indian it services firms are geared for apps....
TRANSCRIPT
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 1
Information Technology & Enabled Services
Sectoral Initiation | 19th September, 2011
Sectoral Coverage Top 3 Marquee Firms
Indian IT services firms are geared for Apps. Transformations and EMAs. EMs
will lead aggressive growth, DMs will vie for stability, thereby, creating cost
rationale along with better Apps. EU & US reeled by debt burden are unlikely
to impact in the mid-long term. We are highly optimistic on the lot due
emergence to needy Apps. stable demand environment & guidance from the
said companies
Indian IT services firms have demonstrated resilient growth in FY’11 led by pent up demand
in the Q1FY’11 and slow growth in demand in Q3 & Q4FY’11, for IT services. Though,
discretionary spend has boosted demand in Q1FY’12, for various services lines but economic
translations in US and EU coupled with transaction risk has affected the growth of the
industry. Though, growth momentum of services is still intact driven by strong demand of
applications in DMs and EMA services in EMs. And since US has been downgraded and
danger looming over EU, we expect a very resilient growth in till the end of Q2FY’12E and
thereafter, we expect the revenue zones to recover. Large Indian IT vendors like Infosys, TCS
& Wipro will benefit the most from this improved demand environment as compared to the
smaller IT vendors. However, global issues on the contract & supply side, salary hikes, billing
rate and higher attrition is expected to create pressure on their profitability in FY’12E.
Befitting Reasons of our optimism on the IT services Sector in FY’12-13E
Improved macroeconomic environment: positive trigger for IT services
demand: US has been the growth driver for Indian IT services in FY’11. Europe has
lagged in terms of growth; France and Germany have done well. IMF has revised
GDP forecast of US and UK upwards for CY’11 and CY’12 in expectation of improved
economy. According to TPI, TCV in US surged ~17% QoQ which demonstrates
confidence in demand. However, some panicky cues are hovering on the global front
but we expect them to be over by Q2FY’12.
Higher discretionary spend & expansion of non linear services: Strong growth
in license sales by SAP and Oracle will continue to benefit Indian IT vendors.
Discretionary spend globally is expected to boost growth rates for IT spend.
Strong client mining, large deal pipeline & robust outlook: strong client mining
efforts will boost volumes for Indian IT vendors. The companies have a large deal
pipeline for FY’12 and have provided for strong revenue guidance.
Off-shoring – will continue to remain high for TCS & Infosys, Wipro lags back:
The existing clients might as well look for cost cutting through increased off-
shoring going ahead. TCS was one of the best placed as pre Lehman crisis the
off-shoring from TCS was ~42% which shot up to ~52% in FY’11. This also
helped in increasing the profitability for TCS & Infosys which was taken well by
the investors.
At the current position Wipro has relatively lesser off-shore revenues. Wipro
has won numerous large scale assignments and now it is placed better to
leverage on the progress of the deals by increasing the off-shoring revenue. This
will help in supporting profitability Wipro. From clients’ perspective, we might
see more emphasis on off-shoring to cut costs. Several first time outsourcers in
Continental and mainland Europe might try the outsourcing. However, it will
not be done in a publicized manner amidst an environment of high
unemployment rate in these economies.
TCS Ltd
CMP ( `) 1018
TP ( `) 1206
Upside (%) 15.5
P/E (x) 16.9
P/BV (x) 6.3
Rating BUY
Horizon 12M
Infosys Ltd
CMP ( `) 2198
TP (`) 2562
Upside (%) 7.8
P/E (x) 13.9
P/BV (x) 3.7
Rating HOLD
Horizon 12M
Wipro Ltd
CMP ( `) 325
TP ( `) 416
Upside (%) 18
P/E (x) 6.8
P/BV (x) 1.6
Rating BUY
Horizon 12M
Research Analyst: Sourav Ghosh [email protected]
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 2
Information Technology & Enabled Services
Drivers of our positive Expectations on the IT Industry
Margins expected to stay steady, growth levers to offset potential headwinds over global cues
Despite challenged revenue growth during the downturn, Indian IT companies preserved their profitability by
focusing on efficiency and cost rationalization. A focus on efficiency driven profits saw companies deploy most
of their levers like utilization, fixed-bid mix, SGA, offshore mix to the fullest. This is best reflected in 200 bps
YoY improvement in operating margins in FY’11 at TCS, 200 bps expansions in operating margins for Infosys.
However, Wipro saw a margin decline at 500 bps (despite US dollar revenue growth being tepid at ~5.4% and
~1.6% respectively) due to slippages of deals. We believe there is limited scope to further expand margins
through the exercise of these levers, but see enough slack available to help keep margins steady around
current levels and ward off potential headwinds from wage inflation/currency.
Wipro’s margins are probably at the bottom, due to: (a) lowest utilization among the top four (76%, v/s TCS at
~84% & Infosys at ~75%), (b) low proportion of fixed-price projects at 41.5% v/s 49.5% for TCS & ~47.6 for
Infosys, (c) highest SG&A as a percentage of sales among peers (adjusted for bench costs at TCS, shown within
SG&A), (d) prospects of a turnaround in BPO margins over time (BPO margins were -11% in Q1FY’12) and (e)
the worst employee pyramid compared to peers, which is expected to change with greater fresher hiring, going
forward. Infosys is best placed to preserve margins among the top-three companies, due to its lower
utilization, offshore mix and proportion of revenue from fixed-price projects compared with TCS. Going in the
forward Qs and FYs, we not that confident regarding the margin performance as we see constant pressures of
global headwinds that could affect the discretionary spends, incremental wages on an average of ~6.7% &
lower traction of billing rate for the industry top-3.
Traditional growth drivers intact, new segments to steer next growth wave
FY’11 revenue growth for tier-one IT majors were close to ~27.3% (average for the top three companies) after
two lackluster years in FY’09 and FY’10, when growth was just ~11.5% and ~6.9% respectively. Although
FY’11 growth has been aided by one-time factors like pent-up demand and M&A integration in BFSI, we
believe industry growth can continue with the trend and remain healthy for FY’12-13E near ~22%+. Low
penetration of off-shoring, high cost arbitrage despite wage inflation and a large skilled talent pool suggest that
the factors that made the Indian IT industry so successful are as valid today as they were a few years ago. The
following factors are set to drive the next wave of growth: (A) large under-penetrated service lines (IMS,
Consulting, R&D Services/OPD), (B) Healthcare, Energy & Utilities verticals, (C) greater offshore adoption in
regions like Continental Europe and Japan and (D) additional triggers in the form of client mining potential and
impending deal renegotiations are also expected to endure stable growth.
The Indian IT industry (as defined by the top three companies, TCS, Infosys & Wipro) has grown phenomenally
over the past five years. Industry revenue is expected to post ~25.3% in FY’12E despite the world economy
has been billed as the worst phase since FY’09. This is testimony to the value proposition that Indian IT
services companies brings to the table.
0%
5%
10%
15%
20%
25%
30%
20%
25%
30%
35%
40%
45%
FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E FY'13E
TCS Infosys Wipro (RHS)
Source: Company, R K Global Research Estimates
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Information Technology & Enabled Services
Terrific Expansion Service offerings, in IMS, ES, Consulting & OPD
The industry is in early stages of growth as far as emerging service lines (EMAs) are concerned. We expect
high growth and increased penetration in non-traditional service lines of: (1) Infrastructure Management
Services (IMS), a huge market segment (~2.5x ADM) in which there is increased off-shoring at the expense of
MNC incumbents, and (2) in under-penetrated segments like Outsourced Product Development (Estimatesd
revenue of USD940 mn in FY’11 with off-shoring of ~USD 9 bn) and Consulting (contributing only ~4.5% of
revenue at Infosys and ~2% at TCS, despite comprising ~15% of the global outsourcing spend). During the
early stages of the industry's development, Application Development and Maintenance (ADM) drove most of
the growth. Although the industry graduated to the higher end, developing capabilities to implement SAP,
Oracle and PeopleSoft software packages, it has only recently aggressively moved into other service lines such
as Consulting, IMS and OPD, using the organic and inorganic routes. Other new Apps. route, like, EMVs, like,
energy, utilities and green applications (other applications like, AutoApps & MPIT) are also expected to
flourish.
Large untapped potential, higher off-shoring to drive Engineering/Services/OPD/R&D for Top-2
The global software product market size is over USD300 bn, out of which nearly USD40 bn is spent on R&D
and Product Engineering services. Out of this nearly USD9 bn is Estimatesd to have been off-shored in FY’11.
However, about ~90% of what is off-shored is done on a captive basis by companies like Oracle, Microsoft and
SAP. The rest goes to independent third-party specialist service providers, such as Mindtree and generalist
providers like HCL Tech and Wipro.
Indian IT Services' revenue from OPD is Estimatesd by IDC-NASSCOM at USD940 mn, implying market share of
just about ~10% of the aggregate offshore spends. IDC expects R&D and Product Engineering to post ~17%
CAGR over FY’12-13E and offshore spending on them to grow ~19%. However, an even bigger opportunity
exists outside the OPD space in off-shoring of engineering services. We believe that there are opportunities
within industrial automation, medical equipment and auto electronics, which expand the opportunity for
Indian vendors significantly. NASSCOM expects the worldwide engineering spend to increase to USD1.2 tn- 1.3
tn by FY’13 from USD1.1tn in FY’11. The potential of this segment to grow is exciting because of (1) increased
5
25
45
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85
105
125
145
165
185
205
Q1FY'10 Q2FY'10 Q3FY'10 Q4FY'10 Q1FY'11 Q2FY'11 Q3FY'11 Q4FY'11 Q1FY'12
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TCS Infosys Wipro
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FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E FY'13E
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R&D Spend R&D Off-Shore Revenues (%) Off-shored
Source: Company, R K Global Research, As on 20th July FY’12
Source: Company, IDC, NASSCOM, R K Global Research Estimates
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 4
Information Technology & Enabled Services
off-shoring of R&D spends, (2) greater spends on software product development and consequently R&D as the
global market improves, (3) market share gains of third-party providers v/s captives, (4) the need for
considerable experience of offshore players to reduce risks of failure and time-to-market and (5) spending on
product redesign for emerging markets, where product requirements may be different from developed
markets; like in emerging markets, the consumer focus may be on lower costs or greater value for money
against enhanced features.
Higher discretionary spend & expansion of Non-Linear services to exude revenues
Growth in FY’11 was driven by higher discretionary spend across geographies and verticals. The expansion
towards non-linear services was also driven in FY’11 in order to meet client’s needs. We expect high growth in
non linear services and discretionary spend which will boost volumes and improve pricing in FY’12E. New
license sales of global IT vendors like Oracle and SAP have recorded strong growth led by uptick in
discretionary spend. Q1FY’12 has reported highest YoY growth since the last two years. Clients’ shift towards
new projects and higher emphasis on cost saving has led to the purchase of new licenses in the recent past.
This will positively impact growth for players like Infosys, as its consulting arm uses SAP & Oracle as Apps.
usages. Growth in the overall license sales has been reflected in package implementation revenues for Indian
IT vendors.
Consulting has also witnessed huge traction led by demand in discretionary spend. Spending by BFSI and retail has pushed this growth in consulting. Demand from this segment will help it post high growth rates and outperform other service lines.
-43
-33
-23
-13
-3
7
17
27
37
May
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Jun
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July
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Sep
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Oct
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No
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Jan
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Source: Company, R K Global Research Source: Company, R K Global Research
-23
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22
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Source: Company, R K Global Research Source: Company, R K Global Research
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Information Technology & Enabled Services
While there is a general consensus that the USD60 bn Indian IT industry will perform much
better, the key factor responsible to revenue and profits growth is client mining or, in simple
terms, how to extract more out of large and key clients. We believe that, client mining & higher
impending deal renegotiations will be one of the key areas to engage large/transformational
clients. TCS & Infosys remains marquee, Wipro crops a laggard approach…
Service delivery expansion has helped the top-tier companies to grow their annualized revenue per client to
USD8 mn, up ~57% from USD5.2 mn, four years ago. Although this is impressive, potential exists to grow this
metric as Indian vendors add depth and breadth to their service offerings and gain access to board level
management at Fortune 500 companies. Also, about ~25% of the technology spend in FY’11 is Estimatesd to
have come from first-time outsourcers, indicating that 'new converts' are an important growth driver. Other
factors such as discretionary pick-up, vendor consolidation and market share growth through deal
renegotiations are likely to add to growth in the near and intermediate term, though Indian vendors may not
have as much control on the timing and magnitude of these drivers. 4.1 Client mining: room for upside IT
companies have been expanding their footprint with their clients mainly through better execution in service
delivery and expansion in service capabilities, such as in areas of Infrastructure Management Services (IMS),
Outsourced Product Development (OPD) and Consulting. Out of the top three companies, Infosys and TCS have
done better at driving higher business with their clients, whereas it has been an Achilles heel for Wipro.
Between Q4FY’06 and Q1FY’12E, revenue per client at Infosys and TCS grew by ~98% and ~100%
respectively, whereas for Wipro it grew ~46%. Part of the difference may be explained by the difference in the
service mix between the companies. Wipro has a higher proportion of revenue from R&D services, wherein
start-ups and SMEs may be part of the client mix, which may depress revenue per client numbers. However,
the differential is too big to be explained by such arguments alone. Wipro appreciates this fact and is taking
steps to address the issue. It has restructured its sales efforts, appointing Chief Engagement Managers for 65
key accounts to help in better client mining.
