Update | October 2011
Technology
The bright spots
Nitin Padmanabhan
(Nitin.Padmanabhan@MotilalOswal.com) Tel: +91 22 3982 5426
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com); Tel: +91 22 3982 5424

Technology
Technology: The bright spots
Page No.
Summary
.....................................................................................................................
3
Weak global macro environment raises uncertainty for Indian IT
..........................
5
Examining the three growth scenarios for FY13
.......................................................
8
Traditional margin levers unlikely to help in FY13
.................................................
11
Expect revenue growth, valuation multiples for INFY and TCS to converge
........
12
HCL Tech v/s Wipro: Advantage HCL Tech
...........................................................
15
The bright spots
........................................................................................................
17
Infosys Technologies
................................................................................................
19
Tata Consultancy Services
.......................................................................................
23
Wipro
.........................................................................................................................
27
HCL Technologies
....................................................................................................
31
4 October 2011
2

Update
Technology
The bright spots
Cutting EPS estimates by 2-10%; Infosys and HCL are our top picks
Increasingly weak global macro economic data implies deceleration in growth
for Indian IT companies. However, the decline in growth rates is unlikely to
be as severe as in FY09-10.
Margin pressures will increase for most vendors in FY13.
Expect revenue growth, valuation multiples to converge for Infosys and TCS.
Prefer HCL Tech over Wipro on high revenue visibility, strong execution history.
Infosys and HCL Tech are our top Buys in the large-cap IT space.
Weak global macro environment implies growth deceleration for Indian IT
In the last few months, increasingly weak macro economic data has been emanating from
both the US and Europe. While this implies deceleration in growth for Indian IT Services
companies, management commentary/guidance has remained positive. This has been
driven by strong growth outlook for FY12 (20-30% growth in USD revenues). While FY13
budgets are yet to be hinted, we expect a moderation in growth across the sector. We
trim our FY13 revenue estimates by 2-6% and EPS estimates by 2-10% for the top-tier
companies.
FY13 to be a low growth year
(not a weak one as in FY10)
Margin headwinds to increase
for most vendors in FY13
Our EPS estimates are lower
than consensus by 3-4% in
FY13E
Revenue growth and valuation
multiples to converge for
Infosys and TCS
Prefer HCL Tech over Wipro
Impact in FY13 unlikely to be as severe as in FY09
We analyze the impact of recent global events on IT business under three scenarios for
FY13: (1) a normal year, with ~20% growth, (2) 3-4% cut in IT budgets as in 2003, implying
10-15% growth, and (3) 6-8% cut in IT budgets as in 2008, implying a 0-5% growth.
Scenario-2 is most likely in our view.
FY13 is unlikely to map growth trends seen in
FY09-FY10. Factors that drive our view are:
1) Clients have been more cautious in their IT spends this time (According to TPI, TCV
of deals signed in CY10 (USD84b) is 5.1% lower than CY08 (USD88.5b) and 6.7%
lower than CY09 (USD90b).
2) Pricing is unlikely to see a sharp fall as:
(i) Billing rates in FY11 are lower than in FY09 (Infosys' per capita productivity fell
from USD87k in FY08 to USD82.5k in FY11)
(ii) Gross margins of vendors like HCL Tech and Cognizant are lower by 650bp and
200bp, respectively v/s FY09
(iii) Volumes are unlikely to see a sharp fall this time
3) Unlike the crisis of 2008, which was unprecedented, the current crisis has a clear
reference point, which will increase the preparedness of both vendors and clients.
IT sector outperforms the
market despite headwinds
BSE IT
120
110
100
90
80
Sensex
Re-based to 100
Margin levers like utilization and salary may count for little in FY13
Unlike FY10, which saw an expansion in margins on the back of wage hike deferrals,
offshore shift and higher utilization (by some vendors), these levers are unlikely to be of
any significance in FY13, as companies are still likely to report lower double-digit growth
on a higher revenue base, implying gross headcount additions similar to FY12, despite
assumption of a 2% decline in attrition in FY12 and FY13.
4 October 2011

Technology
Infosys stock performance
Infosys
Sensex - Rebased
4,000
3,500
3,000
2,500
2,000
Expect revenue growth, valuation multiples for Infosys and TCS to
converge
The key arguments in favor of higher multiple for TCS have been (1) revenue growth at the
higher end of the industry quartile, and (2) shrinking margin gap vis-à-vis Infosys. However,
sustaining growth on expanded revenue base in a weak environment would be a challenge
(revenue run-rate in 1QFY12 implies a revenue base of USD9.6b for FY12). Also, TCS has
limited headroom to improve margins, with most levers being exhausted through aggressive
cost management efforts.
On the other hand, Infosys' relatively lower growth is more a function of (1) revenue declines
from BT, (2) lack of tailwinds from strategic acquisitions like CGSL for TCS, and (3) the
organizational restructuring. With most of these headwinds behind it, Infosys' revenue
growth in FY13 could be similar to TCS. We note that Infosys' growth in BFSI would have
been higher than TCS if not for the latter's acquisition of CGSL. Moreover, our checks and
media reports suggest a more aggressive stance on acquisitions than in the past. Infosys
is also better placed to manage margins post restructuring, with a higher fungibility of
resources, allowing it to operate at utilization of 78-82% on a sustainable basis v/s the
average of 75.4% over the past 8 quarters.
TCS stock performance
TCS
Sensex - Rebased
1,300
1,150
1,000
850
700
HCL Tech v/s Wipro: Advantage HCL Tech
We prefer HCL Tech over Wipro on higher revenue visibility and strong execution history.
HCL Tech has consistently demonstrated its ability to win market share and achieve
industry leading growth irrespective of the macro environment. Valuations at 11.5x FY13E
EPS of INR35 are compelling. The company does not face the headwinds from a huge
hedge portfolio or declining margins in FY12 and FY13. Moreover, it is likely to continue
delivering industry-leading revenue and EPS growth in FY12 and FY13.
Wipro, on the other hand, has seen multiple leadership changes and has not been able to
demonstrate consistency in revenue growth or earnings. It has underperformed peers on
both revenue growth and margins over the past 5 quarters. While management commentary
indicates the possibility of matching if not outperforming industry growth by 4QFY12, we
would wait for fruition before going bullish. Valuations appear reasonable despite sharp
cut in estimates, but the company's core strategy appears to be still evolving.
Revised estimates for FY13E
Revenue Growth (%)
EBIT Margin (%)
EPS (INR)
Company Revised
Earlier Chg (pp) Revised
Earlier Change Revised Earlier Chg (%)
TCS
15.4
19.1
-3.7
25.8
27.3
-147bp
58.6
64.0
-8.5
Wipro stock performance
Wipro
Sensex - Rebased
550
475
400
325
250
HCL stock performance
HCL Technologies
Sensex - Rebased
600
525
450
375
300
Infosys
Wipro
HCL Tech
14.7
12.3
18.2
19.2
18.0
20.5
-4.5
-5.7
-2.3
27.8
19.8
13.4
28.0
21.7
13.4
-17bp
-192bp
-4bp
152.5
24.6
34.9
158.8
27.4
35.5
-3.9
-10.1
-1.7
Source: MOSL
Comparative valuations
Company TP/TM*
%
Rating
EPS (INR)
P/E (x)
FY11-13 CAGR (%)
INR/x
Upside
FY11 FY12E FY13E
Infosys
3,050 / 20x 23.2 Buy
119.4 133.7 152.5
TCS
1,172 / 20x 12.3 Neutral 44.4
52.8
58.6
Wipro
369 / 15x
11.5 Neutral 21.6
22.6
24.6
HCL Tech 525 / 15x
31.3 Buy
23.1
29.3
34.9
* TP: Target Price, TM - Target Multiple based on FY13EPS
FY11 FY12E FY13E USD Rev EPS
20.7
18.5
16.2
16.6 13.0
23.5
19.8
17.8
21.1 14.9
15.3
14.6
13.4
13.2 6.8
17.3
13.6
11.5
21.5 23.1
Source: MOSL
4 October 2011
4

Technology
Weak global macro environment raises uncertainty for Indian IT
Revenue growth could decelerate; revising estimates downward
In the last few months, increasingly weak macro economic data has been
emanating from both the US and Europe.
While this implies deceleration in growth for Indian IT Services companies,
management commentary/guidance has remained positive.
While growth outlook for FY12 remains strong, FY13 budgets are yet to be hinted.
We expect a moderation in growth across the sector, and trim our FY13 revenue
estimates by 2-6% and EPS estimates by 2-10% for the top-tier companies.
Weak macro environment in US implies deceleration in growth for Indian
IT
In the last few months, increasingly weak macro economic data has been emanating from
both the US and Europe. The US accounts for 57% of the aggregate revenues of the top
4 Indian IT vendors and 42% of the global IT spends. Revenue growth for Indian IT is
closely tied with US GDP growth. This is evident in the exhibit below, which shows how
Infosys' revenue growth tracks US GDP growth. US GDP estimates imply a downtrend
in CY12, in turn implying a deceleration in growth for Indian IT.
Infosys' revenue growth directionally in line with US GDP growth
Infosy s CY USD rev grw th (LHS)
120
US Nominal GDP grw th (RHS)
10
7
4
40
1
0
-40
-2
-5
Expect deceleration in
Infosys' revenue growth as
US GDP trends downwards.
80
Source: Bloomberg/MOSL
Drawing parallels from history: 2003 v/s 2008
Most macro indicators currently point to directionally low growth in quarters ahead. While
it is difficult to assess the intensity of the weakness for Indian IT Services, going forward,
based on our interactions with companies and offshore advisors, we expect a scenario of
low growth (10-15% YoY) and not weak growth (0-5% YoY, as witnessed in 2008).
4 October 2011
5

