India IT Services Sector
Transcript of India IT Services Sector
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19 February 2015
Asia Pacific/India
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India IT Services Sector SECTOR REVIEW
Can the recent captive trend be a headwind for
Indian IT sector? We don't think so
Figure 1: Three broad outsourcing strategies (size of the bubble represents
management efforts)
High
LowControl
Thirdparty
- High management control- Adherence to regulatory
requirements- No fear of IP losses- Skills in certain areas may
be unavailable with 3rd party
Virtual/ Hybrid
Captive- Relatively low cost- Flexible operations- Best-in-class practices- Lesser management
bandwidth required
Source: Credit Suisse
■ Captives have always been an integral part of offshoring. Global firms
have three options when they consider moving work to an offshore location
such as India – captive, third-party or a hybrid model. Captives form about
22% of revenue (currency-adjusted using 2003 as a base). This has come
down from 31% in 2003 but has been stable for the past five years.
■ Signs of captive activity picking up. Recent news flow suggest renewed
captive activity and we think that this has raised some questions on the
structural prospects for the Indian companies. The news flow include setting
up of new captives as well as the expansion of existing ones.
■ What does it mean for Indian IT vendors? We believe that there is no
material incremental threat for four reasons. (1) A large part of the recent
activity is in engineering and R&D services (ER&D), which forms 45% of
captive revenue but only 10% for the Indian companies. (2) The hybrid
model is being increasingly adopted – the financial services segment is the
best example of hybrid and third-party co-existence – it accounts for 40% of
captive headcount but third-party market share is up from 37% to 44% in five
years. (3) Third-party vendors have significant advantages of scale,
processes and platforms for relatively more commoditised services. (4) Both
BPO and infra services commenced largely with captives but third-party
plays a bigger role now. Most recent captive activity is around ER&D and
SMAC. Once these markets mature, there could be potentially big
opportunities for Indian IT firms.
Research Analysts
Anantha Narayan
91 22 6777 3730
Nitin Jain
91 22 6777 3851
19 February 2015
India IT Services Sector 2
Focus charts Figure 2: After witnessing a declining trend during FY03-
09, the captives' proportion of Indian IT exports has
remained stable during FY09-14
Figure 3: Several new/incremental captives have been set-
up in the last one year
0%
20%
40%
0.0
50.0
100.0
2003 2009 2014
US
D b
n
Overall IT/BPO exports (currency adjusted)Captive exports (currency adjusted)Captive as % of total (RHS)
Source: NASSCOM, Credit Suisse estimates Source: Credit Suisse research
Figure 4: ER&D accounts for the largest share of captive
revenue in India…
Figure 5: …and this segment is still a small part of Indian
IT services firms' revenue IT
33%
BPM22%
ER&D and Products
45%
IT
61%
BPM24%
ER&D and Products
15%
Source: NASSCOM, Credit Suisse estimates Source: NASSCOM
Figure 6: BFSI accounts for ~36-38% of the employees in
IT captives …
Figure 7: The growth for the top-five firms has been better
than the overall BFSI exports growth, partly indicating
likely share gains from captives
BFSI36-38%
Software24-28%
Telecom13-15%
Industrials3-5%
Aerospace & Defence
3-5%
Semiconductors2-4%
Others10-14%
32.0%
34.0%
36.0%
38.0%
40.0%
42.0%
44.0%
46.0%
FY09 FY10 FY11 FY12 FY13 FY14
Top 5 firms BFSI revenues as % of overall BFSI exports
Source: NASSCOM Source: Company data, NASSCOM
Figure 8: ER&D is estimated to be a US$40 bn +
opportunity by 2020
Figure 9: NASSCOM estimates SMAC to be have over
US$280 bn addressable market opportunity by 2016
0
5
10
15
20
25
30
35
40
45
2013 2014 2020
Engineering and R&D exports (US$ bn)
0
50
100
150
200
250
300
350
2013 2016
SMAC - addressable market (US$ bn)
Source: NASSCOM Source: NASSCOM
19 February 2015
India IT Services Sector 3
Captives have always been an integral part of offshoring Three different models
Global firms have three options when they consider moving work offshore (to India): (1)
captive only (have all the operations in in-house offshore captive centres), (2) third-party
offshoring (use vendors such as TCS, Cognizant and Infosys or Accenture); and (3) hybrid
model (combination of the captive and third-party offshoring model). While management
control is the highest in the pure captive model, it comes with greater management efforts
and higher costs. On the other hand, third-party outsourcing model requires lower
management bandwidth and relatively lower costs, but it leaves management with lesser
control on operations. The third model is somewhere in between the first two models.
Major global outsourcers have used these models to varying degree in their outsourcing
strategies, with captives being an integral part. For example, many of the major financial
institutions have both captive and third-party operations though the mix varies – banks
such as Morgan Stanley and Goldman Sachs have a captive heavy outsourcing strategy,
while banks such as Citi are more outsourcing heavy.
Figure 10: Three broad outsourcing strategies (size of the bubble represents
management efforts)
High
LowControl
Thirdparty
- High management control- Adherence to regulatory
requirements- No fear of IP losses- Skills in certain areas may
be unavailable with 3rd party
Virtual/ Hybrid
Captive- Relatively low cost- Flexible operations- Best-in-class practices- Lesser management
bandwidth required
Source: Credit Suisse research
Captives have been a significant part of India's IT and BPO growth story. While the first
few captive centres were set up by organisations such as GE and Texas Instruments in
the 1980s, the momentum picked up only in 2000 with several companies, particularly in
financial services and hi-tech, setting up offshore centres of their own in India. This not
only provided these companies with high quality resources at significantly lower costs, but
also served as 'proof of concept' for India as an offshore technology services destination.
As the India IT and BPO sector flourished over the last 10-15 years, captives have also
prospered. Captives have grown into a significantly large sub-segment of the India IT and
BPO sector with over US$15 bn revenue (of a total of US$86 bn industry revenue in FY14)
and over 530,000 employees.
Three options: captive, third
party, hybrid
Captives form about 17% of
the Indian industry
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India IT Services Sector 4
Common motives behind a captive strategy
Captive vs. third-party outsourcing has always been a topic of debate. While prima facie,
captives may appear to be attractive option – both from cost and control, there are several
inherent intricacies. While captives have the advantage of knowledge retention (i.e.
knowledge gained during a project remains within the firm) and information security
(though third-party service providers too have rigorous security standards), there are
issues pertaining to employee management as there is limited scope for career
enhancement and learning, unlike in an IT firm that provides employees with scope to
work with multiple clients on varying technologies. Given this, attrition can be high and
scalability becomes an issue beyond a certain point.
Captives also have a high cost employee structure. Given relatively limited career growth
prospects for the employees, captives generally tend to have a higher compensation in
order to attract talent. Furthermore, captives do not have the kind of training facilities that
third-party service providers have developed and cannot maintain the extent of bench that
third-party providers can maintain (given limited business expansion scope). This leads to
a flatter employee pyramid, which also pushes up the cost base. Also, during cyclical
downturns, it becomes challenging for these companies to scale down quickly while work
with a third-party vendor can be cut down at short notice.
Despite these challenges, global firms have followed a combination of captive and third-
party outsourcing models. Traditionally, global firms use a captive model for a variety of
reasons that can include:
■ Greater control over the IT operations: Some companies, typically first-time risk-
averse offshorers, are often not comfortable with giving control of the IT functions to
third-party IT services vendors. These firms prefer to test the offshoring model through
their own captive centres.
