information technology: a qualitative assessment of two billing models - prabhudas lilladher

September 26, 2014

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to important disclosures and disclaimers at the end of the report

Information Technology

FPP v/s T&M: A qualitative assessment of two billing models

Sector Update Shashi Bhusan

[email protected] +91‐22‐66322300

Hussain Kagzi [email protected] +91‐22‐66322242

Sensex v/s CNX IT

90

100

110

120

130

140

Sep‐13

Nov‐13

Jan‐14

Mar‐14

May‐14

Jul‐14

Sep‐14

CNX IT Sensex

Source: Bloomberg

Stock Performance

(%) 1M 6M 12M

Sensex 0.1 19.8 33.0

CNX IT Index 4.8 21.3 37.1

HCL Tech. 7.2 23.5 63.9

Infosys 2.0 13.8 22.6

TCS 6.9 31.0 41.7

Wipro 5.8 6.9 22.1

The creeping transition of Indian IT companies to Fixed Price Projects (FPP) from Time & Material (T&M) to mitigate the pricing pressure was evident over the last half‐a‐decade. We have tried to qualitatively assess the pros & cons of these two billing models. Our assessment indicated the maturity of commoditized business which has resulted in migration towards FPP, whereas T&M is handy for Greenfield projects. We don’t see any inherent advantage for either of these models. However, different stages of business cycles and process maturities will promote different billing models.

T&M v/s FPP – Consulting v/s Engineering: IT Services originates from Consulting business; hence, T&M became the de‐facto choice of billing. Our analysis indicates no inherent advantage of one over the other and Indian IT companies are likely to stay amicable with both the billing models.

FPP is a reflection of process maturity...: There are few myths around the FPP like T&M protects eventuality in cost overruns, need stronger control processes for FPP, vendors can pad‐up their bids to escape uncertainty and risk is bad. We believe Indian IT companies over the last two decades have got the most evolved processes for IT Services; hence, they can see creeping migration to FPP.

... but, T&M handy for Greenfield projects: T&M model is convenient for projects marred with uncertainties. Need for flexibility for uncertainties associated with a project and transparency of the process drives the existence of T&M model. We see the contribution of discretionary (App Development, Greenfield PI, SMAC etc.) to drive the sustained T&M.

Pricing pressure on traditional services – An inevitable waited to happen: The great financial crisis (2008) changed the spending pattern of the corporate when clients wanted to do more with less. Hence, the commoditized services witnessed pricing pressure. Indian IT adapted to the changing need and offered FPP as a solution that can give them manoeuvrability on the costing front.

TCS has the slowest growth in FPP, Wipro & HCL Tech have the fastest growth in FPP contribution: TCS’ FPP contribution has been relatively flattish over the last five years, whereas Wipro and HCL Tech have witnessed maximum increase. We see improved process maturity and productivity gain for TCS, whereas, HCL Tech reaped the benefit of continued migration of FPP.

Valuation & Recommendation – Prefers TCS, INFO & WPRO: There is no winning billing model. Challenging macro pushes for cost cognizance. Hence, FPP offers a solution for matured services, whereas, the conducive environment implies a green‐field development project that may push for T&M model. We see a quick transition to FPP translating into margin gains having risk of mean reversal in renegotiation. We continue to see similar risk for HCL Tech. However, TCS, Infosys and Wipro still have unexplored opportunities.

Exhibit 1: Top picks – TCS, Infosys and Wipro

Revenues (Rs m) EPS (Rs) CMP (Rs) Target (Rs) Rating Upside EPS CAGR

2015E 2016E 2015E 2016E

Infosys 538,365 606,727 213.7 238.2 3,691 4,040 BUY 9.5% 13.1%

TCS 963,409 1,135,703 113.9 131.2 2,709 2,900 BUY 7.1% 15.7%

Wipro 488,922 545,933 36.0 41.8 583 680 BUY 16.7% 14.6%

HCL Technologies 373,127 422,588 107.8 119.3 1,708 1,750 Accumulate 2.4% 13.9%

Source: Company Data, Bloomberg, PL Research (All prices as on September 25, 2014)

September 26, 2014 2


Pricing Models ‐ Time & Material v/s Fixed Price: Stem from their evolution to Consulting v/s Engineering

Emergence of IT Services from high cost IT infrastructure in the 1960‐70s, wherein

the clients used to rent the infrastructure, resulted in a consulting‐led approach for

pricing i.e. T&M. However, FPP evolution stems their root from Engineering Floor,

wherein, the process efficiency, adaptability and productivity gain holds the key.

Prima facie, there is no inherent advantage of one type of billing over the other.

Open discussions between the clients and consultant can allow both types of billing

to go forward amicably. Consultants with little experience in billing clients directly

are usually better off billing time‐and‐materials until they have learnt how to quote a

fixed price. However, in the future, they can select the model that works best and

most profitably. Clients decide tradeoff between certainty and the prospect of a

lower bill when the work can be completed efficiently then choose the model that

suits them best.

Time‐and‐Materials: IT professionals are billed by the hour with expenses. They are

assured of being paid for their time, regardless of how long the project takes or for

an ongoing project. Client has the freedom to change the specifications of the

project or to add new components, as it is understood that such changes will incur

more time on the project and hence, a higher invoice. The disadvantages come when

the consultant bills too many hours and exceeds the client's budget. This can cause

friction between the two if the budget runs out before the contract is completed.

Fixed Price Project: A fixed price contract is ideal when the client requires work that

can be provided with a quick turnaround built/implemented/maintained from pre‐

existing templates, where much of the work may have already been completed (in

terms of requirement gathering) prior to landing the contract. Likewise, a client‐

vendor may prefer a fixed price contract because it is easier to set a budget for such

projects. However, a fixed price contract can be an issue when the consultant and

client do not come to a detailed agreement on what the work will include.

Exhibit 2: Is FPP actually a high risk for IT Services providers?

Buyer Low Risk High Risk

FPP T&M Cost Plus

Provider High Risk Low Risk

Source: PL Research



Exhibit 3: Parameters comparison – The business model

Time & Material (T&M) Fixed Price (FP)

Flexibility to balance team size and workloads Requirement & Project due dates clear

Optimising the cost and time lines Control the project budget

Project model tailored to clients’ requirement Planning, schedule & deliverable clear

Increase or decrease the pricing and resources Based on active and mutual consent

Source: PL Research

Exhibit 4: T&M: Profitability stabilizes as project reaches steady‐state

US$

Time

Revenue Cost Profit

Source: PL Research

Exhibit 5: FPP: A steady improvement in profitability during tenure

US$

Time

Revenue Cost Profit

Source: PL Research

FPP – How it scores over T&M? Busting myths!