Technology
Announced job cuts across banks in Europe/US
Banks
Synovus Financial Corp
Lloyds Banking Group PLC
Banca Monte dei Paschi di S
Bank of America Corp
HSBC Holdings PLC
Sparbank
Banco Popolare SC
Bankinter SA
Sparekassen Himmerland A
Nordea Bank AB
UBS AG
Unione di Banche Italiane S
Credit Suisse Group AG
Beneficial Mutual Bancorp I
Intesa Sanpaolo SpA
Barclays PLC
Royal Bank of Scotland Grou
Bank of Montreal
Erste Group Bank AG
Total
Job cuts
1,150
16,095
3,900
34,075
33925
35
1,788
350
21
2,000
3,750
1,100
2,025
30
3,000
3140
2,260
475
550
109,669
Tot al employees
6,109
103,859
31,405
287,839
302,327
351
19,345
4,400
296
34,169
65,707
19,597
50,700
754
101,169
146,100
148,300
38,715
50,272
1,411,414
% of employee base
19
15
12
12
11
10
9
8
7
6
6
6
4
4
3
2
2
1
1
According to media reports,
the announced job cuts by
banks in Europe and US
amount to 8% of their
workforce
8
Source: Media Reports/MOSL
CEO confidence levels in the US declining
10.0
CEO Confidenc e Index
7.5
5.0
2.5
0.0
US vendor performance index approaching bearish territory
72
64
56
48
40
Vendor Performanc e (LHS)
Source: Bloomberg
Source: Bloomberg/MOSL
Note: Read as bullish when above 50 and bearish when below 50
How
the cycle works
Rapidly increasing US productivity growth (output/hour) indicates a scenario of falling
demand, which drives corporations to cut headcount and capacities in an effort to correct
the demand-supply mismatch. In such a scenario, productivity boosting measures such as
cutting headcount and capacities take significant amount of management time, and investing
in IT Services becomes a low priority activity. Growth in IT Services tends to resume, as
productivity growth approaches its peak, with a significant improvement in the demand
environment. Corporations begin investing in IT to improve processes and reduce the fall
in productivity, as they add headcount and capacities.
4 October 2011
6

Technology
Where we are now
Exhibit below maps Infosys' YoY revenue growth with the productivity growth in the US.
Revenue growth for Infosys begins to decline when productivity growth bottoms and
begins to improve when productivity growth begins to peak. Productivity growth bottomed
in October 2008 and peaked in 4QFY09 - this is when revenue growth for Infosys turned
positive. US productivity growth is once again approaching lows.
US productivity growth (LHS) approaching lows
9
US Prod grow th (LHS)
Infy rev grow th (RHS)
150
100
50
0
-50
The US saw 9 years of
productivity led GDP growth
from 1995 to 2003. A similar
scenario could bode well for
IT driving more business
transformational deals
6
3
0
-3
Source: Bloomberg/MOSL
Trim revenue estimates by 2-6%, EPS estimates by 2-10% for FY13
We trim our estimates to factor in a scenario of low growth (but not weak growth as
witnessed in 2008) and margin pressures from wage hikes. Our FY13 revenue growth/
EPS estimates are cut 4.5%/9%, 4.5%/4%, 5.7%/10% and 2.5%/1% for TCS, Infosys,
Wipro and HCL Tech, respectively.
Revised estimates for FY13E
Revenue Growth (%)
EBIT Margin (%)
EPS (INR)
Company Revised
Earlier Chg (pp) Revised
Earlier Change Revised Earlier Chg (%)
TCS
Infosys
Wipro
HCL Tech
15.4
14.7
12.3
18.2
19.1
19.2
18.0
20.5
-3.7
-4.5
-5.7
-2.3
25.8
27.8
19.8
13.4
27.3
28.0
21.7
13.4
-147bp
-17bp
-192bp
-4bp
58.6
152.5
24.6
34.9
64.0
158.8
27.4
-8.5
-3.9
-10.1
35.5
-1.7
Source: MOSL
4 October 2011
7

Technology
Examining the three growth scenarios for FY13
Impact in FY13 unlikely to be as severe as in FY09
We analyze the impact of recent global events on IT business under three
scenarios for FY13: (1) a normal growth year, (2) 3-4% cut in IT budgets, similar
to 2003, and (3) 6-8% cut in IT budgets, similar to 2008.
Scenario-2 is most likely in our view - FY13 is unlikely to map growth trends
seen in FY09.
Two factors that drive our view: (1) clients have been more cautious in their IT
spends, and (2) billing rates in FY11 are lower than those in FY09.
Indian IT companies are better placed this time, with relatively lower hedges
in an environment of depreciating INR.
3-4% cut in CY12
technology budgets is more
likely than a 6-8% cut
witnessed in CY08
The three scenarios
Our conversations with companies indicate that they have reasonable visibility for FY12.
However, they are unclear on how clients would react in FY13. We believe there are
three possible scenarios for FY13:
Scenario-1 (the best case and least likely scenario):
The environment becomes
more certain over the next two quarters allowing the next year's IT budgeting process
to close in time, giving us a normal growth year.
Scenario-2 (the base case and most likely scenario):
A 3-4% cut in IT budgets
(similar to 2003), driving a sub-normal year but aiding growth for offshore vendors
over a period - expect revenues from existing customers to remain flat, but business
won over the previous year and offshoring to drive growth. Margin levers like utilization,
salary and pricing may count for little in such a scenario (explained later).
Scenario-3 (worst case scenario):
A 6-8% budget cut (similar to 2008), resulting in
canning of projects and ramp-downs.
Scenario-2 most likely
FY13 is unlikely to map the growth trends seen in FY09. The two factors that drive our
view are:
Clients have been more cautious in their IT spends:
The broader market TCV
(total contract value) of deals signed in CY10 is lower than that in CY08 and CY09 by
5.1% and 6.7%, respectively. Moreover, deals signed during 1HCY11 are 20% weaker
than 1HCY10. Our conversations with vendors indicate that though clients have a
clear idea of their roadmap for IT spends over a couple of years, spends are allocated
on a quarterly basis - large TCV deals of the order of USD200-500m+ have shrunk.
Clients have been more measured in their spends and are unlikely to have any knee-
jerk reaction as was seen in FY09, post the Lehman collapse.
4 October 2011
8

Technology
Clients have been cautious on spending, 1H deal signings lowest in recent years
Deal TCVs as per TPI
1H
50.6
47.8
44
40.7
39.4
40
37.2
2H
1HCY11 deal signings have
been lowest in years. TPI in
its last quarter's
presentation had talked
about the 2HCY11 making
up for the loss in 1HCY11
CY08
CY09
CY10
CY11
Source: TPI/MOSL
Pricing is unlikely to see a sharp fall this time:
We expect billing rates to remain
stable as i) billing rates in FY11 are lower than in FY09 (Infosys' per capita productivity
fell from USD87k in FY08 to USD82.5k in FY11), ii) gross margins of vendors like
HCL Tech and Cognizant are lower by 650bps and 200bps respectively v/s FY09,
hence expect better pricing discipline from vendors and iii) volumes are unlikely to see
a sharp fall this time. In the event that our thesis on pricing does not hold, Infosys is
better placed considering its strategy of moving up the value chain.
Despite uptick in FY11, per capita productivity at INFY still below FY09
Infosy s per capita productivity (USD/annum)
5.6
4.9
YoY Grow th (%)
Even after the guided
3% YoY realization increase
in FY12, pricing will
continue to remain weaker
than in FY08
84,422
82,700
87,307
-3.3
81,078
1.8
82,500
-4.0
FY07
FY08
FY09
FY10
FY11
Source: Company/MOSL
Both clients and vendors are better prepared this time:
Unlike the crisis of
2008, which was unprecedented in its nature for the industry, the current crisis has a
clear reference point, which will increase the preparedness of both vendors and clients.
Hence, we are unlikely to see a knee-jerk reaction or a freeze in spending as seen in
2008.
4 October 2011
9

Technology
Companies better placed, with relatively lower hedges
The INR has depreciated by 10.5% from the closing rate for 1QFY12. With 1% INR
depreciation against the USD, EBITDA margin expands by 40bp. Indian IT companies
are relatively less hedged as compared to 2QFY09, when we saw similar currency
depreciation. We note that current hedges for Infosys, Wipro and HCL Tech cover 2-3
months of net inflows. TCS is the most hedged - USD1.1b for 2QFY12 and USD1.5b of
non-designated hedges, which will impact its P&L, with MTM losses.
Indian IT companies are relatively less hedged as compared to 2QFY09
2QFY09
TCS
Infosys
Wipro*
2,900
932
3,500
1QFY12
2,600
745
1,704
HCL Tech**
2,700
390
*Hedges for Wipro are spread over a tenure of 24 months; **HCL Tech spread over a tenure of 12 months
EPS sensitivity to 1% change in INR v/s USD
EPS
Currency Change (%)
-2
-1
Base Case
1
2
3
4
5
6
7
8
INR/USD
44.1
44.6
45.0
45.5
45.9
46.4
46.8
47.3
47.7
48.2
48.6
TCS
56.6
57.6
58.6
59.6
60.6
61.6
62.6
63.6
64.6
65.7
66.7
Infosys
147.8
150.2
152.5
154.9
157.3
159.7
162.1
164.4
166.8
169.2
171.6
Wipro
23.7
24.1
24.6
25.1
25.6
26.1
26.6
27.1
27.6
28
28.5
HCL Tech
33.3
34.2
35
35.8
36.7
37.5
38.3
39.2
40
40.8
41.7
HCL Tech has the highest
EPS sensitivity to the INR
EPS Sensitivity to 1% Chg (%)
1.7
1.6
2.0
2.4
*Sensitivity does not include the impact from hedge losses
4 October 2011
10

Technology
Traditional margin levers unlikely to help in FY13
We examined the impact of the unfolding of scenario-2 on Indian IT companies' operating
metrics and margins for FY13. We present our findings below:
Salary increases unlikely to moderate meaningfully:
Market expectations of a
meaningful moderation in wages in FY13 v/s FY12 on the back of lower revenue
growth is unlikely to play out, assuming our base case. We note that despite lower
revenue growth in FY13 and assuming a 2% decline in attrition rates, companies
would need to add a marginally lower number of employees if not similar, on an absolute
basis. Hence we believe wage increases are unlikely to moderate meaningfully. We
assume a 10% salary hike in FY13 v/s the 12-14% seen in FY12.
Gross
FY12E
FY13E
45,462
59,495
40,259
28,404
34,457
62,060
42,600
28,162
Net
FY12E
FY13E
24,454
31,020
12,366
15,050
82,890
14,753
34,582
14,660
14,800
78,795
Attrition %
FY11
FY12E
FY13E
15.8
14.4
22.7
16.5
17.0
13.8
12.4
20.7
14.5
14.9
11.8
10.4
18.7
12.5
12.9
Attrition Nos
FY11
FY12E
FY13E
20,189
28,600
17,030
12,713
21,008
28,475
27,893
13,354
19,704
27,478
27,940
13,362
Absolute hiring numbers in FY13 not very different from FY12 despite lower growth
Headcount
FY11
FY12E
FY13E
Infosys
TCS
Wipro
HCL Tech
Aggregate
127,779 152,233 166,986
198,614 229,634 264,216
122,385 134,751 149,411
77,046 92,096 106,896
525,824 608,714 687,509 173,620 167,280
78,532 90,730 88,485
Source: Company/MOSL
Utilization is a lever only for
Infosys within our universe
as it benefits from higher
fungibility of resources post
restructuring
Utilization should drop for most players:
Our conversations with tier-1 offshore
IT vendors indicate continued bullishness in the business, with caution on the macro
environment. In such a case, given our assumption of lower than normal growth, we
believe companies are more likely to add headcount and have slack in utilization to be
in a position to capture growth. We note that vendors who were high on utilization or
had positioned themselves for a certain kind of demand lost out when demand revived
in 2010, moreover the lack of slack in utilization increases the cost of talent acquisition
when growth returns. Hence, utilization is unlikely to be a major lever in FY13.
Utilization unlikely to be a lever for TCS, Wipro and HCL Tech in FY13
Infos ys
76
70
TCS
76 75
71
69 69
68
Wipro
79
75
69 70
74
74
75
72
HCL Tech
76 77
71
72
77
77
73
68
FY07
FY08
FY09
FY10
FY11
FY12E
Source: Company/MOSL
Pricing is also an unlikely lever:
While pricing is still below FY09 levels (despite
an uptick in FY11), given the scenario of budget cuts, there is little likelihood of like-to-
like pricing increases.
Limited scope for offshore shift:
The scope for offshore shift will be limited, as
companies increasingly hire locals onsite to ward of protectionist pressures and visa
hurdles. We note that US presidential elections are due in November 2012. Protectionist
rhetoric is usually at its highest around election time.
11
4 October 2011