■ Intellectual property concerns: In services that involve greater use of intellectual
property, global firms generally prefer to keep the work in-house. Engineering services
is one such area, for example.
■ Core IT functions and regulatory reasons: In some industries such as telecom, hi-
tech and to some extent banking, IT is considered to be a core part of the business.
Hence a large part of the IT work is still done in-house – either onsite or in captive
centres. Similarly, in banking, certain IT functions could be kept in-house due to
compliance reasons.
■ Evolving service lines: Among the emerging service lines, where third-party IT
service providers do not have an established track record, global firms could keep the
work in-house, until the third-party service providers demonstrate reasonable
execution credentials. For example, initially, some of the US financial institutions used
the captive route for remote infrastructure management (RIM) work. However, over
time, Indian IT services firms have developed capabilities. We believe that the mix has
shifted in favour of third-party service providers over the past few years.
■ Weaker INR is an added incentive: A sustained weakness in INR against USD makes
the cost of setting-up and operating a captive operation much more economical for global
firms. Indian IT firms have typically not passed on the currency benefits (or losses) to their
clients. In such a scenario, a weaker INR narrows the relative cost benefit of third-party
vendors over captives. However, we do not think that currency by itself would be a criteria
to set up a captive centre in India, though it may be an added incentive.
High attrition, scalability
challenges and relatively
higher costs are key issues
for captives
Privacy, IP-related issues
and a desire to have
complete control are often
the reasons for opting for a
captive
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India IT Services Sector 5
Signs of captive activity picking up Captives have a fairly long history in Indian IT outsourcing, with GE and Texas pioneering
the concept of offshoring through captives in the 1980s. From ER&D (engineering and
R&D) operations to start with, the captive model expanded to include BPO services
(processes as well as call centres) and IT. The captives have gone through several cycles
of expansion and downscaling. From ~31% of the overall Indian IT and BPO exports in
2003, the share of captives has stabilised at ~20%. However, of late there has been an
increase in news flows relating to both - expansion of existing captive centres as well as
setting up of new captive centres.
Stable trend over the last 5 years
Over 2003-14, captive revenues have grown at an impressive 19% CAGR (adjusted for
currency, accounting for the fact that they recognise revenue on a 'cost plus' basis).
However, growth trends have differed during this period. During 2003-09, captive revenue
grew at below the sector's average growth rates (23% CAGR vs 30% CAGR for the overall
sector), partly due to sale of several captives (particularly by financial services firms) to
third-party service providers during the global financial crisis. For example, TCS acquired
Citigroup's BPO in 2008, Capita acquired Axa's back-office operations in 2008 and WNS
acquired Aviva's back office operations in 2007. However, since then, over the last five
years (2009-14), the captive revenue growth has largely been in line with the overall
industry exports growth rate, although it has decelerated (to 13%).
Figure 11: After witnessing a declining trend during FY03-09, the captives' proportion of
Indian IT exports has remained stable during FY09-14
0%
5%
10%
15%
20%
25%
30%
35%
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
2003 2009 2014
US
D b
n
Overall IT/BPO exports (currency adjusted) Captive exports (currency adjusted)
Captive as % of total (RHS)
Source: NASSCOM, Credit Suisse estimates. Note: A large proportion of captives recognise revenue on a
'cost plus' basis (i.e. in INR). Given that the USD has appreciated significantly over the last 5 years, we
have restated the captive revenue using 2003 rates as a base.
The captives' share in
Indian IT exports has been
stable for the past 5 years,
after declining for the
preceding 5
19 February 2015
India IT Services Sector 6
However, there seems to be renewed captive activity
over the last one year
After a stable mix between third-party outsourcing vs. captive centres, there seems to be a
pick-up in captive activity in India over the last one year. There have been several media
reports of new captives being set-up or of existing captives expanding. For example, while
there are media reports (Media sources such as Economic Time and Business Standard)
about companies such as Citigroup, Wells Fargo, Allstate Insurance, AstraZeneca and
Mercedes Benz expanding their captive operations in India, companies such as Danske
Bank and some smaller players (such as Victoria Secret and Cargill) are said to have set
up new captive centres in India. While the quantitative details (in terms of number of
centres and FTEs) of the recent trends are not available, a cursory look at the news flow
indicate signs of positive momentum.
Figure 12: Several new/incremental captives set-up in the last one year
Date of media
announcement
Company Location Nature of operations Remarks
Feb-15 Twitter Bengaluru ER&D Focus on emerging markets
Jan-15 Wells Fargo Bengaluru IT and BPO Incremental investment over its existing captive operations. Wells Fargo has acquired 1 mn sq feet office space.
4QCY14 Honeywell Bengaluru IT (SMAC) and ER&D Have bought 2 mn sq feet of office space in aggregate
4QCY14 Adobe Bengaluru ER&D
4QCY14 SanDisk Bengaluru ER&D
Dec-14 Mercedes Benz Bengaluru ER&D Second dedicated facility at Whitefield, spread across an area of 266,000 sq ft with a capacity of over 2,400 people to accommodate future growth
Nov-14 Citigroup Chennai and Pune IT According to media reports, Citigroup is planning to set up its own IT arm
Nov-14 Danske Bank Bengaluru IT The IT captive centre was started with 1,000 employees. Danske Bank will also continue working with ITC Infotech (its existing IT outsourcing vendor in India).
Nov-14 Allstate Insurance Bengaluru and Pune IT (SMAC) Currently, Allstate Insurance has 800 employees in its Bengaluru captive centre and another 3,700 employees work with third-party vendors such as Infosys. It is planning to hire 600-800 employees across Bengaluru and Pune over the next 3-4 years.
Jul-14 Lowe's Bengaluru BPO Customer support centre
Jun-14 Rolls-Royce Bengaluru ER&D Setting up a R&D centre. It already operates two engineering centres with TCS and Quest.
Feb-14 AstraZeneca Chennai ER&D To reduce IT outsourcing from 70% to ~30%
Feb-14 Victoria Secret Bengaluru IT (SMAC) Captive centre for data analytics.
2014 Cargill Bengaluru BPO Captive centre
Source: Media sources such as Economic Time and Business Standard
News flows suggest
renewed captive activity
19 February 2015
India IT Services Sector 7
What does it mean for Indian IT vendors? With the recent news flow on a pick-up in captive activity by global corporations, there
have been questions on the possible implications for the third-party IT service providers.
This is not the first time these concerns have been raised - there have been several
instances earlier and third-party service providers have managed to garner their fair share
of business on each of these occasions. In the current context as well, we believe there is
no material incremental threat to Indian IT firms from captives. Our belief is based on four
reasons:
■ Most of the recent captive growth has been in ER&D, that is a low proportion of the
Indian IT firms' business and is still an underpenetrated segment. This segment has
also started showing signs of significant acceleration for many of the Indian companies
and their management teams have started highlighting the strong growth prospects in
this segment.
■ A 'hybrid' model is gaining more prominence. First time offshorers using this model
can add to incremental revenue for the Indian IT firms. Just as was the case with the
past round of ER&D captives, it is likely that these corporations supplement their
captives' work with work done by third-party providers. EClerx is a relevant example of
successful co-existence of captive and third-party vendors.
