Edelweiss

August 25 , 2010
Kunal Sangoi +91 22 6623 3370 kunal.sangoi@edelcap.com
Ganesh Duvvuri +91 22 4040 7586 ganesh.duvvuri@edelcap.com
Omkar Hadkar +91 22 6620 3146 omkar.hadkar@edelcap.com
Post Conference Notes
CONTENTS
eClerx Services ......................................................................................................................................... 9 Hexaware Technologies .......................................................................................................................... 13 Info Edge (India) .................................................................................................................................... 17 Infotech Enterprises ............................................................................................................................... 21 KPIT Cummins Infosystems ..................................................................................................................... 25 Mindtree ................................................................................................................................................ 29 Patni Computer ...................................................................................................................................... 33 Sasken Communication Technologies ....................................................................................................... 37 Take Solutions ........................................................................................................................................ 41 Zensar Technologies ............................................................................................................................... 45
Edelweiss Edelweiss Securities Securities Limited Limited 1 1
Introduction
In August 2010, we hosted the Edelweiss IT Conference 2010 Unleashing Potential in Mumbai. The conference brought together 10 high-potential mid-cap companies which focus on distinct and established IT spaces. Though categorised mid-cap, due to their niche focus these players have inherently varied growth trajectories, market dynamics, and risk-reward opportunities. We have categorised these 10 companies in the following four buckets:
Patni Com puters MindTree Hexaware Technologies Zensar Technologies Enterprise IT services Engineering and R&D services
Infotech Enterprises KPIT Cum m ins Sasken Com m unication
Info Edge (India).
Internet centric
KPO and Products
eClerx Services TAKE Solutions
a)
Enterprise IT services companies : These firms have focused on specific service lines and have expanded the same across verticals, while maintaining a core vertical. The opportunity tends to be cyclical, driven by the enterprises IT spending pattern. After a tough last year, we expect these companies to benefit from increasing IT spending and target high revenue growth. Participating companies in this category included Patni Computers, MindTree, Hexaware Technologies, and Zensar Technologies.
b)
Engineering and R&D services companies : These firms are now in an integrated network for research and global product development of their clients. Having successfully built and demonstrated capabilities to support and cater R&D in an outsourced model, these firms have taken a vertical specialist approach and some are expanding across multiple verticals. The increasing offshore centricity of engineering services has been fruitful for India-based service providers. Participating companies in this category included Infotech Enterprises, KPIT Cummins, and Sasken Communication Technologies.
c)
KPO and product companies : As demand for data analytics, operations management, and business intelligence and horizontal-vertical specific products is increasing, India-based KPO and product companies have an opportunity to emerge as niche leaders in a variety of spaces. Participating companies in this category included eClerx Services and TAKE Solutions.
d)
Internet-centric companies : Increasing internet penetration and net savviness of online users in India, combined with increasing adoption of e-commerce has led to a vast growth opportunity for online classified and e-commerce companies. Participating company in this category included Info Edge (India).
Edelweiss Securities Limited

In this reports company section, we have delineated answers to 10 relevant questions posed by us to the participating companies. The questions cover areas like business strategy, traction in the marketplace, challenges in delivery and scaling up from peoples perspective. We believe our questions establish a basis of comprehensive comparison among them and will enable the investor to get a relative sense of where these companies stand vis--vis each other, with regard to their competencies and growth prospects, among other aspects. Questions addressed to companies are common, though a few are company-specific. 10 relevant questions are as below: 1. 2. 3. Can you outline the key growth drivers seen in your business and industry? What growth targets are you pursuing for next couple of years? What is the growth indication from your top clients and how do you plan to increase your wallet share in those accounts? 4. What is the pricing scenario for new contracts and is there any deliberate pricing strategy followed? 5. What are the pricing models you are seeing in new deals. FP, TM, outcome based, IP-related. Is there any major IP-related revenue you are expecting in the next couple of years? 6. What are the key supply side issues that you need to focus on and what kind of ramp-up of personnel shall we see going forward? 7. How do you plan to deal with the current high attrition levels in business and salary pressures? 8. 9. What according to you are the levers to improve operating margins? How important is M&A in your growth strategy and is there a specific M&A agenda that you have? 10. How do you plan to deploy cash efficiently? Based on the responses to the questions from all the 10 participants, we see top 3 themes that will play out in the mid-tier space for Indian IT. These themes run like a common tread through many of companies in their businesses and strategies. A. Acquisitions to be a key in long-term strategy Most companies perceive acquisitions as necessary to fill a well stated need. Several players have made acquisitions in the past. However, now they are open to sizeable acquisitions given their need to scale new horizontals. As they achieve size in excess of USD 200 mn, participating in larger sized deals has become critical for growth and next level of scale up. Patni, MindTree, and Hexaware, among others, have emphasized the need of feeding multiple services within the same client so as to participate and win larger deals. For companies like eClerx Services and Infotech Enterprises the guiding acquisition mantra is new client entry (potentially large) or newer service/vertical.

We summarize in the table below from our interaction the rationale/interest area of acquisition for each of the companies. Table 1: Acquisition interest and rationale for all participating companies
Company eClerx Services Hexaware Technologies Info Edge (India) Infotech Enterprises KPIT Cummins Mindtree Patni Computer Sasken Communication TAKE Solutions Zensar Technologies Acquisition interest area/ rationale New services or new clients BPO - F&A space and RIMS space Open to good teams and ideas for investments Entry in new vertical, specific client accoount New technology, geography, anchor customer IMTS domain, SAP practice PES and BPO space New adjacencies and increasing wallet share New services or new geographies IMS and others Source: Companies, Edelweiss research
B.
Attrition: A worry, but not long term All companies are cognizant of supply side issues and are scaling up to meet demand. Most companies we spoke to expressed concern on: (a) attrition; and (b) wage inflation. (a) Attrition: Most companies were of the view that attrition is the No.1 concern currently and it has dual impact. One is increase in the overall cost and second revenue loss due to skill shortage (Patni and Sasken). However, companies are countering this by increasing fresher intake and training, assigning greater responsibilities at workplace, and higher level of management communication. By and large the belief is that attrition is likely to cool off within two quarters and they will be comfortable with attrition levels below 18-20%. All companies confirmed that their capacity addition plans (employees) will equip them to capture the recovering demand. (b) Wage inflation: Most companies have limited their average salary increases between 12% and 15%, while the critical layer 3-6 years experience employees have got 18-20% plus hikes. Mid-tier companies, during the downturn, undertook employee rationalization, introduced virtual bench and lowered salaries. All these actions are being reversed, leading to higher margin pressure. Companies stated that specific skill sets command a premium in the market place. Also, currently companies do not foresee or plan for second round of salary increase.
C.
Client concentration may continue to remain high in the near term As companies emerge from the downturn, key growth area for them is existing large customers. A few companiesInfotech Enterprises, eClerx Services, Hexaware Technologies, TAKE Solutions believe that in the short term, client concentration will continue to increase as they envisage stronger growth opportunities from their large customers.

Chart 1: Top 10 client contribution across all companies
100.0
80.0
60.0
(%)
40.0
20.0
0.0 eClerx* Hexaware Infotech KPIT Mindtree Patni Sasken Zensar
Source: Company, Edelweiss research Notes: *eClerx contribution is from top 5 clients
Valuations attractive, but investors awaiting all round performance

Overall, we believe growth for mid-tier companies will improve with enhanced IT spending across verticals. Tier-1 vendors have been registering high growth since the past three-four quarters, while client-specific issues have restricted growth for tier-2 vendors. As witnessed in the June quarter results, we expect the revenue growth to revive with improved pipeline and visibility.
Chart 2: Recent quarter Q-o-Q revenue growth compared to earlier four quarter CQGR shows improvement across most companies
22.0 16.0 10.0 4.0 (2.0) (8.0)

Hexaware Infotech Sasken eClerx MindTree Info Edge Take Solutions Zensar
5
(%)
KPIT
Apr09 - Mar10 CQGR
Q1FY11 (Q-o-Q growth)

Source: Company, Edelweiss research
Patni

Though currently operating margins are under pressure, driven by salary hikes and increased attrition, we believe with improvement in revenue growth companies will be able to enhance operating margins. We see at this stage value emerging with high cash and equivalents relative to market cap and healthy free cash flow generation (see chart 3). However, despite this value emerging, investors continue to await growth at the topline and bottomline levels, and improvement in operating metrics i.e., an all round performance. Companies that have delivered an all round performance vis-vis peers have already seen upward P/E re-rating (eClerx Services, Info Edge, Infotech Enterprises and KPIT). Chart 3: Relative cash balance and FCF yield comparison across all companies
50.0 40.0 30.0

(%)
19.5 15.0
(%)
4.7 4.3 2.8 3.9 0.9 8.0 1.3 1.3 1.2 2.0 0.7 NA 0.6
10.5 6.0 1.5 (3.0)

Hexaware Infotech Sasken eClerx KPIT Info Edge Take Solutions MindTree Zensar
Mcap/ Rev FY11E 5.8 4.9 3.2
20.0 10.0 0.0

Patni
FY11E 15.6 16.1 13.6
Cash as % of Market cap. (LHS)
FCF yield-FY10 (RHS)

Source: Company, Edelweiss research
Table 2: Valuation metrics for Big-3 Indian IT companies

Price (INR) Infosys TCS Wipro 2,770 869 412 Market Cap (INR mn) 1,589,477 1,700,727 1,008,664 Net cash (INR mn) 139,870 90,849 40,152 P/E FY11E 22.7 21.7 18.8 FY12E 19.4 20.1 17.0 EV/EBITDA FY12E 12.7 14.3 11.8 FY12E
Source: Edelweiss research
Table 3: Valuation metrics of all participating companies

Price (INR) eClerx Hexaware Info Edge Infotech KPIT MindTree Patni Sasken Take Solutions Zensar 550 77 1,027 154 179 529 532 201 41 170 Market Cap (INR mn) 15,739 11,122 28,032 17,138 14,126 21,113 69,340 5,543 4,988 7,345 Net cash (INR mn) 1,395 4,452 3,444 4,052 597 1,348 13,464* 1,800 928 1,200 P/E FY11E 15.0 17.0 39.8 10.9 15.3 15.0 13.3 7.1 NA 5.3 FY12E 12.8 7.9 29.9 8.9 12.3 10.5 14.5 6.6 NA 5.0 EV/EBITDA FY11E 7.6 7.6 25.8 6.0 5.2 9.9 7.4 2.8 NA 2.6 FY12E 6.2 4.0 19.1 4.1 4.1 7.1 6.5 2.5 NA 2.3 Mcap/ Rev FY11E 4.9 1.1 9.5 1.5 1.6 1.4 2.2 0.9 NA 0.7 FY12E
Source: Bloomberg, Edelweiss research * This excludes special dividend of Rs. 63 per share though not paid

Table 4: Key operating metric data across companies
eClerx Hexaware Info Edge Infotech KPIT Mindtree Patni Sasken Take Solutions Revenues-FY10 (INR mn) Revenue (USD mn) Market cap (USD mn) Headcount Net addition (LTM) Attrition (%) Utilisation (%) Client data (%) Top client Top 5 clients Top 10 clients Geography-wise (%) USA Europe ROW Total Verical -wise (%) BFSI Telecom Manufacturing Healthcare Others Total 50.0 100.0 21.7 100.0 50.0 36.5 41.8 29.5# 70.5# 100.0 4.6 79.2 16.2 100.0 17.3 13.6 69.1^ 100.0 16.4 100.0 42.0 11.7 29.9 100.0 100.0 52.0 43.0 5.0 100.0 21.0 48.0 31.0 100.0 63.0 30.0 7.0 100.0 65.7 28.9 5.4 100.0 0.0 0.0 100.0 100.0 52.2 38.4 9.4 100.0 65.7 21.7 12.6 100.0 64.6 16.9 18.5 100.0 81.0 12.0 7.0 100.0 19.0 45.0 36.0 100.0 62.0 0.0 38.0 100.0 63.0 14.0 23.0 100.0 NA 87.0 NA 8.6 34.1 48.5 NA NA NA NA 41.4 60.0 24.4 NA 54.9 7.0 26.9 40.2 11.2 35.5 48.6 NA 61.2 77.7 NA NA NA NA 53.0 60.0 2,570 55 332 3,124 930 38.8 NA 10,386 215 235 6,031 990 22.6 68.0 2,371 50 592 1,635 73 NA NA 9,531 201 362 7,669 211 22.0 71.0* 7,316 154 298 5,344 974 25.0 68.5 12,960 272 446 9,012 1,319 17.8 70.5 31,620 656 1464 14,893 1,113 21.5 75.0 5,742 121 117 3,284 93 35.4 77.6 NA NA 3,518 74 105 890+ 9,646 203 155 5,342 612 NA 84.0 Zensar
Source: Company, Edelweiss research Notes: *Utilisation for Infotech is only for EMI segment # Telecom revenues for Infotech is UTG and Manufacturing is EMI ^Others for MindTree include Travel and Transportation, R&D services, SPE and others
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India Equity Research
Information Technology
eCLERX SERVICES
Scoring high on all counts
1. Can you outline the key growth drivers seen in your business and industry?
A gradual economic recovery in the West has motivated large corporations to look at opportunities to increase efficiencies and reduce cost, and this has augured well for the outsourcing industry in general and eClerxs business as well. Specifically, the increased focus on e-commerce as a business channel and the rapid pace of change in capital markets has created opportunities for players like eClerx. Generally, growth for eClerx has been along one of the following dimensions: (1) ability to undertake operations upstream and downstream to existing work; (2) replicating existing services across business units and countries of existing multinational clients; and (3) ability to productise a client specific solution and sell more broadly to the industry.
August 20, 2010
Reuters : ECLE.BO
Bloomberg : ECLX IN
MARKET DATA CMP 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : : INR 550 589 / 200 28.6 15.9 / 340.4 72.5
2. What growth targets are you pursuing for next couple of years?
eClerx does not give future guidance as a policy, but aims to grow as quickly as possible. Over the past two years (FY08-10), eClerx has registered a CAGR of 45% in revenues.
Avg. Daily Vol. BSE/NSE (000) :
SHARE HOLDING PATTERN (%) Promoters* MFs, FIs & Banks FIIs Others * Promoters pledged shares (% of share in issue) : : : : : 59.8 11.2 15.4 13.6 Nil
3. What is the growth indication from your top clients and how do you plan to increase your wallet share in those accounts?
Growth indications are positive. Specific growth strategies are similar to those as outlined in answer to question No. 1 above.
4. What is the pricing scenario for new contracts and is there any deliberate pricing strategy followed?
Pricing has largely remained constant over the last couple of years, and eClerx does not expect much change in prices unless there are large forex movements. For pricing strategy, eClerx tries to maintain a healthy mix of FTE vs. fixed price contracts, and diversification across contracting currencies.
RELATIVE PERFORMANCE (%) Sensex 1 month 3 months 12 months 3.2 11.7 22.9 Stock 19.2 66.1 161.0 Stock over Sensex 16.0 54.4 138.0
5. What are the pricing models you are seeing in new deals. FP, TM, outcome based, IP-related. Is there any major IP-related revenue you are expecting in the next couple of years?
eClerxs book of revenue is priced in the following manner: (a) FTE: In this it agrees on a skill and tenure based rate card with the client and depending on number of people engaged, the client pays as per rate card. This type of billing accounts for 80% of revenues; and (b) Fixed price: In this, the client agrees Financials
Year to March Revenues (INR mn) Growth (%) EBITDA (INR mn) Net profit (INR mn) Adj. shares outstdg (mn) Diluted EPS (INR) EPS growth (%) Diluted P/E (x) EV/EBITDA (x) ROAE (%) FY07 861 82.5 430 399 18 22.7 61.9 29.5 26.6 193.1 FY08 1,217 41.3 492 449 18 25.5 12.3 26.2 21.7 55.3 FY09 1,973 62.2 815 618 19 32.5 27.4 20.6 14.2 41.4 FY10 2,570 30.3 1,004 735 20 37.1 14.2 18.0 11.3 40.2 Kunal Sangoi +91-22-6623 3370 kunal.sangoi@edelcap.com Ganesh Duvvuri +91-22-4040 7586 ganesh.duvvuri@edelcap.com
9 Edelweiss Research is also available on WWW.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

