INSTITUTIONAL EQUITY RESEARCH...

INSTITUTIONAL EQUITY RESEARCH

Mindtree(MTCL IN)

Another large‐cap in the making

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH

INDIA | IT Services | Initiating Coverage

29 July 2015

We believe Mindtree (MTCL) is on its way to becoming a large IT‐services company — this is visible in its strategy of focusing on multiple segments through expertise‐driven client engagements and the fact that it has aligned its portfolio to growth areas, such as digital and product engineering. The transition of a company from mid‐cap to large‐cap and its successful migration into that category leads to higher multiples (case study Tech Mahindra).We expect MTCL to break into the large‐cap league and hence believe valuations are justified. We initiate coverage with a BUY rating and target price of Rs 1,400 (16x FY17) Strong growth to over FY15‐17 MTCL delivered a strong 13% CAGR over FY12‐15 as its ‘back‐to‐basics’ strategy yielded results. Over the last two years, eight of MTCL’s top‐40 accounts have grown above company average, driving overall growth. This growth has come from focus on client mining through account managers for top‐forty accounts. We expect MTCL to continue to improve its wallet‐share in top accounts. Our quarterly analysis suggests acceleration in top‐5 and top‐10 accounts —2‐quarter/4‐quarter/8‐quarter CQGRs for top‐5 and top‐10 accounts were 3.5%/3.0%/4.3% and 2.8%/2.1%/4.2% respectively. Right portfolio mix – of emerging and traditional business MTCL has the right mix of emerging businesses – digital (35%) and ER&D (20%). Specialization in chosen verticals and deep account mining led the growth. Going ahead, MTCL has increased its focus on emerging businesses – it is the first mid‐cap company to introduce a new business model for tapping its clients’ digital spends. It has also made acquisitions to strengthen its offerings. We believe MTCL’s industry‐leading growth over FY15‐17 will be led by (1) its DNA of being born digital, (2) introduction of new business models, and (3) focussed acquisitions. Successful migration into the top bracket of the sector will lead to rerating MTCL is currently trading at 14x our FY17 EPS estimates, which is at a inline with the valuations of some large‐caps (such as HCL Tech and Wipro) and premium to mid‐cap companies. MTCL has all the necessary qualities to break into the large‐cap space and hence warrants such valuations based on earnings visibility and superior portfolio mix. We draw our inference from the rerating of Tech Mahindra, which moved into the top bracket after acquiring Satyam– leading to a sharp rerating. We expect the same for MTCL. Key concerns: Management churn to weaken account mining In the last few quarters, MTCL saw multiple top‐level exits that resulted in organisational restructuring. These kinds of exits have an impact on near‐term performance due to transition impact on client mining and loss of management bandwidth. Outlook and valuations – good franchise commands premium We expect revenue CAGR of 18% over FY15‐17E — highest in our coverage universe. It will easily achieve FY16 organic growth in the 12‐14% (NASCCOM guidance) because of (1) acceleration in top clients and (2) superior business mix. Acquisition in digital space will lead to industry leading growth. We expect earnings CAGR of 17% over FY15‐17E in spite of continued investments for expanding its digital footprint. We value the company at Rs 1,400, 16x FY17 EPS (highest among our mid‐cap universe), expecting it to break into the top bracket of the IT sector. We initiate with a BUY rating.

BUY CMP RS 1240 TARGET RS 1400 (+13%) COMPANY DATA O/S SHARES (MN) : 84MARKET CAP (RSBN) : 106MARKET CAP (USDBN) : 1.652 ‐ WK HI/LO (RS) : 1589 / 967LIQUIDITY 3M (USDMN) : 4.1PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % PROMOTERS : 13.7FII / NRI : 37.7FI / MF : 7.9NON PROMOTER CORP. HOLDINGS : 14.1PUBLIC & OTHERS : 26.5 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS ‐3.2 6.0 23.3REL TO BSE ‐2.3 4.6 17.8 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY15 FY16E FY17ENet Sales 35,619 43,955 51,068EBIDTA 7,092 8,239 10,025Net Profit 5,363 5,981 7,301EPS, Rs 64.1 71.4 87.2PER, x 19.3 17.4 14.2EV/EBIDTA, x 14.2 12.1 9.3P/BV, x 5.2 4.1 3.3ROE, % 26.6 23.8 23.2Debt/Equity (%) 0.1 0.1 0.1

Source: PhillipCapital India Research Est. Deepan Kapadia(+ 9122 6667 9992) [email protected] Vibhor Singhal(+ 9122 6667 9949) [email protected]

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Apr‐13 Apr‐14 Apr‐15Mindtree BSE Sensex

