshas grown to 20% in2010 from 5% in 2005
We estimate top 4players won 28 dealsin 1H FY11 with~US$2bn combined
TCV
Indian players havebeen dominating the
ADM deals signedpost CY06
The low share inIMS/full ITO dealscould be due to higherincumbencyadvantage in suchdeals in our view
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Fig 10 Qualified renewal deal pipeline over 2011-2015CY11E CY12E CY13E CY14E CY15E Total
Qualified Deals Signed Pre-CY06
Deals (nos)Application services 8 12 7 10 2 39
Infrastructure services 37 24 17 9 9 96
IT outsourcing services 26 28 32 11 14 111
Total 71 64 56 30 25 246
TCV (USD bn)
Application services 4.9 3.1 0.8 2.2 0.4 11.3
Infrastructure services 14.5 7.7 8.6 5.1 2.7 38.7
IT outsourcing services 10.0 20.6 18.0 10.1 4.4 63.2
Total 29.4 31.4 27.5 17.4 7.5 113.2
Qualified Deals Signed CY06 Onwards
Deals (nos)
Application services 35 56 44 46 27 208
Infrastructure services 62 79 102 71 53 367
IT outsourcing services 24 29 31 52 23 159
Total 121 164 177 169 103 734
TCV (USD bn)
Application services 1.9 3.6 3.5 2.9 2.3 14.3
Infrastructure services 5.1 6.5 14.7 14.9 6.1 47.3
IT outsourcing services 3.6 3.9 8.6 7.3 5.8 29.2
Total 10.6 14.0 26.8 25.1 14.2 90.7
Note: The above figures exclude deals that have a Indian offshore participant
Source: TPI Contract Database
Fig 11 Renewal pipeline: by vertical Fig 12 Renewal pipeline: by region
0
10
20
30
40
50
60
CY11E
CY12E
CY13E
CY14E
CY15E
US$bn
BFSI Energy & Utilities HealthcareManufacturing TMT Retail
Transportation Others
0
10
20
30
40
50
60
CY11E
CY12E
CY13E
CY14E
CY15E
US$bn
Americas Asia-Pacific EMEA
Note: The above figures exclude deals that have a Indian offshore participant
Source: TPI Contract Database
We estimate a US$23bn market opportunity on base case assumptions
The cost focus in non-discretionary spend could open up a US$22bn opportunity over 2011-15
from the deal renewal pipeline on our base case assumptions. While ADM services could be fully
offshorable, we have taken offshorable annual contract value (ACV) as 50% in Infrastructure
services and 60% in a total outsourcing deal. We believe US$50-250m TCV deal size would be
the sweet-spot for Indian offshore vendors and while there could be larger size deals, we expect
them to be few and far between. We believe the average contract period will be five years; even
currently larger duration deals would get split in to shorter duration. Lastly, we have assumed the
normalized ACV of a deal would be 35% of the current value, adjusting for migration to offshore
costs (typically, offshore realizations are one-third of onsite realisation). Our analysis excludes
potential BPO deals where we believe switching costs for clients could be relatively much higher.
Application services,Infrastructure services
and IT outsourcingservices constitute13%, 42% and 45% ofdeals (in terms of TCVdue for renewal over2011-15, respectively
Deals signed pre-CY06, when Indianplayers were notactive in the largedeal segment,constitute 25% by
number and 56% byTCV of the renewalpipeline
BFSI (22% of TCV),Manufacturing (29%)and TMT (18%) arethe key verticals in therenewal pipeline
Europe accounts for50%+ of the potentialmarket in terms ofTCV
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We believe the estimates could be conservative; our base is restricted to publicly announced
contracts which historical trend suggest are only a part of the overall contract activity. For
instance, the TPI contract database defines 122 deals worth US$15.1bn TCV won over 2006-10.
However, as per our self compiled data, the top 4 Indian players won 227 US$50m+ deals of anestimated TCV of US$20bn over FY07-1H FY11.
Fig13 Potential renewal deal opportunity for tier 1 playersOffshorable ACV (US$m) 200 Total
Implied TCV (US$ bn)
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Fig 14 Top 4 players - large deals wins: impact on revenue growth forecastsUS$ m FY09 FY10 FY11E FY12E FY13E
Consolidated revenues
TCS 6,016 6,339 8,103 9,874 12,220Infosys 4,663 4,804 6,112 7,660 9,677
Wipro 4,324 4,391 5,246 6,522 8,195
HCLT 2,179 2,705 3,533 4,367 5,392
Total 17,182 18,238 22,993 28,423 35,485
Large deal wins(E) (current/ potential)
TCS 17 23 26 32 40
Infosys 10 18 20 24 28
Wipro 9 17 16 24 28
HCLT 14 12 15 18 22
Total 50 70 77 98 118
TCV(E) (US$m)
TCS 1,200 1,395 1,860 2,862 4,471
Infosys 663 1,325 1,767 2,544 3,562
Wipro 737 1,750 1,100 2,013 2,865
HCLT 1,160 1,050 1,378 1,786 2,401
Total 3,760 5,520 6,105 9,205 13,300
Revenues - large deals
TCS 616 960 1,315 1,648 2,073
Infosys 416 675 995 1,346 1,770
Wipro 346 637 939 1,213 1,549
HCLT 568 647 916 1,127 1,436
Total 1,946 2,919 4,165 5,333 6,829
Share of total revenues (%)
TCS 10.2 15.2 16.2 16.7 17.0
Infosys 8.9 14.0 16.3 17.6 18.3
Wipro 8.0 14.5 17.9 18.6 18.9
HCLT 26.1 23.9 25.9 25.8 26.6
Total 11.3 16.0 18.1 18.8 19.2
Source: Standard Chartered Research estimates
Are these deals margin dilutive? We do not think so
The margin impact of the growing share of large deals is a potential concern, as pricing in these
deals is typically at a discount to the standard rate cards. We believe while there is an immediate
depression in margins, even losses in certain cases, in such deals largely due to transition costs,
there is a recovery in the later period as the deal ramps up, given the natural hedges of higher
utilization, offshore delivery and lower effective per-capita manpower costs. For instance,utilization is high (typically 90%, and as high as 95% for offshore), given the strong visibility on
skill and headcount requirements. Similarly, we estimate the offshore delivery component is
higher at 70%, going as high as 80% in the steady state (with the project at full ramp up). In
addition, average manpower expenses are relatively low, given the broader staffing model. We
estimate the impact on corporate margins could be broadly neutral over the full deal term even at
10-15% lower blended pricing than the corporate average. However, the timelines of breakeven
may vary depending on the specific deal structure.
The other side of cost saving vendor consolidation: who gains, who looses?
The increasing focus on cost efficiencies should continue to push vendor consolidation. However,
we expect a relatively higher share of cases where consolidation may involve two offshore
vendors unlike the earlier round in 2001-03 when primarily onsite vendors were replaced. Thiswould be both to lower program management costs (replacing interfacing between vendors) and
push for rate-card cuts (volume linked pricing discounts). This could affect mid-scale players with
Higher offshore and abroader staffing modelhelp marginalize themargin hit from lower
rates in annuity deals
Vendors are alsopushing non-effortlinked pricing modelsto manage profitabilityby securingproductivity gains forthemselves
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high ADM exposure and client dependence even as their limited service portfolio and relatively
inflexible cost structure restrict new client generation.
Non-discretionary spend We expect beachheads of tier 1 could expandThe growing penetration around clients core IT applications could help the Indian vendors to gain
a larger pie of the discretionary spend going forward, at least in the development and integration
components. However, the design piece could likely remain dominated by global consulting and
SI majors, given the higher domain/process knowledge requirements.
