it’s all about money, honey! - india...

IT’S ALL ABOUT MONEY, HONEY!

AnalystVinod Chari 5675 4482([email protected])

Dealing(+91 22) 2685 0505Sandeepa Arora 5540 9033Biren Patel 5540 8601

June 2004

Indian Software SectorITs back

The Indian software services sector continues to shine on the back ofaccelerated volume growth. Billing rates are stable and may even throw upsome positive surprises in the course of FY05. Offshoring continues to be thekey business driver, politicization of the issue notwithstanding. Verticalizationof business and enhanced service offerings should see deeper client ramp up.The strong March quarter despite currency concerns, indicate increasingvolumes and price stability. Companies have been liberal in rewarding investorsin FY04, indicating reducing conservatism to save cash and belief in strongfuture cash flows. Rupee appreciation, the sector’s bugbear in FY04, has donea volte-face in Q105, falling ~3% thus easing concerns. Attrition remains theonly concern on the horizon for the IT services company. The icing on thecake is that the sector is largely policy proof, virtually eliminating politicalrisk. We are extremely positive and rate the sector OUTPERFORMER.

We find Satyam and Mphasis the most attractive among Tier 1 and Tier 2 ITservices companies respectively.

Positives for the sector• Sector is largely insulated against incumbent government policies, virtually

eliminating political risk• Global IT spending is set to improve• Offshoring is part of the mainstream IT strategy of most global CIOs• Sustained volume growth due to recovery of IT spends in most major verticals• Billing pressures have eased off and rates have stabilized• Companies witnessing increased client visits and a strong RFP pipeline• Companies are ramping up to attain stability. No pressure on the manpower supply

side yet• Verticalization and enhanced service offerings is leading companies to look for

niche consolidation• BPO initiatives of most companies are paying off and are becoming key growth

drivers• Margin look sustainable despite rising wage bills as companies counter with reducing

SG&A costs• Domestic MNC competition yet to take off in a big way as they still face transition

pains• Minimal impact on business due to the current political backlash in the US.• Rupee concerns are easing even as the rupee has slid back ~3% in the current

quarter so far

Concerns for the sector• Companies unable to reduce attrition in the wake of MNC competition on the

hiring front; also facing wage pressure on this account• Low value addition work like application development and maintenance still form

the biggest chunk of the business.• Will not be able to maintain the current leveraging of SG&A costs as companies

move up the value chain• At a macro level, though a few Tier 1 Indian companies have touched the $1bn

size, they are still laggards behind global majors in terms of size and scale.

CMP Net Sales PAT EPS P/E Net Sales PAT EPS P/ERs Rs Mn Rs Mn Rs Rs Mn Rs Mn

Tier 1Infosys 5,265 62,187 15,737 59.4 22.1 79,599 19,344 73.1 18.0Wipro 1,510 75,397 13,220 18.9 26.6 95,076 16,643 23.8 21.1Satyam 310 32,532 6,885 21.8 14.2 40,665 8,097 25.6 12.1HCL Tech 308 25,415 4,320 15.6 19.7 33,265 5,679 19.2 16.0Tier 2Mphasis BFL 242 7,764 1,474 21.1 11.5 10,016 1,767 25.3 9.6Hexaware Systems 342 4,983 503 22.0 15.6 6,528 686 29.9 11.4Geometric 513 1,484 299 27.8 9.2 1,944 381 35.3 7.3KPIT Cummins 308 1,863 240 40.6 7.6 2,646 331 56.1 5.5

June 10, 2004 2

Estimates Summary

EPS adjusted in case bonus is issued; HCLT YE June, Hexaware YE Dec HCLT FY05E PAT excludes Extraordinary income of Rs 2633, EPS excludes EOI

Indian IT Services sector

FY05E FY06E

Indian Software Sector - ITs back

June 10, 2004 3


Global IT spend set to improveGlobal IT spend is set to be on the upsurge after a couple of years of tight IT budgets.IT services which grew by 4% in 2003 is expected to grow over 5% in 2004.

IDC has forecast a worldwide IT spend of around 7% in 2004. Gartner has projecteda growth of 5.5% to the worldwide IT spend in 2004. The spending in the US, wheremost Indian companies have the highest exposure is set to increase. According toForrester research, the US IT spend is expected to increase by 4% in 2004.

This will translate into increased revenue growth for domestic IT companies in India.In India, Nasscomm estimates the industry to grow to $12.2bn from $9.55bn in theprevious year, a growth of 28%. The growth will be however lower in rupee terms onaccount of appreciating rupee.

