Thematic | May 2013

Technology

Economic Moat Series

who in Technology Creates Sustained wealth?

Ashish Chopra

Ashish.Chopra@MotilalOswal.com; +91 22 3982 5424

Siddharth Vora

Siddharth.Vora@MotilalOswal.com; +91 22 3982 5585

Economic Moat Thematic | Technology

Technology: who in Technology Creates Sustained wealth?

Page No.

Summary

..........................................................................................................................

3-4

BACKDROP: Economic Moat - Fountainhead of Wealth Creation

..................................

5

Applying Economic Moat Framework to Technology sector

......................................

6-8

Economic Moat: Management Strategy Perspectives

...............................................

9-19

Infosys: What could pay off? .................................................................. 10-12

Tech Mahindra + Mahindra Satyam = Large Tech EMC? ........................ 13-15

Wipro: Could focus on IT Services help emerge as an EMC? ................ 16-17

Tech Mahindra + Mahindra Satyam = Large Tech EMC? ........................ 18-19

Appendix

......................................................................................................................

20-23

Companies

....................................................................................................................

24-60

Tata Consultancy Services (TCS) ............................................................ 25-27

E-Clerx Services (ECLX) .......................................................................... 28-30

Tech Mahindra (TECHM) ........................................................................ 31-33

Infosys (INFO) ......................................................................................... 34-36

Wipro (WPRO) ........................................................................................ 37-39

HCL Technologies (HCLT) ....................................................................... 40-42

MindTree (MTCL) .................................................................................... 43-45

Hexaware (HEXW) .................................................................................. 46-48

Persistent Systems (PSYS) ...................................................................... 49-51

NIIT Technologies (NITEC) ...................................................................... 52-54

MphasiS (MPHL) ..................................................................................... 55-57

KPIT Cummins (KPIT) .............................................................................. 58-60

Other companies covered in this report:

Cognizant Technology Solutions (CTSH), CMC,

Infotech Enterprises (INFTC), Oracle Financial Services (OFSS)

Prices as on 11 May 2013

May 2013

2

Thematic

Technology

Who in Technology Creates Sustained wealth?

Applying the Economic Moat Framework to the Technology sector

We apply the Economic Moat Framework to the Technology sector. Key findings:



TCS, e-Clerx Services (ECLX) and Tech Mahindra (TECHM) emerge as Economic Moat

Companies (EMCs) in the Economic Moat Period (EMP) FY04-10.



EMCs in the EMP outperformed non-EMCs and benchmark indices over April 2010 -

March 2013 (FY11-13), conforming to our EMC hypothesis.



The current EMC set (EMCs from FY07-FY13) is the same as in FY10, implying that TCS,

ECLX and TECHM could continue to outperform.

Companies set

Tier-I

HCLT

INFO

TCS

WPRO

CTSH

Tier-II

CMC

ECLX

HEXW

INFTC

KPIT

MTCL

MPHL

NITEC

OFSS

PSYS

TECHM

Methodology and findings: TCS, ECLX and TECHM emerge as EMCs in EMP

FY04-10

We apply the Economic Moat Framework to the Technology sector. Our methodology

and findings are as follows:

Methodology:

We look at the number of years between FY04 and FY10 in which each

company under our consideration delivered an RoE greater than the weighted average

RoE for the segment. Companies outperforming the weighted average sector RoE in at

least six of the last seven years are classified as Economic Moat Companies (EMCs).

Findings:

Within Tier-I IT companies, we observe that TCS is the only company which

had sustained above-industry RoE for all the seven years during FY04-FY10. Among

the Tier-II IT companies, ECLX (seven years) and TECHM (six years) are the only two

companies that emerged as EMCs.

No. of years of RoE

outperformance (FY04-FY10)

Tier-I

HCLT

INFO

TCS

WPRO

CTSH

0

5

7

0

0

Tier-II

CMC

ECLX

HEXW

INFTC

KPIT

MTCL

MPHL

NITEC

OFSS

PSYS

TECHM

4

7

2

2

5

2

2

4

1

3

6

EMCs outperform non-EMCs and Benchmark over April 2010 - March 2013

True to the EMC hypothesis, TCS outperformed average Tier-I non-EMCs, BSE Sensex

and BSE IT during the period April 2010 - March 2013. Our Tier-II EMC portfolio (ECLX,

TECHM) too, outperformed the non-EMCs, BSE IT and BSE Sensex in perfect agreement

with our EMC hypothesis.

Portfolio of EMC stocks outperformed both non-EMCs and index returns

Re-based to 100

Re-based to 100

Current EMC set same as in FY10; expect continued outperformance

Current EMC set based on

FY07-13 RoE outperformance

Tier-I

Tier-II

TCS

ECLX

TECHM

Extending our EMC hypothesis to the period FY07-13, we observe that among Tier-I

IT companies, TCS continues to be the only EMC. Among the Tier-II IT companies too,

ECLX and TECHM continue to show above-industry RoE. This implies that the EMC

portfolio could continue to outperform in the following three-year period as well.

3

May 2013

Economic Moat Thematic | Technology

Economic Moat: Management Strategy Perspectives

We discuss how key strategic decisions by select companies could potentially

influence their Economic Moat.

INFO: Moat imperatives

Infosys: What could pay off? Payout | Pricing | Purchase | Portfolio

Despite having enjoyed superior margins over almost the entire period under

consideration, Infosys' failure to make the cut in the Tier-I EMCs is surprising. The

explanation for the same in one word is 'cash'. We summarize four key factors that

could potentially influence Infosys' Economic Moat, in the order of doability, in our

opinion : [1] Payout ratio, [2] Greater flexibility in Business IT Services, [3]

Acquisitions, and [4] Materialization of Infosys 3.0.

Significant scale

integration with SCS

post

Tech Mahindra + Mahindra Satyam = Large Tech EMC in the making?

While TECHM emerges as an EMC during EMP FY04-10 as well as the current period,

on an absolute basis, its stock has underperformed. We see the fundamentals further

solidified post its merger with Mahindra Satyam, and this could drive better stock

returns, going forward. Merger of TECHM with Mahindra Satyam (SCS) will derive

synergies from [1] De-risking of revenue profile from dependency on one vertical

(Telecom) and one client (BT), [2] Size - qualifying the company for large deals, [3]

Cross-selling of services, and [4] Opportunity to cut cost redundancies.

WPRO: Returns post de-

merger

RoCE (%)

FY11

FY12

Overall

Business

20.9

20.1

IT

Business

24.4

23.4

Wipro: Could focus on higher RoI IT Services help emerge as an EMC?

The demerger of non-IT business will improve RoCE of the business by over 3pp

and channelize focus on IT Services, the only operating business under the listed

entity. Wipro's growth has struggled to match peers, despite its restructuring for

the good. It has struggled to make the cut amid stiff competition in large

commoditized deals; improvement in the same is imperative for any strengthening

of its Economic Moat.

Overseas acquisitions

Acquirer

HCLT

INFO

TCS

Target

Axon

Lodestone

ALTI

Acquisitions and impact on Economic Moat: HCLT (Axon), Infosys

(Lodestone), TCS (ALTI)

Acquisition of Axon by HCLT helped it to scale up revenues in the Consulting and

Implementation Services segment significantly, thereby filling an offering gap and

making it a more relevant player in the 'change-the-business' (CTB) space.

Incrementally, the move helped to strengthen its moat. At Infosys, Lodestone's

productivity suggests offerings at the higher end of the value chain, which along

with access to marquee European clientele. However, the relative scale of the

acquisition is very small, and hence, falls short of having an Axon-like impact. Prima

facie, TCS' acquisition of ALTI seems to be driven by access to marquee clientele in

Continental Europe.

May 2013

4

Economic Moat Thematic | Technology

Please refer to our Thematic

Study dated 12 Dec 2012

BACKDROP: Economic Moat - Fountainhead of Wealth Creation

In the Motilal Oswal 17th Wealth Creation Study 2012, we studied the concept of

Economic Moat. We believe Economic Moats can prove to be Fountainheads of Wealth

Creation. Markets world over are replete with examples of how companies with

"Deep, Dangerous Moats" (read, Sustainable Competitive Advantage)

comprehensively outperform those without such moats, both in terms of financial

performance and stock returns.

In this report, we:

1. Summarize the key findings and conclusions of our Economic Moat study, and

2. Apply the Economic Moat methodology to the Technology sector to identify

Economic Moat Companies (EMCs), which we expect will outperform the markets

over the medium and long term.

What is an Economic Moat?

An Economic Moat protects a company's profits from being attacked by a combination

of multiple business forces. Traditional management theory terms such as "Sustainable

Competitive Advantage" or "Entry Barriers" essentially connote the idea of an

Economic Moat.

Porter's Five Forces of Industry:

Economic Moat helps a company sustain

superior profitability amidst these pulls

and pressures

Threat of new

entrants

Bargaining power

of suppliers

Rivalry

among

existing

competitors

Bargaining power

of buyers

Threat of

substitute

products or

services

Factors determining Economic Moat

A company's profitability and the strength of its Economic Moat are both determined

by the same set of factors: (1) Industry Structure, and (2) Company's Own Strategy.

Applying Economic Moat concept to investing

Investors can use the Economic Moat framework and actively seek out companies

with "Deep, Dangerous Moats", run by "Honest and Decent Leaders" (to use Buffett's

words). This way, investors can ensure that they continue to enjoy their share of the

"Gold" which the leaders make within the safety of their Moats.

For the Economic Moat methodology, please see Appendix on page 20. We adapt that

methodology to Technology sector companies. TCS emerges as the EMC among Tier-

Is; ECLX and TECHM are the EMCs among Tier-IIs.