to pay a minimum guaranteed amount. If the transactions exceed the pre-agreed ceiling, eClerx is paid on per transaction basis for the incremental amount of transactions. While eClerx does not expect any specific IP-related revenue, the significant domain knowledge that it has built over the years is certainly expected to help accelerate closure of new deals and result in a higher contract win rate.
6. What are the key supply side issues that you need to focus on and what kind of ramp-up of personnel shall we see going forward?
Industry attrition has picked up in last two quarters. Though eClerx has built hiring and training systems to make the business less people dependent, this trend does pose a strain on the HR systems of the company. However, attrition for eClerx has largely been at the entry level positions, and the company has had a good success in retaining managerial talent, which is the DNA of the firm. The companys decision in the last two years to over-invest in top management, who not only provide operational resilience but also act as offshore consultants to our client organizations, has also given the requisite bench strength to handle the more aggressive labor market that prevails currently.
7. How do you plan to deal with the current high attrition levels in the business and salary pressures?
eClerxs attrition historically has been in the mid 30% range. The attrition is largely focused at front end operation employees which is the larger part of the staff pyramid, while the managerial attrition has been much lower. The attrition as long as targeted at the front end operation employees is useful in reducing the average salary per headcount as employees with 2-3 years of experience are replaced with fresh resources at the starting level pay. In some of the niche service areas, due to its ability to establish specialist skills buckets with higher FTE rates to clients, eClerx has been able to attract and retain costly specialist resources.
8. What according to you are the levers to improve operating margins?

eClerx targets to maintain operating margins in the 32-35% range. Margins are sensitive to blip events such as ramp up of new facility and margins improve with ramp up of those new facilities as fixed operating cost per FTE reduces. The key lever for operating margin in the business is employee cost. Its knowledge management practice helps it cushion the negative impact of attrition while maximizing the positive impact of cost reduction.
9. How important is M&A in your growth strategy and is there a specific M&A agenda that you have?
eClerx thinks M&A is helpful if it is either able to gain access to new service lines that can be sold to new/existing clients or gain clients to whom it can sell existing services. The company is working with various investment banks to identify targets. However, primary growth plans are centered around organic growth.
10. How do you plan to deploy cash efficiently?

Cash will be used either for acquisition, if it is able to find an attractive opportunity, or for distribution to shareholders. It distributed more than 50% of net income in FY10.
10
Company description
eClerx Services (eClerx) is a strongly differentiated play in Indias burgeoning KPO space, and stands out by virtue of its business model. The company has built a strong, relatively uncontested, and almost proprietary position in specific segments such as data analytics, operations management, data audits, metrics management, and reporting services. It inks longer-term, multi-year annuity contracts, which is facilitated by the stickiness and ongoing nature of its engagements. Its growth largely comes from existing large clients that contribute a significant revenue share (top 5 clients contribute ~87%). This has helped the company forge a unique revenue model which generates extremely attractive profitability (35% EBITDA margins in Q1FY11). Its LTM revenues stood at INR 2.9 bn and net profits at INR 909 mn. It derives 63% revenues from North America and generates 52% revenues from SEZ.
Key highlights
(a) Investment in strengthening client engagement team during 2008-09 is bearing fruit as growth from existing large clients has picked up sharply. Client concentration is expected to increase further in the short term. (b) Favourable hedge position: With hedges at an average exchange rate of INR 48/ USD and INR 65/EUR, eClerx has its FY11 net inflow protected. (c) Huge net cash position of INR 1.4 bn provides headroom to expand inorganically. eClerx intends to aggressively look for acquisition targets in the next two years.
Key risks
(a) High client concentration as eClerxs growth has been primarily concentrated and dependent on a few anchor clients. Top 5 clients contribute 87% of revenues. (b) Lack of quality talent supply could affect client servicing: With high attrition rate of over 30%, client servicing could be impacted, which could also pressurise margins. (c) Foreign exchange fluctuation : Significant INR appreciation against USD and EUR could impact profits significantly.
11

Financial Statements
Income statement
Year to March Revenues Cost of revenues Gross profit S&M expenses G&A expenses Total SG&A expenses EBITDA Depreciation & amortization EBIT Other income Profit before tax Ta x Core profit Shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) diluted CEPS (INR) Dividend per share Dividend pay out (%) FY07 861 246 616 107 79 185 430 32 398 1 399 0 399 17 23.2 18 22.7 25.1 11.8 58.2 FY08 1,217 505 712 49 172 220 492 52 440 67 507 58 449 17 26.1 18 25.5 29.1 11.0 48.0
(INR mn)
FY09 1,973 749 1,224 58 352 410 815 79 735 (40) 695 76 618 19 32.7 19 32.5 36.9 12.5 44.8 FY10 2,570 1,078 1,492 96 393 489 1,004 70 934 (106) 828 93 735 19 38.7 20 37.1 42.4 17.6 53.0
Balance sheet
As on 31st March Equity share capital Share premium account Reserves Total shareholders funds Borrowings Sources of funds Gross fixed assets Less: Accum. depreciation Net fixed assets Capital WIP Investments Deferred tax asset Cash & bank balances Debtors Loans and advances Total current assets Sundry creditors Provisions Total current liabilities Working capital Application of funds FY07 10 0 283 294 0 294 143 66 77 0 0 0 74 119 86 279 23 39 62 217 294 17 FY08 190 735 403 1,328 40 1,368 77 228 112 116 69 654 2 224 256 212 692 184 59 243 449 1,368 76
(INR mn)
FY09 190 735 731 1,657 0 1,657 108 383 182 201 1 851 7 213 451 307 970 231 251 482 488 1,657 87 FY10 193 740 1,066 1,999 0 1,999 101 446 246 199 22 775 7 472 392 501 1,366 220 251 471 894 1,999 101
Goodwill & other intangible asset 0
Common size metrics as % of net revenues

Year to March Cost of revenues Gross margin G&A expenses S&M expenses SG&A expenses EBITDA margin EBIT margin Net profit margins FY07 28.5 71.5 9.1 12.4 21.5 50.0 46.2 46.4 FY08 41.5 58.5 14.1 4.0 18.1 40.4 36.2 36.9 FY09 38.0 62.0 17.8 2.9 20.8 41.3 37.3 31.3 FY10 41.9 58.1 15.3 3.7 19.0 39.0 36.3 28.6
Book value per share (INR)
Ratios
Year to March ROAE (%) ROACE (%) Debtors (days) Payable (days) FY07 193.1 198.6 39 27 12 4.5 11.4 4.2 4.2 FY08 55.3 87.4 56 31 25 2.9 12.6 1.5 1.5 FY09 41.4 96.8 65 38 27 2.0 12.4 1.3 1.3 FY10 40.2 92.0 60 32 28 2.9 0.0 4.7
Growth metrics (%)

Year to March Revenues EBITDA EBIT PBT Net profit EPS FY07 82.5 67.6 64.8 61.9 61.9 61.9 FY08 41.3 14.3 10.5 26.8 12.3 12.3 FY09 62.2 65.6 67.1 37.2 37.9 27.4 FY10 30.3 23.2 27.0 19.2 18.9 14.2
Cash conversion cycle Current ratio Fixed assets turnover (x) Total asset turnover(x) Equity turnover(x)
Valuation parameters Cash flow statement

Year to March Net profit Depreciation Others Gross cash flow Less:Changes in wkg. cap. Operating cash flow Less: Capex Free cash flow
12 Edelweiss Securities Limited
(INR mn)
FY07 399 32 97 529 169 359 28 332 FY08 449 52 (88) 413 83 330 154 176 FY09 618 79 (237) 461 50 411 87 324 FY10 735 70 (53) 753 147 606 84 522
Year to March Diluted EPS CEPS (INR) Diluted P/E (x) Price/BV(x) EV/Revenues (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward Dividend Yield % (INR) Y-o-Y growth (%)
FY07 22.7 61.9 25.1 29.5 40.1 13.3 26.6 23.2 1.8
FY08 25.5 12.3 29.1 26.2 8.9 8.8 21.7 13.1 1.6
FY09 32.5 27.4 36.9 20.6 7.7 5.9 14.2 11.6 1.8
FY10 37.1 14.2 42.4 18.0 6.6 4.4 11.3 2.1
HEXAWARE TEHNOLOGIES
Awaiting profitability boost
Hexaware is witnessing growth opportunities primarily in Americas. Coming on the back of 2008 and 2009, the market is witnessing demand uptake in the form of new application development, technology upgrades such as PeopleSoft version 9.1 and roll-out of new IT applications such as in the Business Analytics space. Also, the top 20 clients are beginning to show signs of growth and these customers are not concentrated on any specific vertical. In addition, Hexaware has multiple services feeding into these clients giving it a higher wallet share. Further, two large deals signed last quarter gives the company enhanced visibility and growth path going into 2010 and 2011 as well.
August 20, 2010
Reuters : HEXT.BO
Bloomberg : HEXW IN
MARKET DATA CMP 52-week range (INR) Share in issue (mn) : : : : INR 77 102 / 64 144.8 11.2 / 239.4 1,198.8
Hexaware reported revenue growth of 13% in Q2CY10 and has guided for revenue growth of 5.5-7.5% for Q3CY10. The company does not provide revenue guidance beyond the immediate quarter; however, the company shared that it is keen to leverage the economic revival and capture healthy revenue growth.
M cap (INR bn/USD mn)
3. What is the growth indication from your top clients (particularly as top 10 clients contribute almost 50% to revenues) and how do you plan to increase your wallet share in those accounts?
Growth indications from top clients (particularly in the USA) remain positive and Hexaware has witnessed growth in revenues from top 20 clients. This is also validated from 18% sequential revenue growth from top 10 clients in Q2CY10. Also, the visibility from top clients has given Hexaware the confidence to issue revenue guidance of 5.5-7.5% growth in Q3CY10. Hexaware has a few specific initiatives focused towards increasing the wallet share such as: (a) each of the major account has a dedicated account manager / client partner; and (b) successful launch of new service offerings in the ERP space, in the BPO space and new horizontal in the form of Remote Infrastructure Management Services. These initiatives will aid Hexaware offer more services in existing accounts and increase wallet share.
RELATIVE PERFORMANCE (%) Sensex 1 month 3 months 12 months 3.2 11.7 22.9 Stock (4.9) 1.3 0.9 Stock over Sensex (8.1) (10.4) (22.1)
Current pricing environment with existing clients on the existing business is stable. The market scenario is competitive, especially, in multiple vendor Financials
Year to December Revenues (INR mn) Rev. growth (%) EBITDA (INR mn) Net profit (INR mn) Shares outstanding (mn) Diluted EPS (INR) EPS growth (%) Diluted PE (x) EV/EBITDA (x) ROAE (%) CY08 11,520 10.8 1,289 666 144.4 4.6 (47.1) 16.7 6.6 9.7 CY09 10,386 (9.8) 2,023 1,343 148.8 9.0 95.8 8.5 3.4 17.8 CY10E 10,185 (1.9) 840 676 149.1 4.5 (49.8) 17.0 7.6 7.5 CY11E 11,973 17.6 1,532 1,451 149.1 9.7 114.6 7.9 4.0 14.5 Kunal Sangoi +91-22-6623 3370 kunal.sangoi@edelcap.com Ganesh Duvvuri +91-22-4040 7586 ganesh.duvvuri@edelcap.com
Edelweiss Research is also available on WWW.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. 13

scenarios. When it comes to larger deals, most companies in the market are vying for higher volume growth. These scenarios result in some downward pressure on bill rates, primarily, driven on account of competitive market conditions. Hexaware is beginning to seek price increases from existing clients but both the success as well the financial impact may take time to manifest itself.
5. What are the pricing models you are seeing in new deals - FP, TM, outcome based, IP-related. Is there any major IP-related revenue you are expecting in the next couple of years?
Pricing models prevalent in the market are: FP, T&M, combination of them and to some extent outcome based / transaction based pricing. Hexaware has launched service offerings which generate non-linear revenues: a) IP-based service solutions like: AKIVA, BIMA, TAO; b) shared services delivery model for ERP services; c) republic multitenancy HR service offering. Other models being considered are pay as you grow, fees linked to business growth such as AUM (Assets under Management).
Hexaware does not see any major immediate supply side challenges per se. The concerns are attrition and wage hikes. It plans to add 1,000 people to its headcount in CY10. The company had zero fresh campus recruits in 2008, 300 in 2009 and 500 planned in 2010 (260 already added in H1 2010). The plan to recruit freshers (campus recruit) continues through 2011.
Current attrition as of Q2 2010 is 22.6%. Hexaware has a few employee engagement programs to manage attrition: a) opportunity to work on latest technology: PeopleSoft 9.1; b) ability to liaise with the clients early: Proactive; c) training and development through Hexavarsity; and d) job rotation and onsite opportunities. Currently, Hexaware does not intend to offer any interim salary increments.