Positives for the sector

Exhibit 1: Projected global IT Spend 2002 - 2007

Source: NasscommNote:1.Outsourcing comprises of Application Management, IS Outsourcing, Network and Desktop O/S,Application Service Providers, System Infra service providers.2. Support and Training comprises of Hardware deployment and support, Software deployment andsupport, IT Education and Training3. Project Oriented Services comprises of IS Consulting, Systems Integration, Network consultingand integration, Custom Application Development

020406080

100120140160180200

2002 2003 2004e 2005e 2006e 2007e

US

$ '0

00 M

n

Outsourcing Support and Training Project Oriented Services

June 10, 2004 4


Offshoring continues to be the key driverOffshoring will continue to be the major driver of the industry in 2004 also. Offshoringhas produced cost savings of around 30-60% for user companies and is now themainstream IT strategy in most companies. IDC has estimated offshoring to double at$16bn in 2004 and increase five folds to $40bn by 2007. A recent Morgan StanleyCIO survey the number of CIO’s outsourcing is set to triple to 28% in 2004.

India is a big offshoring destination and will be one of the biggest beneficiaries. ThatIndia is of the prized location is borne by the number of MNCs setting up their offshoreunits here. Another fact that has helped is that the offshoring model is complementaryto business process outsourcing (BPO)

Exhibit 2: Offshore trend in Indian IT since 2000 (Rs bn)

Source: Nasscomm

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June 10, 2004 5


Sustained volume growth seenThe flow of business has improved significantly in the last couple of quarters In theMarch quarter the services majors showed a double digit or a high single digit sequentialgrowth. In case of Tier 1 companies, Wipro showed the maximum sequential growthof 17.4%, Satyam showed a growth of 8.8% while Infosys grew at 6%. HCL Techshowed a lower sequential growth at 4% compared to the growth earlier quarter. Thisis an aberration that should be corrected in the current quarter, the year ending quarterfor HCL Tech.Wipro also showed the highest yoy growth for the March quarter at 44.6% as well asthe full year growth at 35.6%, closely followed by HCL Tech at 33%.Exhibit 3: Volume growth at the end of March 04 quarter for Tier 1 companies

Source: Company dataNote: FY04 growth for HCL Tech is for 9 months since HCL Tech is a June ending company

The Tier 2 companies have shown a higher sequential growth due to base effect. Forexample, KPIT Cummins has been able to show a sequential growth of 12.4% and ayoy growth of 71.5%. The company was also showed the highest FY04 growthamong Tier 2 companies covered.Exhibit 4: Volume growth at the end of March 04 quarter for tier 2 companies

Source: Company dataNote: Hexaware is a December ending company

05

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Mar Qtr qoq Mar Qtr yoy FY04 grow th

%

Infosys Wipro Satyam HCLTech

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Mphasis Geometric KPIT Hexaw are

June 10, 2004 6


Another indicator of sustained volume growth is that the utilization levels of mostcompanies have not dropped significantly despite the aggressive hiring that thesecompanies have undertaken. A case in point is that of Infosys. Though the companyhas seen its employee strength swell by 7.2%, the company has been able to maintainits employee utilization level at fairly stable levels.

Exhibit 5: Infosys employee growth and utilization rates

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Source Company data

Recovery in major verticalsThe share on individual verticals in the Indian IT industry is as shown in Figure 6.

Exhibit 6: Indian IT industry by vertical

BFSI39%

Healthcare5%

Others21%

TSP4%

Transportation1%

Utilities3%

Retail5%

Government1%

Telecom OEM9%

Manufacturing12%

Source: Nasscomm

June 10, 2004 7


Major end user verticals are showing signs of recovery and this should see themincrease their technology spend. Some of the major verticals expected to drive futurerevenue growth of Indian IT companies area.BFSIThe single largest user of IT accounting for 39% of total IT services, the BFSI sector,should see fresh spending arising out of regulatory requirements like Sarbannes Oxleyand Basle II. According to IDC, US banks are expected to increase their annualspend at 5% CAGR till 2007. Similarly IT spend from the EU insurance industry isexpected to pick up. According to Celent, EU insurance IT spend is expected totouch Euro 22.3bn in 2004. Most of the Indian services majors have a large presencein BFSI and should continue to show growth as BFSI IT spend increases.b. ManufacturingManufacturing is expected to grow at 5% CAGR. The global market size was ~100bnin 2003. This vertical accounts for 12% of total IT services. Manufacturing industry isexpected to spend more on integrating IT systems, product design and datamanagement in 2004.c. TelecomTelecom contributes to around 13% of the market. Telecom companies are recoveringand business flow is expected to increase from OEMs as well as service providers. In2003, the IT spend on telecom was $53bn($36bn by OEM and $17bn by TSPs).According to Nasscomm, the OEM market is expected to grow at 9% and the TSPmarket by 16%.d. UtilitiesThe utility sector (Oil & Gas, power, water supply) is around $16bn. It is expected togrow at a CAGR of around 10% till 2005. It accounts for 3% of Indian IT industry.Utility companies’ IT spend is low compared to other verticals and hence this is agrowth vertical for Indian companies. Companies like Wipro, which have a strongpresence in this vertical, will stand to gain by the increased spend in this vertical.e. HealthcareThis vertical accounts for 5% of Indian IT industry. This is a big market with $15bn inUS and $5.2bn in UK. Indian companies in IT as well as ITeS see this as a growtharea.f. RetailingGlobally this is a $41bn market and accounts for 5% of Indian IT services. Thisindustry is expected to grow by around 8% CAGR in the medium termg. Transport and logisticsThis accounts for 4% of global IT spend and is one of the fastest growing verticals inthe industry. It is a growing vertical, which accounts for 1% on the industry.