Technology
Expect revenue growth, valuation for INFY and TCS to converge
Infosys better placed post restructuring
TCS would find it challenging to sustain higher revenue growth and shrinking
margin gap vis-à-vis Infosys.
As Infosys tackles client-specific issues and emerges stronger post restructuring,
its revenue growth in FY13 could be similar to TCS.
While TCS has little room to improve margins further, Infosys is better placed to
manage margins post restructuring.
TCS' high BFSI exposure
puts sustenance of leading
growth rates at risk. Higher
emerging markets exposure
may not be a cushion during
the downturn.
TCS: Little room for improvement
The key arguments in favor of TCS's higher multiple have been: (1) revenue growth at the
higher end of the industry quartile, and (2) shrinking margin gap vis-à-vis Infosys. We see
challenges to sustainability of both.
1. Revenue growth at the higher end of the industry quartile was driven by a larger BFSI
portfolio than peers (USD3.6b in revenues; 44% of portfolio). In the midst of a global
slowdown, with financials in the heart of the crisis, this is unlikely to be a tailwind.
Moreover, TCS would find it difficult to maintain revenue growth rates on a much
larger revenue base of USD10.4b in FY12. Arguments of a higher exposure to
developing markets v/s Infosys acting as a cushion during a downturn do not reflect in
actual data. Emerging markets contributed 1.2pp to growth across the top-tier in FY09,
implying that declines in growth are all pervasive in a global crisis.
Expect similar revenue growth for Infosys and TCS in FY13
USD Revenue Grow th YoY
29%
26%
19%
15% 15%
5%
3%
Infos ys
TCS
27%
FY10
FY11
FY12E
FY13E
Source: Company/MOSL
Infosys has more margin
levers than TCS. Expect gap
in EBIDTA margins to
expand.
2. Shrinking margin gap vis-à-vis Infosys has been another driver for TCS' P/E multiple
expansion. TCS has been able to expand margins on the back of aggressive cost
management and ability to operate at higher utilization rate. With utilization at its peak
and our view of low growth in FY13, TCS will need to build a slack in its utilization to
be ready for any pull-back in demand. Hence, utilization will be a headwind this time.
TCS has aggressively rationalized SG&A over the past two years, leaving little or no
room for further cuts. Hence, TCS will see a downside bias to margins (we estimate
a 90bp decline in FY13).
4 October 2011
12

Technology
Aggressive cost management drove SGA leverage for TCS over 1QFY08-4QFY11
SGA (% of Revenues )
30%
EBIT Margin (%)
TCS has aggressively
rationalized SG&A over the
past two years, leaving little
or no room for further cuts
27%
23%
20%
16%
Source: Company/MOSL
Infosys: Better placed post restructuring
We believe that post restructuring, Infosys is better placed than TCS in the current
environment.
Our checks and media
reports suggest that the
company has now adopted a
more aggressive stance on
acquisitions than in the past
We hope that Infosys would
not repeat the conservatism
for a strategic fit like Axon
1. Infosys' growth will not be very different from TCS in FY13:
Infosys has seen
lower growth than TCS on the back of headwinds specific to it - (a) revenue declines
from a large customer, BT, (b) no tailwind from strategic acquisitions, and (c)
organizational restructuring. With most of these factors behind the company, revenue
growth for Infosys will not be very different from TCS. Moreover Infosys is consciously
increasing the proportion of the wireless business (currently 30% of the telecom vertical)
in an effort to de-risk the vertical. Our checks and media reports suggest that the
company has now adopted a more aggressive stance on acquisitions than in the past.
We hope that Infosys would not repeat the conservatism for a strategic fit like Axon.
Media reports suggest Infosys is close to acquiring Thomson Reuters Healthcare
division in the US for USD700m. Infosys is also better placed post restructuring (8
verticals now cut to 4) to target multi geography, multi service transformational deals.
The risk to our argument in favour of Infosys would be a large EPS accretive acquisition
by TCS like CGSL.
Impact on Infosys' revenues due to declines in BT
Impact on rev enues due to dec lines in BT
Infosy s revenue grow th %
25.7%
11.7%
1.3%
FY09
2.1%3.0%
1.7%
FY11
Source: Company/MOSL
FY10
4 October 2011
13

Technology
Infosys' BFSI growth would have been higher than TCS if not for the latter's CGSL acquisition
BFSI Revenues - USD m
TCS (Incl CGSL)
CGSL Contribution (Approximates)
TCS - Organic
Infosys
BFSI Growth - YoY
TCS (Incl CGSL) (%)
TCS - Organic (%)
Infosys (%)
FY08
2,484
0
2,484
1,494
FY09
2,544
71
2,473
1,583
2.4
-0.4
6.0
FY10
2,821
353
2,468
1,634
10.9
-0.2
3.2
FY11
3,627
413
3,214
2,166
28.6
30.2
32.5
2. Margin performance to improve relative to TCS:
Infosys is better placed to
manage margins post the restructuring. It can operate at a utilization of 78-82% on a
sustainable basis v/s the average of 75.4% over the last 8 quarters. This increases
Infosys' slack in utilization, thereby allowing it to be conservative with its hiring plans
in an uncertain environment.
Utilization and offshore mix shift unlikely to be margin levers for TCS in FY13
Utilization (Including Trainees)
Offshore Revenue proportion
Infos ys
TCS
56.4%
48.8%
Infosy s
74.9%
72.5%
70.0%
68.6%
68.1%
TCS
76.2%
74.1%
72.0%
56.0%
46.1%
46.9%
48.4%
48.8%
46.2%
FY08
FY09
FY10
FY11
FY08
FY09
FY10
FY11
Source: Company/MOSL
Infosys would be better placed to manage margins than TCS in FY13
Infos ys EBIDTA %
7.4
5.4
4.4
32
27
31
26
33
26
35
29
FY10
5.7
33
2.6
1.9
30
FY11
29
FY12E
28
FY13E
31
31
2.5
TCS EBIDTA %
Difference
FY07
FY08
FY09
Source: Company/MOSL
4 October 2011
14

Technology
HCL Tech v/s Wipro: Advantage HCL Tech
Higher revenue visibility; strong execution history
We prefer HCL Tech over Wipro on higher revenue visibility and strong execution
history.
HCL Tech has consistently demonstrated its ability to win market share and
achieve industry leading growth irrespective of the macro environment.
Wipro, on the other hand, has seen multiple leadership changes and has not
been able to demonstrate consistency in revenue growth or earnings.
According to TPI, HCL Tech
is the only Indian vendor to
be listed among the top 10
service providers based on
the large deals won in the
Americas and APAC.
Arguments in favour of HCL Tech
HCL Tech has consistently achieved industry leading revenue growth and market
share gains irrespective of the macro environment: Our channel checks indicate that
the company continues to be a part of large deals and RFP's, which could fructify
over the next two quarters. According to TPI HCL Tech is the only Indian vendor to
be listed among the top 10 service providers based on the large deals won in the
Americas and APAC.
Expect industry leading growth at HCL Tech to continue
FY08
35%
31%
24%
16%
12%
3%
HCL Tech
Infosy s
6% 5%
2%
TCS
Wipro
Source: Company/MOSL
FY09
FY10
33%
FY11
40%
35%
26%
29%
17%
19%
BPO business will see its first
full year of profitability in
FY13. BPO should add
~50bp to margins in FY13
HCL Tech is better placed this time, with no headwinds from a large hedge portfolio.
Its hedges now cover 20% of its net inflows over the next 12 months (current hedge
portfolio of USD390m v/s USD2.7b in 2QFY09).
We do not see any downside to HCL Tech's margins as
i) the BPO business will see its first full year of profitability in FY13 and
ii) the company is steadily working to improve its employee pyramid by hiring more
freshers (30% of gross hires in FY11 v/s over 20% in FY10). The company has
been on track in 1QFY12 to add 2,500 freshers inline with their guidance.
4 October 2011
15

Technology
Expect margins to remain flat (on full year basis) after drop in FY11
16.9%
15.8%
13.4%
13.6%
13.4%
HCL Tech EBIT Margin
FY09
FY10
FY11
FY12E
FY13E
Source: Company/MOSL
Even if we assume all of
Wipro's momentum verticals
to grow by 5% on a QoQ
basis, the company will still
be able to clock a growth of
only 3-3.5% QoQ
Wait for Wipro to demonstrate strong execution and ability to sustain it
Wipro has seen multiple leadership changes and consistent attrition across second
level leadership roles.
It has underperformed peers on a sustained basis on both the revenue and margin
front.
The management has indicated a return to industry growth rates by the 4QFY12.
However, we would prefer to wait for fruition and indicators of sustenance of peer-
leadinf/matching growth rates, before turning bullish on the stock.
1QFY12 was Wipro's third consecutive quarter of sub-2%
QoQ volume growth
8%
4%
0%
QoQ v olume grow th
QoQ pricing grow th
Wipro has underperformed peers for the past five quarters
12
9
6
QoQ USD Revenue growth from 3QFY10 to 1QFY12
-4%
3
-8%
0
HCL Tech
Infosys
TCS
Wipro
Source: Company/MOSL
Two BFS deals won in the
last quarter amounting to
USD500m in TCV could
drive growth in 4Q for Wipro
The management has indicated a return to industry growth rates by the 4QFY12 on
the back of growth in its momentum verticals (BFSI, Retail, Energy & utilities and
Healthcare) While the two BFS deals won in the last quarter amounting to USD500m
in TCV could drive growth in 4Q, we are cautious on the sustainability of the same.
The healthcare vertical is currently on an investment mode and growth is set to begin
only four quarters hence. Even if we assume all of Wipro's momentum verticals to
grow by 5% on a QoQ basis, the company will still be able to clock a growth of only
3-3.5% QoQ. We would prefer to wait for fruition and greater comfort in sustainability
of the growth that is likely to be seen in 4QFY12.
4 October 2011
16