MINDTREE INITIATING COVERAGE

Investment Thesis MTCL has been among the few successful midsized IT companies with revenue CAGR of ~30% in the last decade. Its success is largely due to its niche positioning and strong management pedigree. The company had a revenue run rate of US$ 55mn in FY05,which catapulted to US$ 583mn in FY15. We expect MTCL to deliver 16% revenue CAGR over FY15‐17, highest in the IT space, and the stock to deliver significant returns. 1QFY16 results to drive the momentum In FY15, MTCL delivered strong broad‐based growth of 16%, higher than the industry’s growth rate of 12%. However, in the 2HFY15 growth momentum slowed down and concerns about client concentration cropped up. We believe that the strong broad based growth in 1QFY16 results with contribution from BFSI, Retail CPG, and Hi Tech should put these concerns to rest. We expect strong 1QFY16 results and better outlook for Q2 to help MTCL easily achieve its FY16 aspiration of beating Nasccom’s guidance. Our belief is strengthened by signs of improvement in 1Q— (1)ramp up in growth in top‐10 clients, (2) revival of growth in digital, and (3) focused acquisition to expand capability.

Revenue growth breakup (our assumptions) (%) FY15 FY16E FY17EOrganic $ rev growth 16.0 12.8 16.3Inorganic $ rev growth ‐ 6.5 ‐Total $ rev growth 16.0 19.3 16.3

Source: Company, PhillipCapital India Research Estimates Diversified portfolio of Digital and Hi Tech Our incremental growth analysis suggested broad‐based growth for MTCL. We believe this diversified portfolio with contribution from Hi‐Tech (~20%) and Digital (~34%) insulates the business from pricing pressure in the commoditized IT‐services business (~45%). As highlighted in our Ground View publication (Click here), the market opportunity for ER&D is huge and the potential in the hi‐tech space for specialised vendors such as MTCL will lead to sustained growth. Hi‐Tech’s CQGR growth Broad‐based growth in FY15

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2qtr 4Qtr Cqgr 8Qtr Cqgr

Revenu

e Growth

Hi‐Tech & Media Services

Hi‐Tech & Media

Services, 32.9%

BFSI, 26.4%Retail, CPG & Manufacturing , 22.5%

Travel & Hospitality,

23.0%

Others , ‐4.7%

Incremental growth analysis

Source: Company, PhillipCapital India Research Estimates


http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_GV_1st_June_2015_for_email_20150612104324.pdf


Hi‐tech vertical was the joker in the pack in FY15 Hi‐Tech business (erstwhile Product Engineering Services) is cyclical as project sizes in this are small and require constant backfilling. MTCL was plagued by problems in Hi‐Tech from FY11‐13 as it was unable to backfill the contracts lost from semi‐conductor clients. To mitigate this risk, the management verticalised Hi‐Tech in FY15. PES clients were sold the entire bouquet of MTCL’s services and PES services could be cross‐sold. This strategy yielded results with 16.5% growth in FY15. Hi‐Tech growth Hi‐Tech annual growth rate

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Hi‐Tech & Media Services Growth

Source: Company, PhillipCapital India Research (Note: FY14N is post‐merger of hi‐tech and media services) As per NASSCOM’s estimates, the Indian ESO market stood at US$ 19bn in FY15, an addition of US$ 2.2bn over FY14’s market size. Automotive and consumer electronics sectors accounted for over ~25% of this spend— consumer electronics driven by increasing demand for new products and interfaces. US and Europe continued to account for over 2/3rd of this spend with Asia (excluding Japan) constituting 10% and growing fast. MTCL’s Hi‐tech practice at US$ 190mn is large enough to win deals from existing as well as new clients. We believe these two things will help MTCL to grow at a healthy pace: (1) its approach of cross selling services to existing client and (2) industry tailwind of the need to outsource due to (a) reducing time to market and (b) increased product launches. ER&D revenues and growth (Hi Tech for MTCL) US$ mn FY10 FY11 FY12 FY13 FY14 FY15 CAGR % of RevsTCS 356 318 395 473 535 632 12% 4%Infosys 106 146 238 246 270 298 23% 3%HCL Tech 510 644 774 821 881 1,028 15% 18%Wipro ‐ 726 734 689 673 694 ‐1% 10%Mindtree 126 138 139 133 164 191 9% 33%