Myth 1: T&M pricing protects IT Companies if they exceed their estimate.

Fact: If IT Companies exceed their estimate, even with a T&M pricing model, their

client will fight with them tooth and nail over the overage, even small overages (This

is even more true in today’s world of tightened budgets). Often clients will refuse to

pay above the estimate, forcing IT Companies into a compromise. Moreover, getting

new business from this client will be substantially harder next time.

Myth 2: With T&M, IT Companies don’t need a change control process.

Fact: IT Companies will need to show hard evidence explaining why their estimates

were wrong. The only evidence worth anything is the change control documents

signed by clients that clearly outline the cost of change in T&M. In FPP, clients have

less control over the process maturity, but any change in control processes escalated

by clients is associated with the cost.

Myth 3: With T&M, the client benefits if IT Companies are under their estimate.

Fact: IT Companies will simply not leave money on the table. The Change Requests

(CR) initiated normally takes longer to get incorporated and even longer if the

projects are running ahead of schedule. Any successful execution of projects within

time are generally rewarded by more contracts.



Myth 4: Incompetency in IT Companies’ ability to accurately estimate is a good reason to choose T&M

Fact: Unless IT Companies are upfront with their client about their inability to

estimate a project, choosing T&M is unethical. The companies are run by

professionals; they sold themselves as experts with statements like “We’ve done this

kind of stuff a hundred times before!” If they cannot properly estimate a project,

they have no right to call themselves experts on the subject matter. If they would

never tell their prospective clients the real reasons why they are proposing T&M,

their reason for choosing T&M is simply not valid and likely unethical. They did the

estimates, they are the expert and it’s their job to know how long it will take and

what problems may arise.

Myth 5: Double their estimate, just to be safe.

Fact: This myth comes in many varieties, which can range from adding 15% to

quadrupling their estimate. The truth is, doubling their estimate will simply make

their bid uncompetitive (or unrealistic) and they will lose the contract to a

competitor. Currently, the market is heavily contested by Large MNCs, Indian

Heritage Vendors and Niche players.

Myth 6: Developers don’t need to know the pricing model.

Fact: Everyone on the team needs to know the pricing model as it affects every

decision involving billed effort which the team makes. Who is paying for the effort is

always a factor in such decisions.

Myth 7: Risk is bad

Fact: Risk is an opportunity to make (or lose) money. It’s neither good nor bad.

Successful IT Companies will stay above the Companies stuck with T&M model. They

can easily earn more just by accepting the risk associated with their own estimate.

Pricing pressure – An inevitable waiting to happen

The great financial crisis of 2008 has had a significant impact on the spending pattern

of the corporate. While the most immediate and pressing impact of the financial

crisis has been the lack of readily available credit, it is expected that its mid and long‐

term effects will still be felt in the timing of economic recovery and in high

unemployment rates in many countries.

During the crisis, new investments were postponed or scaled back, as investors

became more cautious. Moreover, IT companies operators came under further price

pressure for their services as consumers’ purchasing power diminished.



Exhibit 6: Blended Realization (QoQ gr.) (A proxy for pricing): More troughs

‐6%

‐3%

0%

3%

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

Q3FY13

Q4FY13

Q1FY14

Q2FY14

Q3FY14

Q4FY14

Q1FY15

TCS Infosys

Source: Company Data, PL Research

The economic downturn posed challenges on the spending turn squeezing the client

budget. Indian IT Companies have seized the opportunity to offer an effective pricing

pragmatism through Fixed Price Model.

Exhibit 7: HCL Tech and Wipro: Strongest improvement in FPP projects


20%

28%

36%

44%

52%

60%

Q3FY06

Q1FY07

Q3FY07

Q1FY08

Q3FY08

Q1FY09

Q3FY09

Q1FY10

Q3FY10

Q1FY11

Q3FY11

Q1FY12

Q3FY12

Q1FY13

Q3FY13

Q1FY14

Q3FY14

Q1FY15

Infosys TCS Wipro HCL Tech



Why clients will push for FPPs over T&M?

Indian IT companies have been driving towards FPPs over the last few years. The

overarching concerns on pricing has been mitigated partially by undertaking (or

migrating to) FPP. Moreover, there has been push from the clients also for FPP. We

highlight two reasons of FPP drive:

To test the potential of IT Companies, clients ask for fixed‐price proposal: By

asking for FPP, clients tell IT Companies that vendors have not yet "proven" their

capabilities to clients, which puts clients at risk of not receiving an adequate

solution. To reduce that risk, clients want IT Companies to demonstrate that IT

vendors understand clients’ unique problem fully by providing clients with a

proposed solution. IT Companies proposed solution must have a sound scientific

basis that will lead to a reliable and reproducible product. IT Companies must

provide clients with a detailed technical explanation of their proposed solution's

operation principles, along with calculations that demonstrate IT companies

have considered and accounted for the deleterious effects of all tolerances,

parasitic parameters, variations of parameters with ambient conditions and

aging and so on.

Risk of failure in a tight schedule: A potential client's project schedule is too

tight to take a chance that IT companies might fail, requiring the client to find

another vendor to do the job over. The client wants IT Companies to remove that

schedule risk by demonstrating conclusively that their proposed solution will

meet the requirements.

Is T&M all that bad?

We do not see the death of T&M business model in the near future. IT Companies

working at cutting/bleeding edge of technology has to work with various unknowns.

We see the less likelihood of adoption of FPP in projects where initial deliverables

are uncertain example Application Development, SMAC etc.

Need for Flexibility in a World of Unknowns/ Insufficient data to properly estimate

it: In a new software development, it rarely happens that features and functionality

of the new software are known upfront. Even with the best written RFP, there are

many unknowns that need to flushed out. Clients’ projects are complex and it is

nearly impossible to understand all the facets of the projects at the beginning. Our

industry sources indicated that clients would know 60‐80% of what they want to

build when they provide an estimate. That’s a lot of uncertainty!

In a FPP, deliverables are agreed upon upfront and there is little flexibility with

regard to changing features. Any change in a feature set requires an “engineering

change order”/”Change Request” (CO/CR) and additional funds are approved. In

some cases, changes are permitted without additional funds. However, in these

cases, it’s only because the original estimate had so much “fat” that the change can

be absorbed.



