May 29, 2014

ICICI Securities Ltd | Retail Equity Research

Sector Update




Rupee anecdote
The rupee has appreciated 2.3% relative to the FY14 average of | 60.3
and 1.8% since April 1, 2014 and raised anxiety on the rupee assumption
going into FY16E. Though the demand environment outlook continues to
be optimistic with both themes recovery in the US and penetration in
Europe playing out, near team challenges from an appreciating rupee
could not be overlooked. Our sensitivity analysis suggests a 4%
appreciation in the rupee and 125 bps margin impact relative to our old
FY16E assumption of 27.3% for TCS. This could reduce our FY16E EPS to
| 112.5 vs. | 122 earlier assuming average |/$ of 59 and equals our old
FY15E estimate of | 111 assuming average |/$ of 60. Consequently, we
are adjusting our rupee assumption for FY15/16E to
| 59/58 vs. | 60/59 earlier, which drives a 1.5%-4.5% cut in our FY16E
EPS estimate for tier-Is and 1.4-4.7% for tier-IIs within our coverage
universe. Though the shares may underperform relative to the market led
by rupee appreciation concerns and sector rotation, we believe valuations
at 14.8x one-year forward for tier-Is are reasonable relative to historical
average (15.9x) and FY15-16E growth expectations. Weaknesses could be
used to accumulate TCS, HCLT, Wipro and MindTree.
F/x headwinds may shift focus to margins vs. reinvestments currently
Note that TCS had margins of 27.7% in FY12 when the rupee averaged
~48. Since then the average rupee has depreciated ~26% to reach 60.9
in FY14 and could have released eight percentage points (pp) of margin
tailwinds assuming 30 bps of relief for every 100 bps of rupee
depreciation. However, TCS margins improved a modest 144 bps to
29.1% as business reinvestments in the form of SG&A spends (refer
Exhibit 12), large deal transition costs including onsite ramp-ups
accelerated. We believe, were the rupee to appreciate sharply, IT
companies could curtail a part of these costs shifting focus to maintain
respectable margin levels.
Valuations, growth favour tier-Is
We are changing our FY15E rupee assumption to 59 vs. 60 earlier, as if
the rupee stays at the current level of 58.8 for the remainder of year, the
FY15E average could stand at 59. This drives a 1.5-4.5% cut in our FY16E
EPS estimate for tier-Is and 1.4-4.7% for tier-IIs within our coverage
universe. Though a sharp rupee appreciation could cause near term
challenges, a gradual appreciation should be manageable as
reinvestments could be curtailed somewhat. That said, we would use
weakness to accumulate tier-I and quality midcaps as 1) tier-Is are likely to
report average dollar revenue CAGR of 12.9% during FY14-16E (average
24.3% EBIT margins in FY15-16E), vs. 14.5% reported during FY09-14
(average 23.8% margins), 2) while valuations at 14.8x one-year forward
are at a ~7% discount to its FY09-14 average multiple of 15.9x. Though
tier-IIs are trading in-line with their historical average (10x vs. 9.6x),
growth has accelerated for select midcaps like MindTree. We believe
large caps are better placed to weather the currency volatility. Hence, we
recommend accumulating select stocks on sharp sell-offs.
Information Technology
Sector View
Equal weight

Whats changed?
Name Old New Old New
Cyient 32.0 31.6 34.0 33.5
HCL Technologies 103.0 99.7 113.7 110.8
Infosys 208.0 198.8 227.0 216.8
KPIT 17.1 16.9 19.5 19.2
Mindtree 125.5 123.6 142.9 140.7
NIIT Technologies 45.1 44.4 51.7 50.9
Persistent Systems 75.3 73.8 86.7 84.9
TCS 111.0 108.2 122.0 118.7
Tech Mahindra 131.0 125.1 148.0 141.1
Wipro 35.4 34.9 39.4 38.8
FY15E EPS estimate FY16E EPS estimate


Name Old New Old New
Cyient 380 350 Buy Buy
HCL Technologies 1,600 1,600 Buy Buy
Infosys 3,550 3,400 Hold Hold
KPIT 170 170 Hold Hold
Mindtree 1,600 1,580 Buy Buy
NIIT Technologies 415 400 Hold Hold
Persistent Systems 1,100 1,080 Hold Hold
TCS 2,450 2,375 Buy Buy
Tech Mahindra 1,900 1,800 Hold Hold
Wipro 610 600 Buy Buy
Target price Rating


