Emkay

India Equity Research | IT Services

January 5, 2015

Sector Update

IT Services

Your success is our success

Dec'14 preview: Cross currency

pangs add to the seasonal weakness
Result highlights
Cross currency headwinds of ~150-220 bps will add to the usual seasonal Dec weakness
resulting in a 0.6-2.9%QoQ US$ revenue growth for Tier I companies with TCS at the
lower end and TechM at the upper end

Amongst Tier II companies, Persistent and Hexaware are expected to report strong
revenue performance (+5% /3% QoQ). eClerx and Mindtree which reported strong
revenue performance in Sep14 quarter will report modest revenue growth in Dec14

Operating margins are expected to inch up sequentially across most of the companies
aided by ~2.3% QoQ INR depreciation against US$ except for HCL Tech, Hexaware ( on
wage hikes hits) and First source( ramp downs on large projects)

Currency reset to Rs 63/$ for FY16/17 drive raise in EPS estimates for coverage barring
eClerx. While we retain our preference for Tier Is, we upgrade Hexaware to ACCUM, TP
Rs 230 as we back upsides to earnings aided by strong operating performance

Watch out forCY15 IT Spending trends, demand in key verticals

While the Dec14 quarter results are expected to see modest revenue growth performance,
we would be focused on early indications on CY15 IT spending trends, demand from key
verticals like Financial Services, Retail and geographies likes US and Europe. We note that
while the commentary from global peers has been reassuring, TCS has indicated of some
softness recently as well as the YoY US$ revenue growth for the Top 5 offshore players has
decelerated in recent quarters.

Currency resets drive a (1.5%)-8% change in FY16/17E EPS, continue to prefer

Tier I; upgrade Hexaware in the mid-tier universe
We revise our US$/INR exchange assumptions to Rs 63/$ for FY16/17(V/s Rs 61 earlier)
driving a (1.5%)-8% change in FY16/17E earnings. We also incorporate the recently
announced LCC acquisition for Tech Mahindra driving a raise in US$ revenue estimates as
we moderately cut growth assumptions for others in the sector. We revise up TP for Tier I
players by 0-7% while for TP revision for Tier II players is in range of -4% to 27%. We continue
to prefer Tier Is with Infosys, HCL Tech and TCS as our top picks in that order of
preference. We also upgrade Hexaware to ACCUMULATE, TP Rs 230 as we back
upsides to earnings aided by strong operating performance. We continue to back
downsides for REDUCE rated Mindtree and SELL rated Persistent given expensive
valuations and downside risks to margins/earnings in the near/medium term.

Hexaware
CMP
201

ACCUMULATE
Target Price
230

eClerx Services
CMP
1,289

HOLD
Target Price
1,220

Infosys
CMP
1,974

BUY
Target Price
2,250

Mindtree
CMP
1,296

REDUCE
Target Price
1,030

NIIT Tech
CMP
367

HOLD
Target Price
380

Persistent Systems
CMP
1,733

SELL
Target Price
1,400

TCS
CMP
2,546

ACCUMULATE
Target Price
2,860

Tech Mahindra
CMP
2,595

ACCUMULATE
Target Price
2,800

Wipro
CMP
552

HOLD
Target Price
630

HCL Tech
CMP
1,605

ACCUMULATE
Target Price
1,750

Financial Snapshot (Consolidated)

EPS
(Rs mn)

EV/EBIT

P/E

FY15E

FY16E

FY15E

FY16E

FY15E

FY16E

Infosys

109

124

13.9

11.7

18.5

16.3

TCS

110

129

18.1

14.9

23.4

20

35

41

11.9

10

15.7

13.6

HCL Tech**

107

117

12.5

11

15.1

13.7

Tech Mahindra

139

171

14.3

11.2

18.8

15.2

Mindtree

65

76

15.5

12.3

19.8

17.2

eClerx

81

95

12.1

9.8

16.4

13.9

Hexaware*

11

15

13.3

9.9

19.1

14

Persistent Systems

76

85

20.7

16.2

24.6

22

NIIT Tech

31

36

7.9

6.4

12.4

10.7

Mphasis

35

32

6.8

7.5

11.1

12

9.2

6.9

9.9

7.5

Wipro

Firstsource
Emkay

View

Mphasis
CMP
390
Firstsource
CMP
35

HOLD
Target Price
410
ACCUMULATE
Target Price
45

Source: Company, Emkay Research

Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES.

