implication of - avendus...early hits to revenue coming from clients in sectors like travel and...

Implication of

On Technology Outsourcing

And M&A Deal Activity

March 2020

What Are IT Companies Saying…VIEWPOINTS CHANGE QUICKLY AS SITUATION ESCALATES

WEEK OF 11TH FEB

WHO names the diseases ‘COVID-19’

WEEK OF 24TH FEB

COVID-19 spreads across Europe, Middle East & US

WEEK OF 16TH MARCH

WHO declares COVID-19 as Pandemic, US declares National Emergency

The IT sector may see some indirect impact in the medium to long-term as some of the clients have exposure to manufacturing in China

- PRAVIN RAONASSCOM vice-chairman, as well as COO Infosys

We don't see a big impact at this stage across global operations, but we are analyzing our business continuity plans to see if more employees need to work from home. We have flexi work policies that can be leveraged in case we need it but there has been no need to take any specific actions right now.

- ANTOINE IMBERTChief Operating Officer of Capgemini

“That will have significant impact on spending. I think next year, the growth for Indian IT services industry is going to be a big challenge,” he said. “It’s (now) exactly like 2008 when everything got shut down over a period of time but again recovery then was in a V-shape because central banks and all got in and stabilised,” Balakrishnan said.

- V BALAKRISHNANInfosys CFO

It could impair our ability to manage day-to-day service delivery for certain clients or at certain sites and result in, among other things, losses of revenue and inadvertent breaches of our client contracts if a large number of our employees, or a group of employees in the same service line or who serve the same clients, were unable to work at the same time.

- GENPACT SPOKESPERSON

Most of the Mindtree Minds are working from home already... Further, we are working with our customers to enable alternate work options.

- MINDTREE SPOKESPERSON

TIMELINE

The uncertainty around the macroeconomic environment following the COVID-19 outbreak does not enable the Group to release a 2020 guidance at this stage. The full year guidance will be released once the economic environment presents a clearer visibility.

-AKKA TECHNOLOGIES OFFICIAL RELEASE

February 2020 March 2020

1. Numbers are for the entire world and as at the start of the respective week3

And What Is The Industry Ecosystem Saying…THE LAST MONTH HAS RAPIDLY CHANGED DISCOURSE AND ECONOMIC PROJECTIONS

WEEK OF 11TH FEB

WHO names the disease ‘COVID-19’

WEEK OF 24TH FEB

COVID-19 spreads across Europe, Middle East & US

WEEK OF 16TH MARCH

WHO declares COVID-19 as Pandemic, US declares National Emergency

TIMELINE

41. Numbers are for the entire world and as at the start of the respective week

The human costs of the coronavirus pandemic are already immeasurable, and all countries need to work together to protect people and limit the economic damage. Expect a recession at least as bad as during the global financial crisis or worse.

- KRISTALINA GEORGIEVAManaging Director, IMF

The global spread of coronavirus has accelerated, and its economic effect has worsened sharply. Economic data is scarce, but the long-awaited initial figures from China for January and February were much worse than feared. ……As a result, we now forecasta global recession with annual GDP rising 1%-1.5%.

- SHAUN ROACHEManaging Director and Chief Economist, S&P Global

There is no longer doubt that the longest global expansion on record will end this quarter. We now think that the COVID-19 shockwill produce a global recession as nearly all of the world contracts over the three months between February and April.

- BRUCE KASMANChief Economist, JP Morgan

Volatility is bad for dealmaking, It throws off your ability to appropriately gauge if it’s a good time to buy or a time to sell.

- ALAN KLEINCo-head of M&A at law firm Simpson Thacher

We envisage a slowdown in the global economy to under two per cent for this year, and that will probably cost in the order of $1 trillion, compared with what people were forecasting back in September.

- RICHARD KOZUL-WRIGHTDirector, UN Conference on Trade & Development

It is still too early to map out the full impact of the coronavirus (or COVID-19, as it is now called) on the global economy or on global tech markets. We think that any economic and tech market impacts will be short-lived and localized.

- ANDREW BARTELSVP, Forrester

Sequoia Capital sent a letter to its founders on Thursday warning that the coronavirus was a “black swan” event and startups should “brace themselves for turbulence” by considering if they have enough cash and preparing to face supply chain disruptions.The letter also warned they could have a harder time fundraising, similar to the market downturns of 2001 and 2009.