Client Mining - ARPC (USD mn) Q1FY'07 Q1FY'12 Increase/Decrease (%)
TCS 5 11 100
Infosys 5 10 98
Wipro 4 6 46
-15%
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-5%
0%
5%
10%
15%
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5
6
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Source: Company, R K Global Research
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 6
Information Technology & Enabled Services
Concerns, Headwinds to propel Platform Changes….However, could be turned around as
opportunities…
Improved macroeconomic environment: positive trigger for IT services demand
US geography has outperformed & lead growth for Indian IT vendors. Improved economic environment in US
and better GDP growth will boost IT spending and lead to an improvement in sentiments. Europe has lagged
behind in terms of growth but is expected to do well in FY’12E as companies become more open towards
offshore outsourcing. Moreover, there are enough regulatory changes happening in the US & EU, this will ramp
up changes in application platforms for regulatory environment. As per the data released by OECD, UK
outperformed the nations in European Union and grew ~0.5% QoQ in Q1FY’12 as against a decline in the last
quarter. France and Germany continued to remain in growth trajectory with ~1% QoQ and 1.5% QoQ growth
respectively. US’ growth was muted with ~0.5% QoQ growth whereas Japan continued to remain weak. We
think, the applications, which are concentrated for changing environment, such as, consulting, PCi,
EnergyApps. Will be a big draw for the future as a paradigm shift has already started taking place.
Consumer confidence looks vertical, but abrupt, could hurt retail sector as well
Indian IT vendors have highest exposure to US followed by UK and other emerging nations. Improved
economic conditions in US will benefit overall IT spending as clients look for expansion of their businesses. UK
has remained a laggard in FY’11 and we expect this trend to continue in FY’12E. However, Indian IT companies
have invested huge amounts for sales and marketing efforts in Germany and France which are a huge
untapped opportunity. Japan will remain weak in FY’12E with lower growth rates on the back of earthquake;
Indian IT vendors derive a mere ~1% of their revenues from Japan, so we don’t foresee major implications.
Consumer confidence in US has remained stable in the recent past after a surge in the last 8 months. With the
improvement in macroeconomic environment, we expect this to rise further. UK consumer confidence has
lagged on the back of weak European economy; however we believe the worst (Greece crisis) is over for
Europe and expect uptick in the consumer confidence once the France-Germany pact goes on air.
-2
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1
2
3
4
5
6
Q1FY'10 Q2FY'10 Q3FY'10 Q4FY'10 Q1FY'11 Q2FY'11 Q3FY'11 Q4FY'11
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40
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65
70
75
USA
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Source: Company, TradingEco, R K Global Research
-28
-23
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-8
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Source, TE, CIA WFB, R K Global Research Source, TE, CIA WFB, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 7
Information Technology & Enabled Services
Manufacturers had their weakest growth in two years in July. However, recovery signs that
the demand of MPAT/Manf.Apps. could strengthen after Q3FY’12E The US manufacturing sector has expanded for 23 straight months. But we have seen a dismal performance in
the last three months, the manufacturing sector has given a very weak growth sentiment in the US is not
spiraling due to slower consumption levels (telecommunication equipments, MLI products). New orders
shrank for the first time since the recession ended. Companies slashed their inventories after building them up
in June. Output, employment, and prices paid by manufacturers all grew more slowly in July.
The disappointing report on manufacturing is the first major reading on how the economy performed in July. It
suggests the dismal economic growth in the first half of the year could extend into the July-September quarter.
Manufacturing in US has been weak all throughout FY’10 and Q1/Q2&Q3FY’11 due to recessionary
environment. However, improve showed from Q4FY’11 onwards. A PMI in excess of ~42.5% over a period of
time indicates expansion in overall economy, however slower. It even reached levels of ~60% last month led
by increase in manufacturing activity. We expect this to increase again and help growth in US economy.
Manufacturing vertical which was a laggard and has witnessed back ended recovery in FY’11. We expect this to
continue on the back of uptick in manufacturing activity globally. United States and Europe have witnessed
strong manufacturing activity in the recent past. Increased focus of manufacturing companies towards PLM,
SCM, CRM and ERP for improving competitiveness will drive growth in this vertical. The automotive industry
constitutes a large portion of the manufacturing vertical for Indian IT vendors.
Telecom too has gone through a rough phase in FY’11. We expect underperformance to continue in this
vertical on the back of muted spending globally. We believe the increased focus of telecom vendors on IT
spend could pose a positive surprise in FY’12E and report well than expected growth rates. With the
slowdown in telecom equipment sector, Indian IT vendors have shifted focus towards telecom service
providers to attain growth.
46
48
50
52
54
56
58
60
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Man
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2
7
12
17
Rev
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50
100
150
200
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350
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Source: Company, R K Global Research
Source: TradindE, EuroStat, R K Global Research
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 8
Information Technology & Enabled Services
The United States downgrade by Standard & Poor & EU debt crisis…Any Implications…?
As markets ponder in this difficult situation, there will likely be plenty of volatility in the coming Qs — but
everything is not as bleak as it appears. Emerging markets are growing robustly and should do more to spur
domestic demand of EMAs and application that concentrates on energy & efficiency, if, for no other reason
than to keep their economies growing. Corporations long ago adapted to the weak economic scenario by
keeping costs low, obtaining growth from emerging markets and limiting hiring. While this does not do much
for the unemployment rate, corporate earnings are still reasonably strong in spite of continued economic
weakness. In the short run, little damage will likely be done as a result of S&P's downgrade of the United
States from AAA to AA+. Despite global woes, the United States is still viewed as a bastion of stability. US is a
country that submits to the rule of law, with an economic system that can take a good idea and finance it
more quickly than anywhere else in the world. Similar reasoning goes for EU (UK, France and Germany) as
well, though it has a double pressure of continental Europe debt and warnings of France downgrade. However, we
see greener pastures as France & Germany are on the line of a possible financial integration of reforms and many
EU countries looking to change their economic landscape through plans & strategies for a better future.
We must never forget that US & EU economic system are the strongest in the world and household names such
as Apple, Tesco, Starbucks, Google and Amazon either didn't exist or were small companies just 30 years ago &
have grown to giant size now. And moreover, most of the Fortune 500 companies (Goldman Sachs, Apple,
Google, Motorola Mobility, BOA & BAE, BT, majorly technology companies) have made excellent profits in
Q1FY’12 and the picture looks rosy for FY’12E profits as well. Even their performance of the Dow Index shows
a return of an average of ~3.7% v/s ~3.4% (Dow broader Index) over the last FY. Growth remains but slow;
however demand is superior for products (TCMs, AdGs) preference from companies will see more demand and
transformations of IT apps. that will be tethered for better efficiency and also save on the cost fronts for the
clients. And this viable emergence on the cost front (manage/save cost) will require cutting edge applications
from seasoned players who can manage cost. And we remain optimist, that marquee Indian IT firms like TCS,
Infosys & Wipro could leverage on the demand outskirts from their global clients. Thereby, we don’t weigh any
major implications over the technology companies from the US downgrade.
Having said all these, we, on the other side are not as confident on the performance of the EU & US BFSI
services firms as because global financial firms aren’t looking in the best of their helms (return of ~0.04% v/s
~3.4%). Banks increasingly are falling prey to volatile economic conditions (customer oriented) and are
unable to drive Growth. US banks add checking account customers at an average rate of ~17% a year, but
losing them at an annual rate of ~15%. Moreover, debt crisis in Europe and US has also squeezed the big
leagues (Societe’ Generale, Barclays, Banca Santandar & Unicredit-Capitalia et al). Goldman Sachs has already
held back a USD400 mn IT services deal to be handed to one of the big-three Indian IT firm and we expect
more to follow. Though, we feel that the repercussions will be off-sided by the end of Q2FY’11 but somehow
the banks will not be able to freely consider discretionary spends and regular IT spends for some time now.
However, we remain very optimistic on the banking sector of emerging economies (Asia, MEAs, APAC & Libero
America) and believe that enormous reforms (regulatory Apps, customer orientation, data theft reduction,
integrated CRM & application of reformatory transfers) will lead to demand of IT services. We believe that
these drivers will considerably contribute to the growth of the IT services firms in India and thus will be one of
the vital reasons that the IT firms will focus more of the paradigm shift towards these emerging markets.
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dex
FinSec Industry Dow Jones Industrial Index
Source: Dow Jones, DJIVY ETF, R K Global Research Source: Dow Jones, DJIVY ETF, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 9
Information Technology & Enabled Services
The Indian IT Industry Update Economies of scale for the IT industry are superior
The Indian Information Technology industry accounts for a 5.19% of the country's GDP and export earnings as
of 2009, while providing employment to a significant number of its tertiary sector workforce.
In FY’10-11, annual revenues from IT-BPO sector is Estimatesd to have grown over USD76 bn compared
to China with USD35.76 bn and Philippines with USD8.85 bn. India's outsourcing industry is expected to
increase to USD225 bn by FY’20. IT is one of the most important industries in the Indian economy. The IT
industry of India has registered huge growth in recent years. India's IT industry grew from 150 mn USD in
FY’90-91 to a whopping 88 bn USD in FY’09-10. In the last ten years the IT services industry in India has
grown at an average annual rate of ~30% over the last 10 years.
Reports pouring in from international technology research agencies like Gartner Research and McKinsey
Quarterly pointed towards a resurgence of the Indian IT industry. It was expected that during FY’11, IT outlays
would increase in the US and other major economies, which was indeed good news for Indian IT exporters.
While Gartner forecasts a 5.3% rise in global IT expenditure, Forrester is a bit more optimistic with 7.7%
growth. Forrester expects US IT purchases to grow by 8.4% and of Asia-Pacific by 8.3%. Various US sectors
such as finance and insurance, manufacturing, healthcare, utilities, energy and telecommunications are
expected to make a strong come back with higher IT spending as compared to last two years. Forrester has
raised the hopes of Indian IT exporters by predicting that these sectors will spend 17% of their IT budget on
outsourcing. Both research agencies anticipate that preference will initially be given to projects offering low-
cost benefits, as the focus will be on cost-optimization. Key demand indicators in the last two quarters such as
increased deal flow, volume growth, stable pricing, and faster decision making of clients in entering into
contracts has made the proxy of the reports as of now. Though full recovery is expected in another two
quarters, development of new growth levers, improved efficiency and changing demand outlook signify early
signs of recovery. Thus, Growth in the near-term, therefore, will be strong for Indian low cost IT Service
providers Over the years, Indian IT service companies have evolved to emerge as full service players
providing testing services, infrastructure services, consulting and system integration. Indian IT Application
Export revenues grossed USD49.75 bn in FY’10, growing by 5.4% over FY’09, and contributing 69% of the total
IT-BPO revenues. The expected total software exports for FY’11 could be to the tune of USD52 bn which
accounts for over 99% of total IT exports, employing around 2.15 mn employees.
For FY’12E, IT budgets will see greater offshore spending with significant expenditure on discretionary IT
spending. Conventional cost take out continues to drive growth for services like IS, BPO, ADM, GDM and IMS
(exposure less than 5%) while revenue enhancement is driven by strong spend in Enterprise Solutions (ES),
Consulting, Manufacturing and Package Implementations (MPI). We expect discretionary spending from large
clients (preferably Govt. clients and Fortune 500 cos.) to drive visibility for Tier I Companies like, TCS, Infosys
& Wipro going through FY’12E And FY’13E.
1%
6%
11%
16%
21%
26%
31%
36%
41%
46%
3
13
23
33
43
53
63
FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E FY'13E
(`b
n)
IT Exports Growth
Source: DGE; Govt. India, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 10
Information Technology & Enabled Services
Company Report section
Tata Consultancy Services Page 11-22
CMP (`) Target Price (`) Rating Upside (%)
1018 1206 BUY ~15.5%
Infosys Ltd Page 23-29
CMP (`) Target Price (`) Rating Upside (%)
2362 2562 HOLD ~7.8
Wipro Ltd Page 30-38
CMP (`) Target Price (`) Rating Upside (%)
325 416 BUY ~18
Source: R K Global Research Estimatess
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 11
Information Technology & Enabled Services
Descriptions FY'10 FY'11 FY'12E FY'13E
Revenue (` mn) 230445 292754 380997 461373
EBIDTA (` mn) 68493 92583 117426 141324
NPAT (` mn) 56185 75700 97582 117848
Book Value (`) 77 100 129 160
EPS (`) 29 39 49 60
EPS Growth (%) (40) 35 22 22
ROE (%) 37 39 38 37
ROCE (%) 58 59 45 44
P/BV (x)* 14 4 7.8 6.3
P/E (x)* 30 30 20.7 16.9
* Data as on, 19th, Sep’ 2011, on the closing price of `1018
CMP-`1018 “BUY” Target Price-`1206
Market Data Bloomberg Code TCS IN Reuters Code TCS.BO SENSEX 16745 NIFTY 5031 Dividend Yield (%) 1.5 52 Week High/ Low(`) 1246/869 Equity Capital(` mn) 978 Face Value (`) 1 Market Cap (` mn) 1992050 Avg. 10 day Vol. NSE 1926119 Time Period (Months) 12
Key Market Ratios TTM EPS (`) 39 TTM Book Value (`) 100 TTM PE (x) 30 TTM P/BV (x) 4 TTM EV/EBIDTA (x) 21 EV/TTM Sales (x) 7 Mcap/TTM Sales (x) 7.1
Share-Holding Pattern (%)
Price v/s NIFTY
74%
8%
13%
5%
Promoters Public FIIs Others
950
1000
1050
1100
1150
1200
1250
5200
5300
5400
5500
5600
5700
5800
5900
6000
6-Apr-11 6-May-11 6-Jun-11
NIFTY TCS
Tata Consultancy Services: Scaling High & Adding Value…
TCS should benefit from scale and a diverse geographic and business mix
and has the largest ADM practice and BPO and second largest Infrastructure
services practice among Indian service providers. We believe it is well-placed
to benefit from scale in the event of any vendor consolidation activity by large
clients (TCS is among the top three IT services vendors for most clients) as
they brace the slowdown in the US & EU and increase discretions.
