india it services sector - credit suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

13 February 2017 Asia Pacific/India Equity Research

Computer Services & IT Consulting

India IT Services sector Research Analysts

Anantha Narayan

91 22 6777 3730

[email protected]

Nitin Jain

91 22 6777 3851

[email protected]

COMMENT

Any change in capital return policy can be a

potential trigger, immigration still an overhang Figure 1: Similar to Cognizant, TCS, Infosys and Wipro too have

significant cash as a percentage of LTM revenue

Source: Company data, Credit Suisse estimates, Thomson Reuters

■ Companies hopeful of cyclical upturn in the US though no signs of it

yet. During the just concluded earnings season, the companies sounded

hopeful of an upturn in the US economy in 2017 and resulting traction in IT

spends, although they do not have visibility on this yet. Most of the

companies have sounded positive on financial services given the rising

interest rate environment – the current outlook is better than that at the

beginning of 2016. Healthcare, on the other hand, could see some potential

headwinds depending on the developments on the Affordable Care Act.

■ Any visa-related development in the US remains an overhang. With the

anti-immigration and anti-H1-B rhetoric in the US, there is a higher

likelihood of any action related to visas. However, at this moment, there is

little clarity on the eventual actions and possible "worst case scenario" for

the sector. While companies such as HCL Tech (that has above 50% local

employee mix in the US) are relatively better positioned, the regulatory

overhang is likely to remain until some clarity emerges.

■ Any step-up in capital returns could bring-back investor interest in

the sector. Like Cognizant, its India-listed peers have accumulated

significant net cash on their balance sheet – as a % of LTM revenue, it

ranges from 27-52% (HCLT and INFY at the lower and upper end,

respectively, vs. 32% for Cognizant). Cognizant's recent step-up in capital

returns (US$3.4 bn over 2017-18) sets an example for the Indian IT firms. In

any case, some of the management teams have been sounding that they are

open to considering this but Cognizant's move may hasten the process. High

and predictable dividend/buy-back could increase the sector's attractiveness.

■ HCLT and TechM remain our preferred picks, given their better growth

momentum and reasonable valuations. In addition, HCLT has a high local

employee mix in the US and TechM's telecom business has bottomed-out

and margins have scope to expand from the current depressed levels.

0%

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30%

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0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

TCS Cognizant Infosys Wipro HCLT TechM Accenture

Net cash balance (US$ mn) As % of market cap [RHS] As % of LTM revenue [RHS]

13 February 2017

India IT Services sector 2

Focus charts

Figure 2: Decelerating growth rates across the

board with the exception of HCLT

Figure 3: For TechM, the margins have possibly

bottomed-out

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 4: The growth rates have come down in the US, companies are hopeful of a potential pick-up in

spending, particularly so in the BFSI


Figure 5: Infra and Engg services continue to grow

above industry average

Figure 6: HCLT has relatively larger exposure in

both these segments


Figure 7: Any visa-related development in the US

remains a key overhang; HCLT may be relatively

better positioned given its high local mix

Figure 8: Historically, Indian IT firms have

accumulated significant cash, scope to increase

payout

Source: Company data, Credit Suisse estimates. *North America, ^US, # Americas. Note: Labels in bold represent the mix of locals

Source: Company data, Credit Suisse estimates

0%

5%

10%

15%

20%

25%

Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16

Revenue growth (LTM, YoY, cc, organic)

TCS Infosys Wipro

HCLT Cognizant TechM

10%

15%

20%

25%

30%


LTM EBIT margins

TCS InfosysWipro (IT services) HCLTCognizant Tech Mahindra

-5%

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15%

25%


US revenue growth (LTM, YoY, US$ , organic)

TCS Infosys Wipro


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BFSI revenue growth (LTM, YoY, cc, organic)

TCS Infosys Wipro


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Top-4 firms (ex-Cognizant) revenue growth (LTM, YoY, cc, organic)

Engg services Infra. revenue growth Overall

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45%

TCS Infosys Wipro HCLT

% exposure (Dec-16)