■ Commoditised services may still be economical with third-party service providers that
have developed better processes and automation tools over time and can scale up or
down quickly; and
■ The recent trend of a pick-up in ER&D and SMAC related activities should benefit the
Indian IT firms in the medium term as global firms get confidence on India's ability to
offer these services (similar to the evolution of other service lines such as BPO and
IMS which were initiated with captive centres initially). Some of the captives can
eventually be acquired by third-party service providers.
Although there can be one-off cases such as Danske Bank (setting-up its captive centre
and taking over some employees from its existing outsourcing vendor, ITC Infotech1) and
AstraZeneca (targeting to reduce the proportion of third-party outsourcing from ~70% to
~30%2), we believe there is no structural trend that could pose headwinds to Indian IT
firms' growth prospects. We continue to think that demand trends for Indian IT firms
remain solid (please see our note dated 5 February 2015 "Though not dramatically better
than 2014, demand trends are solid for 2015" and the note dated 16 February 2015 "Ten
key takeaways from the NASSCOM conference").
A large part of the recent captive activity has been in
ER&D
There has been a pick-up in ER&D outsourcing to India of late. After years of strong
execution in IT and BPO and building reasonable reference ability in ER&D, there is
increasing willingness among clients to set up ER&D operations in India. For example,
Sony has increased the size of its R&D centre from 100 in 1997 to over 1,800 in 2014,
Manahattan Associates (a US-based supply chain management software company) has
1 http://www.business-standard.com/article/companies/danske-bank-to-set-up-own-captive-technology-
centre-in-india-114112601468_1.html 2 http://www.thehindu.com/business/Industry/astrazeneca-to-set-up-it-captive-unit-in-
chennai/article5685611.ece
We believe there is no
material incremental threat
to Indian IT firms from
captives
ER&D accounts for 45% of
captives' revenue but only
10% of the Indian
companies' revenue
19 February 2015
India IT Services Sector 8
increased its headcount from 5 in 2002 to over 1,100 people. Similar expansions continue
and new companies continue to explore the India market.
Historically too, ER&D has been a major focus area for global firms for captive operations
and a majority of captive centres in India (over 60% in numbers and over 45% in revenue)
focus on ER&D outsourcing. Several companies in sectors such as telecom, hi-tech and
automotive have traditionally preferred a captive model (with small centres). Despite
increasing interest in a captive model for ER&D services, we believe it will not have
material impact on Indian IT service providers as ER&D constitutes a relatively moderate
10% of their revenue. Indeed, as we have discussed in the latter section, this could bring
incremental business opportunities.
Figure 13: ER&D accounts for the largest share of captive
revenue in India…
Figure 14: …and this segment is still a small part of Indian
IT services firms' revenue
IT33%
BPM22%
ER&D and Products
45%
IT66%
BPM24%
ER&D and Products
10%
Source: NASSCOM, Credit Suisse estimates Source: NASSCOM
'Hybrid' model ensures that third-party IT firms and
captives can co-exist
There is an increasing adoption of a 'hybrid' model among global firms. As discussed
earlier, a 'hybrid' model lies somewhere between pure third-party offshoring and a pure
captive strategy. This includes 'virtual captives', where the third-party IT vendor provides
the IT as well as physical infrastructure, and services such as training and hiring and
dedicated resources to service the outsourcing firm (buyer). The buyer, in turn, retains an
element of control over the technology and processes, thus enabling a captive-like
environment. Banks such as Nomura and Credit Suisse already have this type of
arrangement.
There is another dynamic that works in favour of Indian IT firms. Many of the global firms
following a 'hybrid' model are using captives as centres to manage the third-party vendor
relationships as well managing the captives in other geographies such as China and
Philippines. As more new companies follow this model to enter the India offshoring market,
there could be incremental opportunity for the Indian IT firms.
In a hybrid model, captives
are also used to manage
third-party vendor
relationships
19 February 2015
India IT Services Sector 9
BFSI vertical - the best example of captive and third-party co-existence
Traditionally, BFSI (banking, financial services and insurance) has been the largest and
amongst the most penetrated industry segments for the Indian IT firms. That holds true for
captives as well. Most of the major global banks (including Barclays, Credit Suisse,
Deutsche, Goldman Sachs, JP Morgan, Morgan Stanley, and UBS) have captive centres
in India. BFSI sector accounts for ~40% of both IT and BPO captive headcount in India.
These are also major clients for Indian IT firms.
Figure 15: BFSI accounts for ~35-40% of the employees in
IT captives …
Figure 16: … and ~40-45% in the BPO captives
BFSI36-38%
Software24-28%
Telecom13-15%
Industrials3-5%
Aerospace & Defence
3-5%
Semiconductors2-4%
Others10-14%
BFSI40-42%
Software20-22%
Research & Consulting
9-11%
Computer hardware
8-10%
Telecom7-9%
Healthcare4-6%
Others5-7%
Source: NASSCOM, Credit Suisse Source: NASSCOM, Credit Suisse
A look at the BFSI revenues of third-party Indian IT vendors (represented by the top-5
firms3), indicates that they have growth at an impressive 17% CAGR over FY09-14 as
compared to ~13% CAGR for the industry's BFSI exports (note that industry also includes
captives and MNC vendors). While this growth differential may partly reflect higher growth
for the top-five compared to their smaller and MNC peers, it does confirm the fact that
third-party and captive providers can co-exist. This also includes a period of sustained
weakness in INR during FY12-14, which was an added incentive for global banks to set up
captive operations.
Figure 17: Despite the captive competition, Indian IT
firms' (top 5 firms) BFSI revenue has recorded a healthy
17% CAGR over FY09-14
Figure 18: The growth for the top-five firms has been
better than the overall BFSI exports growth, partly
indicating likely share gains from captives
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
FY09 FY10 FY11 FY12 FY13 FY14
BFSI revenues top 5 firms
32.0%
34.0%
36.0%
38.0%
40.0%
42.0%
44.0%
46.0%
FY09 FY10 FY11 FY12 FY13 FY14
Top 5 firms BFSI revenues as % of overall BFSI exports
Source: Company data, Credit Suisse Source: Company data, NASSCOM, Credit Suisse
3 TCS, Cognizant, Infosys, Wipro and HCL Tech
BFSI accounts for 40% of
captive headcount …
… but the market share of
third-party vendors in BFSI
has gone up from 37% to
44% in the past five years
19 February 2015
India IT Services Sector 10
Case study: eClerx
eClerx is an India based KPO with a focus on capital markets, retail and cable segments (through its recently acquired
entity, Agilyst). In the capital markets business, it provides services ranging from trade entry, settlement, clearing and
reconciliation, besides providing documentation and accounting services. Similarly, in sales and marketing services, its
work involves data management, business intelligence and analytics and content management on the website. The
cable business is largely into performance monitoring, technical services and revenue auditing. While the cable
business is niche, eClerx' capital markets business witnesses intense competition from captives given the process
oriented nature of the services. Historically, this business has accounted for nearly half of the company's revenues
(though, this proportion has come down to ~40-42% due to the Agilyst acquisition). Most of eClerx' large client in this
segment already have captive operations in India.