Technology
The bright spots
We prefer Infosys and HCL Tech
Expect TCS and Infosys' growth and multiples to converge in FY13. TCS' stock
outperformance leaves limited room to stomach negative surprises.
We prefer HCL Tech over Wipro on growth visibility.
Downgrade Wipro to Neutral. We will wait for fruition of new strategies before
going bullish.
Infosys and HCL Tech are
our top Buys in the large-
cap IT space
Infosys: CMP INR2,476, TP INR3,050, Upside 23%, BUY
i) Infosys would see higher realizations and would be able to manage margins better
than peers in FY13, post restructuring.
ii) The restructuring helps Infosys position itself higher on the value chain (driving
consulting and transformational projects, which in turn drive downstream revenues at
higher realizations) and operate at a higher utilization (78-82% on a sustained basis
v/s an average of 75.4% over the past 8 quarters).
iii) The drag on revenues from ramp-downs in the BT account is also likely to end over
the next two quarters.
iv) The company should benefit from spends driven by regulations, risk and compliance
(expected to be 4x the M&A opportunity seen over the last 36 months, spread over
the next 6 years), which are unlikely to be impacted by a slowdown.
v) Moreover, the stock has underperformed relative to peers, making risk-reward more
favorable. We value the stock at 20x FY13E EPS of INR152.5, with a price target of
INR3,050, implying 23% upside.
TCS: CMP INR1,044, TP INR1,172, Upside 12%, Neutral
i) We like TCS for the strong execution and high growth exhibited over the last two
years. However, we believe the sharp outperformance by the stock v/s peers leaves
limited room to stomach any negative surprises.
ii) TCS is currently operating at its peak in terms of utilization (83.2% ex-trainees). In
the event of a slowdown (our base case), the company would take time to re-adjust to
new realities (considering that it remains extremely bullish on its outlook), forcing a
drop in utilization, thereby making it difficult to maintain margins.
iii) We believe QoQ growth trends for TCS are likely to be weaker on a larger revenue
base. We value TCS at 20x FY13E EPS of INR58.6, considering the superior growth
and margin management over the past two years, giving us a price target of INR1,172,
implying an upside of 12%.
Wipro: CMP INR331, TP INR369, Upside 12%, Neutral
i) Wipro has sharply underperformed peers on a YTD basis, due to sustained
underperformance on revenue growth and margins.
ii) We believe the recent restructuring from a dual CEO structure to a single CEO and a
matrix structure to a vertical structure with P&L responsibilities is likely to make the
company more focussed and agile. We do not build in a convergence in growth rates
in FY13.
4 October 2011
17

Technology
iii) While management commentary indicates that it would be able to address slower
growth in the US geography and BFSI by 4QFY12/1QFY13, as deals won in the
recent past drive growth, we would wait for the company to deliver before we adopt
a bullish stance.
iv) We downgrade Wipro to 'Neutral' and value it at a 25% discount to Infosys at 15x
FY13E EPS of INR24.6, with a price target of INR369, implying 11.5% upside.
HCL Tech: INR402, TP INR525, Upside 31%, Buy
i) HCL Tech is likely to continue its trend of strong growth.
ii) Our channel checks indicate that HCL Tech continues to be a part of large deals and
RFPs, which could fructify over the next two quarters.
iii) HCL Tech was also able to grow (ex-Axon) during the last downturn (2008) on the
back of large deal wins.
iv) The company's relative stock outperformance v/s Infosys and Wipro indicates the
market's view of HCL's ability to replicate such a performance.
v) We value HCL Tech at 15x (25% discount to Infosys) FY13E EPS of INR35, with a
price target of INR525, implying an upside of 31%.
Comparative valuations
Company TP/TM*
Infosys
TCS
Wipro
HCL Tech
%
Upside
3,050 / 20x 23.2
12.3
11.5
31.3
Rating
Buy
EPS (INR)
FY11 FY12E FY13E
119.4 133.7 152.5
52.8
22.6
29.3
58.6
24.6
34.9
P/E (x)
FY11-13 CAGR (%)
FY11 FY12E FY13E USD Rev EPS
20.7
18.5
16.2
16.6 13.0
23.5
15.3
17.3
19.8
14.6
13.6
17.8
13.4
11.5
21.1 14.9
13.2 6.8
21.5 23.1
Source: MOSL
1,172 / 20x
369 / 15x
525 / 15x
Neutral 44.4
Neutral 21.6
Buy
23.1
* - TP: Target Price, TM - Target Multiple based on FY13EPS
Consensus estimates v/s MOSL
Consensus EPS
FY12
FY13
52.9
61.2
135.6
22.7
30.3
157.2
25.6
36.3
MOSL EPS
FY12
FY13
52.8
58.6
133.7
22.6
29.3
152.5
24.6
34.9
MOSL/Consensus variance
FY12
FY13
-0.2
-4.2
-1.4
-0.4
-3.3
-3.0
-3.9
-3.9
TCS
Infosys
Wipro
HCL Tech
Source: MOSL/Bloomberg
4 October 2011
18

Technology
Infosys Technologies
BSE SENSEX
S&P CNX
16,151
4,850
CMP: INR2,476
TP: INR3,050
Buy
Bloomberg
INFO IN
Better prepared for a slowdown in FY13
Our top pick in the sector; Maintain Buy
Equity Shares (m)
571.2
52-Week Range (INR) 3,494/2,169
1,6,12 Rel. Perf. (%)
11/-6/2
M.Cap. (INR b)
M.Cap. (USD b)
1,414.4
28.8
Differential in revenue growth rate vis-à-vis TCS more a function of revenue
declines from BT, expect convergence in FY13.
In a position to manage margins better than peers during a possible
downturn, post the restructuring undertaken earlier this year.
Buy with a target price of INR3,050 (20x FY13E EPS of INR152.5) - 23%
upside.
Y/E March
2011 2012E 2013E
323
99
30.6
370
113
30.5
Sales (INR b)
275
EBITDA (INR b) 90
Margin (%)
32.6
PAT (INR b)
EPS (INR)
EPS Gr. (%)
68
119.4
11.2
76
87
133.7 152.5
12.0 14.1
18.5
12.3
3.8
4.6
26.8
31.4
16.2
10.4
3.2
4.0
26.4
31.2
P/E (x)
20.7
EV/EBITDA (x) 14.1
EV/Sales (x)
4.6
P/B (x)
RoE (%)
RoCE (%)
5.5
27.8
33.1
Revenue growth to converge with TCS in FY13
Infosys' core philosophy of having industry leading margins is driven by its strategy of
moving up the value chain. The company's differential in growth v/s TCS in FY10 and
FY11 can be attributed to revenue declines from its large client - BT (the account
declined from 10% of revenues to less than 2% of revenues currently), accelerated
growth in BPO for TCS post the acquisition of CGSL and the organizational restructuring
at Infosys. Headwinds of FY10 and FY11 are unlikely to repeat and Infosys is better
placed for FY13. Moreover our checks and media reports suggest that, the company
has a far more aggressive view on acquisitions than in the past to fill gaps in areas like
healthcare, products, solutions & platforms and in geographies like Germany and France.
Revenue growth trends - Infosys v/s TCS
Shareholding pattern % (Mar-11)
Others,
21.7
Promoter
16.0
Infos ys revenue grow th yoy
TCS revenue grow th yoy
29%
27%
19%
15% 15%
26%
Domestic
Inst.,
9.8
12%
6%
3%
5%
Foreign
52.4
FY09
FY10
FY11
FY12E
FY13E
Impact on Infosys' revenues due to declines in BT
Impac t on rev enues due to dec lines in BT
Infosy s rev enue grow th %
25.7%
Stock performance (1 year)
Infos ys
Sensex - Rebased
4,000
3,500
3,000
2,500
2,000
11.7%
1.3%
FY09
2.1%
3.0%
1.7%
FY11
Source: Company/MOSL
FY10
4 October 2011
19

Infosys Technologies
Infosys plans to increase the
multiplier effect of
downstream revenues by its
consulting engagements
from 3x to 8x (from
~USD600m to ~USD1.6b)
over the next few years
Strategy of moving up the value chain yielding results
Infosys' strategy of moving up the value chain is yielding results, with the increasing mix
shift in favour of such services should drive mix-based pricing increase. In FY11, 40% of
Infosys' incremental revenues came from Consulting/Package Implementation/Systems
Integration (these services contributed 33% of overall revenues). This is expected to
increase its YoY realization by upwards of 3.4%, based on exit rate of 4QFY11. Moreover
the company plans to increase the multiplier effect of downstream revenues by its consulting
engagements from 3x to 8x (from ~USD600m to ~USD1.6b) over the next few years. To
achieve this Infosys plans to increase its headcount in consulting and system integration at
a CAGR of 58% (from 4000 currently to 10,000) over the next two years v/s its overall
headcount growth of 14% CAGR. The restructuring effort announced earlier this year
will also improve the company's ability to target large multi service, multi geography deals
by reducing the number of verticals from 8 to 5 and empowering vertical heads with a
larger P&L responsibility.
Greater thrust on high value services to drive realizations
High value o fferings - FY11 (EAS/Cons ultin g)
Proportion of FY11 revenues
40.1
31
16.2
Inc. Revenues in FY11
12.3
Infosy s
TCS
Source: Company/MOSL
Higher fungibility of
resources in FY13 post
restructuring to give Infosys
more leeway to quickly
respond to lower demand by
reducing hiring for FY13
Better placed than peers to manage margins, post restructuring
Infosys went through organizational restructuring earlier this year, cutting the total number
of verticals and horizontals down to 8 from 15 earlier. We believe this would help maintain
utilization levels at 78-82% on a sustained basis (v/s average utilization of 75.4% over the
past 8 quarters), as the company benefits from better fungibility of resources across the
organization in FY13, post stabilization of the new structure in FY12. Moreover, this gives
Infosys more leeway to quickly respond to lower demand by reducing hiring for FY13.
Effective tax rate for Infosys has grown faster than TCS
Infos ys ETR (%)
TCS ETR (%)
26.7
27.8
22.9
19.4
13.8
12.0
15.1
14.915.3
13.4
14.8
27.5
23.0
EBITDA margin trends: Infosys v/s TCS
Infos ys EBIDTA %
31.6
31.4
33.2
34.6
TCS EBIDTA %
32.6
30.6
30.5
22.3
27.2
26.0
25.8
28.9
30.0
28.8
28.0
FY07
FY08
FY09
FY10
FY11
FY12E
FY13E
FY07
FY08
FY09
FY10
FY11
FY12E
FY13E
Source: Company/MOSL
4 October 2011
20