February 2020 March 2020

PROLONGED CONTRACTION

The virus spreads globally without a seasonal decline, creating a demand that lasts until Q2 2021. Large-scale human and economic impact

…Even McKinsey & S&P Global Paint a Grim Picture

5

WORLD GDP EXPECTED TO FALL WITH RECOVERY ANYWHERE BETWEEN Q3 CY20 TO Q2 CY21

AS PER MCKINSEY, ECONOMIES TO SHOW RECOVERY ANYWHERE BETWEEN Q3 CY20 TO Q2 CY21 AS PER S&P GLOBAL, GLOBAL RECESSION IS FORECASTED

US Unemployment Rate for April (as per Greg Daco - chief US Economist at Oxford Economics)

% WORLD GDP1 FORECASTS

REDUCTION IN GROWTH

OVERALL WORLD GDP

NA 1% - 1.5% 1%

CHINA 17% 2.7% - 3.2% 1.6% - 2.1%

US 25% (1)% - (0.5)% 2.4% - 2.9%

EUROZONE ~24% (1)% - (0.5)% 2.0% - 2.5%

JAPAN 6% (1.2)% 0.8%

INDIA 4% 5.2% 0.5%

10%

SCENARIOS ECONOMIC OUTCOME

DELAYED RECOVERY

The virus spreads across Middle East, Europe and US until mid Q2 2020, when virus seasonality combined with a stronger public health response drives case load reduction

China and East Asian countries start recovery, but supply chain remain impaired in much of Q2

2020. In the US and Europe, large-scale quarantines drive drop-off in consumer spending and

investment in 2020.

▪ Layoffs drive unemployment rates higher

▪ Monetary easing has limited impact

▪ Self-reinforcing recession dynamics extend GDP

▪ Critical sectors see surge in volumes

▪ Declines through Q3, recovery begins in Q4

2020 Global GDP growth falls sharply, driven by recession in the US and Europe and slower

growth in Asian countries.

China and East Asian countries experience slowdowns as economic recovery is derailed in 2020

and pushed into Q1 2021. The US and Europe experience deep recessions in 2020

▪ Layoffs and bankruptcies in the most affected sectors rise sharply throughout 2020

▪ Financial systems distress is significant but a full-scale banking crisis is averted

▪ Fiscal and monetary policy responses prove insufficient to break the headwinds

▪ Critical sectors see surge in volumes from an outsourcing perspective

The global economic impact is severe, with significant GDP contraction in most major economies

in 2020 and slow-moving recovery beginning in only Q2 2021

1. Nominal GDP for 20192. Source: McKinsey COVID-19 Briefing Report (16th March, 2020); CRISIL report on COVID-19 Fallout (19th March, 2020)

Experience Implementing WFH Across IT-BPM Companies EXPECT PRODUCTIVITY HIT TO BPM OPERATIONS WHILE TRANSITION FOR IT OPERATIONS HAS BEEN RELATIVELY SEAMLESS

KEY TAKEAWAYS FROM OUR CONVERSATION WITH 20+ TECHNOLOGY OUTSOURCING COMPANIES

Depending On

Business Mix

Considerations

around WFH

A portion of the work in BPM can’t be taken home. Certain geographies like India are making some exceptions and defining IT BPM as essential services given strategic importance of the sector in supporting healthcare, telecom & banking sectors.

Vendors with existing WFH businesses have been able to adapt quickly given that their technology and security infrastructure and processes were already in place.

IT is fairing better than voice BPM. BPM work in cases require movement of workstations home (given confidentiality concerns) while for IT services, teams can work on laptops.

Most companies have been busy implementing BCP plans and have majority of their workforce in WFH model. Major hurdle hasn’t been regulatory issues rather it has been client consent and internal risk approvals. This is changing quickly as clients are becoming more amenable to WFH.

From an immediate perspective more capex (as companies buy new workstations and, in some cases, rent personal laptops to bring them under corporate purview as well as invest in security and networking technology) and potential revenue loss.

In the long run can lead to lower operating costs (rent, transportation etc.) as a portion of the workforce may continue to WFH as companies get used to the model.

Utilization levels at middle management have fallen while junior staff continue to be overburdened. Companies trying to figure out ways to monitor productivity improvement.