Figure 19: eClerx's services in the capital markets segment are highly process oriented – prone to competition from
captives
Capital markets business
Operational Support Utility Functions
Trade support Trade Entry, Reconciliations, Exceptions Mgmt. Tax Operations Tax Form Coding, Cost Basis, Tax Reclaims
Confirmations Affirmations & Confirmations (Paper & Elec.) Securities
Documentation
Trading Relationship Document Administration
Settlements Settlements, Clearing, Fail Management Finance Financial Accounting, BC&E, Product Control
Margin Collateral Operations & Portfolio Reconciliation Reference Data and
KYC
Client On-boarding, KYC, SSI, Static Data
Asset Servicing Announcements, Corporate Actions, Claims Risk Management Operations Risk & Control, Regulatory Support Source: Company presentation
Historically, eClerx has competed and co-existed with its clients' captive operations in India and despite this, has
achieved an impressive 27% revenues CAGR over FY09-14, while at the same time maintaining healthy margins
(EBITDA margins have averaged ~40% over FY09-14).
Figure 20: eClerx has reasonably high exposure to the
capital markets business
Figure 21: Despite competition from captives in at least
40% of the business, eClerx has managed to post
impressive revenue growth and healthy margins
Capital markets42%
Sales and Marketing
(Retail)42%
Cable16%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Revenue (US$ mn) EBITDA margins (RHS)
Source: Company data Source: Company data
According to eClerx management, global banks have historically used a combination of captive and third-party service
providers. They use captives for proprietary work and third-party firms for IT development and run-the-business kind of
work. They view captives as partners as well competitors; however, management remains confident of the co-existence
of both the business models.
19 February 2015
India IT Services Sector 11
Figure 22: Quite a few of the top customers for Indian companies have captives
Sr no Company Vertical Captive
presence in
India
Sr no Company Vertical Captive
presence in
India
1 Wal-Mart Retail/CPG Yes 26 Bank of America Corp BFSI Yes
2 Royal Dutch Shell Energy and
utilities
Yes 27 Citigroup Inc BFSI Yes
3 Exxon Mobil Corp Energy and
utilities
Yes 28 Boeing Co/The Mfg/Hi-tech Yes
4 BP PLC Energy and
utilities
29 Wells Fargo & Co BFSI Yes
5 Volkswagen AG Auto Yes 30 Munich Re BFSI
6 Chevron Corp Energy and
utilities
Yes 31 Amazon.com Inc Retail/CPG
7 Apple Inc Mfg/Hi-tech 32 Procter & Gamble Co Healthcare
8 Daimler AG Auto Yes 33 Deutsche Telekom AG Telecom/media Yes
9 General Motors Co Auto Yes 34 BNP Paribas SA BFSI Yes
10 Phillips Energy and
utilities
Yes 35 Home Depot Inc/The Retail/CPG
11 General Electric Co Mfg/Hi-tech 36 Airbus Group NV Mfg/Hi-tech Yes
12 Ford Motor Co Auto Yes 37 Deutsche Post AG Others
13 Allianz SE BFSI Yes 38 Johnson & Johnson Healthcare
14 AT&T Inc Telecom/media 39 HSBC Holdings PLC BFSI Yes
15 Verizon Communications Inc Telecom/media Yes 40 Target Corp Retail/CPG Yes
16 Hewlett-Packard Co Mfg/Hi-tech Yes 41 MetLife Inc BFSI Yes
17 BMW Auto 42 Telefonica SA Telecom/media
18 JPMorgan Chase & Co BFSI Yes 43 Audi AG Auto
19 Tesco PLC Retail/CPG Yes 44 Comcast Corp Telecom/media
20 BASF SE Mfg/Hi-tech 45 BHP Billiton PLC Mfg/Hi-tech
21 Carrefour SA Retail/CPG 46 Vodafone Group PLC Telecom/media Yes
22 Statoil ASA Energy and
utilities
47 Unilever NV Retail/CPG Yes
23 Nestle SA Retail/CPG 48 Deutsche Bank AG BFSI Yes
24 Siemens AG Mfg/Hi-tech Yes 49 ThyssenKrupp AG Mfg/Hi-tech
25 Prudential PLC BFSI 50 Bayer AG Healthcare
Source: Media sources such as Economic Time and Business Standard, Credit Suisse; Note: We have considered the top 50 US and European
companies by revenue in the Bloomberg World index that we know have outsourced work to Indian vendors and their captive presence is based
on news reports.
Third-party service providers have scale advantage
in commoditised services
Indian IT firms have built scale and strong client reference-ability in several service lines
as such as application development and maintenance, testing, BPO and more recently,
infrastructure management. Given their experience of working with multiple clients over a
long period of time, these firms have developed best-in-class practices and processes and
built several re-usable tools. For example, due to repetitive use of certain codes for
application development, IT companies develop frameworks that reduce the manual
efforts to some extent. Similarly in testing projects, these companies have a large
repository of test cases that makes the process relatively more reliable and faster. In BPO
and infrastructure management, many of the companies have built platforms and several
other automation tools, reducing overall manpower efforts.
While some of the global firms may prefer to perform these functions in-house due to
security or other reasons, we believe third-party vendors are better equipped to perform
relatively commoditised work.
Third-party vendors have
the advantages of scale,
processes, and re-usable
IP/platforms
19 February 2015
India IT Services Sector 12
ER&D and SMAC can be potential big growth
opportunities for Indian IT firms
Traditionally, captives have helped the Indian IT market grow. Captives provide the first-
time offshoring experience to many first time offshorers. This in turn helps in the
development of the market. BPO is one of the best examples. The BPO services evolved
in India through the establishment of American Express and GE captives in the 1990s.
From being purely captive then, the revenue mix in the BPO segment has gradually shifted
in favour of third-party service providers. The captive centres' share in BPO exports was
~43% in 2003 and has been gradually coming down since then - it stood at just over 20%
in 2014. The BPO business has evolved from a pure voice-based model (call-centres) to a
more transaction-oriented model over time. There are several pure play third-party service
providers (such as Genpact, WNS, EXL Services, eClerx, Firstsource Solutions and
Evalueserve) as well as full service providers such as TCS, Infosys and Wipro.
Figure 23: The BPO business has evolved from being dominated by captives to a third-
party dominated business
0%
20%
40%
60%
80%
100%
120%
1990's 2003 2009 2014
BPM - captive revenues as % of overall exports
Source: NASSCOM, Credit Suisse
A similar trend was observed in the infrastructure management business, particularly in
the BFSI industry vertical. While the banks were initially reluctant to outsource their
infrastructure management work to third-party providers, once they had some offshoring
experience through captives, they were comfortable with third-party vendors. In fact, some
of the banks are now comfortable with outsourcing significant part of infrastructure
management to third-party providers on a managed service basis.
"It is not unusual for companies to start out with a captive model, and over time move to an
outsourcing model. Other companies which started their transformation journey late, often
skip the first step and go straight to outsourcing. However, those companies which have
had significant experience with developing a captive model have clearly found the
transition to a fully-outsourced model less complex and arduous, as they typically have
some degree of standardization of their processes and technology already established. In
many cases, moving from a captive model to a fully-outsourced scenario has proven to be
a straightforward advancement in optimizing efficiencies, as outsourcing offers the logical
next step for companies with captives to strip out further costs and find further
efficiencies." - Graham Russell, Head of Global Transaction Processing, AstraZeneca
Both BPO and infra
management services
commenced largely with
captives but third-party
plays a bigger role now
19 February 2015
India IT Services Sector 13
Recent trend of increasing captive activity in ER&D and emerging technologies
bodes well for Indian IT firms
Many of the new captives and recent expansions are focussed on ER&D and emerging
technologies (Social, Media, Analytics and Cloud - SMAC). While Indian IT firms already
have some presence in the ER&D business for quite some time, it is still small in the
context of addressable market opportunities. On the other hand, emerging technologies
are relatively new for Indian IT firms and they still need to build a referenceable client base
here. But these services are growing very quickly for the Indian companies and holds a lot
of potential (see our note, "The SMAC pack" dated 10 July 2013 for more discussion on
this subject). Both these are multi-billion dollar revenue opportunities and we believe
increasing captive activity in these service lines bodes well for the industry.