Infosys Technologies
Lower PAT growth in the past driven by higher ETR
Infos ys PAT grow th y oy
28.5%
14.1%
12.0%
8.9%
4.6%
FY09
FY10
FY11
FY12E
FY13E
Source: Company/MOSL
Cutting revenue and EPS estimates; expect margins to sustain in FY13
In the wake of the global challenges and expectations of budget cuts, we have cut our
FY12/13 revenue estimates by 2.4%/5.7% and EPS estimates by 2%/4%. While our
margin assumptions are largely unchanged, the lower cut in EPS estimates is on account
of revised currency assumptions after the recent weakening of the INR.
FY13 USD revenue and EPS estimates cut by 4% and 6% respectively
We cut EPS estimates for
Infosys by 2% in FY12 and
4% in FY13 to factor macro
headwinds
INFOSYS
Change in Estimates
Revenue (USD m)
YoY Growth (%)
EBIT Margin (%)
EPS (INR)
Revised
FY12E
FY13E
7,164
18.6
27.7
133.7
8,217
14.7
27.8
152.5
Earlier
FY12E
FY13E
7,345
21.6
27.8
136.7
8,752
19.2
28.0
158.8
Chg (%)
FY12E
FY13E
-2.5
-3
-9bp
-6.1
-4.5
-17bp
-2
-4
Source: Company/MOSL
Valuations attractive; Buy
Infosys is currently trading at 16x FY13E EPS of INR152.5. Historically, it has always
bottomed out at a multiple of 14x, excluding the aftermath of the Lehman crisis, when it
had traded at 11x for three months. We recommend
Buy,
with a target price of INR3,050
(20x FY13E EPS of INR152.5) - 23% upside.
Stock bottomed at 14x pre
Lehman collapse
Fell in the month of September
post Lehman collapse and
bottomed in three months at
10.4x
Upside potential at historical
average P/E of 20x is 23%
Infosys' PE at a 19% discount to the 5-year historical band
P/E (x)
34
27
20
19.8
13
6
10.4
0.0
Av g
Peak(x)
Min
12.0
P/B (x)
Avg
Peak(x )
Min
29.0
8.0
4.0
9.5
5.7
16.2
4.1
2.9
Source: Company/MOSL
4 October 2011
21

Infosys Technologies
Financials and Valuation
Income Statement
Y/E March
2009
2010
2011
(INR Million)
2012E
2013E
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout % (excl.div.t ax)
Valuation (x)
P/E
Cash P/E
EV/EBITDA
EV/Sales
Price/Book Value
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios
Debtors (Days)
Fixed Asset Turnover (x)
74
5.5
70
4.9
62
5.6
74
6.4
74
6.9
20.7
18.5
14.1
4.6
5.5
2.4
18.5
16.5
12.3
3.8
4.6
1.6
16.2
14.6
10.4
3.2
4.0
2.8
2009
102.5
116.1
319.1
23.5
22.9
2010
107.4
123.1
403.0
25.1
23.3
2011
119.4
134.2
454.1
60.3
50.5
2012E
133.7
150.1
541.9
40.0
29.9
2013E
152.5
169.6
612.5
70.0
45.9
Sales
216,930 227,420 275,010 322,751 369,772
Change (%)
30.0
4.8
20.9
17.4
14.6
Software Develop. Exp.117,650 120,710 150,620 182,829 210,760
Selling and Mktg. Exp.
Administration Exp.
EBITDA
% of Net Sales
Depreciation
Other Income
PBT
Tax
Rate (%)
Adjusted PAT
Extraordinary Items
Reported PAT
Change (%)
11,040 11,840 15,320 17,119 19,228
16,290 16,260 19,510 23,925 26,993
71,950 78,610 89,560 98,879 112,791
33.2
7,610
4,730
34.6
32.6
30.6
30.5
9,050
8,540
9,457
9,872
9,430 12,110 16,330 17,298
69,070 78,990 93,130 105,752 120,217
10,270 17,650 24,900 29,353 33,060
14.9
22.3
26.7
27.8
27.5
58,800 61,340 68,230
-1,080 -1,320
0
59,880 62,660 68,230
28.5
4.6
8.9
76,399 87,157
0
0
76,399 87,157
12.0
14.1
36.7
40.2
29.7
33.7
27.8
33.1
26.8
31.4
26.4
31.2
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Capital Employed
Gross Block
Less : Depreciation
Net Block
CWIP
Investments
Curr . Assets
Debtors
Cash & Bank Balance
Loans & Advances
Other Current Assets
2009
2,860
2010
2,860
2011
2,860
(INR Million)
2012E
2,860
2013E
2,860
179,680 227,630 256,900 307,101 347,468
182,540 230,490 259,760 309,961 350,328
182,540 230,490 259,760 309,961 350,328
70,930 78,390 85,010
24,160 28,930 32,660
46,770 49,460 52,350
6,770
4,090
0 37,120
5,250
1,440
94,080 106,880
39,767 49,639
54,313 57,241
6,250
530
6,250
530
Cash Flow Statement
Y/E March
CF from Operations
(INR Million)
2013E
97,029
2009
2010
2011 2012E
67,420 70,880 75,560 85,436
Cash for Working Capital-12,020 -1,470 -14,300 -2,518
7,938
Net Operating CF
55,400 69,410 61,260 82,917 104,967
Net Purchase of FA
-13,380 -9,060 -12,590 -12,420 -12,800
Net Purchase of Invest.
720 -37,030 35,680
910
0
Net Cash from Invest.-12,660 -46,090 23,090 -11,510 -12,800
Proceeds from Equity
Dividend Payments
Cash Flow from Fin.
Net Cash Flow
Opening Cash Bal.
Add: Net Cash
Closing Cash Bal.
440
2,014
1,170
540
0
-15,730 -16,724 -40,130 -26,737 -46,790
-15,290 -14,710 -38,960 -26,197 -46,790
27,450
8,610
45,390 45,210
45,377
167,720 184,370 253,890 302,420 362,174
44,220 43,350 46,530
65,435 74,968
96,950 105,560 150,950 196,160 241,537
25,290 33,460 53,200 37,195 42,039
1,260
2,000
3,210
3,630
3,630
Current Liab. & Prov 38,720 44,550 53,170
53,551 75,867
Current Liabilities
20,040 23,430 26,770 28,710 32,956
Provisions
18,680 21,120 26,400 24,841 42,911
Net Current Assets 129,000 139,820 200,720 248,868 286,307
Application of Funds 182,540 230,490 259,760 309,961 350,328
E: MOSL Estimates
69,500 96,950 105,560 150,950 196,160
27,450
8,610 45,390 45,210 45,377
96,950 105,560 150,950 196,160 241,537
4 October 2011
22

Technology
Tata Consultancy Services
BSE SENSEX
S&P CNX
16,151
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
4,850
TCS IN
1,957.2
1,247/903
6/5/30
2,043.3
41.6
CMP: INR1,044
TP: INR1,172
Neutral
Risk-reward less favorable
We maintain our Neutral rating
Sustaining growth on expanded revenue base to be a challenge
considering the macro environment and higher BFSI exposure
Limited headroom to improve margins, with most levers being exhausted
through aggressive cost management efforts.
Stock outperformance over the past 3, 6 and 12 months leaves limited
room to stomach negative surprises; Neutral.
Y/E March
Sales (INR b)
EBITDA (INR b)
Margin (%)
PAT (INR b)
EPS (INR)
2011 2012E 2013E
373
112
30.0
87
44.4
469
135
28.8
103
52.8
19.0
19.8
14.6
4.2
6.2
35.6
40.9
540
151
28.0
115
58.6
11.0
17.8
12.7
3.6
5.2
31.8
36.9
EPS Gr. (%)
26.3
P/E (x)
23.5
EV/EBITDA (x) 17.8
EV/Sales (x)
P/B (x)
RoE (%)
RoCE (%)
5.3
8.1
37.4
42.2
Higher skew towards BFSI puts sustenance of outperformance at risk
TCS derives 44% of its revenues from BFSI v/s 35%, 27% and 26% for Infosys,
Wipro and HCL Tech, respectively. Moreover, at a higher revenue base, portfolio
diversification to other sectors becomes even more important. The ongoing crisis in
Europe (TCS derives 25% of its BFSI revenue from Europe) and US increases TCS'
overall risk profile v/s peers, implying that the company's revenue outperformance v/s
peers will be difficult to replicate in FY13.
TCS has the highest proportion of BFSI revenues among the top-tier IT companies
Revenue from BFSI in FY11 - %
Shareholding pattern % (Mar-11)
Others,
Foreign,
12.8
Domestic
Inst, 8.1
5.0
44
36
27
27
TCS
Promoter
74.1
Infos ys
HCL Tec h
Wipro
Source: Company/MOSL
Stock performance (1 year)
TCS
1,300
1,150
1,000
850
700
Sensex - Rebas ed
Limited headroom to improve margins
TCS' continued aggression in cost management and exercise of margin levers saw the
company expand its EBIT margins by ~560bp over 1QFY08-4QFY11. During this
period: (1) SGA costs reduced by 370bp, (2) proportion of revenues from offshore
increased by ~900bp, and (3) proportion of revenues from fixed price contracts increased
by 700bp. However, with TCS' utilization close to historical peaks, the company is
more likely to keep some slack in utilization to be able to better manage growth when
it returns.
4 October 2011
23