May 2013

5

Economic Moat Thematic | Technology

Applying Economic Moat Framework to Technology sector

The idea of an economic moat refers to how likely a company is able to keep

competitors at bay for an extended period. We adapt that methodology to Technology

companies. The key precondition for applying the Economic Moat Framework is

homogeneity of businesses, including size and scale of operations to make them

comparable. We have, therefore, classified the companies into two groups - Tier-I

and Tier-II.

Keeping in mind the

requirement for

homogeneity of

businesses, we divide

the set of companies into

tier-I and tier-II

Companies set

Tier-I

HCLT

INFO

CTSH

TCS

WPRO

CMC

HEXW

KPIT

ECLX

OFSS

TECHM

Tier-II

MPHL

INFTC

MTCL

NITEC

PSYS

Identifying companies with Economic Moats

We consider FY04-10 (seven years) as our Economic Moat Period (EMP). In each of the

seven years, we compare company RoE with sector weighted RoE. Companies that

outperform the weighted sector RoE in at least six of the seven years are classified as

Economic Moat Companies (EMCs).

TCS' RoE in FY04 would

have been above

weighted average

sector RoE even after

including raised IPO

money in networth

Comparing individual company RoEs each year with aggregate segment RoE for that year (%)

FY04

FY05

FY06

FY07

FY08

FY09

FY10

No. of yrs

of RoE

outperformance

to sector

7

5

0

0

0

eClerx's RoE decline

from FY08 was on the

back of raising INR1b

through its IPO

Decline in TECHM's RoE

in FY10 followed the

company's acquisition of

Mahindra Satyam

TIER-I

TCS

116

INFO

41

WPRO

28

HCLT

26

CTSH

26

Aggregate RoE 42

TIER-II

CMC

32

ECLX

501

HEXW

10

INFTC

7

KPIT

49

MTCL

2

MPHL

15

NITEC

41

OFSS

21

PSYS

37

TECHM

26

Aggregate RoE 20

85

44

36

20

28

42

15

321

26

18

41

21

25

29

22

42

21

24

62

40

34

19

28

39

16

263

29

27

27

48

23

26

19

26

43

27

56

42

36

35

26

41

31

197

26

33

30

32

22

39

20

24

71

32

48

37

30

23

28

35

34

55

15

19

23

21

24

32

16

30

64

27

37

37

30

27

25

33

32

41

9

14

31

9

23

26

25

18

64

29

41

30

29

22

23

31

31

40

18

20

32

35

48

26

20

22

29

28

4

7

2

2

5

2

2

4

1

3

6

Source: MOSL



TCS the only Tier-I IT company with Economic Moat:

Back-testing the EMC

hypothesis for Tier-I IT companies, we observe that TCS is the only Tier-I company

that sustained above-industry RoE for all the seven years during FY04-10.

6

May 2013

Economic Moat Thematic | Technology



ECLX and TECHM make the cut among Tier-IIs:

Among the Tier-IIs, ECLX (seven

years) and TECHM (six years) are the only two companies that had above-industry

RoE for six years or more of the seven years between FY04 and FY10.

TCS emerges as EMC in the top-tier, TECHM and e-Clerx in tier-II

Source: MOSL

Testing the stock performance of EMCs

Stock performance of

EMCs (both tier-I and

tier-II portfolios) in 3-

year period after EMP

was better than non-EMC

portfolio, BSE Sensex

Index and sector Index

We observe the stock performance of EMCs in the three-year period post the EMP.

The findings conform to our hypothesis that investing in a portfolio of EMCs should

lead to sustained outperformance over benchmark indices across years, irrespective

of market conditions.

EMCs outperformed in both groups:

True to the EMC hypothesis, TCS outperformed

average Tier-I non-EMCs, BSE Sensex and BSE IT during the period April 2010-March

2013. Our Tier-II EMC portfolio (ECLX, TECHM) too, outperformed the non-EMCs, BSE

IT and BSE Sensex, conforming with our EMC hypothesis.

Portfolio of EMC stocks outperformed both non-EMCs and index returns

Re-based to 100

Re-based to 100

Source: MOSL

Identifying current EMCs

Current EMC set based on

FY07-13 RoE outperformance

Tier-I

Tier-II

TCS

ECLX

TECHM

Having back-tested the hypothesis for the period FY04-10, we apply the same

framework to the 7-year period FY07-13 to identify the current EMCs.



TCS continues to be the only Tier-I IT company with Economic Moat:

Further

extending our EMC hypothesis to the period FY07-13, we find that among Tier-I IT

companies, TCS continues to be the only company that achieved above-industry

RoE in all the seven years. It is, thus, the only Tier-I company that can be expected

to outperform non-EMCs, BSE IT and BSE Sensex returns in the coming three years.

7

May 2013

Economic Moat Thematic | Technology



ECLX and TECHM continue to stay ahead of the pack among Tier-IIs:

Among the

Tier-IIs, ECLX and TECHM continued to achieve above-industry RoE over FY07-13.

A portfolio of these two companies should continue to outperform non-EMCs,

BSE IT and BSE Sensex over the next three years.

FY07

FY08

FY09

FY10

FY11

FY12

FY13

No. of yrs

of RoE

outperformance

to sector

7

4

0

1

0

Shifting the period to FY07-13 to identify future outperformers (%)

TIER-I

TCS

56

INFO

42

WPRO

36

HCLT

35

CTSH

26

Aggregate RoE 41

Tier-II

CMC

31

ECLX

197

HEXW

26

INFTC

33

KPIT

30

MTCL

32

MPHL

22

NITEC

39

OFSS

20

PSYS

24

TECHM

71

Aggregate RoE 32

48

37

30

23

28

35

34

55

15

19

23

21

24

32

16

30

64

27

37

37

30

27

25

33

32

41

9

14

31

9

23

26

25

18

64

29

41

30

29

22

23

31

31

40

18

20

32

35

48

26

20

22

29

28

42

28

26

24

24

30

31

60

8

14

19

14

39

27

23

20

31

26

39

29

23

28

23

29

20

55

27

15

22

25

23

23

16

18

30

22

41

27

24

35

24

30

28

46

30

19

21

29

19

22

16

21

26

22

5

7

2

2

5

1

1

3

0

3

7

Source: MOSL

No change in the current EMC set

Source: MOSL

Implication

Expect portfolio of TCS in

tier-I and portfolio of

ECLX and TECHM in tier-II

to outperform in 3 year

period going forward

The analysis above suggests that over the next three years, TCS should continue

to outperform the collective portfolio of Tier-I IT stocks excluding itself, and also

the BSE Sensex.



Among Tier-II IT stocks, a portfolio consisting of ECLX and TECHM should

outperform the collective portfolio of other Tier-II IT stocks and also the BSE

Sensex over the next three years.



8

May 2013

Economic Moat Thematic | Technology

Economic Moat: Management Strategy Perspectives

We discuss how key strategic decisions by select companies could potentially

influence their Economic Moat.In this report, we limit our scope of discussion to the

following:

Infosys: What could payoff? Payout | Pricing | Purchase | Portfolio

We assess the factors at

Infosys in order of their

do-ability in our opinion

We summarize 4 key factors that could potentially influence Infosys' economic moat:



Increase in payout ratio



Greater pricing flexibility



Acquisitions of multiple companies



Change in business mix in favor of PPS - materialization of Infosys 3.0

Tech Mahindra + Mahindra Satyam = A new large Tech EMC in the making?

TECHM was already an

EMC, but at the individual

level, its stock has

underperformed, which

may change going

forward

We discuss the scope of further strengthening of TECHM's economic moat post the

acquisition of Mahindra Satyam, from potential merger synergies:



Economies of scale of a larger entity - qualification in large TCV bids



De-risking over dependence on one client: BT



De-risking over dependence on one vertical: Telecom



A more balanced geographic profile



Cost synergies from removing redundancies



Cross sell of services to clients

Wipro demerger - Could the focus on higher ROI IT Services business be a

trigger to it becoming an EMC?

De-merger improves

Wipro's stated RoE in the

listed business, but does

it improve its Moat?

The de-merger of non-IT business will improve RoCE of the business by over 3pp

and channelize focus on the IT Services, the only operating business under the

listed entity Wipro Ltd. Is it sufficient to make it an EMC?



Wipro's restructuring was a welcome one, but growth remains elusive - growth

revival remains imperative to strengthening of its moat.



Acquisitions & their impact on Economic Moat - HCL Tech (Axon), Infosys

(Lodestone), TCS (ALTI)

Acquisition of Axon by HCL Tech helped it scale up revenues in the consulting and

implementation services segment significantly, thereby filling an offering gap and

making it a more relevant player in the 'change-the-business' space (CTB). At Infosys

and TCS, the relative sizes of acquired entities are much smaller, but could these

have an Axon-like impact?

May 2013

9

Economic Moat Thematic | Technology

STRATEGY

Case Study #1

Infosys: What could pay off?

Payout | Pricing | Purchase | Portfolio





Despite having enjoyed superior margins over almost the entire period under

consideration, Infosys' failure to make the cut in the Tier-I EMCs is surprising. The

explanation for the same in one word is 'cash'.

We summarize four key factors that could potentially influence Infosys' Economic Moat:

[1] Payout ratio, [2] Greater flexibility in Business IT Services, [3] Acquisitions, and [4]

Materialization of Infosys 3.0.