Figure 24: ER&D is estimated to be a US$40 bn +
opportunity by 2020
Figure 25: NASSCOM estimates SMAC to be have over
US$280 bn addressable market opportunity
0
5
10
15
20
25
30
35
40
45
2013 2014 2020
Engineering and R&D exports (US$ bn)
0
50
100
150
200
250
300
350
2013 2016
SMAC - addressable market (US$ bn)
Source: NASSCOM Source: NASSCOM
Captives as potential acquisition targets
There have been several instances of captives being acquired by third-party service
providers in the past, the largest being the Citigroup BPO acquisition by TCS in 2008 (for
~US$500 mn). Though most of these acquisitions (particularly in the financial services
sector) were at the time of the global financial crisis, there has also been some activity
later with Cognizant acquiring CoreLogic and ValueSource and Tech Mahindra acquiring
Sony mobile's testing lab and BASF's captive operations. We believe captive acquisition
remains an attractive option for new client acquisition (with some revenue visibility) and
capability building as demonstrated by TCS' Citigroup BPO acquisition. Companies such
as Cyient are looking to acquire captives of its must-win prospects, while the Infosys
management has mentioned missing the captive acquisition opportunities.
Captive activity is picking up
in ER&D and emerging
technologies and both are
significant opportunities for
the Indian companies
Captive acquisition can
provide access to a new
client, significant revenue
with high visibility and new
capabilities
19 February 2015
India IT Services Sector 14
Figure 26: Some of the captive acquisitions by Indian IT/BPO firms
Year Company Captive operations acquired
2007 WNS Aviva
2007 Infosys Back-office operations of Philips
2008 TCS Citigroup BPO
2008 Capita Axa
2009 Wipro Citi Technology services
2009 Cognizant UBS
2009 Mphasis AIG
2009 EXL Services Schneider Logistics
2009 Mindtree Kyocera Wireless
2011 Cognizant CoreLogic
2013 Tech Mahindra Sony Mobile's testing lab
2013 Cognizant KBC's offshore arm (ValueSource)
2014 Tech Mahindra BASF
Source: Company data, Credit Suisse estimates
19 F
eb
ruary
201
5
Ind
ia IT
Serv
ices
Sec
tor
15
Figure 27: Global valuation comparables
Company Local Mcap 3M
ADTV
Sales
(CY14)
EV/Sales Sales
CAGR
EV/EBITDA EBITDA
CAGR
P/E (x) EPS Growth (%) Share price perf
Price US$
mn
US$
mn
US$
mn
CY14 CY15E CY16E CY14-
16
CY14 CY15E CY16E CY14-16 CY14 CY15E CY16E CY14 CY15E CY16E 1m 3m 12m
US-listed
Accenture 89 59,340 230.8 30,337 1.8 1.7 1.6 4.7% 11.0 10.5 9.9 5.1% 19.3 18.1 16.6 7% 7% 9% 0% 7% 8%
Syntel* 45 3,768 7.5 911 4.9 4.5 4.1 9.0% 16.0 15.5 13.5 9.0% 15.9 15.6 14.1 8% 2% 10% -2% 3% 0%
Cognizant* 60 36,651 221.9 10,263 3.4 2.8 2.4 17.3% 15.2 13.0 11.4 15.5% 23.2 20.5 17.7 29% 13% 16% 9% 16% 20%
CSC* 67 9,406 68.8 12,499 0.8 0.8 0.8 0.2% 4.7 4.6 4.5 2.6% 15.1 13.8 12.6 27% 9% 9% 6% 6% 6%
EXLS* 32 1,040 3.9 502 1.9 1.7 1.5 11.2% 9.5 8.5 7.2 15.1% 17.7 16.6 14.6 -1% 7% 14% 2% 15% 22%
iGATE* 39 3,145 9.6 1,268 2.8 2.5 2.3 10.4% 12.6 11.5 9.8 13.5% 19.8 17.9 14.8 4% 11% 21% -8% 10% 11%
Infosys (ADR) 36 41,540 92.8 8,666 4.3 3.9 3.4 11.6% 15.5 14.1 12.8 10.1% 21.5 19.3 17.3 16% 12% 11% 5% 9% 21%
Wipro (ADR) 14 34,308 6.4 7,000 4.8 4.3 3.8 11.5% 19.1 16.8 14.8 13.7% 25.4 21.9 19.2 11% 16% 14% 15% 14% 7%
Genpact* 22 4,696 12.0 2,279 2.2 2.0 1.8 9.4% 13.5 12.3 10.8 11.5% 21.0 18.9 16.6 -9% 12% 13% 7% 22% 43%
WNS* 24 1,228 2.5 496 2.6 2.4 2.2 8.5% 11.2 10.5 9.5 8.4% 14.5 13.7 12.6 27% 7% 8% 2% 19% 12%
Europe-listed
Atos 67 7,702 21.2 12,022 0.6 0.6 0.6 -0.5% 5.9 5.3 4.9 9.3% 15.0 13.0 11.6 3% 16% 11% 2% 22% -4%
Capgemini 65 12,057 42.3 13,976 0.8 0.9 0.8 -1.3% 8.6 7.8 7.3 8.4% 17.3 15.2 14.0 26% 14% 9% 6% 14% 20%
Indra 9 1,678 18.5 3,911 0.6 0.6 0.6 0.5% 7.5 7.3 7.0 3.8% 12.5 11.2 10.2 -14% 11% 10% 12% 9% -33%
TietoEnator 23 1,955 3.0 2,035 0.9 1.1 1.1 -6.1% 7.0 7.0 6.9 1.0% 15.6 15.5 15.0 2% 1% 3% 7% 16% 28%
India-listed
Cyient* 548 989 0.8 425 2.1 1.8 1.6 15.3% 12.4 10.3 8.7 19.7% 18.5 15.1 13.2 29% 23% 14% -3% 5% 57%
eClerx* 1,274 620 0.6 150 3.9 3.5 3.1 12.7% 10.5 9.6 8.7 10.0% 15.8 13.8 12.6 5% 14% 9% -3% 3% 5%
Firstsource Solutions* 32 339 1.3 505 0.9 0.9 0.8 8.0% 7.5 6.4 5.6 15.9% 9.7 7.4 6.1 16% 32% 21% 2% -17% 10%
HCL Tech 2,033 22,938 28.7 5,694 0.1 0.1 0.0 14.0% 15.0 13.8 12.2 11.0% 20.6 18.0 15.8 34% 15% 13% 23% 23% 38%
Hexaware 268 1,295 6.1 422 3.0 2.5 2.2 14.7% 16.5 14.0 12.0 17.1% 25.3 19.8 17.1 -16% 27% 16% 23% 20% 69%
Infosys (local) 2,296 42,335 113.0 8,666 4.4 4.0 3.5 11.6% 16.2 14.6 13.1 10.9% 21.9 19.7 17.7 16% 12% 11% 9% 9% 25%
KPIT* 210 661 7.0 484 1.5 1.3 1.2 13.1% 10.8 9.1 7.4 20.7% 16.1 12.8 10.5 10% 25% 22% -2% 22% 24%
Mindtree 1,462 1,965 3.9 566 3.3 2.9 2.5 14.5% 16.7 14.1 12.1 17.3% 23.5 20.5 17.8 23% 15% 15% 4% 18% 80%
MphasiS* 375 1,265 0.5 973 1.3 1.3 1.2 4.2% 8.2 8.2 7.5 4.5% 11.4 10.9 9.8 61% 4% 12% 1% -6% -6%
NIIT Technologies 409 365 0.7 386 0.9 0.8 0.7 9.1% 6.0 5.2 4.3 18.1% 12.8 11.2 8.9 -15% 14% 26% 0% -5% -12%
OFSS* 3,367 4,573 2.2 634 5.5 5.0 4.1 16.2% 14.6 13.5 10.6 17.4% 21.9 21.3 17.5 1% 3% 21% 1% 2% 26%