Infra management Engg services

79%

62% 62%55% 54%

48%

Over 50%

25-35%Over 40%

35%

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Cognizant* HCLT ^ Infosys* Wipro # TCS* TechM #

US as % of revenue % of local staff in the US [RHS]

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TCS Cognizant Infosys Wipro HCL Tech Accenture

Application of cash flow generated over FY07-16

Net capex Dividend/Buy-back Acquisitions Cash accumulation

13 February 2017


Global valuation comps

Company Local Mcap 3M ADTV Sales

(CY15)

EV/EBITDA EBITDA

CAGR

P/E (x) EPS

CAGR

Share price perf

Price US$ mn US$ mn US$ mn CY16E CY17E CY15-17 CY16E CY17E CY15-17 1m 3m 12m

US-listed

Accenture 118 76,432 299.0 31,660 12.7 12.2 5.6% 21.3 19.5 10.0% 1% 0% 24%

Cognizant 57 34,825 354.0 12,416 10.2 9.2 9.2% 17.3 15.8 8.7% 2% 6% 7%

CSC* 71 9,989 97.9 7,359 9.4 8.5 6.0% 26.0 22.8 12.6% 14% 17% 156%

EXLS* 46 1,548 9.0 628 12.6 10.8 11.4% 19.8 17.8 13.0% -7% 3% 6%

Genpact* 24 4,911 24.1 2,461 12.5 11.2 6.5% 17.1 15.6 11.6% -1% 4% -1%

Infosys (ADR) 15 33,142 84.1 9,303 10.3 9.5 7.6% 15.7 14.7 6.8% 0% 3% -10%

Syntel* 22 1,868 24.1 969 8.3 8.1 -3.5% nm 9.7 -12.7% 5% 9% -21%

Wipro (ADR) 9 23,078 7.9 7,280 14.0 13.4 0.9% 17.9 17.0 1.1% -4% 1% -16%

WNS* 29 1,473 6.3 524 9.9 9.5 1.0% 16.7 15.7 4.1% 7% 12% 7%

Europe-listed

Atos 104 11,547 25.6 11,864 7.1 6.6 11.2% 14.3 12.8 16.7% 0% 13% 65%

Capgemini 77 14,123 61.9 13,229 9.2 8.8 8.8% 15.1 13.8 10.5% -4% 8% 12%

Indra 11 1,873 10.6 3,165 10.6 8.8 45.4% 21.3 16.1 146.4% 1% 0% 37%

TietoEnator 26 2,014 4.3 1,621 9.7 9.8 -0.3% 15.9 15.3 2.8% -2% 9% 12%

India-listed

Cyient* 469 790 0.8 463 9.9 8.4 17.1% 14.7 12.6 11.2% -7% 2% 25%

eClerx* 1,412 839 1.1 188 10.5 10.0 7.0% 15.7 14.9 9.3% -1% 0% 7%

Firstsource Solutions* 48 483 1.1 485 8.2 7.3 9.1% 11.6 9.9 14.4% 24% 31% 53%

HCL Tech 828 17,491 22.0 5,011 10.6 9.4 10.5% 14.5 13.4 9.0% -2% 8% 4%

Hexaware 205 925 3.0 486 10.0 8.9 9.8% 14.9 13.7 7.6% 2% 7% -8%

Infosys (local) 968 33,117 51.0 9,303 10.3 9.5 9.6% 15.7 14.7 6.8% -1% 5% -11%

KPIT* 135 398 2.2 490 6.5 5.9 1.9% 10.5 9.8 -0.8% -5% 5% 18%

L&T Infotech* 695 1,774 0.9 870 9.1 8.3 12.1% 12.6 12.2 3.3% 2% 12% NA

L&T Tech. Services* 805 1,210 NA 457 NA NA NA NA NA NA -1% 2% NA

Mindtree 467 1,174 5.5 680 10.0 9.0 1.9% 16.9 15.2 -3.0% -5% 10% -34%

MphasiS* 560 1,762 1.1 931 9.9 9.0 8.8% 14.7 13.4 10.9% 6% 12% 29%

