IT Mid Caps The Untold Story

FEBRUARY 2006
Sector Report : IT Industry

Mid-Caps: The Untold Story
Lakshmi Nambiar, Senior Associate

(+91) 80 5152 4088
lakshmi.nambiar@avendus.com
Industry Coverage Sector Report : IT Industry
Lakshmi Nambiar, Senior Associate

(+91) 80 5152 4088
Mid-Caps: The Untold Story
lakshmi.nambiar@avendus.com
Recent Reports + Strong Growth Driven By Structural Shifts In Global IT Industry:

- BPO opportunities in the US Residential The Indian IT industry is witnessing rapid growth as leading Indian IT
Mortgage Market companies globalize their operations, IT multinationals enhance their offshore
presence and as players move up the value chain, offering services like design
- Bioinfomatics
conceptualization and implementation, product co-development and IT
infrastructure management.
- Analysis of the Non-voice Back Office
Market in India
+ Emergence Of Mid-Caps:
-The Indian Semiconductor Sector After going through a turbulent phase during the IT industry slowdown
between 2001-2003, Mid-Caps have emerged larger and stronger. Mid-Caps
have taken bolder strategic decisions than Large-Caps, and have benefited by
them. Based on these strategies, Mid-Caps can be classified into four categories:
Niche Service Providers, Multi-Domain Players, Consolidators, and
Solutions/Product Providers.
+ Drivers Of Mid-Cap Growth:

A three-year Compounded Annual Growth Rate (CAGR) analysis of Market Cap
of Mid-Cap companies, post the IT industry slowdown, indicates that
companies with a clear differentiated strategy have performed extremely well.
The strategies include one or a combination of the following - focusing on
intellectual property related products and services, developing leadership along
fast-growing niche markets, focusing on under-served markets and acquiring
strategically.
+ Differentiated Mid-Caps - A Compelling Proposition:

Mid-Cap Market Cap has grown dramatically compared to those of Large-Caps.
The difference is more compelling in the case of the Top 10 performing Mid-Cap
companies who have adopted a differentiated strategy and whose revenue
growth exceeds that of Large-Caps at comparable levels of profitability. The
median three-year CAGR in Market Cap (2002-2005) for Large-Caps was 32%,
compared with 37% for Mid-Caps and 65% for the top 10 performing Mid-Cap
companies.
+ The Road Ahead:

Going forward, we expect the Mid-Cap landscape to be action-packed, with a
number of mergers, acquisitions, private equity plays and public market
offerings, as companies try to move to the next level and fill the void between
the Large-Cap and the Mid-Cap players. (Revenues of the largest Mid-Cap player
in India are less than USD 200 million.) Also, as the level of risk capital available
increases over the next couple of years, we expect more product-centric
companies to grow into the Mid-Cap segment.
01
Table of Contents
Executive Summary 01
The Indian IT Industry: A Snapshot 03
Mid-Caps: An Evolution 05
Mid-Caps: Building Market Competitiveness 06
Mid-Caps: Drivers for Growth 09
Differentiated Mid-caps: A Compelling Value Proposition 15
Mid-Caps: The Road Ahead 17
Appendix A: Company Specific Strategy of Top Ten Performers 18
Appendix B: Financials, Growth & Margins and Valuation Analysis 29
List of Exhibits
Exhibit 1: Indian IT Software and Services Revenues 03
Exhibit 2: Global Delivery Centers for Infosys, Satyam, TCS and Wipro 03
Exhibit 3: IT IPO's in Calendar Year 2005 07
Exhibit 4: Overview of Mid-Cap Landscape 07-08
Exhibit 5: Market Cap CAGR Comparison for Mid-Cap Companies 09
Exhibit 6: Strategies of Top Performers 10
Exhibit 7: Emerging Service Offerings for Products 12
Exhibit 8: Acquisitions by Mid-Cap Companies in the Last Twelve Months 13-14
Exhibit 9: Market Cap CAGR for Large-Cap, Mid-Cap and the Top Performers 15
Exhibit 10: Median EBITDA and PAT Comparison 15
Exhibit 11: Median PAT Margin Comparison 15
Exhibit 12: Median Market Cap/Sales comparison 16
Exhibit 13: Median Market Cap/EBITDA Comparison 16
Exhibit 14: Median Market Cap/PAT Comparison 16
Exhibit 15: Private Companies That Might Go Public In The Near Future 17
02
The Indian IT Industry: A Snapshot
The story of Indian IT Large-Caps is that of relentless Emergence of the Indian IT Multinational
execution, supported by a strong global structural shift in Recognizing the impending competition from multinational IT
the IT industry, whereas that of the Indian IT Mid-Caps1 is companies, large Indian IT companies have aggressively
that of bold choices. expanded their global footprint over the last few years. They
now offer a Global Delivery Model (GDM) that enables them
In this section, we take a brief snapshot of the Indian IT to service diverse needs of their clients more effectively than a
industry. “one-size-fits-all” approach. This will also help them hedge
their risks against rapid wage escalation in India and the
It is a commonly accepted fact that the Indian IT industry growth of other geographies like China and Eastern Europe as
has leveraged offshore delivery capability to position India more cost-competitive delivery options. Exhibit 2 illustrates
as the 'go-to' IT destination in the world. This is evident in the emergence of the Indian IT multinational.
the industry's double-digit growth rate, which validates the Exhibit 2: Global Delivery Centers for Infosys, Satyam, TCS & Wipro
compelling economics of offshore outsourcing.
As the industry assumed a larger scale, many predicted a

slowdown. However, the past year has proved to be a
watershed, as the industry has not only maintained its
momentum for growth, but has also accelerated it. National
Association of Software and Service Companies (NASSCOM),
the premier Indian IT industry body, has estimated that the
Indian IT and BPO industry recorded revenues of USD 22
billion in fiscal year 2005 (ending March 2005)2. This
translates into a 32% growth, the highest since 2001, as Wipro Infosys TCS Satyam
illustrated in Exhibit 1. This growth is underlined by certain Source: Avendus Research