Source: Company, PhillipCapital India Research Estimates



Digital — the new growth frontier MTCL’s digital practice constituted ~33% of its FY15 revenue and benefits from the company’s inherent strengths in web (front‐end) capabilities and expertise acquired by working extensively in the retail and CPG space—the early adopters of digital. Digital marketing and commerce projects account for 60% of MTCL’s digital revenues; it attributes about 50% of its new client wins in the past 12 months to the digital practice. In its analyst meet, MTCL was the first IT services company to explain its digital strategy clearly (see annexure). MTCL has the highest contribution from digital revenue and if we consider the DNA of the company, it was born digital in 1999 as an internet‐consulting company. It pioneered the hybrid model — high consulting capability at the front end combined with low‐cost scalability of India. We feel this DNA will help the company understand the transition during the third wave of outsourcing – Digital and SMAC. MTCL expects digital services to become its key growth driver through offerings to other industry verticals. To enhance its offering in the digital space, it has introduced ‘Rightsourcing’ model for digital transformation. Rightsourcing requires having practice‐specific delivery capabilities near the customer for agile development, digital transformation, and cloud solutions using offshore resources to scale up once the digital strategy is formed. This unique arrangement strikes a balance between agile and cost containment. We believe this unique model will enable MTCL to partner with clients while they shape their digital strategy. The key concern about digital revenue is the nature of the deal size (too small) resulting in lumpiness of revenue, necessitating consistent backfilling for growth. While prima facie this appears to impede growth and result in volatility, we believe similar concerns have existed during the transition phase of any new service. Digital growth spurts in 1Q

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Digital/SMAC

Source: Company, Phillip Capital Growth momentums picks up again in top‐10 MTCL’s ‘back to basics’ strategy was to specialise in chosen verticals and deep account mining leading to growth. The strategy also separated teams for hunting and farming thus improving MTCL’s ability to get better‐quality deals. The strategy yielded revenue CAGR of 16% over FY13‐15. We do not see this trend changing in FY16. Delay in commencement of a project did lead to concerns in 4QFY15; however,




strongest‐ever order booking in 1QFY16 (US$ 207mn) and growth in top‐ten clients adequately addressed these concerns. Like any mid‐sized company, MTCL runs a high client concentration risk (top‐10 clients contributed ~50% of FY15 revenues vs. 23% for large‐sized peers). High client concentration worked in its favour in FY15, with top‐10 clients growing at 17.5% against the company’s average growth rate of 16.4%. Management’s relationships with these clients will enable it to partner with them in their digital journey. We believe growth is because of the management’s concerted efforts to mine top‐40 accounts. In FY15, one of its clients crossed US$50mn in revenue, it had four clients with over US$30mn in revenue (from three), and six clients with over US$20mn in revenue. Client‐mining trends

FY11 FY12 FY13 FY14 FY15 1QFY16

$1m clients 67 77 74 73 88 88

$5m clients 14 17 20 24 28 28

$10m clients 6 7 9 13 14 13

$20m clients 0 4 5 6 6 6

$30m clients 0 0 3 3 4 0

$50 mn clients 0 0 0 0 1 2

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Source: Company, PhillipCapital India Research Focused acquisitions MTCL says focused acquisition is one of the pillars of its growth strategy. It has setup an M&A team and hired Mr Rahul Malhotra to head the team. Mr Malhotra joined Mindtree in February 2015 from Tech Mahindra (where he looked after mergers and acquisitions). MTCL’s goal —inorganic revenues would constitute 10% of its revenue by 2020. Acquisitions will be largely to strengthen digital business and to gain access to large clients.

In our report, IT midcaps – One + One = Eleven (September 2014, Click here), we had highlighted the issue of scaling‐up for mid‐caps – pricing being the only differentiator in entrenched areas. We believe acquiring small players to gain access to clients and gain expertise at reasonable valuations is a good strategy to grow faster‐than‐industry average. MTCL’s inorganic strategy

Mindtree has a fresh team under its new M&A head

Mid‐tier services co looking to achieve greater scale

Aiming to get access to large customers, not mere size

Challenge for mid‐sized Indian companies is two pronged: a) Future

strategic vision b) Change in

existing services

M&A head Rahul Malhotra will focus on niche cos and new technology

Over $250 million acquisition was chest in cash, equivalents

“Velocity of the market now is 10x what is five years ago. Acquisition is going to be a key part of it. To be honest, earlier we held back a little on that front Krishnakumar,” Natarajan,

Mindtree CEO & co‐founder

Source: Media, Company, PhillipCapital India Research

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_IT_Midcaps_Sector_Update_-_Sept_2014_20140925172452.pdf


In the last two quarters, MTCL has acquired Discoverture, Bluefin, and Relational Solutions Inc to strengthen its digital services.

• Discoverture Solutions LLC is a property‐ and casualty‐packaged‐solutions provider. It clocks revenue of US$ 14mn (with a margin profile that is similar to MTCL’s) and should bring 15 marquee clients. Management noted that the company has seen c20% yoy revenue growth over the past two years. Around 230 of Discoverture’s employees are based out of India while the remaining c100 are in North America and the UK. MTCL paid US$ 15mn for Discoverture in an all‐cash deal (to be paid via internal accruals over the next 18 months).

• Bluefin Solutions is a leading UK‐based IT solutions provider specializing in

SAP HANA solutions and having a track‐record of helping businesses, managing digital transformation through their expertise in SAP, analytics, digital, web, cloud and SAP HANA. MTCL acquired it for £ 42.3mn, of which £ 8mn is in the form of ‘earnouts’ to be paid after three years. Bluefin’s revenues were US$45mn and margins were lower than Mindtree. As per management the transaction is EPS‐accretive from day one. Bluefin has a team of experts (170) for transitioning to SAP HANA, digital, and real‐time analytics.