IT

BPM

7

Easier to implement onshore compared to offshore due to network bandwidth issues & frequent power failures. Onsite employees (on H1B visas) including their families (who may be permanent citizens) have faced issues

Near Term Business Outlook To Be Affected…EARLY FEEDBACK POINT TO A MARGINAL HIT TO REVENUE IN THE NEAR TERM

KEY TAKEAWAYS FROM OUR CONVERSATION WITH 20+ TECHNOLOGY OUTSOURCING COMPANIES

8

OTHER KEY TAKEAWAYS

Earnings release has been postponed as companies try to

quantify the impact on their businesses.

Early hits to revenue coming from clients in sectors like travel

and hospitality. Travel has seen a spurt in demand for BPM

services in Feb’20 given widespread cancellations.

Few who are commenting have reduced their growth

projections and they feel that growth forecasts would be

shifted / delayed by a year.

Significant loss in business development activities. Major

tech conferences have been cancelled leading to loss of

~$1.1Bn (as per PredictHQ).

IT support work has gone up as enterprises are trying to get

their digital platforms and WFH environment up and running.

Discretionary projects likely to be delayed.

Work for critical industries has also gone up. Telecom and

utilities are faring well.

…Extent Of Implication To Vary Depending On Business Mix..STRENGTH OF MANAGEMENT AND AGILITY OF BUSINESS KEY DRIVER OF PERFORMANCE

COMPANY PERFORMANCE

FIXED / SEMI VARIABLE VARIABLE

REVENUE EXPENSES

Approximately 15-20% of revenue of typical IT

services companies are fixed or semi variable

comprising of G&A salaries, rent and other fixed cost of maintenance and support

Approximately 60-70% of revenue of typical IT

services companies are variable comprising of salaries to delivery and

S&M folks

9

Vertical GeographyService / Contract

TypeClient Type New vs Existing Business

ECONOMIC OUTLOOK

Business Mix Analysis Client Level Analysis

FRAMEWORK TO ANALYSE IMPLICATION

…Service Type & Vertical Mix Being Key Risk DriversDIGITAL TRANSFORMATION TO DRIVE GROWTH IN MEDIUM TO LONG TERM

REVENUE EXPENSES

OFFEIRNG /CONTRACT

TYPE

GEOGRAPHY

▪ Virus has spread across EMEA, APAC &

Americas. Demand weak across geographies

▪ From delivery perspective, European laws restrict

firm’ s ability to react to economic shocks

VERTICAL▪ Travel, hospitality, aviation, retail and

manufacturing

KEY CHARATERISTICS

COVID-19 is causing enterprises to accelerate adoption of digital business models and technologiesleading to increased spend on digital transformation initiatives in the medium to long term

10

▪ Telecom and utilities may perform better

▪ Other sectors would see low to medium impact

▪ US labor laws allow for companies to quickly

react to change in economic environment

▪ Discretionary spend and spend on new

initiatives

▪ Short term contracts

▪ Stable long-term contracts to continue

▪ More work for IT infrastructure management

▪ Spend on digital transformation and analytics

will come back the quickest and vendors in that

space will lead recovery

H

H

H

M

M

L

MOST AFFECTED LESS AFFECTED DEGREE OF IMPACTDEGREE OF IMPACT

…With Client Size / Concentration Being Additional DriversEXISTING BUSINESS TO CONTINUE WITH SOME DISRUPTION BUT GROWTH FROM NEW BUSINESS TO BE MUTED

REVENUE EXPENSES

Economic shocks drive enterprises towards more flexible business models and variable cost structures which can increase outsourcing

11

H

CLIENT TYPE

KEY CHARATERISTICS MOST AFFECTED DEGREE OF IMPACTLESS AFFECTEDDEGREE OF IMPACT

▪ Small clients like SMEs & start-ups

▪ Companies with high client concentration at

higher risk of a top client going away

▪ Fortune 2000 companies are likely to better

navigate through the current uncertainty

▪ Companies with diversified client baseM

EXISTING VSNEW BUSINESS

▪ New business as

▪ Discretionary spend on digital

transformation initiatives may be put on

hold as companies face a liquidity crunch

▪ Technology budget allocations may be

curtailed by clients

▪ Cancellation of major conferences leading

to loss of revenue generation opportunities

▪ New pitch opportunities have gotten

delayed due to travel restrictions

▪ Existing business

▪ Are continuing with some disruption

in onsite work shifting to WFH

▪ New SOWs under main MSAs can get

delayed as clients may try to hold

back / delay on expenses

▪ Volatility is causing enterprises to

push off re-bids on existing contracts

▪ Expect amendments to contracts to

factor in similar scenarios

L

L

DELIVERY- ONSITE▪ Heavily disrupted due to travel restriction▪ People are stuck and have faced issues ranging from visas getting cancelled to visas expiring in a few weeks leading