long-term structural shifts in the global IT outsourcing
Global IT Vendors Embracing India
industry as outlined below.
Indian companies face stiff competition from global IT
vendors (Accenture, IBM, EDS, Cap Gemini) who are
Exhibit 1: Indian IT Software & Services Revenues aggressively developing and enhancing their offshore delivery
capability. They are doing this through both organic growth in
30
headcount as well selective strategic acquisitions. For
25 6.0 example, Accenture announced plans to increase its
(US $ Billion)
Exhibit
20
1: Indian IT Software & Services Revenues headcount in India to 22,500 employees in fiscal year 20053, a
4.8
3.9 15.2 growth of almost 50%.
15
12
10 9.2 Furthermore, global IT firms have started taking a long-term
5 7.3 strategic view on the Indian market to position themselves
3.6 5.2
well for the expected growth in the domestic IT market. IBM's
0 FY04 FY05 FY06 (E)
acquisition of Network Solutions, which provides it an entry
ITES-BPO Exports IT Software & Services Exports Domestic Market
into the domestic IT Infrastructure Management business,
Source: NASSCOM 2005 Report
illustrates this early trend. This will create additional pressure
for Indian IT companies on their home turf, a market many
have neglected due to low revenue realizations.
1
For the purpose of this report, we have segmented publicly listed Indian IT companies (comprising software services, products and training companies)
based on their market caps as follows:
! Large-Caps : Companies with market cap of more than USD 1 billion
! Mid-Caps: Companies with market cap between USD 100 million and USD 1 billion
! Small-Caps: Companies with market cap of less than USD 100 million
Market Cap used to segment these companies is the 30-day trailing average as of December 30, 2005.
Besides listed companies, we expect several private companies to enter the mid-cap universe over the next couple of years through an IPO. Our analysis does not cover these companies,
though we have included a brief section on them in the report.
2
As per Nasscom 2005 Report
3
Source: Financial Express: India is Accenture's Flagship Global Delivery Center - September 13, 2005
03
Scale And Offshore Leadership Is Enabling Indian IT Vendors
To Compete With MNCs For Large Global Projects
The year 2005 has seen leading Indian IT companies
breaking the glass ceiling and competing successfully with
IT multinational companies for large global projects. Two
factors have made this possible:
a. Offshore outsourcing of IT requirements has

assumed strategic importance for large global
corporations owing to its compelling cost-quality
equation.
b. Leading Indian IT companies have developed an

excellent track record and assumed a leadership
position for offshore delivery, making them 'go-to'
players for a company's offshore outsourcing
requirements. In addition, they have attained a
level of scale that enables them to compete
effectively for large multi-year IT contracts,
business that was previously ring-fenced by large
IT multinational companies.
Some examples of this trend include ABN Amro awarding a

USD 400 million, five-year contract to TCS, Infosys and Patni
for outsourcing of IT infrastructure, application support and
application development4. More recently, General Motors
awarded Wipro a five-year contract that was valued at
around USD 300 million5.
The significance of these contracts goes beyond size and

quality. It indicates an emerging trend towards unbundling
of large multi-year outsourcing contracts and distribution to
multiple vendors as opposed to the hitherto single-vendor
norm. This further increases the eligibility of Indian offshore
majors.
Movement up the Value Chain