Rising Application Expenditures in US, EU & EMs will help maintain its
client contracts growth in FY’12E revenue growth outlook. Discretionary
spending (as seen in Q1FY’12) will further add to the growth outlook in terms
of revenue & NPAT, though the company guided on the sustainability of the
same. Retail & E&U verticals will continue to lead growth. While
manufacturing is expected to lag company growth (as the company in this
segment is not competitively aligned), growth in telecom (with renewed
spending) will be in line with industry growth.
TCS is stepping up its non-linear initiatives, iON, the first of its kind fully
integrated IT solution for SMB segment, has about 200 clients. The company is
also investing in developing platforms for the other industry verticals like
retail and health care. Currently, non-linear initiatives contribute about 5.5%
of the total revenues with asset leveraging solutions contributing about 4%.
The management has reiterated its target of generating about 10% of the
incremental revenues in Q4FY’12E from the non-linear initiatives like
Platform BPO and SMB solutions.
The BFSI vertical is witnessing the benefit of discretionary spending
towards regulatory changes. The vertical enjoyed the benefit of the spends
relating to M&A activities in FY’10 and in the early part of FY’11. However
since then the benefit has mainly been from the spends towards regulatory
changes, we expect them to contribute now as the BFSI in US & EU are gearing
for various regulatory changes norms. The management believes that
regulatory changes related spends are likely to continue till FY’14E.
Valuation & Outlook
At CMP, the stock trades at a PE of 16.9x of FY’13E EPS of `60 and P/BV of 6.3x of FY’13E BVPS of `160. The industry PE & P/BV roll around ~19.2x and ~5.5x. Thereby, we initiate BUY on the TCS stock with a 12M price target of `1206, an upside potential of ~15.5% from current levels, using a PE of ~20.1x of FY’13E EPS.
Source: Company, R K Global Research, as on 19th Sep’11
Source: Company, R K Global Research, on 30th Aug’11
Source: BSE, Ace Equity, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 12
Information Technology & Enabled Services
Investment Thesis Pertaining to Investments
TCS should benefit from Volume, and diverse geographic Orientation, business
mix & moderate EU Exposure The United States is the world’s largest IT spender followed by Europe and Japan. The string of slowing growth
in the United States would make lesser impact on TCS as the company has diversified exposure to US clients,
than in comparison to other IT services firm like Infosys and Wipro. On the other hand, TCS’s exposure to the EU
as a percentage of revenues is lowest among Indian peers, which caps the downside in the event of any severe
cut in spending. However, the exposure as we feel is still considerably moderate at ~27% of its revenues that
comes from continental Europe. TCS bagged few large deals in Q1FY’12, however, the company has built in
delayed project starts and possible cuts that could see a slowdown in revenues. But there could be a short term
impact on its earnings from the European economic conditions (continental Europe) in general. Greece seems to
lose its balance and other shivering economies like Italy & Portugal is also weak, thereby could affect the short-
term earnings of the company, it could linger on till the Q2FY’12. The company has been securing Sovereign
(Governmental) projects from European countries for quite some time now and few more Sovereign projects are
also on the line, and the most impressive thing is that TCS has become very known name in Europe as a part of
Tata Group, post the famous acquisition of Corus and Jaguar- Land Rover and their turnaround. This is what can
work for the company in the long term. France has open up its outsourcing activities for the Indian IT firms and
United Kingdom is also on the roll out for some of the big governmental healthcare projects on IT application.
TCS chairman Mr. Ratan Naval Tata is already chipping in for few meetings with the UK Prime Minister David
Cameron for securing the projects, which are worth anything between USD50-200 mn and could be counted as
transformational deals. These deals could provide mid-long term stability to the company in terms of revenues
and more vitality.
Global Revenue TCS Infosys Mahindra Satyam Wipro HCL Tech.
EU Revenue (%) of Total Revenue 27 29 31 32 35
US Revenue (%) of Total Revenue 53 63 58 64 54
*Calculated Till FY’11 June
Service Line Revenue Contribution (%) Remarks
ADM
48 Discretionary
BI 11 Discretionary
Assurance Services
5 Partial
IES 4 Partial
Infrastructure
5 Non-Discretionary
Global Consulting 5 Discretionary
ALS
3 Discretionary
BPO 5 Non-Discretionary
MPIT 14 Partial & Non-Discretionary
*Calculated Till FY’11 June
The BFSI sector, which constitutes ~45% of total revenue, grew at 22.5% YoY leading the volume growth for the
company. We believe that higher growth in Asset Leveraged Solutions (which is mainly the Core banking
software), Compliance, high-end analytics, customer insights and re-plat-forming initiatives in the BFSI space
could have resulted in high growth in this vertical. BANCS (TCS’ core banking product) grew by 26% YoY.
However, Enterprise Solutions and BI which indicates discretionary spending saw muted growth in FY’11 but
will see surge in later FY’12E as there will be many clients who will reconstruct their business, and will thus
need consulting approaches for saving costs. We believe that, a clear growth trend in discretionary spending is
still not established given the global economic scenario and spurt of discretionary spending in FY’12E because of
pent up demand and one-offs. Hence, we expect normal growth.
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 13
Information Technology & Enabled Services
Segmental YoY Growth Renewed Confidence of Positive outlook in FY’12
In Q1FY’12 TCS delivered a decent performance on revenue growth front coming in line with street’s
expectations, it performed better than expectation on the operational efficiency front. Gross and Net employee
additions remained strong for the quarter (~20K gross additions in each of the last three quarters), margins
more or less remained flat and improvement seen in pricing for the second consecutive quarter. The company
plans around 60K gross hiring for FY’12E, which appears optimistic and reflects the strong demand environment
for IT services and rotational shifts for varied projects. There was secular growth across markets and industries
during FY’11. Growth was led by the developed markets of the United States and Europe (UK & France) with
strong contributions from Asia Pacific and the Middle East and Africa. The company has been instrumental in
realizing growth opportunities in the Middle East, with thrust on the energy sector applications as most of the
verticals returned to the growth path during the year. In terms of services, TCS’ full-services capabilities
continue to be leveraged by customers with their new service lines like Assurance, Infrastructure Services,
Products and Enterprise Solutions growing at a fast pace. The company broke free ahead of Infosys in terms of
setting newest segmental applications, which became very much operational in the year. This trend is expected
to continue in FY’12E. Adding to it we also do not sideline acquisitions plans from the company in few verticals,
like, consulting & Manf. The Q1FY’12 witnessed a secular growth across all sectors except telecom which
reported a fall in revenues. However, the other segments reported steady growth in revenues.
H2FY’11 & Q1FY’12 marked a strong resurgence in volume and demand growth, for the first time, post the
downturns after FY’08. This growth was led mainly by developed markets of the United States and Europe &
recently being contributed by EMs. The second half of the year also witnessed an uptick in pricing for the first
time since September FY’08. The Company has registered a strong broad based sequential growth across all key
markets and customer segments. On consolidated basis for the year FY’11, revenues at `292754 mn were higher
by ~27% over the previous year’s revenues of `230444 mn. Operating profit (profit before taxes excluding other
income) at `92382 mn was higher by ~35% over the previous year’s operating profit of `68397 mn. NPAT for
FY’11 stood at `75700 mn was higher by ~35% over the previous year’s net profit of `56185 mn.
0.1
1.1
2.1
3.1
4.1
5.1
6.1
7.1
8.1
USD Revenue Volume Growth Pricing Growth INR Revenue Growth
Per
cen
tage
(%
)
TCS Infosys
0%
5%
10%
15%
20%
25%
30%
35%
55000
105000
155000
205000
255000
305000
355000
405000
455000
505000
FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E FY'13E
An
nu
al R
even
ue
(`m
n)
Revenue Revenue Growth
Source: Company, R K Global Research
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 14
Information Technology & Enabled Services
Growth led by the US, APAC & Middle East with Increase Spending in the Newer Verticals TCS continues to focus on serving large global clients in the major markets of North America and Europe
including UK & APAC. The Company’s key focus in these mature markets is to grow its wallet-share in key
customer accounts by increasing the scope of engagement applications. TCS is also focused on winning new key
accounts in these major markets by using its integrated full services and GNDMTM offerings. The Industry
domain and consulting led focus has enabled the Company to push for aggressive growth. The Company has
numerous multi-year relationships established with global multinationals in these markets and continues to
provide them a multiple range of services.
Banking, financial services & insurance grew at an average of 3.5% YoY despite negative tractions in global
markets. Manufacturing, life sciences, transportation and media & entertainment continue to see demand uptick
with over ~9%, ~6.7%, ~20% and ~4.7%, respectively. Hi-tech grew more than ~13% on the back of ~16.3%
growth in FY’11. The active client roster increased to 969 v/s 959 in FY’11 as TCS added 140 new clients. US
(+8.4% QoQ) and UK (+5.7%) grew well while India (+5.2%) and Asia Pacific (+12.1%) also contributed strongly
to overall growth. Continental Europe was the only geography to report a decline at ~4.2% FY’11, although in a
constant currency terms it still grew by ~1.2% over the same period. Management mentioned that demand in
Europe could start improving going forward in FY’12E. Management also noted that the PADA contract (GBP 600
mn, over a 10 Year Period) is running as per schedule and the government is conducting the due diligence on it
and will soon be allotted to TCS as a vendor partner.
USA & Canada
54%
Latin America
4%
UK15%
Continental Europe
10%
India 9%
APAC6%
MEA2%
1
3
5
7
9
11
13
1
3
5
7
9
11
13
15
Q4FY'10 Q1FY'11 Q2FY'11 Q3FY'11 Q4'FY'11 Q1'FY'12E Q2FY'12E Q3FY'12E Q4FY'12E
Rev
enu
e (%
)
Revenue Growth Volume Growth
Vo
lum
e (%
)
Global Earning Contribution (%)
FY'10 FY'11 FY'12E
North America 52.8 54 54.5
Libero America 4.7 4.8 4.7
European Union 16.2 16.9 16.8
Continental Europe 10.5 10.8 11
India 8.7 8.5 8.6
APAC 5.2 5.7 5.9
MEA 1.9 2.1 2.2
Source: Company, R K Global Research
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 15
Information Technology & Enabled Services
Growth Momentum in E&U Vertical to Remain Strong in the Coming Quarters
The ‘Other segments’ constituted ~23.1% of Company’s revenues in FY’11 (21.85% in FY’10) & ~5.1% in Q1FY’12
and has contributed ~20.5% of total segment result in FY’11 (20.44% in FY’10). The combined performance of
‘Other segments’ was an excellent growth in revenues (31.84% in FY’11 over FY’10) and an impressive
improvement in segment result (29.89% in FY’11 over FY’10). Among them the Energy, ReSource and Utilities too
clocked a revenue growth of astounding ~79.5% in FY’11 and ~16.2% in Q1FY’12.
This vertical posted revenue of ~13.6% CQGR over the last seven quarters. Given the small base, even one large
contract tends to bring about a sharp spike in numbers. We expect growth momentum to remain strong due to
the following: (1) small base, (2) large sizes of the organizations in this space, holding potential for large
contracts and (3) increasing privatization, which is expected to drive the focus on cost efficiency. As energy
conservation outlook is increasing in EU, so there will be a requirements of application and advisory to make it
happen and thus we feel that E&U could make a double-digit percentage contribution to TCS' revenue in the next
few years.
Single-digit pricing improvement likely in FY’12E, could be higher in FY’13E…
TCS reiterated that the pricing environment is more sanguine now than it was last year. The company
seems confident of low single-digit pricing improvement in FY’12E and potentially even higher in FY’13E.
This would be on the back of 120 bps sequential increase in constant currency pricing in Q1FY’12. While the
pricing up-tick may be in low single digits going forward (~2-3%), the management expects the up-tick to be
much more significant in FY’12-13E. This is primarily because several contracts (particularly in the EAS
segment) saw pricing cuts during the slowdown. These will come up for renewal early next year and may
see pricing being restored to at least the post-recovery levels. Overall pricing would also be favorably
impacted by (a) improvement in revenue mix, driven by pick-up in discretionary spends, and (b) like-to-like
hikes, driven by cost of living adjustments (COLA).