NIIT Technologies 425 390 2.0 405 4.8 4.4 6.0% 10.1 9.6 2.3% 0% 7% -13%

OFSS* 3,701 4,712 2.4 627 14.3 12.6 10.4% 24.6 21.8 10.2% 14% 18% 9%

Persistent* 613 734 1.0 341 9.5 8.0 11.1% 16.0 14.0 8.7% -3% -4% 4%

TCS 2,397 70,683 45.2 16,272 13.8 12.8 7.8% 18.3 17.3 8.7% 6% 14% 8%

TechM 500 7,284 20.5 3,944 10.0 8.4 11.5% 14.7 13.1 7.0% 2% 16% 18%

Wipro (local) 468 17,311 14.8 7,280 10.5 10.1 2.9% 13.4 12.8 1.1% -3% 6% -9%

Zensar* 917 615 0.5 446 9.0 7.9 10.1% 13.2 11.3 10.6% 0% -4% 5%

Sensex 4% 6% 23%

BSEIT 1% 9% -2%

Estimates for companies marked with an asterisk (*) are consensus estimates provided by IBES. Adjusted for treasury shares. Source: Company data, IBESE, Thomson Reuters

13 February 2017


Any change in capital return policy can be a potential trigger, immigration still an overhang

Figure 9: Dec-16—Earnings season snapshot

Company Revenue growth EBIT margin change (bps) EPS (Rs) Stock

perf .# QoQ QoQ

(cc)

YoY A vs E A vs

cons

QoQ YoY A vs E A vs

cons

% chg

QoQ

% chg

YoY

A vs E A vs

cons

Tier 1

TCS 0.3% 2.0% 5.8% 0.1% 0.2% (0) (58) (28) 10 2.9% 10.9% 5.1% 4.9% 0.1%

Cognizant 0.3% 1.0% 7.1% -0.4% -0.7% (57) (81) (127) (58) 1.2% 8.7% 0.6% 1.2% 1.7%

Infosys -1.4% -0.3% 5.7% -0.4% -0.1% 20 19 47 77 2.9% 7.0% 5.5% 4.6% -2.2%

Wipro* -1.5% -0.2% -1.6% -1.1% -0.8% 51 (185) 34 50 2.1% -3.8% -1.5% 0.9% -2.4%

HCLT 0.7% 2.2% 7.2% -0.7% -0.1% 25 33 60 66 3.3% 8.3% -1.6% 2.9% -1.6%

Tech Mahindra 1.6% 2.5% 6.6% 2.5% 2.0% 90 (184) (57) (15) 32.8% 10.1% 4.8% 15.5% 2.4%

Tier 2

Mindtree -0.4% 0.4% 0.3% -0.5% -0.4% 95 (421) (27) 6 8.7% -26.8% -4.4% -4.8% -6.3%

Mphasis -0.3% NA -2.3% NA -1.7% (72) 57 NA (97) -3.1% 21.2% NA 3.7% 6.7%

KPIT -0.4% NA -0.3% NA -0.7% (72) (425) NA (92) 31.0% 1.9% NA 24.2% -3.5%

Cyient India -0.5% 0.6% 14.5% NA -1.0% (66) 10 NA (69) -2.3% 15.1% NA -4.7% -5.2%

Hexaware 2.7% 3.4% 11.9% 1.6% 2.1% (10) 146 48 57 9.0% 22.0% 10.1% 9.6% 1.4%

NIIT Tech -0.5% 0.6% -0.5% 0.3% 0.8% 17 (205) 28 7 5.2% -16.5% 2.3% -2.7% -1.4%

Zensar 1.3% 1.9% 2.3% NA -0.5% (24) (104) NA NA 13.2% 13.7% NA NA -2.3%

Persistent 4.6% NA 4.0% NA 0.7% 20 (386) NA (137) 11.4% 17.7% NA -0.5% -3.0%

Source: Company data, IBES, Credit Suisse estimates * Revenue and EBIT for IT Services and EPS for the consolidated business # since 11 Jan, 2017. Note: The revenue growth is adjusted for acquisitions for Infosys, Wipro, HCLT, TechM, Mindtree, Cyient and Persistent