Price performance (%)
1M 3M 6M 12M
Cyient (8.5) (15.8) 5.3 76.3
eClerx (12.0) (13.0) (1.9) 73.3
HCL Tech 1.8 (3.6) 35.6 95.5
Infosys (0.1) (15.5) (5.1) 34.5
KPIT (5.8) (7.9) 10.9 49.5
MindTree 0.5 (10.9) 1.8 79.7
NIIT Tech (7.0) (15.2) 18.8 41.5
Persistent 0.9 3.4 23.8 106.7
TCS (2.0) (2.2) 8.3 44.1
TechM 2.2 2.4 13.8 98.1
Wipro (2.0) (9.1) 7.5 52.6

Analyst
Abhishek Shindadkar
abhishek.shindadkar@icicisecurities.com
Hardik Varma
hardik.varma@icicisecurities.com



ICICI Securities Ltd | Retail Equity Research
Page 2
Exhibit 1: A 4% change in rupee may drive 3.7% EPS change for TCS assuming stable margins
EPS (|) Rupee assumption
118.7 55.7 56.8 58.0 59.2 60.3
25.8 109.4 111.5 113.6 115.7 117.8
26.4 111.9 114.0 116.2 118.3 120.5
27.0 114.3 116.5 118.7 120.9 123.0
27.6 116.6 118.8 121.1 123.3 125.5
28.2 118.8 121.1 123.3 125.6 127.9
EPS (%, change) Rupee assumption
55.7 56.8 58.0 59.2 60.3
25.8 (7.8) (6.0) (4.3) (2.5) (0.8)
26.4 (5.7) (3.9) (2.1) (0.3) 1.5
27.0 (3.7) (1.8) - 1.8 3.7
27.6 (1.8) 0.1 2.0 3.9 5.8
28.2 0.1 2.0 3.9 5.9 7.8
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Source: Company Presentation, ICICIdirect.com Research


Exhibit 2: A 4% change in rupee may drive 1.6% EPS change for Infosys assuming stable margins
EPS (|) Rupee assumption
216.8 55.7 56.8 58.0 59.2 60.3
22.9 194.9 199.5 204.2 208.8 213.4
23.5 201.1 205.8 210.6 215.4 220.1
24.1 207.0 211.9 216.8 221.7 226.6
24.7 212.8 217.8 222.8 227.8 232.8
25.3 218.3 223.4 228.5 233.6 238.7
EPS (%, change) Rupee assumption
55.7 56.8 58.0 59.2 60.3
22.9 (10.1) (8.0) (5.8) (3.7) (1.6)
23.5 (7.3) (5.1) (2.9) (0.7) 1.5
24.1 (4.5) (2.3) - 2.3 4.5
24.7 (1.9) 0.4 2.7 5.1 7.4
25.3 0.7 3.0 5.4 7.8 10.1
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Source: Company, ICICIdirect.com Research

Exhibit 3: A 4% change in rupee may drive 3.6% EPS change for Wipro assuming stable margins
EPS (|) Rupee assumption
38.8 55.7 56.8 58.0 59.2 60.3
21.8 35.7 36.3 37.0 37.6 38.2
22.4 36.6 37.2 37.9 38.6 39.2
23.0 37.4 38.1 38.8 39.5 40.1
23.6 38.3 39.0 39.7 40.3 41.0
24.2 39.1 39.8 40.5 41.2 41.9
EPS (%, change) Rupee assumption
55.7 56.8 58.0 59.2 60.3
21.8 8.7 6.8 5.0 3.2 1.5
22.4 6.0 4.2 2.4 0.6 (1.1)
23.0 3.6 1.8 - (1.7) (3.4)
23.6 1.4 (0.4) (2.2) (3.9) (5.5)
24.2 (0.7) (2.5) (4.2) (5.8) (7.4)
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Source: Company, ICICIdirect.com Research



ICICI Securities Ltd | Retail Equity Research
Page 3
Exhibit 4: A 4% change in rupee may drive 3.7% EPS change for HCL Tech assuming stable margins
EPS (|) Rupee assumption
110.8 55.7 56.8 58.0 59.2 60.3
21.2 101.1 103.1 105.1 107.0 109.0
21.8 104.0 106.0 108.0 110.0 112.0
22.4 106.7 108.8 110.8 112.9 115.0
23.0 109.3 111.4 113.6 115.7 117.8
23.6 111.8 114.0 116.2 118.4 120.5
EPS (%, change) Rupee assumption
55.7 56.8 58.0 59.2 60.3
21.2 (8.8) (7.0) (5.2) (3.4) (1.7)
21.8 (6.2) (4.4) (2.6) (0.7) 1.1
22.4 (3.7) (1.9) - 1.9 3.7
23.0 (1.4) 0.5 2.5 4.4 6.3
23.6 0.9 2.8 4.8 6.8 8.8
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Source: Company, ICICIdirect.com Research