However, we are cautious on gains from potential technology shifts
We consent with the view that cloud computing, along with software as services (SaaS) and
platform-centric BPO, could form the cornerstones of the next evolution in IT architecture, in our
view, similar to the earlier shifts client-server architecture from main-frame based computing in
the early 1990s, and then to web-based computing in the early 2000s. We also believe the
opportunities for tier 1 Indian offshore players to participate and gain from this shift will be
immense. However, we are unsure of the pace of acceptance of the concept (of services-based
IT architecture) and, thus, its contribution to incremental revenues over FY10-13. Also, the likely
adoption of infra ahead of applications as services could place global players such as IBM and
HP in a better position to address the initial demand, in our view.
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We do not see margin management as a challenge
We believe scale players can absorb margin headwinds as effective per-capita employee
costs normalise and realization growth comes back as a mid-range lever.
Fig 15 We expect per-capita manpower costs to normalize over FY11-13, more so for larger players
Source: Standard Chartered Research
Fig 16 And realization growth could come back as a margin tailwind over FY12/13
Source: Standard Chartered Research
-36%
-28%
-20%
-12%
-4%
4%
12%
20%
FY06
FY07
FY08
FY09
FY10
1HFY11
FY11E
FY12E
FY13E
Infosys - yoy change in per-capita manpower costs (E) TCS - yoy change in per-capita manpower costs (E)
Infosys - Reported offshore hike (yoy) TCS - Reported offshore hike (yoy)
Change in lateral share - Infosys Change in lateral share - TCS
Represents the spiral impact of the
campus wage hike (~15% yoy)
TCS attempted to manage itsemployee pyramid (fresher intake was
up 30% to 76% in FY08) and offshore
shift (up3%+)
Demand momentum comes faster
than expectation; drives up
attrition and thus, wage
incrementsEffective per capita manpower
cost up as lateral intakes rises
We expect the increase of 1H11 to
normalize over 2H11, in sync withfall in lateral recruitment
Onsite effort should pick-up in FY12
with ES/Consulting, could affect
manpower costsWe do not see campus salary rising,
at-least in FY12, as checks indicate
a more disciplined player behavior
FY11-13 A repeat of FY09?
Strong demand momentum (35%+ US$revenue CAGR) led to higher lateral intake,thus driving up attrition and in-turn, keepingthe annual wage hikes high (~15%)-36%
-28%
-20%
-12%
-4%
4%
12%
20%
FY06
FY07
FY08
FY09
FY10
1HFY11
FY11E
FY12E
FY13E
Infosys - yoy change in per-capita manpower costs (E) TCS - yoy change in per-capita manpower costs (E)
Infosys - Reported offshore hike (yoy) TCS - Reported offshore hike (yoy)
Change in lateral share - Infosys Change in lateral share - TCS
Represents the spiral impact of the
campus wage hike (~15% yoy)
TCS attempted to manage itsemployee pyramid (fresher intake was
up 30% to 76% in FY08) and offshore
shift (up3%+)
Demand momentum comes faster
than expectation; drives up
attrition and thus, wage
incrementsEffective per capita manpower
cost up as lateral intakes rises
We expect the increase of 1H11 to
normalize over 2H11, in sync withfall in lateral recruitment
Onsite effort should pick-up in FY12
with ES/Consulting, could affect
manpower costsWe do not see campus salary rising,
at-least in FY12, as checks indicate
a more disciplined player behavior
FY11-13 A repeat of FY09?
Strong demand momentum (35%+ US$revenue CAGR) led to higher lateral intake,thus driving up attrition and in-turn, keepingthe annual wage hikes high (~15%)
-6%
-4%
-2%
0%
2%
4%
6%
Q105
Q205
Q305
Q405
Q106
Q206
Q306
Q406
Q107
Q207
Q307
Q407
Q108
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Q110
Q210
Q310
Q410
Q111
Q211
FY11E
FY12E
FY13E
Onsite realisation - qoq/yoy change Offshore realisation - qoq/yoy change
Double hit from cross currency (-4%+) and pricing cuts (2-3%)
We believe the lower effective price cuts were due to proactive
shift to alternate pricing models and/or linking discounts to
volumes
Historically, onsite and offshore realizations have moved in-sync
We estimate volume linked discounts
given over 2009-10 could have been
up to 10-15% to then prevailing rate-
cards. However, these appear to have
been mainly on offshore rates
We expect the lag impact of discounts on offshore realizations could
bottom-out by 3Q11
While rates are unlikely to see an uptrend in FY12, partial reversal of
earlier discounts + growing share of ES/consulting should aid reported
realization
FY11-13 We expect a stable rates environment
Proactive client rationalisation could have helped Infosys to report higher
uptick in realization versus peers. However, this likely weighed on its
volume growth that has underperformed over recent quarters
-6%
-4%
-2%
0%
2%
4%
6%
Q105
Q205
Q305
Q405
Q106
Q206
Q306
Q406
Q107
Q207
Q307
Q407
Q108
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Q110
Q210
Q310
Q410
Q111
Q211
FY11E
FY12E
FY13E
Onsite realisation - qoq/yoy change Offshore realisation - qoq/yoy change
Double hit from cross currency (-4%+) and pricing cuts (2-3%)
We believe the lower effective price cuts were due to proactive
shift to alternate pricing models and/or linking discounts to
volumes
Historically, onsite and offshore realizations have moved in-sync
We estimate volume linked discounts
given over 2009-10 could have been
up to 10-15% to then prevailing rate-
cards. However, these appear to have
been mainly on offshore rates
We expect the lag impact of discounts on offshore realizations could
bottom-out by 3Q11
While rates are unlikely to see an uptrend in FY12, partial reversal of
earlier discounts + growing share of ES/consulting should aid reported
realization
FY11-13 We expect a stable rates environment
Proactive client rationalisation could have helped Infosys to report higher
uptick in realization versus peers. However, this likely weighed on its
volume growth that has underperformed over recent quarters
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Valuation: Stay safe, get richer
We expect tier 1 players to be disproportionate gainers of the structural shifts in demand
profile, driving a multiple earnings upgrade cycle. Infosys is our best buy idea.We see no
attractive long-range play among mid-caps.
We believe the structural demand shift should drive sector polarisation. While overall IT budgets
are projected to see only modest growth over 2011-15, with a likely return of hardware refresh
cycle, we believe discretionary IT spend will be primarily funded through cost savings in non-
discretionary spend. This could restrict volume upside for mid-scale players with high ADM
exposure (typically 65-70% versus sub-50% for scale players) and high client dependence (top
10 clients are typically 50%+ vs ~30% for larger players).
We also believe US$1bn top-line as the critical threshold will also lose its relevance over the
medium term as the scale players crowd out the potential demand space. Limitations on margin
management remain and the visibility on the SEZ migration remains low, exposing them to sharpjumps in effective tax rates in FY12 as STPI tax benefits expire. Thus, we would avoid a long-
range play on mid-caps as a basket; however, we dont discount trading opportunities.
Fig 17 We expect the performance gaps between the top 3 and mid-caps to widen further
0
5
10
15
20
25
FY07-10 Rev. CAGR FY07-10 EBITDA CAGR FY010-12 Rev. CAGR FY10-12 EBITDA CAGR
%
TCS Infosys Wipro Mid-Caps
Source: Bloomberg, Standard Chartered Research estimates
While the overall IT sector has significantly outperformed the Sensex over the past 18 months,
we believe that the earnings upgrade cycle for tier 1 players may not be over and thus valuations
are still reasonable given the potential earnings growth.