June 10, 2004 8


Billing pressures seen to be easingThe billing pressure that plagued the industry in 2002 and early 2003 seems to befading away. While there has been no significant upward bias in billing rates, theclamor for price cut backs and renegotiations of existing contracts have died down.Billing rates have been stable since Q2FY04 with onsite revenues in the range of$55-60 and offshore rates in the range of $18-24.

The number of client visits and RFIs and RFPs have seen a quantum jump comparedto last year. Going forward, not only will billing rates be stable, but also there may bea positive surprise in the form of ~1-3% rise in new order wins in FY05.

Margins will remain stable despite rising employee costsEBIDTA margins will stabilize at current levels and may even witness of ~80-100bpson account of rising wage bill. The wage bill is expected to go up by 10-15% in FY05on account of increased strength as well as salary hikes. This would shave off ~1.3-1.5% of EBDITA which will be partially offset by a declining SG&A. SG&A expensesare likely to remain at current levels in absolute terms, thereby falling as a proportionof sales.

The other lever that companies employ to shore up margins is to increase utilizationlevels. A 1% improvement in utilization levels should result in EBIDTA gains of ~30-35bps. The companies increasing the bias of trainees in project teams to push downthe overall manpower costs of each project. They are also trying to reduce the cycletime before trainees become billable resources. For example, Satyam has put in placea training program where the turnaround time for trainees is 10 weeks instead of thenormal 14weeks.

Companies are ramping up to attain increasing scalabilityIn the face of rising business volumes, companies are ramping up their bench strength.Most of the companies are hiring aggressively. This trend is expected continue wellinto FY05. The most aggressive hiring was done by Wipro which added nearly 5700people in the IT services business in the March quarter.

June 10, 2004 9


Exhibit 7: Aggressive hiring by majors in last few years

The supply of qualified manpower is still not an issue. India has a manpower pool ofnearly 300000 engineers and 2.5mn college graduates. This has been able to sustainthe attrition rates witnessed by the companies. Infrastructure also does not seem tobe a constraint as most companies are operating at a shift factor of 1.5x-1.7x but canramp up to 2x-2.5x. Apart from improving shift utilization factors, the capex of mostcompanies entail investment in infrastructure.

BPO initiatives of services majors starting to pay offBPO initiatives of the services majors have started to pay off, albeit at a differentpace for each of them. The most visible beneficiaries have been Wipro and MphasisBFL. Spectramind’s contribution to Wipro’s topline has increased from 5% in Q403to 9% in Q204 quarter to 11% in Q304. The business has also shown good sequentialgrowth in the first three quarters in the current year.

Source: Company data

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Sep 02 Dec 02 Mar 03 Jun 03 Sep 03 Dec 03 Mar 04

Infosys Wipro Satyam HCL Tech

Exhibit 8: spectramind’s yoy growth rate during the year

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23

28

33

38

43

48

Q104 Q204 Q304 Q404

Source: Company data

June 10, 2004 10


Similarly, Msource’s contribution to Mphasis’s revenues has increased from 25.2%in Q403 to 35.4% in Q404.

Verticalization and offering of enhanced services will deepen clientrelationship…Indian software companies were hampered moving up the value chain due to lack ofdomain expertise. This has led them to focus on verticals in order to ramp up the runrate from existing clients. Tier 1 companies like Infosys and Wipro have alreadycompleted this process and this has led to a jump in the number of clients with a runrate of $1mn. As per Nasscomm estimates, the total number of $1mn clients haveincreased from 331 to 442in FY04, a growth of 34%. The lower tiered companiesare also moving towards verticalization. For example, Infotech Enterprises which hasits business revolving around the horizontals of GIS, Engineering Design, and softwareservices is talking of restructuring the business along the lines of verticals likemanufacturing, aerospace etc.

A focus on verticals, while providing domain depth to the service provider, alsoprovides visibility and branding. This increases the comfort level of users and deepensthe client relationship, with the client willing to outsource more and more services tothe IT service provider.

The focus on verticals has to be coupled with the service provider offering end to endsolution from consulting to maintenance. This has led companies to increase theirofferings in specialized verticals.

