8/7/2019 M & A_Group 13

1/31

Group 13

Shaleen Bartaria (006)

Mandar Kulkarni (029)Rohan V.Manohar (032)

Aswathi V (057)

8/7/2019 M & A_Group 13

2/31

The Indian IT industryy Contribution to GDP : 5.8%(2008-09)

y Among the largest employment generator in the organized

sector employing 7.5 million people, estimated to cross the10 million mark by 2012

y Revenues estimated at USD 71 billion in 2008-09,consistent rise in growth with 5 year compound annualgrowth (CAGR) at 27%

y Domestic IT revenues estimated at USD 24.3 billion, with a5 year CAGR of 24%

y Projected revenue of about US $ 80 billion in 2011

8/7/2019 M & A_Group 13

3/31

Major Players in the Industryy Tata Consultancy Services

y Infosys Technologies

yWiproy HCL

y Tech Mahindra

y Patni

y Mphasis

8/7/2019 M & A_Group 13

4/31

Indian software exports

8/7/2019 M & A_Group 13

5/31

Some other Potential Targetsy Patni

y Hexaware

y Geometric Softwarey Polaris LabsReasons for Rejection :

None of these companies operate in areas that are

totally out of Infosyss reach and do not present veryattractive avenues for investment.

These companies are in such a segment that does notmake good strategic fit with future plans of Infosys

8/7/2019 M & A_Group 13

6/31

Recent M &A in the Industryy Oracle acquired Sun Microsystems for US $ 7.4 Billion

in 2009

8/7/2019 M & A_Group 13

7/31

Rationale for Infosysy Recognized Brand in the Insurance sector Products spacey It will give Infosys an access into the Insurance Industryy Access to Elixir Core, a cutting edge technology product

developed by Mastek that allowsCos to go live with theirbusinesses in 90 days

y Access to Masteks skilled workforce and R &D facilitiesy Addition of Product development to Infosyss Support and

maintenance projects

y Mastek is currently in distressed financial state. Thus itspossible to get a good buy at a reasonable price.

y Masteks client base is spread across UK, Asia-pacific andthe Middle East, while Infosyss clientele is mostly based inNorth America, primarily the US.

8/7/2019 M & A_Group 13

8/31

Rationale for Masteky Only 2% of its revenues are from India. Hence if it is

acquired by a strong Indian IT player , like Infosys, ithas a great opportunity in the Indian IT sector forproviding services to Insurance companies, which isconsidered to be the sun-rise sector of the Indianeconomy

y Due to the distressed state of the company, the

attrition rate has shot up to almost 20%, compared tothe industry average of around 9-10 %. Thus thecompany now needs a strong leadership to guide the

workforce in order to stage a turnaround.

8/7/2019 M & A_Group 13

9/31

Financial Rationale for Masteky Revenue has declined by almost 25 %

y Its net profit has declined from Rs.1412 Mn in 2009 to

Rs.677 Mn in 2010 (i.e. its profit has more than halved )y EPS has dropped from Rs.52 per share to Rs.25 per share

y Its % profit has touched an all time low of 9.34%

y The Cash flows have declined from Rs.2143 in 2009 to

Rs.314y i.e. Decline of almost 85%

y ROE has dropped down substantially

8/7/2019 M & A_Group 13

10/31

Company Overview :Masteky Masteks business model is characterized by a focus on IP and

enterprise solutionsy Focus on two verticals Government and Insurancey Masteks solutions for the insurance industry address both the life and

non-life segments. The Insurance vertical delivered revenues of Rs258.6 croreduring FY2010,comprising more than 36% of overallrevenues.

y Relies mostly on Product development and Application buildingy As a result, it incurs more of R & D costs as well as marketing expensesy It has subsidiaries in US,UK,Malaysia,Singapore,Germany,Thailand,Canada

y Has around 3240 employeesy Promoters hold more than 40% share in Masek which is appreciable

shareholding for IT Company.

8/7/2019 M & A_Group 13

11/31

8/7/2019 M & A_Group 13

12/31

Company Overview : Infosysy Indias 2nd largest IT Company by size and Revenue.

y Involved in multiple business segments like IT Consulting,IT Solutions, Industrial Solutions, BPO Services.

y Infosys has a global footprint with 63 offices anddevelopment centres in India, China, Australia, the CzechRepublic, Poland, the UK, Canada and Japan.

y 114,822 employees as on June 30, 2010.

yIt is more of generic service provider so not niche based &focuses on multiple sectors at a time.

y Promoters shareholding has successively decreasedwhereas MF,Banks,FII have increased their shareholding.