Some disappointment on already-low expectations

As expected, Dec-16 was a subdued quarter for the IT firms, given a lower number of

working days and furloughs. Infosys, Wipro and Cognizant reported a soft -0.3%, -0.2%

and 1% organic QoQ growth in constant currency, respectively. For Infosys, the RBS deal

ramp-down had slightly over 1% impact on revenue growth (no major spill-over likely in

4Q), and the India business did not have any offsetting incremental contribution (from the

GST deal). Cognizant's 2017 guidance of 8-10% revenue growth was in line with

expectations; however, its new strategy of significantly higher capital return and increase

in margin target from 19-20% to 22% by 2019, was received positively by the market. TCS

and HCLT reported a decent 2% and 2.2% revenue growth (assuming an 80 bp inorganic

contribution from the IBM deal in the case of HCLT), but the former’s results were

overshadowed by the change in CEO. TechM, on the other hand, stood out with over 4%

organic growth, with a strong performance in both the telecom and enterprise businesses.

Among the tier-2 companies, Hexaware surprised positively with much better than

expected results, but next year's guidance was impacted by some client-specific issues.

Companies hopeful of some cyclical upturn in the US

Deferment of discretionary projects due to an uncertain macro has been a key reason for

the sector's slower growth over the past year. Additionally, some companies have also

pointed out that customers are not fully prepared yet to channel the savings from legacy

projects towards new large digital projects. As customers get more comfortable with the

macro, and digital becomes mainstream, they should eventually increase discretionary

spending.

The companies remain hopeful of an upturn in the US economy and resulting traction in

the IT spends although there is not much visibility on this yet. Most of the companies have

13 February 2017


sounded positive on the financial services segment, given the increasing interest rate

environment. Healthcare, on the other hand, could see some potential headwinds

depending on the developments on the Affordable Care Act. Both Cognizant and Wipro

(the two companies with higher exposure to this segment) sounded cautious about this

segment on the back of this regulatory development.

Figure 10: Companies remain optimistic of a recover in the US business

Company Comments on the demand environment

TCS Looking forward, there is a sense of buoyancy in customer sentiment, particularly in the BFSI sector, and we look forward to positioning ourselves to

participate in whatever growth we see in the US and any other markets… We are seeing increased traction in terms of people talking about projects.

I think it is early yet for us to start commenting on whether there are budget hikes and whether the budgets will flow through. – Rajesh Gopinathan

(CFO)

Cognizant BFSI clients are in much better shape going into 2017 versus 2016. Still too early to see the positive impact of higher interest rates. In healthcare,

there is slight uptick in discretionary spends but clients are still cautious about the future of the Affordable Care Act. – Raj Mehta (COO)

Infosys Clients are not holding back spends because of visa issues … From a FY18 and a 4Q perspective, the (BFSI) pipeline is looking good from the US

perspective … The Europe (BFSI) business outlook is very positive for the next 12 months. – Praveen Rao (COO) & Mohit Joshi (President)

Wipro We continue to have a very good funnel and we are engaged in a large number of deals, and we are closely monitoring the decision-making cycles

of these deals. However, we are particularly watchful on two specific areas of our business – one is the Healthcare business where we are heavily

invested and there is a transition phase and once there is clarity on the regulation of replacement of the Affordable Care Act till then we expect to see

certain uncertainties and headwind. The second is as I have mentioned last quarter, we are well underway in our restructuring of the India and

Middle East business (company specific). – Abidali Neemuchwala (CEO)

HCL Tech Most customers are either reporting a flat spend or marginal increase. That could be the view from what we see in our client base. – C Vijayakumar

(CEO)

Tech Mahindra Communications sector has shown a gradual improvement and it had overall a few good wins also. – CP Gurnani (CEO)