Pricing Trends in FY'11
TCS Up 0.5% QoQ in constant currency (Overall)
Infosys Tech Up 1.2% QoQ in constant currency (Overall)
Wipro Offshore Price increase by ~2.5% sequentially
Cognizant Tech. Offshore Price increase by ~2%
HCL Tech. Flat Pricing Environment
*Data till FY’11 March
-20
-10
0
10
20
30
40
50
60
70
Q1FY'10 Q2FY'10 Q3FY'10 Q4FY'10 Q1FY'11 Q2FY'11 Q3FY'11 Q4'FY'11 Q1FY'12E Q2FY'12E
Per
cen
tage
(%
)
Telecom E&U Total
Source: Company, R K Global Research
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 16
Information Technology & Enabled Services
Higher SG&A Efficiencies & Better Pricing Helps Maintain Margins: Utilization Levels at ~84%
TCS has guided to hire ~60K gross employees (50:50/lateral: fresher) in FY’12E and expects utilization
excluding trainees to be in the range of ~82-84% (highest amongst peers), which we expect to be decent,
considering the higher employee base. The company added 89,685 and 31,185 employees on gross and net basis,
taking the total employee count to 198,614 at the end of Q1FY'12. TCS won seven large deals across major
verticals with 2 in manufacturing vertical. OPM expanded 12% YoY to 35% (despite robust employee additions
and ~2% drop in utilization rates), contributed 0.58% by currency, higher pricing, productivity and lower SG&A
expenses , offset by a negative impact of 0.52% due to the onsite effort shift. SG&A efficiencies offset by rise in
utilization (excluding trainees) to 83.8% in FY’11 from 82.4% in FY’10. The NPM increased ~2% YoY primarily
due to adjusted tax rate.
Present Net Employee addition at ~33.1% of gross but Utilization remains on the higher end
over strong project delivery
High Utilization levels, implies strong deals, but concerns remain on the attrition
(voluntary/involuntary) levels
68%
70%
72%
74%
76%
78%
80%
82%
84%
86%
-3000
2000
7000
12000
17000
22000
Q1FY'10 Q2FY'10 Q3FY'10 Q4FY'10 Q1FY'11 Q2FY'11 Q3FY'11 Q4FY'11 Q1FY'12
Gro
ss &
Ne
t A
dd
itio
n o
f Em
plo
ye
es
Gross Employee Addition Net Employee Addition
Utilization Including Trainees Utilization Excluding Trainees
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
1
3
5
7
9
11
13
15
17
FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11
Att
riti
on
Rat
e (%
)
Attrition Rate Growth/Fall
Source: Company, R K Global Research
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 17
Information Technology & Enabled Services
Increasing contracts and robust Delivery model & Engagement paves way for growth
Continuous shift towards Fixed Price Contracts helped Maintain operating margins
TCS has relatively adopted cost-price structures over the years and the company has understood that adoption
of fixed-pricing contracts will reduce the risk level for foreign exchange fluctuation. Though, risk or outcome-
based pricing is still in its nascent stage of adoption in India but the company is invigorating enough to adopt it
in its business model. TCS has many customers that are repeat customers, doing business with the company
for more than 5 Yrs or so, it becomes easy in this case to enter into a fixed-price contract with those customers.
More Offshoring of volume (29.7% YoY growth in FY’11 & ~28.6% IN Q1FY’12) led to considerable revenue
growth of 24.3% in FY’11, offsetting the effects of a ~4.2% YoY decline due to forex movement. In addition,
pricing and effort mix shift offshore affected the company’s revenue growth negatively by 0.3% and 0.9% YoY,
respectively. However, Offshoring growth is expected to pull-back in FY’12E (discounting Q1 & Q2).
0%
5%
10%
15%
20%
25%
30%
0
50
100
150
200
250
300
350
400
450
500
$1 Mn $5 Mn $10 Mn $20 Mn $50 Mn $100 Mn
No
. of
Cli
ents
Qo
Q
Q1FY'12 Q4FY'11 Growth
41
42
43
44
45
46
47
48
49
50
25
35
45
55
65
75
85
95
Per
cen
tage
(%
)
Offshore Revenue Mix Utilization Mix
-400%
-300%
-200%
-100%
0%
100%
200%
300%
-10
-5
0
5
10
15
20
25
30
35
Volume Forex Movement Pricing Effort Mix Shift Offshore
Total Revenue Growth
Rev
enu
e D
rive
rs F
Y'1
1 (
%)
Revenue FY'10 Revenue FY'11 VAR
Source: Company, R K Global Research Estimates
Source: Company, R K Global Research
Source: Company, R K Global Research
0%
1%
2%
3%
4%
5%
6%
7%
8%
30
35
40
45
50
55
60
FY'08 FY'09 FY'10 FY'11
Per
cen
tage
Rev
enu
e (%
)
Time & Material Basis Fixed Price & TimeFixed Price & Time (G/L)
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 18
Information Technology & Enabled Services
Appreciating US$ will aid EBIDTA, going forward through Q2 & Q3FY’12E
The company’s cost rationalization programme led to enhancement in its EBIDTAM profile, which expanded to
~32% from ~31% in FY’’11 Management applied various levers such as Offshoring more work, reducing the
cost of revenue by improving productivity and SG&A benefits, which gave positive benefits of 100 bps,
respectively, negating the effect of exchange rate of 215 bps YoY. Management has announced a substantial
wage hike of 12–14% offshore and 2–4% onsite in FY’12, effective April FY’12. This got TCS a 100 bps negative
impact on margins in Q1 FY’12.
EBIDTA in FY’11 was `92382 mn (`111164 mn in FY’12E), EBIDTA as percentage of revenues was ~32% in
FY’11 (~31% in FY’12E). The cease in the EBIDTA of ~100 bps. Could be mainly attributable to:
Increase in operational & other expenses by ~100 bps.
Improvement in other income by ~31% in FY’12E (net).
Offset by an increase in overseas expenses, ~0.2% and services rendered by business associates at
~0.7%.
In FY’12E, however, we feel that the debarring the first quarters, the EBIDTA will be stable as the impact of
operational expenses is expected to be off-sided by the US$/` rate, which stood at `47/US$ and expected to
ravel through `46/US$ by Nov’/Dec’ FY’12. The company can garner more from its off-shoring activity and US$
denominated contracts.
-150%
-100%
-50%
0%
50%
100%
150%
200%
250%
300%
350%
-250
-150
-50
50
150
250
350
INR (Dep/App.) Pricing & productivity
Effort Shift Offshore
SG&A Efficiency Total Impact
EB
IDT
A R
even
ue
Dri
ver
s (B
PS)
EBIDTA FY'10 EBIDTA FY'11 VAR
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 19
Information Technology & Enabled Services
Valuation & Outlook We are positive on TCS in the mid-long term; the stock has come up by about ~12-15% over the last few weeks
despite strong global headwinds. It is trading at about 20.7x FY’12E earnings and we are factoring a NPAT of
around ~24% CAGR from FY’11 to FY’12E & ~26% CAGR from FY’11-13E. On the EPS front we stand at Rs 47
(FY’12E), a growth of ~22% from FY’11. So, we feel that, there is a lot of scope for upside after the correction
that’s taking place. The valuations are very attractive, also post the H1B visa issue in the US and confidence
vote win by the Greek Government for a bail-out (ECB help for USD 90 bn) & slow US recovery amidst tension.
However, we would like to be patient for sometime more as we feel the global downturn will affect its upside
in the short-term. Most of the other IT stocks have also come off quite a bit and has been correcting since last
month’s contagion. TCS is also a stock we would like to recommend BUY at these levels. As, we feel that, the
current economic doldrums at the global levels will lead to some more corrections.
At CMP, the stock trades at a P/E of 16.9x of FY’13E EPS of `60 and a P/BV of 6.3 of FY’13E BVPS of `160.
There is a strong domestic IT service growth expected to come coupled with the IT expenditure drive from EU
& US (discounting the headwinds). These two factors taken together with some non-linear business picking up
in the second half of the year will allow TCS to post considerable growth in revenue and NPAT. Thereby, we
initiate BUY on the TCS stock with a 12M price target of `1206, an upside potential of ~15.5%, using a
PE of ~20.1x of FY’13E EPS.
15
17
19
21
23
25
27
29
31
33
Ext
end
ed P
E B
and
Band: 30x
Band: 25x
Band: 20x
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 20
Information Technology & Enabled Services
Global Revenues across Geographies…North America Sill Leads…
Operational Performance, Geo-Regions, Domain Segments & Verticals: Q1FY’12
North
America
53%
LIbero
America
3%
UK
16%
Continent
al Europe
10%
India
9%
APAC
7%
MEA
2%
BFSI
43%
Telecom
12%Retail &
Distribution
12%
Manf.
7%
Hi-Tech
6%
Life
Sciences &
Healthcare
5%
Travel &
Hospitality
4%
EAU
4%
ME
2%
Others
5%
ADM
46%
BI
5%
ESAM
11%
Assurance
s
7%
Eng.
Services
5%
Infrstructur
e Services
9%
Global
Consulting
2%
ALSM
4% BPO
11%
In this quarter, both the Americas & EU region
gave a very receding growth. North US, Libero
American & EU revenue declined (due to macro-
economic challenges). However, the revenues
from India, APAC & MEA continue to see growth
from their EVs as a reason of paradigm shift and
emergence of new application in the area of
Energy, Utilities & Green Apps. We expect to see
steady demand flow for applications in EMs in
the entire FY’12.
The BFSI sector continued to be the top biller,
accounting for ~43% of the overall revenues
(declined by ~30 bps QoQ). The Telecom vertical
accounted for ~11.7% of the total revenues.
However, there was a lower traction among the
telecom clients in EU in terms of positive pricing
movements. The trigger segments, such as, Tel.
(~0.7%), Retail (~0.4%), Hi-Tech (~0.4%) &
MPIT (~0.1). saw growth, whereas, Life-Sciences
& Hospitality saw a decline of ~0.1% and ~0.2%
respectively.
Among the domain verticals, most of top revenue
contributing verticals gave either a very small
growth (IT soln. Assurances, Infrastructure &
Consulting) or remained flat (BI & ESAM). The
BPO vertical saw a negative traction of ~0.7%
due to the geographic movements of BPO
services, which has been observed lately. And,
this is quite evident that, going forward, we will
see that consulting taking the centre-stage as
strategic consulting is expected to be the next big
area. Whereas, BI, etc, will be somewhat company
centric rather than industry centric, so it might
remain flat in Q2 also.