Emkay Global Financial Services Ltd.

IT Services

India Equity Research | Sector Update

Cross currency pangs add to the usual December weakness

Cross currency headwinds of ~150-220 bps will impair revenue growth for the coverage universe
in an already seasonally weak Dec quarter with Tier I companies expected to report a 0.6-2.9%
QoQ US$ revenue growth. Tech Mahindra is expected to lead the Tier I companies in revenue
growth at ~2.9% QoQ (albeit also aided by consolidation of the Mahindra Engineering Services
acquisition).
Amongst Tier II companies, Persistent (+5% QoQ) and Hexaware (+3% QoQ) are expected to
report a strong revenue performance with eClerx (+1.5% QoQ) and Mindtree expected to report
modest revenue growth after the strong revenue show in Sep14 quarter. We note that Persistent
will see the least headwind from cross currency movements on account of the company deriving
~86% of revenues from US.

Operating margins to improve sequentially for most of the universe barring HCL
Tech, Hexaware and Firstsource
We expect the operating margins for most of the coverage universe to improve sequentially aided
by growth leverage and INR depreciation albeit for companies like HCL Tech and Hexaware
(impact of wage hikes) and Firstsource (headwinds from ramp downs in a large client). We note
that the benefit from INR depreciation V/s USD will be limited during the current quarter on
account of adverse INR move against other currencies like GBP and Euro.
Exhibit 1: Emkay Dec14 quarter earnings estimates for Indian IT Services players
Co Name

Revenues

Revenue growth

EBITDA

YoY (in Rs mn)

EBITDA growth

EBITDA margins (bps)

Net profits

Net Profits growth

(in US$ mn)

QoQ

QoQ

YoY

QoQ

YoY

(in Rs mn)

QoQ

YoY

Infosys

2,236

1.6

6.5

39,434

4.5

8.9

52

31,625

2.1

10.0

TCS

3,947

0.5

14.8

71,150

4.5

6.4

35

-247

54,699

3.4

2.9

Wipro*

1,791

1.1

6.7

24,748

4.6

5.7

64

21,809

4.6

8.2

HCL Tech

1,450

1.2

9.7

21,816

-0.5

2.7

-95

-182

17,607

-6.0

17.8

Tech M

926

2.9

17.1

11,771

7.3

3.6

41

-279

8,141

13.1

-19.4

eClerx

39

1.5

8.4

862

5.7

-2.9

58

-470

650

4.3

4.2

Hexaware

113

3.0

13.2

1,249

3.4

-10.4

-32

-479

895

4.0

-13.3

NIIT Tech

96

-3.2

0.9

853

3.7

-10.9

45

-187

462

15.6

-13.0

148

0.6

16.4

1,832

4.3

18.9

28

55

1,375

0.1

55.5

Mindtree Ltd
Persistent

80

5.1

14.7

1,101

15.1

-8.1

142

-564

814

14.2

26.8

Mphasis**

238

-1.1

-5.3

2,200

2.6

-6.3

38

-183

1,584

-1.1

-12.3

Firstsource

126

-1.0

-1.6

933

-1.7

0.2

-46

15

521

-15.0

7.4

Source: Emkay Research

Exhibit 2: We estimate 80-220bps cross currency headwinds on account of USD strengthening