For Hexaware, there are multiple levers to the margins. These include induction of fresh engineers, volume growth leading to improvement in technical utilization and operating leverage, increased realization from clients, and continued watch on discretionary expenses G&A segments.
9. How important is M&A in you growth strategy and is there a specific M&A agenda that you have?
M&A will be important to Hexawares growth strategy. It is keen to scale up its business in the Remote IMS space. Hexawares RIM practice now has 15 customers since it started a year ago. Another area for acquisitions is the BPO F&A space, since it has gained recognition in the the HRO area.

The plans for deployment of cash include: a) fund two M&A transactions: one in the remote IMS space and another in the F&A BPO space; b) to fund capex: both on the physical infrastructure as well as the technical infrastructure side; and c) dividends.
14
Company description
Hexaware Technologies (Hexaware) is an IT-services company, specialised in offering enterprise solutions, application management, and embedded systems. It provides software services to banking and financial services, insurance, travel & transportation, and emerging segments (manufacturing and healthcare). Hexaware has a dominant PeopleSoft practice and is amongst the Top 20 software and services exporter from India. The companys last twelve month revenues stood at INR 10.4 bn (USD 223 mn) and it employs 5,304 people.
Investment theme
Over the past one year, Hexaware has focused on improving operational efficiencies and re-aligned itself vertically from the earlier horizontal sales-based approach. Further, strengthening of the sales force with 16 new recruits and new deal wins reported in the past six months could improve revenue traction, going forward. In addition, high US and BFSI exposure should aid growth in an improving macro environment. We see Hexaware fundamentally strengthened with its recent initiatives. With a healthy cash position, it is poised to explore inorganic growth opportunities.
Key risks
(a) A double-dip recession in its major market, US, and prolonged slowdown in Europe; (b) Appreciation of the INR against USD, EUR and GBP; and (c) Inadequate availability of manpower.
15

Income statement
Year to December Revenues Cost of revenues Gross profit G&A expenses Total SG&A expenses EBITDA Depreciation & Amortization EBIT Other income Profit before tax Ta x Core Profit Profit after tax Net profit after minority int. Shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) diluted CEPS (INR) Dividend per share Dividend (%) Dividend pay out (%) CY08 11,520 7,061 4,458 3,170 3,170 1,289 270 1,019 (198) 821 155 666 666 666 144.2 4.6 144.4 4.6 6.5 1.0 49.8 21.6 CY09 10,386 5,643 4,743 2,720 2,720 2,023 270 1,753 (307) 1,446 103 1,343 1,343 1,343 143.4 9.4 148.8 9.0 11.2 1.4 70.2 15.0
(INR mn)
CY10E 10,185 6,559 3,626 2,786 2,786 840 246 594 158 752 76 676 676 676 143.4 4.7 149.1 4.5 6.4 1.4 70.0 31.3 CY11E 11,973 7,388 4,585 3,053 3,053 1,532 280 1,252 435 1,687 236 1,451 1,451 1,451 143.4 10.1 149.1 9.7 12.1 1.4 70.0 14.0
Balance sheet
As on 31st December Equity share capital Share premium account Reserves Total shareholders funds Borrowings Deferred tax liability Sources of funds Goodwill and other intangible asset Gross fixed assets Less: Acc. depreciation Net fixed assets Capital WIP Investments Deferred tax asset Cash & bank balances Debtors Loans and advances Total current assets Sundry creditors Provisions Total current liabilities Working capital Application of funds 1,263 2,839 1,202 1,637 1,597 0 84 2,849 2,065 1,035 5,950 3,008 704 3,711 2,239 6,820 1,207 3,298 1,404 1,893 1,258 1,269 121 2,992 1,526 1,113 5,632 1,998 710 2,709 2,923 8,670 59 CY08 288 4,726 1,612 6,625 195 6,820 CY09 290 4,726 3,482 8,497 163 10 8,670
(INR mn)
CY10E 290 4,726 4,474 9,490 9,490 1,207 4,016 1,650 2,366 1,006 1,500 121 3,154 1,870 1,200 6,224 2,184 750 2,934 3,290 9,490 66 CY11E 290 4,726 5,450 10,465 10,465 1,207 5,079 1,930 3,149 906 1,500 121 3,439 2,165 1,200 6,804 2,471 750 3,221 3,583 10,465 73

Year to December Cost of revenues Gross margin G&A expenses SG&A expenses EBITDA margin EBIT margin Net profit margins CY08 61.3 38.7 27.5 27.5 11.2 8.8 5.8 CY09 54.3 45.7 26.2 26.2 19.5 16.9 12.9 CY10E 64.4 35.6 27.3 27.3 8.2 5.8 6.6 CY11E 61.7 38.3 25.5 25.5 12.8 10.5 12.1
Book value per share (BV) (INR) 46
Ratios
Year to December ROAE (%) ROACE (%) Debtors (days) Payable (days) Cash conversion cycle CY08 9.7 17.6 67 85 (18) 1.6 0.2 7.8 1.7 1.7 CY09 17.8 24.7 63 88 (25) 2.1 0.1 5.9 1.3 1.4 CY10E 7.5 7.7 61 75 (14) 2.1 4.8 1.1 1.1 CY11E 14.5 14.8 61 71 (9) 2.1 4.3 1.2 1.2
Growth metrics (%)

Year to December Revenues EBITDA EBIT PBT Net profit EPS CY08 10.8 7.3 5.2 (33.5) (39.5) (47.1) CY09 (9.8) 57.0 72.1 76.2 101.6 95.8 CY10E (1.9) (58.5) (66.1) (48.0) (49.7) (49.8) CY11E 17.6 82.4 110.8 124.3 114.6 114.6
Current ratio Debt/EBITDA Fixed assets turnover (x) Total asset turnover(x) Equity turnover(x)

Year to December Net profit Depreciation Others Gross cash flow Operating cash flow Less: Capex Free cash flow
(INR mn)
CY08 666 270 (1,152) (216) 685 1,149 (464) CY09 1,343 270 (336) 1,277 (201) 1,478 82 1,397 CY10E 676 246 351 1,273 (145) 1,419 467 952 CY11E 1,451 280 (436) 1,295 127 1,169 962 206
Year to December Diluted EPS CEPS (INR) Diluted P/E (x) Price/BV(x) EV/Revenues (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward Dividend yield (%) (INR) Y-o-Y growth (%)
CY08 4.6 (47.1) 6.5 16.7 1.7 0.7 6.6 4.2 1.3
CY09 9.0 95.8 11.2 8.5 1.3 0.7 3.4 8.3 1.8
CY10E 4.5 (49.8) 6.4 17.0 1.2 0.6 7.6 4.2 1.8
CY11E 9.7 114.6 12.1 7.9 1.1 0.5 4.0 1.8
Less:Changes in wor. capital (901)
INFO EDGE (INDIA)

On the fast track
Indias internet user base is growing at over 25% p.a., with wider broadband usage leading to increasing internet penetration. Further, with the cyclical economic slowdown behind, improving business confidence and expansion is leading to new job creations and high churn rate in existing jobs. This is witnessed from the significant increase in IELs deferred sales revenues. Another growth driver is expected ramp up of matrimony segment where Info Edge expects to increase investments and gain revenue market share. Also, as real estate segment has taken lead in traffic share increasing revenue traction will lead to likely break-even this fiscal. Lastly, incremental growth contribution would be from investee companies. In a nutshell, GDP growth, internet penetration, price and quality of broadband/ computers/ mobiles and content in local languages are going to be key drivers for an internet classifieds play like IEL.
August 20, 2010
Reuters : INED.BO
Bloomberg : INFOE IN
MARKET DATA CMP 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : : INR 1,027 1,150 / 602 27.3 28.0 / 601.0 22.6
As Indias GDP growth is back to 8% plus levels and economic activity increasing, Info Edge expects to grow in mid-20 as far as this year is concerned. Pre slowdown (FY07-09), IEL has grown at 32% CAGR.
Hiring is back and different customers in different industries are witnessing differing levels of attrition as also growth. IEL tries to sell better higher priced solutions, add newer customers, rejuvenate latent customers and offer innovative products for specific needs. The gain in traffic share during the slowdown should lead to higher market share as the market rebounds.
IEL typically sells for durations less than 12 months so as to retain the ability to re-price. Also newer innovative products are introduced to cater to a much diversified client base. It expects higher pricing power through higher share of traffic.
Financials
Year to March Revenues (INR mn) Rev. growth (%) EBITDA (INR mn) Net profit (INR mn) Shares outstanding (mn) Diluted EPS (INR) EPS growth (%) Diluted PE (x) EV/EBITDA (x) ROAE (%) FY09 2,458 12.3 644 570 28 20.4 0.2 50.4 38.2 19.2 FY10 2,371 (3.5) 607 521 27 19.1 (6.2) 53.8 39.7 15.9 FY11E 2,961 24.9 902 708 27 25.8 35.4 39.7 25.8 17.1 FY12E 3,521 18.9 1,169 952 27.5 34.6 33.9 29.7 19.1 19.0 Kunal Sangoi +91-22-6623 3370 kunal.sangoi@edelcap.com Ganesh Duvvuri +91-22-4040 7586 ganesh.duvvuri@edelcap.com

5. What are the pricing models you are seeing and any change that you are expecting in the next couple of years?
As of now, IEL sells subscription based products but would like to gradually move to a pay per use type model. Some basic pay for specific use products has already been introduced and it keeps evaluating customers acceptance of the pay per use model from time to time.
Internet businesses inherently have a high operating leverage. IEL is witnessing it in its leading business, Naukri.com and expects this to continue in the future. For internet businesses, personnel would be added based on the need of the business and its stage of evolution.
IEL gave salary hikes this year and incentivizes its performers through ESoPs. The sales staff earns incentives every month based on their achievements. If top line grows at a rapid rate, IEL will have the cushion to take care of increased personnel expenses through the operating leverage in businesses.

Personnel and advertising cost are the two main costs for IEL. Both are closely monitored with regards to growth and brand building objectives by the management. The operating leverage should help IEL manage these effectively.
IEL recognizes that M&A is a focus area, evaluates opportunities from time to time and would pursue appropriate deals. Mr. Sanjeev Bikhchandani moving to handle investments and M&A will provide a sharper focus to this area for IEL.

IEL has stated its intent to invest in internet related start ups which have good teams and ideas which it expects can be big. It will also invest in its existing businesses with an eye on growth and brand building. M&A may also provide an opportunity to use cash. Also, IEL is incurring capital expenditure in infrastructure to provide a great working environment and visibility to its headcount needs.
18
Company description
Info Edge (India; IEL) is amongst Indias leading online classified companies, with presence in online recruitment, matrimony, real estate, and offline executive search. It pioneered the online recruitment business under its flagship brand Naukri.com and operates offline recruitment business under the Quadrangle brand. The companys online matrimony and real estate divisions operate under Jeevansathi.com and 99acres.com, respectively, and are currently in investment mode. New launches include Firstnaukri.com (fresher recruitment site), Brijj.com (professional networking site), asknaukri.com (career guidance website), and shiksha.com (education information portal). IELs TTM revenue is USD 52 mn and employee strength 1,635 people.
Investment theme
IEL is a long-term play on the internet space in India. With lead in the online recruitment market (through Naukri.com) and presence in online classified space, it has the potential to establish a market leading position and grab large pie of increasing online adoption. As various businesses come out of the recent slowdown, we expect the recruitment industry to grow significantly (since it is highly correlated to growth in domestic corporate sector). We expect IELs earnings growth at 35% CAGR over FY10-12E and value it at INR 1,100 per share using target P/E of 32x on FY12E earnings.
Key risks
Heavy dependence on the recruitment segment; potential threat from professional networking portals; and the need to continuously innovate.
19

Income statement
Year to March Revenues Cost of revenues Gross profit S&M expenses G&A expenses Total SG&A expenses EBITDA Depreciation & Amortization EBIT Interest expense Other income Profit before tax Ta x Core profit Extraordinary income/(loss) Profit after tax Min.int. & others - paid/(recd.) Net profit after minority int. Shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) diluted CEPS (INR) Dividend per share Dividend (%) Dividend pay out (%) FY09 2,458 1,024 1,434 433 356 789 644 71 573 279 853 270 582 582 12 570 27.3 20.9 28.0 20.4 23.5 0.8 7.5 4.2 FY10 2,371 1,011 1,360 394 359 753 607 65 542 1 307 848 317 531 (38) 493 (28) 521 27.3 19.1 27.3 19.1 22.8 1.0 10.0 5.9
(INR mn)
FY11E 2,961 1,263 1,698 439 358 796 902 68 835 273 1,108 364 743 743 35 708 27.4 25.8 27.4 25.8 28.3 2.0 20.0 8.7 FY12E 3,521 1,253 2,267 669 430 1,098 1,169 85 1,084 389 1,473 486 987 987 35 952 27.5 34.6 27.5 34.6 37.7 2.0 20.0 6.5
Balance sheet
As on 31st March Equity share capital Share premium account Reserves Total shareholders funds Borrowings Sources of funds Gross fixed assets Less: Accu. depreciation Net fixed assets Capital WIP Investments Deferred tax asset Cash & bank balances Debtors Loans and advances Total current assets Sundry creditors Provisions Total current liabilities Working capital Application of funds BV per share (INR) FY09 273 28 2,966 3,268 3 3,271 527 225 301 83 211 19 3,218 38 166 3,422 705 61 766 2,655 3,271 120 FY10 273 28 3,444 3,745 6 3,751 581 287 294 69 1,161 34 2,791 80 219 3,090 812 84 896 2,194 3,751 137
(INR mn)
FY11E 274 28 4,215 4,517 4,517 661 360 301 60 819 34 4,041 57 210 4,307 893 112 1,005 3,302 4,517 165 FY12E 275 28 5,200 5,503 5,503 771 444 326 1,019 34 4,959 58 250 5,267 1,027 117 1,144 4,123 5,503 200