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 21
Information Technology & Enabled Services
Financial Results: Q1FY’12 & Q2FY’12E
Descriptions (` mn) Q1FY'12E Q1FY'12
Actual VAR (%)
Q1FY'11 YoY (%) Q4FY'11 QoQ (%) Q2FY'12E
Revenues 82273 86135 5 64109 34 79697 8 93210
Raw Materials Cost 20730 21171 2 16531 28 19872 7 23348
Employee Cost 38593 40621 5 30390 34 37236 9 43609
Total Operating Expenses 59323 61792 4 46921 32 57108 8 66957
Operating Profit 22950 24343 6 17188 42 22589 8 26253
Other Income 1762 2574 46 1896 36 2902 (11) 2,49
PBIT 2,712 26917 9 19084 41 25491 6 28402
Tax 4295 4694 9 3198 47 4637 1 4936
NPAT 20417 22223 9 15886 40 20854 7 23466
Basic EPS (`) 10.4 11.4 9 8.1 40 10.7 7 12.0
Diluted EPS (`) 10.4 11.3 9 8.1 40 10.6 7 11.9
Operational Parameters: Services Onboard and Offboard & contract type
Revenue (%)
Delivery Location*
Onshore 44.8 44.7
GDC/RDC 4.6 5
Offshore 50.6 50.3
Contract Type*
Time & Material 50.3 50.5
Fixed Price & Time 49.7 49.5
*Excluding domestic clients
Client Parameters: Revenue contribution from Marquee clients
Client Contribution*
Revenue (%)
Top 1 7.1 7.4
Top 5 20.7 21.4
Top 10 28.9 29.6 *Last twelve months
Source: Company, R K Global Research
Source: Company, R K Global Research Estimates
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 22
Information Technology & Enabled Services
TCS Ltd, Financials: Reported & Forecasted
Income Statement (` Mn)
Balance Sheet (` Mn)
Descriptions FY'10 FY'11 FY'12E FY'13E
Descriptions FY'10 FY'11 FY'12E FY'13E
Revenue 230445 292754 380997 461373
SOURCE OF FUNDS
Expenditure 165855 206726 273313 331157
Share Capital 2957 2957 2870 2870
Operating Profit (Excl OI) 64589.4 86028.2 107684 130216
Total Reserves 148209 192838 248709 310692
Other Income 3903.3 6554 9742 11109
Shareholder's Funds 151166 195795 251579 313562
Operating Profit 68492 92582 117426 141324
Total Debt 357 411 619 455
PBDT 68397.3 92382.5 117426 141324
Total Liabilities 151524 196206 252198 314017
Depreciation 4693.5 5378.2 8218 9219
APPLICATION OF FUNDS
PBT(OI) 63704 87004 109208 132106
Gross Block 48712 60301 71940 93225
PBT 63704 87004 109208 132106
Less: Acc. Dep. 21107 26080 34298 43517
PAT 7519 11304 11626 14258
Net Block 27605 34222 37642 49709
NPAT 56185 75700 97582 117848
CWIP 9407 13454 14037 14647
Cash At Bank 33962 56045 8485 19052
Financial Ratios
Investments 78934 57955 91725 120148
Description FY'10 FY'11 FY'12E FY'13E
Total CA 107840 154280 138436 176418
Per Share (`)
Total CL 72393 63532 28958 46052
Adjusted EPS 29 39 49 60
Net CA 35447 90749 109478 130366
CEPS 31 41 54 65
Def. Tax/Liab. 130.3 (173) (684) (852)
DPS 23 16 21 29
Total Assets 151524 196206 252198 314017
Book value 77 100 129 160
Margin Ratios (%)
Cash Flow Statement (` Mn)
PBIDTM 30 32 31 31
Descriptions FY'10 FY'11 FY'12E FY'13E
EBIDTM 39 38 30 30
CASH FLOW FROM OPERATING ACTIVITIES
Pre-Tax Margin 27 29 28 28
EBDIT 68493 92583 117426 141324
PATM 24 26 25 26
Changes in CA 1463 (24357) (31716) (27415)
CPM 27 29 28 28
Changes in CL 23964 (8861) (34574) 17094
Performance Ratios (%)
Changes In WC 25427 (33218) (66290) (10321)
ROA 37 39 74 36
Cash From Operations 93919 59365 51137 131004
ROE 37 38 37 36
Taxes Paid 7519 11304 11626 14258
ROCE 57 58 45 44
Net Cash Operations 86401 48060 39510 116746
Sales/FA 4.7 4.9 5.3 4.9
CASH FLOW FROM INVESTMENT ACTIVITIES
Efficiency Ratios (%)
CAPEX (7676) (15636) (12222) (21895)
Revenue Growth 3 27 24 21
Investments (36310) (36309) (33771) (28423)
EBIDTA Growth 22 33 19 21
Cash In Investment (27249) 5343 (45992) (50318)
EBIT Growth 23 35 20 21
CASH FLOW FROM FINANCING ACTIVITIES
PAT Growth 20 35 22 22
Dividends Paid (45889) (32019) (41710) (55865)
EPS Growth (40) 35 22 23
Others 4941 543 Nil Nil
Valuation Ratios(x)
DTL & Misc. Ex. Changes (1124) 303 511 168
EV/EBIDTA 21 21 22 26
Cash In Financing (41242) (31320) (41078) (55861)
EV/Sales 6 7 7 8
Cash & Cash Equivalents 17909 22084 (47560) 10567
Mcap/Sales 7 7 7 8
Cash At The Beginning 16053 33962 56045 8485
P/BV 10 12 7.8 7.5
Increase In Cash 17909 22084 (47560) 10567
P/E 27 30 20.6 20.1
Cash At The End 33962 56045 8485 19052
Source: Company, R K Global Research Estimates
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 23
Information Technology & Enabled Services
Descriptions FY'10 FY'11 FY'12E FY'13E
Revenue (` mn) 211400 275010 321361 376444
Operating Profit (` mn) 82810 92290 108415 128827
PAT (` mn) 57550 61100 83094 97578
Book Value (`) 383.9 426.8 524 635
EPS (`) 100.2 112.2 145 170
EPS Growth (%) 16 12 29 17
ROE (%) 26 26 29 28
ROCE (%) 41 42 37 37
P/E (x)* 26 31 16.2 13.8
P/BV (x)* 7 8 4.5 3.7
* Data as on, 19th, Sep’ 2011, on the closing price of `2362
CMP - `2362 “HOLD” Target Price - ` 2562
Market Data Bloomberg Code INFO IN Reuters Code INFY.BO SENSEX 16745 NIFTY 5031 Dividend Yield (%) 2.6 52 Week High/ Low(`) 3499/2161 Equity Capital(` mn) 2860 Face Value (`) 5 Market Cap (` mn) 1375320 Avg. 10 day Vol. NSE 1135783 Time Period (Months) 12
Key Market Ratios TTM EPS (`) 112.2 TTM Book Value (`) 426.8 TTM PE (x) 31 TTM P/BV (x) 8 TTM EV/EBIDTA (x) 21 EV/TTM Sales (x) 8.3 Mcap/TTM Sales (x) 8.1
Share-Holding Pattern (%)
Price v/s NIFTY
16%
15%
44%
25%
Promoters Public FIIs Others
4000
4500
5000
5500
6000
6500
2000
2200
2400
2600
2800
3000
3200
3400
3600Infosys NIFTY
Investment Thesis: It’s Restructuring, Integrating, Brand
Positioning & Transforming…Its New Infosys!
Strong Demand of IT services & Renewed Budgets to leading to Revenue
Growth with IT spending reaching USD 1.5 trillion in FY’11 and will grow by
~8% in FY’12. With macro outlook in advanced economies to improve after
the Greece’s debt crisis gets over, it is seen that demand for IT services has
picked up this year. We expect Infosys revenue to grow at a CAGR of ~22%
during FY’12-13E backed by strong demand for IT services throughout the
world & increasing application requirements in the EU and US & APAC.
Acquisition forefront, the company has acquired Gen-I Technology of
New Zealand on 8th June FY’12, giving the company ready access to 3,300 of
Gen-I’s clients (BFSI, Energy, Sovereign, Healthcare & Rural) in APAC region.
The transaction is expected to complete by the end of Q2FY’12 and will see an
impact on the revenue by FY’12E by close to USD12 mn. We see more
probable acquisitions in East Europe or Japan with an expected spending of
USD600 mn in the areas of consulting in East Europe for acquisitions (cash
reserve of `16,00,00 mn) as consulting Apps. demand in EU opens up.
Inorganic route will provide ready clienteles (especially sovereign clients) to
Infosys which will benefit the company in garnering the opportunities in
Europe in the long run.
Segmental performance looks upbeat and major segments are pursuing
growth track in FY’12E, viz, BFSI (~6%), Retail (~11%) and Manufacturing &
Package Implementation (MPI) (~24%), will drive up revenue. Infosys stands
to be the most preferred IT services firm for BFSI application (Finacle)
globally catering to 106 banks across 61 countries.
Organization Transformation & Integration is leading the new Infosys
board through a series of restructuring in Q4FY’11 and will beyond, & it was
all done to vehemently to impose strategic shifting to new ideas and
competitive intelligence.
Valuation & Outlook
At CMP, the stock trades at a P/E and P/BV of ~13.9x and ~3.7x FY13E EPS of `170 and BVPS of `635 respectively with industry P/E and P/BV hovering around 19.2x and 5.5x respectively. We initiate a HOLD rating on the Infosys stock with a 12M price target of `2562, an upside potential of ~7.8%, using a P/E of ~15x of FY13E EPS of `170.
Source: Company, R K Global Research, as on 30th June’11
Source: Company, R K Global Research, as on 19th Sep’11
Source: NSE, Ace Equity, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 24
Information Technology & Enabled Services
Investment Thesis of Infosys Ltd.
Strong Demand of IT services & probable acquisitions leading to Revenue Growth Our muted growth expectation of ~17% YoY, buoyed by the Gen-I acquisition & increase in the price
realization from the US and Europe. But we expect some surprise as Infosys is always industry plus. EBITDA as
we see could be a bit pressurized due to the rising expenditure (employee cost rising at ~20% YoY & SGA
expenses rising by ~9% YoY, guided by its wage hike FY’12E). Majority of the clients’ contracts has been
renewed and the company’s clients have finalized the spending for this year’s budgets and there may be a
pricing hike as expected during Q2FY’12E. For FY’12E, we see a very positive surprise in revenue pick up. The
current environment has meant budgets were being re-evaluated on a quarterly basis, providing little comfort
in establishing definite short-term growth trends. If the allocated budgets are fully spent (despite a flat trend
YoY), it will act as a significant change for the Indian IT industry. Our FY’12E EPS guidance of Rs 145 YoY is
significantly above market expectations and can be attributed to; 1) Voluminous income in FY’12E driven by
new projects across the EU as the company is expected to trap outsourcing projects in Germany and France. 2)
Contribution from recent acquisition Gen-I Technologies, NZ and more acquisitions to follow in FY’12E. 3)
Increase in the BFSI & telecom expenditure as the sector has outdid the recessionary problems, returning to
growth track. 4) The manufacturing & package implementation will see a very strong surge (our expectation of
24% growth YoY. 5) For the USD/INR issue; we do not see major impact for the company on the rupee
appreciation as long as the revenue keeps up track.
Volume growth at ~4%, lowers sequentially, but stable
Infosys maintained a good volume growth this quarter, ~4% volume growth vis-à-vis’ 4.3% from QoQ
sequentially (however, down by ~7.5%). Client addition has been lower as clients have been re-shuffling their
spends as they are concerned about the ongoing debt crisis in Europe. We believe that this year the company is
going to see an even growth rather than a frontloaded or back ended growth. However, both growths will
solely depend on the European and the US markets, if they revive.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
30000
80000
130000
180000
230000
280000
330000
380000
430000
FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E FY'13E
(`m
n)
Revenue Revenue Growth
-6
-5
-4
-3
-2
-1
0
1
2
3
4
-2
-1
0
1
2
3
4
5
6
7
8
9
Vo
lum
e (
%)
Volume (%) Inc/Dec. Pricing (%)
Source: Company, R K Global Research Estimates
-40
-30
-20
-10
0
10
20
30
40
50
60
0
10
20
30
40
50
60
Ne
t C
lien
ts
Net Client Additions Growth QoQ (%)
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 25
Information Technology & Enabled Services
Business Segments seems positive on new Technology reprising; as a support services
Infosys’ products and platform space has grown faster than other areas. The business operation has gone up
by ~4%, the business transformation is up by ~4.5%, the products and platform space is high by ~8.2%, which
is also a different kind of growth. In the product & platform space, the company won had 5 large deals (USD
50-100 mn+) in the iEngage platform; and had one good sell of iTransform through the Infosys Public Service.
Therefore, we feel, it is a different kind of growth because it is in the backend as a support service to the
existing clients and new acquisitions. Discretionary spend is flat and is not really ramping up, so these support
services could lead the company offset the flat trend in discretionary spends. This we expect will gel well to
help acquire more clients in the future. Manufacturing Companies in the FY’12E is expected to increase their
expenditure vehemently on technology components of their differential product segments. Moreover the
recent acquisition of Gen-I (ICT applications) will handsomely contribute to the telecom segment. The retail
vertical, which fell around ~7% YoY in FY’11, is expected to revive in FY’12E (company guidance). We forecast
a ~11% YoY growth in the FY’12E revenue. High impact of consumer on the buying side due to the
improvement in the economies (flat improvement) of the US and EU will lead to the demand of application of
retail verticals
Volume growth at ~4%, lowers sequentially, but stable…
Infosys maintained a good volume growth this quarter, ~4% volume growth vis-à-vis’ ~4.3% from QoQ
sequentially (however, down by ~7.5%). Client addition has been lower as clients have been re-shuffling their
spends as they are concerned about the ongoing debt crisis in Europe. We believe that this year the company is
going to see an even growth rather than a frontloaded or back ended growth. However, both growths will
solely depend on the European and the US markets, and especially on the BFSI segment that is showing a bit of
negative traction. However, we are positive on the regulatory Apps. as this seems a very valuable proposition
in difficult times.
5
10
15
20
25
30
35
40
FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E
(%)
Of
To
tal R
even
ue
BFSI MPIT Retail Telecom Others
-2%
0%
2%
4%
6%
8%
10%
12%
14%
0
20
40
60
80
100
120
140
160
180
Sh
ore
Co
ntr
ac
t (
` m
n)
Onshore Person/Month Offshore Person/Month Total volume Growth
Source: Company, R K Global Research Estimates
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 26
Information Technology & Enabled Services
Infosys shows stable performance against volatile USD, Impressive turn-around in Q1FY’12
With the increased uncertainty in the global economic scenario and S&P downgrade of US sovereign debt
rating, there might be pressures on the IT budget and more on the actual spending. The annual revenue
growth of large IT firms is set to decline in FY’12E to lower than ~20%YoY against earlier expectations of over
~25%YoY growth. During the rebound after the previous slowdown due to Lehman crisis, we have noticed
that the large firms were able to grow faster than smaller firms in general. The robust business model,
diversity in service lines and size made it possible for large Indian IT vendors to steal the market share.
Immediately after the Lehman crisis in Sep FY’09, revenue of Infosys for December quarter (Q3FY’09) missed
its guidance by large margin and further missed guidance in Q4FY’09. The impact was severe as the financial
sector collapsed in US. Subsequently, Infosys took a cautious stance while guiding for FY10 and started the
year with a guidance of ~3.1-6.7%YoY USD revenue decline for FY’10. The impact was severe but outsourcing
from Indian vendors started to gain incremental market share in FY’10 & FY’11.
Attrition Levels Drops, Utilization rate higher at ~74.9%, signifies, more contracts The company’s utilization rate stood higher at ~74.9% (signifies better co-ordination & robust project
framework). It’s quite below the industry average of ~79% but has been on an increasing fold in this quarter.