Tier 1 companies are moving into high end IT services like consulting and design. Forexample, Infosys has set up a consulting arm and Satyam is seriously exploring consultingopportunities. The Tier 1 companies, which have a scale advantage, are already offeringend to end solutions in their chosen verticals.

…is also leading into niche consolidation.The focus on verticals and enhanced offerings is also leading companies to focus onniche consolidation. In the past Wipro led the way with the acquisition of Nervewireand AMS’s energy practice A recent example is Mphasis, which has recently forayedinto SAP with the acquisition of the SAP division of MIRC Electronics. The companyhas also acquired Kshema Technologies to deepen its presence in embeddedtechnologies, which currently contributes to around 15% of IT services revenues.

Geographical presence is also a reason for consolidation as seen the case of Infosys,which acquired the Australian, firm Expert Systems to bolster its presence in theAPAC region.

June 10, 2004 11


MNC competition yet to take off in a big wayMNCs have set up their offshore development centers in India to take advantage oflower costs. However they are still some distance away before taking off fully. Theyare currently through the transition phase towards an offshore delivery model. Anotherissue that puts Indian services companies at an advantage is the relative inexperienceof MNC IT companies with the global delivery model.

Backlash in US will have minimal impactThe fear of volume growth slowing on account of US backlash is a bit overstated. Itwill have a minimal impact on IT services major. It is more an election tool in the US.The economics of offshoring are far too compelling for the strong business lobby inthe US to ignore. Hence there is no major cause of worry on this front.There have been stray cases like TCS losing $15 million contract in Indiana. Thereare also few bills pending in some states trying to ban offshoring of government work.However this will not impact the Indian IT companies in a major way as governmentcontracts account for just 1% of the industry as seen from the vertical break up inExhibit 6.

Rupee seems to be favoring IT companiesIT companies had to grapple with a strong rupee in FY04. The rupee has appreciated~ 8% in the period of Apr03-Mar 04. However the trend seems to have reversed forthe moment. The rupee has depreciated by 3% in the current quarter. This will aid theprofitability of IT companies A 1% depreciation in rupee results in a gain of ~40 basispoints in EBIDTA margins.

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Exhibit 9: Rupee has depreciated 3% in the current quarter

Source: RBI

The downside to this is that companies may not be able to take full advantage of thefall in rupee on account of hedged positions, which while capping the downside alsocaps the upside in case of a reversal. For example, Infosys has taken a forward coverof around $203mn spread over four quarters in FY05. Similarly, Satyam and Wiprotoo have taken forward cover, which would limit them benefiting from the rupee fall tothat extent.

June 10, 2004 12


Sector insulated against incumbent government policiesThe very nature of the IT services business makes it impervious to government policies.This sector is one of the least affected sectors due the recent change of guard in theIndian political scenario. This increases the relative attractiveness of the sector due tothe stable predictability of earnings.

TCS IPO will add to shine in the sectorThe much-awaited IPO of software behemoth TCS will soon hit the markets. Thecompany is filing its offer documents with the regulator SEBI. This will introduce onemore top rung company for people to invest in. This will bring more action in thesector in the capital markets. However, there is a possibility of investors moving out ofan existing Tier 1 company like Wipro and getting into TCS.

June 10, 2004 13


Increased attrition in face of MNC competition…Indian software majors are fertile poaching grounds for MNC companies in theirscale up plans. Most of the companies are planning to double their existing strengthand are able to attract talent from Indian companies by offering them a 20-50%salary differential over their Indian counterparts at various levels. Attrition atexperienced level is higher and hurts the domestic companies more

MNCs have strong recruitment plans and retention will pose a big challenge for domesticcompanies in such a scenario. Some of the big growth MNC recruitment plans asreported in the media are:

Concerns

Company Current Manpower Recruitment plansAccenture 5000 To double by end of CY04Cap Gemini 1400 2000 by end of CY04EDS 1000 2500 by end of CY04IBM Global Services 5000 To double in two yearsPerot Systems 3500 To double in one yearsXansa 1400 To triple by FY05Bearing Point NA (Set up in Feb 04) Will be 3000 in two yearsConvergys 7000 To add 13000 in one year

…Will cause wage bills to riseThe wage bills of domestic companies have increased as MNCs are causing wagepressure to build up. Most of them are planning to double their strength and this willimpact Indian companies. Indian companies will be forced to hike salaries. Wagebills are expected to go up by ~15% in FY05. This is likely to shave off ~125-150basis points from EBIDTA. Apart from the imminent hike in salaries, attrition will alsopush up recruitment and training costs.

SG&A expenses will increase as companies move up value chain.A large portion of revenues still comes from Application Development andMaintenance, where the offshore model works very well. However as Indiancompanies move higher in the value chain into areas like consulting and SI, it willinvolve more onsite work. MNCs still dominate this area. Indian companies wouldneed to improve branding and this should see higher SG&A expenses.