Persistent* 1,738 1,116 2.5 304 3.4 2.9 2.5 18.0% 15.5 12.8 10.5 21.4% 24.4 20.1 17.0 22% 22% 18% -5% 34% 73%
Polaris* 147 236 2.6 333 0.6 0.6 0.6 3.9% 5.3 5.1 4.6 7.5% 8.3 7.6 7.1 -11% 9% 7% -12% -29% 31%
TCS 2,634 82,837 48.2 15,010 5.4 4.7 4.1 14.5% 18.7 16.5 14.3 14.5% 24.9 22.0 19.1 16% 13% 15% 5% 1% 23%
TechM # 2,892 11,146 23.5 3,521 3.0 2.4 2.1 20.6% 15.4 12.7 10.5 21.0% 22.5 18.6 15.3 9% 21% 21% 3% 7% 59%
Wipro (local) 669 26,327 18.0 7,000 3.6 3.3 2.9 11.5% 14.8 12.9 11.3 14.5% 19.5 16.8 14.7 11% 16% 14% 14% 17% 20%
Zensar* 743 524 0.5 427 1.2 1.1 NA NA 7.9 6.9 26.8 NA 12.7 10.9 NA 17% 16% NA 15% 23% 90%
Note: Estimates for companies marked with an asterisk (*) are consensus estimates provided by IBES. #Adjusted for treasury shares. Source: Company data, Thomson Reuters, Credit Suisse
estimates
19 February 2015
India IT Services Sector 16
Companies Mentioned (Price as of 18-Feb-2015)
AT&T (T.N, $34.71) Accenture Plc (ACN.N, $89.3) Adobe Systems Inc. (ADBE.OQ, $77.13) Airbus Group (AIRG.F, €50.692) Allianz (AZSEY.PK, $16.88) Allstate Corporation (ALL.N, $71.27) Amazon com Inc. (AMZN.OQ, $375.43) American Express Co. (AXP.N, $79.08) Apple Inc (AAPL.OQ, $127.83) AstraZeneca (AZN.N, $69.61) Atos (ATOS.PA, €66.65) Audi (NSUG.F, €647.708) Aviva PLC (AVV.N, $27.8) Axa SA (AXAF.DE, €20.52) BASF SE (BASFY.PK, $94.29) BHP Billiton Ltd (BHP.N, $50.99) BMW (BMWG.F, €106.545) BNP Paribas (BNPP.PA, €49.52) BP (BP.N, $41.78) Bank of America (BAND.L, $14.0) Barclays (BCS.N, $15.93) Bayer (BAYRY.PK, $143.55) Boeing (BA.N, $149.92) Capgemini (CAPP.PA, €64.63) Cargills (CARG.CM, SLRs147.3) Carrefour (CARR.PA, €28.985) Chevron Corp. (CVX.N, $112.4) Cisco Systems Inc. (CSCO.OQ, $29.31) Citigroup Inc. (C.N, $51.69) Cognizant Technology Solutions Corp. (CTSH.OQ, $60.19) Comcast Corporation Inc. (CMCSA.OQ, $58.8) Credit Suisse (MLPN.P, $32.43) Cyient (CYIE.NS, Rs548.35) Daimler (DDAIY.PK, $94.34) Danske Bank (DANSKE.CO, Dkr169.2) Deutsche Bank (DB.N, $32.6) Deutsche Bank (DBKGn.F, €28.64) Deutsche Post DHL (DPWGn.DE, €28.66) Deutsche Telekom (DTEGY.PK, $17.96) EClerx (ECLE.NS, Rs1273.55) ExlService Holdings Inc. (EXLS.OQ, $31.67) ExxonMobil Corporation (XOM.N, $93.05) Firstsource (FISO.NS, Rs31.75) Ford Motor Company (F.N, $16.11) GE Captal (GEH.N, $25.08) General Electric (GE.N, $25.17) General Motors Corp. (GM.N, $37.24) Genpact (G.N, $21.68) Goldman Sachs Group, Inc. (GS.N, $190.02) HCL Technologies (HCLT.BO, Rs2033.15, OUTPERFORM, TP Rs2100.0) HSBC (HSBC.N, $46.26) Hewlett Packard (HPQ.N, $38.53) Hexaware Technologies (HEXT.BO, Rs268.1) Home Depot (HD.N, $112.0) Honeywell International Inc. (HON.N, $104.0) Indra (IDR.MC, €8.96) Infosys Limited (INFY.BO, Rs2295.75, NEUTRAL, TP Rs2125.0) Johnson & Johnson (JNJ.N, $100.44) KPIT Tech (KPIT.BO, Rs209.9) Lowe's (LOW.N, $72.47) MetLife (MLU.N, $72.47) Mindtree Ltd (MINT.BO, Rs1462.05) Morgan Stanley (MS.N, $36.92) Mphasis Ltd (MBFL.BO, Rs374.8) Munich Re (MUVGn.DE, €179.75) NIIT Technologies (NITT.NS, Rs372.25) Nestle (NSRGY.PK, $76.26) Oracle Financial (ORCL.BO, Rs3366.6) Persistent Systems (PERS.BO, Rs1737.75) Phillips 66 (PSX.N, $76.9) Procter & Gamble Co. (PG.N, $85.49) Prudential (PUK.N, $49.64) Rolls-Royce (RR.L, 922.5p) SanDisk Corp. (SNDK.OQ, $82.2) Shell (RDSb.N, $69.42) Siemens (SIES.L, €87.84) Statoil (STO.N, $19.62) Syntel (SYNT.OQ, $45.0) Target Corporation (TGT.N, $76.64) Tata Consultancy Services (TCS.BO, Rs2633.9, OUTPERFORM, TP Rs3100.0) Tech Mahindra Limited (TEML.BO, Rs2892.35, OUTPERFORM, TP Rs3300.0) Telefonica (TEF.N, $14.98)
19 February 2015
India IT Services Sector 17
Tesco (TSCDY.PK, $11.22) Texas Instruments Inc. (TXN.OQ, $58.2) ThyssenKrupp (TYEKF.PK, $26.07) Tieto (TIE1V.HE, €23.26) Twitter (TWTR.N, $48.03) UBS (UBSN.S, SFr16.2) Unilvr (UL.N, $43.18) Verizon Communications Inc (VZ.N, $49.18) Vodafone Group (VOD.OQ, $35.47) Volkswagen (VLKPY.PK, $48.5) WNS Global Services (WNS.N, $23.75) Wal-Mart Stores, Inc. (WMT.N, $85.96) Wells Fargo (EAD.A, $8.82) Wells Fargo & Company (WFC.N, $55.37) Wipro Ltd (WIT.N, $13.99) Wipro Ltd. (WIPR.BO, Rs668.6, OUTPERFORM, TP Rs725.0) Zensar Tech (ZENT.NS, Rs742.7) iGate PA (IGTE.OQ, $38.89)
Disclosure Appendix
Important Global Disclosures
I, Anantha Narayan, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for HCL Technologies (HCLT.BO)
HCLT.BO Closing Price Target Price
Date (Rs) (Rs) Rating
20-Feb-12 487.66 555.68 O
18-Apr-12 491.72 575.52
06-Jul-12 486.17 570.56
25-Jul-12 509.78 644.98
01-Oct-12 577.41 694.60
17-Oct-12 575.82 734.29
03-Jan-13 620.57 759.09
17-Jan-13 697.87 853.36
04-Mar-13 709.38 922.82
17-Apr-13 745.35 942.67
31-Jul-13 930.51 1091.51
12-Aug-13 924.41 1190.74
26-Sep-13 1044.67 1265.16
17-Oct-13 1074.79 1414.00
16-Jan-14 1381.15 1662.07
17-Apr-14 1413.30 1736.49
31-Jul-14 1542.90 1850.00
30-Sep-14 1715.35 2050.00
30-Jan-15 1794.10 2100.00
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
19 February 2015
India IT Services Sector 18
3-Year Price and Rating History for Infosys Limited (INFY.BO)
INFY.BO Closing Price Target Price
Date (Rs) (Rs) Rating
20-Feb-12 1475.30 1600.00 N