Year to March Cost of revenues Gross margin G&A expenses S&M expenses SG&A expenses EBITDA margin EBIT margin Net profit margins FY09 41.7 58.3 14.5 17.6 32.1 26.2 23.3 23.7 FY10 42.6 57.4 15.1 16.6 31.8 25.6 22.9 22.4 FY11E 42.6 57.4 12.1 14.8 26.9 30.5 28.2 25.1 FY12E 35.6 64.4 12.2 19.0 31.2 33.2 30.8 28.0
Ratios
Year to March ROAE (%) ROACE (%) Debtors (days) Payable (days) Cash conversion cycle Current Ratio Fixed assets turnover (x) Total asset turnover(x) Equity turnover(x) Adjusted debt/Equity FY09 19.2 37 5 125 (119) 4.5 7.9 0.8 0.8 0.0 FY10 15.9 19.2 9 117 (108) 3.4 8.0 0.7 0.7 0.0 FY11E 17.1 26.5 8 105 (97) 4.3 10.0 0.7 0.7 (0.1) FY12E 19.0 26.5 6 100 (94) 4.6 11.2 0.7 0.7 -
Growth metrics (%)

Year to March Revenues EBITDA EBIT PBT Net profit Diluted EPS FY09 12.3 1.5 (1.0) 8.5 2.8 0.2 FY10 (3.5) (5.9) (5.5) (0.5) (8.6) (6.2) FY11E 24.9 48.7 54.0 30.6 35.9 35.4 FY12E 18.9 29.5 29.9 33.0 34.4 33.9
Valuation parameters
Year to March Diluted EPS CEPS (INR) Diluted P/E (x) Price/BV(x) EV/Revenues (x) Mcap/Revenues (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward Dividend yield (%) (INR) Y-o-Y growth (%) FY09 20.4 0.2 23.5 50.4 8.6 10.0 11.4 38.2 40.6 0.1 FY10 19.1 (6.2) 22.8 53.8 7.5 10.2 11.8 39.7 26.7 0.1 FY11E 25.8 35.4 28.3 39.7 6.2 7.9 9.5 25.8 19.9 0.2 0.2 FY12E 34.6 33.9 37.7 29.7 5.1 6.3 8.0 19.1
Cash flow statement

Year to March Net profit Depreciation Others Gross cash flow Less:Changes in wor. capital Operating cash flow Less: Capex Free cash flow
(INR mn)
FY09 570 71 (203) 438 240 198 86 112 FY10 521 65 (231) 355 (22) 376 44 332 FY11E 708 68 (238) 538 (138) 676 71 605 FY12E 952 85 (354) 683 (98) 781 50 731
INFOTECH ENTERPRISES
Cruise control
Key growth driver of engineering services outsourcing is the transformation of offshore R&D sites into an integrated network for research and global product development. For India in particular, the suitable talent pool and strong track record of vendors in IT services and BPO are important drivers. Infotech continues to expand its addressable market by entry into newer verticals within the engineering services (inorganically) and key client accounts with high engineering spend.
August 20, 2010
Reuters : INFE.BO
Bloomberg : INFTC IN
Infotech expects to grow in mid-20 including the consolidation of Daxcon and Wellsco acquisitions. Organic growth is expected to be about 20%.
Most of the top clients have shown positive signs and specific growth strategies to increase the wallet share are improving client engagement with developing front end presence and roping in account managers.
SHARE HOLDING PATTERN (%) Promoters* MFs, FIs & Banks FIIs Others * Promoters pledged shares (% of share in issue) : : : : : 23.1 7.0 23.6 46.3 0.5
By virtue of faster growth in the engineering segment and realizations being higher here relative to the GIS, overall realizations will improve for Infotech.
RELATIVE PERFORMANCE (%) Sensex 1 month 3 months 12 months 3.2 11.7 22.9 Stock (11.1) (17.9) 23.0 Stock over Sensex (14.3) (29.6) 0.1
Pricing models prevalent are FP, T&M or a combination of them. There is no significant IP related reveenus that the company expects in the next couple of years.
Financials
Year to March Revenues (INR mn) Revenue growth (%) EBITDA (INR mn) Net profit (INR mn) Shares outstanding (mn) Diluted EPS (INR) EPS growth (%) Diluted P/E (x) EV/EBITDA (x) ROAE (%) FY09 8,898 32.0 1,785 925 107 8.7 2.2 17.8 7.2 12.8 FY10 9,531 7.1 2,083 1,709 111 15.4 77.9 10.0 6.1 20.4 FY11E 11,718 22.9 2,069 1,582 112 14.2 (8.1) 10.9 6.0 16.3 FY12E 13,562 15.7 2,760 1,968 114 17.3 22.2 8.9 4.1 17.2 Kunal Sangoi +91-22-6623 3370 kunal.sangoi@edelcap.com Ganesh Duvvuri +91-22-4040 7586 ganesh.duvvuri@edelcap.com

Infotech plans to add 1,100 people in FY11 with freshers constituting about 400-500. Key focus area for Infotech is to build bench with requisite skill.
Annualised attrition for the company currently stands at 22% (Q1FY11). To combat the higher attrition Infotech has raised salary by 14% for offshore employees and by 35% for onsite people.

Margin improvement is the key focus given the 16% level it witnessed in Q1FY11 (down from 21% in Q4FY10). Infotech expects to end FY11 with EBITDA margins of around 18%. Improvement in utilization with increasing volumes will be the key drive for margin improvement. Other factor that will contribute to margin increase is higher fresher hiring (reducing average cost/employee) increased use of shared services resources. The room for cost rationalization remains low though increased consciousness will control it.
Infotech has an active M&A team that constantly evaluates acquisitions. The stated M&A strategy is go after target that cuts across the following three objectives: a) access to clients that are listed in its category of must-have accounts; b) expanding engineering services to new market segments; and c) strengthening front-end presence.

M&A will be the key area towards utilizing the cash.
22
Company description
Infotech Enterprises (Infotech) is a 7,650 plus employee software services company, with competencies in: (a) GIS services (catering to utility, transportation, and government segments); (b) engineering design services (for engineering, manufacturing, and industrial products verticals); and (c) software services (to clients in data and technology services, engineering design, and IT services. The companys past twelve month revenues stood at INR 9.7 bn (USD 209 mn).
Investment theme
Outsourcing of engineering services is expected to reach USD 38-50 bn by FY20E against USD 2 bn currently, as per a Nasscom-Booz Allen Hamilton study. Being a leading offshore engineering services companies for the manufacturing industry, Infotech is poised to grab the rising opportunities. The company has strong domain knowledge and complete solution capability in the GIS segment, along with a healthy deal pipeline. Its skills in mapping and designing across diverse segments and in a variety of end-user IT environments give it competitive edge over peers. We expect Infotechs net profits (ex-forex) to post CAGR of 16% (each) over FY10-12E.
Key risks
Significant appreciation of the INR against USD, EUR, and GBP; inadequate availability of skilled manpower; and sustained slowdown in engineering services spending.
23

Income statement
Year to March Revenues Cost of revenues Gross profit S&M expenses G&A expenses Total SG&A expenses EBITDA Depreciation & amortization EBIT Interest expense Other income Profit before tax Ta x Core profit Extraordinary income/(loss) Profit after tax Net profit after minority int. Shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) diluted CEPS (INR) Dividend per share Dividend (%) Dividend pay out (%) Year to March Cost of revenues Gross margin G&A expenses S&M expenses SG&A expenses EBITDA margin EBIT margin Net profit margins FY09 8,898 4,896 4,001 959 1,258 2,216 1,785 466 1,320 40 (295) 985 140 844 0 844 925 107 8.7 107 8.7 13.0 0.8 30.2 10.6 FY09 55.0 45.0 14.1 10.8 24.9 20.1 14.8 9.5 FY10 9,531 5,427 4,104 874 1,147 2,022 2,083 436 1,647 31 464 2,080 505 1,575 0 1,575 (134) 1,709 111 15.4 111 15.4 19.4 1.0 40.0 7.6 FY10 56.9 43.1 12.0 9.2 21.2 21.9 17.3 16.5
(INR mn)
FY11E 11,718 7,089 4,629 1,069 1,491 2,560 2,069 515 1,554 2 339 1,890 420 1,470 0 1,470 (112) 1,582 111 14.3 112 14.2 18.9 2.5 50.0 20.5 FY11E 60.5 39.5 12.7 9.1 21.8 17.7 13.3 12.5 FY12E 13,562 7,893 5,669 1,248 1,661 2,909 2,760 611 2,149 0 309 2,458 590 1,868 0 1,868 (100) 1,968 113 17.4 114 17.3 22.8 2.3 45.0 15.1 FY12E 58.2 41.8 12.3 9.2 21.5 20.4 15.8 13.8
Balance sheet
As on 31st March Equity share capital Share premium account Reserves Total shareholders funds Borrowings Minority interest Sources of funds Gross fixed assets Less: Accu.depreciation Net fixed assets Capital WIP Investments Deferred tax asset Cash & bank balances Debtors Loans and advances Others Total current assets Sundry creditors Provisions Other liabilities Total current liabilities Working capital Application of funds BV (INR) FY09 276 3,601 3,826 7,703 195 3 7,901 4,614 2,189 2,424 584 402 165 3,334 2,628 603 0 6,564 822 392 1,025 2,238 4,326 7,901 72 FY10 277 3,628 5,158 9,063 44 0 9,107 4,942 2,392 2,549 605 2,023 29 2,337 2,065 1,337 325 6,064 658 1,005 499 2,162 3,901 9,107 82
(INR mn)
FY11E 555 3,351 6,407 10,313 0 0 10,313 6,142 2,907 3,234 200 1,200 29 3,439 2,568 1,605 0 7,612 833 575 555 1,963 5,649 10,313 93 FY12E 565 3,951 8,069 12,585 0 0 12,585 6,792 3,519 3,273 350 1,350 29 4,638 3,047 2,086 0 9,771 916 522 750 2,189 7,583 12,585 111
Min. int. & others -paid/(recd.) (80)
Common size metrics as % of net revenues Ratios

Year to March ROAE (%) ROACE (%) Debtors (days) Payable (days) Cash conversion cycle Current ratio Fixed assets turnover (x) FY09 32.0 46.4 54.6 (5.4) 6.2 2.2 FY10 7.1 16.7 24.8 111.2 86.5 77.9 FY11E 22.9 (0.7) (5.6) (9.1) (6.7) (8.1) FY12E 15.7 33.4 38.3 30.0 27.1 22.2 Total asset turnover(x) Equity turnover(x) FY09 12.8 21.4 98 27 71 2.9 4.0 1.2 1.2 FY10 20.4 22.6 90 28 62 2.8 3.8 1.1 1.1 FY11E 16.3 19.2 72 23 49 3.9 4.1 1.2 1.2 FY12E 17.2 21.1 76 24 52 4.5 4.2 1.2 1.2
Growth metrics (%)

Year to March Revenues EBITDA EBIT PBT Net profit EPS

Year to March Net profit Depreciation Others Gross cash flow Operating cash flow Less: Capex Free cash flow
(INR mn)
FY09 925 466 (152) 1,238 1,831 944 887 FY10 1,709 436 (141) 2,003 569 1,434 347 1,086 FY11E 1,582 515 (107) 1,990 841 1,149 795 354 FY12E 1,968 611 (100) 2,479 707 1,772 800 972
Year to March Diluted EPS CEPS (INR) Diluted P/E (x) Price/BV(x) EV/Revenues (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward Dividend yield % (INR) Y-o-Y growth (%)
FY09 8.7 2.2 13.0 17.8 2.1 1.4 7.2 6.2 0.5
FY10 15.4 77.9 19.4 10.0 1.9 1.3 6.1 6.2 0.7
FY11E 14.2 (8.1) 18.9 10.9 1.7 1.1 6.0 4.5 1.6
FY12E 17.3 22.2 22.8 8.9 1.4 0.8 4.1 1.5
Less: Changes in wor. capital (593)
KPIT CUMMINS INFOSYSTEMS

Banking on REVOLO
Key growth drivers for KPIT include: a) Automotive Electronics (increasing spend in electronics with focus on green, small, smart, connected and efficient cars); b) SAP (integration of Sparta); c) MEDS (in line with the automotive electronics); d) Middleware (more outsourcing and interlinking of different systems); and e) Emerging markets (India, China, Korea, South Africa, Australia).
August 20, 2010
Reuters : KPIT.BO
Bloomberg : KPIT IN
KPIT has guided a growth of 25% for FY11 in revenues which will majorly come from the growth drivers mentioned above and with the performance in Q1, the company is fairly confident of achieving the same. KPIT has a vision of being a USD 500 mn (in revenue) company by FY13. This would include combination of organic and inorganic growth.
KPIT has identified 50 accounts from the current list of customers which will give it growth in the coming years. These are accounts where it practices global account management to mine further. Currently, it sees good sales traction in these accounts. These key customers include auto OEMs, auto tier 1 companies, Semicon and discrete manufacturing companies.
SHARE HOLDING PATTERN (%) Promoters* MFs, FIs & Banks FIIs Others * Promoters pledged shares (% of share in issue) : : : : : 30.2 16.3 8.0 45.6 9.3
Pricing is stable and there is no major upward or downward shift in prices for new contracts. However, for KPIT as the share of auto and SAP business increases average realizations across the company will go up as they enjoy a premium to current company average rates.
KPIT has seen an increase in the FP contracts and it expects that to continue for the new contracts also. 80% of its GBS business (which is 10% of the total business) is outcome based. It expects all new business in this area to be outcome based. Currently, its IP related revenue is just about 2% of the total revenue Financials
Year to March Revenues (INR mn) Revenue growth (%) EBITDA (INR mn) Net profit (INR mn) Shares outstanding (mn) Diluted EPS (INR) EPS growth (%) Diluted P/E (x) EV/EBITDA (x) ROAE (%) FY07 4,637 45.7 715 501 93.0 6.4 76.0 27.9 19.4 33.0 FY08 6,005 29.5 923 525 78 6.6 3.1 27.1 15.3 22.7 FY09 7,627 27.0 1,415 658 78 8.4 27.2 21.3 9.5 30.8 FY10 7,316 (4.1) 1,614 857 81 10.6 26.0 16.9 8.3 31.2 Kunal Sangoi +91-22-6623 3370 kunal.sangoi@edelcap.com Ganesh Duvvuri +91-22-4040 7586 ganesh.duvvuri@edelcap.com

and expects it to go up significantly in the coming years. Revolo is a significant step in this direction. It targets at least 10% of the total revenues to be IP based in FY13.
KPIT targets to add 1,100-1,200 net people in FY11. It has already added 400+ net people in Q1 FY11. 50% of the gross hiring will be constituted of fresh graduates. The attrition in the last 2 quarters has risen but it is not out of control. Barring the exception of FY10, KPIT has witnessed attrition in the range of 18-20%, which it believes to reduce in H2FY11. It sees supply constraint in specific areas like ERP functional consultants.
Attrition is keenly monitored in its top block performers and the key employees (about 25-30%) where the attrition is about 8%. It has various employee centric programs like certifications, trainings, innovation opportunities, quarterly promotions, technical growth paths among others for employee career path which is the key to employee satisfaction. The company has given salary increments effective April 01, 2010, and does not foresee any further increments in FY11.