June 10, 2004 14


Companysnapshots

June 10, 2004 15


Infosys Technologies Ltd.Highlights• Infosys had one of its lowest sequential growth rates of 6% in revenues in its latestquarter.• The big positive was the 92bps sequential improvement in operating margins. Thiswas in line with the company’s stated objective of leveraging on SG&A costs andhigher utilization to negate factors such as rising rupee• The company saw a dip in utilization levels due to inclusion of new trainees. Thisshould however be corrected over the next couple of quarters and the companyshould go back to its earlier levels of 82.5% utilization rates(excluding trainees)• The company has increased its presence in the APAC market with the acquisitionof Expert Systems in Australia.• The company is seriously ramping up the value chain with the start of InfosysConsulting Inc. The China center is also an investment into the future. These kind ofstrategic decisions should see Infosys maintain its lead over peers.• For the full year FY05, the company should see a revenue growth of 30.6% at Rs62,187mn, and net profits of Rs 15,737,m giving it a bonus adjusted EPS of Rs 59.4.• The stock is looking very attractive at Rs 5265, available at 22.1xFY05E and18.0xFY06E.

Share Holding Pattern %Promoters 26.52Institutional Investors 48.59Other Investors 15.88General Public 9.02

Share Price Chart

CMP Rs 526552 week H/L Rs 6100/2866Market Cap Rs 350.8bn

Key Financials of the companyFY03 FY04 FY05E FY06E

Rs Mn (12) (12) (12) (12)Net Sales 36,227 47,609 62,187 79,599% Change 31.4 30.6 28.0Total Expenditure (23,507) (31,772) (42,011) (54,278)Operating Profit 12,720 15,837 20,176 25,321% Change 24.5 27.4 25.5EBIDTA % 35.1 33.3 32.4 31.8Other Income 996 1,274 1,424 1,474Depreciation (1,890) (2,309) (3,013) (3,947)PBT 11,826 14,802 18,587 22,848Tax (2,010) (2,270) (2,850) (3,504)PAT 9,816 12,435 15,737 19,344% Change 26.7 26.6 22.9Equity (Mn Nos.) 66.2 66.6 264.8 264.8EPS 37.1 46.6 59.4 73.1EPS adjusted for bonus

June 10, 2004 16


Wipro Ltd.

Highlights• Wipro showed the strongest growth among Tier 1 companies last quarter, bothsequentially as well as on a yoy basis, growing at 17.4%qoq and 44.6% yoy. Offshorevolumes growing at 12% qoq fueled this growth.• The company also saw strong growth in the R&D services segment. This segmentshould continue to do well going forward as more and more companies are increasinglyoffshoring their R&D. The outlook on the telecom OEM and TSP clients also continuesto remain positive.• The company saw margin expansion of 140bps, the largest margin gain the lastthree years.• The company has been successful in reining in SG&A expenses. SG&A expenseshave remained more or less unchanged over the last couple of quarters, thereby fallingas a % of sales.• The company is confident of maintaining a high single digit growth going forward.Margins should also further expansion as the company is focusing to increase itsutilization rates from the current 75% levels• Spectramind’s growth should continue unabated and the pulling out of LehmanBrothers and Capitalone was an aberration last year.• For the full year FY05, the company should see total revenues of Rs 75,397mn,We also see margin improvement of about 70bps and a PAT of Rs 13,220mn, givingit a bonus adjusted EPS of Rs 18.9• The stock is trading at Rs 1510, which is 26.6xFY05E and 21.1xFY06E. Itcommands the highest premium in the industry, probably recognition of its uniquestrengths in the niche R&D outsourcing business and its ability to show high growthrates.

Key Financials of the company


Share Price Chart


FY03 FY04 FY05E FY06ERs Mn (12) (12) (12) (12)Total Income 43,383 58,812 75,397 95,076% Change 35.6 28.2 26.1Total Expenditure (33,881) (47,653) (60,519) (76,254)Operating Profit 9,502 11,159 14,878 18,821% Change 17.4 33.3 26.5EBIDTA % 21.9 19.0 19.7 19.8Interest (Net) 634 766 512 553PBT 10,136 11,925 15,390 19,374Tax (1,276) (1,681) (2,169) (2,731)PAT 8,860 10,315 13,220 16,643% Change 16.4 28.2 25.9Equity( Mn Nos.) 231 233 698 698EPS 12.8 14.8 18.9 23.8EPS adjusted for bonus