Fig 18 IT Sector relative performance versus Sensex
2,000
3,000
4,000
5,000
6,000
7,000
Jan-09
Apr-09
Jul-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
BSE IT Index Sensex - rebased
Source: Bloomberg
Tier 1 IT players haveoutperformed mid-capIT on both revenue aswell as earningsgrowth over the lastfour years
BSE IT Index hasoutperformed the
broader market byover ~78% sinceJanuary 2009
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Valuation methodology
We value Infosys, which is widely accepted as the sector benchmark, using the Price to Earnings
Growth (PEG) method, as we believe that it provides a better incorporation of medium-termgrowth expectations.
We value the other companies at relative discounts to Infosys based on their historic trading
range and how that could track based on the expected financial performance over the next two
years. However, given the uncertain outlook on Satyams effective tax rates and potential
liabilities, we have valued the stock based on EV/EBITDA to EBITDA growth multiple that also
captures the potential margin expansion play.
Fig 19 Key players Operating free cash flows as % of trailing 12 month revenues
0
5
10
15
20
25
30
1QFY06
2QFY06
3QFY06
4QFY06
1QFY07
2QFY07
3QFY07
4QFY07
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
%
Infosys TCS Wipro HCLT Patni
Source: Standard Chartered Research estimates
Fig 20 Infosys: PEG movement on 12-month forward EPS
0.0
0.4
0.8
1.2
1.6
2.0
Apr-97
Apr-98
Apr-99
Apr-00
Apr-01
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
PEG(x)
Source: Bloomberg, Company data, Standard Chartered Research estimates
Also, historically, Infosys has largely traded at a premium to its closest peers TCS and Wipro.
Reversals in this trend have generally coincided with periods of relative US$ revenue growth out-
performance by either company.
Infosys stock hasbeen a widelyaccepted sector
valuation benchmarkgiven consistentlysuperior cash-generation
Long-range, Infosyshas traded in 0.8x-1.2x PEG band on 12-month forward EPS,except periods ofextreme volatility.
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Fig 21 TCS: Relative P/E valuation movement versus Infosys
-35
-30
-25
-20
-15
-10-5
0
5
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
%
Premium US$ revenue O/P
Source: Bloomberg, Company data, Standard Chartered Research estimates
Fig 22 Wipro: Relative P/E valuation movement versus Infosys
-35
-25
-15
-5
5
15
25
Nov-04
May-05
Nov-05
May-06
Nov-06
May-07
Nov-07
May-08
Nov-08
May-09
Nov-09
May-10
Nov-10
%
Premium US$ revenue O/P
Source: Bloomberg, Company data, Standard Chartered Research estimates
Valuation benchmarking to Sensex supports our viewWe have attempted to authenticate our benchmark valuation for Infosys based on its historical
trading premium/discount to the Sensex. At our target P/E multiple, Infosys is valued at 26%
premium to Sensex on 12-month forward EPS (using Bloomberg consensus estimates for
Sensex), in-line with the median premium over the last five years.
Fig 23 Infosys: Relative P/E valuation movement versus Sensex
-60
-30
0
30
60
90
120
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
%
Source: Bloomberg, Standard Chartered Research estimates
Our reverse DCF valuations are broadly inline with P/E based price targets
We have also attempted to corroborate our P/E based valuation through reverse DCF valuation
for the top 3 players, based on WACC of 12.5% and perpetual growth rate of 3.5%. We have kept
our core assumptions in a narrow range for the three players given the common operative
environment and comparable scale. We have assumed an appreciating INR (1% CAGR overStage II and 0.3% over Stage III). We have assumed declining margin trend,~10% and 8% during
Stage II and III respectively. Our tax-rate assumptions build in SEZ transition and assumes final
corporate tax rate at 30% in-line with the draft DTC proposals.
Movement of TCSand Wipros relative
valuations to Infosystrack its relative US$revenue growthperformance
Over the past sixyears, Infosys hastraded at a medianpremium of ~26% tothe Sensex.
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The implied revenue growth for our price targets at ~18% CAGR over the value driver phase. We
believe this is achievable in a front-ended growth environment given the renewal deal pipeline
and compares with the current growth rates for significantly larger global players such as
Accenture (18% yoy growth on US$25bn revenue base) and IBM Global Services (10% yoygrowth on US$55bn revenue base) during the stable FY06-08 period.
However, we believe DCF may not be the best valuation method for IT services players given the
absence of historical operative cycles and low visibility on key external variables such currency.
Fig 24 Reverse DCF: Free-cash-flow growth for top 3 players
13.615.0
4.0
18.7
12.9
5.3
35.8
15.5
4.7
0
5
10
15
20
25
30
35
40
FY10-13 FY14-24 FY25-36
%
Infosys TCS Wipro
Source: Standard Chartered Research estimates
Fig 25 Reverse DCF: Free cash flow assumptions (%)Stage FY10-13 FY14-24 FY25-36
Infosys
US$ Revenue CAGR 26 18 8
EBITDA CAGR 18 15 4
FCF CAGR 14 15 4
TCS
US$ Revenue CAGR 24 18 8
EBITDA CAGR 19 13 4
FCF CAGR 19 13 5
Wipro
US$ Revenue CAGR 22 18 8
EBITDA CAGR 17 13 4
FCF CAGR 36 15 5
Source: Standard Chartered Research estimates
Infosys is our preferred play in the sector
We expect the pace of realization growth will be faster and higher for Infosys, and could sustain amultiple earnings upgrade cycle. We initiate with an OUTPERFORM rating and Rs3,610 price
target (13% upside). We also see concurrent earnings upgrade/valuation expansion stories in
Wipro (margin disappointment could reverse) and HCL Tech (strong volume momentum).
However, the elevated expectations pose a risk to TCS (IN-LINE; Rs1,150; 4% upside). Despite
the sharp correction (10-28% over the past three months), we do not see near-term triggers for
our mid-cap coverage and have IN-LINE ratings on Satyam (Rs64; 3% downside) and Patni
(Rs480; 1% downside) with an UNDERPERFORM rating on Tech Mahindra (Rs603; 10%
downside).
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Fig 26 Coverage universe: PE to earnings growth matrix
InfosysWipro
HCLT
Patni
TechMSatyam
TCS
0
5
10
15
20
25
-5 0 5 10 15 20 25 30
EPS CAGR FY10-13E
NTMP/E(x
Source: Standard Chartered Research estimates
Fig 27 Coverage universe: EV/EBITDA to EBITDA growth matrix
Wipro
HCLT
Patni
TechM
Infosys
TCS
Satyam
0
2
4
6
8
10
12
14
16
-5 0 5 10 15 20
EBITDA CAGR
FY13EV/EBITDA(x
Source: Standard Chartered Research estimates
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Company Valuation
Infosys We value Infosys at 1.1x FY10-FY13 EPS CAGR of 18.8%, closer to the top-end of the
historical band, on the 12-month forward EPS of Rs174.2, which we believe is suitable, givenimproving demand visibility as well as comfort on margin management. As a result, our price
target on the stock is Rs3,610 and implies 14% total return (including 1% dividend yield) from
current levels. We believe the stocks valuation could improve as the focus shifts to medium-term
earnings, where we see better visibility and potential for a positive surprise.