Today, India as an offshore destination for IT services offers
more than just a cost proposition. Its demonstrated track
record of delivering global quality at low cost has enabled
the Indian IT industry to transition from being a lower-end
application development and maintenance services
provider to offering higher-end critical services like design
conceptualization and implementation, product co-
development and IT infrastructure management. This
validates the maturing of the Indian IT industry as a
provider of high-productivity, quality-driven services.
4
Source: Company Website
5
Source: Company Website
04
Mid-Caps : An Evolution
The IT industry has undergone significant changes as result + Margin Pressures and Increased Competition: Companies
of the slowdown in the US economy in 2001. The sharp fall faced margin pressures and gross profit growth reduced
in industry growth affected all IT companies adversely but dramatically as customers stopped being relationship-
Mid-Caps were among the worst affected. In the last five oriented and began re-negotiating billing rates. As
years, some companies (like DSQ, Pentafour and Silverline) customers threatened to withdraw future prospects if
disappeared from the Mid-Cap IT landscape in India, while billing rates were not brought down, companies were
some entirely new players emerged like Geodesic. Several forced to compete on price. Mid-Caps were the worst
others took bold decisions and reorganized themselves affected because more often than not, larger companies
around strategies that could help them differentiate and not only succumbed to pricing pressures but also started
grow in highly dynamic and difficult market conditions. competing for the smallest deals - mainly because
economies of scale allowed them to take a long-term
Our analysis led us to classifying stages in the evolution of view of the customer relationship.
Mid-Caps over the last five years into three distinct phases.
+ Business Model Challenges: Mid-Cap companies were
Phase 1: Unbridled Growth further challenged because more than 50% of their
Prior to the slowdown in the US economy in 2001, the revenues came from on-site work, which was under
Indian IT sector enjoyed a phenomenal growth rate of more severe pressure in terms of both volume and pricing. In
than 60%. The scorching pace of growth was first led by the some cases, companies with high client concentration
Y2K wave, which was immediately followed by the Internet saw a dramatic decline in revenues and profits due to a
hysteria. loss of one customer.
With no demand constraints, medium-sized companies Faced with the threat of being squeezed out of business, Mid-
adopted a carpet- bombing approach, claiming to offer Cap companies responded by streamlining operations and
services in every vertical, technology or business practice. devising strategies that helped them differentiate themselves,
These companies were also exposed to high customer which in turn, helped them survive and grow in a highly
concentration and the US as the primary market for growth. dynamic market condition.
Lastly, the relative lack of competitive market pressure
made companies lose focus on creating differentiation and Phase 3: Focused Growth
on developing their sales capability. By the end of 2003, the US economy started its path to
recovery and the third phase of the offshore outsourcing era
Customers, on the other hand, adopted a diversified vendor had begun. Large-Cap players scaled their business
selection strategy by selecting different offshore suppliers dramatically by developing capabilities across multiple
for each division. While this provided a large number of verticals. Mid-Caps, on the other hand, focused on developing
projects for Mid-Cap vendors, revenues were mainly time- a strong niche focus. This phase also witnessed the evolution
bound, owing to their project-based nature. Coupled with of new areas of outsourcing like product engineering services,
concentration of business around a few large clients left IT infrastructure management and software testing services.
Mid-Caps highly vulnerable to several business risks.
Meanwhile, customers re-oriented their IT outsourcing
Phase 2: Challenged Growth strategy by consolidating their vendor base and tightening the
Phase 1 came to an abrupt halt with the slowdown in the norms for new vendor selection. These changes implied that
US economy in 2001, which severely affected the fortunes only large vendors or medium-sized companies with
of Indian companies and exposed the limitations of the specialization were positioned for growth.
Indian model. This phase was characterized by:
In this report, we have tried to look at how Mid-Caps have
+ Decline in the Industry Growth Rate: As customers in overcome the lack of scale leadership by adopting distinct
the US started cutting back IT budgets, overall industry strategies in order to survive and thrive in a rapidly evolving IT
growth fell from more than 60 per cent year-on-year to industry.
around 35-40 per cent.
05
Mid-Caps : Building Market Competitiveness
The existing Large-Caps broke away from the pack in the growing their businesses. Scandent Solutions is among the
late 1990s to emerge as dominant market leaders. Around first few that has relied largely on equal-sized mergers and
this time, the rest of the Indian IT industry was highly significant acquisitions to grow its business. Its merger with
fragmented, with certain sources estimating that there SSI Technologies enabled the formation of a company that
were more than 2,000 IT companies. In an industry where leapfrogged into the Mid-Cap segment.
scale came from qualifying for larger projects, which, in
turn, were awarded primarily to larger companies, 4. Solution/Product Providers: The surprise package from
companies other than the market leaders were clearly our analysis was the product and solution providers. These
challenged for growth. As described in the previous section, include companies such as Cranes Software, Geodesic and
some of these companies focused on building strong niche Polaris, which have grown largely through a product-led
or domain differentiation to compete effectively. In this strategy. These companies seem to have defined their target
section, we take a deeper look at some of these companies product/solution segments early and have aligned their
and the strategies that have helped them survive and execution around this focus. One of the players, Cranes
thrive. Software, has acquired companies globally in a highly
methodical manner with a clear goal of enhancing its product
The publicly listed Mid-Cap landscape in India includes 23 portfolio in the scientific products market.
companies with a cumulative Market Cap of USD 4.6 billion
(based on a 30-day trailing average as of December 30, In addition, there are a few other companies such as Sasken
2005). Exhibit 4 provides a summary listing of these and 3i Infotech that have listed their stocks on the capital
companies. markets recently and are new additions to the Mid-Cap sector.
They have not been included in our analysis of Top Performing
While the Mid-Caps constitute a fairly diverse universe, our Mid-Caps due to an inadequate track record of their stocks,
analysis provided insights that helped us classify them into post listing.
the following categories, based on the strategy they have
adopted to differentiate themselves: Also, there are several privately held companies waiting to
break into the Mid-Cap segment. Amongst these, MindTree
1. Niche Service Providers: Some companies, such as Consulting and Caritor have witnessed significant growth in
Aztec, and Hexaware, have diligently focused on developing recent times. While the former has positioned itself as one of
their capability around a specific niche with a goal to build a the only offshore vendors providing high-end systems
leadership position in that segment. For example, architecting capability, the latter has leveraged a couple of
Hexaware's positioning as a leading offshore ERP vendor large client relationships to build a USD 100 million+ revenue
has helped it compete effectively with Large-Caps for large company. Citigroup Venture Corporation (“CVC”) has recently
ERP contracts. invested into the company.
2. Multi-Domain Players: This segment constitutes We believe many more private companies will go public in the
companies that have achieved more than USD 50 million in next 24 months, thereby enhancing the depth of the Mid-Cap
revenues by building capabilities across multiple domains. sector. Calendar year 2005 saw nine IT companies list on the
Examples include companies such as KPIT Cummins, Mastek Indian capital markets, the highest number after the Internet
and Zensar. While it is difficult to pinpoint a common hysteria in 1999-2000. Exhibit 3 lists all companies that went
strategy adopted by these players, companies that have public in 2005. For these companies, the median Market Cap-
developed a strong capability in a couple of high-growth to-sales multiple was 2.85x and the Market Cap-to-earnings
verticals and in some cases, a leadership position in one, multiple was 27.1x.
clearly stand out from the rest. For example, KPIT Cummins
enjoys a significant differentiation in the market owing to
its established track record in executing moderate-sized
manufacturing-related IT projects.
3. Consolidators: There seems to be an emerging segment

of players that are adopting a highly inorganic approach to
06
Exhibit 3: IT IPO’s in Calendar Year 2005
As on Listing As on December 30, 2005
Company Issue Capital Revenue* PAT* Market Market Market Market Market Market Change Since
Opening Raised Cap Cap/Sales /PAT Cap Cap/Sales Cap/PAT Listing as on
Date 30 Dec 05
Mid-Cap
3i Infotech Apr-05 51.1 64.9 3.9 110.8 1.7 28.3 225.0 3.4 57.4 103%
Aurionpro Oct-05 6.0 1.9 0.5 25.6 13.4 48.5 23.0 12.0 43.6 -10%
Solutions
Compulink Dec-05 6.0 2.8 0.8 16.8 5.9 21 16.0 5.7 20.3 -3%
Systems
Small-Cap
FCS Software Sep-05 3.9 18.8 2.5 55.7 2.9 27.1 34.0 1.8 16.6 -39%
Kernex Dec-05 22.0 11.7 2.0 87.1 7.5 43.7 78.0 6.6 38.9 -11%
Microsystems
Paradyne Info Nov-05 3.1 15.2 1.1 18.2 1.2 16.4 19.0 1.2 16.9 4%
Prithvi Nov-05 30.0 67.8 6.3 113.4 1.7 17.8 136.0 2.0 21.6 21%
Information
Systems
Saksoft Mar-05 1.7 4.1 1.3 28.2 6.8 22.2 29.0 7.1 23.0 4%
Sasken Sep-05 28.9 53.3 4.8 284.0 5.3 56.1 232.0 4.3 48.3 -18%
*Revenue and PAT are for fiscal year prior to listing

Market Cap, Revenue, PAT in USD Million
Source: Avendus Estimates, CMIE Database
Exhibit 4: Overview of Mid-Cap Landscape
Company Segment Key Focus Area Market Cap Revenue EBITDA

(TTM) (TTM)
3i infotech Product/Solution Provider IT services company focused on BFSI, 189 85 17

www.3i-infotech.com manufacturing, retail and
distribution space
Aftek Infosys Product/Solution Provider Product cum services company 217 51 19
www.aftek.com in the embedded space
Aptech Ltd. Niche Service Provider IT training company 115 27 (5)

www.aptech-worldwide.com
Aztec Software & Niche Service Provider Product engineering company 166 40 9
Technology Services (Product-Centric Services)
www.aztek.com
Cranes Software Product/Solution Provider Product-centric company in 268 44 28

www.cranessoftware.com scientific and engineering space
Geodesic Information Product/Solution Provider Product company in the 299 17 10