Reason for Infosys not figuring among EMCs = Cash

We don't consider

operational RoE to

identify EMC because of

the longevity of duration

considered as EMP in our

study

Infosys' huge pile of unutilized cash reserves has been suppressing its reported RoE

for years. When we compare its operating RoE with TCS' (the only Tier-I EMC), we find

that Infosys has matched/bettered TCS in five of the seven years over FY07-13. This

compares with just one, when we consider reported RoE.

Operationally, INFO's RoE bettered TCS' in five out of last seven years

Source: Company, MOSL

Four factors that could influence Infosys' Economic Moat

Infosys' acute conservatism towards cash utilization has been the primary factor

holding it back. Besides, there have also been concerns around growth in the last

couple of years, raising suspicions of market share loss. We highlight four potential

factors that could influence its Economic Moat, in the order of their ease of doability,

as per our opinion:

Infosys: Economic Moat imperatives

Payout and Purchase may

sound counter-balancing

factors, but that is not the

case (explained later)

May 2013

10

Economic Moat Thematic | Technology

1. Uptick in payout ratio

This is a low-hanging fruit. Over FY06-13, Infosys' aggregate payout ratio stands at

30%, 6pp lower than TCS' 36%.

Lower payout ratio at Infosys has hurt returns, valuations

Source: Company, MOSL

Had Infosys paid out 50% in each of these years (v/s average of 30% in the last eight

years), its return ratios would have compared as follows:

Difference between RoEs if INFO's payout ratio had been 50% every year

Infosys' average RoE over

FY07-13 would have been

~6pp higher had the

company's payout ratio

been 50% during this

period

Source: Company, MOSL

This would have sufficed to push the company into the EMC league. The cash balance

following 50% payout each year, at the end of FY13 would have been ~USD2.7b,

suggesting that Infosys would have been still have enough left in its kitty for

acquisitions. Higher payout would not conflict with the second imperative.

2. Acquisitions

Cash is more strategic now than ever before, given the management's own admission

that aggressive scale-up in segments like Products / Platforms / Solutions (PPS) will

be a function of multiple acquisitions. However, we are yet to see the management

taking bold inorganic growth decisions. It acquisition of low-margin Lodestone is a

small first step and many more will have to follow to achieve the desired momentum

and scale. Also, this, as explained above, should not conflict with the practice of

higher payout, and both can co-exist to collectively strengthen Infosys' moat.

May 2013

11

Economic Moat Thematic | Technology

3. Increased flexibility in Business IT services

Infosys' lower growth and potential danger of market share loss in a weak environment

prompted the management to become more flexible in pricing in the commoditized

BITS segment (which contributed 63% of its revenues) in FY13. Given increasing

competition, we expect Infosys' pricing flexibility to extend to new business in BITS,

which may be margin dilutive but would add to absolute operating profits. Also,

given limited capital investments, there need not be corresponding increase in net

worth in the same proportion, thereby boosting the RoEs. We see this already in

action at the company, with the pricing in FY13 having seen a significant drop, resulting

in lower margins.

Decline in offshore pricing has driven lower margins in FY13, along with declining revenue growth

Offshore per capita productivity (USD per manmonth)

Source: Company, MOSL

PPS contributed 5.3% of

INFO's revenues in FY11,

which was nearly

unchanged at 5.8% in

FY13

4. Materialization of Infosys 3.0

We believe that the formulation of Infosys 3.0 was a step in the right direction. Infosys

has been thinking ahead of competition in identifying the trends that may shape the

industry and is positioning itself to take advantage of these trends early. However,

two years into the same, the proportion of revenue from PPS has remained flattish.

Partly, the performance is also attributed to weakening discretionary spending during

this period. Improvement in Infosys' Consulting & Systems Integration (CSI) and PPS

segment performance will be key to a turnaround in growth, and utilization of high-

end resources will also drive benefits from high operating leverage.

Revenue contribution from PPS yet to pick up, two years since the onset of Infosys 3.0

Source: Company, MOSL

May 2013

12

Economic Moat Thematic | Technology

STRATEGY

Case Study #2

Tech Mahindra + Mahindra Satyam = Large Tech EMC?

Potential synergies - diversification, size, cross-selling and scale





While TECHM emerges as an EMC during EMP FY04-10 as well as the current period, on an

absolute basis, its stock has underperformed. We see the fundamentals further solidified

post its merger with Mahindra Satyam, and this could drive better stock returns, going forward.

Merger of TECHM with Mahindra Satyam (SCS) will derive synergies from [1] De-risking of

revenue profile from over dependency on one vertical (Telecom) and one client (BT), [2]

Size - qualifying the company for large deals, [3] Cross-selling of services, and [4] Opportunity

to cut cost redundancies.

Please refer to our Update

dated 22 February 2013

Merger with Mahindra Satyam to yield multiple benefits

While TECHM emerges as an EMC during EMP FY04-10 as well as the current period, on

an absolute basis, its stock has underperformed. We see the fundamentals further

solidified post its merger with Mahindra Satyam (SCS), and this could drive better

stock returns, going forward. We expect synergies on at least four counts.

1. De-risking business profile through diversification

The combined entity will see a more balanced geography-wise revenue spread and

reduction in dependence on top accounts. This bodes well for the risk profile in the

long run. Geographically, TECHM derives a significant proportion of its revenues from

Europe, while Mahindra Satyam's business is highly focused on the Americas. The

amalgamated entity will have more balanced revenue contribution from three key

geographies - Americas, Europe and Rest of the World.

Secondly, despite contraction in absolute revenues from BT, the client continues to

constitute ~1/3d of TECHM's revenues. That dependency will decline to 12% post

merger with SCS, after considering revenues from the acquisition of HGS, Comviva

and Complex IT. Contribution from top-10 clients will fall from 77% to 57%.

Well balanced geographic exposure

Source: Company

13

May 2013

Economic Moat Thematic | Technology

Dependence on top client to reduce significantly post integration

BT is becoming

increasingly irrelevant in

TECHM's overall scheme

of things

To come down to 12% after

factoring acquisitions

Source: Company

Qualification in higher

TCV deals has been a key

synergy visible thus far

2. Qualification of larger entity for much higher deal TCVs

While the environment may not be supportive of signing higher number of large

deals, SCS' turnaround has TECHM-SCS in good stead. The management has cited

marked improvement in invitations for larger opportunities. Earlier, the company

faced challenges in getting invited for USD30m-USD50m deals, but that has changed

now, with many invitations for deals upwards of USD50m each. The company has

already won ~USD60m business as a combined entity.

Additionally, clients that had left SCS during the uncertain times have started returning

to the TECHM-SCS fold. Clients that had imposed embargos on awarding fresh projects

to SCS have since revoked their decisions. This lends confidence on the prospects of

abating impact of the scandal-tainted Raju regime, in terms of winning new clients.

Significant scale post integration to qualify merged entity for much larger deals

Source: Company, MOSL

May 2013

14

Economic Moat Thematic | Technology

3. Facilitate revenue growth through cross-selling of services

TECHM's offerings and expertise have been mainly in services like ADM, BPO, Network,

ITO and Security. Integration with SCS gives it the ability to offer a wider range of

offerings like Enterprise Services and Engineering Services. Conversely, there are

services at TECHM, expertise in which would be salable to clients at SCS.

Working directly with companies in the Telecom domain has forced TECHM to

continuously build capabilities in areas like Mobility, Collaboration and Cloud

Computing. Offerings in these areas are not restricted to the Telecom vertical alone

and will find demand in other verticals addressed by SCS.

Shared Services - Shared Infrastructure

Telecom

Manufacturing

BFSI

There have already been

cases of successful cross

sell post TECHM's SCS

acquisition (~USD60m)

Cloud Services

Enterprise Mobility

Technology and Media

Retail, T&L

Security Solutions

Healthcare & Life Science

Managed Services

BPO

Shared Services

Shared Infrastructure

Source: Company

Enterprise Solutions

4. Benefits of scale - cost cutting and better opportunities

We expect the combined entity's revenues to be USD2.7b in FY13 and USD3.02b in

FY14. Apart from the larger entity's scale benefits (like much matured ADM practice),

yielding the combined entity invitations / qualifications / opportunities in much larger

bids, the merger will create some synergies on the cost front as well, with the company

able to do away with redundancies in processes, facilities, etc.

Combined entity Snapshot

FY10

USD Revenue (m)

YoY (%)

Revenue (INR b)

YoY (%)

EBITDA

Margin (%)

PAT (INR b)

YoY (%)

Margin (%)

EPS (INR)

2,027

101

17

16.7

8

8.3

40

FY11

2,191

8.1

100

-1.2

14

14.5

11

26.6

10.6

51

FY12

2,464

12.4

119

19.0

19

16.3

18

65.4

14.8

85

FY13E

2,654

7.7

145

21.8

30

21.0

20

12.3

13.6

95

FY14E

FY15E

3,024

3,330

13.9

10.1

163

176

12.8

8.1

32

32

19.7

17.9

21

23

4.4

11.4

12.6

13.0

99

111

Source: Company, MOSL

May 2013

15

Economic Moat Thematic | Technology

STRATEGY

Case Study #3

Wipro: Could focus on IT Services help emerge as an EMC?

Non-IT demerger to improve RoCE, but bridging growth gap also essential





The demerger of non-IT business will improve RoCE of the business by over 3pp and channelize

focus on IT Services, the only operating business under the listed entity.

Wipro’s growth has struggled to match peers, despite its restructuring for the good. It has

struggled to make the cut amid stiff competition in large commoditized deals; improvement

in the same is imperative for any strengthening of its Economic Moat.