In T&M, IT Companies keep a close eye on the pulse of the project, the budget and

the needs of our clients. They discuss the changes, they look at the budget and

determine priority of the features relative to budget and time constraints. Often,

features that the client thought they needed are no longer important and can be

postponed for future release. As such, new features can often be added without

impacting the budget.

Need for Total Transparency/ Clients want to take part in the project in any way:

Clients deserve full transparency with regard to project expenses. A firm fixed price

contract will not provide any transparency, IT Companies will not know if a task took

two hours to build or 20 hours. Clients are constantly wondering if they paid too

much. In most cases, clients probably did because the financial risk is 100% on the

side of the contractors; IT vendors need to inflate their bid to cover their financial

risk.

In a T&M project, clients have full transparency on how their budget is being spent.

There is no guessing as to how many hours a task cost: It’s right there in the invoice!

If client is providing resources (i.e. internal developers or another vendor is

participating that the client is managing) or if IT Companies are working on site,

vendor should go T&M. IT Companies should not be held accountable for the

performance of client’s resources, where IT Companies are obligated to ensure they

succeed. Chances are high that IT Companies will wind up performing this work in its

entirety, while fearing to tell the client that his trusted employees are incompetent.

T&M is not a Blank Check, Process is the Key: A major misconception is that a T&M

based project is like having a blank check for the IT vendors. IT Companies’ initial

estimate is clients’ project budget. They develop in multiple iterations and at the end

of each iterations, the project is in a working, testable state. They repeat this process

until the project is ready for final testing and release. This allows them to have

meaningful conversations with their clients around features, budget and time. They

have the flexibility to adjust features as priorities shift or as allowed by the budget.

They have the flexibility to make adjustments that are the best for the project and

stay within budget.

Conclusion – There are merits in T&M projects as well

FPP works best when the clients and IT companies work the best when the

deliverables are well‐known and understood up front, when there is little need for

flexibility and changes to the deliverables. The challenges of FPP multiply manifold

when clients want their IT vendor to build custom software application. We believe

in the development of software applications need flexible process, which allows for

change.



Exhibit 8: Parameters comparison – The business model

Parameters Fixed Price (FP) Time & Material (T&M)

Requirements Clear Evolving

Enhancements Additional cost and time, deviation in project plan

Flexibility in Projects Task & Schedule

Resource Selection

Cost Effective ‐

(Expensive: if requirements not clear)

‐ (Expensive: if project deadline

overrun)

Customized Report

Project Task

Work Load

Idle Time

Progress

Source: PL Research

TCS: Stable on FPP, Wipro and HCL Tech: Maximum increase in FPP

Contrary to the popular belief about the FPPs, TCS’ contribution from FPP has stayed

largely stable over the last eight years. According to TCS’ management commentary,

the clients drive for FPP depending on the project types.

Infosys has offered limited colour on their initiatives for FPPs. The company

continues to have the lowest contribution from FPP. One possible reason for the

same could be their higher contribution from discretionary portfolio. As we have

examined earlier in the note, the higher discretionary contribution restricts the

scope of FPP in the portfolio.

Wipro and HCL Tech have driven their FPPs migration the strongest among peers.

The management is more vocal on their initiative to drive their projects toward FPPs.

Exhibit 9: Wipro and HCL Tech: Maximum increase in FPP contracts. TCS had minimum

790 bps

180 bps

1170 bps

‐510 bps

510 bps

160 bps

1480 bps

1400 bps

3090 bps

880 bps

1890 bps 2910 bps

‐600 bps

50 bps

700 bps

1350 bps

2000 bps

2650 bps

3300 bps

(Dec‐05 to Dec‐08) (Mar‐09 to Jun‐14) (Dec‐05 to Jun‐14)





HCL Tech – Benefitted maximum from the FPP drive

We are over‐simplifying our analysis by attributing the margin expansion only to

FPP.

Improvement in HCL Tech’s EBITDA margin has been maximum over the last five

years, in‐line with their increased FPP which could be attributed to strong growth in

IMS (contributed ~75% of incremental revenue over the last five years). HCL Tech

managed to improve their EBITDA margin by ~500bps since Mar‐09 due to increase

in FPP contribution by near ~1900bps. The company currently has the highest

contribution from FPP, leaving limited room for another uptick in margin. We see

pricing renegotiation of older FPP contracts at lower price, resulting in mean

reversion.

However, TCS has the most balanced approach among the peers keeping their FPP

contribution slowly creeping up and investing in efficiencies and process yielding

increase in operating margin. We expect TCS to stand benefitted during renewal

cycle of the contracts.

Wipro and Infosys struggled to keep pace with margin expansion with improvement

in FPPs. Challenges for Infosys are linked to shrinkages in their pricing premium over

the last few years. However, Wipro could not manage to keep pace with the industry

growth and got impacted by rising costs.

Exhibit 10: Strong operating margin improvement by HCL Tech over last 5 years

15%

19%

23%

27%

31%

35%

Q4FY06

Q2FY07

Q4FY07

Q2FY08

Q4FY08

Q2FY09

Q4FY09

Q2FY10

Q4FY10

Q2FY11

Q4FY11

Q2FY12

Q4FY12

Q2FY13

Q4FY13

Q2FY14

Q4FY14





Exhibit 11: TCS EBITDA margin improvement linked to operational efficiency

336 bps

‐661 bps

‐480 bps

37 bps 198 bps

179 bps

‐382 bps

124 bps

‐38 bps

22 bps

499 bps

405 bps

‐700 bps

‐400 bps

‐100 bps

200 bps

500 bps

(Mar‐06 to Dec‐08) (Mar‐09 to Jun‐14) (Mar‐06 to Jun‐14)



Exhibit 12: TCS (Management’s Commentary on FPP): Clients drive to FPP

Q1FY15 Fixed price engagement is a key lever in terms of costs and also mix or realization

Q2FY14

Q: Unbilled revenues have gone up in the past 10 quarters but FPP has not changed.One need to look at UBR minus UER as a metric because that gives you a better picture and if you look at that last two quarters that has been increasing, previous two quarters it was decreasing. And the overall trend is more a reflection of the nature of contracts and the size of contracts rather than just T&M versus Turnkey. When product‐based or asset leverage‐based projects kick in, those tend to have a different billing profile. So it is not just a difference between T&M and FPP.

Q3FY13

Fixed price engagements require a higher level of productivity.

TCS has seen fixed price projects go up by 50bps. So does that mean that the company is going to be driven by higher fixed price or some other measures? S. Mahalingam: No, it will not be purely fixed price. N. Chandrasekaran: We also have to operate based on what the customers want. It is not something that we decide, frankly.