against all major currencies
Exchange rate

Dec'14

Sep'14

Dec'13

QoQ

YoY

Average

62.24

60.78

61.90

2.4%

0.5%

Close

63.33

61.61

61.90

2.8%

2.3%

Average

1.24

1.31

1.37

-5.4%

-9.6%

Close

1.22

1.27

1.38

-4.2%

-11.8%

Average

1.57

1.66

1.63

-5.1%

-3.3%

Close

1.56

1.63

1.65

-4.4%

-5.5%

Average

0.85

0.91

0.92

-6.7%

-7.6%

Close

0.82

0.87

0.89

-5.8%

-5.8%

Average

115.96

105.43

101.81

10.0%

13.9%

Close

120.28

109.40

104.96

9.9%

9.9%

USD/INR

Euro/USD

GBP/USD

AUD/USD

JPY/USD

Source: Bloomberg, Emkay Research

Emkay Research | January 5, 2015

IT Services

India Equity Research | Sector Update

Watch out for demand across key verticals/geographies, CY15 IT budgetary trends
While the Dec14 quarter results will be modestly weak, we believe that investors need to focus
on management commentary on outlook on client spending in key verticals like Banking and
Financial Services, Retail and geographies like US (strong macro with pick up in GDP growth
rates, note that the YoY revenue growth trajectory of revenues from US for the offshore techs
has improved in H1FY15 after a relatively weak H2FY14 ) as well as Continental Europe( given
increased acceptance for offshoring as reflected from deal activity from the region over the past
12-15 months).
Besides commentary on margin outlook (given the changing mix of revenues) will be monitored.
We highlight that some of the mid-tier players have seen a sharp decline in margins over the
past 4 quarters driven by both a change in business mix as well as the required Sales and
marketing investments.
Exhibit 3: YoY revenue growth from US has been better in H1FY15 after a relatively weak
performance in H2FY14
25%
20%
15%
10%
5%

Europe Revenues, YoY growth(%)

Sep'14

Jun'14

Mar'14

Dec'13

Sep'13

Jun'13

Mar'13

Dec'12

Sep'12

Jun'12

0%

Revenue growth from US YoY, %

Source: Company, Emkay Research. Combined revenue growth rate for TCS, Infosys, Wipro, HCL Tech and Cognizant.

Exhibit 4: Few of the mid-tier players have seen a sharp decline in margins over the past 4 quarters
EBITDA Margin

Sep'13

Dec'13

Mar'14

June'14

Sep'14

Dec'14

Infosys

26.1%

27.8%

28.3%

26.9%

28.3%

28.3%

TCS

31.6%

31.4%

30.9%

28.8%

28.6%

28.9%

Wipro

25.1%

25.8%

27.3%

25.6%

24.8%

24.8%

HCL Tech

26.3%

26.0%

26.7%

26.3%

25.1%

24.1%

Tech Mahindra

23.3%

23.2%

21.2%

18.1%

20.0%

20.4%

Mindtree

20.8%

19.5%

21.5%

20.0%

19.8%

20.0%

Persistent

25.9%

27.7%

27.0%

21.8%

20.6%

22.0%

Hexaware

23.8%

22.5%

19.2%

16.7%

18.0%

17.7%

NIIT Tech

15.1%

16.3%

15.1%

13.8%

14.3%

14.6%

Tier I Companies

Tier II companies

Source: Company, Emkay Research

Currency resets drive a (1.5%)-8% change in FY16/17E EPS, continue to prefer

Tier I; upgrade Hexaware in the mid-tier universe
While we cut our US$ revenue growth assumptions modestly, we revise our US$/INR exchange
assumptions to Rs 63/$ (V/s Rs 61/$ earlier) driving a (1.5%)-8% change in our FY16/17E
earnings (refer table below for complete details).We also incorporate the recently announced
acquisition of Lightbridge Communications into our estimates for Tech M which drives an
increase in our US$ revenue estimates for the company. Roll over to Dec16 couple with change
in earnings drive a TP change of 0-7% for Tier I companies and -4% to 27% for tier II
companies.

Emkay Research | January 5, 2015

IT Services

India Equity Research | Sector Update

Exhibit 5: Changes in earnings estimates and Target prices

FY15E
(in Rs/sh)