to questioning from government authorities

Margins Remaining Stable As Most Services Firms Adept At Managing CostsEXECUTIVES FACE TOUGH CHOICES AS THEY LOOK TO BALANCE COST CUTTING MEASURES AGAINST INVESTING IN THE FUTURE

REVENUE EXPENSES

TYPE OF EXPENSES CONSEQUENCES OF COVID-19

Services companies are generally more resilient in tough markets as most of the cost is variable and strengthening dollar provides a boost to margins

DELIVERY- OFFSHORE

▪ WFH model has been initiated▪ Utilization rates are expected to fall but natural attrition will potentially help; given wage differentials carrying costs

of bench is more manageable in offshore locations▪ Gross margins are expected to be cushioned by currency depreciation▪ Hiring freeze combined with no hikes and bonuses may be initiated

S&M SALARIES▪ Extreme pressure on sales teams as new revenue comes down▪ Hiring freeze, layoffs and reduction in bonuses likely

DELIVERY- ONSHORE▪ WFH model has been initiated▪ Hiring freeze combined with layoffs may be initiated (depending on exposure to US / European markets)

Rent, maintenance and support expenses

▪ Degree of freedom limited in near term▪ Expenses on rent & transport (6-8% of revenue) may potentially reduce over time based on higher adoption of WFH ▪ Current experience may lead to further BCP related investments to prepare for future shocks

VARIABLE

FIXED /

SEMI

VARIABLE

DEGREE OF EFFECT

H

L

M

H

12

(60-70% of revenue)

L

(15-20% of revenue)

G&A SALARIES ▪ Limited scope for reduction in near term▪ Can look at making organization leaner over time or outsourcing additional functions

Implications Summarized By The Bellwether IT Stock

13

ACCENTURE NOW FORECASTS A DEGROWTH OF 4.6% FOR H2 FY20 WITH MINISCULE IMPACT ON MARGINS

The coronavirus (COVID-19) crisis is rapidly evolving and has created a significant amount of uncertainty. Accenture’s third-quarter and full-year 2020 business outlook reflects its assumptions, as of today, regarding the potential effect of the coronavirus pandemic. The extent to which this impacts Accenture’s business, operations, and financial results, including the duration and magnitude of such impact, will depend on numerous factors that the company may not be able to accurately predict

- KC MCCLUREAccenture CFO

PERCENTAGE OF EMPLOYEES WORKING FROM HOME

India & Philippines European countries

60% 85-90%

BUSINESS OUTLOOK

THIRD QUARTER FY20 (FYE AUG)

Expected to be in the range of $10.75 billion to $11.15 billion, or negative 2% to positive 2% growth in local

currency, reflecting the company’s assumption of a negative 1.5% foreign-exchange impact

FULL FY20

For fiscal 2020, the company now expects revenue growth to be in the range of 3% to 6% in local currency

compared with 6% to 8% previously. This implies that Accenture now forecasts a degrowth of 4.6% over its

earlier forecasts for H2 FY20 , dollar hit in the range of $864Mn-$1,296Mn for H2 FY20.

It expects operating margin to be in the range of 14.7% to 14.8%, which is a marginal impact of 10-30 basis

points compared with earlier estimates.

KEY ASSUMPTION:

Assumes a higher degree of impact to financial results in Q3, with some improvement in the business

environment in the fourth quarter, either due to an improved situation, or clients having adjusted to operating in

a new environment.

INORGANIC GROWTH

Accenture will invest up to $1.6 billion in acquisitions this year. It has already committed $1.1 billion through to

date with dry powder of another $500 million left for acquisitions.