HANA is core to everything that SAP does across its product categories, mainly cloud, mobile, analytics, applications and technology. MTCL expects a significant number of existing SAP customers to migrate part of their application portfolio to HANA in the next 18 months. This creates huge opportunity; in one of its communications, SAP had estimated the services market for HANA to be around US$40 bn. This strategic acquisition is a step ahead to capture this market and will strengthen MTCL’s position to deliver HANA‐based digital transformation solutions.

• Relational Solutions, a US‐based specialty provider of analytic solution, is

backed by a strong differentiated IP in the area of demand‐signal repository and trade promotion analytics for the CPG domain. Insight‐based optimization is a big priority for leading CPG companies globally. Integrating data from internal transaction sources and external, both small and big data sources, and creating a single source of truth and perform analytics on them is a key focus area for CPG companies. This space is complex and requires specialized understanding of data sources, automation and a deep domain expertise. MTCL’s estimate is that globally CPG companies spent US$1.5‐2bn every year on similar analytic services. With this acquisition, MTCL will be able to deliver strong predictive analytic solution to enhance the sales and marketing effectiveness of CPG companies. The acquisition will also add 30 leading CPG clients, including two of the global top‐10 FMCG companies. This is an IP‐led business with lower scale and higher margins

Before its recent acquisitions, MTCL made two acquisitions (Kyocera’s captive and 7Strata) with mixed results — Kyocera worked out well while 7Strata did not. MTCL’s acquisition history Company Space Year Revenue (US$) Price(US$ mn) Employees MultipleASAP Solutions SAP & ERP TES‐Purple Vision Electronics(IC Design). 2007 4.5‐5 6.5 150 1.4 Aztecsoft Product engineering and Testing services company 2008 6.3 40 2200 NAKyocera Wireless India Pvt Ltd Wireless services. 2009 NA 6.2 600 NA7Strata Remote infrastructure management services 2010 NA 7.2 90 NADiscoverture Solutions LLC Property and Casualty Insurance 2015 NA 15 300 NABluefin Solutions Limited IT solutions, SAP HANA solutions 2015 48 64 NA 1.3 Relational Solutions Inc IT solutions — CPG 2015 3 10 NA 3.3

Source: Company, Phillip Capital



Key concerns Management churn to impact growth MTCL has undergone organizational restructuring recently with around 40 people in the senior management changing roles. This has resulted in some senior‐management exits. The management believes that such transitions are good for the long term. However, we believe that senior management churn impacts near‐term revenue growth due to (1) transition impact due to change in strategy at the unit level and (2) impact on client relationships if the exiting employee has a long‐standing relationship with the client. Organisation changes in MTCL Name Earlier role New Role Senior Management Exits Ashutosh Shukla Senior VP; North America sales VP, Consumer Goods, Retail and Pharma, L&T Infotech AnandaRaoLadi Senior VP; managing APAC Entrepreneur Ramachandran Narayanaswamy VP and Global head of quality NA Vineet Gupta Global Head of digital NA Rajesh Narang Company Secretary and Legal Advisor Amit Varma Head of Consulting Digital Transformation, Infosys Ravi Shankar B Chief People Officer NA Organisational changes Rostow Ravanan CFO Head, service lines (except digital), Europe, Key accounts Jagannathan Chakravarti Finance Controller CFO Janakiraman Srinivasan CTO Chairman, vmUnify – a cloud metering solution spun out of MTCLMadhusudhan KM Part of the CTO team CTO Parthasarathy N S COO, head of service lines COO, Chief People Officer, head of M&A, Corporate

Information Systems, Admin, Facilities Rahul Malhotra Tech Mahindra Head, M&A Veeraraghavan R K CDO Head of Hi‐Tech and Media Services Radha R Head of Retail, CPG, Manufacturing and TTL Head of Digital Business Group Gaurav Johri Head of BFSI Head of Platforms and Products Kamran Ozair Head of Microsoft Account Head of BFSI Ramesh Gopalakrishnan Part of CDO team Global Head of Delivery and Operations Sushant Pai Investor Relations, M&A and business finance Investor Relations, Chief Risk Officer, Business finance. M&A Margin tailwinds missing Over FY12‐15, MTCL’s margins expanded by only 460bps to 19.9% in spite of currency benefits of ~850bps. Investment in S&M and wage hikes offset the remaining benefit from currency. MTCL’s management has said that, to drive growth, it will continue to invest more in S&M and digital space. Utilization at 73% (excluding training) has recovered 300bps in FY15. We believe that going ahead further improvement in margins is difficult. Utilization levers are already exploited. Utilisation lever already exploited