Tata Consultancy Services
Aggressive cost management drove TCS' SGA
leverage over 1QFY08-4QFY11
SGA (% of Rev enues )
30%
27%
23%
20%
16%
EBIT Margin (%)
TCS' utilization has trended upwards; we expect a 100bp
decline in FY13
Utilization Ex cl. Trainees
88%
84%
80%
76%
72%
68%
Utiliz ation Inc l. Trainees
Source: Company/MOSL
TCS needs to crank up its
non-linear initiatives faster
than peers on a higher
revenue and headcount base
Ability to drive non-linearity more important on a higher revenue base
TCS needs to crank up its non-linear initiatives faster than peers on a higher revenue and
headcount base. Growth for TCS on this base will be increasingly a function of how much
the company can hire. While TCS has non-linear plays like Bancs, SMB (iON), platforms
& solutions and certain government projects, we believe it will need to do more. TCS'
revenues from non-linear initiates are unlikely to be very different from peers that report
them at 8-11% of revenues.
Higher Emerging Markets exposure not a cushion during the downturn
As revenues from BT bottom out for Infosys and the company's restructured house is in
order, revenue growth rates of TCS and Infosys should converge. While TCS' high exposure
to BFSI puts it at risk in the current environment, we do not believe that the cushion
against this may come in the form of higher exposure to emerging economies. The table
below shows the incremental revenue growth contribution by emerging economies in FY09.
As the numbers suggest, the contribution to growth from emerging economies during a
downturn is not significant. However a large acquisition in a competency gap like healthcare
can be a significant positive for TCS.
Emerging economies do not make up for loss of growth from developed markets during a
downturn
Revenues
EM Contribution
to gr.
FY09
FY09 (pp)
4,663
6,012
4,323
2,188
17,186
1.7
-0.1
3.3
0.3
1.2
Revenue contribution
from EM's (%)
FY09
FY11
10.4
19.0
11.2
12.7
13.2
21.3
16.1
17.3
Emerging market exposure
not a cushion during a
downturn
FY08
Infosys
TCS
Wipro
HCL Tech
Total
4,176
5,697
3,647
1,879
15,400
Source: Company/MOSL
4 October 2011
24

Tata Consultancy Services
Cutting revenue and EPS estimates by 4% and 8%, respectively for FY13
Our revenue growth and operating margin estimates for TCS are largely unchanged for
FY12. We expect TCS to grow its revenue by 27% and our EPS estimate for FY12
stands at INR52.8. However, we expect FY13 USD revenue growth to moderate to
15.4% (v/s 14.7% at Infosys). Also, we see slack in utilization driving margins down by
90bp in FY13, leading to a 8% cut in our EPS estimate for FY13 to INR58.6.
FY13 USD revenue and EPS estimates cut by 4% and 8% respectively
TCS
Change in Estimates
Revenue (USD m)
YoY Growth (%)
EBIT Margin (%)
EPS (INR)
Revised
FY12E
FY13E
10,403
27.1
26.7
52.8
12,008
15.4
25.8
58.6
Earlier
FY12E
FY13E
10,486
28.1
26.9
53.0
12,485
19.1
27.3
64.0
Chg (%)
FY12E
FY13E
-1
-1
-18bp
0
-4
-3.7
-147bp
-8
Source: Company/MOSL
TCS has outperformed
with a YTD return
of -11% v/s -26% for Infosys
Current valuations leave limited room for negative surprises
TCS currently trades at 18x FY13E EPS of INR58.6. The stock has yielded a return of
-10% on a YTD basis v/s -29%, -32% and -14% for Infosys, Wipro and HCL Tech,
respectively. Though current valuations indicate a premium over Infosys on the back of
strong revenue and operational performance in the past, we believe TCS has limited room
to drive a similar outperformance over the next year, both in terms of margins and revenues.
Moreover, the expanded base (revenue run-rate in 1QFY12 implies a revenue base of
USD9.6b for FY12) raises the hurdle on incremental growth rates. We value TCS at 20x
FY13E EPS of INR58.6, yielding a price target of INR1,172 - 12% upside. We have a
Neutral rating.
TCS' PE higher than peers on sustained outperformance
P/E (x)
28
25.5
21
14
7
0
6.9
17.6
17.8
6.0
3.0
0.0
2.3
9.0
10.4
6.0
5.1
Av g
Peak(x)
Min
12.0
P/B (x)
Avg
Peak(x )
Min
Source: Company/MOSL
4 October 2011
25

Tata Consultancy Services
Financials and Valuation
Income Statement
Y/E March
Sales
Change (%)
Cost of Services
SG&A Expenses
EBITDA
% of Net Sales
Depreciation
Other Income
PBT
2009
2010
2011
(INR Million)
2012E
2013E
278,129 300,289 373,245 468,597 540,376
21.7
8.0
24.3
25.5
15.3
150,745 157,243 198,505 252,806 296,733
55,606 56,246 62,848 80,878 92,577
71,778 86,800 111,892 134,913 151,067
25.8
28.9
30.0
28.8
28.0
5,765
7,209
7,990
9,717 11,506
-4,673
2,255
5,243 10,317 10,812
61,340 81,846 109,145 135,512 150,373
Ratios*
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout %
Valuation (x)
P/E
Cash P/E
EV/EBITDA
EV/Sales
Price/Book Value
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
23.5
21.6
17.8
5.3
8.1
1.3
19.8
18.1
14.6
4.2
6.2
1.6
17.8
16.2
12.7
3.6
5.2
2.0
2009
26.2
29.2
80.5
7.0
26.7
2010
35.1
38.8
107.5
20.0
57.0
2011
44.4
48.4
129.5
14.0
31.6
2012E
52.8
57.8
167.1
17.0
32.2
2013E
58.6
64.5
201.7
20.5
35.0
Tax
9,362 12,088 21,203 31,067 34,586
Rate (%)
15.3
14.8
19.4
22.9
23.0
Eq. in earnings of affiliates - 7
-10
0
0
0
Minority Interest
PAT
Extraordinary
Net Income
Change (%)
604
1,019
1,116
1,124
1,124
51,367 68,729 86,826 103,322 114,663
350
0
0
0
0
51,717 68,729 86,826 103,321 114,663
3.0
32.9
26.3
19.0
11.0
36.4
44.2
37.4
41.0
37.4
42.2
35.6
40.9
31.8
36.9
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Preference shares
Minority Interest
Loans
Capital Employed
Gross Block
Less : Depreciation
Net Block
Other LT Assets
Investments
Curr . Assets
Debtors
Cash & Bank Balance
Other Current Assets
2009
2010
2011
(INR Million)
2012E
2013E
Turnover Ratios
Debtors (Days)
94
88
81
Fixed Asset Turnover (x) 8.2
7.6
7.9
* 1:1 bonus in FY07, accordingly ratios are adjusted
88
7.9
94
7.9
979
1,957
1,957
1,957
1,957
155,567 207,427 250,432 324,034 391,755
156,545 209,384 252,389 325,991 393,713
1,000
3,098
4,505
1,000
1,000
4,056
4,663
9,110 10,718
1,000
1,000
3,274
3,274
13,475 15,297
Cash Flow Statement
(INR Million)
165,149 223,549 268,771 343,740 413,283
57,959 69,379 88,003 102,320 106,397
20,464 27,673 35,663 35,663 35,663
37,495 41,706 52,340
62,353 54,920 89,929
17,257 37,799 18,390
66,657 70,734
91,220 95,912
15,194 15,194
Y/E March
2009
2010
2011 2012E 2013E
CF from Operations
57,132 75,856 94,816 113,039 126,169
Cash for Working Capital 6,792 -44,271 18,165 -37,637 -12,398
Net Operating CF
63,925 31,585 112,981 75,401 113,771
Net Purchase of FA
-50,234 -3,987 -53,633 -25,325 -20,275
Net Purchase of Invest. 9,568 -20,461 19,409
3,196
0
Net Cash from Invest.-40,666 -24,448 -34,224 -22,129 -20,275
Proc. from equity issues -2,164
30,864 -11,154
7,818
0
109,753 140,120 171,948 240,012 311,125
75,276 70,109 95,479 129,897 147,509
13,440 10,249 47,401
21,037 59,762 29,068
72,322 120,698
37,794 42,918
Proceeds from LTB/STB -1,978
4,605
1,608
2,757
1,822
Dividend Payments
-16,029 -45,797 -32,058 -38,927 -46,942
Cash Flow from Fin. -20,171 -10,328 -41,604 -28,352 -45,120
Free Cash Flow
Net Cash Flow
Opening Cash Bal.
Add: Net Cash
Closing Cash Bal.
13,691 27,598 59,348 50,077 93,496
3,088 -3,191 37,153 24,920 48,376
10,352 13,440 10,249 47,401 72,322
3,088 -3,191 37,153 24,920 48,376
13,440 10,249 47,401 72,322 120,698
Current Liab. & Prov 61,709 50,996 63,837 69,343 79,682
Current Liabilities
61,709 50,996 63,837 69,343 79,682
Net Current Assets
48,044 89,124 108,111 170,669 231,442
Misc. Expenses
2
2
2
2
2
Application of Funds 165,149 223,549 268,771 343,740 413,283
E: MOSL Estimates
4 October 2011
26

Technology
Wipro
BSE SENSEX
S&P CNX
16,151
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel.Perf.(%)
M.Cap. (INR b)
M.Cap. (USD b)
4,850
WPRO IN
2,454.1
500/310
3/-14/-7
812.3
16.5
CMP: INR331
TP: INR369
Neutral
Core strategy still evolving
Wait for execution before going bullish
Has underperformed peers on a sustained basis - both on the revenue
and margin front.
While management commentary indicates the possibility of matching if
not outperforming industry growth by 4QFY12, we are wary about the
sustenance of the same in FY13 amid global headwinds.
Valuations appear reasonable despite sharp cut in estimates, but the
company's core strategy is still evolving. We would wait for fruition before
going bullish. Downgrade to Neutral.
Y/E March
2011 2012E 2013E
Sales (INR b) 310.5 354.5 398.0
EBITDA (INR b) 65.4
70.2 75.8
Margin (%)
21.1 19.8
19.0
PAT (INR b)
EPS (INR)
EPS Gr. (%)
52.8
21.6
15.1
55.5
22.6
4.7
14.6
10.2
2.0
2.8
21.0
18.3
60.5
24.6
9.0
13.4
8.9
1.7
2.4
19.2
16.9
P/E (x)
15.3
EV/EBITDA (x) 11.4
EV/Sales (x)
2.4
P/B (x)
RoE (%)
RoCE (%)
3.4
24.2
20.0
Sustained underperformance on revenue growth v/s peers
Wipro has underperformed peers on both revenue growth and margins over the past 5
quarters. While we believe the recent restructuring would yield results over time, and
management commentary of meeting if not exceeding industry growth rates by 4QFY12
is a possibility on the back of large deal wins in BFS, we are wary about Wipro's ability
to sustain performance. The key reasons for this are:
Shareholding pattern % (Mar-11)
Foreign,
8.0
Domestic
Inst, 3.7
Others,
9.0
Momentum verticals (BFSI, Energy & Utilities, Retail, and Healthcare) would
have to grow by 5% QoQ to achieve a 3% growth for the company on a YoY
basis.
Healthcare (a momentum vertical), which accounts for 10% of Wipro's revenues,
is currently in the investment phase and it could take 4 quarters before we see any
meaningful growth.
Wipro's non-momentum verticals (Telecom & Media and Manufacturing & Hitech),
which account for 36% of its business, will also need to contribute to revenue
growth for sustained outperformance v/s peers.
Wipro has underperformed peers for the past five quarters
12
Promoter
79.2
9
Stock performance (1 year)
Wipro
Sens ex - Rebased
550
475
400
325
250
6
3
0
HCL Tech
Infosy s
TCS
Wipro
Source: Company/MOSL
4 October 2011
27