TCS We value TCS at 1.1x FY10-FY13 EPS CAGR, in-line with our target PEG for Infosys. The
implied valuation at 22.9x FY12E EPS is again in-line with Infosys; we believe the normalized
valuation gap between the two should be minimal, given their broadly similar dependence on
macro demand drivers and comparable margin performance. As a result, our price target for the
stock is Rs1,150 and implies 5% total return (including 1% dividend yield) from current levels.
Wipro We value the stock at 1.2x FY10-FY13 EPS CAGR of 15.4%, at the top-end of itshistorical band of 0.8-1.2x on the 12-month forward EPS of Rs27.6. The implied valuation at
18.5x 12-month forward EPS is at a discount of 11% to Infosys; we believe the normalized
valuation gap between the two should narrow from the current 13% discount given improving
demand visibility as well as comfort on margin management for Wipro. Our price target for the
stock is Rs510 and implies 12% total return (including 1% dividend yield) from current levels.
HCLT We value HCL Tech at a 23% discount to our target 12-month-forward PE valuation for
close peer Infosys, in line with the median discount over the past five years, given similar volume
growth trajectory and improving free cash flow conversion outlook. Thus, we value the stock at
15.9x 12-month-forward EPS of Rs31.2. The implied PEG valuation of 0.6x is in-line with the long
range band of 0.4x-0.8x, though higher than the average of 0.5x. Our price target on the stock is
Rs495 and implies 12% total return (including 1% dividend yield) from current levels.
Patni We value Patni at a 40% discount to our target PE for Infosys, in-line with the long term
average. We believe this is justified as we expect the tier 1 players to exhibit a better growth
profile in the medium term, while retaining better flexibility to manage margins. At our target price
of Rs480, the stock would trade at 12.4x 12-month forward EPS.
Tech Mahindra We value Tech Mahindra using sum-of-the-parts (SOTP) method that values
the core business at Rs406 per share ((including unrealised forex gains of Rs7/share) and stake
in Mahindra Satyam at Rs197/share. Our target valuation of the core business is based on a 50%
discount to our target 12-month forward rolling P/E for Infosys, higher than the long-range median
discount of 36% given uncertain volume growth outlook and increased client-specific risks. This
implies 9.3x 12-month forward rolling normalised EPS (ex-quarterly amortised BT contract
restructuring fees). We value Tech Mahindras 42.7% stake in Mahindra Satyam at 20% holdingcompany discount to our Rs64/share price target for Satyam.
Satyam Given the uncertain outlook on Satyams effective tax rate, we have valued the stock
based on EV/EBITDA to EBITDA growth multiple that also captures the potential margin
expansion play. Our Rs64 price target values the stock at 6.8x FY13 EV/EBITDA, a 0.6x
EV/EBITDA to EBITDA growth ratio that is in-line with HCL Tech, the closest peer. The implied
17x on FY12E EPS implies a 28% discount to Infosys. Our valuation is inclusive of US$100m of
potential litigation costs. Note that the company has pending class-action suits as well as alleged
claims of Rs12,304m by erstwhile Satyam creditors.
Infosys Fair value of
Rs3,610 at 1.1x PEG;Implied FY12 P/E of23.9x
TCS Fair value ofRs1,150 at par withInfosys target PEGmultiple
Wipro Fair value ofRs510 at 11%discount to InfosysP/E
HCLT Fair value ofRs495 at 23%discount to targetInfosys P/E multiple
Patni Fair value ofRs480 at 40%discount to targetInfosys P/E multiple
Tech Mahindra SOTP based value ofRs603
Satyam fair value ofRs64 based onEV/EBITDA toEBITDA growth ratioin-line with HCLT
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Annexure
Fig 29 Coverage deals universe - IT services
ADM IMS Full ITO Total
Deals (nos) 332 488 285 1,105
Share of all deals 30% 44% 26% 100%TCV (USD bn) 36.6 88.0 94.9 219.5
Share of all deals 17% 40% 43% 100%
Source: TPI Contract Database, Standard Chartered Research estimates
Fig 30 Qualified deals universe
ADM IMS Full ITO Total
Deals (nos) 247 463 270 980
Share of all deals 30% 44% 26% 100%
TCV (USD bn) 25.6 86.0 92.4 203.9
Share of all deals 13% 42% 45% 100%
Source: TPI Contract Database, Standard Chartered Research estimates
Fig 28 Select IT contracts due for renewal in 2011
Country Industry Service Provider TCV (US$m) Period (Yrs) ACV (US$m)
Application maintenance
Deutsche Bank Germany BFS Siemens Bus. Services 1,870 10 187
Zurich Financial Services Switzerland Insurance CSC 1,300 7 186
Infrastructure management
Michelin United States Manufacturing IBM Global Services 1,230 8 154
Cendant United States Services IBM Global Services 1,400 10 140
Thomson MultiMedia SA France Media IBM Global Services 1,350 10 135
Zurich Financial Services United Kingdom Insurance IBM Global Services 1,200 10 120
Telenor ASA Norway Telecom EDB Business Partner 760 7 109
RAG Aktiengesellschaft Germany Manufacturing Siemens Bus. Services 665 7 95Aon United States Insurance CSC 600 7 86
Royal & Sun Alliance United Kingdom Insurance IBM Global Services 675 10 68
Chubb & Son United States Insurance ACS 365 7 52
Franklin Templeton United States BFS IBM Global Services 480 10 48
TD Bank Financial Group Canada BFS Hewlett-Packard 320 7 46
Irving Oil Limited Canada Services IBM Global Services 200 11 18
IT outsourcing
Alcatel France Technology EDS 2,700 10 270
Xerox United States Services EDS 1,400 7 200
Coors United States Manufacturing EDS 400 8 50
Syngenta AG Switzerland Manufacturing Hewlett-Packard 350 7 50
Blue Shield of California United States Insurance EDS 475 10 48
Schmalbach Lubeca + VAW Germany Utilities IBM Global Services 460 11 42
Hochtief Germany Manufacturing Cap Gemini 230 10 23
Marathon Oil United States Energy SAIC 156 7 22
British Home Stores United Kingdom Retail CSC 147 7 21
National Bank of Canada Canada BFS IBM Global Services 140 8 18
Wellmark United States Insurance EDS 140 10 14
Source: TPI Contract Database
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Fig 31 IT + BPO deal universe
Deals (nos) TCV (US$bn)
Application services 332 36.6
Infrastructure services 488 88.0
IT outsourcing services 285 94.9
Total IT Services 1,105 219.5
BPO CRM 72 6.4
BPO - Document mgmt. 31 3.5
BPO - F&A 55 4.5
BPO Facilities mgmt. 41 6.5
BPO FSO 121 11.2
BPO HR 106 9.3
BPO - Industry-Specific 41 3.1
BPO KPO 3 0.2
BPO - Procurement 28 4.4
BPO - R&D/Engineering 17 1.0
BPO SCM 16 0.9