70.0

70.4

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Utilisation (%)

Source: Company, PhillipCapital India Research



Entry into top bracket to drive rerating We derive comfort from TECHM’s case study below which demonstrates how valuation significantly increases as the company transitions into the top bracket. We believe MTCL has all the characteristics to enter into the top bracket and we expect its multiples to rerate further. Tech Mahindra – evolution from midcap to top‐5 Tech Mahindra’s transition from a midcap telecom solutions vendor to one among the top‐5 (listed) IT companies in India was a result of its merger with Satyam. Before the merger, TechM had strong vertical and client concentration, which was a major cause of its sluggish growth over FY10‐11. Telecom, its single largest vertical contributed a huge 97% of its revenues, and BT, its largest client, provided around 45% of its revenues. The company had only 9% revenue CAGR over FY10‐12, with an EBITDA‐margin contraction of 770bps.

TechM: Clear indication of re‐rating in P/E and P/BV valuations after merger with Satyam

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Source: PhillipCapital India Research (Prices pre spilt and bonus)

Today TechM is one of the preferred IT vendors for telecom companies. It has been able to add key large clients such as AT&T and Verizon to its portfolio. Its telecom division has seen a CQGR of 8.9% (excluding BT) over the last six quarters. Contribution from telecom for TECHM after Satyam acquisition came down to 45% from 97% and contribution from top client reduced to ~7% from 45%.

TechM’s multi‐vertical focus will help it to bag large deals where it can cross sell its expertise in telecom services along with Satyam’s enterprise‐level outsourcing capabilities. It has also devised a strategy to cross‐sell expertise in telecom services to the networking and communications segment of all non‐telecom verticals, which will enable diversification with low incremental investments.

The belief led to the traditional ‘top‐4’ bracket in the Indian IT services space expanding to ‘top‐5’. At current levels, TechM trades at 17.5x our FY16 earnings, at premium to HCL Tech (17.0x FY16) and Wipro (15.5x FY16).

However, in the history of Indian IT‐services companies, only a few have managed to make this transition. The journey from mid‐cap to top‐bracket entails adding new clients across geographies and verticals – a mammoth task for any company that has been focussed on a niche domain. Such an aspiring company would have to compete with incumbents in new domains. It remains an arduous task to accomplish organically. However, an inorganic route (such as TechM’s acquisition of Satyam) could prove to be a shortest and proven way out.



Valuations Outlook and valuation We expect MTCL to report 18% revenue CAGR over FY15‐17E aided by acquisitions and strong organic growth. The management is confident of growing above Nasscom’s guidance of 12‐14% in FY16 and we believe it will be able to achieve this because of acceleration in top clients, broad‐based growth across verticals, and right portfolio of emerging and traditional businesses. We like MTCL’s portfolio as it is aligned to growth areas – digital and product engineering (~50% of revenues). MTCL should benefit from increasing spends in digital, and deliver industry leading growth. MTCL’s growth is the highest in our coverage universe. We expect earnings CAGR of 17% over FY15‐17E despite investments in digital impacting margins. Currently, the stock trades at 14x FY17 EPS, at a premium to its historical three‐year average of 12x. These valuations are in line with some large‐caps (such as HCL Tech and Wipro) and premium to most mid‐cap companies. We believe MTCL continue to command premium valuations due to strong revenue visibility and better business mix than mid‐cap peers. Companies such as KPIT are inexpensive but lack earnings visibility. While large‐cap peers such as HCLT are available at the same valuations, MTCL’s business mix is superior (with lower exposure to the commoditised IT‐services business). The transition of the company from mid‐cap to large‐cap and successful migration into that category leads to higher multiples (case study Tech Mahindra). We believe MTCL has the characteristics for breaking into the large‐cap space; hence, we believe valuations are justified. Our target price of Rs 1,400 is based on 16x our FY17 EPS. We have assigned premium valuation to MTCL over its mid‐sized peers due to superior growth rates, exposure to digital, and better execution track record. We initiate coverage with a BUY rating. MTCL: Phillip Capital vs. consensus ____Phillip Capital____ ____Consensus____ ____Deviation____(Rs mn) FY16E FY17E FY16E FY17E FY16E FY17ERevenue(US$mn) 697 811 679 792 2.7% 2.3%Revenue 43,955 51,068 43,094 50,317 2.0% 1.5%EBITDA 8,239 10,025 8,078 9,681 2.0% 3.5%EBITDA Margins 18.7% 19.6% 18.7% 19.2% 0bps 39bps Net Income 5,981 7,301 5,892 6,993 1.5% 4.4%EPS 71.4 87.2 70.6 83.4 1.1% 4.5%