Exhibit 5: A 4% change in rupee may drive 4.3% EPS change for TechM assuming stable margins
EPS (|) Rupee assumption
141.1 55.7 56.8 58.0 59.2 60.3
19.0 126.0 128.8 131.7 134.5 137.4
19.6 130.6 133.5 136.5 139.4 142.4
20.2 135.0 138.0 141.1 144.1 147.1
20.8 139.2 142.3 145.5 148.6 151.7
21.4 143.3 146.5 149.7 152.9 156.1
EPS (%, change) Rupee assumption
55.7 56.8 58.0 59.2 60.3
19.0 (10.7) (8.7) (6.6) (4.6) (2.6)
19.6 (7.4) (5.3) (3.3) (1.2) 0.9
20.2 (4.3) (2.2) - 2.2 4.3
20.8 (1.3) 0.9 3.1 5.3 7.6
21.4 1.6 3.9 6.1 8.4 10.7
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Source: Company, ICICIdirect.com Research

Exhibit 6: A 4% change in rupee may drive 4.2% EPS change for MindTree assuming stable margins
EPS (|) Rupee assumption
140.7 55.7 56.8 58.0 59.2 60.3
19.0 126.0 128.8 131.6 134.3 137.1
19.6 130.5 133.4 136.2 139.1 142.0
20.2 134.8 137.8 140.7 143.7 146.6
20.8 138.9 142.0 145.0 148.1 151.1
21.4 142.9 146.0 149.2 152.3 155.4
EPS (%, change) Rupee assumption
55.7 56.8 58.0 59.2 60.3
19.0 (10.5) (8.5) (6.5) (4.5) (2.6)
19.6 (7.3) (5.2) (3.2) (1.1) 0.9
20.2 (4.2) (2.1) - 2.1 4.2
20.8 (1.3) 0.9 3.1 5.2 7.4
21.4 1.6 3.8 6.0 8.2 10.5
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Source: Company, ICICIdirect.com Research



ICICI Securities Ltd | Retail Equity Research
Page 4
Exhibit 7: A 4% change in rupee may drive 4.5% EPS change for KPIT assuming stable margins
EPS (|) Rupee assumption
19.2 55.7 56.8 58.0 59.2 60.3
15.8 16.9 17.2 17.6 18.0 18.4
16.4 17.6 18.0 18.5 18.9 19.3
17.0 18.4 18.8 19.2 19.7 20.1
17.6 19.1 19.5 20.0 20.4 20.9
18.2 19.8 20.2 20.7 21.1 21.6
EPS (%, change) Rupee assumption
55.7 56.8 58.0 59.2 60.3
15.8 (12.3) (10.3) (8.2) (6.1) (4.1)
16.4 (8.3) (6.2) (4.0) (1.9) 0.3
17.0 (4.5) (2.2) - 2.2 4.5
17.6 (0.8) 1.6 3.9 6.2 8.5
18.2 2.8 5.2 7.6 10.0 12.3
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Source: Company, ICICIdirect.com Research

Exhibit 8: A 4% change in rupee may drive 4.7% EPS change for Persistent Systems assuming stable
margins
EPS (|) Rupee assumption
84.9 55.7 56.8 58.0 59.2 60.3
23.8 76.2 78.1 80.0 81.9 83.7
24.4 78.6 80.6 82.5 84.4 86.4
25.0 81.0 83.0 84.9 86.9 88.9
25.6 83.2 85.2 87.3 89.3 91.4
26.2 85.4 87.5 89.5 91.6 93.7
EPS (%, change) Rupee assumption
55.7 56.8 58.0 59.2 60.3
23.8 (10.3) (8.1) (5.9) (3.6) (1.4)
24.4 (7.5) (5.2) (2.9) (0.6) 1.7
25.0 (4.7) (2.3) - 2.3 4.7
25.6 (2.0) 0.4 2.8 5.2 7.6
26.2 0.5 3.0 5.4 7.9 10.3
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Source: Company, ICICIdirect.com Research