Global peers

Accenture Interestingly, the overall budget, including digital, is probably increasing more than decreasing because you have the

budget coming from, for instance, digital advertising and digital marketing now are becoming part of the addressable

market for a company like us. So our rotation to digital cloud and security has opened new opportunities for us. - Pierre Nanterme (CEO)

IBM In the more traditional engagements, we continue to have some price and profit pressure. We continue to shift away from these areas to our digital

businesses, adding nearly 8,000 resources to these practices in 2016. - Martin J. Schroeter (CFO)

Source: Company data

Any visa-related development in the US remains an

overhang

With increasing anti-immigration rhetoric in the US, there is a higher likelihood of possible

actions related to H-1B and L-1 visas that are an important part of Indian IT companies'

operations in the US. Recent bills as well as the pre- and post-election statements of

various officials centered around measures such as raising the minimum wage

requirement, increasing the regulatory oversight, and altering the visa allocation method

from a lottery to other methods such as wage-based allocation (higher wages to get

priority). There have also been concerns on any executive action related to visas that

could bypass the regulatory process, thereby leaving little time for the companies to adjust

to the new reality.

The companies have, over the past few years, increased their global delivery capacities

and have also stepped up local hiring. However, all of them still continue to be visa

dependent (the recent bills define a visa dependent company as one that has more than

15% of its US staff on visa). Stepping up the local hiring is the common strategy that most

of the companies have indicated in the past few weeks in response to the anti-immigration

sentiments. However, availability of local talent could be a key challenge and replacing

visa holders with locals could reduce flexibility (in terms of movement of personnel across

the US) and create a higher onsite bench.

13 February 2017


Although the Indian IT companies claim to be compliant with the existing visa regulations

(prevailing local wage rate and other rules), any increase in minimum wage requirements

(with an absolute floor) could have a dilutive impact on the margins. Theoretically, a 15%

increase in the average H-1B salary can lead to 120-200 bp margin headwind, other things

remaining constant. On the other hand, a more extreme measure such as lowering the

number of visas could be disruptive for the business.

At this moment, there is less clarity on the eventual actions and possible "worst case

scenario" for the sector. While companies such as HCL Tech (that claims to have much

above 50% local employee mix in the US) are relatively better positioned, the regulatory

overhang is likely to remain until some clarity emerges.

Figure 11: Step-up in local hiring is the key strategy to deal with the US regulatory developments

Company's comments on the H-1B visa developments

TCS "Our earlier model of local requirement was to hire at the higher end of the spectrum rather than at the entry level. We are relooking at

that, we are trying to optimize our delivery models to be able to utilise resources across the spectrum better and overall trying to align it so that we do

not have different categories of employees at different stratified levels of cost. Instead, we want a more holistic mix which reflects the age and

experience bracket. Overall, we are trying to see how to make our delivery model less dependent on visas and sub-contractors and that includes using

both near shore and offshore, so we can manage and be on top of the developments in the US. "

Cognizant Will be as aggressive in scaling up the local hiring going forward. Given the talent shortage, there will be need to supplement the local staff with

external talent.

Infosys We have to become much more local and locally oriented on our strategy in the market and globally.

Wipro As an organisation we have been preparing for this for a while. We have been hiring locally.

HCL Tech "As a company, we have been fairly comfortable because our H1B visa dependencies have been substantially lower and we have built significant

onshore presence like in US, we have six delivery centers and two of them are significant scale and we are continuing to leverage them, we are

continuing to increase our local hiring, we are also putting a thrust on fresher and entry level hires in the US ... On H1B whether we can pass on the

cost to the customers? I do not think so. I think it is a very competitive market and it is a level playing field and it will be difficult but in new deals

obviously we will look at any fundamental cost structure changes and see we need to do any change in our pricing mechanisms. But at this point, in

the near term I do not see any price increase possibility due to this."