The company has also re-aligned 55,000 of its global workforce across its European operations to work on
projects in Germany & France. However, we do feel that the company has the capacity to re-rate higher
utilization levels in-case there are more opportunities for the company to grow faster, and thus, the company
will be able to take those opportunities. Nevertheless, we believe that it will be evenly spread over the coming
quarters and has a high chance of hitting the level of ~78% with renewed contracts.
The attrition rate has gone up by ~6% to 17.5% by June Q1FY’11 from ~12% YoY and by 0.4% sequentially
from ~17% over the previous quarter ending March’11. With additional hiring, the total number of employees
stood at 130,779 at the end of the Q1FY’12 as against 122,468 a quarter ago and 109,882 YoY. Attrition during
the Q1FY’12 was 6,618 employees while net addition was 7,646 employees. While on the ITIL side attrition has
come down from 4300 to 3500. Given greater visibility of the supply cycle, Infosys is in a position to plan and
hire talent and sustain them through lucrative contracts, ESOPs in line with the market's supply dynamics. We
expect the attrition to further decrease with the introduction of referral and engagement programme among
the existing employees from Q1FY’12. Adding to that is the wage increase in FY’12E by 1-2% onshore & ~11%
offshore.
-6
-4
-2
0
2
4
6
8
USD
Rev
enu
e P
erfo
rman
ce (
%)
Outperformance from Upper Band Outperformance from Lower Band
02468
101214161820
Att
riti
on
Lev
el (
%)
LTM Overall Attrition (%) LTM Voluntary Attrition (%)
LTM Involuntary Attrition (%)
Source: Company, R K Global Research
Source: Company, R K Global Research
404550556065707580
66
68
70
72
74
76
Uti
liza
tio
n L
evel
s (%
)
Utilization Excluding Trainees (%)Utilization Including Trainees (%) RHS
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 27
Information Technology & Enabled Services
Valuation Fundamentals
Infosys remains our seasoned favorite, and its restructuring phase recently prompted us to value it more
positively than ever. At CMP, the stock trades at a P/E and P/BV of ~13.9x and 3.7x FY12E EPS of `170 and
BVPS of `635 respectively with industry P/E and P/BV hovering around 19.2x and 5.5x respectively. We see
better performance in the coming quarters, certainly after Q2FY’12E. The company has guided that its segment
portfolio remains strong and sees no effect of global headwinds on its clients. However, in the short term, the
stock is expected to perform a little mundane, till the economic headwinds in the Global markets, such as the
serious debt crisis in Greece, Italy (continental EU) and slow economy growth in the United States get cleared.
We initiate a HOLD rating on the Infosys Ltd. stock with a 12-Month price target of `2562, an upside
potential of ~7.8%, using a P/E of ~15x of FY13E EPS.
Statement of Comprehensive Income: Q1FY’12 & Q2FY’12E
Descriptions (` mn) Q1FY'12E Q1 FY'12
Actual VAR (%)
Q1 FY'11 VAR (%) Q4 FY'11 VAR (%)
Q2FY'12E
Revenues 75860 74850 1 61980 20.8 72500 3.2 79341
Cost of Sales 43922 45770 (4) 36480 25.5 42340 8.1 45748
Gross Profit 31938 29080 10 25500 14 30160 (3.6) 33593
Operating Expenses
S&M Expenses 4169 2980 40 3390 17.4 4000 (0.5) 4367
Administrative Expenses 5443 5580 (2) 4560 22.4 5140 8.6 5658
Total Operating Expenses 9612 9560 1 7950 20.3 9140 4.6 10024
Operating Profit 22326 19520 14 17550 11.2 21020 (7.1) 23569
Other Income 3380 4430 (24) 2390 85.4 4150 6.7 4430
PBIT 25706 23950 7 19940 20.1 25170 (4.8) 27999
Tax 6929 6730 3 5060 33 6990 (3.7) 6730
NPAT 18777 17220 9 14880 15.7 18180 (5.3) 21269
Earnings Per Share
Basic (`) 29.2 30.1 (3) 26.06 15.7 31.8 (5.3) 37
Diluted (`) 29.2 30.1 (3) 26.05 15.7 31.8 (5.3) 37
2100
2300
2500
2700
2900
3100
3300
3500
3700
1 Y
ear
Pri
ce B
and
(`
)
Source: Company, R K Global Research Estimates
Source: NSE, Ace Equity, R K Global Research
Band: 22x
Band: 17x
Band: 15x
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 28
Information Technology & Enabled Services
Revenues across Different Industry Lines
Revenue By Industry (%) Quarter Ended LTM
Q1 FY'12 Q4 FY'11 Q1 FY'11 Q1 FY'12 Q1 FY'11
BFSI 35.4 35.7 36.1 35.7 34.8
Banking & Financial Services 28.1 28.5 27.7 27.9 26.8
Insurance 7.3 7.2 8.4 7.8 8.0
Manufacturing 20.3 20.4 19.5 19.8 19.6
Retail & Life sciences 22.7 21.4 19.4 21.3 20.1
Retail & CPG 16.1 14.5 13.2 14.9 13.3
Transportation & Logistics 1.8 2.1 1.8 1.9 1.9
Life Sciences 3.7 3.7 3.4 3.5 3.7
Healthcare 1.1 1.1 1 1 1.2
Energy Utilities Communication 21.6 22.5 25 23.2 25.5
Energy & Utilities 5.7 5.8 6 6 5.9
Communication 10.6 11.9 14.1 12 15.4
Others 5.3 4.8 4.9 5.2 4.2
Revenues by Project Pricing
Revenue By Project Type (%) Quarter Ended LTM
Q1 FY'12 Q4 FY'11 Q1 FY'11 Q1 FY'12 Q1 FY'11
Fixed Time 39.1 41 39 40.3 38.7
Time & Materials 60.9 59 61 59.7 61.3
Revenues across Service Lines
Services Lines (%) Quarter Ended LTM
Q1 FY'12 Q4 FY'11 Q1 FY'11 Q1 FY'12
Business Operations 60 60 63.3 60.4
Application Development 16.1 16 16.9 15.8
Application Maintenance 22.3 22 23.9 22.6
Infrastructural Management 5.9 6.1 6.9 6
Testing Services 7.5 7.3 7.3 7.6
Business Process Management 5.4 5.6 5.7 5.6
Others 2.8 3 2.6 2.8
Consulting & System Integration 31.7 31.8 29.2 31.7
Consulting Package Implementation 25.2 25.4 24.9 25.5
System Integration 6.3 6.1 4.2 5.9
Others 0.2 0.3 0.1 0.3
Product Platform Services 8.3 8.2 7.5 7.9
Products 4.8 5.4 4.7 4.9
Product Engineering 3.2 2.4 2.1 2.7
Others 0.3 0.4 0.7 0.3
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 29
Information Technology & Enabled Services
Infosys Ltd Financials: Reported & Forecasted
Income Statement (` Mn)
Balance Sheet (` Mn)
Descriptions FY'10 FY'11 FY'12E FY'13E
Descriptions FY'10 FY'11 FY'12E FY'13E
Total Revenue 211400 275010 321361 376445
SOURCE OF FUNDS
Total Expenditure 137810 194190 228950 265264
Share Capital 2870 2870 2870 2870
Operating Profit (Excl OI) 73590 80820 92411 111181
Total Reserves 217490 242140 298212 361591
Other Income 9220 11470 16003 17646
Shareholder's Funds 220360 245010 301082 364461
Operating Profit 82810 92290 108415 128827
Total Liabilities 220360 245010 301082 364461
PBDT 82790 92280 108415 128827
APPLICATION OF FUNDS
Depreciation 8070 7400 11602 13624
Gross Block 63570 69340 95046 111337
PBT(OI) 74720 84880 96812 115203
Less: Acc. Dep. 25780 28780 40382 54006
PBT 74720 84880 96812 115203
Net Block 37790 40560 54664 57331
PAT 17170 23780 13718 17625
CWIP 4090 4990 5246 5492
NPAT 57550 61100 83094 97578
Cash At Bank 97970 136650 125034 165350
Investments 46260 13250 31622 39647
Financial Ratios
Total CA 169390 227440 231401 294880
Description FY'10 FY'11 FY'12E FY'13E
Total CL 37980 43530 23566 34848
Per Share (Rs)
Net CA 131410 183910 207835 260033
Adjusted EPS 100 112 145 170
Def. Tax/Liab. 810 2300 1715 1958
CEPS 114 125 165 194
Total Assets 220360 245010 301082 364461
DPS 29 70 47 60
Book value 384 427 525 635
Cash Flow Statement (` Mn)
Margin Ratios (%)
Descriptions FY'10 FY'11 FY'12E FY'13E
PBIDTM 35 33 30 30
CASH FLOW FROM OPERATING ACTIVITIES
EBIDTM 39 38 34 34
EBDIT 82810 92290 108415 128827
Pre-Tax Margin 35 34 30 30
Changes in CA (5880) (19370) (15577) (23163)
PATM 27 25 26 25
Changes in CL 4930 5550 (19964) 11282
CPM 35 34 30 30
Changes In WC (950) (13820) (35541) (11881)
Performance Ratios (%)
Cash From Operations 81860 81800 72873 116945
ROA 36 36 38 27
Taxes Paid 17170 23780 13718 17625
ROE 26 26 29 28
Net Cash Balance 64690 58020 59155 99321
ROCE 41 42 37 37
CASH FLOW FROM INVESTMENT ACTIVITIES
Sales/FA 3.3 3.7 3.4 3.4
CAPEX (1650) (6670) (25962) (16537)
Efficiency Ratios (%)
Investments (36310) (36309) (18372) (8025)
Revenue Growth 4 20 31 19
Cash In Investment (37860) 26340 (44334) (24562)
EBIDTA Growth 13 14 17 19
CASH FLOW FROM FINANCING ACTIVITIES
EBIT Growth 12 15 20 19
Dividends Paid (16740) (40130) (27022) (34199)
PAT Growth (0.01) 11 36 17
Others (2710) (4050) Nil Nil
EPS Growth (0.01) 10 27 15
DTL, Misc. Exp. Changes 210 (1490) 585 (243)
Valuation ratios(x)
Cash In Financing (19250) (45680) (26437) (34442)
EV/EBIDTA 18 21 17 13
Cash Equivalents 7580 38680 (11616) 40316
EV/Sales 7 8 6 5
Cash At The Beginning 90390 97970 136650 125034
Mcap/Sales 7 8 6 5
Increase In Cash 7580 38680 (11616) 40316
P/BV 7 8 4.1 4
Cash At The End 97970 136650 125034 165350
P/E 26 31 15.1 15
Source: Company, R K Global Research Estimates
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 30
Information Technology & Enabled Services
Descriptions FY'10 FY'11 FY'12E FY'13E
Revenue (` mn) 229220 309979 365948 436049
Operating Profit (` mn) 63682 70906 79086 95218
NPAT (` mn) 48980 55701 61784 73047
Book Value (`) 119 145 175 211
Adjusted EPS (`) 33 38 42 50
EPS Growth (%) 64 13 11 18
ROE (%) 28 26 24 24
ROCE (%) 35 34 24 25
P/BV (x)* 6 6 1.9 1.6
P/E (x)* 12 18 8.1 6.8
*Data as on, 19th September 2011, on the closing price of `341
CMP –`341 “BUY” Target Price - `416
Wipro has been a dawdler in the last 4Qs, as compared to its peers and has performed below overall industry growth in FY’11. We expect the company to perform on the SI & NBD led by new CEO Mr. T K Kurien, a new organization structure, increase discretions in BFSI & EUA Vertical & improved demand environment
Price increase on the cards: The management is confident of achieving
higher realisations (average of ~3%+ on reported currency levels) in FY’12
on the back of non-linear services and productivity gains. FPP stands at an
all time high level (~5.7%) which helps in achieving operational efficiency.
Investments in non linear initiatives are in a primitive stage and will pay off
in the longer term, expectedly after Q3FY’12E. Higher realisations (with
pricing at ~3%+) is also expected to improve EBIDTA margins forward.
European Geography and EMEs to continue growth momentum: Europe has done reasonably well for Wipro as compared to peers. The
management has witnessed traction in Europe and expects it to be one of the
growth drivers in FY’12E-13E. Focus towards MEA and other emerging
markets will drive volumes as they provide a huge opportunity for new deal
wins. More spaces in the Eco.Apps. is also likely to renew the revenue uptick
for the forward Qs.
Scope of further growth left in BFSI; Healthcare &
Energy/Utilities vertical to outperform: The management believes
that growth in BFSI has not peaked out and it will continue to out-perform
verticals even in FY’12-13E. This will be driven by the demand for high end
services and discretionary IT spends. Healthcare poses a significant
opportunity for growth in the US, whereas energy & utilities and green Apps.
is also expected to do well.
Valuation & Rating
At CMP, the stock trades at a P/E and P/BV of ~6.8x and 1.6x FY13E EPS of `50 and BVPS of `211 respectively with industry P/E and P/BV hovering around 19.2x and 5.5x respectively. We initiate a BUY rating on the Wipro stock, with a 12M price target of `416, an upside potential of ~18% from the current levels, using a P/E multiple of ~8.3x FY13E EPS of `50.