BPO Multi-tower 76 20.1
Total BPO 607 71.1
Total IT + BPO 1,712 290.6
Source: TPI Contract Database, Standard Chartered Research estimates
Fig 33 Deals signed CY06 onwards by Indian service providers
CY06 CY07 CY08 CY09 9MCY10 Total
Deals (nos)
Application services 13 12 24 19 14 82
Infrastructure services 2 1 4 9 9 25
IT outsourcing services 3 2 2 7 1 15
Total 18 15 30 35 24 122
TCV(US$bn)
Application services 2.4 1.7 2.7 2.9 1.0 10.7
Infrastructure services 0.2 0.1 0.4 0.8 0.6 2.0
IT outsourcing services 0.6 0.2 0.2 0.5 1.0 2.5
Total 3.2 1.9 3.3 4.1 2.6 15.1
Source: TPI Contract Database, Standard Chartered Research estimates
Fig 32 Qualified deals: Geography-wise distribution
Americas EMEA APAC
US Non-US UK Cont. MEA Japan Ex-Japan
Deals (nos)
Application services 56 16 33 110 4 7 21Infrastructure services 122 41 52 183 11 6 48
IT outsourcing services 86 14 28 102 6 16 18
TOTAL 264 71 113 395 21 29 87
TCV (US$bn)
Application services 5.0 1.6 2.8 11.9 0.2 2.3 1.8
Infrastructure services 31.2 5.4 9.1 32.1 1.4 0.8 5.9
IT outsourcing services 32.2 3.1 14.8 34.0 0.7 5.6 2.1
TOTAL 68.4 10.0 26.6 78.0 2.3 8.7 9.9
Source: TPI Contract Database, Standard Chartered Research estimates
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Fig 34 Deals signed CY06 onwards share of Indian service providers
ADM IMS Full ITO Total
Deals (nos) 82 25 15 122
% Share 28% 6% 9% 14%
TCV(US$bn) 10.7 2.0 2.5 15.1
% Share 43% 4% 8% 14%
Source: TPI Contract Database, Standard Chartered Research estimates
Fig 35 ACV of qualified deals up for renewal by service type
ACV (US$bn) CY11E CY12E CY13E CY14E CY15E Total
Application services 1.1 1.2 0.8 0.7 0.5 4.3
Infrastructure services 2.9 2.3 3.7 3.2 1.2 13.3
IT outsourcing services 1.9 3.2 3.3 2.3 1.5 12.2
Total 5.9 6.7 7.8 6.2 3.2 29.8
Source: TPI Contract Database, Standard Chartered Research estimates
Fig 36 Qualified deals up for renewal by TCV range
CY11E CY12E CY13E CY14E CY15E Total
DealsTCV
(US$bn)Deals
TCV(US$bn)
DealsTCV
(US$bn)Deals
TCV(US$bn)
DealsTCV
(US$bn)Deals
TCV(US$bn)
$1,000m 12 17.5 10 19.4 14 24.5 11 19.5 2 3.1 49 83.9
Total 192 40.0 228 45.4 233 54.3 199 42.5 128 21.7 980 203.9
Source: TPI Contract Database, Standard Chartered Research estimates
Fig 37 Qualified deals up for renewal by ACV range
CY11E CY12E CY13E CY14E CY15E Total
DealsACV
(US$bn)Deals
ACV(US$bn)
DealsACV
(US$bn)Deals
ACV(US$bn)
DealsACV
(US$bn)Deals
ACV(US$bn)
$200m 2 0.6 5 1.3 9 2.2 6 1.8 1 0.4 23 6.3
Total 192 5.9 228 6.7 233 7.8 199 6.2 128 3.2 980 29.8
Source: TPI Contract Database, Standard Chartered Research estimates
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Company Section
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India | Technology EQUITY RESEARCH
16 December 2010
Infosys TechnologiesOUTPERFORM (initiating coverage)PRICE (as at 15 December 10)
Rs3,203
Price target
Rs3,610
A slam dunk
Bloomberg code Reuters code
INFO IN INFY.BO
Market cap 12 month range
Rs1,827,694m (US$40,337m) Rs2,353 - 3,202
EPS est. change - - - -
We expect Infosys to post 26% US$ revenue CAGR overFY10-13E given potential deal flow from the large-dealsrenewal pipeline.
We also expect realization improvement to trend ahead of
peers and could be the key mid-range margin lever even assupply-side pressures normalize.
While the stocks valuation appears rich, we believe macrodrivers could actuate a multiple upgrade cycle to consensusearnings.
Initiate with OUTPERFORM and Rs3,610 price target.
Year end: March 2010 2011E 2012E 2013E
Sales (Rs m) 227,420 277,188 340,869 406,441EBIT (Rs m) 69,560 83,525 102,739 119,481EBITDA (Rs m) 78,610 92,316 112,880 130,494Pretax prof it (Rs m) 78,990 94,771 116,718 136,296Earnings (Rs m) adjusted 62,660 70,124 86,371 104,948Diluted EPS (Rs ) adjusted 109.45 122.73 151.17 183.68Diluted EPS growth (%) adj. 4.8 12.1 23.2 21.5DPS (Rs ) 25.0 58.0 38.0 46.0DPS growth (%) 6.4 132.0 -34.5 21.1EBITDA margin (%) 34.6 33.3 33.1 32.1EBIT margin (%) 30.6 30.1 30.1 29.4Net margin (%) 27.6 25.3 25.3 25.8
Div payout (%) 25.9 55.1 29.4 29.3Book value/share (Rs ) 421.7 506.2 613.0 742.9Net gearing (%) -50.3 -60.4 -61.2 -64.9ROE (%) 29.4 26.5 27.0 27.1ROACE (%) 73.3 71.4 82.1 83.8FCF (Rs m) 44,230 48,180 50,870 75,075EV/Sales (x) 7.5 6.0 4.7 3.8EV/EBITDA (x) 21.7 17.9 14.3 11.9PBR (x) 7.6 6.3 5.2 4.3PER (x) 29.3 26.1 21.2 17.4
Dividend yield (%) 0.8 1.8 1.2 1.4
Source: Company, Standard Chartered Research estimates
Share price performance
2,1002,2002,3002,4002,5002,6002,700
2,8002,9003,0003,1003,200
Dec09 Mar10 Jun10 Sep10 Dec10
InfosysTechnologiesLimited
BSESENSEX30INDEX(rebased)
Share price (%) -1 mth -3 mth -12 mth
Ordinary shares 8 5 28Relative to Index 9 4 10Relative to Sector - - -Major shareholder Promoters (16.0%)Free float 84%Average turnover (US$) 60,919,059
We see a strong secular long-term growth picture Our
analysis of the potential deal pipeline suggests a base-case
US$22bn TCV opportunity for tier 1 offshore players from large
annuity deals due for renewal over 2011-15 (see sector section
Dribbling into the big league). We estimate such deals could
contribute an incremental US$1.1bn to Infosys revenue over
FY11-13E. We project 26% US$ revenue CAGR over FY10-13
implying incremental revenue of ~US$5bn over the period
with upside potential from earlier/better-than-expected pricing
recovery and/or a mega (US$500m+) deal win.
Improving realization could be the key margin lever We
expect Infosys to sustain above-peer average realization growth
over FY10-13, as discretionary spend revives, and with
easing/reversals of pricing discounts given over FY09-10. Note,
offshore realization declined by ~13% over 1Q FY09-2Q FY11.
Per-capita manpower costs are likely to normalize over FY12-
13, as the recruitment mix reverses to campus hires. We also
expect the evolving revenue mix to help in better bench
management, thus pushing utilization above historical band.
Infosys is our preferred stock in the sector We forecast
19% CAGR in EPS over FY10-13, building on a 26% CAGR in
US$ revenue and 119bp decline in EBIT margin. Our Rs3,610
price target values Infosys at a 1.1x FY10-13E EPS CAGR,
closer to the top-end of its 0.8-1.2x historical PEG band. The
implied valuation at 20.7x 12-month forward EPS is at a 27%
premium to the Sensex, in-line with the long-range median. A
significant up-tick in campus salaries and INR appreciation
beyond the assumed 10% over 3Q FY11-FY13 are the key
risks to our forecasts and price target.