The biggest lever for KPIT is fresher hiring which will help it improve margins in H2. Offshore utilization (68% in Q1), space utilization (it will not add space for the 25% growth in FY10), revenue growth (25% in FY2011) and more IP led revenues would be some of the levers to improve operating margins. However in FY11, its profits will grow only by 5% against a 25% revenue growth due to lower forex realized rate, salary increments and planned investments in front end, practices and R&D.
M&A has been an important factor of KPITs growth strategy. It has done seven deals till date and expects to continue the inorganic growth path. The strategic objectives for an M&A for KPIT are technological advancement and/or entry into a new geography and/or acquisition of an anchor customer.

Main deployment of cash would remain M&A deals for KPIT.
26
Company description
Evolved out of an accounting and tax advisory business, KPIT Infosystems was founded in 1991 as an IT services company. The company began operations serving the manufacturing and BFSI clientele; however, post its merger with Cummins Infotech (Indian software-development unit of US diesel engine maker Cummins Inc) in 2002; KPIT Cummins was formed and started deepening its presence in the global automotive space. Over the years KPIT acquired clients organically as well as inorganically and leveraged on these ties to develop expertise in broader areas to pursue its gotomarket strategy. Today, KPIT has transformed into a niche IT player with a competitive edge over larger players in its area of expertise-auto and allied manufacturing space. KPITs LTM revenues stood at INR 7.6 bn (USD 164mn) and it employees over 5,300 people. It derives almost 80% of its revenues from the manufacturing vertical and about two-thirds from America.
Key highlights
(a) Full year consolidation of Sparta (acquired in October 2009) to fuel growth in FY11. Sparta acquisition strengthens KPITs SAP implementation capability, particularly in energy and utilities vertical and enhances stature in enterprise application space. (b) During Q1FY11, the company made a technology announcement about the launch of REVOLO- innovative, intelligent, plug-in, parallel hybrid technology solution for automobiles and entered into a 50:50 JV with Bharat Forge to manufacture and market the same. (c) After six quarters of sequential decline, Cummins (top client) showed positive revenue momentum with 2.6% growth in Q1FY11. The company maintained its FY11 growth outlook at 25% for revenue and atleast 5% jump in net profits.
Key risks
a) b) c) Double dip recession in its major market US and prolonged slowdown in Europe. Appreciation of INR against USD, EUR, and GBP. Inadequate availability of manpower due to high attrition across industry.
27

Income statement
Year to March Revenues Cost of revenues Gross profit S&M expenses G&A expenses Total SG & A expenses EBITDA Depreciation & amortization EBIT Interest expense Other income Profit before tax Ta x Core profit Profit after tax Min. int. & others - paid/(recd.) Net profit after minority int. Shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) diluted CEPS (INR) Dividend per share Dividend (%) Dividend pay out (%) FY07 4,637 2,884 1,753 512 526 1,038 715 121 594 45 6 555 52 503 503 2 501 74 6.7 78 6.4 8.4 0.8 40.0 13.5 FY08 6,005 3,730 2,275 577 775 1,352 923 255 668 75 9 602 76 526 526 1 525 78 6.7 79 6.6 10.0 0.5 45.0 7.8
(INR mn)
FY09 7,627 4,467 3,160 688 1,057 1,745 1,415 436 978 45 (155) 778 120 658 658 0 658 78 8.4 78 8.4 14.0 2.5 50.0 33.7 FY10 7,316 4,091 3,226 664 948 1,611 1,614 308 1,306 27 (253) 1,026 169 857 857 0 857 78 10.9 81 10.6 14.9 2.5 50.0 26.1
Balance sheet
As on 31st March Equity share capital Share premium account Reserves Total shareholders funds Borrowings Minority interest Deferred tax liability Sources of funds Goodwill & other intan. asset Gross fixed assets Less: Accu. depreciation Net fixed assets Capital WIP Investments Cash & bank balances Debtors Loans and advances Total current assets Sundry creditors Provisions Total current liabilities Working capital Application of funds BV per share (INR) FY07 175 578 1,238 1,990 1,223 5 10 3,228 0 1,970 379 1,591 181 49 625 1,102 345 2,072 506 159 665 1,407 3,228 27 FY08 184 588 1,866 2,638 865 5 42 3,550 0 2,102 629 1,473 207 1 740 1,432 530 2,702 546 287 833 1,868 3,550 34
(INR mn)
FY09 156 598 877 1,631 1,185 3 60 2,878 285 2,205 1,042 1,163 348 0 1,671 1,776 742 4,189 2,696 410 3,106 1,083 2,878 21 FY10 174 608 3,089 3,871 1,108 0 51 5,030 950 2,514 1,278 1,236 286 747 1,052 1,388 677 3,117 1,076 230 1,306 1,811 5,030 49

Ratios
Year to March ROAE (%) ROACE (%) Debtors (days) Payable (days) Cash conversion cycle Current ratio Debt/EBITDA Interest cover (x) Fixed assets turnover (x) Total asset turnover(x) Equity turnover(x) Debt/Equity (x) FY07 29.4 21.7 78 31 46 3.1 1.7 13.3 4.1 1.7 2.7 0.6 FY08 22.7 19.9 77 32 45 3.2 0.9 8.9 3.9 1.8 2.6 0.3 FY09 30.8 30.4 77 78 (1) 1.3 0.8 21.5 5.8 2.4 3.6 0.7 FY10 31.2 36.5 79 94 (15) 2.4 0.7 47.6 6.1 1.9 2.7 0.3
Growth metrics (%)

Year to March Revenues EBITDA EBIT PBT Net profit EPS FY07 45.7 55.7 57.3 54.7 54.5 76.0 FY08 29.5 29.1 12.5 8.4 4.5 3.1 FY09 27.0 53.3 46.4 29.3 25.2 27.2 FY10 (4.1) 14.1 33.5 32.0 30.3 26.0

(INR mn)
FY07 501 121 66 689 801 916 (114) FY08 525 255 52 831 390 441 355 85 FY09 658 436 (14) 1,080 (126) 1,206 496 709 FY10 857 308 80 1,245 169 1,076 905 171
Year to March Diluted EPS CEPS (INR) Diluted P/E (x) Price/BV(x) EV/Revenues (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward Dividend yield % (INR) Y-o-Y growth (%)
FY07 6.4 76.0 8.4 27.9 6.7 3.0 19.4 15.1 0.4
FY08 6.6 3.1 10.0 27.1 5.3 2.4 15.3 10.0 0.3
FY09 8.4 27.2 14.0 21.3 8.6 1.8 9.5 8.3 1.4
FY10 10.6 26.0 14.9 16.9 3.6 1.8 8.3 0.0 1.4
Less:Changes in wor. capital (113)
MINDTREE
Future holds promise
MindTree has organized itself into 7 growth engines which will drive growth. Some of the areas such as testing is where it has now gained critical mass. IMTS has shown good traction and is expected to continue this trend. The company focuses on a few verticals where it has established a good client base and skills. Some of the significant names that it added are expected to show traction and will drive growth in the coming years.
August 20, 2010
Reuters : MINT.BO
Bloomberg : MTCL IN
MindTree has stopped giving guidance; however, it has shared that for FY11 it will grow faster than the industry growth of 13-15% (stated by NASSCOM) for the services business. Long-term vision for the company is to reach USD 1 bn by 2014.
By and large, growth indications are positive and the company has invested in key client facing roles which will help it mine these accounts further. Current focus of MindTree remains servicing existing verticals while expanding the service portfolio in existing clients. Penetration of Infrastructure management and testing services (IMTS) will help MindTree increase the wallet share.
The company has not seen price increases in the past 1 -2 years, the current indications are that it will have some price increases as part of its growth for the current year. This is expected in H2 of FY11. It works on pricing models that meet customer requirements as well as which are feasible.
RELATIVE PERFORMANCE (%) Sensex 1 month 3 months 12 months 3.2 11.7 22.9 Stock (1.7) (1.7) 9.9 Stock over Sensex (5.0) (13.4) (13.0)
5. What are the pricing models you are seeing in new deals - FP, TM, outcome based, IP-related. Is there any major IP-related revenue you are expecting in the next couple of years?
MindTree follows T&M-based pricing model for two-third of its revenue book, while balance is fixed bid. In some of its businesses such as IMTS, it can even be an output based pricing or fixed monthly pricing.
Financials
Year to March Revenues (INR mn) Growth (%) EBITDA (INR mn) Net profit (INR mn) Shares outstanding (mn) - diluted Diluted EPS (INR) EPS growth (%) Diluted P/E (x) EV/EBITDA (x) ROAE (%) FY07 5,904 31.5 1,096 901 33 27.7 32.2 19.1 12.6 31.9 FY08 7,338 24.3 1,258 1,042 39 26.8 (3.4) 19.8 15.0 21.5 FY09 12,375 68.6 3,309 549 38 12.9 (51.6) 40.9 6.1 9.1 FY10 12,960 4.7 2,456 2,156 41 52.6 306.8 10.1 7.8 35.3 Kunal Sangoi +91-22-6623 3370 kunal.sangoi@edelcap.com Ganesh Duvvuri +91-22-4040 7586 ganesh.duvvuri@edelcap.com

MindTree believes that the increase in the people movement is a temporary phenomenon in the industry and will settle down in two quarters time frame.
MindTree believes that the increase in the people movement is a temporary phenomenon in the industry and will settle down in two quarters time frame.

Growth and pricing are key margin improvement levers. It expects pricing to move up in H2 of the current fiscal year. For FY11, the company expects to sustain operating margins in services business at FY10 levels of 19%.
9. How important is M&A in your growth strategy and is there a specific M&A agenda that you have?
Traditionally, 20-25% of revenues for MindTree have come from acquisitions. MindTrees philosophy of acquisition is centered on expanding domain and key areas are: a) IMTS and b) SAP practice. It would look at revenue size in USD 50-100 mn range for these acquisitions.

MindTree has cash of about USD 30 mn and no debt. Further, if it goes for acquisition or any major expansions, it may need to raise capital. In that regard, the company has already passed an enabling resolution to raise up to USD 100 mn with options across instruments.
30
Company description
MindTree is an IT solutions company specializing in IT services, R&D services and software product engineering services. It was started in 1999 by a diverse team of 10 professionals who came from Cambridge Technology Partners, Lucent Technologies and Wipro and achieved USD 100 mn of revenues in fiscal 2006, the fastest Indian IT company to achieve the target. It is known for its focus on human capital management and has multiple accolades to its credit by various industry surveys. Its client roaster includes marquee names such as AIG, Microsoft, AVIS Budget, United Technologies, Volvo, and Symantec, among others. MindTree is the youngest company in the world to combine Level 5 in both Capability Maturity Model Integration (CMMi) and People Capability Maturity Model (PCMM). Its LTM revenues stood at INR 13.4 bn (USD 287 mn) and employees over 9,000 people.
Key highlights
(a) Investment in products business continues to be an overhang. MindTree during Q1FY11 spent only USD 1 mn against guided USD 4-5 mn and expects to spend higher in forthcoming quarters. With this investment in mobile handset business the operating margin recovery will lag. (b) MindTree believes it is on track for the first IP sale in H2 of fiscal 2011. Currently, the prototype is ready and the phones business team is in discussions with prospective clients. (c) Weaker margin performance in Q1FY11. Recovery from current 12% EBITDA margin level will require significant volume growth. (d) Well poised in services business to capture high quarterly growth due to high proportion of discretionary services; however, R&D services declined in Q1FY11.
Key risks
a) b) c) Double dip recession in its major market US and prolonged slowdown in Europe. Appreciation of INR against USD, EUR, and GBP. Inadequate availability of manpower due to high attrition across the industry.
31

Income statement
Year to March Revenues Cost of revenues Gross profit G&A expenses Total SG&A expenses EBITDA Depreciation & amortization EBIT Interest expense Other income Foreign exchange gain/(loss) Profit before tax Ta x Core profit Profit after tax Net profit after minority int. Shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) diluted CEPS (INR) Dividend per share Dividend (%) Dividend pay out (%) FY07 5,904 3,509 2,395 1,298 1,298 1,096 244 852 30 69 5 896 (5) 901 901 901 31 29.0 33 27.7 35.4 2.4 20.9 8.8 FY08 7,338 4,678 2,661 1,403 1,403 1,258 349 909 59 238 40 1,127 85 1,042 1,042 1,042 38 27.7 39 26.8 35.8 2.3 23.4 8.5
(INR mn)
FY09 12,375 6,968 5,407 2,097 2,097 3,309 570 2,740 162 115 (2,089) 604 67 537 591 549 38 13.1 38 12.9 26.3 1.2 11.7 8.1 FY10 12,960 7,982 4,977 2,522 2,522 2,456 652 1,804 27 96 673 2,546 391 2,156 2,156 2,156 39 54.7 41 52.6 71.3 3.4 35.0 6.4
Balance sheet
As on 31st March Equity share capital Share premium account Reserves Total shareholders funds Borrowings Minority interest Sources of funds Goodwill & oth. intang. asset Gross fixed assets Less: Accu. depreciation Net fixed assets Capital WIP Investments Deferred tax asset Cash & bank balances Debtors Loans and advances Total current assets Sundry creditors Provisions Total current liabilities Working capital Application of funds BV per share (BV) (INR) FY07 378 2,750 1,227 4,355 264 0 4,619 0 1,368 800 568 132 2,141 46 768 1,172 830 2,770 862 176 1,038 1,732 4,619 134 FY08 379 2,761 2,191 5,331 919 0 6,250 214 3,582 1,189 2,393 233 1,395 90 553 1,756 949 3,258 1,162 170 1,332 1,926 6,250 137
(INR mn)
FY09 380 2,552 2,580 5,513 1,394 328 7,234 1,460 4,941 2,110 2,831 130 1,013 190 488 2,792 1,411 4,691 2,858 224 3,082 1,609 7,234 144 FY10 395 2,904 3,407 6,706 31 0 6,737 154 5,145 2,533 2,612 247 1,272 214 523 2,370 1,948 4,841 2,111 492 2,604 2,238 6,737 164