Old

FY16E

New % change

Old

FY17E

New % change

Old

Change in TP

New % change

Old

New % change

Tier I
TCS

108.3

110.4

1.9%

127.6

129.0

1.1%

146.8

146.6

-0.2%

2860

2860

0%

Infosys

108.6

109.1

0.4%

120.7

123.7

2.5%

133.3

136.2

2.2%

2100

2250

7%

Wipro

36.0

35.5

-1.5%

39.7

41.1

3.5%

44.4

45.0

1.3%

630

630

0%

HCL Tech

104.5

106.6

2.0%

113.7

116.9

2.8%

126.6

130.6

3.1%

1700

1750

3%

Tech Mahindra

136.1

138.5

1.7%

160.5

171.5

6.8%

177.9

191.3

0.1%

2650

2800

6%

Mindtree

63.8

65.5

2.6%

73.3

75.6

3.1%

83.1

85.1

2.4%

970

1030

6%

Hexaware

10.9

10.7

-1.8%

13.7

14.6

6.5%

15.9

17.3

8.6%

190

230

21%

eClerx

83.1

81.0

-2.6%

96.7

95.2

-1.5%

105.6

104.4

-1.2%

1200

1220

2%

NIIT Tech

30.3

30.6

0.9%

34.2

35.7

4.2%

37.9

39.8

5.1%

360

380

6%

Persistent

75.2

76.3

1.5%

80.6

85.2

5.6%

92.1

99.0

7.5%

1100

1400

27%

Mphasis

32.3

32.4

0.2%

34.2

35.7

4.5%

33.3

35.2

5.6%

400

410

2%

3.6

3.5

-2.9%

4.7

4.6

-1.5%

5.0

5.3

6.6%

47

45

-4%

Tier II

Firstsource
Source: Emkay Research

While we continue to prefer Tier Is over Tier IIs our order of preference within Tier Is
changes to Infosys, HCL Tech, TCS in that order Versus Infosys, TCS and HCL Tech
earlier. We also upgrade Hexaware to ACCUMULATE, TP RS 230 (V/s REDUCE, TP RS 190
earlier) as we back upsides to earnings aided by strong operating performance ahead. We
continue to back downsides for REDUCE rated Mindtree and SELL rated Persistent given
expensive valuations and downside risks to margins/earnings in the near/medium term.
Exhibit 6: IT Services valuation summary
Target
EPS
P/E
EV/EBIT
ROE
Price
New FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E
Co Name
CMP Recco.
Infosys

2,013 Buy

2,250

109

124

136

18.5

16.3

14.8

13.9

11.7

10.2

25.4

26.0

25.0

TCS

2,579 Accumulate

2,860

110

129

147

23.4

20.0

17.6

18.1

14.9

12.8

35.4

34.3

32.6

630

35

41

45

15.7

13.6

12.4

11.9

10.0

14.0

23.4

23.1

44.1

Wipro

557 Hold

HCL Tech**

1,605 Accumulate

1,750

107

117

131

15.1

13.7

12.3

12.5

11.0

9.6

39.8

33.7

30.2

Tech Mahindra

2,607 Accumulate

2,800

139

171

191

18.8

15.2

13.6

14.3

11.2

9.9

28.4

27.5

24.4

Mindtree

1,299 Reduce

1,030

65

76

85

19.8

17.2

15.3

15.5

12.3

10.4

28.3

24.5

21.4

eClerx

1,324 Hold

1,220

81

95

104

16.4

13.9

12.7

12.1

9.8

8.4

38.5

37.8

34.9

Hexaware*
Persistent Systems

204 Accumulate
1,874 Sell

230

11

15

17

19.1

14.0

11.8

13.3

9.9

8.6

27.1

36.2

41.0

1,400

76

85

99

24.6

22.0

18.9

20.7

16.2

13.6

19.0

21.7

21.5

NIIT Tech

380 Hold

380

31

36

40

12.4

10.7

9.5

7.9

6.4

5.3

13.9

14.7

14.9

Mphasis

390 Hold

410

35

32

36

11.1

12.0

10.9

6.8

7.5

6.4

14.8

13.3

13.7

45

3.5

4.7

5.4

9.9

7.5

6.5

9.2

6.9

5.7

10.6

12.5

12.7

Firstsource

35 Accumulate

Source: Bloomberg, Companies, Emkay Research* Note: FY15 refers to FYDec'14 for Hexaware and so on, ** FY15 refers to FY ending June'15 for HCL Tech and so on.

Emkay Research | January 5, 2015

IT Services

India Equity Research | Sector Update

Exhibit 7: IT Services Dec14 quarter estimates

Name

Dec'14

Sep'14

Dec'13 YoY chg QoQ chg

1,39,291

1,33,420

1,30,260

6.9%

39,434

37,730

36,200

8.9%

28.3

28.3

27.8

52 bps

31,625

30,960

28,750

10.0%

27.7

27.1

25.2

10.0%

2,45,901

2,38,165

2,12,940

15.5%

71,150

68,087

66,866

6.4%

28.9

28.6

54,699

52,883

53,140

2.9%

27.9

27.0

27.2

2.9%

1,19,702

1,18,161

1,13,317

5.6%

24,748

23,670

23,418

5.7%

20.7

20.0

20.7

1 bps

21,809

20,848

20,148

8.2%

8.8

8.5

8.2

8.0%

Infosys
CMP(Rs)

2,013

Net Sales (Rs mn)

Mkt Cap (Rs bn)

2,312

EBITDA (Rs mn)

Reco

Buy

EBITDA Margin (%)

Target Price (Rs)