Demerger of non-IT business positive in multiple respects

De-merger is only the

first step towards many

that are needed to

strengthen WPRO's

economic moat

In November 2012, Wipro’s Board approved the demerger of Wipro Consumer Care

and Lighting (including Furniture business), Wipro Infrastructure Engineering

(Hydraulics and Water businesses), and Medical Diagnostic Products and Services

businesses into a separate company to be named Wipro Enterprises Limited (WEL).

We believe that the demerger of non-IT business was long overdue, and is positive in

multiple respects: [1] Will improve RoCE of the IT Services business by over 3pp (after

proportionately allocating reconciling items, RoCE would have been 24.4% / 23.4% in

FY11 / FY12, +3.5pp / 3.2pp), and [2] Channelize focus on IT Services, the only operating

business under the listed entity, Wipro Limited.

However, bridging growth gap also essential

Wipro’s growth has struggled to match peers’, despite its efforts. While there are

lead indicators like client additions and improvement in mining of top accounts, win

rates remain a problem amid quarters of decent deal wins. Guidance for 1QFY14 came

below our expectations, and the best the company has managed in the past five

quarters is growth at the mid-point of its guidance, and that too only once. While the

demerger will improve return ratios, Wipro has struggled to make the cut amid stiff

competition in large commoditized deals.

Returns better in IT services as compared to overall business before demerger

IT

Business

FY11

FY12

118

140

42.8

43.8

81.8

226

55,016

24.4

81.8

261

61,052

23.4

Consumer care

& Lighting

FY11

FY12

20

22

7.3

6.8

13.9

38

3,450

9.0

12.7

41

3,956

9.7

Others

FY11

6

2.2

4.3

12

-97

-0.8

FY12

9

2.9

5.5

18

110

0.6

Reconciling

items

FY11

FY12

132

148

47.7

46.4

Total

FY11

276

100.0

FY12

319

100.0

Capital employed (INR b)

Capital employed share (%)

Share after distributing reconciling

item proportionately (%)

Adjusted capital employed (INR b)

Segmental EBIT (INR m)

RoCE (%)

276

319

57,668 64,013

20.9

20.1

Source: Company, MOSL

Better equipped for growth post restructuring

Post restructuring, Wipro has put right multiple factors that were restricting growth.

In the last five quarters, its SGA investments have increased by 170bp. Utilization has

declined 900bp in 13 quarters; and the bench will help cater to any increase in demand.

Client mining has improved – the number of USD100m+ clients is up from 1 to 10 in

two years. We believe that revenue growth should improve, going forward, on the

May 2013

16

Economic Moat Thematic | Technology

back of: (1) Some improvement in deal closure in 2Q and 3QFY13, and (2) Bottoming

out of some of the weak areas like Hi-Tech and India based IMS business. The company

has continued to invest even in the lean period to ensure it is growth ready this time

around. As growth returns, utilization will be a key margin lever and will drive better

returns.

Investments in SGA have increased; will remain high, as Wipro continues to chase growth

Higher investments,

lower utilization

substantiate WPRO's

growth readiness

Utilization at historic low, implying growth readiness; growth could drive up margins

Impetus on mining reflected in increase in USD100m+ client bucket

Successful mining of top

accounts has eluded

growth revival

Source: Company, MOSL

Strengthening of Wipro's Economic Moat will require not only better revenue growth,

but also improvement in profitability from current levels to boost returns. While

growth will partially drive better margins, efficiency-driven gains too, are imperative.

May 2013

17

Economic Moat Thematic | Technology

STRATEGY

Case Study #4

Acquisitions and impact on Economic Moat

Covering HCLT (Axon), Infosys (Lodestone), TCS (ALTI)







Acquisition of Axon by HCLT helped it to scale up revenues in the Consulting and

Implementation Services segment significantly, thereby filling an offering gap and making it a

more relevant player in the ‘change-the-business’ (CTB) space. Incrementally, the move helped

to strengthen its moat.

At Infosys, Lodestone’s productivity suggests offerings at the higher end of the value chain,

along with access to marquee European clientele, but a relatively smaller scale rules out an

Axon-like impact.

Prima facie, TCS’ acquisition of ALTI seems to be driven by access to marquee clientele in

Continental Europe over anything else.

Acquisitions – a strategic imperative

Activity on the ground

has gone up on the

inorganic front, expect it

to increase going forward

Acquisitions have been a strategic imperative for most IT companies, but transactions

have been few and far. With rapid changes in demand trends within the sector, there

has been some action on the ground in the recent quarters. We try to assess these in

the context of Economic Moat and discuss the potential impact of recent acquisition

of Lodestone by Infosys and ALTI by TCS, v/s that of Axon by HCL Tech a few years ago.

1. Axon by HCLT:

Axon had a large blueprint in Consulting Services and

Implementation Services, with only ~12% of revenue from Operations (at the

time of acquisition) v/s 50% of revenue from the HCL service pack, which offered

immediate opportunity to cross-sell Operations Services to Axon customers. HCLT

has enhanced its change-the-business (CTB) portfolio significantly, and the

successful cross-selling of multiple services has helped it to increase the number

of USD50m+ clients from three in 1QFY09 to 10 by 3QFY12.

Large deal prowess at HCLT enchanced by adding Consulting capability following Axon acquisition

Source: Company, MOSL

2. Lodestone by Infosys:

The acquisition of Lodestone is similar in its nature of

capabilities to HCLT’s Axon acquisition, adding 750 SAP consultants and scaling up

Infosys’ operations in Continental Europe. Ability to offer services at the higher

end of the value chain and grow Lodestone’s marquee clientele through cross-

selling of services are key synergies. However, unlike HCLT, Infosys already had a

large SAP consulting practice (albeit with lower productivity); hence, it has a much

lower impact on margins. However, the higher-end nature of Lodestone’s activities

May 2013

18

Economic Moat Thematic | Technology

could fill some void in Infosys’ Consulting capabilities. Also, like in the case of

HCLT, there is significant potential to add to its list of clients in the higher revenue

buckets through cross-selling.

Consulting/SI has been a fairly large practice for Infosys even before the Lodestone acquisition

Could the acquisition help increase USD50m+ accounts for Infosys, a stagnant metric over the

past few quarters

Source: Company, MOSL

3. ALTI by TCS:

TCS’ ALTI acquisition was at a much smaller scale, with the intent

being access to marquee clientele within Continental Europe rather than filling

any offering gap. Unlike Lodestone, the productivity at ALTI is similar to that at

onsite for Indian IT vendors.

The company is regarded as one of the top 5 System Integrators of Enterprise

Solutions. Primarily, the acquisition gives TCS access to blue-chip French and

European clients across multiple verticals like BFSI, Manufacturing and Utilities.

France is the third largest IT Services market in Europe, estimated to be EUR30b+

(~USD40b+), after UK and Germany, and the acquisition is expected to help TCS

accelerate growth in France with an expanded set of Services. The trend of

Continental Europe gradually opening up to outsourcing and offshoring has been

increasingly visible in the last few quarters, as a result of which expanding reach

in the geography has been a key imperative for the industry.

May 2013

19

Economic Moat Thematic | Technology

Appendix

Economic Moat – Fountainhead of Wealth Creation

“(Great companies to invest are like) Wonderful castles, surrounded by deep, dangerous

moats where the leader inside is an honest and decent person … the moat is permanent

and acts as a powerful deterrent to those considering an attack … Roughly translated,

we like great companies with dominant positions, whose franchise is hard to duplicate

and has tremendous staying power or some permanence to it.”

– Warren Buffett

In the Motilal Oswal 17th Wealth Creation Study 2012, we studied the concept of

Economic Moat. We believe Economic Moats can prove to be Fountainheads of Wealth

Creation. Markets world over are replete with examples of how companies with

“Deep, Dangerous Moats” (read, Sustainable Competitive Advantage)

comprehensively outperform those without such moats, both in terms of financial

performance and stock returns.

What is an Economic Moat?

The concept of “Economic Moat” has its roots in the idea of a traditional moat. A moat

is a deep, wide trench, usually filled with water, which surrounds the rampart of a

castle or fortified place. In many cases, the waters are also infested with sharks and

crocodiles to further keep enemies at bay, and the inhabitants safe.

Akin to a moat, an Economic Moat protects a company’s profits from being attacked

by a combination of multiple business forces. Traditional management theory terms

such as “Sustainable Competitive Advantage” or “Entry Barriers” essentially connote

the idea of an Economic Moat.

Porter's Five Forces of Industry:

Economic Moat helps a company sustain

superior profitability amidst these pulls

and pressures

Threat of new

entrants

Bargaining power

of suppliers

Rivalry

among

existing

competitors

Bargaining power

of buyers

Threat of

substitute

products or

services

“The idea of an economic moat refers to how likely a company is able to keep

competitors at bay for an extended period. One of the keys to finding superior long-

term investments is buying companies that will be able to stay one step ahead of

their competitors.”

– MorningStar, a US-based investment firm, which manages a Wide Moat Focus Index

May 2013

20

Economic Moat Thematic | Technology

Factors determining Economic Moat

Interestingly, a company’s profitability and the strength of its Economic Moat are

both determined by the same set of factors: (1) Industry Structure, and (2) Company’s

Own Strategy.

“Why are some companies more profitable than others? … The answer has two

parts. First, companies benefit from (or are hurt by) the structure of their industry.

Second, a company’s relative position within its industry can account for even more

of the difference.”