IT/BPM Stocks Severely Impacted By The Global Selloff (1/4)MID-CAP IT, DIVERSIFIED BPM AND ER&D HAVE TAKEN ~50% HIT TO SHARE PRICES WHILE OTHERS HAVE BEEN HIT ~30%

TECHNOLOGY SERVICES INDEX ARE TOUCHING 3 YEAR LOWS EXCEPT FOR DIGITAL ENGINEERING SERVICES (DES) PROVIDERS

Source: Last 5 years data taken as on 26th March 2020 from CapIQ; Indices for each group have been calculated free float market cap methodology (sum of free float shares* share price) and then rebased to 100Note: Large-Cap IT: Tata Consultancy Services Limited, Infosys Limited, Cognizant Technology Solutions Corporation, Wipro Limited, HCL Technologies Limited, Tech Mahindra Limited, International Business Machines Corporation, Accenture plc, Capgemini SE; Mid-Cap IT: Mphasis Limited, Mindtree Limited, Hexaware Technologies Limited, NIIT Technologies Limited, Persistent Systems Limited, Zensar Technologies Limited, The Hackett Group, Inc., Larsen & Toubro Infotech Limited; Digital Digital Engineering Services: Endava plc, EPAM Systems, Inc., Globant S.A.CRM Focused BPM: TTEC Holdings, Inc., Sykes Enterprises, Incorporated; Teleperformance SE, StarTek, Inc., Firstsource Solutions Limited Diversified BPM: WNS (Holdings) Limited, Genpact Limited, Conduent Incorporated, ExlService Holdings, Inc.; SaaS: salesforce.com, inc., Workday, Inc., ServiceNow, Inc., Box, Inc., LogMeIn, Inc.; ER&D: Alten, Akka, Assystem, L&T Technology, Cyient & KPIT

143

111

155

684

298

86

256

15

% DECLINE FROM5 YR HIGHS

TRADING AT LEVELS

OF

S&P 25% May-2017

Large Cap IT 27% Dec-2015

Mid Cap IT 48% Jul-2017

Digital Engineering

24% May-2019

CRM Focused BPM

32% May-2019

DiversifiedBPM

54% Oct-2016

ER&D 49% Nov-2016

INDEX

IT/BPM Stocks Severely Impacted By The Global Selloff (2/4)EV / REVENUE MULTIPLES HAVE FALLEN ~45% AND ARE AT 7-10-YEAR LOWS EXCEPT FOR DES PROVIDERS

5 YEAR EV / REVENUE MULTIPLES CHART

Source: Last 5 years data taken as on 26th Mar 2020 from CapIQNote: Large-Cap IT: Tata Consultancy Services Limited, Infosys Limited, Cognizant Technology Solutions Corporation, Wipro Limited, HCL Technologies Limited, Tech Mahindra Limited, International Business Machines Corporation, Accenture plc, Capgemini SE; Mid-Cap IT: Mphasis Limited, Mindtree Limited, Hexaware Technologies Limited, NIIT Technologies Limited, Persistent Systems Limited, Zensar Technologies Limited, The Hackett Group, Inc., Larsen & Toubro Infotech Limited; Digital Digital Engineering Services: Endava plc, EPAM Systems, Inc., Globant S.A.CRM Focused BPM: TTEC Holdings, Inc., Sykes Enterprises, Incorporated; Teleperformance SE, StarTek, Inc., Firstsource Solutions Limited Diversified BPM: WNS (Holdings) Limited, Genpact Limited, Conduent Incorporated, ExlService Holdings, Inc.; SaaS: salesforce.com, inc., Workday, Inc., ServiceNow, Inc., Box, Inc., LogMeIn, Inc.; ER&D: Alten, Akka, Assystem, L&T Technology, Cyient & KPIT

2.0x

2.4x

3.2x

2.1x

1.3x1.9x

3.2x

6.4x

0.9x 0.9x

2.2x2.5x

0.8x1.0x

16


TRADING AT LEVELS

OF

S&P 22% Jan-2008

Large Cap IT 44% May-2009

Mid Cap IT 48% Dec-2013

Digital Engineering

37% Nov-2017

CRM Focused BPM

49% Jan-2013

DiversifiedBPM

41% Jun-2014

INDEX

ER&D 56% Oct-2015

IT/BPM Stocks Severely Impacted By The Global Selloff (3/4)EV / EBITDA MULTIPLES HAVE FALLEN ~50% AND ARE AT 7-10-YEAR LOWS EXCEPT FOR DES PROVIDERS