Wipro
1QFY12 was third consecutive quarter of sub-2% QoQ
volume growth for Wipro
QoQ v olume grow th
9%
6%
3%
0%
-3%
-6%
-9%
QoQ pricing grow th
Client mining and customer additions augur well for Wipro,
but sustainability is uncertain
Client Additions
75
60
45
30
15
USD100m+ clients (TTM)
26
22
18
14
10
Source: Company/MOSL
Reduced sub-contractor
expenses will be a margin
lever, but expect pressures to
remain on continued
investment in growth
Margin performance has seen a sustained downtrend
Wipro has seen a sustained decline in margins over the past 4 quarters. It plans to restrict
this downtrend by using various levers, one being reduced subcontracting. Subcontracting
forms 22% of the company's cost of revenues, which is much higher than peers. Reducing
subcontracting could show up in the form of more aggressive hiring and volume growth
with no visible change in revenue growth. We believe this could be an immediate lever for
margin expansion. However, we would watch for the pace at which Wipro is able to
execute this change.
Wipro's IT margins have remained under stress over the past four quarters
IT Services EBIT margin - % (LHS)
25
23
21
19
17
IT Services SGA - % (RHS)
14
13
12
11
10
Source: Company/MOSL
Core strategy at Wipro is still evolving
We believe the core strategy at Wipro is still evolving. While key components in the form
of (1) focus on momentum verticals, (2) improving margins by reducing subcontracting
cost apart from improving the pyramid, and (3) improving client mining capabilities (the
restructuring helps in our view) are clearly articulated, recent media reports of Wipro
selling its datacenter business and Infocrossing calling it non-core are yet to be understood.
4 October 2011
28

Wipro
Proportion of Wipro's revenues from momentum verticals has been increasing quarter after
quarter
Revenue Proportio n
Momentum verticals Other v erticals
61.4%
62.2%
63.0%
63.1%
63.5%
38.6%
37.8%
37.0%
36.9%
36.5%
Source: Company/MOSL
Cutting FY13 revenue/EPS estimates by 5/10%
We do not build in a convergence in growth rates in FY13, and we expect Wipro's growth
rates to remain below peers like HCL and TCS. While the company may have the necessary
engine in place, Wipro could do with a more sanguine macro environment to facilitate the
same. We cut our revenue estimate by 5% and EPS estimate by 10% for FY13. Continued
deal wins and stable margins will be essential for any upgrades to our numbers.
FY13 USD revenue and EPS estimates cut by 5% and 10% respectively
Wipro
Change in Estimates
Revenue (USD m)
YoY Growth (%)
EBIT Margin (%)
EPS (INR)
FY12E
5,955
14.1
21.1
22.6
Revised
FY13E
6,689
12.3
19.8
24.6
Earlier
FY12E
5,979
14.5
21.5
23.2
FY13E
7,054
18.0
21.7
27.4
Chg (%)
FY12E
0
-0.4
-35bp
-3
FY13E
-5
-5.7
-192bp
-10
Source: Company/MOSL
Core strategy at Wipro
continues to evolve,
uncertain macro limits
Wipro's chances to match
peer-growth in FY13
Valuations reasonable, but we would wait for execution before going bullish
Wipro trades at 13.4x FY13E EPS. We note that our 12% revenue growth assumption for
Wipro in FY13 is lower than peers. However, we would watch for Wipro's ability to
manoeuvre in an increasingly challenging environment and show signs of ability to sustain
peer-matching growth. The key signposts for going bullish on Wipro would be (1) fruition
of industry level or leading growth in 4QFY12, (2) visible improvement in margins over the
next two quarters and (3) commentary on how the company plans to sustain it.
Continued underperformance to peers driving PE below historical average
P/E (x)
31
24
17
10
3
6.8
13.4
28.1
Avg
Peak(x )
Min
P/B (x)
10.0
7.5
Avg
Peak(x )
Min
17.9
7.2
5.0
2.5
0.0
1.6
4.1
2.5
Source: Company/MOSL
4 October 2011
29

Wipro
Financials and Valuation
Income Statement
Y/E March
Sales
Change (%)
Operating Costs
SG&A
EBITDA
% of Net Sales
Depreciation & Amort.
EBIT
Margins
Other Income
Income from Eq. Inv.
PBT
Tax
Rate (%)
PAT
Minority Interest
PAT bef EO
Extraordinary items
Net Income
Change (%)
2009
2010
2011
(INR Million)
2012E
2013E
256,891 271,957 310,542 354,465 398,007
30.1
5.9
14.2
14.1
12.3
173,813 179,373 204,639 239,816 272,739
31,214 32,822 40,467 44,450 49,501
51,864 59,762 65,436 70,199 75,767
20.2
22.0
21.1
19.8
19.0
6,948
7,534
8,211
9,076
9,950
44,916 52,228 57,225 61,123 65,817
17.5
19.2
18.4
17.2
16.5
-467
2,654
5,162
7,380
8,982
362
530
648
440
440
44,811 55,412 63,035 68,943 75,238
6,035
13.5
38,776
9,293
9,896
16.8
15.7
46,119 53,139
13,259 14,586
19.2
19.4
55,684 60,653
Ratios
Y/E March
Basic (INR)
EPS*
Book Value
DPS
Payout %
Valuation (x)
P/E
EV/EBITDA
EV/Sales
Price/Book Value
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios
Debtors (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity Ratio(x)
28.0
23.2
26.8
21.9
24.2
20.0
21.0
18.3
19.2
16.9
2009
15.9
60.7
2.4
15.2
2010
18.8
80.7
2.4
12.8
2011
21.6
98.6
4.4
20.4
2012E
22.6
118.4
2.4
10.6
2013E
24.6
140.5
2.4
9.8
15.3
11.4
2.4
3.4
1.3
14.6
10.2
2.0
2.8
0.7
13.4
8.9
1.7
2.4
0.7
-99
-184
-345
-196
-196
38,677 45,935 52,794 55,488 60,457
0
0
182
0
0
38,677 45,935 52,976 55,488 60,457
22.7
18.8
15.3
4.7
9.0
78
6.0
87
5.7
90
5.3
91
5.8
88
6.2
Balance Sheet
Y/E March
Share Capital
2009
2,930
2010
2,936
2011
4,908
(INR Million)
2012E
4,911
2013E
4,911
0.4
0.3
0.3
0.2
0.2
Reserves
144,214 193,176 234,772 283,038 336,656
Net Worth
147,144 196,112 239,680 287,949 341,567
Minority Interest & others 5,016
8,339 13,710 14,661 14,661
Loans
56,892 62,511 52,802 60,574 60,574
Capital Employed
Gross Block
Less : Depreciation
Net Block
Investments
Curr . Assets
Debtors
Inventories
Cash & Bank Balance
209,052 266,962 306,192 363,184 416,802
78,301 89,499 99,346 114,422 120,422
28,507 36,041 44,252 53,328 53,328
49,794 53,458 55,094 61,094 67,094
16,543 30,420 49,282
49,282 49,282
Cash Flow Statement
Y/E March
CF from Operations
Cash for Wkg. Capital
Net Operating CF
(INR Million)
2013E
61,425
-7,852
53,573
2009
2010
2011 2012E
45,625 53,172 55,843 57,184
6,862 -25,743 -12,374
52,487 27,429 43,469
-973
56,211
Net Purchase of FA
-15,836 -10,901 -9,847 -15,076 -15,950
Net Pur. of Investments -18,491 -12,742 -28,775 -8,758 -1,543
Net Cash from Invest.-34,327 -23,643 -38,622 -23,834 -17,493
Issue of Shares
-14,009 10,072
Proceeds from LTB/STB 12,535
8,742
Dividend Payments
Net CF from Finan.
Free Cash Flow
Net Cash Flow
Opening Cash Bal.
Add: Net Cash
Closing Cash Bal.
-6,839
-8,313
3,386
-4,592
-320
8,663
-6,839
8,885
0
0
-6,839
2,143
145,708 175,094 186,016 242,407 298,650
62,720 67,636 85,776 90,689 101,829
7,586
7,926
9,707 10,683 11,995
49,117 64,878 61,141 102,402 140,626
38,633 44,201
79,407 89,575
-6,839 -12,540
11,975 -8,584
Adv.,Other Curr. Assets 26,285 34,654 29,392
Current Liab. & Prov 75,084 62,966 65,251
36,651 16,528 33,622 41,134 37,623
9,847 15,761 -3,737 41,261 38,223
39,270 49,117 64,878 61,141 102,402
9,847 15,761 -3,737 41,261 38,223
49,117 64,878 61,141 102,402 140,626
Net Current Assets 70,624 112,128 120,765 162,999 209,075
Application of Funds 209,052 266,962 306,192 363,184 416,802
E: MOSL Estimates
4 October 2011
30