Exhibit 13: Infosys (Management’s Commentary on FPP): Not much commentary on FPP

Q2FY13

Post Sales Supports are provisions which Infosys makes on all fixed prices contracts. The trend in last few quarters, the write‐off in this space is much lower. These are all conservative estimates the company makes on certain FPPs. It will get reversed in the future period if they are able to run it more elegantly.




Exhibit 14: Wipro (Management’s Commentary on FPP): Gains on margins due to FPP

Q3FY14

Wipro’s FPP percentage remains pretty high. So to that extent, whatever money the company makes out of automation and everything else, they keep the gains as margin gains. Second is on T&M projects again, Wipro believes that ultimately what the customers look for is end‐to‐end, cost of the value that they get on an end‐to‐end project.

Q4FY13 48% is FPP and within that, 48%, especially in the area of Wipro’s technology infrastructure services and some of the applications, directionally, the company is moving towards more and more outcome‐based results as well as the BPO.

Q3FY13

The key driver for increase in price realization this quarter was the benefit of the productivity gain that Wipro is able to get, by implementing tools and automation and some of the productivity techniques into their FPP and that has been the driver for the overall realization uptick.

Q2FY13

A lot of the realization improvement has been achieved during the quarter due to driving revenue productivity and fixed‐price contracts which will have a negative impact on volume. Despite the impact of additional two months of salary increase, continued investment in sales and marketing, utilization drop and FOREX impact, margin impact was limited to 30bps through significant improvement in revenue productivity and other operational parameters.


Exhibit 15: HCL Tech (Management’s Commentary on FPP): Strong initiative to FPP

Q4FY14

Managed Services and FPP were about 50‐50 till about two years back; however, they have moved up to 52 in FPP last year and now 56% of the portfolio in FY14. Revenue per employee within HCL today is a little over US$61,000 or US$62,000 per employee which is significantly higher than the industry average. And one reason is non‐linearity and the FPP/Managed Services construct.

Q3FY14 Most of the rebid market that HCL Tech bids is Managed Services or FPP.

Q1FY14 Ratio of FPP, Managed Services and outcome base is increasing since FY11 that is helping HCL Tech to decide the most optimal way to run the operations.

Q4FY13

HCL Tech continues to increase the amount of their revenue that comes from Managed Service or Fixed Price Revenue Models which allows the company to move to more into low cost locations. This dampens the top‐line growth but enhances company’s margin deliveries.

Q2FY13

With respect to the question on leaves and furloughs, the company has limited exposure there, because a lot of their engagements have moved significantly into FPP and managed services model and therefore, the company is really not dependant on that construct.




Top picks – TCS, Infosys and Wipro

There is no eventual winning billing model. Challenges on the macro front pushes for

cost cognizance. Hence, FPP offers a solution for matured services or challenging

business environment, whereas, a conducive business environment implies the

takeoff of more green‐field development projects which may push for T&M model.

We see a swift transition to FPP accompanied by margin expansion as a risk

because it would expose the company to the risk of mean reversal in renegotiation.

We continue to see similar risk for HCL Tech. However, TCS, Infosys and Wipro still

have room for exploiting that opportunity.

We reiterate our ‘BUY’ recommendation on TCS, Infosys and Wipro and

‘Accumulate’ on HCL Tech.

Exhibit 16: TCS

16.2

0.0

4.0

8.0

12.0

16.0

20.0

24.0

28.0

32.0

Sep‐08 Sep‐09 Sep‐10 Sep‐11 Sep‐12 Sep‐13 Sep‐14

1‐Yr Forward PER Average PER

Source: Company Data, Bloomberg, PL Research

Exhibit 17: Infosys

16.9

0.0

4.0

8.0

12.0

16.0

20.0

24.0

28.0

32.0




Exhibit 18: Wipro

13.7

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0




Exhibit 19: HCL Tech

11.6x

0.0

5.0

10.0

15.0

20.0


1‐Yr. Forward PER Average PER




Appendix

Other non‐linear pricing models

We have ignored the discussion on other non‐linear pricing model to keep discussion

lucid and simple. Among, the other widely used pricing models that Indian IT

companies offer are Hybrid Model, Managed Service Model, Outcome Based Model,

Transaction Based Model.

Non‐linear pricing models decouple the relationship between time and material

(effort and rate). Normally, T&M and FP do not offer much scope for modification

and changes. Service providers have realized the need to be flexible to satisfy their

customers. This has led to innovations in pricing models that suit varying needs.

Some non‐linear pricing models are mentioned below

Hybrid Model: The hybrid model uses T&M techniques to estimate costs for projects

that do not have clear‐cut goals or detailed and complete requirements initially. It

then allows customers to pay a fixed price based on the estimation. This hybrid

pricing model has the best features of both the models – T&M and FP, as mentioned

above. It allows service providers to deploy resources as in the T&M model, but most

of the project is executed according to the FP model. Hence, the project has a

smooth workflow and well‐aligned processes.

Hybrid is the best pricing model for bigger, longer and ongoing projects with unclear

objectives at the start. Here input and feedback is needed in the beginning, but

delivery can be perfected over time to ensure that all customer requirements are

successfully met. This model is a great middle ground for professionals who like

hourly payments and customers who prefer to make a one‐time payment for the

project. The hybrid pricing model helps customers optimize budgets without

compromising on the quality of product or application. It also gives the service

provider a controlled environment with shared risks in operations.

Exhibit 20: Pros‐Cons of Hybrid Model

Pros Cons

Utilizes the best features of both the T&M and FP pricing models

Customer has no control in resource utilization and maximum ownership is with service providers

Middle ground for the customers amongst hourly payment and one‐time payment

Shared risks between service provider and customer

Helps the customer to optimize the budget without compromising on the quality of deliverables

Low risk model for both service provider and customer

Knowledge retention

Source: PL Research



Managed Services Model: The managed services model offers defined service

deliverables at a fixed cost. Traditionally, value was realized according to how well it

was managed by the service provider, and how well it was perceived by the

customer. This was more qualitative in nature. In the managed services model on the

other hand, the value‐add is quantitatively measured in terms of target Service Level

Agreements (SLAs). This is based on clearly defined parameters in project

performance and quality.

Customers are billed at a fixed monthly cost plus unit cost per additional unit

delivered. For customers, the model helps them arrive at a predictable budget. For

service providers, it assures continuous fixed revenue, plus additional revenue

through scalability and better margins through repetition. Mutually agreed SLAs will

be met, unless the service provider wishes to pay a penalty. If the service provider

meets / exceeds all agreed SLAs they are monetarily rewarded, as per the contract.