June 10, 2004 17


Highlights• The company is witnessing volume growth and revenue growth for the year is expectedto be around 28%. Package implementation would continue to be the main revenuedriver for IT services companies in FY05. Package implementation contributes toaround 30% of the company’s revenues• The company has been able to withstand pricing pressure in the last couple ofquarters. Pricing has been stable and there is no risk of any downward bias in pricingin FY05• EBIDTA margin preservation remains a challenge. This year should see a dip inEBIDTA margins from FY04 levels of 27.3% by 60bps. Onsite salaries have gone upby 4% and is likely to impact margins by 1.6%. However the overall impact willlessen due to saving arising out of SG&A costs and better utilization rates.• The company is following the steps of big boys Infosys and Wipro and is planning tofocus on consulting as an offering, thereby offering the entire range of services fromBPO to consulting• The company is seeing increased customer addition in the BPO arm, Nipuna due toincreased cross selling to IT services customers. Nipuna has a total of 16 customersof which 13 are IT services customers. Nipuna is expected to touch revenues of$12bn in FY05• The company has a relatively high attrition of 17.4%. Around 80% of this attritionhappen in the 2-4 years experience range.• The company has a healthy cash position with Rs 3.8bn at the end of the year. Apartfrom increasing dividend payout and funding organic growth, the company is alsotargeting inorganic growth opportunities.• We expect the company to clock revenues of Rs 35,532mn in FY05 and a netprofit of Rs 6885mn, giving it an EPS of Rs 21.8• The company is the most attractive among Tier 1 companies at Rs 310, trading at14.2xFY05E and 12.1xFY06E.

Satyam Computer Service Ltd.


Share Price Chart


June 10, 2004 18


Satyam Computer Service Ltd.Key Financials of the company

FY03 FY04 FY05E FY06ERs Mn (12) (12) (12) (12)Net Sales 20,237 25,415.5 32,532 40,665% Change 25.6 28.0 25.0Total Expenditure (14,051) (18,490) (23,846) (30,475)Operating Profit 6,186 6,925.8 8,686 10,190% Change 12.0 25.4 17.3EBIDTA % 30.6 27.3 26.7 25.1Other Income 279 817.3 700 850Interest (7) (7) (7) (6)Depreciation (1,242) (1,116.2) (1,179) (1,264)PBT 5,216 6,619.4 8,200 9,812Tax (616) (1,061.5) (1,315) (1,715)PAT 4,600 5,557.9 6,885 8,097% Change 20.8 23.9 17.6Equity (Mn Nos.) 315 316.3 316.3 316.3EPS 14.6 17.6 21.8 25.6Note: FY03 results do not include extraordinary item of Rs1517mn

June 10, 2004 19


Highlights• HCL Tech has shown a lower sequential growth of 4% in the March quarter. Howeverwe believe this to be an aberration and expect this to be corrected in this quarter.• Revenue from software services was flat while infrastructure business grew by 5%.The heartening part is the growth in the BPO business, which has grown by 27%sequentially.• The company’s BPO business is poised to compete with major third party andcaptive BPOs even as it ramps up in scale and size• The company has shown good client addition in the quarter adding 26 clients andhaving a total of 454 clients. Of this, 104 clients have a run rate of $1mn. This is higherthan its closest peer, Satyam which has 101 clients with a run rate of $1mn.• Of the 26 clients, 2 clients were added in the BPO segment• The company should also see good traction in the services business due to therevival in the technology sector, a key domain serviced by the company• For the full year the company should post a topline growth of 41.1% and end at Rs254149mn. While bulk of the revenues will come from services business, BPOsegments will witness highest growth and infrastructure segment will continue its currentgrowth rate• The company should be able to post an EBIDTA of around 19.5% as it is trying toimprove its offshore utilization rate from the present 76%• The company will to post a net profit of around Rs 6953mn, which includesextraordinary income generated on account on divestment to Perot Systems. Theprojected FY04 EPS for the company excluding the extraordinary income is Rs 15.6.• For FY05, we expect the company to post a topline of Rs33265.1mn and a netprofit of Rs 5679mn, which translates into an earning per share of Rs 19.2

HCL Technologies Ltd.


Share Price Chart

CMP Rs 30852 week H/L Rs 349/138Market Cap Rs 91bn

Key Financials of the companyFY06/03 FY06/04E FY06/05E

Rs Mn (12) (12) (12)Net Sales 18,009 25,414 33,265% Change 41.1 30.9Total Expenditure (14,302) (20,458) (26,376)Operating Profit 3,707 4,957 6,890% Change 33.7 39.0EBIDTA % 20.6 19.5 20.7Other Income 884 1,275 1,100Depreciation (861) (1,089) (1,228)PBT 3,730 5,143 6,762Tax (347) (522) (807)PAT 3,384 4,620 5,955Extraordinary Income (186) 2,633 (276)Net Profit* 3,053 6,953 5,679Equity 591 591 591EPS (Annualized) 10.3 23.5 19.2EPS ( Excl EOI) 11.0 15.6 19.2* After adjusting for minority interest, stock based incentive and share of equity investments