Technology
HCL Technologies
BSE SENSEX
S&P CNX
16,151
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
4,850
HCLT IN
700.9
528/360
5/3/14
281.8
5.7
CMP: INR402
TP: INR525
Buy
Expect industry-leading growth to continue
Earnings visibility high; Buy
Has consistently outperformed peers on revenue growth on the back of
market share gains through large deal wins.
Deal pipeline remains strong, led by vendor consolidation across Europe
and US.
Least cut in FY13 estimates due to visibility on growth and margin levers.
Buy with a target price of INR525 - 31% upside.
Y/E June
2011E 2012E 2013E
200
33
16.7
21
29.3
27.0
13.7
8.0
1.3
2.8
22.5
19.9
236
38
16.3
25
34.9
19.1
11.5
6.7
1.1
2.4
23.0
21.4
Sales (INR b)
159
EBITDA (INR b) 26
Margin (%)
16.5
PAT (INR b)
EPS (INR)
EPS Gr. (%)
16
23.1
35.0
P/E (x)
17.4
EV/EBITDA (x) 10.3
EV/Sales (x)
1.7
P/B (x)
RoE (%)
RoCE (%)
3.3
20.8
15.9
Expect industry-leading growth on market share gains to continue
HCL Tech closed large deals with a TCV (total contract value) of USD1b in CY08,
USD1.5b in CY09 and USD2.65b in CY10. Moreover, our channel checks suggest
that HCL Tech continues to be a part of large deals and RFPs that are likely to fructify
over the next two quarters. HCL Tech is pursuing a deal pipeline of USD2b in BFSI
alone. We believe the spread of deals being pursued is also wide across BFSI, consumer
& retail, and manufacturing. HCL Tech's ability to increase market share was clearly
visible even in FY10 (a weak year), with the company adding incremental revenues of
USD336m organically (ex-Axon) v/s USD138m, USD62m and USD313m for Infosys,
Wipro and TCS, respectively (the highest among its peer set).
Expect industry leading growth at HCL Tech to continue
Shareholding pattern % (Jun-11)
Others,
6.5
Foreign,
23.0
FY08
35%
31%
24%
16%
12%
3%
35%
FY09
FY10
FY11
40%
33%
29%
26%
17%
6% 5%
2%
TCS
Wipro
Source: Company/MOSL
19%
Domestic
Inst, 6.1
Promoter
64.4
HCL Tech
Infosy s
Stock performance (1 year)
HCL Tec hnologies
Sensex - Rebas ed
600
525
450
375
300
Limited headwinds due to a lighter hedge book unlike in the past
HCL Tech had a hedge book of USD2.7b in FY09, spread over 24 months, which led
to an impact on PBT of 15%, 24% and 4% in FY09, FY10 and FY11, respectively.
The company is now relatively less hedged, with hedges of USD390m covering 2-3
months of net inflows or 20% of its net inflows for the next 12 months. This puts HCL
Tech in a much better position than in the past. We expect EPS growth to be in line
with revenue growth in FY12 and FY13.
4 October 2011
31

HCL Technologies
Fattening of the pyramid
and BPO's return to
profitability are the key
levers that will help sustain
margins in FY13.
We model in flat margins for FY12 and FY13
HCL Tech's levers for margin improvement include:
Broadening the pyramid:
HCL Tech has reduced the proportion of lateral hires
from 80% of gross hires in FY10 to 70% in FY11 (still compares to 37% and 42% for
Infosys and TCS respectively in FY11). We expect this trend to continue over the
next few years, thereby driving margin benefits from a broadening pyramid.
BPO business turning profitable:
HCL Tech began an overhaul of its BPO business
in FY09, with the acquisition of Liberata and Control Point to create a platform-based
BPO that is non-linear and less dependent on voice-based revenues. The BPO should
turn profitable by 3QFY12 and should report its first full year of profitability in FY13
v/s an EBIT loss of USD4.5m and USD21m in FY10 and FY11 respectively. This
should add ~50bp to margins in FY13.
Expect HCL Tech's margins to remain flat (on a full year basis) after declining in FY11
25
21
17
13
9
EBITDA margin (%)
SG&A as % of s ales (RHS)
19
18
17
16
15
14
13
Source: Company/MOSL
Least cut in estimates due to high growth visibility, margin levers
While we have cut our revenue estimate for HCL Tech by 2% in FY13, our FY12
assumptions and margin assumptions for FY13 are largely unchanged. We believe that in
line with its commentary, the company will be able to report flattish margins YoY in FY12,
and go on to sustain the same in FY13, aided by levers from pyramid, BPO and ramp-up
in large deals.
FY13 USD revenue and EPS estimates cut by -2% each; least in our universe
Wipro
Change in Estimates
Revenue (USD m)
YoY Growth (%)
EBIT Margin (%)
EPS (INR)
FY12E
4,428
24.9
13.7
29.3
Revised
FY13E
5,235
18.2
13.4
34.9
Earlier
FY12E
4,446
25.4
13.5
28.8
FY13E
5,360
20.5
13.4
35.5
Chg (%)
FY12E
0
-0.5
17bp
FY13E
-2
-2.3
-4bp
2
-2
Source: Company/MOSL
4 October 2011
32

HCL Technologies
Least cut in estimates across
our Universe. Our TP implies
maximum potential upside
across top-tier.
Valuations compelling; maintain Buy
HCL Tech's valuations at 11.5x FY13E EPS of INR35 are compelling. The company does
not face the headwinds from a huge hedge portfolio or declining margins in FY12 and
FY13. Moreover, it is likely to deliver industry-leading revenue and EPS growth in FY12
and FY13. Hence, HCL Tech is unlikely to see the trough valuations of 6-7x one-year
forward earnings seen in 2008.
Buy
with a target price of INR525 - 31% upside.
HCL Tech P/E at 27% discount to historical average
P/E (x)
24
22.6
19
13
8
5.8
2
0.0
Avg
Peak(x)
Min
4.8
P/B (x)
Avg
Peak(x )
Min
4.4
3.6
2.4
3.1
2. 7
15.7
11.5
1.2
1.0
Source: Company/MOSL
4 October 2011
33

HCL Technologies
Financials and Valuation
Income Statement
Y/E June
Sales
Change (%)
Cost of Goods Sold
Gross Profit
% of Net Sales
Selling Expenses
% of Net Sales
EBITDA
% of Net Sales
% Growth
Depreciation
EBIT
% of Net Sales
Interest
PBT
Tax
Rate (%)
PAT
Net Profit
Minority interest
Net Income
% of Net Sales
Change (%)
2009
2010
2011
(INR Million)
2012E
2013E
106,014 125,650 159,118 199,680 235,595
38.8
18.5
26.6
25.5
18.0
66,280 82,883 109,280 137,363 163,041
39,734 42,767 49,838 62,317 72,554
37.5
34.0
31.3
31.2
30.8
17,362 17,965 23,526 29,016 34,212
16.4
14.3
14.8
14.5
14.5
22,372 24,802 26,312 33,302 38,342
21.1
19.7
16.5
16.7
16.3
40.1
10.9
6.1
26.6
15.1
4,493
5,009
4,935
5,996
6,875
17,879 19,793 21,377 27,305 31,467
16.9
15.8
13.4
13.7
13.4
0
0
0
1,114
791
14,492 14,491 20,836 27,300 32,138
2,514
2,724
4,744
6,688
7,392
17.3
18.8
22.8
11,978 11,767 16,092
11,978 11,767 16,092
-30
12,008
11.3
15.9
24.5
23.0
20,611 24,747
20,611 24,747
Ratios
Y/E June
Diluted (INR)
EPS after ESOP chg
Cash EPS
Book Value
DPS
Payout %
Valuation (x)
P/E after ESOP chg
Cash P/E
EV/EBITDA
EV/Sales
Price/Book Value
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios
Debtors (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
79
7.3
84
7.3
74
7.8
69
8.2
69
8.5
22.6
16.4
12.5
2.6
4.7
1.7
23.5
16.5
11.0
2.2
3.8
1.0
17.4
13.3
10.3
1.7
3.3
1.9
13.7
10.6
8.0
1.3
2.8
2.0
11.5
9.0
6.7
1.1
2.4
2.0
2009
17.8
24.5
85.0
7.0
39.4
2010
17.1
24.4
104.6
4.0
23.4
2011
23.1
30.2
123.6
7.5
32.6
2012E
29.3
37.8
143.0
8.0
27.3
2013E
34.9
44.6
168.4
8.0
22.9
22.0
17.3
18.5
12.8
20.8
15.9
22.5
19.9
23.0
21.4
0
-6
0
0
11,767 16,098 20,611 24,747
9.4
10.1
10.3
10.5
-2.0
36.8
28.0
20.1
Balance Sheet
Y/E June
Share Capital
Other Reserves
Net Worth
Loans
Minority Interest
Capital Employed
Gross Block
Less : Depreciation
Net Block
Intangibles
Investments
Curr. Assets
Debtors
Days
2009
2010
2011
(INR Million)
2012E
2013E
1,337
1,345
1,364
1,378
1,387
55,506 69,023 82,981 97,123 115,372
56,843 70,368 84,345 98,501 116,759
29,771 26,632 21,240
14,131
8,728
16
0
0
0
0
86,633 97,000 105,585 112,632 125,487
32,423 40,056 48,670
16,561 21,570 26,505
15,862 18,486 22,165
53,933 52,762 52,270
15,162 20,440 19,991
52,777 55,802
26,505 26,505
26,271 29,296
54,908 56,821
19,991 19,991
0.5
0.4
0.3
0.1
0.1
Cash Flow Statement
(INR Million)
2013E
31,621
-2,510
29,111
Y/E June
2009
2010
2011 2012E
CF from Operations
16,501 17,148 21,033 26,607
Chg. in Working Capital
2,076 -3,153 -5,335
321
Net Operating CF
18,577 13,995 15,698 26,928
Net Purchase of FA
-46,323
Net Purchase of Invest. 5,718
Net Cash from Inv.
Issue of shares
-6,462
-5,294
-8,122 -12,740 -11,813
449
0
0
-7,673 -12,740 -11,813
3,879
-2
-1
-40,605 -11,756
-1,908
4,539
-3,139
-3,153
-1,753
7,533
486
4,200
4,686
41,985 44,027 51,809 61,408 78,370
27,083 30,496 34,065 41,030 48,410
74
76
66
0
0
Proceeds from LTB/STB 29,771
Dividend Payments
-5,475
Net CF from Finan.
22,388
Free Cash Flow
Net Cash Flow
-27,746
360
-5,392 -7,109 -5,403
-6,000 -6,453 -6,488
-7,513 -13,564 -11,892
7,576 14,188
512
624
4,686
5,198
5,198
5,823
17,298
5,406
5,823
11,228
Cash & Bank Balance
4,203
4,686
5,198
5,822 11,228
Loans & Advances
10,699
8,845 12,546 14,555 18,732
Current Liab. & Prov 40,309 38,715 40,650 49,945 58,991
Current Liabilities
Provisions
Net Current Assets
32,675 31,329 33,763 41,310 49,089
7,634
7,386
6,887
8,635
9,903
1,676
5,312 11,159 11,462 19,379
Opening Cash Balance 3,840
Closing CashBalance 4,200
Application of Funds 86,633 97,000 105,585 112,632 125,487
E: MOSL Estimates
4 October 2011
34

Motilal Oswal Sector Gallery

Technology
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MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report.To enhance transparency, MOSt has incorporated a Disclosure of Interest
Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.
Disclosure of Interest Statement
1. Analyst ownership of the stock
2. Group/Directors ownership of the stock
3. Broking relationship with company covered
4. Investment Banking relationship with company covered
Infosys Technologies
No
No
No
No
TCS
No
No
No
No
Wipro
No
No
No
No
HCL Tech
No
No
No
No
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36