Source: Company, PhillipCapital India Research Valuation table ‐ comparison mid‐cap – IT services CMP M‐Cap _____ROE (%)____ _____P/E (x)_____ _____P/BV (x)_____ ___EV/EBITDA (x____Companies Rs Rs bn FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17EMindTree 1240 104 23.8 23.2 17.4 14.2 4.1 3.3 12.0 9.3Hexaware 272 82 28.4 30.7 14.2 13.0 6.0 5.6 14.0 12.1Persistent 622 50 18.0 17.7 17.0 14.9 3.1 2.6 11.8 10.3Cyient 562 50 18.7 18.6 14.6 12.6 2.9 2.5 8.4 6.5NIIT Tech 472 29 16.2 15.9 11.5 10.3 1.9 1.6 6.5 5.9Mastek 188 7 9.3 10.4 11.6 9.6 NA* NA* 2.7 1.8KPIT 110 21 11.2 13.9 12.6 8.8 1.4 1.2 7.6 5.5Polaris 188 19 14.7 14.9 10.0 8.6 2.0 1.8 7.2 6.2

Source: Bloomberg Estimates, Company, PhillipCapital India Research



Valuation table ‐ comparison large‐cap ‐ IT services CMP M‐Cap _____ROE (%)____ _____P/E (x)_____ _____P/BV (x)_____ ___EV/EBITDA (x____Companies Rs Rs bn FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17EMindTree 1,240 104 23.8 23.2 17.4 14.2 4.1 3.3 12.0 9.3TCS 2,500 4,897 36.3 33.7 20.4 18.1 7.4 6.1 16.1 14.5Infosys 1,063 2,430 23.8 24.4 18.8 16.2 4.5 4.0 12.8 10.8Wipro 555 1,366 19.8 18.8 15.5 14.3 3.1 2.7 11.2 10.3Hcl Tech 924 1,303 26.9 26.0 17.0 14.9 4.6 3.9 12.5 10.7Tech Mahindra 524 504 18.4 19.5 17.5 13.9 3.2 2.7 11.0 8.3

Source: Company, PhillipCapital India Research MTCL PE band MTCL EV/EBITDA band

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Appendix

I ‐ Business Profile Revenue profile

Hitech and Media Services, 33 BFSI, 24 Retail, CPG & Mfg,

22

Travel & Hospitality,

16 Others, 6

Development & Engg, 34

Maintenance, 21

Consulting & IP Licensing, 6

Package Implementation,

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Independent Testing, 16

Infra mngt & tech support, 18

US, 62 Europe, 25

India, 4

Rest of World, 9

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Services

Geographies

Source: Company, PhillipCapital India Research Business mix, employee mix, and client profile

Onsite, 46 Offshore, 54

Top Client, 9

Top 5 client, 32 Top 10 client, 48

FPP, 45 T&M, 55

‐ 10 20 30 40 50 60 70 80 90 100

Employee Mix

Client Mix

Project Type




II ‐ Digital for MTCL MTCL defines digital as summation of four themes—(1) creating digital customer experience, (2) digitizing the value chain, (3) developing ‘sense and respond’ systems and (4) shaping innovative business models. Creating digital customer experiences. MTCL plans to create a richer digital experience through better speed and convenience. It has already built an end‐to‐end platform for digital marketing that involves reaching out to consumers, collecting data, and cycling back data. This platform has resulted in 40% cost saving and 50% decrease in time‐to‐market for brand campaigns. A few examples – • For a large CPG company, MTCL acts as system integrator for the digital

marketing channel • For a large car‐rental company, it developed a tablet‐based app to reduce

queues for renting cars. Digitizing the value chain. This approach involves digitizing the value across front and back ends. It should result in faster response time, better availability, and cost effectiveness. An example — • For a hospitality company, MTCL developed a completely integrated concierge

app that allows guests to place requests and track them using any digital device (tab, mobile, laptop, etc.). This app significantly reduced the response time for guests.

Developing ‘sense and respond’ systems. The key to developing ‘sense and response’ systems is to make the enterprise adaptive with data, and insights generated from this data, through analytics. An example — • For a P&C insurance company, MTCL was the data partner for a sense and

response program. MTCL built a huge analytical engine for the client that forecasts risk pricing and catastrophe damage estimation. In a subsequent natural devastation, the client was much better placed to assess and drive preventive measures for limiting risk damage.

Shaping innovative business models. MTCL plans to help its clients in creating innovative business models. An example — • MTCL created a solution for cross‐referencing industrial parts with factory shop;

essentially, a buyer simply needs to take a photograph of the part, which will then be processed by the part supplier.