Hexaware "Executive action cannot really impact most aspects of H1B … Any important changes about salaries and limits, and process and everything else has

to follow legislative action. Our 2017 supply pool for H1B is already secured, they are already with us. Unless there is new law that actually come in

before that, we would actually petition for 2017 also by April 1, and that on the basis of those petitions, 2018 supply cycle will also be largely secured."

Source: Company data

13 February 2017


Chartbook

Figure 12: The growth momentum has been soft,

driven by macro factors and short-term structural

shifts

Figure 13: Decelerating growth rates across the

board with the exception of HCLT; it may have

bottomed-out for TechM++ ++ ++ ++ ++ ++ ++


Figure 14: Margins continue to trend down in

general ++

Figure 15: For TechM, the margins should possibly

move up from the current depressed levels


Figure 16: Growth rates have come down in the US,

companies are hopeful of a potential pick-up in

spending

Figure 17: HCLT had a decent momentum in the US,

growing at the fastest pace +++ + ++ ++ ++ ++ ++ ++

++


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Top 6 Indian IT firms

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TCS Infosys Wipro


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LTM EBIT margins

Top 6 Indian IT companies

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LTM EBIT margins

TCS Infosys

Wipro (IT services) HCLT

Cognizant Tech Mahindra

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US revenue growth (LTM, YoY, US$ , organic)

TCS Infosys Wipro


13 February 2017


Figure 18: Growth in Europe has stabilised Figure 19: Wipro continues to struggle in Europe


Figure 20: Client spends remain weak in BFSI;

companies hopeful of recovery, but have low

visibility at the moment

Figure 21: TechM has shown a decent momentum in

BFSI (on a low base); it has bottomed-out for HCLT

++ ++ ++ ++ ++ + +


Figure 22: Some pick-up in manufacturing revenue

growth ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ ++ +

+

Figure 23: Manufacturing growth has converged for

most of the companies, Cognizant growing at

relatively higher pace


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TCS Infosys Wipro


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Top 6 Indian IT companies - BFSI revenues

Revenue growth (LTM, YoY, cc, organic) BFSI as % of revenues (RHS)

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BFSI revenue growth (LTM, YoY, cc, organic)

TCS Infosys Wipro


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TCS Infosys Wipro

HCL Tech Cognizant TechM

13 February 2017


Figure 24: Healthcare has been impacted by some

regulatory developments in the US and

consolidation in the industry. It is still growing

above the overall growth

Figure 25: Although Wipro has shown a recovery in

healthcare, the management's outlook was cautious

due to regulatory developments in the US ++ ++ ++

++


Figure 26: Deceleration in retail revenue growth; no

negative comments though

Figure 27: HCL Tech witnessed acceleration in retail

+


Figure 28: Some recovery in the energy and utilities

vertical, led by the utilities sub-segment

Figure 29: Wipro continues to struggle given its

relatively higher exposure to energy


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5%

10%

15%

20%

25%

Mar

-13

Jun-

13

Sep

-13

Dec

-13

Mar

-14

Jun-

14

Sep

-14

Dec

-14

Mar

-15

Jun-

15

Sep

-15

Dec

-15

Mar

-16

Jun-

16

Sep

-16

Dec

-16

Top 5 Indian IT companies' - Healthcare revenue


Healthcare as % of revenues (RHS)

-4%

6%

16%

26%

36%

46%

56%


Healthcare revenue growth (LTM, YoY, cc, organic)

TCS Infosys Wipro

HCL Tech Cognizant

8%

9%

10%

11%

12%

13%

14%

15%

5%

7%

9%

11%

13%

15%

17%

19%

Mar

-13

Jun-

13

Sep

-13

Dec

-13

Mar

-14

Jun-

14

Sep

-14

Dec

-14

Mar

-15

Jun-

15

Sep

-15

Dec

-15

Mar

-16

Jun-

16

Sep

-16

Dec

-16

Top 5 Indian IT companies' (excl Cognizant) - Retail revenues

Revenue growth (LTM, YoY, cc, organic) Retail as % of revenues (RHS)

0%

5%

10%

15%

20%

25%

30%


Retail revenue growth (LTM, YoY, cc, organic)