15-Apr-12 1201.65 1400.00
06-Jul-12 1221.92 1350.00
13-Jul-12 1113.90 1250.00
12-Oct-12 1197.82 1225.00
03-Jan-13 1168.15 1250.00
11-Jan-13 1356.30 1350.00
04-Mar-13 1451.50 1555.00
12-Apr-13 1147.72 1225.00
03-Jun-13 1256.98 1350.00
12-Jul-13 1401.38 1400.00
12-Aug-13 1502.62 1600.00
26-Sep-13 1506.68 1650.00
11-Oct-13 1636.95 1700.00
10-Jan-14 1774.45 1900.00
01-Apr-14 1655.30 1825.00
11-Jul-14 1662.90 1850.00
30-Sep-14 1873.82 2000.00
09-Jan-15 2073.60 2125.00
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
3-Year Price and Rating History for Tata Consultancy Services (TCS.BO)
TCS.BO Closing Price Target Price
Date (Rs) (Rs) Rating
21-Feb-12 1214.96 1398.20 O
24-Apr-12 1176.90 1378.51
13-Jul-12 1230.47 1427.74
14-Jan-13 1313.82 1476.98
04-Mar-13 1487.02 1732.98
18-Jul-13 1634.67 1944.68
12-Aug-13 1786.75 2117.00
27-Sep-13 1917.26 2215.46
15-Oct-13 2184.10 2609.32
16-Jan-14 2315.26 2707.79
18-Jul-14 2405.16 2850.00
30-Sep-14 2738.20 3100.00
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
19 February 2015
India IT Services Sector 19
3-Year Price and Rating History for Tech Mahindra Limited (TEML.BO)
TEML.BO Closing Price Target Price
Date (Rs) (Rs) Rating
22-Mar-12 724.80 720.00 N
06-Jul-12 722.00 750.00
09-Aug-12 761.70 790.00
30-Aug-12 792.15 R
03-Sep-12 810.50 790.00 N
05-Nov-12 955.00 1020.00
12-Dec-12 910.80 R
20-Dec-12 926.85 1020.00 N
03-Jan-13 941.40 1040.00
06-Feb-13 979.10 1085.00
21-May-13 909.75 1040.00
12-Aug-13 1265.80 1500.00 O
26-Sep-13 1314.05 1550.00
07-Nov-13 1580.20 1925.00
04-Feb-14 1769.50 2200.00
14-May-14 1838.15 2300.00
31-Jul-14 2150.30 2350.00
06-Aug-14 2198.20 2600.00
30-Sep-14 2487.65 2850.00
09-Jan-15 2680.10 2950.00
02-Feb-15 2894.35 3300.00
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
REST RICT ED
O U T PERFO RM
3-Year Price and Rating History for Wipro Ltd. (WIPR.BO)
WIPR.BO Closing Price Target Price
Date (Rs) (Rs) Rating
20-Feb-12 394.75 377.88 N
12-Mar-12 384.16 R
15-Mar-12 375.29 377.88 N
25-Apr-12 360.44 369.09
06-Jul-12 344.57 355.91
24-Jul-12 304.06 338.33
29-Oct-12 302.96 364.70 O
02-Nov-12 320.71 373.49
03-Jan-13 349.23 386.67
04-Mar-13 368.39 430.61
19-Apr-13 368.65 400.00
08-Jul-13 356.05 440.00
12-Aug-13 454.85 525.00
26-Sep-13 477.50 540.00
22-Oct-13 514.90 600.00
17-Jan-14 552.45 650.00
17-Apr-14 585.55 675.00
30-Sep-14 596.35 725.00
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
REST RICT ED
O U T PERFO RM
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19 February 2015
India IT Services Sector 20
Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10 -15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
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Restricted 2%
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Price Target: (12 months) for HCL Technologies (HCLT.BO)
Method: Our target price of Rs2,100 for HCL is based on 16x (~25% discount to multiple implied by TCS TP) 24-month forward EPS.
Risk: Risks to our 12-month target price of Rs2,100 for HCL include the following: (1) slower than expected traction in the software business; (2) significant slowdown in IMS business because of greater competition; and (3) grater than expected margin contraction; and (4) adverse currency movement.
Price Target: (12 months) for Infosys Limited (INFY.BO)
Method: Our target price of Rs2,125 for Infosys is at 16x (~30% discount to implied multiple for TCS) our estimated EPS (earnings per share) for the next 24 months.
Risk: Downside risks to our Rs2,125 target price for Infosys include: (1) a weaker economic environment in the US or Europe leading to slower IT services spending; (2) lack of material pick-up in the revenue growth in FY16; (3) impact on margins due to the necessity of making further investments; and (4) adverse currency movements. Key upside risk is faster than expected turnaround by the management.
Price Target: (12 months) for Tata Consultancy Services (TCS.BO)
Method: Our target price of Rs3,100 for TCS is based on 22x 24-month forward EPS (earnings per share), in line with the stock's historical average.
19 February 2015
India IT Services Sector 21
Risk: Potential risks to our target price of Rs3,100 for TCS include: (1) a slowdown in the global economies, which could lead to a slowdown in revenues, and (2) a sharp appreciation in the INR vs. the USD.
Price Target: (12 months) for Wipro Ltd. (WIPR.BO)
Method: Our target price of Rs725 for Wipro is based on 16x (~ 30% discount to the multiple implied by TCS's target price) 24-month forward EPS (earnings per share).
Risk: Risks that could impede achievement of our Rs725 target price for Wipro include: (1) a weaker economic environment in the US leading to slower IT services; (2) lack of revenue acceleration for Wipro; and (3) adverse currency movements.
Price Target: (12 months) for Tech Mahindra Limited (TEML.BO)
Method: Our target price of Rs3,300 for Tech Mahindra is based on 17x (~20% discount to implied TCS P/E [price-to-earnings]) 24M forward EPS (earnings per share), adjusting for treasury shares.