Market Data Bloomberg Code WPRO IN Reuters Code WIPR.BO SENSEX 16745 NIFTY 5031 Dividend Yield (%) 3 52 Week High/ Low(`) 500/310 Equity Capital(` mn) 2918 Face Value (`) 2 Market Cap (` mn) 854320 Avg. 10 day Vol. NSE 122145 Time Period (Months) 12
Key Market Ratios TTM EPS (`) 38 TTM Book Value (`) 145 TTM PE (x) 18 TTM P/BV (x) 6 TTM EV/EBIDTA (x) 18.3 EV/TTM Sales (x) 4.4 Mcap/TTM Sales (x) 4.4
Share-Holding Pattern (%)
Price v/s NIFTY
79%
6%
8%7%
Promoters Public FIIs Others
2000
2500
3000
3500
4000
4500
5000
5500
6000
6500
7000
350
370
390
410
430
450
470
490
510
8/9 9/9 10/9 11/9 12/9 1/9 2/9 3/9 4/9 5/9 6/9 7/9
Wipro Ltd NIFTY
Source: Company, R K Global Research, as on 19th Sep’11
2011
Source: Company, R K Global Research, as on 30th June’11
Source: NSE, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 31
Information Technology & Enabled Services
Investment Thesis: The Company is deemed de-clawed, though, improvement space is
plenty
FY’12E Revenue growth to be in guided band, with possible contribution from pricing
increase, Re-generation of R&D & more penetration of Consulting services
On the first positive font, we expect Wipro's sequential revenue growth for Q2FY’11E to be within the guided
band of ~3-5%. Like in Q1FY’12, revenue growth may be driven by a combination of volume growth and
pricing increment (sequential constant currency pricing growth of 2.5% in Q1FY’12 contributed to the 5.6%
USD revenue growth). A large chunk of Wipro's projects comes up for re-negotiation every year, and the
company is witnessing pricing up-ticks of ~3% (an average of ~1.3% in case of Infosys & TCS) in these
contracts from segments like BFSI, healthcare and other EMVs, like, energy, utilities and green applications
(other applications like, AutoApps & MPIT are substantially subsided in performance in the last 4Qs). As
Wipro's confidence at achieving revenue growth within the guided band may include pricing impact, we
believe that Wipro may continue to underperform peers like TCS on volume growth in Q2FY’12 (especially
after adjusting for the fact that volumes will benefit in Q2FY’12E on account of new deal from Q1FY’12).
On the secondary font, Wipro has taken lead services like infrastructure management, testing and R&D
services. In fact the latter is presently contributing approximately ~29% (pricing uptick at ~1.5%) of the total
revenues. But we feel, in this new age of business and consulting, Wipro has a very low penetration, as the
business unit (pricing at ~2.2%+ & sub-Contracting fee at ~20%) contributes only ~3.1% of its revenue for
the last quarter, Q1FY’12. Though, it’s also a concern for its peers, but they (Infosys & Wipro) have already
offered the maximum possible services in consulting remaining with up-gradation. However, in case of Wipro
it’s only acting as a support service, which the company is failing to consider as a strategic business making
unit. We feel that there are issues that are confronting the company at this moment the company might be
having some myopic sense of its real contributory verticals and also have a very bad sense of timings. It is
important for the company to get its strategic priorities right and fast or else the company will be losing
considerable business.
-3
-2
-1
0
1
2
3
4
5
6
7
Q1FY'10 Q2FY'10 Q3FY'10 Q4FY'10 Q1FY'11 Q2FY'11 Q3FY'11 Q4FY'11 Q1FY'12
Pri
cin
g G
row
th (
%)
Pricing Volume
0%
1%
1%
2%
2%
3%
3%
0
5
10
15
20
25
30
Q1FY'10 Q2FY'10 Q3FY'10 Q4FY'10 Q1FY'11 Q2FY'11 Q3FY'11 Q4FY'11 Q1FY'12
Sub
-Co
ntr
acti
ng
Co
sts
(%)
of
Em
plo
yee
Co
st
Sub-Contracting Costs Pricing
Source: Company, R K Global Research
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 32
Information Technology & Enabled Services
European geography continues momentum growth; US mundane, India, MEAs Slowing down The ongoing troubles in the Middle East are likely to impact Wipro's Q2FY’12 numbers, albeit marginally. The
Middle East contributes ~2% and Japan contributes ~1.5% to Wipro's revenue. The company also suggested
that decision making in the India geography had slowed down due to ongoing corruption revelations and given
that a major chunk of the IT Services revenue from India comes from the government segment for. The key
geographies of US and Europe continue to do well. Europe, in particular, is seeing traction from each of the
three countries where Wipro has a notable presence - UK, Germany and France.
Geographies (%) Q1FY'10 Q2FY'10 Q3FY'10 Q4FY'10 Q1FY'11 Q2FY'11 Q3FY'11 Q4FY'11 Q1FY'12
Europe 26.3 26.5 27 26.7 26.5 28.3 28 27.1 28
US 56 56.5 56.6 56.7 55.9 54.2 53.9 55.3 56
Japan 1.4 1.3 1.4 1.5 1.5 1.5 1.5 1.5 1.5
India & ME 7.9 8.9 8.8 8.8 9 8.9 8.9 9.1 9
Other EMs 6.6 6.5 6.6 6.7 6.8 7.2 7.14 7.5 7.1
Our Question mark on Wipro’s Geographic Segment Growth & clash of IT & non-IT business;
Growth is abrupt with subdued orientation strategies
Overtaking Infosys & TCS may be a very far-fetched conclusion, when Wipro’s current rank is under serious
threat. In our line chart (down below), we see that the revenue growth from a particular geographic segments
(US, EU, et, al) is very abrupt and unhealthy. Japan growth remains flat as the automotive applications
(AutoApps) have been down to a halt after the earthquake, growth stands at an average of ~2%. US revenue is
slowly rising after the Q1FY’12 as the demand environment remains stable, there has been a step increase in
the manufacturing sector in the US, and so we are quite optimistic that the company will be able to drive off
lethargy from the segment. The EU sector has been very stable (sequentially ~3%) but has been hampered by
situational disturbances by credit threats, otherwise there has been an increase in the discretionary spends in
countries like France, Italy, which are considered to be Wipro’ traditional business platforms in the
Continental Europe for BFSI, EVs. Furthermore, ~25% of Wipro’s business comes from the non-IT related
services business (desktop computers, medical equipments, soaps, stationary & hydraulics), which are
typically low on margins in these countries. So, somehow we feel, the company hasn’t been able to classify its
IT business with non-IT business. Classification will add to a time tested strategy as to where, leverage on IT
services and where to leverage on non-IT services. However, we are very optimistic that the company will be
able to find out a suitable structure to focus on more cost saving capabilities of efficient IT applications and
shift away from the traditional application modules.
-4%
-2%
0%
2%
4%
6%
8%
-10%
-5%
0%
5%
10%
15%
Q2FY'10 Q3FY'10 Q4FY'10 Q1FY'11 Q2FY'11 Q3FY'11 Q4FY'11 Q1FY'12
Geo
grap
hic
Gro
wth
(Q
oQ
)
Japan India & ME Other EMs Europe (RHS) US (RHS)
Source: Company, R K Global Research
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 33
Information Technology & Enabled Services
Growth in R&D Services maybe lower than IT Services, Telecom may underperform as
compared to company’s average expectations on the vertical. EcoEnergy & GreenEnergy Apps.
vertical is expected to bloom.
Wipro has been rated the No. 1 R&D Services provider globally by Zinnov, a leading ratings firm. A wide range
of Product & Engineering Services are provided to firms across semiconductor, technology, telecom, health,
manufacturing, energy & utilities, transportation, retail and process industries. Wipro also provides
technology management and consulting services that help its customers reduce their product development life
cycle. Today, Wipro’s Product Engineering Services business accounts for ~16% of overall IT Services revenue.
However, we feel that the company may stance upon to provide ready applications to earn better revenues, as
R&D incurs substantial investment. During FY’11, Wipro incurred an expenditure of `1656 mn, up by ~66%
YoY mn including capital expenditure in continued development of R&D activities.
Energy & Utilities is one area, where Wipro has considerable expertise in creating Eco.Apps. Wipro has
extensive experience in implementing solutions on the Microsoft platform for the Energy and Utilities
industry. The company’s Enterprise Solutions Business serves customers in Energy & Utilities (EAU) business.
EAU contributes ~9% of the total revenue and is one of the fastest growing vertical, providing applications
especially to the EU energy clients. The business has grown 3-folds from ~3% in FY’09 an can be mainly
credited to Wipro’s findings on application based on future sensitive applications for orgs. Like Oil Majors, Gas
Transmission companies, Investor Owned Utilities, Public Power Utilities, Electricity transmission companies
and Independent System Operators. This application has secured Wipro’s demand among the large
transforming clients, especially in EU and would be quite vital as a revenue source in the days to come. And we
expect considerable revenues at a CAGR of ~11% from FY’12-13E.
0%
1%
2%
3%
4%
5%
6%
30000
32000
34000
36000
38000
40000
42000
44000
46000
48000
Q1FY'10 Q2FY'10 Q3FY'10 Q4FY'10 Q1FY'11 Q2FY'11 Q3FY'11 Q4FY'11 Q1FY'12
R&
D E
nab
led
Rev
enu
e (`
Mn
)
R&D Enabled Revenue R&D Investment (%) of Revenue
-10%
-5%
0%
5%
10%
15%
20%
25%
3000
4000
5000
6000
7000
8000
9000
10000
Q1FY'10 Q2FY'10 Q3FY'10 Q3FY'10 Q1FY'11 Q2FY'11 Q3FY'11 Q4FY'11 Q1FY'12
EA
U R
even
ue
(`M
n)
EAU Revenue EAU (%) of Revenue RHS Growth Rate RHS
Source: Company, R K Global Research
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 34
Information Technology & Enabled Services
Wipro Ltd. Strategic Analysis of Financial Positions
Industry growth at 2Qs away, Expect to repeat FY’11 Revenue feat at ~16% growth, FMCG
business to bloom Wipro, has been lagging behind the industry and even behind its peers for the last few quarters, and it’s just
not the global headwinds or clients lower discretionary spends that has been affecting. There has been a thin
thread between the opportunity perplexes and the decision making approaches that has been reeling on the
company’s front for quite some time. But Wipro has realized this now & has opted for a decentralization
approach (SBUs & SMUs) for revenue garnering.
We see some of its positive intent trailing from the Q1FY’12 and we expect that FY’12E would not be that
formative but still there will be an increase in penetration in the segments that will contribute revenues from
the major verticals, viz, BFSI, EAU, Manf.Apps, Retail & LTR Apps. In FY’11, we saw the company’s revenue at
`309979 mn, that grew by ~14.7% YoY, much lower than Avg. IT industry standards and we are not so
optimistic regarding the FY’12E revenue as Q1FY’12 remained muted, lost couple of large deals in the BFSI
vertical that could have contributed `3000 mn+ and so, the kind of growth we are expecting is still 3Qs away,
when the deal contracts amount will start pouring in & company will start relishing the results of re-
structuring strategy. We have discounted the next two Qs, however, again, if still the Q4FY’12E gives a very
strong growth; still it would be hard for the company to achieve the industry growth rate of ~18-20%. Our
revenue is much muted and we stick to the back-ended growth through our forecasting model. We expect
Wipro to post revenue of `365948 mn, a growth of ~12% from FY’12E. However, we factored a descent
FY’13E growth at ~18% to `436048 mn. On the FMCG segment (avg. ~15% contribution to cons. Revenue) we
remain quite stable with our FY’12E forecasted figure of `54,808 mn, a growth of ~15% from FY’11 & `66,010
mn for FY’13E at a growth of ~20%.
EBIDTAM is expected to be intact, despite wage hike. However, EBIDTA growth will falter Our expectation for the company’s EBIDTAM for FY’12E stands at ~22% (EBIDTA at `79086 mn, up by ~12%
YoY) & `95218 mn for FY’13E, up by ~20% YoY. The company could face operating inefficiency, due the (1)
~12-15% wage increase offshore & ~2-3% onshore. (2) Below industry growth in revenues, this will be not
enough to offset the expenditure if garners more revenues. (3) High employee expenses (No addition of
resources & muted SG&A expenses) rising at a rate of ~19% QoQ. (4) And cross currency volatility from EU &
US, though pricing is expected to remain upbeat at ~2%+ over ~1.5%+ in FY’12E.