Some key features of the managed services model:

The service provider takes end‐to‐end responsibility of set service lines and

deliverables

The service provider makes the decisions and takes the responsibility to provide

the agreed set of deliverables

Budgets are mostly fixed for the entire piece of work, making it more like a fixed

price managed services engagement. In this case, the service provider has a free

hand in deciding how, where and with how many personnel the project can be

delivered. The risk associated with such an approach is that the service provider

may decide to allocate shared resources, which could result in delivery issues

This model is often adopted when work can be clearly scoped out, with clearly

marked deliverables

For this model to work, the service provider should have an excellent

understanding of the customer’s systems. The customer in turn should be

confident enough to hand over work to the service provider

The customer’s role is that of a reviewer with the additional responsibility of

contracts management and budget tracking

The service provider will be responsible for selection of resources as well as

managing stakeholder expectations

There will be clearly marked SLAs for each deliverable, with penalties applicable

for non‐delivery



Delivery of service can be performed onshore at the client location, offshore or

a combination of both

A managed services model is often adopted by enterprises as a continuation of

an existing staff augmentation. Adopting a managed services model from day

one comes with lots of risks.

Exhibit 21: Pros‐Cons of Managed Service Model

Pros Cons

Since delivery and stakeholder expectations are the service provider’s responsibility, the customer can focus

fully on their core strategic initiatives

Service providers are sometimes reluctant to assume more management responsibilities

Service providers are more independent and have a relatively interference‐free management of the project

Culture mismatch between the customer and service provider can result in a lack of understanding, which

may affect deliverables

Enables service providers to make long‐term strategic investments that should indirectly benefit the customer

Sometimes, service providers don’t have a view of the scope of the project or may not understand all of the customer’s pain points, which could result in

major setbacks

Service providers bring their best practices into the project, thereby making key process improvements

In a multi‐service provider scenario, where for instance one provider manages applications and the other,

infrastructure, blame games are common, with no‐one willing to assume responsibility

SLA driven approach results in key process improvements delivering significant, measurable benefits to the customer

Re‐allocation of the contract, in case of performance issues or non‐conformance of SLAs, might be a challenge,

given that the existing service provider will be less cooperative

Knowledge retention becomes more streamlined and sustainable

Source: PL Research

Outcome‐Based Pricing Model: Outcome‐driven solutions are pin‐pointed and

positioned as delivering specific value to the business. Outcome‐based projects aim

to deliver measurable impact on the customer’s overall business results. The basic

philosophy is to align the interests of the service provider and the customer so that

both work towards the same goal. In this model, the scope is the business outcome

itself. Clearly defined and fixed outcomes which can be measured and delivered for a

given project is critical to its success. In an outcome‐based model, resource loading,

costing and pricing is a complicated exercise.

The mechanism for paying the service provider varies. But generally the payment is

made in made in one lump sum when the result is achieved or over shorter

milestones, so that the service provider recoups its investment in time.

The three key elements of an outcomes‐driven project are:

The service provider cannot earn a direct revenue from the customer unless the

work outcome delivers value to the customer



The scope of work impacts a large chunk of the process that influences a

business outcome, and service provider can adjust / tweak some elements of

the process to impact the business outcome

Service providers need to develop competences to tightly define the scope of an

outcome‐based project to be successful

The primary driver of outcome‐based pricing is the process characteristics, and

scope of engagement with the customer. As a rule of thumb, if a process directly

impacts measurable business outcome like revenue or cost, the service provider

should explore a business outcome‐based pricing. More so if there are enough

opportunities to impact the business outcome. However, the thing to remember is

whether the scope of work covers the majority of elements that drive a particular

outcome.

In outcome‐based projects, service providers control a significant portion of the

value chain affecting outcomes, even when they are not directly under the service

provider’s control. Hence, bringing into your sphere of influence things not under

your influence is a critical part of the execution model. This is where partnership

with other service providers, even competitors, will be a critical factor in success.

In this model, the customer gets rewarded by converting a fixed cost into a truly

variable cost model that scales with the business. It frees up client executives from

worrying about issues like technology, process and people, and allows them to focus

on business outcomes – things that really matter to the business. The customer

carries no risk since they pay only when they get the desired outcome. By having a

standardized definition of input and output in an outcomes‐driven model, services

become more like products.

In an outcome‐based model, service providers bet on the customer and vice versa,

to make success happen. Risk transfers from customer to service provider, the model

progresses from T&M to outcome‐based. The service provider should account for

transference of risk and cover by including a risk premium in the price. The risk

premium increases as you progress through these models and results in increasing

margins for the service provider. The ability to measure risk and charge the

appropriate risk premium is a critical factor in the service provider’s success.

Exhibit 22: Pros‐Cons of Outcome Based Model

Pros Cons

Directly aligned to the customer’s business outcome Lack of transparency in how work is performed

Potential for higher eventual savings as labor arbitrage is replaced by productivity and synergies between tasks

Little insight into cost of services

Ability to incent more innovative behavior from service provider

Cultural resistance from both customer and service provider

Deep appreciation of the customer’s business model, operations and industry nuances

Customer enterprises are sometimes too immature to appreciate the change management process

Source: PL Research



Transaction Pricing Model: A transaction is a sequence of steps with defined input

and output, which achieves a business purpose. Examples of transactions include

invoice or payroll processing. A transaction unit is a unit of measure with which a

transaction can be measured. Examples of transaction units are ‘per pay slip’ or ‘per

invoice’, etc. A transaction price is typically quoted as ‘price per transaction unit’. It

is generally mentioned as applicable for a specified transaction volume range.

The transaction‐based pricing model is based on the number of transactions

processed. Typically a base price is provided for a specified volume band, with a

negotiated increase or decrease in price as usage fluctuates around the specified

band. In this model, the scope becomes very important. The scope is also slightly

different from conventional projects and should be defined more tightly.

The volume of transactions and the variations in volume in a day, week, month or

months make a huge impact on pricing and effort. Another important scope element

is the form of input. Whether the input is electronic, paper form, integrated into xml,

importable or already imported can have a huge impact on the cost. Any change in

the assumption of proportion of the two forms of applications could make a huge

effort and cost difference for the service provider. In this model, service providers

take on a higher risk. They take on risks related to the volume of business, as the

pricing is based on certain volume assumptions. Change or variation in the volume

can have can have a dramatic impact on their cost.