Systems communication and collaboration
www.geodesiconline.com space
Market Cap is a 30-day trailing average, as on December 30, 2005. Continued on the next page...
All figures in USD Million
Source: Avendus Estimates, CMIE Database, Company Annual Reports
07
Exhibit 4: Overview of Mid-Cap Landscape
Company Segment Key Focus Area Market Cap Revenue EBITDA

(TTM) (TTM)
Geometric Software Niche Service Provider PLM software company 135 47 11

www.geometricsoftware.com (Product-Centric Services)
Hexaware Technologies Niche Service Provider IT services company focused on 314 147 23
www.hexaware.com airlines, HR IT, peoplesoft,
insurance, testing and Asset
management solutions
iGATE Gobal Solutions Multi- Domain Player IT services company focused on BFSI 158 129 13
www.igate.com space
Infotech Enterprises Niche Service Provider IT services company focused on GIS, 158 71 14
www.infotechsw.com engineering design space
KPIT Cummins Infosystems Multi-domain Player IT services company focused on BFSI, 111 65 8
www.kpitcummins.com manufacturing space
Mastek Multi-domain Player IT services company focused on BFSI, 168 140 24

www.mastek.com telecom, education and government
space
Mphasis BFL Multi-domain Player IT services company focused on 528 199 49
www.mphasis.com financial services, retail, logistics,
transportation, technology
and healthcare space
NIIT Ltd Niche Service Provider IT training company 127 92 11
www.niit.com
NIIT Technologies Multi-domain Player IT services company focused on 140 109 22

www.niit.com/tech finance, retail, transport and
manufacturing space
Nucleus Software Exports Product/Solution Provider Product company focused on BFSI 138 30 11
www.nucleussoftware.com space
Polaris Software Lab Product/Solution Provider Product-cum-services company 290 183 18

www.polaris.co.in in BFSI space
Rolta India Niche Service Provider IT services company in engineering 288 88 41

www.rolta.com services, GIS and eSolutions space
Sasken Communication Product/Solution Provider IT services company focused on 235 51 6

Technologies Telecom space
www.sasken.com
Scandent Solutions Consolidator IT services company focused on 136 71 12

Corporation manufacturing, government, BFSI
www.scandentgroup.com space
Subex Systems Product/Solution Provider Product company focused on 186 37 11
www.subexgroup.com telecommunications space
Visualsoft Technologies Niche Service Provider Software solutions and product 106 41 9
www.visualsoft-tech.com development company focused
on BFSI, retail and manufacturing
space
Zensar Technologies Multi-domain Player IT services and BPO company 100 78 13
www.zensar.com
Market Cap is a 30-day trailing average, as on December 30, 2005.

Source: Avendus Estimates, CMIE Database, Company Annual Reports
08
Mid-Caps : Drivers for Growth
All Mid-Caps listed in the previous section are survivors of companies seem to be positioned well for growth.
the economic downturn witnessed during 2000-2002. Companies such as Cranes, Geodesic, Nucleus, Subex and 3i
These companies have followed multiple growth strategies Infotech have demonstrated the ability of Indian companies
but in most cases, it has been around a single foundation of developing software products that have global applicability.
consolidation, niche services focus, product/solutions focus The capital markets have rewarded these companies with
or domain differentiation. In this section, we try to answer attractive valuations that factor in the economics of product
the following questions: plays.
Exhibit 5: Market Cap CAGR Comparison for Mid-Cap Companies

+ Which are the top-performing Mid-Cap companies?
+ What is common among these top-performing Company Name 3-yr CAGR in 2-yr CAGR in 1yr CAGR in
Market Cap Market Cap Market Cap
companies?
+ What lessons can be drawn from these top-performing
Geodesic 211% 268% 353%
companies?
Cranes Software 128% 125% 93%
Top Performers Hexaware
Technologies 125% 84% 44%
We have used Market Cap to compare the performance of
these companies. Our analysis excludes companies that Subex Systems 99% 107% 116%
have recently listed on the capital markets, such 3i Infotech
and Sasken. We believe Market Cap is the most appropriate Aptech 68% 62% 63%
metric for comparing companies as it takes into account K P I T Cummins
Infosystems 62% 66% 34%
both, its past track record and future expectation of growth.
We have selected 10 companies that have outperformed Nucleus Software 62% 149% 248%
others, based on a three-year CAGR in their Market Cap.
This period provides a fair measure of the companies' Aftek Infosys 50% 73% 65%
capabilities as it captures efforts made by them to deal with
Aztec Software 45% 132% 240%
extremely challenging market dynamics. The list of the top
ten companies is provided in Exhibit 5 (these companies Geometric
37% 60% 82%
Software Solutions
shall be referred to as “Top Performers” in the rest of the
report). Mphasis B F L 32% 22% 0%
Zensar
Technologies 20% 45% 60%
We have compiled the strategies adopted by each of the Top
Performers in Exhibit 6. Further details on each company Infotech
Enterprises 12% 57% 122%
and their strategies are provided in the Appendix 1 to the
Igate Global
report. 11% 24% 1%
Solutions
Rolta India 6% 33% 70%

As observed in Exhibit 6, five out of the Top Performers are
product companies, two are product-centric services Polaris Software
5% 14% -23%
Lab
companies, two are niche services companies and one is a
multi domain player. Mastek 4% 10% 42%
Visualsoft
Technologies -10% -8% 4%
This data, in conjunction with an in-depth study of each
company, reveals some critical strategies adopted by most NIIT NA -11% 3%
of the Top Performers.
Scandent
NA NA -5%
Solutions
Strategy #1: Build a Product Either Your Own or Somebody
NIIT
Else's Technologies NA NA -5%
In the world of IT services companies, product-related
Sasken NA NA NA
3i Infotech NA NA NA