0%
5%
10%
15%
20%
25%
30%
35%
40%
20
70
120
170
220
270
320
370
420
470
FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E FY'13E
(` 0
00
' mn
)
Revenue Growth
0%
5%
10%
15%
20%
25%
30%
50
150
250
350
450
550
650
750
850
950
1050
FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E FY'13E
EB
IDT
A &
SG
A E
xpen
ses
(`0
00
' mn
)
EBIDTA SG&A Expenses EBIDTM
Source: Company, R K Global Research Estimates
Source: Company, R K Global Research Estimates
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 35
Information Technology & Enabled Services
Wipro Ltd – Financials: Reported First Quarter Ended June FY’12 & Q2FY’12E
Descriptions (` mn) Q1FY'12E Q1’12 Actual VAR(%) Q1FY'11 YoY(%) Q4FY'11 QoQ (%) Q2FY’12E
Revenue 86131 85640 1 72364 18 83024 3 90917
Operating Expenses 68043 68350 (0.4) 55987 22 65956 4 71824
Operating Profit 18088 17290 5 16377 6 17068 1 19093
PBIT 18088 17290 5 16377 6 17068 1 19093
NPAT 14992 15626 (4) 14032 11 14464 8 16299
EPS (`) 10 10.7 (4) 9.6 11 9.9 8 11.1
Wipro beats expectations, posts ~18% YoY Revenue. The seeing some signs of positive momentum
amid increased outsourcing as clients focus on optimizing operations.
Wipro beat street expectations, as consolidated revenues for Q1FY’12 rose ~3% QoQ & ~18% YoY to `85640
mn (including `10060 mn from IT products & `7550 mn from consumer products). Revenues from US region
increased over ~7% to `31220 mn from `2914 mn. From Europe region, revenues went up considerably
~34.3% to `18800 mn from `14000 mn. Though, sequential growth didn’t flowered but the YoY change was a
positive surprise, when the market was considering Wipro a done player in IT services. We feel, this is a pure
outcome of a re-structured company and its impressive investments in client mining that have started showing
results, with 4 customers contributing more than USD100 mn of revenues. Wipro had announced earlier this
year that it would re-organize its technology business into industry-focused units of BFSI, Telecom, Media, etc.
EBIDTAM intact despite wage hike, On-shore & offshore. NPAT growth brings confidence
The company’s EBIDTAM stood at ~20.18% (EBIDTA at `17290, up by ~6% YoY) down by 245 bps YoY and
quite considerably closer to our expectation of ~21% & despite wage hike of ~12-15% offsite and ~2-3%
onsite. IT products EBIT were `420 mn for the quarter, an increase of ~26% YoY. Consumer products (FMCG)
EBIT were `890 mn for the quarter, flat on a YoY basis. Operating Income to Revenue for this segment was
~11.9% in Q1. The company has proved its efficiency in managing, SG&A and GA accounts effectively despite
global headwinds on margin & cost fronts. The NPAT stands at `15626 mn, up by ~11% YoY & ~8%
sequentially.
EPS very stable still looks back ended
The company’s EPS presently stands at `10.7, higher than our expectation of `10. It has increased significantly
by ~11% YoY & ~8% QoQ. However, the company has just emerged through a turnaround and has portrayed
results that guide us to a much improved FY’12E expectations. But the surged growth of the FY’09-10 era as
we think is still 2Qs away.
Utilization at a falling pace, Concerns on management promise v/s roll-out of actual levels. Implies
lower delivery project volumes
72%
74%
76%
78%
80%
82%
84%
6768686969707071717272
Q1FY'11 Q2FY'11 Q3FY'11 Q4FY'11 Q1FY'12
Uti
liza
tio
n le
vel
s (%
)
Gross Utilization Net Utilization (Excl. Support)RHS Net Utilization (Excl. Trainees)RHS
Source: Company, R K Global Research Estimates
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 36
Information Technology & Enabled Services
Wipro, Key Operating Metrics & Parameters, QoQ, Till Q1FY’12
Revenues by Geography
Regions (%) Q1FY'11 Q2FY'11 Q3FY'11 Q4FY'11 Q1FY'12
America 57.3 55.9 54.2 53.9 53
Europe 25.4 26.5 28.3 28 28.6
Japan 1.5 1.5 1.5 1.5 1.5
India & MEA 9 8.9 8.9 9.1 9
APAC & EMs 6.8 7.2 7.1 7.5 8.3
Revenue from Verticals
Verticals (%) Q1FY'11 Q2FY'11 Q3FY'11 Q4FY'11 Q1FY'12
Global Media & Telecom 17.1 16.9 17 17.2 16.8
Finance Solutions 26.9 26.9 27.3 26.7 26.7
Manufacturing & Hi-Tech 21.5 20.9 20 19.7 19.7
Healthcare, Lifesciences & Services 10.7 10.9 10.4 10.5 10.2
Retail & Transportation 14.9 15.5 15.4 15.7 15
Energy & Utilities 8.9 8.9 9.9 10.2 11.6
Revenue from different Industry Practices
Practices (%) Q1FY'11 Q2FY'11 Q3FY'11 Q4FY'11 Q1FY'12
Technology & Infrastructure Services 21 21.1 21.4 21.6 21.7
Analytics & Information Management 5.6 5.8 5.9 6 6.4
Business Application Services 30.4 30.3 29.8 29.7 30.4
BPO 10.1 9.8 9.3 9.8 9.3
Product Engineering & Mobility 8.6 8.7 8.5 8.2 8.3
ADM 24.3 24.3 25.1 24.7 23.9
R&D Business 15 14.3 13.5 13 12.5
Consulting 2.6 2.9 3.1 3.1 3.1
Clients Parameters: Absolute numbers of existing Marque clients
Customer Size Distribution (USD) Q1FY'11 Q2FY'11 Q3FY'11 Q4FY'11 Q1FY'12
100 Mn+ 4 3 1 1 2
75 Mn+ 12 12 10 9 9
50Mn+ 24 22 21 20 17
20Mn+ 69 68 64 63 58
10Mn+ 118 117 113 106 100
5Mn+ 195 180 176 164 165
3Mn+ 258 255 254 244 238
1Mn+ 438 429 433 425 434
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 37
Information Technology & Enabled Services
Wipro’s revenue from US & Europe remains on the lines of receding growth, with occasional
jitters. However, MEAs & APAC looks very promising. However, sequentially flat
Descriptions QoQ YoY Constant Pricing QoQ Constant Pricing YoY
IT Services 0.5 16.9 (0.3) 12.6
Verticals
Global Media & Telecom (1.8) 15.2 (2.9) 9.2
Finance Solutions 0.5 15.9 (0.2) 12.3
Manufacturing & Hi-Tech 0.5 7 0.2 5.1
Healthcare, Lifesciences &Services (3.2) 10.7 (3.5) 9.2
Retail & Transportation (3.6) 17.6 (4.5) 12.5
Energy & Utilities 14.4 54.1 12 41.8
Geography
America (1.2) 8.1 (1.3) 7.7
Europe 2.6 31.4 1.2 20.5
Japan (24.5) (11.6) (25.4) (18.2)
India & MEA 0.2 18.2 (0.9) 10.2
APAC & EMs 11.3 41.8 6.6 25.6
Practices
Technology & Infrastructure Services 0.9 20.6
Analytics & IM 7.6 32.9
Business Application Services 2.7 16.9
BPO (4.2) 8.5
Product Engineering & Mobility 1.6 13.3
ADM (2.8) 14.8
R&D Business (3.4) (2.5)
Consulting 0.2 37.8
Price Realizations
Onsite (0.8) 2.6 (1.7) (1.9)
Offsite (0.4) 4.7 (1.2) 0.6
Source: Company, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 38
Information Technology & Enabled Services
Valuation & Outlook
Wipro’s Q1FY’12 performance was credible, given the kind the global headwinds that in which it was
operating & its restructuring havens; however, we still prefer TCS and Infosys over Wipro within the top 3
given their better client mining skills along with higher exposure to verticals & increase segmentations, which
are seeing greater resurgence in spend. Further in our view Infosys and TCS have more operational levels
which should help the company, as demand picks-up sharply, while Wipro is already operating in a gap to the
utilization levels. However, again, the company could leverage on its capacity and skills to ride on the DMR
applications that is expected to be one of the key areas that will emerge as the world is going through a
technology resurgence of the economic transformation. We are fairly positive on the company discounting
Q2FY’12E.
At CMP, the stock trades at a P/E and P/BV of 6.8x and 1.6x FY13E EPS of `50 and BVPS of `211 respectively
with industry P/E and P/BV hovering around 19.2x and 5.5x respectively. We believe that the new
restructuring strategies into effect will bring in slow transformations for the company going forward, post
Q2FY’12E. We initiate a BUY rating on the Wipro stock, with a 12M price target of `416 an upside potential of
~18% from the current levels, using a P/E multiple of 8.3x & P/BV of ~1.9x FY13E EPS of `50 & BVPS of `211
respectively.
5
10
15
20
25
30
10
60
110
160
210
260
310
360
410
460
510
1Yea
r P
rice
Ban
d
Price PEx Band (RHS)
Band: 22x
Band: 14x
Band: 8x
Source: Company, Ace Equity, R K Global Research
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 39
Information Technology & Enabled Services
Wipro Ltd – Financials: Reported & Forecasted (consolidated)
Income Statement (` mn)
Balance Sheet (` mn)
Descriptions FY'10 FY'11 FY'12E FY'13E
Descriptions FY'10 FY'11 FY'12E FY'13E
Revenue 229220 309979 365948 436049
Source of Funds
Expenditure 174205 245106 286863 340831
Share Capital 2936 4908 4908 4908
Operating Profit (Excl OI) 55015 64873 79086 95218
Total Reserves 172245 208010 252464 305674
Other Income 8667 6033 Nil Nil
Share Warrants & Outstanding 1741 291 1601 946
Operating Profit 63682 70906 79086 95218
Shareholder's Funds 176922 213209 258973 311527
Interests 998 586 1095 1211
Total Debt 55302 47441 47152 67757
PBDT 62684 70320 77991 94007
Total Liabilities 232224 260650 306125 379284
Depreciation 5796 6001 6340 9296
Application of Funds
PBT(OI) 56888 64319 71651 84711
Gross Block 67613 77793 77853 110273
PBT 56888 64319 71651 84711
Less: Acc. Dep. 31050 35423 41763 51059
PAT 7908 8618 9417 11578
Net Block 36563 42370 36090 59214
NPAT 48980 55701 62234 73133
CWIP 9911 6031 6148 6268
Cash At Bank 56643 52033 15528 1367
Key Financial Ratios
Investments 89665 108134 120361 143417
Description FY'10 FY'11 FY'12E FY'13E
Total CA 166787 184555 180374 197791
Per Share (`)
Total CL 71050 80548 37190 28142
Adjusted EPS 33 38 42 50
Net CA 95737 104007 143184 169649
CEPS 37 42 47 56
Def. Tax/Liab. 348 108 342 736
DPS 7 12 12 14
Total Assets 232224 260650 306125 379284
Book value 119 145 175 211
Revenue/Share 156 211 249 297
Cash Flow Statement (` mn)
Price/Revenue 2.1 1.6 1 0.5
Descriptions FY'10 FY'11 FY'12E FY'13E
Margin Ratios (%)
Cash Flow from Operating Activities
PBIDTM 30 32 31 31
EBDIT 63682 70906 79086 95218
EBIDTM 39 38 30 30
Changes in CA (19642) (22378) (32324) (31578)
Pre-Tax Margin 27 29 28 28
Changes in CL (2592) 9498 (43358) (9048)
PATM 24 26 25 26
Changes In WC (22234) (12880) (75682) (40625)
CPM 27 29 28 28
Cash From Operations 41448 58026 3404 54593
Performance Ratios (%)
Taxes Paid 7908 8618 9417 11578
ROA 37 39 74 36
Net Cash From Operations 33540 49408 (6013) 43015
ROE 37 38 37 36
Cash Flow from Investment Activities
ROCE 57 58 45 44
CAPEX (6973) (6300) (178) (32540)
Sales/FA 3.4 4.0 4.7 4.0
Investments (36310) (36309) (12227) (23056)
D/E Ratio 0.3 0.2 0.2 0.2
Cash from Investments (27793) (24769) (12405) (55596)
Current Ratio 2.3 2.3 4.9 7
Cash Flow from Financing Activities
Asset Turnover Ratio 1 1.19 1.2 1.15
Dividends Paid (10092) (16930) (17780) (19924)
Efficiency Ratios (%)
Others 13083 (4634) Nil Nil
Revenue Growth 3 27 24 21
DTL & Misc. Expen. Changes 229 240 (234) (394)
EBIDTA Growth 22 33 19 21
Cash In Financing Activities 6804 (29249) (18087) (1580)
EBIT Growth 23 35 20 21
Cash & Cash Equivalents 12551 (4610) (36505) (14161)
PAT Growth 20 35 22 22
Cash At The Beginning 44092 56643 52033 15528
EPS Growth (40) 35 22 23
Increase In Cash 12551 (4610) (36505) (14161)
Valuation Ratios (x)
Net Balance 56643 52033 15528 1367
EV/EBIDTA 23 18.3 8.3 4
EV/Sales 6 4.4 4.5 4.2
Mcap/Sales 7 4.4 4.4 4.4
P/BV 4 6 1.6 1.9
P/E 13 18 6.6 8.3
Source: Company, R K Global Research Estimates
R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 40
Information Technology & Enabled Services
For Suggestions, clarifications & your valuable feedback write back to us at:
R K Global Research R K Global Institutional Sales R K Global Shares & Securities Ltd: R K Global Shares & Securities Ltd:
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Rating Criteria BUY Stock to generate return above 15% from CMP over the next 12 months period HOLD Stock to generate return between 0-15% from CMP over the next 12 months period SELL Stock to generate less than 0% from CMP over the next 12 months period
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