Exhibit 23: Pros‐Cons of Transaction Based Model

Pros Cons

Closely tied to the customer’s business cycle May not be directly tied to the customer’s business outcome

Enhances customer visibility into consumption pattern Lack of transparency on how work is performed

Encourages productivity and efficiency

Source: PL Research



Which pricing model suits a given engagement?

The pricing model need not be intelligent enough to address the customer’s budget

objectives, but has to suit the respective customer engagement. IT engagements

spread from discovery and definition types to implementation, maintenance and

support. The pricing model that worked for one type of engagement may or may not

work for another. It is also possible that a pricing model that suits one client may not

suit another. Naturally, assessing the best possible pricing model for a customer or

an engagement sometimes requires a trial.

Exhibit 24: Which pricing model suits a given engagement?

Hybrid model

Best pricing model for bigger, longer and ongoing projects, which may need inputs in the beginning but can be perfected over time

Service provider is engaging with the customer for the first time

Both service provider and customer want to mitigate the risks of T&M and FP pricing models

Managed services model

Work clearly scoped out, with clearly marked out deliverables

Service provider has an excellent understanding of the customer’s systems. The customer in turn is confident enough to hand over the work to them

Outcome‐based pricing model

Clearly defined output

Output aligning to business process or where direct impact can be defined

For customers who want to align the service provider’s goals with their business goals

Transaction‐based pricing model

Transaction volumes are known and predictable

From the customer’s perspective, this model is used for business process which can be clearly defined, measured in discrete units

Transaction volume are tied to the service provider’s cost drivers

For the service provider’s perspective, this model is used in business process that are standardized, transaction intensive and demand‐driven

Source: PL Research



Income Statement (Rs m)

Y/e March 2013 2014 2015E 2016E

Net Revenue 629,895 818,094 963,409 1,135,703

Raw Material Expenses 339,245 430,645 516,286 616,404

Gross Profit 290,650 387,449 447,123 519,299

Employee Cost — — — —

Other Expenses 109,779 135,878 159,344 186,836

EBITDA 180,872 251,570 287,779 332,463

Depr. & Amortization 10,792 13,492 15,864 19,316

Net Interest (10,722) (13,789) (11,593) (12,021)

Other Income 11,881 16,613 21,858 24,286

Profit before Tax 181,960 254,691 293,773 337,433

Total Tax 40,345 60,712 68,155 77,610

Profit after Tax 141,615 193,979 225,618 259,823

Ex‐Od items / Min. Int. (1,493) (2,090) (2,466) (2,915)

Adj. PAT 140,122 191,889 223,152 256,908

Avg. Shares O/S (m) 1,957.2 1,958.7 1,958.7 1,958.7

EPS (Rs.) 71.6 98.0 113.9 131.2

Cash Flow Abstract (Rs m)

Y/e March 2013 2014 2015E 2016E

C/F from Operations 123,260 159,223 200,588 237,042

C/F from Investing (68,535) (108,729) (38,536) (45,428)

C/F from Financing (7,115) 75,531 (66,545) (74,432)

Inc. / Dec. in Cash 47,610 126,024 95,507 117,182

Opening Cash 19,936 18,432 144,907 240,414

Closing Cash 67,546 144,907 240,414 357,596

FCFF 70,004 156,027 159,586 188,698

FCFE 70,160 155,990 159,586 188,698

Key Financial Metrics

Y/e March 2013 2014 2015E 2016E

Growth

Revenue (%) 28.8 29.9 17.8 17.9

EBITDA (%) 25.4 39.1 14.4 15.5

PAT (%) 31.0 36.9 16.3 15.1

EPS (%) 31.0 36.8 16.3 15.1

Profitability

EBITDA Margin (%) 28.7 30.8 29.9 29.3

PAT Margin (%) 22.2 23.5 23.2 22.6

RoCE (%) 38.1 39.8 33.8 30.8

RoE (%) 38.1 39.9 35.3 31.9

Balance Sheet

Net Debt : Equity (0.2) (0.3) (0.3) (0.4)

Net Wrkng Cap. (days) — — — —

Valuation

PER (x) 37.8 27.6 23.8 20.7

P / B (x) 12.9 9.6 7.4 5.9

EV / EBITDA (x) 28.9 20.5 17.6 14.9

EV / Sales (x) 8.3 6.3 5.3 4.4

Earnings Quality

Eff. Tax Rate 22.2 23.8 23.2 23.0

Other Inc / PBT 6.5 6.5 7.4 7.2

Eff. Depr. Rate (%) 8.0 7.9 7.6 7.6

FCFE / PAT 50.1 81.3 71.5 73.4

Source: Company Data, PL Research.

Balance Sheet Abstract (Rs m)

Y/e March 2013 2014 2015E 2016E

Shareholder's Funds 409,560 553,352 712,425 897,817

Total Debt 1,310 1,273 1,273 1,273

Other Liabilities 20,340 23,749 23,749 23,749

Total Liabilities 431,209 578,374 737,447 922,839

Net Fixed Assets 81,943 103,644 126,316 152,428

Goodwill 35,063 41,568 41,568 41,568

Investments 20,404 34,489 34,489 34,489

Net Current Assets 215,841 307,363 443,764 603,044

Cash & Equivalents 67,546 144,907 240,414 357,596

Other Current Assets 237,821 273,208 348,377 410,773

Current Liabilities 89,526 110,752 145,027 165,325

Other Assets 77,959 91,309 91,309 91,309

Total Assets 431,209 578,374 737,447 922,839

Quarterly Financials (Rs m)

Y/e March Q2FY14 Q3FY14 Q4FY14 Q1FY15

Net Revenue 209,772 212,940 215,511 221,110

EBITDA 66,390 66,866 66,559 62,324

% of revenue 31.6 31.4 30.9 28.2


Net Interest (3,094) (3,095) (4,420) (4,993)

Other Income (230) 6,870 6,756 8,237


Total Tax 15,563 16,524 16,313 15,312

Profit after Tax 51,441 53,140 53,048 50,578

Adj. PAT 51,441 53,140 53,048 50,578

Key Operating Metrics

Y/e March 2013 2014 2015E 2016E

Volume (persons month) 2,244,506 2,498,135 2,947,799 3,484,299

Pricing (US$ / Hr) 33.4 35.0 35.5 35.9

Currency (USDINR) 54.5 60.9 59.8 59.0

SW Devp. Cost (% of Sales) 53.9 52.6 53.6 54.3

SG&A (% of Sales) 17.4 16.6 16.5 16.5

Revenue (US$ m) 11,568 13,443 16,124 19,249

EBITDA Margin Expansion/(Erosion) (bps) (78) 204 122 (237)