Exhibit 9: A 4% change in rupee may drive 4.6% EPS change for NIIT Tech assuming stable margins
EPS (|) Rupee assumption
50.9 55.7 56.8 58.0 59.2 60.3
15.6 44.4 45.5 46.5 47.6 48.7
16.2 46.5 47.6 48.8 49.9 51.0
16.8 48.6 49.7 50.9 52.1 53.2
17.4 50.5 51.7 52.9 54.2 55.4
18.0 52.4 53.7 54.9 56.2 57.4
EPS (%, change) Rupee assumption
55.7 56.8 58.0 59.2 60.3
15.6 (12.8) (10.7) (8.6) (6.4) (4.3)
16.2 (8.6) (6.4) (4.2) (2.0) 0.2
16.8 (4.6) (2.3) - 2.3 4.6
17.4 (0.7) 1.6 4.0 6.4 8.8
18.0 3.0 5.4 7.9 10.3 12.8
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Source: Company, ICICIdirect.com Research



ICICI Securities Ltd | Retail Equity Research
Page 5
Exhibit 10: A 4% change in rupee may drive 4.1% EPS change for Cyient assuming stable margins
EPS (|) Rupee assumption
33.5 55.7 56.8 58.0 59.2 60.3
16.8 29.9 30.5 31.1 31.8 32.4
17.4 31.0 31.7 32.3 33.0 33.7
18.0 32.1 32.8 33.5 34.2 34.9
18.6 33.2 33.9 34.6 35.3 36.0
19.2 34.2 35.0 35.7 36.4 37.1
EPS (%, change) Rupee assumption
55.7 56.8 58.0 59.2 60.3
16.8 (10.9) (9.0) (7.1) (5.2) (3.3)
17.4 (7.4) (5.4) (3.5) (1.5) 0.5
18.0 (4.1) (2.0) - 2.0 4.1
18.6 (0.9) 1.2 3.3 5.4 7.5
19.2 2.2 4.4 6.5 8.7 10.9
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Source: Company, ICICIdirect.com Research

Exhibit 11: A 4% change in rupee may drive 4% EPS change for eClerx assuming stable margins
EPS (|) Rupee assumption
102.1 55.7 56.8 58.0 59.2 60.3
37.8 94.8 96.8 98.8 100.8 102.7
38.4 96.4 98.4 100.4 102.5 104.5
39.0 98.0 100.0 102.1 104.1 106.1
39.6 99.4 101.5 103.6 105.7 107.7
40.2 100.9 103.0 105.1 107.2 109.3
EPS (%, change) Rupee assumption
55.7 56.8 58.0 59.2 60.3
37.8 (7.1) (5.2) (3.2) (1.3) 0.7
38.4 (5.5) (3.5) (1.6) 0.4 2.4
39.0 (4.0) (2.0) - 2.0 4.0
39.6 (2.6) (0.5) 1.5 3.5 5.6
40.2 (1.2) 0.9 3.0 5.0 7.1
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Source: Company, ICICIdirect.com Research

Exhibit 12: Business reinvestments have offset currency tailwinds in margins
FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14
TCS 48.0 54.5 60.9 27.6 26.9 29.1 17.6 18.5 17.6 8599 11648 14433
YoY change (bps,%) 13.5 11.8 (72) 218 91 (85) 35.5 23.9
Infosys 48.2 54.5 60.8 29.0 25.8 24.0 12.3 11.5 11.9 4147 4643 5950.6
YoY change (bps,%) 13.3 11.4 (314) (183) (81) 36 12.0 28.2
Wipro (IT services) 48.0 54.4 60.3 20.8 20.7 22.6 11.7 12.7 12.4 3333 4301 4937
YoY change (bps,%) 13.5 10.8 (18) 195 98 (35) 29.0 14.8
HCL Tech 50.6 54.9 61.0 16.5 20.1 24.2 14.0 13.3 12.4 2950 3420 4049
YoY change (bps,%) 8.5 11.1 361 410 (74) (92) 15.9 18.4
$/| rate EBIT margins (%) SG&A (% of sales) SG&A (| crores)