5 YEAR EV / EBITDA MULTIPLES CHART

10.5x

12.6x14.0x

9.2x

12.8x11.2x

22.1x

32.6x

7.2x 8.8x

14.6x13.7x

8.5x10.5x

17


TRADING AT LEVELS

OF

S&P 22% Jan-2008

Large Cap IT 46% May-2009

Mid Cap IT 55% Oct-2013

Digital Engineering

39% Apr-2015

CRM Focused BPM

61% Jan-2013

DiversifiedBPM

47% Aug-2009

INDEX

ER&D 58% Nov-2013


IT/BPM Stocks Severely Impacted By The Global Selloff (4/4)

18

COVID-19 IMPACT VISIBLE IN THE FORM OF A DROP IN VALUATIONS OVER A 30-DAY PERIOD

VALUATION PARAMETERS HAVE SHOWN SIGNIFICANT DROP OVER THE LAST 1 MONTH

Share Price Index (SPI) Mean LTM EV / Revenue Mean LTM EV / EBITDA

Large Cap IT Mid Cap IT DPE27% 31% 24% Diversified BPM

48% CRM Focused BPM

48%

76.6274.8972.45

82.30

71.12

52.13

100.00

52.53

01-Jan-2020 01-Feb-2020 01-Mar-2020 25-Mar-2020

2.7x

2.1x2.3x

1.8x1.9x

1.4x

6.4x

4.1x

1.0x 0.7x

2.5x

1.6x1.3x

0.7x

01-Jan-2020 01-Feb-2020 01-Mar-2020 25-Mar-2020

14.1x 11.2x

10.4x7.6x

12.0x8.1x

35.8x

25.5x

9.2x

5.5x

15.5x

9.6x

14.5x

7.0x

01-Jan-2020 01-Feb-2020 01-Mar-2020 25-Mar-2020

S&P 500 Large Cap IT Mid Cap IT Digital Engineering CRM Focussed Diversified BPM ER&D

ER&D 48%

DECLINE IN SHARE PRICE INDEX FROM 1st Feb 2020


Technology Deals Trend Pointing To A Downturn …TEMPORARY SLOWDOWN IN DEAL ACTIVITY OVER THE LAST 2-3 WEEKS

TECHNOLOGY DEALS

283

220 227

270 279262 269

248225

249234 225 226

191

89

0

50

100

150

200

250

300

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

Qtr1 Qtr2 Qtr3 Qtr4 Qtr1

2019 2020

Number of Deals Sum of Deal Value USD(m)

2019 2020

While the current unprecedented situation has shaken investor confidence, we expect technology outsourcing industry to be a net-gainer in the medium to long term

Note- The deal activity is based on deals announced till 18th March 2020; Source: Mergermarket20

...But Technology Services Deals Continue To Be Announced

21

LIMITED HIT VISIBLE IN MARCH 2020 AS LATE STAGE TRANSACTIONS GET COMPLETED

DATE BUYER TARGET

26-Mar-20 TA Associates Accion Labs

25-Mar-20 Capgemini Whitesky Labs

23-Mar-20 Perficient Brainjocks

23-Mar-20 Cognizant Lev

21-Mar-20 Bright Shine Corporation Shenzhen Rayvision Technology

18-Mar-20 Baird Capital Partners Aura Futures Group

16-Mar-20 MAG Aerospace Aaski Technology

16

2320

28

14

28

17

Sep Oct Nov Dec Jan Feb Mar

Qtr3 Qtr4 Qtr1

2019 20202019 2020

TECHNOLOGY SERVICES DEALS FROM SEP 2019 ONWARDS

TECHNOLOGY SERVICES DEALS IN MARCH 2020

DATE BUYER TARGET

13-Mar-20 Infosys Outbox Systems (Simplus)