Source: Avendus Estimates, CMIE Database
09
Exhibit 6: Strategies of Top Performers
Company Name Vertical Profile Strategy
Aftek Infosys Ltd. Embedded Product/Solution Provider , Strong focus on the Embedded space.
, Following a product cum services strategy.
, Effective use of alliances to tap clients.
, Strong focus on inorganic growth with the acquisition of
Arexera in 2003 to enter the European markets and V-Soft
Aptech Ltd. IT Training Niche Service Provider , Focused exclusively on training from 2001
, Established a very strong brand- Second largest Indian IT
training company.
, Focused on international Markets like China, Africa,
Bangladesh, Latin America and Vietnam
, Focused on forming alliances with education institutes as
well as corporate for IT training
Aztec Software & Technology Technology Niche Service Provider , Focused on Product Engineering.
Services (Product-Centric Services) , Strong focus on Technology.
, Select clients and annuity focus.
, Acquired Disha Technologies, a testing company to
facilitate rapid Product Development
Cranes Software Intl. Ltd. Scientific and engineering Product/Solution Provider , Acquisition of under valued products
, Enhancement of these products by leveraging the Indian
development center
, Cross sell these products to their existing and new user
base
, Acquired one company in 2005
Geodesic Information Communication and Product/Solution Provider , Focused on the instant messaging space
Systems Ltd. collaboration , Focused on constantly innovating product lines: Mundu,
its flagship product is the number 1 interoperable instant
messenger in the world
, Did three acquisitions in 2005 in technology companies
that added to Geodesic's product range and
functionality.
Geometric Software Solutions Primarily Manufacturing Niche Service Provider , Focused on Product Lifecycle Management.
Co. Ltd. (Product-Centric Services) , Used Intellectual Property effectively to differentiate
itself.
, Has been expanding service offerings around the PLM
space.
, Started focusing on products with the launch of
Hexaware Technologies Ltd. Airlines,HR IT, Peoplesoft, Niche Service Provider , Identifying undeserved but scalable markets, and then
Insurance and more making substantial investment upfront to create market
recently testing and Asset leadership status
Management Solutions , Focus on niche segments like Airline, HR, Peoplesoft
, Focus on emerging & underserved markets in Europe
specifically Germany
, Focus on client mining
K P I T Cummins Infosystems BFSI, Manufacturing Multi-domain player , Focused on the verticals and domains including
Ltd. advanced technology solutions, information risk
, Focused on mining a few clientsmanagement and
control, SAP and BPO.
, Acquired two companies in 2005 in order to expand
its presence in the French market and add business
intelligence as a domain
Nucleus Software Exports Ltd. BFSI Product/Solution Provider , Focused on niche segments like cash management and
retail lending.
, Focused on untapped markets like Asia, Philippines and
Japan in particular, Middle East and Europe.
, Focused on investment in IP creation and new product
offerings
Subex Systems Ltd. Telecom Product/Solution Provider , Focused on the fraud management and revenue
maximization space
, Focused initially on emerging markets and later entered
developed markets
Source: Avendus Research
10
Refer the inset box for a profile of Subex, one of the top for software exporting, these companies are focusing on
performers that have adopted a product- focused strategy. expanding into newer geographies such as Middle East, Asia
We expect more companies with a product-focused strategy and Latin America. For example, 3i Infotech Limited, a
to access the public markets in coming years. According to a software products company, is believed to achieve almost 25-
recent NASSCOM report, the 30% of its growth from emerging
products and technology SUBEX: An Indian Software Product Company markets like Central Asia, East
services market in India is Subex offers products focused on niches within the Asia and the Middle East.
expected to grow to USD 8 telecom sector. The company identified an
billion by 2008. opportunity in the fraud management and revenue When talking of under-served
maximization solutions for telecom operators. A markets, we need to take stock of
Another rapidly growing survey conducted by Communications Fraud Control a latent opportunity right at our
opportunity is the creation of Association (CFCA) estimated annual telecom fraud doorstep. Some companies are
offshore players dedicated to losses to be in the range of USD 35-40 billion. focusing on the Indian domestic
providing intellectual property However, only 27% of operators currently use IT market that NASSCOM projects
related services to technology or 'Revenue Maximization' solutions. Subex is among will grow to USD 6 billion by
manufacturing companies the few product companies globally that has 2006, a CAGR of 25%. While this
globally. Aztec Software is an developed solutions targeting this opportunity, a may seem lower when compared
example of a company that feat acknowledged by a 100% CAGR in their Market to exports, we can expect the
provides outsourced product Cap over the last three years. domestic IT market to get a fillip
development and software with increased penetration of
testing services to Independent broadband, increased
Software Vendors (ISVs). A similar opportunity exists in investments in e-Governance projects, progressive
Engineering Design Services that help companies manage deregulation, etc. With this expectation, companies are
their product lifecycles more effectively. Exhibit 7 highlights increasing their focus on the domestic market, especially in
each of these opportunities in more detail. emerging sectors such as retail, logistics, telecommunications
and SMEs. Companies such as Nucleus Software have a long
Strategy #2: Focus on A Fast-Growing Niche And Strive For track record of serving the Indian market.
Global Leadership
Positioning, focus and leadership (actual and perceived) go Strategy #4: Leverage Acquisitions, Strategically
a long way towards helping win customers. It does wonders Acquisitions have been used fairly aggressively by the Mid-
for your Market Cap as well. There was a time in the Indian Cap segment, as can be seen in Exhibit 8. While the jury is still
IT markets when being focused on financial services was out on the success or failure of these acquisitions, Mid-Caps
considered a niche. That is no longer true. In today's context, have demonstrated the ability to leverage acquisitions to
a financial services niche implies focusing on something complement their existing capabilities.
more specific, such as Fixed Income Capital Markets.
Hexaware has leveraged its HR IT niche positioning to get

long-term contracts from large clients, whereas Subex has
kept redefining its telecom focus to define a niche where it
can claim to have a global leadership position.
Strategy #3: Target Under-Served Markets

Mid-Cap companies are also following a strategy of
exploring new markets to not only insulate themselves
against over-dependence on the US market, but to also
shield themselves from head-on competition with the
Large-Caps. Though the US will remain a dominant market
11
Exhibit 7: Emerging Service Offerings for Products
Offshore Product Development (OPD)

, OPD is a term that refers to outsourcing pieces of ISV's product development functions to a specialist
, A number of global ISV's like Siebel, Hyperion, BMC software and Autodesk are leveraging this model. partner.
Market Size Market Drivers Service Providers

The Indian OPD , Increasing cost pressures , Mid-Cap companies: Aztec software, Visualsoft
market is estimated to , Need to shorten the time-to-market cycle
grow to $8-11 billion by , Failed attempt by some ISV's to set up captive , Small Cap & Private Companies: Sonata Software,
2008 Symphony Services, Virtusa, ISG Novasoft, Cybernet
Source Nasscom
, Significant traction in startups with many venture
Software Systems, Aditi Software and Persistent
capitalists specifically asking for an 'India plan'.
centers in India due to issues with managing scale Systems.
and operations and keeping their team motivated
, Example: US$ 18 million investment by , Large-Caps: TCS, Infosys, Wipro
Norwest Capital Partners into Pune based
Persistent Systems.
Outsourced Testing Service