Financials

Income Statement Y/E Mar, Rs mn FY14 FY15E FY16E FY17ENet sales 30,316 35,619 43,955 51,068Growth, % 28.4 17.5 23.4 16.2Total income 30,316 35,619 43,955 51,068Other Operating expenses ‐24,216 ‐28,527 ‐35,716 ‐41,043EBITDA (Core) 6,100 7,092 8,239 10,025Growth, % 25.5 16.3 16.2 21.7 Margin, % 20.1 19.9 18.7 19.6 Depreciation ‐809 ‐1,018 ‐1,346 ‐1,532EBIT 5,291 6,074 6,893 8,493Growth, % 24.9 14.8 13.5 23.2 Margin, % 17.5 17.1 15.7 16.6 Interest paid ‐4 0 0 0Other Non‐Operating Income 496 834 784 868Pre‐tax profit 5,783 6,908 7,677 9,361Tax provided ‐1,275 ‐1,545 ‐1,696 ‐2,059Profit after tax 4,508 5,363 5,981 7,301Net Profit 4,508 5,363 5,981 7,301Growth, % 33.0 19.0 11.5 22.1 Net Profit (adjusted) 4,508 5,363 5,981 7,301 Unadj. shares (m) 84 84 84 84 Wtdavg shares (m) 83 84 84 84 FY14 FY15 FY16E FY17EUS$ Revenue ($ mn) 501.6 583.9 696.8 810.6Growth, % 15.1 16.4 19.3 16.3Re / US$ (rate) 60.4 61.0 63.1 63.0 Balance Sheet Y/E Mar, Rs mn FY14 FY15E FY16E FY17ECash & bank 1,184 3,763 4,097 9,372Debtors 6,004 6,963 8,700 10,108Loans & advances 1,371 1,490 1,594 1,594Other current assets 1,727 1,621 1,887 2,197Total current assets 10,286 13,837 16,278 23,271Investments 5,335 5,351 5,518 5,518Gross fixed assets 3,436 5,555 8,659 8,605Add: Capital WIP 496 354 0 0Net fixed assets 3,932 5,909 8,659 8,605Non‐current assets 1,039 1,003 1,039 1,039Total assets 20,994 26,549 31,943 38,882Current liabilities 2,820 4,001 4,769 5,514Provisions 1,574 2,063 2,369 2,919Total current liabilities 4,394 6,064 7,138 8,433Non‐current liabilities 195 357 357 357Total liabilities 4,589 6,421 7,495 8,790Paid‐up capital 417 837 837 837Reserves & surplus 15,988 19,291 23,611 29,255Shareholders’ equity 16,405 20,128 24,448 30,092Total equity & liabilities 20,994 26,549 31,943 38,882 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY14 FY15E FY16E FY17EPre‐tax profit 5,783 6,908 7,677 9,361Depreciation 809 1,018 1,346 1,532Chg in working capital ‐1,901 411 ‐1,375 ‐973Total tax paid ‐855 ‐1,103 ‐1,390 ‐1,509Cash flow from operating activities 3,836 7,234 6,258 8,411Capital expenditure ‐1,581 ‐2,995 ‐4,097 ‐1,478Chg in investments ‐1,064 ‐16 ‐167 0Cash flow from investing activities ‐2,645 ‐3,011 ‐4,264 ‐1,478Free cash flow 1,191 4,223 1,995 6,933Equity raised/(repaid) 2 424 ‐4 0Debt raised/(repaid) ‐5 ‐4 0 0Dividend (incl. tax) ‐972 ‐1,657 ‐1,657 ‐1,657Cash flow from financing activities ‐975 ‐1,644 ‐1,661 ‐1,657Net chg in cash 216 2,579 334 5,276 Valuation Ratios

FY14 FY15E FY16E FY17EPer Share data EPS (INR) 54.2 64.1 71.4 87.2Growth, % 31.1 18.3 11.3 22.1Book NAV/share (INR) 197.2 240.7 291.8 359.2FDEPS (INR) 53.8 63.9 71.2 86.9CEPS (INR) 63.9 76.3 87.5 105.4CFPS (INR) 42.7 76.1 65.8 90.0DPS (INR) 10.1 17.1 17.0 17.0Return ratios Return on assets (%) 23.8 22.6 20.5 20.6Return on equity (%) 27.5 26.6 24.5 24.3Return on capital employed (%) 30.2 28.9 26.4 26.4Turnover ratios Asset turnover (x) 3.4 3.3 3.2 3.2Sales/Total assets (x) 1.6 1.5 1.5 1.4Sales/Net FA (x) 8.5 7.2 6.0 5.9Working capital/Sales (x) 0.2 0.1 0.1 0.1Receivable days 72.3 71.4 72.2 72.2Payable days 1.2 6.9 4.0 4.1Working capital days 56.7 41.1 41.9 39.1Liquidity ratios Current ratio (x) 2.3 2.3 2.3 2.8Quick ratio (x) 2.3 2.3 2.3 2.8Dividend cover (x) 5.4 3.8 4.2 5.1Total debt/Equity (%) 0.2 0.1 0.1 0.1Net debt/Equity (%) (7.1) (18.6) (16.7) (31.1)Valuation PER (x) 22.9 19.3 17.4 14.2PEG (x) ‐ y‐o‐y growth 0.7 1.1 1.5 0.6Price/Book (x) 6.3 5.2 4.2 3.5Yield (%) 0.8 1.4 1.4 1.4EV/Net sales (x) 3.4 2.8 2.3 1.9EV/EBITDA (x) 16.8 14.2 12.1 9.5EV/EBIT (x) 19.4 16.5 14.5 11.2