Ratios
Year to March ROAE (%) ROACE (%) Debtors (days) Payable (days) Cash conversion cycle Current ratio Fixed assets turnover (x) Total asset turnover(x) Equity turnover(x) FY07 31.9 42.9 70 50 21 2.7 12.7 0.4 2.1 FY08 21.5 24.8 73 50 22 2.4 5.0 0.3 1.5 FY09 9.1 49.5 67 59 9 1.5 4.7 0.5 2.3 FY10 35.3 30.9 73 70 5 1.9 4.8 0.5 2.1
Growth metrics (%)

Year to March Revenues EBITDA EBIT PBT Net profit EPS FY07 31.5 41.2 50.3 54.4 59.5 53.3 FY08 24.3 14.7 6.6 25.9 15.7 (3.4) FY09 68.6 163.1 201.5 (46.4) (48.5) (51.6) FY10 4.7 (25.8) (34.2) 321.6 301.7 306.8
Cash flow statement

Year to March Net profit Depreciation Deferred tax Others Gross cash flow Less:Changes in wor. capital Operating cash flow Less: Capex Free cash flow
(INR mn)
FY07 901 244 (46) (156) 943 123 820 535 285 FY08 1,042 349 (43) (23) 1,324 408 916 2,315 (1,399) FY09 549 570 (68) 496 1,547 (251) 1,798 1,257 541 FY10 2,156 652 0 (44) 2,763 593 2,170 320 1,849
Year to March Diluted EPS CEPS (INR) Diluted P/E (x) Price/BV(x) EV/Revenues (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward Dividend yield % (INR) Y-o-Y growth (%) FY07 27.7 53.3 35.4 19.1 4.0 2.3 12.6 11.0 0.5 FY08 26.8 (3.4) 35.8 19.8 3.9 2.6 15.0 5.7 0.4 FY09 12.9 (51.6) 26.3 40.9 3.7 1.6 6.1 8.2 0.2 0.6 FY10 52.6 306.8 71.3 10.1 3.2 1.5 7.8
PATNI COMPUTER
Chasing big deals
1. Can you outline the key growth drivers seen in your business and industry as such?
Patnis growth has lagged that of peers since it lacks practice in banking and financial services vertical, which is the largest spender on IT; have presence only in insurance. Also, the company does not have IMS offering and lacks scale in BPO practice. Thus, there are gaps in service offerings. In insurance, Patni expects growth to be driven by geographical expansion and foray into healthcare insurance.
August 20, 2010
Reuters : PTNI.BO
Bloomberg : PATNI IN
Historically, Patnis growth has lagged the industry rate due to gaps in business. It has issued revenue growth guidance of 5.6% Q-o-Q for Q3CY10. It expects to grow revenues by 3-4% Q-o-Q over the next few quarters.
MARKET DATA CMP 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : INR 532 624 / 385 129.9
: 69.1 / 1,482.2 812.3
Patnis top 10 clients constitute 49% of revenues and the share has remained stable over the past couple of years. Top client contributes USD 80 mn p.a. to revenues. The other four clients in top 5 average about USD 40 mn p.a. But the average account size in the top 5-10 clients group is only about USD 17 mn. This is the category of clients where it expects to increse wallet share by cross selling IMS and BPO services.
Although, rack rates are stable, Patni is winning more bundled deals (multiservice deals) and hence expects realizations to rise.
RELATIVE PERFORMANCE (%) Sensex 1 month 3 months 12 months 3.2 11.7 22.9 Stock 2.9 (3.4) 33.0 Stock over Sensex (0.3) (15.1) 10.1
5. What are the pricing models you are seeing in new deals. FP, TM, outcome based, IP-related. Is there any major IP-related revenue you are expecting in the next couple of years
Patni derives 43% of revenues from fixed price contracts. The recent acquisition of CHCS provides capability to provide content to schools and colleges through the ASP model. It also plans to develop new platforms for schools and colleges, which will help it generate non-linear revenues.
Financials
Year to December Revenues (INR mn) Rev. growth (%) EBITDA (INR mn) Net profit (INR mn) Share outstanding (mn) EPS (INR) EPS growth (%) Diluted P/E (x) EV/EBITDA (x) ROE (%) CY08 31,170 15.8 4,899 4,380 136 32 (6.7) 16.5 11.7 15.7 CY09 31,620 1.4 6,090 5,723 128 44 36.2 12.1 7.8 17.9 CY10E 31,710 0.3 6,032 5,351 130 40 (9.0) 13.3 7.4 14.0 CY11E 35,102 10.7 6,344 4,946 130 37 (8.3) 14.5 6.5 11.5 Ganesh Duvvuri +91-22-4040 7586 ganesh.duvvuri@edelcap.com Kunal Sangoi +91-22-6623 3370 kunal.sangoi@edelcap.com

Patni had to forego USD 5-6 mn revenues due to supply constraints in Q2CY10. Patni is refraining from participating in the practive of hiring laterals at disproportionately higher cost. It plans to increase headcount by 2,500-3,000 in CY10 on an employee base of about 14,000.
It adopted a conscious strategy of not hiking salaries disproportionately over that of the industry, even though attrition levels jumped as it is not a sustainable strategy. The company hiked offshore salaries by 12% for CY10 and expects attrition to stabilize in the next couple of quarters.
8. What according to you are the levers to improvise the operating margins?
Pricing, utilisation, and cost control are the key levers to counter salary hikes. It expects EBIT margins to remain stable at 16-17%, same as in CY09.
Patni believes that acquisition has become very important as size is becoming critical to win larger deals in the USD 30 mn revenue range. In the next six months it will have to acquire as scale is becoming crucial. Inorganic initiative would be along selective services lines like product engineering services and BPO.

Patni had USD 470 mn cash and equivalents at the end of June 30, 2010. It recently announced a special interim dividend of INR 63 per share i.e., USD 180 mn payout and plans to utilize the remaining cash of USD 280 mn for acquisitions.
34
Company description
Incorporated in 1978, Patni Computers (Patni) is one of the oldest and sixth-largest IT solution providers in India. The company provides IT services, mainly focused on banking, financial services, manufacturing and telecom verticals. Its service gamut includes ADM, enterprise solutions, embedded technology service, and product engineering services, among others, catering to over 260 clients in various verticals. The companys past twelve months (TTM) revenue stood at INR 31.4 bn (USD 677 mn) and it employs 14,893 people.
Investment theme
Over the past year, Patni has transformed into a professionally managed company from owner managed. It struggled in the past with a multitude of factors like lack of management focus, attrition (highest in the industry) and low growth visibility from top clients. However, with a new management team in place, improvement on the demand side and healthy cash position, Patni is heading in the right direction. Focus on micro-verticals, APAC geography and traction from Middle East are likely to yield results in 2-3 quarters. Further, with proven cost management during the downturn, the company has proved its ability to sustain margins.
Key risks
Chasing large deals, which could be margin dilutive; likelihood of tax rate jumping next year due to limited SEZ presence; and acquisition integration risk as the company plans to pursue inorganic growth opportunities aggressively.
35

Income statement
Year to December Revenues Cost of revenues Gross profit Total SG&A expenses EBITDA Depreciation & amortization EBIT Interest expense Other income Profit before tax Ta x Core profit Profit after tax Net pro.after minority int. Shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) diluted CEPS (INR) Dividend per share Dividend (%) Dividend pay out (%) CY08 31,170 18,329 12,841 7,942 4,899 782 4,117 117 1,342 4,785 404 4,380 4,380 4,380 136 32.3 136 32.3 38.1 2.8 141.8 8.8 CY09 31,620 19,555 12,065 5,976 6,090 782 5,307 1,145 (488) 5,965 241 5,723 5,723 5,723 128 44.6 130 43.9 50.7 3.0 150.0 6.7
(INR mn)
CY10E 31,710 19,527 12,184 6,152 6,032 784 5,248 861 458 6,567 1,215 5,351 5,351 5,351 130 41.3 134 40.0 47.3 2.4 120.0 5.8 CY11E 35,102 21,938 13,163 6,819 6,344 860 5,484 1,200 6,684 1,738 4,946 4,946 4,946 130 38.0 135 36.7 44.6 2.4 120.0 6.3
Balance sheet
As on 30th December Equity share capital Share premium account Reserves Total shareholders funds Borrowings Deferred tax liability Sources of funds Goodwill & other intang. as. Gross fixed assets Less: Accu. depreciation Net fixed assets Capital WIP Investments Deferred tax asset Cash & bank balances Debtors Loans and advances Others Total current assets Sundry creditors Provisions Total current liabilities Working capital Application of funds BV per share (BV) (INR) CY08 256 8,625 19,519 28,401 18 134 28,552 4,907 11,652 5,168 6,484 2,502 11,771 945 2,932 5,451 2,007 1,495 11,884 6,328 3,613 9,941 1,943 28,552 209 CY09 258 8,896 26,355 35,509 9 67 35,585 4,765 13,127 6,195 6,932 1,337 17,752 893 2,953 5,090 2,561 918 11,522 4,650 2,966 7,616 3,906 35,585 273
(INR mn)
CY10E 259 9,116 31,346 40,721 67 40,788 4,765 14,034 6,978 7,056 1,537 18,500 893 5,671 6,255 3,120 1,102 16,148 4,883 3,228 8,111 8,037 40,788 304 CY11E 260 9,347 35,927 45,534 67 45,600 4,765 14,934 7,838 7,096 1,737 19,000 893 8,855 6,732 3,750 1,322 20,659 5,127 3,422 8,549 12,109 45,600 338
Foreign exchange gain/(loss) (557)

Year to December Cost of revenues Gross margin SG&A expenses EBITDA margin EBIT margin Net profit margins CY08 58.8 41.2 25.5 15.7 13.2 14.1 CY09 61.8 38.2 18.9 19.3 16.8 18.1 CY10E 61.6 38.4 19.4 19.0 16.5 16.9 CY11E 62.5 37.5 19.4 18.1 15.6 14.1
Ratios
Year to December ROAE (%) ROACE (%) Debtors (days) Payable (days) Cash conversion cycle Current ratio CY08 15.7 25.2 63 62 1 1.2 (0.1) 4.9 0.3 1.1 CY09 17.9 30.7 61 63 (3) 1.5 0.0 4.7 0.2 1.0 CY10E 14.0 26.2 65 55 10 2.0 0.0 4.5 0.2 0.8 CY11E 11.5 22.4 68 52 15 2.4 0.0 5.0 0.2 0.8
Growth metrics (%)

Year to December Revenues EBITDA EBIT PBT Net profit EPS CY08 15.8 (5.8) (8.0) (18.1) (9.4) (6.7) CY09 1.4 24.3 28.9 24.7 30.7 36.2 CY10E 0.3 (1.0) (1.1) 10.1 (6.5) (9.0) CY11E 10.7 5.2 4.5 1.8 (7.6) (8.3)
Interest cover (x) Fixed assets turnover (x) Total asset turnover(x) Equity turnover(x)

Year to December Net profit Depreciation Others Gross cash flow Operating cash flow Less: Capex Free cash flow
(INR mn)
CY08 4,380 782 (1,753) 3,410 5,814 1,737 4,077 CY09 5,723 782 1,561 8,067 1,942 6,125 310 5,815 CY10E 5,351 784 (771) 5,364 1,413 3,951 1,107 2,844 CY11E 4,946 860 (1,201) 4,605 889 3,716 1,100 2,616
Year to December Diluted EPS CEPS (INR) Diluted P/E (x) Price/BV(x) EV/Revenues (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward Dividend yield % (INR) Y-o-Y growth (%)
CY08 32.3 (6.7) 38.1 16.5 2.5 1.8 11.7 9.4 0.5
CY09 43.9 36.2 50.7 12.1 2.0 1.5 7.8 7.9 0.6
CY10E 40.0 (9.0) 47.3 13.3 1.7 1.4 7.4 7.1 0.5
CY11E 36.7 (8.3) 44.6 14.5 1.6 1.2 6.5 0.5
Less:Changes in wor. capital(2,404)
SASKEN COMMUNICATION TECHNOLOGIES

Value play
The key growth drivers for Sasken will be: a) increasing trend of R&D services outsourcing: Addressable outsourced embedded systems R&D opportunity is expected to double by 2015 to USD 85 bn (Source: Nasscom reports 2010 ). Outsourcing of applications, user interface solutions, and testing of different elements at unit, system and field testing level will continue to grow, as OEMs and operators look to move activities to third parties located in low cost locations such as India and China. It has an established presence in outsourced R&D services in India, and is looking to capitalize on the opportunity; b) increasing wallet share in existing clients: Sasken will focus on increasing share of wallet within its existing and chosen new customers by improving the visibility at customer headquarters and by providing a global resource base. It has already opened new offices in Japan, Korea, US, and China, to gain closer headquarters relationship. In addition, it has also recruited leaders to penetrate Tier 1 customer base as it has a presence with almost all the Tier 1 names in the telecommunication space; c) scale-up of adjacent verticals: Saskens acquisition of Ingenient will drive its forays into adjacencies such as consumer electronics and the auto vertical. It also plan s to capitalize on its success in satellite segment and venture deeper into the satellite and defence space.
August 20, 2010
Reuters : SKCT.BO
Bloomberg : SACT IN
Saskens goal is to be one of the top 5 global players in the R&D services outsourcing space and in pursuit of this strategy its medium term goal is to grow in revenues to USD 250-300 mn. Its FY10 total revenues stood at USD 122 mn.
RELATIVE PERFORMANCE (%) Sensex 1 month 3 months 12 months 3.2 11.7 22.9 Stock 0.7 4.6 19.7 Stock over Sensex (2.5) (7.2) (3.3)
Saskens customers are pursuing strategies to outsource to low cost locations and in response, the company is putting in place a multi site global delivery model. Further, to gain wallet share from top customers the company has hired client partners who have significant experience at senior management levels with our key customers.
The reduction in prices seen post global melt down has been mitigated by price increases in the current year. Saskens medium term pricing strategy in services Financials
Year to March Revenues (INR mn) Revenue growth (%) EBITDA (INR mn) Net profit (INR mn) Shares outstanding (mn) Diluted EPS (INR) EPS growth (%) Diluted P/E (x) EV/EBITDA (x) FY07 4,751 54.2 755 441 29 15.5 74.3 13.0 7.9 FY08 5,702 20.0 792 324 29 11.3 (26.6) 17.7 7.3 FY09 6,978 22.4 1,638 423 27 15.6 37.6 12.9 2.9 FY10 5,742 (17.7) 1,020 755 27 26.6 70.6 7.6 3.7 Kunal Sangoi +91-22-6623 3370 kunal.sangoi@edelcap.com Ganesh Duvvuri +91-22-4040 7586 ganesh.duvvuri@edelcap.com

is to obtain annual price increases that will cover for inflation and exchange rate related increase in costs. It has increased FPP based revenues over last two years (20% now), and is open to increasing further. Further, it also plans to improve its realisations by leveraging its product capability by foraying into adjacencies as mentioned above that can provide higher margins.
Incrementally, greater number of projects is being taken with FP as seen over the past two years. This is expected to continue with bulk of this coming from adjacencies. Products business has moderate royalties which is not expected to grow significantly.
It has beefed up its training engine (e.g., the number of people imparting training has been increased 5 fold). In addition, it is also tying up with premier technology institutions in the country to impart domain-specific training and align its recruitment to trained output from institutes. For the current year, Sasken plans to add 750 people on a net basis.
Sasken is currently focusing on areas of concern i.e. a) job rotation programmes in line with employee career aspirations; b) increasing the employee touch time and internal communication; and c) transparent and clear salary revision methodology. Also, Sasken has a training programme for managers focused towards enhancing people management skills. The benefit of these initiatives is expected to flow over the next three quarters and bring down attrition.