– Joan Magretta in her book Understanding Michael Porter

Examples of how industry factors which affect moat

Industry factor

1. Bargaining

power with

customers

2. Bargaining

power with

suppliers

Examples of favorably placed



Computer chip industry

(duopoly)



OPEC (global bargaining

power)



Auto OEMs (buy from small

parts suppliers)



Large consumer and retail

companies e.g. Walmart

3. Entry barriers



Indian banking (due to

licensing restrictions)



Industries with large capital

outlays and gestation period

such as Oil & Gas, Power,

Petrochemicals, Hotels, etc



Indian cigarettes industry

(no new entrant, whether

local or global)



Government ruling on

mandatory digitization is

highly favorable for Indian

TV industry

Examples of unfavorably

placed



Auto ancillaries (supplies to

large OEMs)



Unorganized sector



Auto ancillaries (purchase

from metals majors)



Plastic processors (purchase

from petchem giants)



Glass bottles industry

(threat of plastic bottles)



Internet-based businesses



Business without

specialized skill-sets e.g.

general manufacturing,

travel agency, etc

4. Government

policy



Many Indian power

generation companies

operate on regulated return

on capital.



The Indian government's

new Drug Pricing Control

Order is likely to regulate

selling prices of several

drugs, affecting the

Healthcare sector

May 2013

21

Economic Moat Thematic | Technology

Company's strategic issues which affect moat

Positive impact



Strong brand and/or lowest cost



High focus on core competence

Negative impact



No unique competitive advantage



Diversification into unrelated businesses

and/or new geographies



Scale and continuity through



Attempt to achieve scale through large

innovation, steady capacity expansion

acquisitions, whether domestic or global



High level of ethics and compliance



Lapses in corporate governance by way

with the law of the land

of unethical or illegal business practices



Balanced approach towards all



Excessive focus on shareholders, and

stakeholders – customers, employees,

that too the majority owner-

shareholders, and society at large

shareholders

Applying Economic Moat concept to investing

Investors can use the Economic Moat framework and actively seek out companies

with “Deep, Dangerous Moats”, run by “Honest and Decent Leaders” (to use Buffett’s

words). This way, investors can ensure that they continue to enjoy their share of the

“Gold” which the leaders make within the safety of their Moats.

Economic Moat – Backtesting methodology

We backtested our Economic Moat hypothesis over the 10 years between 2004 and

2013. We present the key steps and nuances in our methodology.

Step 1: The Economic Moat hypothesis

Investing in a portfolio of Economic Moat Companies (EMCs) should lead to sustained

outperformance over benchmark indices across years, irrespective of market

conditions.

Step 2: Establishing criteria for Economic Moat

This was the key challenge for our backtesting, as Economic Moat is a highly qualitative

concept, not easily reducible to numbers. So, in deciding our final methodology, we

applied two key principles of Economic Moat:

1. A company’s Economic Moat needs to ultimately reflect in its financials, with

return on investment significantly superior to peers.

2. An Economic Moat is not about being the best or the biggest or even the most

profitable, but about being unique.

We applied these principles as follows:



Economic Moat Period (EMP):

To adapt the methodology for Technology sector

companies we had to deal with the limitation of financial history being available

for few companies 2003 onwards. Accordingly, we fixed the price performance

period as 2010-2013. This price performance period implied that we identify EMCs

as at the end of the financial year 2010 (12 months ending March 2010), and observe

their subsequent equity returns. For this purpose, our EMP was the 7-year period

from 2004 to 2010.

May 2013

22

Economic Moat Thematic | Technology

Economic Moat Universe (EMU) - Technology:

We shortlisted our EMU based on

three criteria: (1) Minimum financial history of seven years ending 2010, (2) scale

of operations and (3) From the shortlist given by (1) and (2), select as many

homogenous companies as possible. Our total EMU-Technology is 16 companies.

The noted exception to our EMU is Cognizant, a US-listed company whose business

model is similar to India-listed Tier-I technology companies and a majority of

whose employees work from India.



Whether EMC or not in 2010:

The idea of an Economic Moat refers to how likely a

company is able to keep competitors at bay for an extended period. We adapt

that methodology to Technology companies. The key precondition for applying

the Economic Moat Framework is homogeneity of businesses based on size and

scale of operations to make them comparable. We have, therefore, classified the

companies into two groups – Tier-I and Tier-II. We calculated the average defined

group RoE for each of the seven years 2004 to 2010. A company was termed as an

EMC if for at least six of the seven years, its RoE was higher than the industry

average.



Whether EMC or not in 2013:

We followed the above process for 2013 as well; the

EMP was seven years from 2007 to 2013.



Economic Moat framework findings

TCS emerges as EMC in the top-tier, TECHM and e-Clerx in tier-II

Portfolio of EMC stocks outperformed both non-EMCs and index returns

Source: MOSL

May 2013

23

Economic Moat Thematic | Technology

Companies

BSE Sensex: 20,122

S&P CNX: 6,107

11 May 2013

Company Name

EMCs

TCS

E-Clerx Services

Tech Mahindra

Non EMCs

Tier-I

Infosys

Wipro

HCL Technologies

Tier-II

MindTree

Hexaware

Persistent Systems

NIIT Technologies

MphasiS

KPIT Cummins

Pg.

25

28

31

34

37

40

43

46

49

52

55

58

May 2013

24

Technology

Tata Consultancy Services

BSE SENSEX

S&P CNX

20,122

6,107

CMP: INR1,488

TP: INR1,500

Neutral

Bloomberg

TCS IN

Equity Shares (m)

1,957.2

M.Cap. (INR b)/(USD b) 2,912/53

52-Week Range (INR) 1598/1176

1,6,12 Rel. Perf. (%)

-12/4/-2

Expect continued broad-based, leading growth

Valuations offer little room to surprise on the upside; Maintain Neutral







Valuation summary (INR b)

Y/E March

Sales

EBITDA

PAT

EPS (INR)

EPS Gr. (%)

RoE (%)

RoCE (%)

Payout (%)

Valuations

P/E (x)

P/BV (x)

Div. yield (%)

20.9

7.1

1.5

18.9

6.0

13.5

1.9

16.9

4.9

37.6

1.9

2013 2014E 2015E

629.9 721.3 809.7

180.9 206.5 228.1

139.4 154.1 172.5

71.2

31.0

37.8

43.8

30.9

78.7

10.5

34.3

41.0

36.8

88.1

11.9

31.8

37.6

32.9



Despite being India's largest IT Services company, TCS continues to grow at industry-

leading rates, defying any impact from a high base.

TCS has displayed exemplary cost aggression and execution in achieving EBIT margin

expansion from 23.7% in FY09 to 27% in FY13.

In USD terms, we expect TCS' revenue to grow at a CAGR of 15% and EPS at a CAGR of

11.2% over FY13-15, outperforming peers.

Current valuations build in the expected outperformance; maintain Neutral.

Continues to lead scale and growth in the sector

Despite being the largest IT Services company in India, with annual (LTM) revenue

of over USD11.6b, TCS has thus far defied any impact of scale on its business,

continuing to grow at industry-leading rates. The broad-based nature of the

company’s growth is even more notable – excluding products, no service line

grew below double digits YoY (in USD terms) and no vertical saw a decline in FY13.

The company’s outlook for FY14 remains bullish, not unlike its performance over

the last few years.

BV/Sh. (INR) 209.8 249.8 304.9

Impressive execution to aid margin expansion

TCS’ FY13 EBIT margin was 27%, its aspiration margin level. The company expects

to continue operating within a tight band. TCS displayed exemplary cost aggression

and execution in achieving EBIT margin expansion from 23.7% in FY09 to 27% in

FY13. Part of this was driven by increase in the proportion of offshore revenue

from 41.9% in FY08 to 49.4% in FY13.

EV/EBITDA (x) 15.7

Shareholding pattern %

As on

Mar-13 Dec-12 Mar-12

Promoter

74.0

74.0

74.0

Dom. Inst

5.4

6.4

7.2

Foreign

16.1

15.0

14.0

Others

4.5

4.6

4.8

INR appreciation could pose risk to margins

Despite the INR depreciating 19.4% vis-à-vis the USD in the last two years, TCS’

EBIT margin declined 80bp during the period. This is partly due to the fact that the

company took this opportunity to invest in regions with lower margins, which

otherwise would not have been the case. TCS’ overall margins may be at risk if

the INR appreciates, unless margins in invested regions improve significantly.

Stock performance (1 year)

Expect continued growth leadership, but outperformance factored in

In USD terms, we expect TCS’ revenue to grow at a CAGR of 15% and EPS at a CAGR

of 11.2% over FY13-15. The stock trades at 18.8x FY14E and 16.8x FY15E EPS. The

management’s outlook for FY14 remains positive and it allays any concerns around

the industry’s performance that emanated following Infosys’ results. While

4QFY13 results did not offer much for estimate upgrades, the management’s

outlook of a broad-based FY14 in every sense may hold the stock in good stead.

Even if we assume an EPS of INR80 in FY14, 20x FY14E EPS implies an upside of

9.6%, levels at which we see the stock peaking in the near term. We maintain our

Neutral

recommendation.