June 10, 2004 20


Highlights• Mphasis is a perfect play on the combined growth in the IT and ITeS sector, ascompared to plain vanilla services company. It is our pick among Tier 2 IT companies.• Msource (ITeS) revenues have been inching up gradually from 25% in the last quarterof FY03 to 35% in the last quarter of FY04.• The company is also confident of strong performance in the IT services segment andwe expect this segment to reverse the low growth rates it has been showing in the pastfew quarters.• Company is expanding its service offerings by entering into the SAP arena. This hasbeen facilitated by its acquisition of the SAP division from MIRC Electronics• The company is also bolstering its efforts in embedded systems with the acquisitionof Kshema Technologies. Embedded Systems currently contribute to nearly 15% ofMphasis revenues.• Going forward, Msource will continue to remain the key revenue driver for thecompany and should contribute to nearly 40% of revenues by end of FY05.• We expect the company to clock in revenues of Rs 7764mn in FY05 and a PAT ofRs 1474mn, giving it an EPS of Rs 21.1• The stock is attractively valued at Rs 242, trading at 11.5xFY05E and 9.6xFY06E.We find it the most attractive among Tier 2 IT services companies.

Mphasis BFL Ltd.


Share Holding Pattern %Institutional Investors 33.20Other Investors 61.51General Public 5.30

Share Price Chart


FY03 FY04 FY05E FY06ERs mn (12) (12) (12) (12)Net Sales 4,293 5,806 7,764 10,016% Change 35.3 33.7 29.0Total Expenditure (3,539) (4,937) (6,439) (8,370)Operating Profit 753 870 1,326 1,646% Change 15.4 52.5 24.1EBIDTA % 17.5 15.0 17.1 16.4Other Income 12 146 200 186Interest ( Net) 23 39 40 45PBT 788 1,055 1,566 1,877Tax (118) (69) (92) (110)PAT 669 986 1,474 1,767% Change 47.4 49.5 19.9Equity( Mn Nos) 17.2 34.9 69.8 69.8EPS Rs 9.6 14.1 21.1 25.3EPS adjusted for bonus

June 10, 2004 21


Highlights• It is one of the fastest growing companies in the last few quarters, showing consistentdouble-digit growth in revenues.• Sequential growth of 11.3% in the last quarter. EBIDTA margins have improved ineach successive quarter, over the last four quarters.• Peoplesoft business (~30% of revenues) remains a key thrust area for the company.The company has an ODC for Peoplesoft in Bangalore and is the primary offshoresupport for Peoplesoft worldwide.• Company is well placed with Peoplesoft in terms of pricing, which is better thanroutine offshore work.• Planning to ramp up the Peoplesoft ODC to 700 people from the current 300people indicating strong offshore growth in that area• Company added its first SAP client in the March quarter.• In terms of verticals, the company is strongly focused on financial services andtransportation. These two verticals contributed to 52% revenues in Q104.• Company has a strong foothold in Germany, the second largest IT market. DeutchseLeasing is a key account in Germany.• Company has been gradually ramping up offshore share from 34% in Q203 to 39%in Q104.• The company has raised guidance for the year – $108 mn in revenues (earlierguidance $102 mn) and PAT for the year – $11.2 mn (earlier guidance $10.2 mn)• We expect company to post a 47% growth in topline at Rs 4983mn and profits atRs 530mn, giving it a F12/044E EPS of Rs 22. For FY12/05, the company shouldpost an EPS of Rs 29.9• At a CMP of Rs 342, the company is trading at an attractive 15.6xF12/04E and11.4F12/05E

HexawareTechnologies Ltd



Share Price Chart


Period F12/02 F12/03 F12/04 F12/05Rs mn (12) (12) (12) (12)Sales 2,486 3,390 4,983 6,528% Change 36.4 47.0 31.0Expenditure (2,349) (3,079) (4,311) (5,604)Operating profit 137 311 672 924% Change 126.4 116.4 37.4OPM (%) 5.5 9.2 13.5 14.2Other income 11 50 60 45Depreciation (142) (150) (170) (192)PBT 7 211 562 777Tax 16 (39) (59) (91)PAT 22 172 503 686% Change 669.5 193.3 36.3Equity 222 229 229 229EPS (Rs) 1.0 7.5 22.0 29.9