TCS Infosys Wipro

HCL Tech TechM

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

0%

3%

6%

9%

12%

15%

18%

21%

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

Mar

-14

Jun-

14

Sep

-14

Dec

-14

Mar

-15

Jun-

15

Sep

-15

Dec

-15

Mar

-16

Jun-

16

Sep

-16

Dec

-16

Top 4 Indian IT companies (excl Cognizant )


Energy and Utilities as % of revenues (RHS)

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Dec-12 Jul-13 Feb-14 Sep-14 Apr-15 Nov-15 Jun-16

Energy revenue growth (LTM, YoY, cc, organic)

TCS Infosys Wipro HCL Tech

13 February 2017


Figure 30: Infra growth rate has picked-up and is

still above the overall growth

Figure 31: HCLT (helped by Volvo internal deal),

Infosys and TCS have shown an uptick


Figure 32: Engg. services is another fast growing

service line; growth rates have been recovering ++

++

Figure 33: After several quarters of decelerating

momentum due to higher base, HCLT witnessed an

improving growth trajectory


Figure 34: Headcount growth is trending down in

general and is lagging the revenue growth

Figure 35: Utilisation remains an important lever

and all firms are trying to push it further


-5%

0%

5%

10%

15%

20%

25%

30%

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

Mar

-14

Jun-

14

Sep

-14

Dec

-14

Mar

-15

Jun-

15

Sep

-15

Dec

-15

Mar

-16

Jun-

16

Sep

-16

Dec

-16

Top 4 Indian IT companies' (excl Cognizant)

Infra revenue growth (LTM, YoY, cc, organic)

Overall revenue growth (YoY, US$, LTM, organic)

0%

10%

20%

30%

40%

50%


IMS revenue growth (LTM, YoY, cc, organic)

TCS Infosys Wipro HCLT

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%



Engg services Overall

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Dec-12 Jul-13 Feb-14 Sep-14 Apr-15 Nov-15 Jun-16


TCS Infosys Wipro HCL Tech

-5%

0%

5%

10%

15%

20%

25%


Headcount growth (YoY)

TCS Infosys Wipro

HCLT Cognizant Tech Mahindra

65%

70%

75%

80%

85%


Ex-trainee utilization

TCS Infosys Wipro

HCLT Tech Mahindra

13 February 2017


Figure 36: Fixed price project mix continues to

increase making execution more important; it

accounts for over 60% of HCLT's revenue now + +

+

Figure 37: While offshore proportion has come

down due to the nature of new deals, this can rise

again in the medium term; TechM was impacted by

an acquisition


Figure 38: Attrition is stable to declining; TCS

remains best-in-class

Figure 39: Per capita profitability declined for

TechM and Wipro


Figure 40: TCS and TechM witnessed improvement

in the receivable days

Figure 41: TCS has the best cash generation profile

(FCF/Sales)


38%

43%

48%

53%

58%


Proportion of fixed price projects

TCS Infosys

Wipro HCL Tech

30%

35%

40%

45%

50%

55%

60%


Offshore revenue mix

TCS Infosys Wipro Tech Mahindra

5%

10%

15%

20%

25%


LTM attrition

TCS (incl BPO) Infosys (IT svcs and consulting)

Wipro (IT svcs, voluntary) HCL Tech (IT svcs, voluntary)

Tech Mahindra

2,000

4,000

6,000

8,000

10,000

12,000

14,000


Per employee EBIT (US$, LTM)

TCS Infosys Wipro

HCLT Cognizant Tech Mahindra

70

80

90

100

110

120


Receivable days (based on LTM revenues)

TCS Infosys Wipro


0%

5%

10%

15%

20%

25%


Cash conversion (FCF/Sales, LTM)