May 2013

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

Tax

Rate (%)

Eq. in earnings of affiliates

Minority Interest

PAT

Net Income

Change (%)

2011

373,245

24.3

198,505

62,848

111,892

30.0

7,990

5,247

109,149

21,203

19.4

-3

1,116

86,827

86,827

26.3

2012

488,938

31.0

258,773

85,988

144,177

29.5

9,036

4,041

139,182

31,688

22.8

0

1,110

106,384

106,384

22.5

2013

629,895

28.8

332,545

116,480

180,870

28.7

10,792

11,174

181,252

40,344

22.3

0

1,494

139,413

139,413

31.0

2014E

721,255

14.5

385,910

128,805

206,540

28.6

13,018

10,225

203,746

48,127

23.6

0

1,524

154,095

154,095

10.5

(INR Million)

2015E

809,705

12.3

441,431

140,182

228,092

28.2

14,730

11,648

225,010

51,022

22.7

0

1,524

172,464

172,464

11.9

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

Current Liab. & Prov

Current Liabilities

Net Current Assets

Misc. Expenses

Application of Funds

E: MOSL Estimates

2011

1,957

250,432

252,389

1,000

4,663

10,718

268,771

86,156

33,816

52,340

89,929

18,390

171,948

95,479

47,401

29,068

63,837

63,837

108,111

2

268,771

2012

1,957

323,276

325,233

1,000

5,276

12,306

343,815

107,400

42,852

64,548

110,269

0

237,173

137,469

34,617

65,087

68,175

68,175

168,998

2

343,815

2013

1,957

407,603

409,560

1,000

6,561

15,089

432,209

135,587

53,644

81,944

113,021

9,832

315,939

172,366

78,118

65,455

88,526

88,526

227,413

2

432,209

2014E

1,957

485,934

487,891

1,000

6,561

17,068

512,519

159,512

66,662

92,850

121,723

9,832

409,807

198,045

136,908

74,854

121,693

121,693

288,114

2

512,519

(INR Million)

2015E

1,957

593,747

595,704

1,000

6,561

19,102

622,366

178,082

81,392

96,690

129,459

9,832

524,842

223,609

216,717

84,517

138,456

138,456

386,386

2

622,366

May 2013

26

Tata Consultancy Services

Financials and Valuation

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

2011

44.4

48.4

129.5

14.0

31.6

2012

54.4

59.0

166.7

25.0

46.0

2013

71.2

76.7

209.8

22.0

30.9

2014E

78.7

85.4

249.8

29.0

36.8

2015E

88.1

95.6

304.9

29.0

32.9

20.9

19.4

15.7

4.5

7.1

1.5

18.9

17.4

13.5

3.9

6.0

1.9

16.9

15.6

11.9

3.3

4.9

1.9

37.4

42.2

36.7

44.1

37.8

43.8

34.3

41.0

31.8

37.6

Turnover Ratios

Debtors (Days)

81

87

Fixed Asset Turnover (x)

7.9

8.4

* 1:1 bonus in FY07, accordingly ratios are adjusted

90

8.6

94

8.3

95

8.5

Cash Flow Statement

Y/E March

CF from Operations

Cash for Working Capital

Net Operating CF

Net Purchase of FA

Net Purchase of Invest.

Net Cash from Invest.

Proc. from equity issues

Proceeds from LTB/STB

Dividend Payments

Cash Flow from Fin.

Free Cash Flow

Net Cash Flow

Opening Cash Bal.

Add: Net Cash

Closing Cash Bal.

E: MOSL Estimates

2011

94,817

18,165

112,982

-53,633

19,409

-34,224

-11,155

1,608

-32,058

-41,604

59,349

37,153

10,249

37,153

47,402

2012

115,420

-73,671

41,748

-41,584

18,390

-23,193

24,319

1,588

-57,246

-31,339

165

-12,784

47,402

-12,784

34,618

2013

150,205

-14,913

135,292

-30,940

-9,832

-40,772

-3,425

2,783

-50,377

-51,019

104,352

43,501

34,618

43,501

78,119

2014E

167,113

-1,912

165,202

-33,171

0

-33,171

-9,789

1,979

-66,406

-74,216

132,031

57,815

78,119

57,815

136,910

(INR Million)

2015E

187,194

-18,463

168,730

-26,850

0

-26,850

0

2,034

-66,406

-64,372

141,881

77,509

136,910

77,509

216,718

May 2013

27

Technology

E-Clerx Services

BSE SENSEX

S&P CNX

20,122

6,107

CMP: INR613

Not Rated

Bloomberg

ECLX IN

Equity Shares (m)

29.6

M.Cap. (INR b)/(USD b) 18.1/1.0

52-Week Range (INR) 900/570

1,6,12 Rel. Perf. (%) -19/-13/-40

Impressive financial track record

Soft outlook on near-term growth







eClerx Services (ECLX) provides Data Analytics and Customized Process Solutions to

global enterprise clients from offshore delivery centers in India.

ECLX's revenue/earnings grew at a CAGR of 32%/29% over FY08-12, with average

EBITDA margin at 36.6%. Its average dividend payout ratio during the period was 45%.

The company has stated goals of margins in mid-30s and utilization of 68-70%.

Valuation summary (INR b)

Y/E March

Sales

EBITDA

PAT

EPS (INR)

EPS Gr. (%)

BV/Sh. (INR)

RoE (%)

RoCE (%)

Payout (%)

Valuation

P/E (x)

P/BV (x)

EV/EBITDA (x)

Div yld (%)

2010

2.6

0.8

0.7

35.2

17.7

97.1

39.8

44.6

49.7

14.2

4.8

10.3

3.5

2011

2012

3.4

4.7

1.2

1.9

1.3

1.6

37.5 51.3

6.4 37.0

67.5 109.1

54.7 55.3

61.8 67.8

60.1 34.1

17.2

8.0

11.9

3.5

14.4

6.4

9.5

2.4

A data analytics and process solutions company

eClerx Services (ECLX) provides Data Analytics and Customized Process Solutions

to global enterprise clients from offshore delivery centers in India. It offers

services to clients in the Financial Services, Retail, Technology, Cable & Telecom

and Manufacturing industries. Its largest clients in terms of revenue contribution

include leading global corporations with multi-year partnerships.

Healthy financial track record

ECLX’s revenue/earnings grew at a CAGR of 32%/29% over FY08-12. This consistent

operational performance was in conjunction with average EBITDA margin of 36.6%.

Cash generation from operations (CFO) remains healthy and grew at 40% CAGR

during FY08-12, with 89% EBITDA converted to CFO. The company has maintained

an average dividend payout ratio of 45% over FY08-12.

Acquisition of Agilyst fitting well

Shareholding pattern %

As on

Mar-13 Dec-12 Mar-12

Promoter

53.3

53.8

54.8

Dom. Inst 14.5

13.5

12.4

Foreign

21.2

22.1

22.0

Others

11.1

10.6

10.8

Stock performance (1 year)

In April 2012, ECLX acquired 100% of Agilyst Inc, a closely-held US company in an

all-cash deal, which includes a substantial earnout component based on Agilyst’s

future performance. Agilyst’s services include Critical Error Identification,

Customer Experience Analysis and End-user Support Services. Agilyst has a low

cost delivery base in a Tier-2 city, employing ~1,000 people, mostly in India. It has

a business model similar to ECLX, and a strong foothold in the media industry in

the US with Fortune-100 clients. It also provides the necessary diversification to

ECLX revenues, a large proportion of which is contributed by Top-5 clients. The

acquisition has been EPS accretive from the first year itself.

Outlook of soft organic growth in the near term

The demand for ECLX’s services is triggered by three factors – low cost execution,

specialization and speed. Growth from Cable & Telecom is expected to continue,

with Agilyst acquisition. As far as pricing is concerned, the commentary is

optimistic. The management expects organic growth to be soft and QoQ volatilities

to increase. Going forward, the company has stated goals of margins in mid-30s,

DSO within 30-50 days and utilization of 68-70%. Client concentration from Top-5

clients has declined steadily to 78% from 86% in the last four quarters and the

trend should continue with more revenues from Agilyst.

May 2013

28

E-Clerx Services

Financials and Valuation

Income statement

Y/E March

Sales

Change (%)

Cost of services

EBITDA

% of Net Sales

Depreciation

Interest

Other Income

PBT

Tax

Rate (%)

Adjusted PAT

Extraordinary Items

Reported PAT

Change (%)

2008

1,170

35.8

692

478

40.8

44

3

65

495

55

11.1

440

0

440

10.3

2009

1,971

68.5

1,272

699

35.5

72

0

49

675

69

10.2

607

0

606

37.7

2010

2,570

30.4

1,743

828

32.2

69

0

54

814

88

10.8

726

3

723

19.2

2011

3,419

33.0

2,223

1,196

35.0

89

0

241

1,348

162

12.0

1,186

-112

1,298

79.5

(INR Million)

2012

4,725

38.2

2,868

1,857

39.3

126

0

223

1,954

384

19.6

1,571

-4

1,574

21.3

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Loans

Capital Employed

Gross Block

Less : Depreciation

Net Block

CWIP

Investments

Deferred tax assets

Curr. Assets

Debtors

Cash & Bank Balance

Loans & Advances

Other Current Assets

Current Liab. & Prov

Current Liabilities

Other liabilites

Provisions

Net Current Assets

Source: Company

2008

189

1,133

1,322

40

1,362

223

111

113

69

788

2

586

246

125

216

0

195

138

0

57

390

2009

189

1,462

1,652

0

1,652

377

179

198

0

985

7

941

451

189

301

0

480

235

0

245

462

2010

193

1,803

1,995

0

1,995

433

243

190

22

909

7

1,343

392

453

497

0

476

227

0

249

867

2011

289

2,050

2,339

0

2,339

625

329

296

65

286

7

2,842

659

1,493

630

60

1,157

250

25.1

882

1,686

2012

293

3,061

3,354

0

3,354

854

427

427

45

1,006

9

3,026

421

1,613

914

79

1,160

339

45.1

776

1,866

May 2013

29

E-Clerx Services

Financials and Valuation

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

Book Value

DPS

Payout % (excl.div.taxes)

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)

Leverage Ratio (x)

Debt/Equity Ratio(x)

2008

22.0

24

66.1

8.5

38.7

2009

29.9

33

81.5

12.5

41.8

2010

35.2

39

97.1

17.5

49.7

2011

37.5

40

67.5

22.5

60.1

2012

51.3

55

109.1

17.5

34.1

11.2

10.1

8.4

4.0

3.5

3.5

3.9

3.5

2.7

1.1

1.4

10.6

14.2

12.9

10.3

3.7

4.8

3.5

17.2

15.9

11.9

5.4

8.0

3.5

14.4

13.3

9.5

4.5

6.4

2.4

54.4

60.2

40.8

44.9

39.8

44.6

54.7

61.8

55.3

67.8

77

12.4

64

12.7

60

13.2

56

14.1

42

13.1

0.0

0.0

0.0

0.0

0.0

Cash Flow Statement

Y/E March

CF from Operations

Cash for Working Capital

Net Operating CF

Net Purchase of FA

Net Purchase of Invest.