Risk: Key downside risk to our target price for Tech Mahindra of Rs3,300 is a sharp downturn in demand from telecom service providers and lower margins for longer due to the large deals signed by the company.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (HCLT.BO, TCS.BO, WIPR.BO, TEML.BO, CVX.N, WFC.N, PSX.N, DBKGn.F, VZ.N, DANSKE.CO, AXP.N, HON.N, TGT.N, AAPL.OQ, HPQ.N, PG.N, GE.N, HD.N, F.N, C.N, JNJ.N, XOM.N, GM.N, CMCSA.OQ, SNDK.OQ, CSCO.OQ, CAPP.PA, LOW.N, T.N, CTSH.OQ, TXN.OQ, GS.N, BNPP.PA, WMT.N, ADBE.OQ, MS.N, BA.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (WFC.N, PSX.N, DBKGn.F, VZ.N, DANSKE.CO, AXP.N, AAPL.OQ, HPQ.N, PG.N, GE.N, HD.N, F.N, C.N, XOM.N, GM.N, CMCSA.OQ, CSCO.OQ, T.N, CTSH.OQ, GS.N, BNPP.PA, WMT.N, ADBE.OQ, MS.N, BA.N) within the past 12 months.
Credit Suisse provided non-investment banking services to the subject company (WFC.N, DBKGn.F, DANSKE.CO, AXP.N, HON.N, GE.N, F.N, C.N, XOM.N, GM.N, TXN.OQ, GS.N, BNPP.PA, MS.N) within the past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (WFC.N, PSX.N, DBKGn.F, VZ.N, DANSKE.CO, AXP.N, AAPL.OQ, PG.N, GE.N, HD.N, F.N, C.N, XOM.N, GM.N, CMCSA.OQ, CSCO.OQ, T.N, GS.N, BNPP.PA, WMT.N, MS.N, BA.N) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (WFC.N, PSX.N, DBKGn.F, VZ.N, DANSKE.CO, AXP.N, AAPL.OQ, HPQ.N, PG.N, GE.N, HD.N, F.N, C.N, XOM.N, GM.N, CMCSA.OQ, CSCO.OQ, T.N, CTSH.OQ, GS.N, BNPP.PA, WMT.N, ADBE.OQ, MS.N, BA.N) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (HCLT.BO, TCS.BO, WIPR.BO, TEML.BO, CVX.N, WFC.N, PSX.N, DBKGn.F, VZ.N, DANSKE.CO, AXP.N, HON.N, TGT.N, AAPL.OQ, HPQ.N, PG.N, GE.N, HD.N, F.N, C.N, JNJ.N, XOM.N, GM.N, CMCSA.OQ, SNDK.OQ, CSCO.OQ, CAPP.PA, ALL.N, LOW.N, T.N, MINT.BO, CTSH.OQ, TXN.OQ, GS.N, BNPP.PA, ATOS.PA, WMT.N, AMZN.OQ, ADBE.OQ, DPWGn.DE, MS.N, BA.N) within the next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (WFC.N, DBKGn.F, DANSKE.CO, AXP.N, HON.N, GE.N, F.N, C.N, XOM.N, GM.N, TXN.OQ, GS.N, BNPP.PA, MS.N) within the past 12 months
As of the date of this report, Credit Suisse makes a market in the following subject companies (CVX.N, WFC.N, PSX.N, VZ.N, AXP.N, HON.N, TGT.N, AAPL.OQ, HPQ.N, ACN.N, PG.N, GE.N, HD.N, F.N, C.N, JNJ.N, XOM.N, GM.N, CMCSA.OQ, SNDK.OQ, CSCO.OQ, ALL.N, LOW.N, T.N, CTSH.OQ, TXN.OQ, GS.N, WMT.N, AMZN.OQ, ADBE.OQ, MS.N, BA.N).
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (DBKGn.F, RR.L, SNDK.OQ, CAPP.PA, ATOS.PA, MUVGn.DE, DPWGn.DE).
Credit Suisse has a material conflict of interest with the subject company (GE.N) . Credit Suisse is acting as financial advisor to General Electric Company (GE) in connection with the announced proposed acquisition of certain assets from Alstom S.A.
As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (WFC.N). As of the date of this report, an analyst involved in the preparation of this report, Susan Katzke, has following material conflicts of interest with the subject company. The analyst or a member of the analyst's household has a long position in the preferred stock Wells Fargo & Company (WFC). As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company. The analyst is a member of the board of directors of Intervest Bancshares, a commercial bank.
As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (AAPL.OQ). A Credit Suisse analyst involved in the preparation of this report has a long position in the common stock of AAPL.
19 February 2015
India IT Services Sector 22
As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (PG.N). An analyst or a member of the analyst's household has a long position in the common stock of (PG).
As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (C.N). As of the date of this report, an analyst involved in the preparation of this report, Susan Katzke, has following material conflicts of interest with the subject company. The analyst or a member of the analyst's household has a long position in the common and preferred stock Citigroup (C). As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company. The analyst is a member of the board of directors of Intervest Bancshares, a commercial bank.
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Important Regional Disclosures
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The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (HCLT.BO, INFY.BO, TCS.BO, WIPR.BO, TEML.BO, CVX.N, WFC.N, WFC.N, PSX.N, DBKGn.F, VZ.N, NITT.NS, DANSKE.CO, AXP.N, HON.N, TGT.N, AAPL.OQ, HPQ.N, RR.L, ACN.N, PG.N, PG.N, GE.N, HD.N, F.N, C.N, C.N, JNJ.N, XOM.N, GM.N, CMCSA.OQ, SNDK.OQ, CSCO.OQ, CAPP.PA, UBSN.S, ALL.N, LOW.N, T.N, MINT.BO, CTSH.OQ, TXN.OQ, IDR.MC, GS.N, BNPP.PA, ATOS.PA, WMT.N, MUVGn.DE, AMZN.OQ, TIE1V.HE, ADBE.OQ, HEXT.BO, MS.N, BA.N) within the past 12 months
An analyst involved in the preparation of this report has visited certain material operations of the subject company (AAPL.OQ, DPWGn.DE) within the past 12 months
The travel expenses of the analyst in connection with such visits were not paid or reimbursed by the subject company, other than de minimus local travel expenses.
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The following disclosed European company/ies have estimates that comply with IFRS: (DBKGn.F, DANSKE.CO, RR.L, F.N, XOM.N, CAPP.PA, UBSN.S, IDR.MC, BNPP.PA, ATOS.PA, MUVGn.DE, TIE1V.HE, DPWGn.DE).
An analyst involved in the preparation of this report received third party benefits in connection with this research report from the subject company (HPQ.N)
Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (WIPR.BO, TEML.BO, WFC.N, PSX.N, DBKGn.F, VZ.N, DANSKE.CO, AXP.N, AAPL.OQ, HPQ.N, PG.N, GE.N, HD.N, F.N, C.N, XOM.N, GM.N, CMCSA.OQ, CSCO.OQ, ALL.N, T.N, GS.N, BNPP.PA, WMT.N, MS.N, BA.N) within the past 3 years.
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To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Credit Suisse Securities (India) Private Limited ......................................................................................................... Anantha Narayan ; Nitin Jain
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19 February 2015
India IT Services Sector 23
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19 February 2015
India IT Services Sector 24
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