2,250

PAT (Rs mn)

% Upside

12%

EPS (Rs)

CMP(Rs)

2,579

Net Sales (Rs mn)

Mkt Cap (Rs bn)

5,052

EBITDA (Rs mn)

Comments

We build in 1.6% QoQ US$ revenue growth and ~150 bps

4.4% cross currency headwinds for Infosys. EBITDA margins
expected to be flat QoQ at 28.3% as currency depreciation
4.5% benefits get negated by slightly lower utilization and
investments in employee training. Net profits expected at Rs
3 bps 31.6 bn (+2.1% QOQ) on account of lower forex gains. While
we believe that Infosys will prune its FY15 revenue guidance
2.1% to ~7-8% US$ revenue growth (V/s 7-9% earlier), we expect
Investors to focus on (1) strategy under new CEO (2)
2.1% performance in key verticals (3) outlook on demand from key
verticals/geographies (4) attrition.

TCS

Reco

Accumulate EBITDA Margin (%)

Target Price (Rs)

2,860

PAT (Rs mn)

% Upside

11%

EPS (Rs)

557

Net Sales (Rs mn)

31.4 -247 bps

3.2% We build in ~220 bps cross currency headwinds. Constant

currency revenue growth assumptions of ~2.7% QoQ growth.
4.5% EBITDA margins estimated to improve by ~30 bps aided by
currency depreciation albeit limited by adverse INR moves
35 bps against GBP and Euro. Profits expected to increase by 3.4%
QoQ aided by ~4.5% QoQ growth in operating profits. Key
3.4%
things to watch out for (1) outlook on FY15 client budgeting, (2)
business from Financial Services, US and Europe and (3)
3.4% outlook on margins and reinvestments.

Wipro**
CMP(Rs)
Mkt Cap (Rs bn)

1,376

EBITDA (Rs mn)

Reco

Hold

EBITDA Margin (%)

Target Price (Rs)

630

PAT (Rs mn)

% Upside

13%

EPS (Rs)

1.3% Building in a 2.8% QoQ US$ revenue growth, ~170 bps cross
currency headwinds. IT Services EBIT margins estimated at
4.6% 22%,flat QoQ in reported terms but up ~50 bps adjusted for
one offs in Sep'14 quarter. Profits expected to increase by ~4.6
64 bps % QoQ. Key things to watch out for (1) Mar'15 quarter revenue
guidance( we expect a 1.5-3.5% QoQ growth outlook), (2)
4.6%
outlook for business from key verticals/geographies and (3)
margin outlook
4.6%

Source: Company, Emkay Research

Emkay Research | January 5, 2015

IT Services

India Equity Research | Sector Update

Exhibit 8: IT Services

Name

Dec'14

Sep'14

Dec'13 YoY chg QoQ chg

Comments

HCL Tech
CMP(Rs)

1,605

Net Sales (Rs mn)

90,338

87,350

81,840

10.4%

3.4%

Mkt Cap (Rs bn)

1,127

EBITDA (Rs mn)

21,816

21,920

21,250

2.7%

-0.5%

24.1

25.1

26.0 -182 bps

-95 bps

17,607

18,740

14,950

17.8%

-6.0%

24.9

26.5

21.2

17.9%

-5.9%

Net Sales (Rs mn)

57,686

54,879

48,985

17.8%

EBITDA (Rs mn)

11,771

10,973

11,363

3.6%

20.4

20.0

8,141

7,196

8,899

-8.5%

33.7

29.8

37.4

-9.8%

2,410

2,318

2,195

9.8%

EBITDA (Rs mn)

862

816

888

-2.9%

Reco

Accumulate EBITDA Margin (%)

Target Price (Rs)

1,750

% Upside

9%

PAT (Rs mn)

EPS (Rs)

We build in ~1.2% QoQ US$ revenue growth with cross

currency headwinds of ~210 bps QOQ. EBITDA margins
expected to decline QoQ by ~100 bps QoQ to 24.1% on a/c of
wage hikes, lower utilization despite benefit from currency
depreciation. Profits expected to decline by 6% QoQ on
account of lower other income. Things to watch out for: 1) Deal
wins 2) Performance in IMS and core software segment 3)
Outlook on demand and (4) Margin performance.