Net Cash from Invest.

Proceeds from Equity

Proceeds from LTB/STB

Dividend Payments

Cash Flow from Fin.

Net Cash Flow

Opening Cash Bal.

Add: Net Cash

Closing Cash Bal.

Source: Company

2008

476

-172

303

-149

-775

-924

809

-30

-108

671

50

72

50

123

2009

631

-189

442

-89

-148

-238

0

-55

-85

-140

65

123

65

187

2010

728

-128

601

-83

130

48

5

-57

-333

-384

264

189

264

453

2011

1328

-313

1,015

-237

572

334

25

-48

-287

-310

1,039

453

1,039

1,493

(INR Million)

2012

1575

92

1,667

-241

-581

-823

34

-106

-652

-724

120

1,493

120

1,613

May 2013

30

Technology

Tech Mahindra

BSE SENSEX

S&P CNX

20,122

6,107

CMP: INR994

TP: INR1,211

Buy

Bloomberg

TECHM IN

Equity Shares (m)

127.8

M.Cap. (INR b)/(USD b) 127/2.3

52-Week Range (INR) 1,124/591

1,6,12 Rel. Perf. (%)

-9/-3/32

eMerging Stronger

Benefits from integration could drive next leg of re-rating; Buy







Valuation summary (INR b)

Y/E March

Sales

EBITDA

Adj. PAT

EPS Gr. (%)

RoE (%)

RoCE (%)

Payout (%)

Valuation

P/E (x)

P/BV (x)

EV/EBITDA (x)

Div. Yield (%)

10.8

2.4

8.6

0.5

10.0

1.9

8.3

0.6

8.6

1.6

7.9

0.8

2013E 2014E 2015E

67.9

13.9

12.1

30.2

22.7

21.7

5.5

76.0

14.4

13.1

8.4

21.8

19.7

6.0

79.6

14.0

15.2

16.1

20.6

19.4

6.9

Synergies of the merger of Tech Mahindra (TECHM) and Mahindra Satyam (SCS) go

beyond revenue de-risking and should drive higher growth.

SCS' turnaround has held TECHM-SCS in good stead; the company has already won

~USD60m business as a combined entity.

Better revenue growth opportunities following the integration of SCS along with

revenue de-risking will drive further re-rating; Buy.

Significant benefits from integration with Mahindra Satyam

Synergies of the merger of Tech Mahindra (TECHM) and Mahindra Satyam (SCS) go

beyond revenue de-risking and should drive higher revenue growth through: [1]

Cross-selling of services, [2] Higher scale (USD2.7b combined revenue in FY13),

facilitating qualifications in much larger bids, and [3] Removal of cost

redundancies, thereby enhancing earnings potential.

Adj. EPS (INR) 91.7

99.3 115.3

BV/Sh.(INR) 417.4 522.9 634.0

SCS: Dust settled; client mining to aid growth

Having addressed concerns around client/employee retention, legal battles and

profitability, SCS can now focus fully on growth. With revenue per client at

USD4.4m (annualized) ample growth potential exists from mining alone. Across

the top-tier, the metric ranges between USD6.5m and USD11.2m. Greater number

of invitations in USD50m+ TCV deals bode positively for its growth prospects.

Qualifying in increasing number of large TCV bids

Shareholding pattern %

As on

Mar-13 Dec-12 Mar-12

Promoter

47.4

47.5

70.8

Dom. Inst 16.0

20.1

14.8

Foreign

27.7

22.6

6.1

Others

8.9

9.9

8.3

While the environment may not be supportive of signing higher number of large

deals, SCS’ turnaround has held TECHM-SCS in good stead. The management has

cited marked improvement in invitations for larger opportunities. Earlier, the

company faced challenges in getting invited for USD30m-USD50m deals, but that

has changed now, with many invitations for deals upwards of USD50m each. The

company has already won ~USD60m business as a combined entity.

Impressive growth in Telecom business outside BT despite challenges

Stock performance (1 year)

Over FY08-12, non-BT revenue grew 19-23% in each year for the company. We see

drivers like large deals, emerging geographies, share gain in clients like AT&T,

and vendor consolidation continuing to fuel growth.

Benefits from integration could drive next leg of re-rating

TECHM trades at 9.8x FY14E and 8.6x FY15E EPS. We believe that better revenue

growth opportunities following the integration of SCS along with revenue de-

risking will drive further re-rating. We value TECHM at 25% discount to the target

multiple for HCLT, due to: [1] Relatively smaller scale, [2] Revenue skew towards

Telecom vertical, and [3] Increasing proportion of BPO revenues. Our target price

is INR1,211 (10.5x FY15E EPS). Maintain

Buy.

May 2013

31

Tech Mahindra

Financials and Valuation

Income statement

Y/E March

Sales

Change (%)

Total Expenses

EBITDA

% of Net Sales

Depreciation

Interest

Other Income

PBT

Tax

Rate (%)

PAT

Minority Interest & EO items

Share of associate's profits

PAT before EO

Change (%)

Effect of restructuring fees

PAT after RF before EO

Change (%)

Extraordinary Items (EO)

PAT after EO

Change (%)

2011

48,413

4.7

38,518

9,895

20.4

1,435

999

1,174

8,635

1,315

15.2

7,320

653

2,120

8,787

6.3

-1,695

7,092

7.4

630

7,722

15.5

2012

54,897

13.4

45,703

9,194

16.7

1,614

1,413

1,368

7,535

1,438

19.1

6,097

714

5,534

10,918

24.2

-1,618

9,299

31.1

679

9,978

29.2

2013E

67,877

23.6

53,941

13,937

20.5

1,935

1,060

-518

10,423

2,276

21.8

8,147

125

5,649

13,671

25.2

-1,563

12,107

30.2

0

12,107

21.3

2014E

76,010

12.0

61,575

14,435

19.0

2,118

1,170

700

11,846

2,916

24.6

8,930

234

5,691

14,387

5.2

-1,266

13,120

8.4

0

13,120

8.4

(INR Million)

2015E

79,642

4.8

65,660

13,983

17.6

2,190

1,030

1,907

12,670

3,041

24.0

9,629

264

5,866

15,231

5.9

0

15,231

16.1

0

15,231

16.1

Balance Sheet

Y/E March

Share Capital

Share Premium

Reserves

Net Worth

Minority Interest

Loans

Deferred Revenue

Capital Employed

Gross Block

Less : Depreciation

Net Block

CWIP

Investments

Deferred Tax Assets

Curr. Assets

Debtors

Cash & Bank Balance

Loans & Advances

Other Current Assets

Current Liab. & Prov

Creditors

Provisions

Net Current Assets

Application of Funds

May 2013

2011

1,260

2,374

29,881

33,514

159

12,227

5,837

51,737

12,783

6,613

6,170

1,105

29,080

638

23,455

12,468

2,666

8,315

6

8,711

5,631

3,080

14,744

51,737

2012

1,275

2,374

39,658

43,307

0

11,266

0

54,573

15,095

8,227

6,868

1,629

35,876

998

20,437

13,172

2,418

4,845

2

11,235

10,377

3,080

9,202

54,573

2013E

1,277

2,374

49,701

53,351

0

13,179

0

66,530

22,837

10,162

12,674

2,126

42,258

1,077

32,354

21,363

7,567

6,220

-2,797

23,958

10,009

13,949

14,576

66,530

2014E

1,275

2,374

63,190

66,839

5

11,861

0

78,705

25,337

12,281

13,056

1,500

34,950

1,077

49,091

20,970

13,210

13,055

1,857

20,970

9,815

11,155

28,122

78,705

(INR Million)

2015E

1,275

2,374

77,398

81,047

10

7,861

0

88,918

29,337

14,471

14,866

1,500

34,558

1,077

58,086

22,448

20,102

13,679

1,857

21,168

10,664

10,505

36,917

88,918

32

Tech Mahindra

Financials and Valuation

Ratios

Y/E March

Basic (INR)

EPS

Diluted 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

Turnover Ratios

Debtors (Days)

Fixed Asset Turnover (x)

Leverage Ratio

Debt/Equity Ratio(x)

2011

56.3

54.3

65.2

266.0

4.0

7.4

2012

72.9

70.4

82.6

339.7

4.0

5.7

2013E

94.7

91.7

106.3

417.4

5.0

5.5

2014E

102.6

99.3

115.4

522.9

6.0

6.0

2015E

119.2

115.3

131.9

634.0

8.0

6.9

14.1

12.0

14.1

2.4

2.9

0.4

10.8

9.3

8.6

1.8

2.4

0.5

10.0

8.6

8.3

1.6

1.9

0.6

8.6

7.5

7.9

1.4

1.6

0.8

24.8

18.5

26.0

21.4

22.7

21.7

21.8

19.7

20.6

19.4

86

4.0

85

3.9

93

3.6

102

3.2

99

2.9

0.4

0.3

0.2

0.2

0.1

Cash Flow Statement

Y/E March

CF from Operations

Change in Working Capital

Net Operating CF

Net Purchase of FA

Net Purchase of Invest.