Source: Company, Bloomberg
Pankaj Kapoorpankaj.kapoor@sc.com
+91 22 6751 5804
Apoorva Ozaapoorva.oza@sc.com
+91 22 6787 2504
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Investment argument and valuation
Infosys could incrementally add US$5bn over FY10-13E, in our view
Our analysis of the potential deal pipeline suggests a base-case US$22.3bn TCV opportunity for
tier 1 offshore players from large annuity deals due for renewal over 2011-15 (see sector section
Dribbling into the big league). We believe such deals could contribute an incremental US$1.1bn
to Infosys revenue over FY11-13E. We expect the traditional or carved-out application
development and maintenance outsourcing deals to dominate the potential deal flow for Infosys.
Its share of the infrastructure management/ITO deals may remain low given a) its relatively lower
execution capacities and b) its risk averseness and predictability focus that could restrict
flexibility in structuring mega (US$500m+) deals that invariably involve asset takeover and may
have elongated pay-back periods.
We also expect Infosys to sustain above-peer average realisation growth over FY10-13. Medium-
term, we believe it could be driven by revenue mix change a pick-up in discretionary spend
centric services with relatively higher realisation and easing/reversal of price discounts givenover FY09-10. While the share of non-effort based pricing models may grow, we expect these to
have only a marginal impact on blended realisation and do not see their revenue share growing
beyond 12-15% by FY13.
Fig 1 Where the next US$5bn for Infosys could come from
Potential revenuestreams
Contribution(US$m)
Facts, comments and key assumptions
Large (US$50m+) annuitybased deals
1,100
US$50m+ deal wins over FY07-1H FY11: 61; TCV: US$4.4bn (E); Incremental revenue:US$650m (E)
Expect a larger play in the US$50-150m TCV deals; average deal size to grow at 20% CAGRover FY10-13; estimates factor in US$7bn TCV of large deal wins over 2H FY11-FY13
Realisation improvementon existing business
500
Overall blended realisation growth FY05-09: 7.8% (Implied CAGR of 1.9%); net of 1.0%
offshore shift
2.2% CAGR in blended realisation over FY10-13 from cost-index linked pricing gains; andease/reversal of pricing discounts; 50bp offshore effort shift
Consulting and packageimplementation services
1,200
FY10 base: US$1,172m; FY06-10 CAGR: 29%; Implied FY10-13E CAGR: 27%
Consulting and PI services incremental revenue share grew to 34% by FY09 from 22% inFY06, accounting for 29% of incremental revenue. FY10 was a low 9% due to macro factorsbut is up again, to 31% in 1H FY11
BFSI - regulatory and riskrelated discretionary spend
300
BFSI FY10 base: US$1,634m; Revenue share: 34%
Internal audit, risk and compliance related new application development projects to pick up;typically, these projects are at higher-than-average price-points and have a higher onsitecomponent; we expect 12-15% of incremental revenue from BFSI verticals could be fromregulatory and audit-related areas
Non-large deal ADM andInfrastructure services 300
FY10 base (E): US$1.6bn; FY07-09 CAGR (E): 8%; Implied FY10-13E CAGR: 5%
Follow-on maintenance and US$20-50m TCV deals; domestic market deals (eg, APDRPrelated projects) could typically be of sub-US$50m TCV; new client additions would also be atsmaller ticket-size projects
Other services 900
FY10 base: US$800m; FY06-09 CAGR: 27%; Implied FY10-13E CAGR: 28%
Includes multiple services such as testing, product engineering, system integration andemerging services (such as learning services); could sustain the historical growth rate overFY10-13; could see a pick-up if discretionary spending recovery is faster/higher
Products and BPOservices
450
FY10 base: US$498m; FY06-10 CAGR: 32%; Implied FY10-13E CAGR: 24%
Products: licence sales may trail services spend; expect revenue run-rate recovers to FY06-08average (~US$35m) by FY11 and exceed it in FY12 with expansion into developed markets
BPO services: slow recovery in transaction volume but growing offshore shift and platform BPOadoption to help total volumes; incremental revenue run-rate to remain below the FY06-09 high(~US$90m) over FY11-12E
Inorganic/mega deals 200 The unknown
Source: Company data, Standard Chartered Research estimates
We expect US$1.1bnof incrementalrevenue for Infosysover FY11-13E fromthe renewal dealpipeline
Our forecasts build6% growth in blended
realization over 2QFY11-FY13
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Margin resilience to remain the strongest among peers
We do not expect margin management to be a significant challenge over FY10-13E for Infosys.
Realization improvement could be a key incremental lever, in our view, as discretionary spend
revives, and with easing/reversals of pricing discounts given over FY09-10. Further, per-capitamanpower costs should normalize over FY12-13, in our view, as attrition declines and the hiring
mix reverses to higher share of campus hires.
While we do not expect Infosys to go for aggressive bench management, we believe the evolving
revenue mix could help in keeping the growth in absolute bench below the overall headcount
growth thus pushing utilization above historical band.
Fig 2 Infosys: Onsite realization has grown by 2%+ over the past 10 quarters
11,000
11,300
11,600
11,900
12,200
12,500
12,800
1QFY07
2QFY07
3QFY07
4QFY07
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
US$perperson-month
40
42
44
46
48
50
52
%
Onsite realisation (LHS) Non-ADM, non-BPO services (RHS)
Source: Company data
Fig 3 The trends in onsite and offshore realization have diverged over the last 6 quarters
4,000
4,400
4,800
5,200
5,600
1QFY01
3QFY01
1QFY02
3QFY02
1QFY03
3QFY03
1QFY04
3QFY04
1QFY05
3QFY05
1QFY06
3QFY06
1QFY07
3QFY07
1QFY08
3QFY08
1QFY09
3QFY09
1QFY10
3QFY10
1QFY11
US$perperson-month
9,000
10,000
11,000
12,000
13,000 US$perperson-month
Onsite realisation (RHS) Offshore realisation (LHS)
Source: Company data
Fig 4 Infosys: Average manpower costs are currently at an all-time high
0
5
10
15
20
25
30
35
FY04
FY05
FY06
FY07
FY08
FY09
FY10
1HFY11
%
85
90
95
100
105 Rs'000perperson-month
Avg manpower cost (RHS) Lateral share (LHS) Onsite effort (LHS)
Source: Company data, Standard Chartered Research estimates
We expect per-capitamanpower costs to
normalize over FY12as hiring mix reversesits bias to campusrecruitment
Onsite realisation fell7.7% over 2Q FY09-4Q FY09 due tonegative cross-
currency and rate-cutsamong FS clients
It has resumed theuptrend, in sync withgain in revenue shareof non-ADM non-BPOservices, from 4QFY10
Continued decline inoffshore realisationover last threequarters could be thelag impact ofdiscounts given toexisting clients overFY09-10
We expect this tostabilise in 2H FY11and recover overFY12
We believe the spikein average manpowercosts in FY09 couldbe the spiral effect ofcampus wage hikesgiven in FY08
The high manpowercosts for 1H FY11could be due tocontraction in pyramid(lateral hires share up13pp over FY10)
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Fig 5 Infosys: Interplay of key margin drivers over the past 8 quarters
-10
-5
0
510
15
3Q
FY09
4Q
FY09
1Q
FY10
2Q
FY10
3Q
FY10
4Q
FY10
1Q
FY11
2Q
FY11
%change
42
43
44
45
46
47
48
%
Offshore effort (LHS) Utilization (LHS)Manpower cost per person-month (LHS) USD/INR (LHS)Blended realisation (LHS) Gross margin % (RHS)
Source: Company data, Standard Chartered Research estimates
Fig 6 Infosys: Growth of client base and share of US$1m+ accounts
0
10
20
30
40
50
60
70
1QFY05
2QFY05
3QFY05
4QFY05
1QFY06
2QFY06
3QFY06
4QFY06
1QFY07
2QFY07
3QFY07
4QFY07
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
%
-3
-2
0
2
3
5
6
8
%
Share of US$1m+ clients (LHS) QoQ growth in active client base (RHS)
Source: Company data
Fig 7 Infosys: Growth of client base and share of US$1m+ accounts
0
2
4
6
8
10
12
1QFY05
2QFY05
3QFY05
4QFY05
1QFY06
2QFY06
3QFY06
4QFY06
1QFY07
2QFY07
3QFY07
4QFY07
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
%
US$5-10m clients US$10-20m clients US$20-50m clientsUS$50-70m clients US$70-100m clients US$100M+ Clients
Source: Company data
Rising per-capitamanpower costs due
to higher lateral hiringand multiple wagehikes have been amargin dragger overthe past threequarters
Note the absence ofqoq realisation growthas a key margin leverover the past 8quarters
US$1m+ accountsshare has been on asecular uptrend and is~60% of active clientbase
Traction in client basehas resumed post thedrop in 2H FY09
Secular uptrend in theshare of clients acrossUS$5-50m revenuebuckets shows strongclient harvesting, inour view
Quarterly volatility hasbeen high acrossUS$50m+ buckets,driven by ramp-ups in
large multi-million,multi-year deals
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We expect a 19% EPS CAGR for Infosys over FY10-13E
We forecast a 26.3% CAGR in US$ revenue for Infosys over FY10-13E, building in 23.8% CAGR
in billed effort and 2.2% CAGR in blended realization for consolidated IT services. We estimate22.7% and 25.6% CAGR in Infosys BPO revenue and Product license sales. Our exchange-rate
assumptions are Rs45.5/US$ for 3Q FY11, Rs44.0/US$ for 4Q FY11, and Rs44.5/US$ and
Rs42.0 for FY12 and FY13, respectively, in line with the latest views of our economist. Our
forecasts build an 119bp decline in EBIT margin over FY10-13 and translate to 18.8% EPS
CAGR over this period.