Margin levers include: a) increasing operational efficiencies in high cost locations; b) improving business mix in favor of higher margin; c) increase in offshore revenue percentage; d) improving utilization; e) pyramid improvement with higher fresher intake (this is expected to result in reduction in Total Relevant Experience (TRE) of the workforce, and consequently reduce average compensation cost); and f) increase in billing rates from some customers who follow an April or June cycle.
M&A will be driven by Saskens need to penetrate into newer adjacencies and increasing share of wallet with chosen strategic customers. The company believes M&As are typically expensive avenues for growth, and all such opportunities will be considered only based on profit margin accretion.

Saskens current cash position covers four months expenses and it is comfortable with this cash level. It believes that it should hold cash that will cover for 2 to 4 months of expenses. Further, it will continue to pursue current dividend policy. Further, cash will also be used to reduce the current debt.
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Company description
Sasken Communication Technologies (Sasken) is a communication software design and development company, focused on the wireless and broadband software space. It offers a hybrid model of services and products, and works with network OEMs, semiconductor vendors, terminal devices OEMs, and operators across the world. It provides embedded communication software across the entire communication value chain, application software services for service providers, and also works in planning, deploying and managing wireless networks. The companys past twelve months (TTM) revenues stood at INR 5.9 bn (USD 129.1 mn) and it employs 3,051 people at its offices in India, China, Finland, Germany, Japan, Mexico, Sweden, UK, and the US.
Key highlights
Increasing wallet share in large customers: Sasken has a foothold in most tier-1 names in the handset and semiconductor segment, though not necessarily high wallet share. The companys strategy, going forward, is to have strong focus on limited set of customers to increase its wallet share. Expanding competencies to adjacent verticals: Sasken, last year, entered the consumer electronics space with asset acquisition of Ingenient Technologies. This acquisition gives it access to customers like Kodak, Canon, JVC, Samsung Electronics, LG Electronics, Toshiba, etc. Expanding management bandwidth to achieve long-term goal: The company has recently strengthened its management bandwidth by adding: (a) Head HR (from Infosys); (b) VP Sales from Qualcomm to head the Qualcomm relationship and semiconductor relationships; and (c) Senior in Finance from Intel to look at captive buy-outs/deals. This will sharpen the focus in respective areas and generate traction for the business.
Key risks
Appreciation of the INR against USD; non-availability of adequate trained resources due to high attrition, which could limit the companys growth; and cyclical nature of its end markets.
39

Income statement
Year to March Revenues Cost of revenues Gross profit S&M expenses Total SG&A expenses EBITDA Depreciation & amortization EBIT Interest expense Other income Foreign exchange gain/(loss) Others Profit before tax Ta x Core profit Profit after tax Net profit after minority int. Shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) diluted CEPS (INR) Dividend per share Dividend (%) Dividend pay out (%) FY07 4,751 3,158 1,593 838 838 755 266 489 45 98 542 101 441 441 441 29 15.5 29 15.5 24.8 3.4 0.3 0.2 FY08 5,702 3,956 1,746 954 954 792 418 374 40 54 180 70 498 174 324 324 324 29 11.3 29 11.3 26.0 4.0 0.4 0.4
(INR mn)
FY09 6,978 4,411 2,567 929 929 1,638 374 1,264 38 60 (426) 152 708 285 423 423 423 27 15.6 27 15.6 29.4 4.0 0.4 0.3 FY10 5,742 3,993 1,749 729 729 1,020 318 702 26 85 168 929 174 755 755 755 27 28.0 28 26.6 39.7 6.0 0.6 0.3
Balance sheet
As on 31st March Equity share capital Share premium account Reserves Total shareholders funds Borrowings Deferred tax liability Sources of funds Gross fixed assets Less: Accum. depreciation Net fixed assets Capital WIP Investments Cash & bank balances Debtors Inventories Loans and advances Total current assets Sundry creditors Provisions Other liabilities Total current liabilities Working capital Application of funds Book value per share (INR) FY07 285 2,904 1,031 4,220 916 (6) 5,130 4,509 1,230 3,278 50 368 349 1,108 8 747 2,212 502 276 0 778 1,434 5,130 148 FY08 286 2,916 1,387 4,588 876 (13) 5,452 4,803 1,526 3,278 7 266 569 1,333 31 866 2,799 313 417 168 898 1,901 5,452 161
(INR mn)
FY09 271 2,916 1,642 4,829 637 (22) 5,445 4,991 1,827 3,164 34 202 1,172 1,390 10 849 3,420 772 430 173 1,375 2,045 5,445 178 FY10 284 1,458 3,494 5,236 341 (40) 5,536 4,835 1,958 2,878 15 1,591 373 978 28 844 2,223 644 393 134 1,171 1,052 5,536 194

Year to March Cost of revenues Gross margin S&M expenses SG&A expenses EBITDA margin EBIT margin Net profit margins FY07 66.5 33.5 17.6 17.6 15.9 10.3 9.3 FY08 69.4 30.6 16.7 16.7 13.9 6.6 5.7 FY09 63.2 36.8 13.3 13.3 23.5 18.1 6.1 FY10 69.5 30.5 12.7 12.7 17.8 12.2 13.2
Ratios
Year to March ROAE (%) ROACE (%) Debtors (days) Payable (days) Cash conversion cycle Current ratio Interest cover (x) Fixed assets turnover (x) Total asset turnover(x) Equity turnover(x) Debt/Equity (x) FY07 10.9 14.5 68 29 39 2.8 11 2.2 0.3 1.2 0.2 FY08 7.4 7.5 78 26 52 3.1 9 1.7 0.3 1.3 0.2 FY09 9.0 24.2 71 28 43 2.5 33 2.2 0.3 1.5 0.1 FY10 15.0 15.3 75 45 30 1.9 27 1.9 0.3 1.1 0.1
Growth metrics (%)

Year to March Revenues EBITDA EBIT PBT Net profit EPS FY07 54.2 56.7 61.4 82.0 92.5 74.3 FY08 20.0 4.9 (23.4) (8.1) (26.6) (26.6) FY09 22.4 106.9 237.9 42.2 30.6 37.6 FY10 (17.7) (37.7) (44.4) 31.2 78.5 70.6
Cash flow statement

Year to March Net profit Depreciation Others Gross cash flow Less:Changes in wkg. cap. Operating cash flow Less: Capex Free cash flow
40
(INR mn)
FY07 441 266 (94) 613 325 288 2399 (2,110) FY08 324 418 161 903 308 595 242 353 FY09 423 374 418 1,215 (113) 1,329 279 1,050 FY10 755 318 (412) 661 (500) 1,161 208 953
Year to March Diluted EPS CEPS (INR) Diluted P/E (x) Price/BV(x) EV/Revenues (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward (INR) Y-o-Y growth (%) FY07 15.5 74.3 24.8 13.0 1.4 1.2 7.9 7.5 FY08 11.3 (26.6) 26.0 17.7 1.3 1.0 7.3 3.5 FY09 15.6 37.6 29.4 12.9 1.1 0.7 2.9 4.6 FY10 26.6 70.6 39.7 7.6 1.0 0.7 3.7
TAKE SOLUTIONS
Winning large deals
TAKE focuses on Life Sciences & Healthcare industry (LS) and Supply Chain Management (SCM). The key growth drivers are: (a) selling more services to existing clients. Currently, TAKE generates 22% of its revenues from the LS practice as licence fees and 59% from services. Thus, for every Dollar of licence fee, TAKE generates about USD 2.0-2.5 of services revenues. It expects to increase this to USD 4 by offering more services like SAS (Statistical Analysis System) programming, biostatistics, clinical data standardization and document & submission publishing; (b) launch six new products across LS and SCM over the next two years; and (c) enter into new geographies like Europe where it has no presence currently, but expects to increase revenue share of Europe to 20% over the next three years.
August 20, 2010
Reuters : TAKE.BO
Bloomberg : TAKE IN
Pursuing 40% CAGR in revenues. TAKEs revenues grew 35% Y-o-Y and 10% Qo-Q in Q1FY11. Growth will be driven by mining existing clients by selling more services.
Top 10 clients contribute 30% to total revenues. TAKE expects to mine existing clients and increase the share of top 10 clients to 40% primarily by offering business services. It currently has three customers with an annual revenue run rate of USD 5 mn. It expects to increase this number to 10 over the next few years.
RELATIVE PERFORMANCE (%) Sensex 1 month 3 months 12 months 3.2 11.7 22.9 Stock 30.5 54.6 3.8 Stock over Sensex 27.2 42.9 (19.1)
As the revenue share from services increases pricing will be based on transactions.
Financials
Year to March Revenues (INR mn) Rev. growth (%) EBITDA (INR mn) Net profit (INR mn) Shares outstanding (mn) Diluted EPS (INR) EPS growth (%) Diluted P/E (x) EV/EBITDA (x) ROAE (%) FY07 1,822 281.0 419 316 94 3.4 214.1 12.1 9.6 60.4 FY08 2,939 61.3 689 529 120 4.4 30.6 9.3 5.9 28.7 FY09 3,354 14.1 568 528 120 4.4 (0.0) 9.3 7.3 16.1 FY10 3,518 4.9 341 324 120 2.7 (38.6) 15.1 13.1 8.8 Ganesh Duvvuri +91-22-4040 7586 ganesh.duvvuri@edelcap.com Kunal Sangoi +91-22-6623 3370 kunal.sangoi@edelcap.com

TAKEs revenue streams are product licence revenues, AMC, subscription and transactional revenues from SaaS, and revenues that accrue from premium business services. It derives 22% revenues from licence fees and 12% from AMC which is linked to licence fees. Most of the 59% revenues from services is transaction-based pricing.
TAKE currently has about 900 employees and expects to increase headcount by 2530% in FY11 by hiring both domain and technology experts.
Attrition levels have increased at par with the industry. But given its niche focus, it is able to attract talent.
As TAKE mines existing clients and sells more services where pricing is linked to transactions rather than to headcount, operating margins would improve. In Q1FY11, EBITDA margins increased by 200bps Q-o-Q and 660bps Y-o-Y to 22.5%.
Expect to add the required business services expertise and also to gain presence in new geographies inorganically.

The current cash balance of INR 928 mn would be utilized for both new product investments and for acquisitions to enter new geographies and add services expertise.
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Company description
TAKE Solutions (TAKE) has carved out its distinctiveness around two segments supply chain management (SCM) and life sciences. It has a well-recognised product-suite in both these segments which yield product license and implementation revenues and related services. It ended FY10 with revenues of INR 3.7 bn and net profits of INR 324 mn with 53% revenues coming from the SCM and 41% from life sciences. It derived 56% revenues from services, 24% from products and 13% from AMC, in FY10. Harikesavanallur Ramani Srinivasan, is the prime founder and a member of the board of TAKE. Prior to setting up TAKE, he was Managing Director, South Asia at SembCorp Logistics. Srinivasan is on the board of a number of companies across industries viz. technology, logistics and SCM and financial services. He was also involved in technology investments of Temasek Holdings.
Key highlights
(a) Three new Master Services Agreements signed during Q1FY11 with Fortune 100 Life Sciences customers. (b) Won a large engagement with a potential to grow substantially in the analytics segment in Q1FY11. (c) Two strategic alliance agreements signed with software providers for the Life Sciences industry in Q1FY11. (d) Won two deals of over USD 5 mn size in Q4FY10, the largest so far in its history in the life sciences vertical from a biotechnology and a pharmaceutical major. (e) It has cash of INR 928 mn as on June 2010.
Key risks
In a challenging economic environment, SCM business will be impacted as discretionary spending gets curtailed; while revenues have doubled in the past three years, net profit has remained stagnant.
43

Income statement
Year to March Revenues Cost of revenues Gross profit Total SG&A expenses EBITDA Depreciation & amortization EBIT Interest expense Other income Profit before tax Ta x Core profit Profit after tax Min. int. & others-paid/(recd.) Net profit after minority int. Shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) diluted CEPS (INR) Dividend per share Dividend (%) FY07 1,822 1,178 643 225 419 10 408 34.19 7 381 51 330 330 14 316 94 3.4 94 3.4 3.5 FY08 2,939 1,893 1,046 358 689 22 666 69 28 625 86 539 539 11 529 120 4.4 120 4.4 4.6 0.2 20.0
(INR mn)
FY09 3,354 2,145 1,209 641 568 34 534 18 79 595 55 540 540 11 528 120 4.4 120 4.4 4.7 0.2 20.0 FY10 3,518 2,354 1,163 823 341 43 298 39 146 405 42 363 363 39 324 120 2.7 120 2.7 3.1 0.2 20.0
Balance sheet
As on 31st March Equity share capital Share premium account Reserves Total shareholders funds Preference shares Borrowings Minority interest Deferred tax liability Sources of funds Goodwill & other intangible asset Gross fixed assets Less: Accumulated depreciation Net fixed assets Investments Other assets Deferred tax asset Cash & Bank balances Debtors Inventories Loans and advances Prepaid & other current assets Total current assets Sundry creditors Provisions Other liabilities Total current liabilities FY07 94 252 453 799 49 1,385 38 38 2,308 223 85 36 50 8 202 1 1,209 785 15 75 11 2,094 174 20 82 276 1,818 8 2,308 8 FY08 120 1,955 815 2,890 49 300 46 43 3,327 1,130 250 168 83 94 320 1 1,061 908 14 326 42 2,351 307 154 191 652 1,700 0 3,327 24
(INR mn)
FY09 120 1,955 1,609 3,684 49 238 126 39 4,135 1,867 387 257 130 565 680 1 537 608 24 562 178 1,909 392 256 368 1,015 894 0 4,135 31 4,235 30 FY10 120 1,955 1,583 3,658 0 344 198 35 4,235 1,735 458 297 161 502 713 0 476 648 81 626 193 2,023 299 192 408 899 1,124

