2010-12-15 (Standard Cha) India IT Services

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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 [email protected]

+91 22 6751 5804

Apoorva [email protected]

+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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Sector research India IT Services | 16 December 2010

2

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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3

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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4

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



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5

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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6

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


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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7

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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8

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



Total 121 164 177 169 103 734

TCV (USD bn)




Total 10.6 14.0 26.8 25.1 14.2 90.7



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



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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9

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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10

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


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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11

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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12

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


Fig 16 And realization growth could come back as a margin tailwind over FY12/13


-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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13

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


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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14

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


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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15

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


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


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

%


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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16

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


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


EBITDA CAGR 19 13 4

FCF CAGR 19 13 5

Wipro


EBITDA CAGR 17 13 4

FCF CAGR 36 15 5


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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17

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


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



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18

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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19

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


Deals (nos) 247 463 270 980


TCV (USD bn) 25.6 86.0 92.4 203.9



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



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20

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


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



Total 18 15 30 35 24 122

TCV(US$bn)




Total 3.2 1.9 3.3 4.1 2.6 15.1


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



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21

Fig 34 Deals signed CY06 onwards share of Indian service providers


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%


Fig 35 ACV of qualified deals up for renewal by service type

ACV (US$bn) CY11E CY12E CY13E CY14E CY15E Total




Total 5.9 6.7 7.8 6.2 3.2 29.8


Fig 36 Qualified deals up for renewal by TCV range


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


Fig 37 Qualified deals up for renewal by ACV range


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



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22


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23

Company Section


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Equity Research India IT Services | 16 December 2010

24

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 [email protected]

+91 22 6751 5804

Apoorva [email protected]

+91 22 6787 2504


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25

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)


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)


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)


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)


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


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


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


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


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)


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

%


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


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



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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


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

2010-12-15 (Standard Cha) India IT Services

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Transcript of 2010-12-15 (Standard Cha) India IT Services