, This refers to quality assurance (QA) service outsourcing functions
, Globally companies endeavor to have a ratio of 3:1 between developers and QA professionals and therefore providing for a huge
market opportunity.
, Outsourced testing services includes services like white-box, black-box, functionality, compatibility, and stress testing

The size of the Indian Cost arbitrage Pure play testing companies: Applabs (now merged with
testing market is Visualsoft), Disha Technologies (now merged with
Increased need for rigor and transparency to the testing
estimated at $300 and defect reporting ocess of the software product Aztec),ThinkSoft, RelQ and Ready Test Go
million (CY05) and is development life cycle.
projected to grow to $1
billion by the year 2007
Time to market is becoming a key for ISVs to Large Players: Infosys, Wipro, TCS, Satyam, Cognizant, HCL
Source Meta Group Technologies, Headstrong, Keane, Patni operate in this space. .
differentiate from each other and capitalize on the
early mover advantage.
Stringent compliance norms set by regulatory bodies in

US and Europe for the banking, financial, insurance and
healthcare sectors, are also driving ISVs to outsource
testing services
Engineering Design Services

, Engineering services are those that augment or manage processes that are associated with the creation of a product or service, as well
as those associated with maximizing the life span and optimizing the yield associated with a product or asset.
, This not only includes design elements of the product or service itself, but also encompasses the infrastructure, equipment and
processes engaged in manufacturing or delivering them.
The worldwide market Current slow down in the global automotive and Focused engineering design players:
for outsourced aerospace sectors has increased the need for low cost Infotech Enterprises, Rolta India, Geometric, Onward
engineering design vendors for design services Technologies, KLG Systel, Hero Global Design, Axis/IT&T, Plexion
services is estimated to & Quest
be $12.4 billion in 2006. Offshoring engineering design and services translate
Source: IDC into: Captive MNCs:
Bechtel, Ford, Daimler Chrysler, GM, Caterpillar
25%-30% reduction in engineering cycle time
30%-40% reduction in cost

Large players with engineering design capabilities:
TCS (recently signed a deal with Ferrari), Infosys (recently signed
20%-30% increase in production efficiency a deal with Airbus), Wipro, Satyam, NIIT, HCL Tech
(productivity and quality)
15%-20% reduction in maintenance cost(Source:

Dataquest)
Lack of skilled manpower/bandwidth within OEMs to

cater to their design needs in-house
Faster time to market- a critical factor in fluctuating

business trends in sectors like automotives
12
Exhibit 8: Acquisitions by Mid-Cap Companies in the Last Twelve Months
Date Acquirer Target Deal Value Purpose/Outcome of Transaction
Dec-05 Geodesic Engage Solutions NA In line with the company's plan to make
strategic investments in technology
companies, that possess innovative ideas that
can be integrated with the company's
existing suit of products.
Nov-05 MBT Axes Technologies 54 Bridge a gap in MBT's service offerings to the
Telecom Equipment Manufacturers (TEM)
segment of the telecom market.
Augment MBT's offerings in product

engineering and enhance capabilities to
provide solutions to telecom service providers.
Strengthen MBT's delivery capabilities.
Nov-05 KPIT Cummins Pivolis 2 Gateway to France (with large manufacturing

& banking companies, KPIT's focus areas), a
new geography
for KPIT.
Strengthen presence in BFSI segment.
Nov-05 Geodesic PicoPeta Simputers 7 Provides Geodesic with new value added
product offerings by combining its instant
messaging platform with PicoPeta's Simputers
and its complementary universal messaging
system.
Leverage on PicoPeta's understanding of a

complete product for the local market with its
global product presence, in order to enable
effective cross selling of products and
solutions.
Nov-05 3i Infotech SDG Software NA Acquisition of new products in banking

Technologies (Anti Money Laundering) and capital markets
(Fraud Management), erstwhile missing in the
company's array of products.
Nov-05 KPIT Cummins SolvCentral.com 2 Strengthen domain focus on BI by creating a

new line of business (LoB).
Establish presence in new geographic

area - Washington DC.
Oct-05 Geodesic Clangula IT AB NA NA
Oct-05 Mastek Entegram 2 Access to strong client base

(Fortune 500 companies).
Sep-05 3i Infotech Innovative Business 4 Enhance company's niche consulting skills in

Solutions EAI, BI and IT security.
Augment geographic reach to US
Credible customer base acquisition.
Aug-05 Aftek Infosys V-Soft Inc 4 Enhance its footprint in the professional
services arena in USA.
Continued on the next page
13
Exhibit 8: Acquisitions by Mid-Cap Companies in the Last Twelve Months
Date Acquirer Target Deal Value Purpose/Outcome of Transaction
Jul-05 Scandent Solutions BWH France NA Entry into the French market.
Jun-05 Caritor Idgo Group 4 Provides consulting to telecom and financials

verticals.
Entry into the Paris market.
May-05 Mindtree Linc Software NA Provides expertise in the areas of application

Consulting development and maintenance domains for
IBM Mid-range systems- An important
component in the growth strategy laid down
Mindtree.
May-05 Cranes Software Engineering Mechanics NA Provides consulting services and customized
Research Corporation software in the field of computer aided
India Operations engineering.
May-05 Mphasis BFL Eldorado Computing 17 Make a foray into the booming healthcare
insurance and payment processing business.
Strengthen presence in the US market.
Mar-05 Infotech Tele Atlas India Pvt Ltd 2 Strategic acquisition to see definitive inflow of
Enterprises revenue by ensuring a minimum amount of
business to be carried out in the next 3 years.
Structured to provide financial aid to Tele
Atlas's large order book execution.
Feb-05 Mphasis BFL Princeton Consulting 8 Add niche consultancy services focused on
providing customer management solutions;
depth to existing service offerings.
Acquisition used as a route to scale operations