Year to March Cost of revenues Gross margin SG&A expenses EBITDA margin EBIT margin Net profit margins FY07 64.7 35.3 12.3 23.0 22.4 18.1 FY08 64.4 35.6 12.2 23.4 22.7 18.4 FY09 63.9 36.1 19.1 16.9 15.9 16.1 FY10 66.9 33.1 23.4 9.7 8.5 10.3
Working capital Miscellaneous exp Application of funds Book value per share (INR)
Ratios
Year to March ROAE (%) ROACE (%) Debtors (days) Payable (days) Cash conversion cycle FY07 60.4 26.8 116 28 88 7.6 3.3 11.9 41.7 1.2 3.5 1.7 FY08 28.7 24.1 105 30 75 3.6 0.4 9.6 44.3 1.0 1.6 0.1 FY09 16.1 15.7 83 38 45 1.9 0.4 30.0 31.6 0.9 1.0 0.1 FY10 8.8 8.2 65 36 29 2.3 1.0 7.6 24.2 0.8 1.0 0.1
Growth metrics (%)

Year to March Revenues EBITDA EBIT PBT Net profit EPS FY07 281.0 186.0 183.9 162.5 204.8 214.1 FY08 61.3 64.4 63.1 64.1 63.2 30.6 FY09 14.1 (17.5) (19.8) (4.8) 0.1 (0.0) FY10 4.9 (40.0) (44.2) (31.9) (32.8) (38.6)
Current ratio Debt/EBITDA Interest cover (x) Fixed assets turnover (x) Total asset turnover(x) Equity turnover(x) Debt/Equity (x)
Year to March FY07 3.4 214.1 3.5 12.1 4.8 2.2 9.6 5.8 0.0 FY08 4.4 30.6 4.6 9.3 1.7 1.4 5.9 7.2 0.5 FY09 4.4 (0.0) 4.7 9.3 1.3 1.2 7.3 0.0 0.5 FY10 2.7 (38.6) 3.1 15.1 1.3 1.3 13.1 1.0 0.5
Cash flow statement

(INR mn)
FY07 316 10 (206) 120 120 162 (42) FY08 529 22 (45) 506 506 250 257 FY09 528 34 104 667 667 570 97 FY10 324 43 (184) 183 183 302 (119)
Diluted EPS CEPS (INR)
(INR)
Y-o-Y growth (%) Diluted PE (x) Price/BV(x) EV/Revenues (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward Dividend yield (%)
ZENSAR TECHNOLOGIES
Building scale
The key growth drivers are: (a) mining existing clients by ramping up new services like infrastructure management and business intelligence and expanding into more geographies where existing large clients have presence; and (b) growing inorganically to scale up new service offering like IMS or to get new geography presence.
August 20, 2010
Reuters : ZENT.BO
Bloomberg : ZENT IN
Fair amount of IT budgets are back. Zensar believes it has the right kind of front-end presence required in the US. The deal pipeline is currently very strong and decision making is improving. As smaller deals (about USD 5 mn) are decided at the middle level and not by the CIO, decision making is quick and not long-drawn. Tier-1 IT companies are expected to grow at 20% CAGR over the next couple of years. It expects to grow faster than the industry.
Top 10 clients contribute 60% to total revenues. Top clients will be mined by tapping their local operations in various geographies and offering new services like IMS. But focus is also on building scale through acquisitions, hence revenue share of top clients would remain stable.
There is no deliberate pricing strategy. 59% of revenues come from time & material contracts. Zensar has been winning new contracts at higher pricing to a large extent on T&M basis.
RELATIVE PERFORMANCE (%) Sensex 1 month 3 months 12 months 3.2 11.7 22.9 Stock (1.6) 13.8 82.4 Stock over Sensex (4.9) 2.1 59.4
5. What are the pricing models you are seeing in new deals. FP, TM, outcome based, IP-related. Is there any major IP-related revenue you are expecting in the next couple of years
There are the three types of pricing models: (a) outcome based for BPO; (b) fixed price for projects where execution skills are critical; and (c) time & materialbased for support and development services. IP-related revenues comprise 1.5-3.0% of revenues. It expects to increase it to 10% of revenues in the next three years. Financials
Year to March Revenues (INR mn) Rev. growth (%) EBITDA (INR mn) Net profit (INR mn) Shares outstanding (mn)- diluted Diluted EPS (INR) EPS growth (%) Diluted P/E (x) EV/EBITDA (x) ROAE (%) FY07 6,059 41.3 813 583 47 12.3 (23.3) 13.8 10.4 28.1 FY08 7,829 29.2 925 646 48 13.6 10.4 12.6 9.0 24.8 FY09 9,189 17.4 1,328 865 48 18.0 32.7 9.5 6.0 31.9 FY10 9,646 5.0 1,755 1,276 47 26.9 49.1 6.4 3.6 43.4 Ganesh Duvvuri +91-22-4040 7586 ganesh.duvvuri@edelcap.com Kunal Sangoi +91-22-6623 3370 kunal.sangoi@edelcap.com

Attrition levels across the industry have been rising, but attrition in the higher experience band has been lower for Zensar.
It has given 12% salary hike on an average with over 20% hike at the middle level. Believe, attrition will stabilize in the next couple of quarters. It has reputed global companies as clients hence employees get to work on large accounts aiding pull back of some attrition.
Pricing, utilisation and cost control are the key levers to counter salary hikes. It expects EBITDA margins to remain stable at 18%, same as in FY10.
It has a specific agenda to scale up new service offerings like IMS through inorganic means. Have USD 100 mn budget for acquisition. Will acquire companies that have grown revenues consistently and make profits. Will look at offshoring potential of services offered by the target company.

It expects to utilize cash for acquisitions (have net cash of INR 1,200 mn).
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Company description
Zensar Technologies (Zensar) is among the top 25 software services providers from India. It provides IT services with focus on retail, manufacturing, banking, insurance and utilities verticals. It has over 5,300 employees, with sales and operations spanning the US, UK, Germany, Sweden, Finland, Middle East, South Africa, Singapore, Australia and Japan. The company delivers comprehensive services in mission-critical applications, enterprise applications, e-business, BPO and knowledge services. It has developed tools and methodologies, including the proprietary Solution BluePrint (SBP), providing its clients innovative business solutions and a rapid go-to-market capability. The company supports Fortune 500 clients with software business solutions, helping them to compete in the digital economy. The company ended FY10 with revenues of INR 9.5 bn and net profits of INR 1.3 bn. It derives 63% revenues from North America and 48% from manufacturing and telecom verticals.
Key highlights
(a) The company has seen some large deal wins in the recent past, including an INR 1 bn deal from one of South Africas leading insurance companies in Q1FY11 and is bidding for a few more. (b) Plans to hire about 1,300 people, including 800 laterals in FY11, to be able to meet the expected demand. (c) Pursuing inorganic growth opportunities in the US and UK, and expects to complete an acquisition in FY11. (d) Strong balance sheet with ~INR 1,200 mn of net cash on its books and ROCE of 45%.
Key risks
Large deals could be margin dilutive; hiring of laterals could put pressure on margins; utilisation (including trainees), at 84%, is unsustainable and, hence, margins could be hit.
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Income statement
Year to March Revenues Total employee cost Other operating expenses Total operating expenditure EBITDA Depreciation & amortization EBIT Interest expense Other income Profit before tax Ta x Core profit Prior period adjustments Profit after tax Min. int. & others - paid/(recd.) Net profit after minority int. Shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) diluted CEPS (INR) Dividend per share Dividend (%) Dividend pay out (%) FY07 6,059 4,000 1,246 5,245 813 153 661 21.00 105 745 151 594 (7) 587 5 583 48 12.3 47 12.4 15.5 1.7 35.0 0.2 FY08 7,829 5,349 1,556 6,904 925 174 751 59.10 122 814 163 651 651 5 646 48 13.5 48 13.6 17.1 1.9 38.0 0.2
(INR mn)
FY09 9,189 6,102 1,760 7,861 1,328 243 1,085 38.80 72 1,118 256 862 862 (3) 865 48 18.1 48 18.0 23.1 2.3 45.0 0.1 FY10 9,646 6,212 1,679 7,891 1,755 264 1,492 27.30 27 1,492 219 1,273 1,273 (3) 1,276 43 29.6 47 26.9 35.7 2.7 55.0 0.1
Balance sheet
As on 31st March Equity share capital Share application money Reserves Total shareholders funds Borrowings Minority interest Sources of funds Gross fixed assets Less: Accumulated deprec. Net fixed assets Capital WIP Investments Deferred tax asset Cash & Bank balances Debtors Loans and advances Other current assets Total current assets Sundry creditors Provisions Total current liabilities Working capital Application of funds Book value per share (INR) FY07 239 1 2,138 2,378 885 1 3,264 2,247 542 1,705 128 204 40 448 1,304 297 295 2,343 919 236 1,156 1,188 3,264 50 FY08 240 0 2,600 2,840 639 7 3,485 2,317 702 1,615 295 160 40 375 1,443 380 369 2,567 904 287 1,191 1,376 3,485 59
(INR mn)
FY09 240 0 2,346 2,586 757 3 3,346 2,019 904 1,115 59 237 58 811 1,333 526 535 3,205 1,046 281 1,327 1,878 3,346 54 FY10 216 0 3,081 3,297 447 0 3,744 2,128 1,106 1,022 14 151 39 1,300 1,426 726 439 3,891 1,016 357 1,373 2,518 3,744 76

Year to March Total employee cost Other operating expenses EBITDA margin EBIT margin Net profit margins FY07 66.0 20.6 13.4 10.9 9.8 FY08 68.3 19.9 11.8 9.6 8.3 FY09 66.4 19.1 14.4 11.8 9.4 FY10 64.4 17.4 18.2 15.5 13.2
Ratios
Year to March ROAE (%) ROACE (%) Debtors (days) Payable (days) Cash conversion cycle Current ratio Debt/EBITDA Interest cover (x) FY07 28.1 27.1 64 44 21 2.0 1.1 31.5 5.1 2.3 2.9 0.4 FY08 24.8 23.5 64 43 22 2.2 0.7 12.7 4.7 2.3 3.0 0.2 FY09 31.9 33.7 55 39 16 2.4 0.6 28.0 6.7 2.7 3.4 0.3 FY10 43.4 44.5 52 39 13 2.8 0.3 54.6 9.0 2.7 3.3 0.1
Growth metrics (%)

Year to March Revenues EBITDA EBIT PBT Net profit EPS FY07 41.3 50.3 71.0 78.7 59.9 (22.7) FY08 29.2 13.7 13.7 9.4 9.7 9.6 FY09 17.4 43.5 44.3 37.3 32.5 32.7 FY10 5.0 32.2 37.5 33.4 47.6 49.1
Fixed assets turnover (x) Total asset turnover(x) Equity turnover(x) Debt/Equity (x)
Year to March FY07 12.4 (22.7) 15.5 13.8 3.5 1.4 10.4 9.1 1.0 FY08 13.6 9.6 17.1 12.6 2.9 1.1 9.0 6.3 1.1 FY09 18.0 32.7 23.1 9.5 3.2 0.9 6.0 4.5 1.3 1.6 FY10 26.9 49.1 35.7 6.4 2.2 0.7 3.6
Cash flow statement

(INR mn)
FY07 583 153 (310) 425 425 1,202 (777) FY08 646 174 (196) 624 624 370 254 FY09 865 243 (59) 1,049 1,049 553 497 FY10 1,276 264 (144) 1,395 1,395 157 1,238
Diluted EPS CEPS (INR)
(INR)
Y-o-Y growth (%) Diluted PE (x) Price/BV(x) EV/Revenues (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward Dividend yield (%)

NOTES:
49

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Vikas Khemani Nischal Maheshwari Head Institutional Equities Head Research vikas.khemani@edelcap.com nischal.maheshwari@edelcap.com 2286 4206 +91 22 6623 3411
Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Rating Distribution* * 4 stocks under review > 50bn Market Cap (INR) 1 0 8 Between 10bn and 50 bn 54 < 10bn 15 109 Hold 52 Reduce 12 Total 177
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August 25 , 2010

Kunal Sangoi +91 22 6623 3370 kunal.sangoi@edelcap.com

Ganesh Duvvuri +91 22 4040 7586 ganesh.duvvuri@edelcap.com

Omkar Hadkar +91 22 6620 3146 omkar.hadkar@edelcap.com

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Edelweiss Edelweiss Securities Securities Limited Limited 1 1

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Infotech Enterprises KPIT Cum m ins Sasken Com m unication

Info Edge (India).

KPO and Products

eClerx Services TAKE Solutions

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0.0 eClerx* Hexaware Infotech KPIT Mindtree Patni Sasken Zensar

Valuations attractive, but investors awaiting all round performance

22.0 16.0 10.0 4.0 (2.0) (8.0)

Apr09 - Mar10 CQGR

Q1FY11 (Q-o-Q growth)

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50.0 40.0 30.0

10.5 6.0 1.5 (3.0)

20.0 10.0 0.0

Cash as % of Market cap. (LHS)

FCF yield-FY10 (RHS)

Table 2: Valuation metrics for Big-3 Indian IT companies

Source: Edelweiss research

Table 3: Valuation metrics of all participating companies

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India Equity Research

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August 20, 2010

Avg. Daily Vol. BSE/NSE (000) :

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8. What according to you are the levers to improve operating margins?

10. How do you plan to deploy cash efficiently?

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Goodwill & other intangible asset 0

Common size metrics as % of net revenues

Book value per share (INR)

Growth metrics (%)

Valuation parameters Cash flow statement

FY10 37.1 14.2 42.4 18.0 6.6 4.4 11.3 2.1

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M cap (INR bn/USD mn)

Avg. Daily Vol. BSE/NSE (000) :

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