Tax Rate (%) 22.3 23.9 23.2 23.0


Tata Consultancy Services BUY CMP: Rs2,709 TP: Rs2,900




Y/e March 2013 2014 2015E 2016E

Net Revenue 403,520 501,330 538,365 606,727


Gross Profit 162,010 193,660 213,437 237,822


Other Expenses 46,430 59,510 65,404 73,478

EBITDA 115,580 134,150 148,033 164,344


Net Interest — — — —

Other Income 23,590 26,690 30,370 33,145


Total Tax 33,670 40,620 46,376 50,389

Profit after Tax 94,210 106,480 122,265 136,236

Ex‐Od items / Min. Int. — — — —

Adj. PAT 94,210 106,480 122,265 136,236

Avg. Shares O/S (m) 572.0 572.0 572.0 572.0

EPS (Rs.) 164.7 186.2 213.7 238.2


Y/e March 2013 2014 2015E 2016E



C/F from Financing (31,860) (30,660) (37,127) (39,983)

Inc. / Dec. in Cash 12,410 41,180 42,914 68,487

Opening Cash 205,910 218,320 259,500 302,414

Closing Cash 218,320 259,500 302,414 370,902

FCFF 79,600 100,820 80,041 108,470

FCFE 79,600 100,820 80,041 108,470


Y/e March 2013 2014 2015E 2016E

Growth

Revenue (%) 19.6 24.2 7.4 12.7

EBITDA (%) 7.9 16.1 10.3 11.0

PAT (%) 13.3 13.0 14.8 11.4

EPS (%) 13.3 13.0 14.8 11.4

Profitability

EBITDA Margin (%) 28.6 26.8 27.5 27.1

PAT Margin (%) 23.3 21.2 22.7 22.5

RoCE (%) 25.6 24.3 23.5 22.3

RoE (%) 25.7 24.4 23.6 22.4

Balance Sheet

Net Debt : Equity (0.5) (0.5) (0.5) (0.6)


Valuation

PER (x) 22.4 19.8 17.3 15.5

P / B (x) 5.3 4.4 3.8 3.2

EV / EBITDA (x) 16.4 13.8 12.2 10.6

EV / Sales (x) 4.7 3.7 3.4 2.9

Earnings Quality

Eff. Tax Rate 26.3 27.6 27.5 27.0

Other Inc / PBT 18.4 18.1 18.0 17.8

Eff. Depr. Rate (%) 10.6 10.2 6.3 6.0

FCFE / PAT 84.5 94.7 65.5 79.6



Y/e March 2013 2014 2015E 2016E


Total Debt — — — —



Net Fixed Assets 64,680 78,870 91,181 105,193

Goodwill 23,440 24,990 24,990 24,990

Investments 17,390 32,710 32,710 32,710





Other Assets 22,260 36,500 36,500 36,500

Total Assets 400,650 479,170 564,308 660,562



Net Revenue 129,650 130,260 128,750 127,700

EBITDA 31,710 36,200 36,410 34,410

% of revenue 24.5 27.8 28.3 26.9



Other Income 5,100 7,310 8,510 8,290


Total Tax 9,400 11,150 11,400 11,540

Profit after Tax 24,070 28,750 29,920 28,860

Adj. PAT 24,070 28,750 29,920 28,860


Y/e March 2013 2014 2015E 2016E

Volume (persons month) 1,236,844 1,367,759 1,442,986 1,630,574

Pricing (US$ / Hr) 34 34 35 36

Currency (USDINR) 54.5 60.8 59.8 59.0

SW Devp. Cost (% of sales) 59.9 61.4 60.4 60.8

SG&A (% of sales) 11.5 11.9 12.1 12.1

Revenue (US$ m) 7,398 8,249 9,010 10,284

EBITDA Margin Expansion/(Erosion) (bps) (312.3) (188.4) 73.8 (41.0)

Tax Rate (%) 26.3 27.5 27.5 27.0


Infosys BUY CMP: Rs3,691 TP: Rs4,040




Y/e March 2013 2014 2015E 2016E

Net Revenue 374,256 434,269 488,922 545,933


Gross Profit 113,591 138,781 157,815 177,410


Other Expenses 35,410 41,680 45,778 51,508

EBITDA 78,181 97,101 112,036 125,903


Net Interest — 52 — —

Other Income 11,250 15,062 14,775 19,327


Total Tax 16,912 22,601 25,079 29,089

Profit after Tax 61,684 78,404 88,918 103,134

Ex‐Od items / Min. Int. — 62 200 100

Adj. PAT 61,684 78,394 88,718 103,034

Avg. Shares O/S (m) 2,463.0 2,466.0 2,466.0 2,466.0

EPS (Rs.) 25.0 31.8 36.0 41.8


Y/e March 2013 2014 2015E 2016E




Inc. / Dec. in Cash 7,172 30,080 75,292 73,387

Opening Cash 77,666 84,121 114,201 189,493

Closing Cash 84,838 114,201 189,493 262,880

FCFF 109,865 45,262 97,385 95,480

FCFE 88,209 55,317 97,385 95,480


Y/e March 2013 2014 2015E 2016E

Growth

Revenue (%) 17.4 16.0 12.6 11.7

EBITDA (%) 17.2 24.2 15.4 12.4

PAT (%) 17.3 27.1 13.2 16.1

EPS (%) 17.1 26.9 13.2 16.1

Profitability

EBITDA Margin (%) 20.9 22.4 22.9 23.1

PAT Margin (%) 16.5 18.1 18.1 18.9

RoCE (%) 20.5 24.2 22.6 22.1

RoE (%) 21.7 25.0 23.5 22.9

Balance Sheet

Net Debt : Equity (0.3) (0.3) (0.4) (0.5)