Our FY12/13 EPS forecasts are 2%/3% higher versus Bloomberg consensus
Our FY11 EPS forecast is broadly in-line with the Bloomberg consensus estimates, while our
FY12 and FY13 EPS forecasts are higher by 2.3% and 2.7%, respectively. We see scope for
consensus upgrades as continued traction in large-deal wins could drive long-range volume
growth assumptions. Also, higher-than-currently-anticipated growth should see higher volume
shift to SEZ units, translating into effective tax rate lower than current consensus estimates.
Fig 8 What has defined our key assumptions
(Rs m) FY10 FY11E FY12E FY13E Comments
Exchange rate (Rs/US$) 47.34 45.35 44.50 42.00
A. Key operating metrics - Cons. IT services
Total employees 85,217 101,768 123,268 149,768
Net addition 6,347 16,551 21,500 26,500
Utilisation (ex. trainees) 65.8% 72.6% 73.4% 73.9%
Onsite effort share (%) 29.0% 29.1% 28.8% 28.5%
Billed effort (person-months) 637,336 809,255 990,735 1,210,249
Change 6.7% 27.0% 22.4% 22.2%
Avg realization - Onsite (US$/p-m) 11,938 12,571 12,948 13,466
Change 0.0% 5.3% 3.0% 4.0%
Avg realization - Offshore (US$/p-m) 4,643 4,428 4,561 4,720
Change -5.1% -4.6% 3.0% 3.5%
B. Key operating metrics - BPO services
Total employees (Delivery) 16,917 18,526 20,726 24,026
Net addition 787 1,609 2,200 3,300
Billed effort (person-months) 184,567 215,617 258,740 318,251
Change 5% 17% 20% 23%
C. Key financial forecasts - Infosys Consolidated (Rs m)
Revenue 227,420 277,188 340,869 406,441
Change 4.8% 21.9% 23.0% 19.2%
Gross margin (%) 46.9% 45.7% 45.2% 43.9%
SG&A as % of revenue 12.4% 12.4% 12.0% 11.8%
Operating margin (%) 34.6% 33.3% 33.1% 32.1%
Tax provision (as % of PBT) 21.3% 26.0% 26.0% 23.0%
PAT (Rs m) 62,180 70,124 86,371 104,948
Change 6.1% 12.8% 23.2% 21.5%
EPS - Basic (Rs) 109.6 122.8 151.2 183.8
EPS - Fully Diluted (Rs) 109.4 122.7 151.2 183.7
Our economists latest forecasts indicate an
appreciating INR; we have built appreciation of
2%/6% in FY12/13
We expect the bias towards campus hires will
return current announced plans are for 20,000
campus offers for FY12 joining. This should help
to keep average manpower costs stable
Utilization could continue to improve as weexpect the growth in absolute bench to lag
overall headcount increase
We expect a near-term pick up in onsite share as
demand for Consulting/PI services grow and/or
with transition in large deals
We expect realisations to pick-up over FY12/13
with potential reversals of earlier discounts and
pick-up in discretionary spend-centric services. A
likely US$ weakness as forecast by our
economist should imply a positive cross-currency
impact
Our effective tax rate assumptions are marginally
below management guidance, due to our likely
higher revenue growth forecasts that should
imply the volume shift to SEZ is higher than
management estimates
Source: Company data, Standard Chartered Research estimates
Our forecasts build in
9.6% INRappreciation over2H11-FY13
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Fig 9 Infosys:Sensitivity of EBITDA and net margins to key variables
Change in FY12E EBITDA margin for every 1% change in:
Exchange rate (INR/USD) -25bp
Utilization 51bp
Blended average realisation 47bp
Increase in offshore effort share 27bp
Manpower costs -45bp
Other direct costs -8bp
SG&A costs -12bp
Change in FY12E net margin for 1% change in:
EBITDA margin -76bp
Depreciation -2bp
Tax rate -35bp
Source: Standard Chartered Research estimates
Initiate with OUTPERFORM and Rs3,610 price target
We have valued Infosys using the Price to Earnings Growth (PEG) method as we believe it is a
better representation of medium-term growth expectations. Our analysis indicates that the stock
has typically traded in the normalised band of 0.8-1.2x price to 12-month forward Bloomberg
estimates for EPS growth. Thus, we value the stock at 1.1x FY10-FY13 EPS CAGR of 18.8%,
closer to the top-end of the historical band, on the 12-month forward EPS, which we believe is
suitable, given improving demand visibility as well as comfort on margin management. As a result,
our price target for the stock is Rs3,610 and implies 13.9% total return (including 1.2% dividend
yield) from current levels. At our target, the implied 12-month forward P/E for Infosys translates to
a 27% premium to the Sensex (based on Bloomberg consensus estimates), which is in-line with
the 26% median premium over the past five years, which we believe is warranted given the highly
cash generative business model and best-in-class margins.
We believe stock valuations could improve as the focus shifts to medium-term earnings, where
we see better visibility and potential for a positive surprise. A significant up-tick in campus
salaries and INR appreciation beyond the assumed 10% over 3Q FY11-FY13 are the key risks to
our forecasts and target price.