Net Cash from Invest.

Inc./(Dec) in Equity & other

related items

Proceeds from LTB/STB

Dividend Payments

Cash Flow from Fin.

Free Cash Flow

Net Cash Flow

Opening Cash Balance

Add: Net Cash

Closing Cash Balance

E: MOSL Estimates

2011

15,717

-11,261

4,455

541

1,065

1,606

2012

3,692

7,778

11,470

-2,836

-6,796

-9,632

2013E

25,690

-9,506

16,184

-8,238

-1,082

-9,321

2014E

9,943

-7,022

2,921

-1,874

6,813

4,939

(INR Million)

2015E

16,974

-1,059

15,915

-4,000

0

-4,000

-3,548

-1,445

-590

-5,582

4,996

479

2,187

479

2,666

-528

-961

-597

-2,086

8,634

-248

2,666

-248

2,418

-2,879

1,913

-748

-1,714

7,945

5,149

2,418

5,149

7,567

-2

-1,318

-897

-2,217

1,046

5,642

7,567

5,642

13,210

0

-4,000

-1,023

-5,023

11,915

6,892

13,210

6,892

20,102

May 2013

33

Technology

Infosys

BSE SENSEX

S&P CNX

20,122

6,107

CMP: INR2,362

TP: INR2,720

Buy

Bloomberg

INFO IN

Equity Shares (m)

571.4

M.Cap. (INR b)/(USD b) 1,350/25

52-Week Range (INR) 3010/2102

1,6,12 Rel. Perf. (%)

-7/-8/-21

A bet on discretionary spend revival

Increasing flexibility to revive growth; Infosys 3.0 yet to pay off







Infosys has been thinking ahead of the competition in identifying trends that may

shape the industry and is positioning itself to take advantage of these trends early.

Mismatch in demand for and sourcing of resources in discretionary segments has led

to an extensive and expensive bench, resulting in high operating leverage.

Revival in discretionary spending remains imperative to revival in margins. Buy

Valuation summary (INR b)

Y/E March

2013 2014E 2015E

433.2

116.9

93.2

163.2

-1.0

806.2

21.7

24.3

27.6

14.5

2.9

9.0

1.9

466.9

128.4

103.5

181.2

11.0

928.8

22.4

23.3

27.6

13.0

2.5

7.7

2.1

Sales

403.5

EBITDA

115.6

PAT

94.2

EPS (INR)

164.9

EPS Gr. (%)

13.3

BV/Sh. (INR) 695.8

RoE (%)

25.7

RoCE (%)

28.5

Payout (%)

25.5

Valuations

P/E (x)

14.3

P/BV (x)

3.4

EV/EBITDA (x) 9.7

Div Yield (%) 1.8

Infosys 3.0: Right strategy but yet to reflect in results

We believe that the formulation of Infosys 3.0 was a step in the right direction.

Infosys has been thinking ahead of the competition in identifying trends that

may shape the industry and is positioning itself to take advantage of these trends

early. However, two years into its implementation, the proportion of revenue

from PPS has remained flattish, with the company having only acquisition of

Lodestone to show for its efforts.

Greater flexibility in Business IT Services (BITS) segment

FY13 saw significant decline in Infosys’ offshore per capita productivity, an indicator

of increasing flexibility in the Business IT Services (BITS) segment, amid increasing

competition in the commoditized business. BITS contributed 63% to Infosys’

revenues in FY13. The nature of pricing cuts is spread across the following: [1]

Deals within the company’s portfolio that come up for renewal, [2] Strategic large

customers, where deals need not necessarily be up for renewal, but where Infosys

cannot run the risk of losing share to competition, and [3] Incremental business

to be won amid stiff competition.

Shareholding pattern %

As on

Mar-13

16.0

17.5

54.1

12.3

Dec-12 Mar-12

16.0

18.7

51.6

13.7

16.0

16.6

53.4

14.0

Promoter

Dom. Inst

Foreign

Others

Margins may remain under pressure in the near term

EBITDA margin at Infosys has declined 720bp in the last six quarters on the back of

multiple factors: [1] Greater aggression in terms of pricing deals in the BITS

segment, [2] Mismatch in demand for and sourcing of resources in the discretionary

segments, leading to an extensive and expensive bench, and [3] Acquisition of

lower-margin Lodestone. Some of these pressures are unlikely to recede in the

near term.

Stock performance (1 year)

A bet on discretionary spend revival; Buy

Infosys’ operating performance in the last two quarters exemplifies the nature

of volatility in its business portfolio. Unutilized resources in segments like

Consulting and Systems Integration has yielded high operating leverage. In the

event of improvement in discretionary spending, margins should also see

considerable uptick. In USD terms, we expect Infosys’ revenue to grow at a CAGR

of 9% and EPS at a CAGR of 5% over FY13-15. Infosys currently trades at 23%

discount to TCS’s FY14E and 15E P/E. Our target price is INR2,720, which discounts

our FY15E EPS by 15x. Maintain

Buy.

May 2013

34

Infosys

Financials and Valuation

Income statement

Y/E March

Sales

Change (%)

Software Develop. Exp.

Selling and Mktg. Exp.

Administration Exp.

EBITDA

% of Net Sales

Depreciation

Other Income

PBT

Tax

Rate (%)

Adjusted PAT

Reported PAT

Change (%)

2011

275,010

20.9

150,620

15,320

19,510

89,560

32.6

8,540

12,110

93,130

24,900

26.7

68,230

68,230

8.9

2012

337,340

22.7

188,710

17,570

23,900

107,160

31.8

9,370

19,040

116,830

33,670

28.8

83,160

83,160

21.9

2013

403,520

19.6

241,510

20,350

26,090

115,570

28.6

11,284

23,590

127,876

33,670

26.3

94,206

94,206

13.3

2014E

433,172

7.3

265,879

22,198

28,156

116,939

27.0

12,594

22,509

126,854

33,616

26.5

93,238

93,238

-1.0

(INR Million)

2015E

466,921

7.8

285,214

23,813

29,526

128,368

27.5

12,776

25,286

140,879

37,333

26.5

103,546

103,546

11.1

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

Current Liab. & Prov

Current Liabilities

Provisions

Net Current Assets

Application of Funds

E: MOSL Estimates

2011

2,860

256,900

259,760

259,760

85,010

32,660

52,350

5,250

1,440

253,890

46,530

150,950

53,200

3,210

53,170

26,770

26,400

200,720

259,760

2012

2,860

331,750

334,610

334,610

91,740

36,210

55,530

10,340

3,770

313,840

77,550

205,910

27,220

3,160

48,870

30,810

18,060

264,970

334,610

2013

2,860

395,110

397,970

397,970

117,540

42,080

75,460

16,600

17,390

354,060

95,180

218,320

35,530

5,030

65,540

41,300

24,240

288,520

397,970

2014E

2,860

458,272

461,132

461,132

131,540

54,674

76,866

16,600

17,390

421,972

94,942

280,831

41,169

5,030

71,696

45,357

26,339

350,276

461,132

(INR Million)

2015E

2,860

528,401

531,261

531,261

145,540

67,450

78,090

16,600

17,390

498,479

102,339

343,680

47,430

5,030

79,298

48,558

30,740

419,181

531,261

May 2013

35

Infosys

Financials and Valuation

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

Book Value

DPS

Payout % (excl.div.tax)

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)

2011

119.4

134.2

454.1

60.3

50.5

2012

145.5

161.8

585.0

47.0

32.3

2013

164.9

184.4

695.8

42.0

25.5

2014E

163.2

185.0

806.2

45.0

27.6

2015E

181.2

203.4

928.8

50.0

27.6

14.3

12.8

9.7

2.8

3.4

1.8

14.5

12.8

9.0

2.4

2.9

1.9

13.0

11.6

7.7

2.1

2.5

2.1

27.8

33.1

28.0

32.9

25.7

28.5

21.7

24.3

22.4

23.3

62

5.6

84

6.6

86

6.5

80

6.0

80

6.4

Cash Flow Statement

Y/E March

CF from Operations

Cash for Working Capital

Net Operating CF

Net Purchase of FA

Net Purchase of Invest.

Net Cash from Invest.

Proceeds from Equity

Dividend Payments

Cash Flow from Fin.

Net Cash Flow

Opening Cash Bal.

Add: Net Cash

Closing Cash Bal.

E: MOSL Estimates

2011

75,560

-14,300

61,260

-12,590

35,680

23,090

1,170

-40,130

-38,960

45,390

105,560

45,390

150,950

2012

90,230

-9,340

80,890

-17,640

-2,330

-19,970

23,109

-29,069

-5,960

54,960

150,950

54,960

205,910

2013

103,620

-9,270

94,350

-37,474

-13,620

-51,094

-2,777

-28,073

-30,850

12,406

205,910

12,406

218,316

2014E

105,832

755

106,587

-14,000

0

-14,000

0

-30,075

-30,075

62,511

218,316

62,511

280,827

(INR Million)

2015E

116,322

-6,056

110,266

-14,000

0

-14,000

0

-33,417

-33,417

62,849

280,827

62,849

343,676

May 2013

36