Management (91 22) 2300 2999

Kinshuk Bharti Tiwari (Head – Institutional Equity) (91 22) 6667 9946(91 22) 6667 9735

Research Economics Midap

Dhawal Doshi (9122) 6667 9769 Anjali Verma (9122) 6667 9969 Amol Rao (9122) 6667 9952Nitesh Sharma, CFA (9122) 6667 9965

Infrastructure & IT Services Portfolio StrategyBanking, NBFCs Vibhor Singhal (9122) 6667 9949 Anindya Bhowmik (9122) 6667 9764Manish Agarwalla (9122) 6667 9962 Deepan Kapadia (9122) 6667 9992Pradeep Agrawal (9122) 6667 9953 TechnicalsParesh Jain (9122) 6667 9948 Logistics, Transportation & Midcap Subodh Gupta, CMT (9122) 6667 9762

Vikram Suryavanshi (9122) 6667 9951Consumer, Media, Telecom Production ManagerNaveen Kulkarni, CFA, FRM (9122) 6667 9947 Metals Ganesh Deorukhkar (9122) 6667 9966Jubil Jain (9122) 6667 9766 Dhawal Doshi (9122) 6667 9769Manoj Behera (9122) 6667 9973 Yash Doshi (9122) 6667 9987 Database Manager

Deepak Agarwal (9122) 6667 9944Cement Oil&Gas, Agri InputsVaibhav Agarwal (9122) 6667 9967 Gauri Anand (9122) 6667 9943 Editor

Roshan Sony 98199 72726Engineering, Capital Goods PharmaAnkur Sharma (9122) 6667 9759 Surya Patra (9122) 6667 9768 Sr. Manager – Equities SupportHrishikesh Bhagat (9122) 6667 9986 Mehul Sheth (9122) 6667 9996 Rosie Ferns (9122) 6667 9971

Sales & Distribution Ashvin Patil (9122) 6667 9991 Sales Trader Zarine Damania (9122) 6667 9976Shubhangi Agrawal (9122) 6667 9964 Dilesh Doshi (9122) 6667 9747 Kishor Binwal (9122) 6667 9989 Suniil Pandit (9122) 6667 9745Sidharth Agrawal (9122) 6667 9934 ExecutionBhavin Shah (9122) 6667 9974 Mayur Shah (9122) 6667 9945

Corporate Communications

Vineet Bhatnagar (Managing Director)

Jignesh Shah (Head – Equity Derivatives)

Automobiles

Contact Information (Regional Member Companies)

SINGAPORE

Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 Raffles City Tower,

Singapore 179101 Tel : (65) 6533 6001 Fax: (65) 6535 3834

www.phillip.com.sg

MALAYSIA Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG Phillip Securities (HK) Ltd

11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN Phillip Securities Japan, Ltd

4‐2 Nihonbashi Kabutocho, Chuo‐ku Tokyo 103‐0026

Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141 www.phillip.co.jp

INDONESIA PT Phillip Securities Indonesia

ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia

Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809 www.phillip.co.id

CHINA Phillip Financial Advisory (Shanghai) Co. Ltd.

No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai 200 001

Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940 www.phillip.com.cn

THAILAND Phillip Securities (Thailand) Public Co. Ltd.

15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand

Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 www.phillip.co.th

FRANCE King & Shaxson Capital Ltd.

3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France

Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017 www.kingandshaxson.com

UNITED KINGDOM King & Shaxson Ltd.

6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS

Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835 www.kingandshaxson.com

UNITED STATES Phillip Futures Inc.

141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building

Chicago, IL 60604 USA Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA PhillipCapital Australia

Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia

Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309 www.phillipcapital.com.au

SRI LANKA Asha Phillip Securities Limited

Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka

Tel: (94) 11 2429 100 Fax: (94) 11 2429 199 www.ashaphillip.net/home.htm

INDIA PhillipCapital (India) Private Limited

No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in


http://www.phillip.com.sg/

http://www.poems.com.my/

http://www.phillip.com.hk/

http://www.phillip.co.jp/

http://www.phillip.co.id/

http://www.phillip.com.cn/

http://www.phillip.co.th/

http://www.kingandshaxson.com/

http://www.kingandshaxson.com/

http://www.phillipcapital.com.au/

http://www.ashaphillip.net/home.htm

http://www.phillipcapital.in/


Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication of future performance. This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice. Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request. Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst(s) have no known conflict of interest and no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific views or recommendations contained in this research report. Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in

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No

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No

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company(ies) covered in the Research report No

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No

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