(buy vs build model).
Jan-05 Geometric Tecsoft Inc 2 NA

Software & Cimitronics Inc
All Figures in USD Million

Source: Avendus Estimates, Company Press Releases
14
Differentiated Mid-caps: A Compelling Value Proposition
As discussed in previous sections, Mid-Caps have followed a What is important to note is that the Top Performers, with
different strategy, as compared with Large-Caps. While Large- median EBITDA margins of 26% and median PAT margins of
Caps have focused on building global delivery capability to 19% (for fiscal year ending March 31, 2005), were
service large multi-year outsourcing engagements, Mid-Caps comparable to the profitability levels of the Large-Caps
have primarily focused on developing their competence whose median EBITDA margins were 27% and PAT margins
around niche areas for growth. Our analysis shows that were 20%, as illustrated in Exhibit 10 and 11.
though Mid-Cap Market Cap has grown dramatically
compared to those of Large-Caps, they are relatively Exhibit 10: Median EBITDA Margin Comparison
undervalued as compared to Large-Caps. The difference is
35%
more telling in the case of our Top Performers, whose revenue
33%
growth rates exceed Large-Caps at comparable levels of
30%
profitability. 27%
27%
25% 26%
25% 26%
Mid-Caps Have Outperformed Large-Caps in Market Cap 25%
23% 21%
20%
Growth 20% 21%
Contrary to the common perception, the Mid-Caps have 19%
shown stronger growth in their Market Cap than the Large- 15% FY 03 FY 04 FY 05 FY06(E)
Caps. We compared the 365-day trailing average Market Cap Median Mid-Cap Median Top Ten Players Median Large-Cap
(as of December 30, 2005) of all Mid-Caps and Large-Caps over
Source: Avendus Research, CMIE Database
the last three years. Mid-Caps performed better than Large-
Caps for all three years.
The median three-year CAGR in Market Cap for Large-Caps Exhibit 11: Median PAT Margin Comparison
was 32%, compared with 37% for Mid-Caps and 65% for the
25%
Top Performers. Mid-Caps have also outperformed Large-Caps 21%
in terms of growth rates of both two-year and one-year 20% 19% 20%
20%
Market Cap, as illustrated in Exhibit 9. 19% 20%
15%
15%
12% 12%
Exhibit 9: Market Cap CAGR for Large-Cap, Mid-Cap 11%
& the Top Performers 10%
11% 11%
100%
95% 88% 5% FY 03 FY 04 FY 05 FY06(E)
80% 65% Median Mid-Cap Median Top Ten Players Median Large-Cap
62%
60% 60%
37%
40% 47% 35%
32%
20%
0 3 year CAGR 2 year CAGR 1 year CAGR

Median Mid-Cap Median Top Ten Players Median Large-Cap
Market Cap is the 365-day trailing average (as of December 30, 2005)
Top Performers Beat Large-Caps in Terms of Revenue Growth,

at Comparable Margins
Mid-Cap companies as a whole have increased their revenue
in the last three years (2003-2005) at a CAGR of 31%.
However, our Top Performers have done better, growing at an
impressive 40%. This growth is better than that of Large-Caps,
who are growing at a CAGR of 36%.
15
Large-Caps Are Still Trading At a Significant Valuation Exhibit 14: Median Market Cap/PAT Comparison
Premium
36.00
For the trailing twelve months (ending December 30, 2005), 31.18
32.00
the Mid-Caps had a Market Cap/Sales, Market Cap/EBITDA
28.00
and Market Cap/PAT of 2.58x, 11.12x and 18.00x respectively.
24.00 21.48 20.12
As expected, the Mid-Caps are trading at lower multiples than 19.21 18.03
20.00
Large-Caps as illustrated in Exhibits 12, 13 and 14.
16.00 13.02 18.00
Based on the above facts, we believe there is a strong case to 11.11 11.06
12.00
be made for investing in Mid-Caps that have demonstrated 11.22 10.09
8.00 10.08
the ability to differentiate themselves in a market dominated
4.00
by the Large-Caps.
0 FY 03 FY 04 FY 05 TTM
Exhibit 12: Median Market Cap/Sales Comparison Source: Avendus Research, CMIE Database
6.00
5.68
5.00
4.01 3.96 3.77 4.23
4.00
3.00 2.11
1.86 2.58
2.00
1.61
1.75 1.57
1.00 1.20
0 FY 03 FY 04 FY 05 TTM
Exhibit 13: Median Market Cap/EBITDA Comparison
27.00
24.13
24.00
21.00
18.00
14.22 13.96
15.00 12.45
13.26
12.00
7.68 7.73 11.12
6.98
9.00
6.45 7.09
6.00 6.61
3.00
0 FY 03 FY 04 FY 05 TTM
16
Mid-Caps : The Road Ahead
Going forward, we expect the Mid-Cap landscape to be last couple of years has witnessed a strong show of
action-packed with a number of mergers, acquisitions, interest by global venture capitalists that have invested
private equity plays and public market offerings as in product companies in India. This includes investments
companies try to move to the next level and fill the void by Nokia Growth Partners and Nortel in Sasken, Bank of
between the Large-Cap and the Mid-Cap players as the America in Ittiam and Battery Ventures and Intel Capital
revenues of the largest Mid-Cap player in India are less than in Tejas Networks.
USD 200 million.
+ We expect weaker Mid-Cap companies that are unable to
If we allow ourselves the liberty to indulge in some crystal develop strong differentiation to get acquired by large IT
gazing, we expect the Mid-Cap segment to witness the multinationals like EDS, Accenture, Cap Gemini, etc, who
following: are constantly looking for inorganic opportunities to
enhance their offshore presence.
+ As mentioned above, there is a huge gap between the
Large and Mid-Cap players today in terms of their + We expect a number of new entrants to the publicly
revenue base. This has created a unique market listed Mid-Cap landscape through IPOs in 2006. Calendar
opportunity for Mid-Caps to fill this void as clients look year 2005 saw a number of IT services companies access
for a second bracket of companies to outsource their the Indian capital markets but most of these companies
services rather than largely depend on the few Large- would be categorized as Small-Cap, except for 3i Infotech,
Caps who are growing larger by the day. Mid-Caps will Sasken and Prithvi Information Systems. Year 2006
adopt different approaches to exploit this opportunity. promises to be different, with a number of sizeable
+ The Niche Service Providers will continue to private companies looking to go public. The companies
specialize and gain scale to become global leaders in we expect to go public in the next 12-18 months are
their areas of focus. This will be facilitated by private illustrated in Exhibit 15.
equity and venture capital firms looking to
participate in the next wave of opportunity in the
Exhibit 15: Private Companies that might Go Public In the Near Future
Indian IT industry. An early indicator of this is the
$18.8 million investment by Norwest Venture Company Profile
Partners and Gabriel Venture Partners in Persistent IT service provider focused on Financial Services,
Caritor Telecommunications, Retail, Manufacturing and
Systems6. Public Sector.
+ Some of the multi-domain players with strong
IT service provider in the Telecommunication
Corpus
capability in a couple of high-growth verticals, and and BFSI space.
possibly a leadership position in one or more, will be Infinite IT service provider focused on Telecom, Utilities,
Healthcare and Government verticals.
well positioned to grow rapidly. In these cases too,
IT services provider focused on Manufacturing,
we can expect private equity firms to provide the L&T Infotech BFSI and Communications and Embedded
capital for expansion through organic or inorganic space.
means. Mahindra British Telecom Telecom-focused IT service provider.