Fig 10 Infosys: 12-month forward P/E band chart
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
PE(x)
6x
12x
18x
24x
30x
Source: Bloomberg, Company data, Standard Chartered Research estimates
Infosys is our top buyidea to play the long-range sector growth
Our implied valuationof 20.7x 12-M forwardEPS is in-line withcurrent levels
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Fig 11 Infosys: 12-month forward PEG movement
0.0
0.4
0.8
1.2
1.6
2.0
Apr-97
Apr-98
Apr-99
Apr-00
Apr-01
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
PEG(x)
Source: Bloomberg, Company data, Standard Chartered Research estimates
Fig 12 Infosys: Premium/discount to Sensex P/E
-60
-30
0
30
60
90
120
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
%
Source: Bloomberg, Company data, Standard Chartered Research estimates
Catalysts for share price performance
The stocks current rich valuations and rupee appreciation (that could affect margins) could weigh
on near-term performance. Seasonally, too, Indian IT stocks tend to underperform as investors
wait for Infosys next fiscal guidance during the 4Q result announcement. We expect a shift in
valuation to FY12 and building in of FY13 earnings growth to steer the stocks movement from
mid-2Q CY11. We also do not discount a marginal expansion in valuation multiples if investor
preference shifts to high cash-flow generation and superior management in a volatile market
foreign institutional investors holding in Infosys is currently below historical levels or a likely shift
in investor focus to margin resilience (from volume growth), which could drive up Infosys
premium to peers, given its perceived room to manage cost pressures and rupee appreciation.
Risks to our estimates and price targetKey downside risks to our price target are: 1) rupee appreciation beyond the levels we assume
and/or adverse cross-currency movements; 2) a slower than anticipated pricing recovery; 3)
delays in the implementation of direct tax code beyond FY12; and 4) strong regulatory action
against outsourcing in Infosyss key geographic markets.
Upside could come from: 1) rupee appreciation slower than the level we assume; 2) faster-than-
anticipated recovery in project awards/ramp-ups; large-deal wins ahead of numbers or contract
value factored into our estimates; and 3) acquisitions/large deal wins not built into our model.
Long-range, Infosyshas traded in a 0.8x-
1.2x PEG band on 12-month forward EPS,except during periodsof extreme volatility
The stock is currentlyat 38% premium tothe Sensex P/E,versus a five-yearmedian of 26%
Seasonal factorscould keep the stockrange-bound. Long-range, we expectmultiple earningsupgrade cycle drivingstock performance
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Key Financials
Fig 13 Infosys: Consolidated income statement (Rs m)
Year end: Mar FY09 FY10 FY11E FY12E FY13EConsolidated Revenue 216,930 227,420 277,188 340,869 406,441
Cost of Revenue 117,650 120,710 150,443 186,933 227,939
Gross Profit 99,280 106,710 126,746 153,936 178,502
Operating Expenses 27,330 28,100 34,430 41,056 48,009
EBITDA 71,950 78,610 92,316 112,880 130,494
Depn & Amort. 7,610 9,050 8,790 10,141 11,013
EBIT 64,340 69,560 83,525 102,739 119,481
Net Non-operating Income 4,550 9,430 11,246 13,979 16,815
Profit Before Tax 68,890 78,990 94,771 116,718 136,296
Income tax expense 10,270 16,810 24,647 30,347 31,348
Profit After Tax 58,620 62,180 70,124 86,371 104,948
Extraordinaries (net of taxes) 1,260 480 0 0 0PAT after Extraordinaries 59,880 62,660 70,124 86,371 104,948
Net Income 59,880 62,660 70,124 86,371 104,948
Wtd avg # of Shares (Basic) 572.5 571.9 571.1 571.1 571.1
Wtd avg # of Shares (Dil) 573.4 572.5 571.4 571.4 571.4
EPS (Basic) (Rs) 104.6 109.6 122.8 151.2 183.8
EPS (Dil) (Rs) 104.4 109.4 122.7 151.2 183.7
DPS (Rs) 23.5 25.0 58.0 38.0 46.0
Dividend Payout Ratio (%) 25.6 25.9 55.1 29.4 29.3
Source: Company, Standard Chartered Research estimates
Fig 14 Infosys: Consolidated balance sheet (Rs m)Year end: Mar FY09 FY10 FY11E FY12E FY13E
Cash and Cash Equivalents 112,460 121,110 174,648 214,107 275,262
Sundry Debtors 36,720 34,940 46,563 57,260 68,275
Other Current Assets 17,280 15,770 19,841 23,218 27,718
Total Current Assets 166,460 171,820 241,052 294,585 371,254
Total Current Liabilities 38,720 31,930 40,477 37,179 43,256
Net Current Assets 127,740 139,890 200,576 257,406 327,999
Deferred Tax Assets 1,260 3,460 3,090 3,090 3,090
Net Fixed Assets 53,540 44,950 48,291 52,441 56,061
Goodwill 0 8,290 8,240 8,240 8,240
Other Non-Current Assets 0 47,600 31,470 31,470 31,470
Total Assets 182,540 244,190 291,666 352,647 426,859
Long Term Debt 0 0 0 0 0
Deferred Tax Liability 0 1,140 10 10 10Other Non-current Liabilities 0 2,320 2,560 2,560 2,560
Total Equity 182,540 240,730 289,096 350,077 424,289
Minority Interest 0 0 0 0 0
Total Liabilities & Equity 182,540 244,190 291,666 352,647 426,859
Source: Company, Standard Chartered Research estimates
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Equity Research India IT Services | 16 December 2010
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Fig 15 Infosys: Cash flow statement (Rs m)Year end: Mar FY09 FY10 FY11E FY12E FY13E
Net Income 59,880 62,660 70,124 86,371 104,948
Depreciation 7,610 9,050 8,790 10,141 11,013Other Income -5,830 -9,820 -11,246 -13,979 -16,815
(Inc.)/Dec.in Def. Tax Assets -70 -7,730 -500 0 0
(Inc.)/Dec. in W. Cap. -10,970 -1,180 -6,907 -17,371 -9,438
Cash flow from Operations (A) 50,620 52,980 60,261 65,162 89,708
Net Capex (B) -13,380 -8,750 -12,081 -14,292 -14,632
Increase in Investments 720 -40,930 15,870 0 0
Other Income 5,830 9,820 11,246 13,979 16,815
Cash Flow from Investing -6,830 -39,860 15,035 -312 2,183
Inc./(Dec.) in Equity 10 11,783 16,910 0 0
Inc./(Dec.) in Debt 0 0 0 0 0Dividend Paid -15,300 -16,253 -38,667 -25,390 -30,736
Cash Flow from Financing -15,290 -4,470 -21,758 -25,390 -30,736
Total Cash Flow 28,500 8,650 53,538 39,459 61,155
Free Cash Flow (A+B) 37,240 44,230 48,180 50,870 75,075
Source: Company, Standard Chartered Research estimates
Fig 16 Infosys: Growth and marginsYear end: Mar FY09 FY10 FY11E FY12E FY13E
Revenue Growth (%) 30.0 4.8 21.9 23.0 19.2
EBITDA Growth (%) 37.4 9.3 17.4 22.3 15.6
EBIT Growth (%) 38.7 8.1 20.1 23.0 16.3
Dil. EPS Growth (%) 28.5 4.8 12.1 23.2 21.5
EBITDA Margin (%) 33.2 34.6 33.3 33.1 32.1
EBIT Margin (%) 29.7 30.6 30.1 30.1 29.4
Net Margin (%) 27.6 27.6 25.3 25.3 25.8
Return on Avg. Capital Empl. (%) 103.7 73.3 71.4 82.1 83.8
Return on Avg. Assets (%) 29.2 25.0 23.1 23.9 24.4
Return on Avg. Equity (%) 36.6 29.4 26.5 27.0 27.1
Source: Company, Standard Chart