13-Mar-20 IT Lab Limited SoI-Tec

11-Mar-20 Starhub Strateg

10-Mar-20 Accenture ESR Labs

10-Mar-20 Nord Holding Ewerk Group

09-Mar-20 Avanade Altius Consulting

06-Mar-20 Accenture Context Information Security

Source: Avendus deal tracker

Implications Across M&A Deal Life Cycle…

22

PROCESSES CONTINUE AT A SLOWER PACE WITH NEW LAUNCHES PUT ON HOLD

IMPLICATION ACROSS DEAL LIFE CYCLE

▪ Deals in launch phase put on hold

▪ Collaterals being prepared to keep

them ready for launch as and when

market improves

▪ Sellers often value face-to-

face meetings with

potential buyers which is

getting hampered

▪ Deals in diligence phase

moving slowly due to

restriction in travel

▪ Buyers are over cautious to

understand the implication on

business

▪ Deals in pre closing stage

stuck as buyers are going

back to valuation

discussions

PRE-LAUNCH / COLLATERAL

PREPARATION PHASE

MARKETING PHASE

DILIGENCE PHASEPRE-CLOSING

STAGE KEY TAKEAWAYS

▪ While the current unprecedented situation has shaken

investor confidence, we expect technology outsourcing

industry to be a net-gainer in the medium to long term

▪ While technology services asset are known for their

predictability and high cash generative nature, , they have

become even more attractive given margin expansion

expected from a strengthening dollar and increased

adoption of the work from home model

▪ Global flight of capital to safety in a strengthening dollar

environment, would generally make investment in IT, KPO

and BPM businesses an even more attractive proposition

Record fund raising over the last two years by PE funds along with the cash-rich outsourcing majorsimplies many active investors will continue to transact through the current uncertainty

… With Expected M&A Deal Activity Coming From

23

LIQUIDITY CRUNCH MAY DETER INVESTORS FROM TAKING ASYMMETRIC RISK IN THE SHORT TERM

STAGE 1 – CURRENT PHASE STAGE 2 STAGE 3

DESCRIPTIONCases rapidly increasing and spreading across the globe

with increasing number of new cases reportedGrowth in new cases start coming down and travel

restrictions start getting lifted

Timeline

COMPANIES LIKELY TO SELL

INVESTORS LIKELY TO BUY

OVERALL EFFECT ON DEAL

ACTIVITY

▪ Assets distressed from a cash flow perspective – likely

driven by unsustainable debt levels

▪ Intrinsically strong assets having low stock prices may

combine with funds for block / take private deals

▪ Companies that have been managing cash flows and

sacrificing investments would come back to market

(especially ones likely to benefit from increased

adoption and spend on digital)

▪ Distress and buyout funds would be most active

followed by funds who have been on the sidelines and

are now looking at favorable terms to do deals

▪ Strategics who have cash piles and have been on the

sidelines over the last 2-3 years

▪ Funds who have dry powder and have helped their

portfolio settle down will become active

▪ Additional cash-rich strategics with stable organic

business will become active

Cases rapidly come down as steps to curb the disease start showing effect and global economy comes back to

functioning normally

▪ More sellers who have assimilated the new normal on

valuations and deal terms will come to market

▪ Companies looking to raise funds to expand businesses

after the slowdown to come back to market

▪ Remaining set of investors and strategics to come back

to normal course of business, that said deal levels and

valuations may not get back to 2018/2019 levels in the

near to medium term

These stages could be 1-2 quarters in the most optimistic “Delayed Recovery” scenario while it could be 3-4 quarters in the pessimistic “Prolonged Contraction” scenario

H M L

No

. of C

ases

In Summary, IT-BPM Likely To Weather The Storm

24

STRONG FUNDAMENTALS, BALANCE SHEETS & TREND TOWARDS DIGITAL ADOPTION TO DRIVE MEDIUM TO LONG TERM GROWTH

Key implication would be in the form of muted growth over the next 2-3 quarters which is likely to rebound as the economic environment improves

Strong fundamentals &balance sheet

Digital adoption across the global economy

Ability to manage costs(60-70% being variable)

and remain profitable

Accelerated adoption of WFH as a business model

to reduce costs

Large set of active investors (cash-rich

strategics and PEs) who continue to invest

Contacts

25

Abhinav GoelDirector

Email: [email protected]

Mobile: +1 929 239 7136

Landline: +1 646 707 0789

Shreyansh JainAssociate


Mobile: +91 90077 70946

Landline: +91 080 6448 3632

Amit SinghExecutive Director & Co-Head –Enterprise Technology & Services


Landline: +91 080 6448 3601

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IL&FS Financial Centre, C & D Quadrant – 6th Floor,Bandra-Kurla Complex, Bandra (East),Mumbai – 400 051, India