Source: Company, ICICIdirect.com Research




ICICI Securities Ltd | Retail Equity Research
Page 6
Exhibit 13: Estimate and target price revision
Name @60 @59 @59 @58 Old Revised Old Revised Old Revised
Cyient 32.0 31.6 34.0 33.5 11.2 10.5 380 350 Buy Buy
HCL Technologies 103.0 99.7 113.7 110.8 15.5 14.5 1,600 1,600 Buy Buy
Infosys 208.0 198.8 227.0 216.8 15.6 15.6 3,550 3,400 Hold Hold
KPIT 17.1 16.9 19.5 19.2 8.7 8.7 170 170 Hold Hold
Mindtree 125.5 123.6 142.9 140.7 11.2 11.2 1,600 1,580 Buy Buy
NIIT Technologies 45.1 44.4 51.7 50.9 8.0 8.0 415 400 Hold Hold
Persistent Systems 75.3 73.8 86.7 84.9 12.7 12.7 1,100 1,080 Hold Hold
TCS 111.0 108.2 122.0 118.7 20.1 20.0 2,450 2,375 Buy Buy
Tech Mahindra 131.0 125.1 148.0 141.1 12.8 12.8 1,900 1,800 Hold Hold
Wipro 35.4 34.9 39.4 38.8 15.5 15.5 610 600 Buy Buy
Rating FY15E EPS estimate FY16E EPS estimate PE,x @FY16E EPS Target price

Source: Company, ICICIdirect.com Research












































ICICI Securities Ltd | Retail Equity Research
Page 7




ICICIdirect.com coverage universe (IT)
CMP M Cap
(|) TP(|) Rating (| Cr) FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E
Cyient (INFTC) 294 350 Buy 3,296 20.7 23.8 31.6 14.2 12.3 9.3 7.5 6.3 5.5 26.5 28.0 27.5 18.6 18.7 21.3
Eclerx (ECLSER) 1,072 1,122 Hold 3,238 56.9 82.8 91.3 18.8 12.9 11.7 11.2 8.2 7.8 60.9 62.5 50.9 39.1 44.1 39.1
Firstsource (FIRSOU) 32 40 Buy 2,100 2.8 2.8 4.0 11.2 11.3 7.9 10.1 7.8 6.2 7.5 10.5 13.2 9.3 10.3 12.6
HCL Tech* (HCLTEC) 1,440 1,600 Buy 100,792 57.1 87.9 99.7 25.2 16.4 14.4 16.0 10.7 10.1 37.0 42.2 34.6 30.6 34.4 30.0
Infosys (INFTEC) 3,173 3,400 Hold 182,222 164.9 186.4 198.8 19.2 17.0 16.0 13.2 11.3 10.6 28.5 27.6 25.4 25.7 24.4 22.4
KPIT Tech (KPISYS) 159 170 Hold 3,083 10.5 13.0 16.9 15.1 12.3 9.4 8.8 7.6 6.2 27.8 25.6 27.4 22.8 21.7 23.0
Mastek (MASTEK) 178 240 Buy 393 14.0 21.1 24.0 12.7 8.4 7.4 4.5 3.0 2.9 5.6 7.8 8.0 6.5 9.0 8.6
Mindtree (MINCON) 1,441 1,580 Buy 6,013 81.8 107.6 123.6 17.6 13.4 11.7 11.9 8.8 7.8 34.1 35.6 32.5 29.9 30.4 28.4
NIIT Ltd. (NIIT) 46 42 Hold 757 1.5 1.1 3.8 30.0 42.5 12.0 19.0 12.8 9.6 NM NM 1.6 3.8 2.7 9.2
NIIT Technologies (NIITEC) 371 400 Hold 2,251 35.4 37.8 44.4 10.5 9.8 8.3 6.0 5.6 4.6 26.7 24.2 26.1 21.3 19.6 20.0
Persistent (PSYS) 1,046 1,080 Hold 4,183 46.1 62.3 73.8 22.7 16.8 14.2 10.6 8.3 7.4 27.3 29.3 27.6 19.8 22.3 22.0
Sasken Com (SASCOM) 205 135 Hold 436 13.1 12.1 13.8 15.7 16.9 14.8 6.9 6.5 5.8 5.2 6.1 7.3 7.6 7.5 8.3
TCS (TCS) 2,151 2,375 Buy 421,234 71.0 97.6 108.2 30.3 22.0 19.9 22.6 16.2 15.0 45.8 49.1 42.7 36.0 37.9 33.7
Tech Mahindra (TECMAH) 1,887 1,800 Hold 44,071 82.4 126.8 125.1 22.9 14.9 15.1 13.3 9.8 9.3 40.3 42.4 34.4 33.5 37.4 28.3
Wipro (WIPRO) 514 600 Buy 126,870 25.0 31.7 34.9 20.6 16.2 14.7 13.9 11.4 10.4 23.6 28.0 25.6 21.6 24.9 23.1
RoCE (%) RoE (%)
Sector / Company
EPS (|) P/E (x) EV/EBITDA (x)
* June year end, Source: Company, ICICIdirect.com Research


ICICI Securities Ltd | Retail Equity Research
Page 8

RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;


Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai 400 093

research@icicidirect.com

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