TCS Infosys Wipro


13 February 2017


Figure 42: Historically, Indian IT firms have

accumulated significant cash on the balance sheet

Figure 43: Cognizant has pursued an aggressive

capital return policy for 2017-18


Figure 44: Similar to Cognizant, TCS, Infosys and

Wipro too have significant cash as a percentage of

LTM revenue

Figure 45: Valuations are close to three-year low

levels, a higher capital return policy can trigger a

multiple re-rating


0%

20%

40%

60%

80%

100%

120%

TCS Cognizant Infosys Wipro HCL Tech Accenture

Application of cash flow generated over FY07-16

Net capex Dividend/Buy-back Acquisitions Cash accumulation

1.5

3.4

1.2

0.7

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

ASR Repurchases Dividends Total capital return

Cognizant's capital return plan (2017-18, US$ mn)

0%

10%

20%

30%

40%

50%

60%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

TCS Cognizant Infosys Wipro HCLT TechM Accenture

Net cash balance (US$ mn) As % of market cap [RHS]

As % of LTM revenue [RHS]

5.0

10.0

15.0

20.0

25.0

TCS Cognizant Infosys Wipro HCLT TechM

12 month forward P/E multiple

Current 3 year high 3 year low 3 year avg

13 February 2017


Companies Mentioned (Price as of 10-Feb-2017) Accenture Plc (ACN.N, $117.6) Atos (ATOS.PA, €103.5) Capgemini (CAPP.PA, €77.38) Cisco Systems Inc. (CSCO.OQ, $31.51) Cognizant Technology Solutions Corp. (CTSH.OQ, $57.4) Computer Sciences Corp. (CSC.N, $70.82) Cyient (CYIE.NS, Rs468.85) EClerx (ECLE.NS, Rs1412.35) ExlService Holdings Inc. (EXLS.OQ, $46.2) Firstsource (FISO.NS, Rs47.55) Genpact (G.N, $24.46) HCL Technologies (HCLT.BO, Rs828.1) Hexaware Technologies (HEXT.BO, Rs204.65) Indra (IDR.MC, €10.72) Infosys Limited (INFY.BO, Rs968.05) International Business Machines Corp. (IBM.N, $178.68) KPIT Tech (KPIT.BO, Rs134.6) L&T Infotech (LRTI.BO, Rs690.7) L&T Technology (LTEH.BO, Rs799.25) Mindtree Ltd (MINT.BO, Rs466.85) Mphasis Ltd (MBFL.BO, Rs559.55) NIIT Technologies (NITT.NS, Rs424.75) Oracle Financial (ORCL.BO, Rs3700.95) Persistent Systems (PERS.BO, Rs613.35) Syntel (SYNT.OQ, $22.235) Tata Consultancy Services (TCS.BO, Rs2396.7) Tech Mahindra Limited (TEML.BO, Rs500.1) Tieto (TIEN.ST, Skr241.6) Tieto (TIE1V.HE, €25.55) WNS Global Services (WNS.N, $28.9) Wipro Ltd (WIT.N, $9.34) Wipro Ltd. (WIPR.BO, Rs468.1) Zensar Tech (ZENT.NS, Rs916.9)

Disclosure Appendix

Analyst Certification I, Anantha Narayan, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12 -month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

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13 February 2017


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Global Ratings Distribution

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13 February 2017


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13 February 2017


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CSSU and CSAM LLC do not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act under Class Order 03/1100 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). Malaysia: Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. Singapore: This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore Branch to overseas investors (as defined under the Financial Advisers Regulations). Credit Suisse AG, Singapore Branch may distribute reports produced by its foreign entities or affiliates pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact Credit Suisse AG, Singapore Branch at +65-6212-2000 for matters arising from, or in connection with, this report. By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore Branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the “FAA”), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore Branch may provide to you. UAE: This information is being distributed by Credit Suisse AG (DIFC Branch), duly licensed and regulated by the Dubai Financial Services Authority (“DFSA”). Related financial services or products are only made available to Professional Clients or Market Counterparties, as defined by the DFSA, and are not intended for any other persons. Credit Suisse AG (DIFC Branch) is located on Level 9 East, The Gate Building, DIFC, Dubai, United Arab Emirates. EU: This report has been produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-US customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. 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This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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