BENGALURU

The Millenia Tower, A – 10th Floor, No 1 & 2,Murphy Road, UlsoorBengaluru – 560 008, India

DELHI

Time Tower,901-B, M.G. Road, Gurgaon,Haryana – 122 002, India

KOLKATA

PS Arcadia,7th Floor, Unit 7B, 4A,Camac Street,Kolkata – 700 016, India

HYDERABAD

Sahiti Sreshta, 1st Floor, Plot No. 1222,Road No. 36, Jubliee Hills,Hyderabad – 500 033, India

AHMEDABAD

Regus Business Centre,Earth Arise, Unit No. 1101, 11th Floor, Sarkhej – Gandhinagar Highway, Makarba,Ahmedabad – 380 015, India

PUNE

Redbrick Offices Limited,Level 5 & 6, The Pavilion, S B Road, Chaturshringi, Next to JW Marriott, Laxmi Society, Model Colony, Shivajinagar, Pune – 411 006, India

LONDON

Avendus Capital (U.K.), Pvt. Ltd.33,St James's Square,London,SW1Y 4JS

NEW YORK

Avendus Capital Inc., 445 Park Avenue, Suite 1900,New York,NY 10022

SINGAPORE

9, Temasek Boulevard#31-00Suntec Tower 2,Singapore,038989

Avendus Offices

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This document is being furnished to you by Avendus Capital Inc. for itself and its affiliates strictly on a confidential basis. The document is for informational purposes only and should not be regarded as anoffer to sell, or offer for subscription, or as a solicitation of an offer to buy the securities or other investments mentioned in it. This information profile has been provided to its recipient upon the expressunderstanding that the information contained herein, or made available in connection with any further investigation, is strictly confidential and is intended for the exclusive use of its recipient. It shall not bephotocopied, reproduced and/or distributed to others at any time without prior written consent.

This document is neither a prospectus nor an invitation to subscribe to securities or other investments. Nothing in this document is intended to constitute legal, tax, securities or investment advice, or opinionregarding the appropriateness of any investment, or a solicitation for any product or service. The information herein is subject to change without notice. Avendus Capital Inc. does not represent that anyinformation, including any third party information, is accurate or complete and it should not be relied upon without proper investigation on the part of the investor/s.

Neither Avendus Capital Inc. nor its affiliates nor any of its officers or employees accept any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents. Therecipient of the material should rely on their own investigations and take their own professional advice. While we endeavor to update on a reasonable basis the information discussed in this material, there maybe regulatory, compliance, or other reasons that prevent us from doing so.

Investments in securities/equity related instruments are subject to market risk. These risks could be security specific or market specific and arising from company, industry, political, economic (both domesticand global), etc, factors. Investor/s should carefully read all disclosure documents before investing and shall not make Avendus Capital Inc. and/or its associates/employees liable for any risks/lossespertaining to any product/scheme offered by them from time to time.

Past performance does not indicate the future performance of any current or future fund or strategies advised or managed by Avendus Capital Inc. or its affiliates.

Distribution of this document in some jurisdictions may be restricted or prohibited by law and regulation, and accordingly recipients of this document represent that they are able to receive it withoutcontravention of any unfulfilled registration requirements or any other legal or regulatory restrictions. Recipients of this document in such jurisdiction should fully inform themselves about and observe allapplicable legal or regulatory requirements and Avendus Capital Inc. and its affiliates, directors, shareholders, managers, officers, employees, agents and advisors, do not accept any liability to any person inrelation thereto.

For the purposes of distribution within the United Kingdom, this communication is exempt from the financial promotion restriction in Section 21 of the Financial Services and Markets Act, 2000 relating to thecommunication of an invitation or inducement to engage in investment activity on the grounds that it is made to those persons falling within the following Articles of the Financial Services and Markets Act 2000(Financial Promotion) Order 2005, as amended: Article 19 (Investment Professionals) and Article 49 (High Net Worth Companies). Any investment to which this communication relates is only available toinvestment professionals and high net worth companies.

If you have received this document and you are not the person for whom it is intended, you should not rely on this communication or act on it.

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implication of - avendus...early hits to revenue coming from clients in sectors like travel and...

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