Tech Mahindra
CMP(Rs)

2,607

Mkt Cap (Rs bn)

Reco

614

Accumulate EBITDA Margin (%)

Target Price (Rs)

% Upside

2,800
7%

PAT (Rs mn)

EPS (Rs)

23.2 -279 bps

5.1% We build in 2.9% sequential revenue growth with cross

currency headwinds of ~180bps. We also incorporate Mah
7.3% Engg Services into our estimates (annualized revenues of US$
45 mn). Margins expected to improve by ~40 bps sequentially
41 bps to 20.4% aided by rupee depreciation and growth leverage.
Profits expected to grow by 13% QoQ on back of operating
13.1%
margin improvement. Key things to watch out for (1) deal wins
and demand outlook within key clients, (2) outlook on margins,
13.0% (3) progress on inorganic growth.

eClerx Services
CMP(Rs)
Mkt Cap (Rs bn)

1,324
40

Net Sales (Rs mn)

Reco

Hold

EBITDA Margin (%)

35.8

35.2

40.5 -470 bps

Target Price (Rs)

1,220

PAT (Rs mn)

650

623

623

4.2%

EPS (Rs)

21.1

20.2

20.3

3.7%

% Upside

-8%

4.0% Building in a ~1.5% QoQ growth in US$ terms with cross

currency headwinds of ~80 bps. Margins expected to improve
5.7% by ~60 bps QoQ on account of lower SG&A (specially
travelling) expenses and currency depreciation. Profits
58 bps expected to increase by 4.3% QoQ aided by ~6% QoQ growth
in operating profits. Key things to watch out for (1) growth
4.3%
outside of non-top 5 clients, (2) outlook for demand within
financial services/cap market clients, Cable and Media
4.3% business and progress on acquisition hunt.

Source: Company, Emkay Research

Emkay Research | January 5, 2015

IT Services

India Equity Research | Sector Update

Exhibit 9: IT Services

Name

Dec'14

Sep'14

Dec'13 YoY chg QoQ chg

Comments

Hexaware Technologies
CMP(Rs)

204

Net Sales (Rs mn)

7,061

6,706

6,200

13.9%

Mkt Cap (Rs bn)

61

EBITDA (Rs mn)

1,250

1,208

1,394

-10.4%

17.7

18.0

Reco

Accumulate EBITDA Margin (%)

22.5 -479 bps

Target Price (Rs)

230

PAT (Rs mn)

895

861

1,032

-13.3%

% Upside

13%

EPS (Rs)

3.0

2.9

3.4

-13.4%

1,874

Net Sales (Rs mn)

4,997

4,642

4,328

15.5%

1,101

957

1,198

-8.1%

5.3% We forecast as 3% QoQ US$ revenue growth with ~150 bps

cross currency headwinds. Margins estimated to decline by
3.4% 30QoQ despite currency depreciation on account of wage
hikes (70 bps hit). Profits expected to improve by ~4% QoQ.
-32 bps Things to watch out for 1) Deal wins 2) revenue performance
of top clients and 3) demand outlook in key verticals like
4.0%
Financial Services and Travel.
4.0%

Persistent Systems
CMP(Rs)
Mkt Cap (Rs bn)

75

EBITDA (Rs mn)

Reco

Sell

EBITDA Margin (%)

22.0

20.6

27.7 -564 bps

Target Price (Rs)

1,100

PAT (Rs mn)

814

713

642

26.8%

% Upside

-41%

EPS (Rs)

20.4

17.8

16.1

26.8%

5,912

5,883

5,873

0.7%
-10.9%

7.7% We expect a 5.1% QoQ US$ revenue growth led by Platform

Business with some improvement in linear business as well.
15.1% Margins expected to improve by ~10 bps aided by growth
leverage and currency depreciation. Profits expected to
142 bps increase by 14% QoQ aided by strong operating profit
performance. Things to watch out for : 1) Performance in the
14.2%
linear business and the Platform business, (2) Outlook on
margins , (3) Revenue growth outlook for H2FY15 and FY16E(
14.2% note that Persistent recently expressed confidence in
achieving a 15% US$ revenue growth for FY15)

NIIT Tech

Reco

Hold

EBITDA Margin (%)

14.4

14.0

16.3 -187 bps

Target Price (Rs)

380

PAT (Rs mn)

462

400

531

-13.0%

0.5% Building in a 0.5% QoQ INR revenue growth. Margins

expected to improve by ~40 bps QoQ on account of currency
3.7% benefit and growth leverage. Profits expected to grow by 16%
QoQ aided by forex swing (forex gains V/s losses in Sep'14
45 bps quarter). Key things to watch out for (1) order bookings/win in
the current quarter, (2) revenue/margin outlook.
15.6%