Net Wrkng Cap. (days) (2) (6) 7 6

Valuation

PER (x) 23.3 18.3 16.2 13.9

P / B (x) 5.1 4.2 3.5 2.9

EV / EBITDA (x) 17.3 13.7 11.2 9.4

EV / Sales (x) 3.6 3.1 2.6 2.2

Earnings Quality

Eff. Tax Rate 21.5 22.4 22.0 22.0

Other Inc / PBT 14.3 14.9 13.0 14.6

Eff. Depr. Rate (%) 10.7 9.8 10.0 9.0

FCFE / PAT 143.0 70.6 109.8 92.7



Y/e March 2013 2014 2015E 2016E


Total Debt 854 10,909 10,909 10,909



Net Fixed Assets 50,525 51,449 53,303 56,674

Goodwill 56,470 65,358 65,358 65,358

Investments 69,222 60,843 60,843 60,843





Other Assets 32,689 40,299 40,299 40,299

Total Assets 294,990 365,848 432,473 513,414



Net Revenue 110,053 112,713 116,535 111,358

EBITDA 25,170 25,923 28,180 25,507

% of revenue 22.9 23.0 24.2 22.9



Other Income 4,949 3,518 3,627 4,449


Total Tax 5,754 6,060 6,536 5,942

Profit after Tax 21,647 20,397 22,391 21,032

Adj. PAT 21,647 20,397 22,391 21,032


Y/e March 2013 2014 2015E 2016E

IT Svcs Revs ($ mn) 689,616 744,785 811,816 884,879

Pricing (US$ / Hr) 38.8 39.2 39.6 40.0

Currency (USDINR) 54.5 60.3 59.8 59.0

Sw. Devp. Cost (% of Sales) 69.6 68.0 67.7 67.5

SG&A (% of Sales) 9.5 9.6 9.4 9.4

Revenue (US$ m) 6,865 7,238 8,183 9,253

EBITDA Margin Expansion/(Erosion) (bps) (4.0) 147.0 55.5 14.7

Tax Rate (%) 21.5 22.4 22.0 22.0


Wipro BUY CMP: Rs583 TP: Rs680




Y/e June 2013 2014 2015E 2016E

Net Revenue 257,336 329,180 373,127 422,588


Gross Profit 92,557 127,020 145,074 162,469


Other Expenses 34,201 40,350 49,942 57,490

EBITDA 58,356 86,670 95,133 104,979



Other Income 1,571 (160) 7,500 9,092


Total Tax 12,217 15,480 19,920 22,709

Profit after Tax 40,984 63,710 74,735 82,714

Ex‐Od items / Min. Int. — — — —

Adj. PAT 40,984 63,710 74,735 82,714

Avg. Shares O/S (m) 693.3 693.3 693.3 693.3

EPS (Rs.) 59.1 91.9 107.8 119.3


Y/e June 2013 2014 2015E 2016E




Inc. / Dec. in Cash 648 449 37,036 55,738

Opening Cash 6,673 7,321 10,206 47,242

Closing Cash 7,321 10,206 47,242 102,980

FCFF 25,332 18,596 56,955 79,224

FCFE 13,070 19,145 56,955 79,224


Y/e June 2013 2014 2015E 2016E

Growth

Revenue (%) 22.4 27.9 13.4 13.3

EBITDA (%) 45.0 48.5 9.8 10.4

PAT (%) 62.2 55.5 17.3 10.7

EPS (%) 62.2 55.5 17.3 10.7

Profitability

EBITDA Margin (%) 22.7 26.3 25.5 24.8

PAT Margin (%) 15.9 19.4 20.0 19.6

RoCE (%) 26.9 32.8 29.4 25.9

RoE (%) 32.8 37.1 32.1 27.6

Balance Sheet

Net Debt : Equity — — (0.1) (0.3)


Valuation

PER (x) 28.9 18.6 15.8 14.3

P / B (x) 8.3 5.9 4.5 3.5

EV / EBITDA (x) 20.3 13.6 12.0 10.4

EV / Sales (x) 4.6 3.6 3.1 2.6

Earnings Quality

Eff. Tax Rate 23.0 19.5 21.0 21.5

Other Inc / PBT 3.0 (0.2) 7.9 8.6

Eff. Depr. Rate (%) 24.7 23.3 21.1 19.1

FCFE / PAT 31.9 30.1 76.2 95.8



Y/e June 2013 2014 2015E 2016E


Total Debt 6,960 7,509 7,509 7,509



Net Fixed Assets 27,283 31,465 37,808 45,203

Goodwill 49,581 51,492 50,977 50,569

Investments 541 156 156 156





Other Assets 22,389 23,462 23,462 23,462

Total Assets 165,020 222,938 285,216 352,685


Y/e June Q2FY14 Q3FY14 Q4FY14 Q1FY15E

Net Revenue 81,840 83,490 84,240 88,272

EBITDA 21,250 22,320 22,170 22,068

% of revenue 26.0 26.7 26.3 25.0



Other Income (470) (70) 1,580 2,000


Total Tax 3,980 4,290 3,620 4,654

Profit after Tax 14,950 16,240 18,360 17,507

Adj. PAT 14,950 16,240 18,360 17,507


Y/e June 2013 2014 2015E 2016E

Volume (persons months) 500,637 562,716 614,486 703,586

Pricing (US$ / Hr) 35.3 37.1 37.7 38.2

Currency (INR/USD) 54.7 61.4 59.8 59.0

SW. Devp. Cost (% of sales) 64.0 61.4 61.1 61.6

SG&A (% of sales) 13.3 12.3 13.4 13.6

Revenue (US$ m) 4,686 5,360 6,245 7,163

EBITDA Margin Expansion/(Erosion) (bps) 354 365 (83) (65)

Tax Rate (%) 23.0 19.5 21.0 21.5


HCL Technologies Accumulate CMP: Rs1,708 TP: Rs1,750



THIS PAGE IS INTENTIONALLY LEFT BLANK



Prabhudas Lilladher Pvt. Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐400 018, India

Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

Rating Distribution of Research Coverage

30.7%

51.8%

17.5%

0.0%0%

10%

20%

30%

40%

50%

60%

BUY Accumulate Reduce Sell

% of Total Coverage

PL’s Recommendation Nomenclature

BUY : Over 15% Outperformance to Sensex over 12‐months Accumulate : Outperformance to Sensex over 12‐months

Reduce : Underperformance to Sensex over 12‐months Sell : Over 15% underperformance to Sensex over 12‐months

Trading Buy : Over 10% absolute upside in 1‐month Trading Sell : Over 10% absolute decline in 1‐month

Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly

This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as

information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be

considered or taken as an offer to sell or a solicitation to buy or sell any security.

The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy

or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information,

statements and opinion given, made available or expressed herein or for any omission therein.

Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The

suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an

independent expert/advisor.

Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or

engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication.

We may from time to time solicit or perform investment banking or other services for any company mentioned in this document.

information technology: a qualitative assessment of two billing models - prabhudas lilladher

Economy & Finance

tcs fpp contribution

fpp evolution

tm handy

fpplike tm

sustained tm

nowinning billing model

billing timeandmaterials

type of billing