8/7/2019 M & A_Group 13

13/31

Ratio Analysisy Current Ratio :

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Mastek1.66 1.71 1.53 1.74 2.88 3.21 3.70 4.07 4.53 4.64

Infosys2.70 4.43 3.11 4.30 4.09 3.98 4.02 4.04 4.05 4.05

Infosys(Post

Acq) 3.87 4.05 4.07 4.08 4.08

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Mastek0.0037 0.0011 0.1820 0.1216 0.0713 0.0626 0.0552 0.0489 0.0434 0.0384

Infosys0 0 0 0 0 0 0 0 0 0

Infosys(Post

Acq) 0.0014 0.0012 0.0009 0.0007 0.0006

D/E Ratio:

8/7/2019 M & A_Group 13

14/31

WCMgmt Ratios:-

2

0

0

6

2

0

0

7

2

0

0

8

2

0

0

9

2

0

1

0

2

0

1

1

E

2

0

1

2

E

2

0

1

3

E

2

0

1

4

E

2

0

1

5

E

Debtors Days

34 40 21 52 90 161 196 225 241 252

Creditors

Days 65 55 75 44 33 33 33 33 33 33

Inventory

Days 0 0 0 0 0 0 0 0 0 0

Cash ConvDays

-30 -15 -55 8 57 128 163 192 208 219

Mastek:

8/7/2019 M & A_Group 13

15/31

y Infosys

20

06

20

07

2

0

0

8

20

09

20

10

20

11

E

2

0

1

2

E

20

13

E

20

14

E

2

0

1

5

E

Debtors

Days

60.76 62.33 69.18 60.47 53.87 53.87 53.87 53.87 53.87

53.87

After

Acquisition 54.56 54.47 54.41 54.35 54.32

Creditors

Days

41.15 44.17 45.51 41.94 42.38 43.03 43.03 43.03 43.03 43.03

After

Acquisition

41.69 41.89 42.03 42.14 42.21

Inventory

Days - - - - - - - - -

-

Cash Conv

Days

19.60 18.16 23.67 18.52 11.48 10.83 10.83 10.83 10.83 10.83

After

Acqusition

12.87 12.58 12.38 12.22 12.11

8/7/2019 M & A_Group 13

16/31

8/7/2019 M & A_Group 13

17/31

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

ROE35.30% 34.22% 33.77% 32.80% 27.15% 24.96% 25.12% 25.24% 25.34% 25.42%

After

Acqusition

24.38% 24.45% 24.51% 24.56% 24.60%

RoCE

35.30% 34.22% 33.77% 32.80% 26.88% 24.96% 25.12% 25.24% 25.34% 25.42%

After

Acquisition

24.35% 24.43% 24.49% 24.54% 24.58%

ROA

34.96% 34.21% 33.77% 32.80% 26.88% 24.96% 25.12% 25.24% 25.34% 25.42%

After

Acquisition

24.34% 24.42% 24.48% 24.54% 24.58%

Infosys:-

8/7/2019 M & A_Group 13

18/31

Growth Ratios

Growth in 2

0

0

7

2

0

0

8

2

0

0

9

2

0

1

0

2

0

1

1

E

2

0

1

2

E

2

0

1

3

E

2

0

1

4

E

2

0

1

5

E

Revenue

15.58% 13.06% 5.32%-

25.19% 5.00% 8.00% 10.00% 12.00% 15.00%

Gross Block

-10.34% 100.42% 13.53% 3.07% 1.01% 1.51% 2.23% 3.30% 4.93%

EBIDTA

Growth12.69% 23.17% -0.28% -47.51% 41.32% 8.00% 10.00% 12.00% 15.00%

Net Profit

Growth54.75% 17.73% 12.14% -52.03% 21.59% 8.10% 10.11% 12.12% 15.14%

Mastek:

8/7/2019 M & A_Group 13

19/31

8/7/2019 M & A_Group 13

20/31

Valuation Ratios

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

EPS

24.55 37.57 45.57 52.50 25.14 30.56 33.04 36.38 40.79 46.96

P/E

14.74 8.23 7.31 2.21 13.21 10.86 10.05 9.13 8.14 7.07

P/BV

3.68 2.50 2.33 0.61 1.63 1.42 1.24 1.09 0.96 0.85

Market

Cap/sa

les 1.45 1.09 1.00 0.32 1.24 1.18 1.09 0.99 0.89 0.77

Divide

ndYield 1.80% 2.43% 3.00% 8.62% 0.38% 2.01% 2.18% 2.39% 2.69% 3.09%

Mastek:

8/7/2019 M & A_Group 13

21/31

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

EPS

45.0 69.1 81.5 104.6 109.6 124.92 155.95 194.67 243.00 303.30

After

Acq

124.91 156.09 194.96 243.48 304.06

P/E

66.20 29.20 17.65 12.65 24.00 20.94 16.77 13.44 10.77 8.63

After

Acq

20.94 16.76 13.42 10.74 8.60

P/BV

23.36 9.98 5.96 4.15 6.47 5.23 4.21 3.39 2.73 2.19

After

Acq

5.11 4.10 3.29 2.64 2.12

Market

Cap/sal

es 16.85 7.88 4.73 3.42 6.30 5.04 4.03 3.22 2.57 2.06

After

Acq

4.91 3.94 3.16 2.53 2.02

Divi

e

Yiel

1.51% 0.57% 2.31% 1.78% 0.96% 1.09% 1.36% 1.70% 2.12% 2.64%

After

Acq

1.00% 1.15% 1.45% 1.81% 2.27%

Infosys:

8/7/2019 M & A_Group 13

22/31

Valuationy Method 1 : DCF Valuation

y For detailed calculations refer to Excel Sheet Tab

FCFF_MASTEK.y Firm Value= Rs7778 Mn.

(Range :7389-8163 Mn , 5% variance)

8/7/2019 M & A_Group 13

23/31

Sensitivity Analysis:y Varying Extraordinary Growth Rate ( first 5 years) :

y Gh = 35%, Value = Rs. 1,145,526 Mny Gh = 45%, Value= Rs. 1,285,484 Mny Gh = 25%, Value = Rs. 1,025,647 Mn

y For a 10% fall in Gh, the value of the firm falls by 11.5%.y For a 10% rise in Gh, the value of firm rises by 12.21 %

y Varying Beta for High Growth:

y Beta= 1.1 , Value of the Firm = Rs. 1,145,526 Mn

y Beta= 1.6 , Value of the Firm = Rs. 1,016,620 Mny Beta = 0.6 , Value of the Firm = Rs.1,296,861 Mny For a 0.5 fall in Beta, the value of the firm rises by 13.2 %.y For a 0.5 rise in Beta, the value of firm falls by 12.67 %.

8/7/2019 M & A_Group 13

24/31

Valuationy Method 2: P/E Valuation

y Current P/E=13.21

y 3 Yr Avg P/E=11.37y So value using P/E = P/E *Net Profit

= 11.37*677

= 7697.5 Mn

( Range: 7313-8082 Mn , 5% variance)

8/7/2019 M & A_Group 13

25/31

Deal Structuringy OPTION1:- Cash Buyout

Method Value Low High Cash with

Infosys

Value/Cash

FCFF 7778 7389 8167 105560 7.4%

P/E 7698 7313 8082 105560 7.3%

8/7/2019 M & A_Group 13

26/31

y OPTION2:- Composite Deal (Cash + Equity)

y Mastek has Promoters Shareholding of 40 odd %. This

represents a hugh block of Shareholders who would beinstrumental in enabling takeover.

yAs Mastek Stock is currently Undervalued it would bebetter for Infosys to go for Cash purchase than Share

purchase.y So Infosys may consider Cash payout to Promoters &

Stock buyout to other shareholders.

8/7/2019 M & A_Group 13

27/31

Calculationsy Pay 40% of total Cash Value to promoters:- ie 0.4*7778= Rs.

3112 Mn

y Offer Shares of Infosys to other Shareholders.

y Swap Ratio Calculation:y CMP Infosys= Rs. 3148.5

y CMP Mastek= Rs. 178.55

y So swap ratio can be 1 Infosys Share for 16-18 Mastek

Shares.y This would mean adding 1.5-1.7 Mn more outstanding

shares for Infosys which is not really big figure consideringInfosys has 570 Mn shares outstanding.

8/7/2019 M & A_Group 13

28/31

Integration from HR perspectiveHR policies- Infosys

y Recruitment

y L&Dy

Campus connecty ILI

y Knowledge initiatives

y Compensation & Benefits

y iRACEy CRR

y Promotions

8/7/2019 M & A_Group 13

29/31

HR policies-MASTEKy Recruitment

y L&D

y Inductiony Bite sized courses

y E-learning

y Learning portal

yAnnual run timeyAnytime promotions

y Manager Assessment

8/7/2019 M & A_Group 13

30/31

Proposed Initiativesy Cultural Integration

y Establish proper communication channels

y Harmonize the compensation packagey Leadership Retention & Retention of Key employees

y Orientation programs

y Post merger team building

y Helpline

y Stress management workshops

y Train the managers on the nature of the change

8/7/2019 M & A_Group 13

31/31

yTHANK YOU