% Upside

0%

EPS (Rs)

7.7

6.7

8.9

-13.0%

15.6%

CMP(Rs)

380

Net Sales (Rs mn)

Mkt Cap (Rs bn)

23

EBITDA (Rs mn)

853

822

957

Source: Company, Emkay Research

Emkay Research | January 5, 2015

IT Services

India Equity Research | Sector Update

Exhibit 10: IT Services

Name

Dec'14

Sep'14

Dec'13 YoY chg QoQ chg

Net Sales (Rs mn)

9,142

8,886

7,906

15.6%

EBITDA (Rs mn)

1,832

1,755

1,541

18.9%

20.0

19.8

19.5

55 bps

1,375

1,374

885

55.5%

16.4

16.4

10.5

55.3%

14,648

14,649

15,640

-6.3%

2,200

2,146

2,636

-16.5%

15.0

14.6

1,584

1,602

1,870

-15.3%

7.5

7.6

8.9

-15.3%

Comments

Mindtree
CMP(Rs)

1,299

Mkt Cap (Rs bn)

109

Reco

Reduce

EBITDA Margin (%)

Target Price (Rs)

1,030

PAT (Rs mn)

% Upside

-21%

EPS (Rs)

2.9% Building in ~0.6% QoQ US$ revenue growth with 110 bps
cross currency headwinds. Margins estimated to improve by
4.3% ~2 bps QoQ to 20% led by currency depreciation and growth
leverage despite wage hikes for ~15% of the staff. We expect
28 bps net profits to remain flat QoQ. Key things to watch out for (1)
growth outlook in both IT Services (Key verticals like
0.1%
Manufacturing and BFSI) and PES business, (2) outlook on
-0.1% margins and attrition, (3) large deal pipeline.

Mphasis*
CMP(Rs)

390

Net Sales (Rs mn)

Mkt Cap (Rs bn)

82

EBITDA (Rs mn)

Reco

Hold

EBITDA Margin (%)

Target Price (Rs)

410

PAT (Rs mn)

% Upside

5%

EPS (Rs)

16.9 -183 bps

0.0% Expect sequentially flat revenues in INR terms. Expect

EBITDA margins to improve by ~40 bps QoQ despite ~170bps
2.5% adverse impact of wage increments due to rupee depreciation
and lack of one time sales costs incurred in Sep'14 quarter.
37 bps Profits expected to be down ~1% QoQ. Things to watch out
for: 1) Outlook on business within Direct Channel and Digital
-1.1%
Risk, (2) Margins picture.
-1.1%

Firstsource Solutions
CMP(Rs)

35

Net Sales (Rs mn)

Mkt Cap (Rs bn)

23

EBITDA (Rs mn)

Reco
Target Price (Rs)
% Upside

7,907

7,740

7,998

-1.1%

2.2%

933

949

931

0.2%

-1.7%

11.8

12.3

11.6

15 bps

-46 bps

PAT (Rs mn)

520

612

483

7.6%

-15.1%

EPS (Rs)

0.8

0.9

0.7

7.4%

-15.1%

Accumulate EBITDA Margin (%)

45
28%

We expect impact of seasonal weakness coupled with adverse

impact of revenue depletion from one of the top 5 client to drag
down sequential revenue growth for Firstsource in Dec'14
quarter. We estimate sequential revenue decline of 1%.
Despite 1% sequential decline in US$ revenues; we expect
INR revenues to grow by 2.2% QoQ due to rupee depreciation
(of 2.4%QoQ) in Dec'14 quarter. We expect ~50bps sequential
operating margin decline due to weaker growth. Net profit is
expected to decrease by 15% QoQ on back of weak growth
and poor operating margins. Key things to look out for 1)
Commentary on deal wins and 2) Revenue growth outlook.

Source: Company, Emkay Research

Note: * YoY comparison with Jan'14 quarter as company changed its financial year end from Oct to Mar from current financial year.. **For Wipro, EBITDA number for Wipro corresponds to EBIT.

Emkay Research | January 5, 2015

IT Services

India Equity Research | Sector Update

Emkay Global Financial Services Ltd.