June 10, 2004 22


Highlights• Geometric had an impressive 13.2% sequential growth in the March quarter andshould be able to maintain the growth momentum going forward• It is a focussed player in the niche areas of CAD/CAM and PLM. PLM businessaccounted for 3/4th of the revenues in FY04.• The global market for end to end PLM solution is estimated to be around $7bn.• The company has deep client relationship with Dassault Systemes and EDS PLM,which together contribute to nearly 60% revenues. The PLM business is expected togrow at 25-30% in FY05.• The services business is also expected to show a high growth of around 60%. Theoverall contribution of the services business to total revenues is also expected toincrease from the current 25%• The company’s partnership model is paying off, as the company is able to ramp upwith a much lower SG&A cost. It is also able to leverage on its ODC strength.• The company has added Engineering services in its offering last year, thereby enablingit to directly reach the end customer apart from going through SI/PLM partners• Company has set itself a target of achieving a size of $100mn by FY07. While thisseems an ambitious target, we are confident of the company achieving its guidedrevenue target of 35-40%.• EBIDTA margins could fall slightly by 60bps in FY05, due to salary hikes duringthe year• The company should end with a net profit of Rs 299mn, giving it a post bonus EPSof Rs 27.8. For FY06, we expect an EPS of Rs35.3• The company is attractively valued at Rs 513, available at 9.2xFY05E and7.3xFY06E.

Geometric Software Solutions Ltd.



Share Price Chart


FY03 FY04 FY05E FY06ERs Mn (12) (12) (12) (12)Net Sales 841 1,060 1,484 1,944% Change 26.0 40.0 31.0Total Expenditure (608) (771) (1,087) (1,433)Operating Profit 233 289 397 511% Change 24.0 37.3 28.8EBIDTA % 27.7 27.3 26.7 26.3Other Income 36 64 90 85Depreciation (61) (82) (106) (119)PBT 208 271 381 477Tax (19) (29) (38) (48)PAT 189 242 342 429% Change 27.9 41.3 25.3Minority Interest (19) (34) (43) (48)Net Profit 171 208 299 381Equity Rs Mn 53 54 108 108EPS (Rs) 15.8 19.3 27.8 35.3EPS adjusted for bonus

June 10, 2004 23


Highlights• In the March quarter, Company’s consolidated revenues grew 12.4% sequentiallyand by 70% yoy to Rs380.9mn• Cummins business has ramped upto $13mn and is expected to grow at 30% duringthe current year• The company is planning to ramp up business from star customers, apart fromCummins. The company expects business from star customers to grow at 50%. Thecompany plans to add three more star customers during the year.• They have also identified new growth areas such as embedded systems and VLSI T• They are scaling up and building infrastructure accordingly. The company isconstructing a 5000 seater capacity in STPI, Pune. The first phase will be completedby the end of 2004.• The PANEX integration is shaping up well and is resulting in new customer addition.HP is a big customer netted by the company through PANEX. The other benefit is thecost control achieved on account of offshoring of SAP.• For FY05, the company has given a revenue guidance of Rs 1730-1760mn, whichis a growth of 40%. The net profits are expected to Rs 225mn to Rs 245mn, which isa 63% growth. This is also a basic EPS of Rs 36.9• We expect the company to outperform its guidance and show revenues of Rs1863mnfor FY05 and a net profit of Rs240mn, giving it an EPS.• The stock is very attractively priced at Rs 308,available at 7.6xFY05E and5.5xFY06E.

KPIT Cummins Infosystems Ltd.


Share Price Chart


Key Financials of the companyPeriod to FY03 FY04 FY05E FY06ERs Mn (12) (12) (12) (12)Sales 763 1,270 1,863 2,646% Change 66.4 46.7 42.0Expenditure (663) (1,074) (1,563) (2,213)Operating profit 100 196 300 432% Change 96.0 53.1 44.1EBIDTA % 13.1 15.4 16.1 16.3Interest (21) (16) (16) (24)Depreciation (16) (29) (38) (68)PBT 63 151 246 340Tax (6) (6) (7) (9)PAT 57 145 240 331% Change 154.4 65.2 38.3Equity 59 59 59.0 59.0EPS (Rs) 9.7 24.6 40.6 56.1

Published in June 2004. All rights reserved. © India Infoline Ltd 2003-4.This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It is not intendedas an offer or solicitation for the purchase and sale of any financial instrument. Any action taken by you on the basis of theinformation contained herein is your responsibility alone and India Infoline Ltd (hereinafter referred as IIL) and its subsidiaries orits employees or directors, associates will not be liable in any manner for the consequences of such action taken by you.We have exercised due diligence in checking the correctness and authenticity of the information contained herein, but do notrepresent that it is accurate or complete. IIL or any of its subsidiaries or associates or employees shall not be in any wayresponsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in thispublication. The recipients of this report should rely on their own investigations. IIL and/or its subsidiaries and/or directors,employees or associates may have interests or positions, financial or otherwise in the securities mentioned in this report.India Infoline Ltd, 24 Nirlon Complex, Off Western Exp. Highway, Goregaon(E). Mumbai -63. Tel 2685 0101 / 0505. Fax 2685 0585

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