indian it services firms are geared for apps....

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]



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



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

65

85

105

125

145

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185

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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



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

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Source: Company, R K Global Research Source: Company, R K Global Research

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Source: Company, R K Global Research Source: Company, R K Global Research



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

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Source: Company, R K Global Research




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.

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Source: Company, TradingEco, R K Global Research

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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.

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Source: TradindE, EuroStat, R K Global Research




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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Source: Dow Jones, DJIVY ETF, R K Global Research Source: Dow Jones, DJIVY ETF, R K Global Research



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



Company Report section

Tata Consultancy Services Page 11-22

CMP (`) Target Price (`) Rating Upside (%)

1018 1206 BUY ~15.5%

Infosys Ltd Page 23-29


2362 2562 HOLD ~7.8

Wipro Ltd Page 30-38


325 416 BUY ~18

Source: R K Global Research Estimatess



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



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.




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


An

nu

al R

even

ue

(`m

n)

Revenue Revenue Growth





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





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





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


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





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




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)




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




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




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.




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





TCS Ltd, Financials: Reported & Forecasted

Income Statement (` Mn)

Balance Sheet (` Mn)



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


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





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


Price v/s NIFTY

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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: NSE, Ace Equity, R K Global Research



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.

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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.

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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.

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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

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Source: NSE, Ace Equity, R K Global Research

Band: 22x

Band: 17x

Band: 15x



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




Infosys Ltd Financials: Reported & Forecasted

Income Statement (` Mn)

Balance Sheet (` Mn)



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




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


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 (%)


PBIDTM 35 33 30 30

CASH FLOW FROM OPERATING ACTIVITIES

EBIDTM 39 38 34 34

EBDIT 82810 92290 108415 128827


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)



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)


Investments (36310) (36309) (18372) (8025)


Cash In Investment (37860) 26340 (44334) (24562)


CASH FLOW FROM FINANCING ACTIVITIES


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


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





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


Price v/s NIFTY

79%

6%

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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


2011

Source: Company, R K Global Research, as on 30th June’11

Source: NSE, R K Global Research



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.

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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.

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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.

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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.

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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

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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




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




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.

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Source: Company, Ace Equity, R K Global Research



Wipro Ltd – Financials: Reported & Forecasted (consolidated)

Income Statement (` mn)

Balance Sheet (` mn)



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



Interests 998 586 1095 1211

Total Debt 55302 47441 47152 67757

PBDT 62684 70320 77991 94007


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


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


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)


Changes in CL (2592) 9498 (43358) (9048)

PATM 24 26 25 26

Changes In WC (22234) (12880) (75682) (40625)

CPM 27 29 28 28



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)


Others 13083 (4634) Nil Nil


DTL & Misc. Expen. Changes 229 240 (234) (394)


Cash In Financing Activities 6804 (29249) (18087) (1580)


Cash & Cash Equivalents 12551 (4610) (36505) (14161)

PAT Growth 20 35 22 22


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




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While every effort is made to ensure the accuracy and completeness of information contained, the company takes no guarantee and

assumes no liability for any errors or omissions of the information. No one can use the information as the basis for any claim, demand or

cause of action. Recipients of this material should rely on their own investigations and take their own professional advice. Each

recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an

investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult

their own advisors to determine the merits and risks of such an investment. R K Global, its directors, analysts or employees do not take

any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on

basis of this report.

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