CIN - L67120MH1995PLC084899
7th Floor, The Ruby, Senapati Bapat Marg, Dadar - West, Mumbai - 400028. India
Tel: +91 22 66121212 Fax: +91 22 66121299 Web: www.emkayglobal.com
DISCLAIMERS AND DISCLOSURES-:

Emkay Global Financial Services Limited (CIN- L67120MH1995PLC084899) and its affiliates are a full-service, brokerage, investment banking,
investment management, and financing group. Emkay Global Financial Services Limited (EGFSL) along with its affiliates are participants in virtually all securities trading markets in India. EGFSL was
established in 1995 and is one of India's leading brokerage and distribution house. EGFSL is a corporate trading member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India
Limited (NSE), MCX Stock Exchange Limited (MCX-SX). EGFSL along with its subsidiaries offers the most comprehensive avenues for investments and is engaged in the businesses including stock
broking (Institutional and retail), merchant banking, commodity broking, depository participant, portfolio management, insurance broking and services rendered in connection with distribution of primary
market issues and financial products like mutual funds, fixed deposits. Details of associates are available on our website i.e. www.emkayglobal.com
EGFSL is under the process of seeking registration under SEBI (Research Analysts) Regulations, 2014. EGFSL hereby declares that it has not defaulted with any stock exchange nor its activities were
suspended by any stock exchange with whom it is registered in last five years, except that NSE had disabled EGFSL from trading on October 05, October 08 and October 09, 2012 for a manifest error
resulting into a bonafide erroneous trade on October 05, 2012. However, SEBI and Stock Exchanges have conducted the routine inspection and based on their observations have issued advice letters or
levied minor penalty on EGFSL for certain operational deviations in ordinary/routine course of business. EGFSL has not been debarred from doing business by any Stock Exchange / SEBI or any other
authorities; nor has its certificate of registration been cancelled by SEBI at any point of time.
EGFSL offers research services to clients as well as prospects. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject
company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
Other disclosures by Emkay Global Financial Services Limited (Research Entity) and its Research Analyst under SEBI (Research Analyst) Regulations, 2014 with reference to the subject
company(s) covered in this report-:
EGFSL or its associates may have financial interest in the subject company.
Research Analyst or his/her relatives financial interest in the subject company. (NO)
EGFSL or its associates and Research Analyst or his/her relatives does not have any material conflict of interest in the subject company. The research Analyst or research entity (EGFSL) have not been
engaged in market making activity for the subject company.
EGFSL or its associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report.
Research Analyst or his/her relatives have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research
Report: (NO)
EGFSL or its associates may have received any compensation including for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. EGFSL or its
associates may have received compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. EGFSL
or its associates may have received any compensation or other benefits from the Subject Company or third party in connection with the research report. Subject Company may have been client of EGFSL
or its associates during twelve months preceding the date of distribution of the research report and EGFSL may have co-managed public offering of securities for the subject company in the past twelve
months.
The research Analyst has served as officer, director or employee of the subject company: (NO)
EGFSL and/or its affiliates may seek investment banking or other business from the company or companies that are the subject of this material. Our salespeople, traders, and other professionals may
provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses
may make investment decisions that may be inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other
things, may give rise to real or potential conflicts of interest including but not limited to those stated herein. Additionally, other important information regarding our relationships with the company or
companies that are the subject of this material is provided herein. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any
locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject EGFSL or its group companies to any
registration or licensing requirement within such jurisdiction. Specifically, this document does not constitute an offer to or solicitation to any U.S. person for the purchase or sale of any financial instrument
or as an official confirmation of any transaction to any U.S. person. Unless otherwise stated, this message should not be construed as official confirmation of any transaction. No part of this document may
be distributed in Canada or used by private customers in United Kingdom. All material presented in this report, unless specifically indicated otherwise, is under copyright to Emkay. None of the material,
nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of EGFSL . All trademarks, service marks
and logos used in this report are trademarks or registered trademarks of EGFSL or its Group Companies. The information contained herein is not intended for publication or distribution or circulation in
any manner whatsoever and any unauthorized reading, dissemination, distribution or copying of this communication is prohibited unless otherwise expressly authorized. Please ensure that you have read
Risk Disclosure Document for Capital Market and Derivatives Segments as prescribed by Securities and Exchange Board of India before investing in Indian Securities Market. In so far as this report
includes current or historic information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.

Emkay Research | January 5, 2015

9
www.emkayglobal.com