+ We could see large global buy-out funds provide the IT service provider focused on Travel and Leisure,
Mindtree Consulting Manufacturing, BFSI, Hi-Tech and
capital to successful managers to build companies Pharmaceutical verticals.
through the consolidator strategy, which relies on Software product development.
Persistent
equal-sized mergers or significant acquisitions in
Source: Avendus Estimates, Industry Reports
order to leapfrog to a certain level of scale. However,
we would like to add a word of caution here because Mid-Cap companies will continue the inorganic route to build
the success of this strategy remains to be proven. on their service offerings or domain expertise. We believe that
The biggest challenge in executing this strategy a number of Mid-Caps might look at adding scale and
would come from integrating cultures of accelerating growth by acquiring a front-end company in the
predominantly human capital-driven businesses. US. This strategy should enable them to get a global scale
rapidly.
+ Considering the outlook that several early stage India-
focused funds are expected to be raised in 2006, we In conclusion, we recommend a close look at Mid-Cap
should expect to see the emergence and growth of companies that have invested in prior years to build a strong
product companies over the next three-five years. The differentiation in the market. We may just be at the threshold
of the next big IT wave.
6
Source: Norwest Venture Partners Press Release
17
Appendix A :
Company Specific Strategy of Top Ten Performers
18
APPENDIX
Geodesic Information Systems
Geodesic is ranked number one on our list of top performing Mid-Cap companies with a three- year CAGR in
Market Cap of 211%.
Founded in 1999 during the dotcom boom, Geodesic has evolved as an innovative product and solutions
provider, focused on instant messaging in the communication and collaboration space.
Company Strategy
The company's success can be attributed to its niche product more than 100% growth in revenues over the last three years.
focus and its constant product innovation. The company also commands one of the highest EBITDA and
PAT margins in the industry at 62% and 47% respectively for
+ Product/Domain focus: The company is fully focused in FY05 as illustrated in the Exhibit below.
the area of communication, commerce, content and
collaboration related IPR development. Exhibit A: Geodesic Financial Performance
+ Innovation of product lines: Geodesic has constantly 80 70%

60%
created successful products, which include the Mundu 60 50%
interoperable instant Messenger, IMaround and ADePT. 40%
40
+ Mundu: This interoperable instant Messenger has 30%
become the world's number one interoperable 20 20%
Messenger. 10%
0%
+ Imaround: A universal product indicator and 0 FY03 FY04 FY05 FY06(E)
communicator that converts asynchronous Market Cap Revenue EBITDA Margin PAT Margin
communications tools viz. email, web pages, into
synchronous and interactive collaborative tools. Revenue, Market Cap in USD Million
+ AdePT: A unique auction-based self-serviced
advertising management engine that empowers
portals to provide their advertisers to build online
advertising.
+ Marketing strategy: The company markets its flagship

product Mundu as an application platform and not just a
Messenger. Apart from the limited direct marketing,
Geodesic has also forged strategic alliances with global
companies to extend its reach.
+ Inorganic Focus: Geodesic's inorganic strategy is to

acquire strategic stakes in various technology companies
that possess innovative ideas, which can be integrated
with its existing technology and suite of products.
+ Using this approach, Geodesic acquired 76% stake in

Sweden-based Clangula IT AB, Bangalore-based
Picopeta Ltd. and Hong Kong-based Engage
Solutions.
The company has been extremely successful, as it has seen
19
APPENDIX
Cranes Software International
Cranes Software International is ranked number two on our list of top performing Mid-Cap companies with
a three-year CAGR in Market Cap of 128%.
Founded in 1991, Cranes Software began business as a distributor of scientific and mathematical software
products from Mathworks Inc.,USA. In the late 1990's, the company also got into the training business. As a
distributor, the company was focused on the domestic sector and established relationships with leading
global technology players and gained tremendous domain experience. However, the company did not own
any IPR. In 2001, the company changed its strategy and initiated its foray into software IPR through the
acquisition of a number of products. This strategy has paid off as the company has expanded over ten times
in the last four years.
Company Strategy
Since 2001, the company has followed a clear strategy of delivered high EBITDA and PAT margins at 55% and 28%
acquiring under-valued products and then enhancing them by respectively for FY05 as illustrated in the Exhibit below.
leveraging its Indian development center and then cross-
selling these products to its existing and new user base. Exhibit B: Cranes Financial Performance
150 70%
+ Acquisition: Acquisitions have been an integral part of
60%
the company's strategy. It has acquired under-valued 50%
products with demonstrated technical capabilities and a 100 40%
strong brand among the user segments. It acquired AISN 30%
50 20%
Software along with its market-leading software
10%
products (2000), SYSTAT and Sigma product line from 0%
SPSS Inc (2001, 2004), and Engineering Mechanics 0 FY03 FY04 FY05 FY06(E)
Research Corporation, the developer of the NISA family of Market Cap Revenue EBITDA Margin PAT Margin
FEA programs and a pioneer in the field of Computer

Aided Engineering Software (2005). With these ExhibitMarket
Revenue, B : Cranes Financial
Cap in Performance
USD million
acquisitions, the company acquired a cumulative user Source: Avendus Research, CMIE Database
base of 350,000, which included customers like Merck,

Eli Lilly, Pfizer and NASA.
+ Enhancement: The company enhances product lines by

setting a clear product development roadmap and by
leveraging its domain expertise and the India
development center.
+ Expansion: Once the product is enhanced with added

capabilities, the company leverages its global presence
and 38 offices to sell. It also optimizes opportunities by
significantly cross-selling to existing and new users.
That the company's strategy has been successful can be seen

from a CAGR in revenue of 84% over the last five years. The
growth has been driven by product business, which
contributes 80% of its current revenues. (The rest of the 20%
in revenue is derived from the distribution of products and
from training on scientific software products.) The company
20
APPENDIX
Hexaware Technologies Ltd.
Hexaware is ranked number three on our list of top performing Mid-Cap companies with a three-year CAGR in
Market Cap of 125%.
Founded in 1990, Hexaware operated independently till 2001 when it merged with the software division of
Aptech. This merged entity later de-merged from the training arm and subsequently went public. Hexaware
provides software services to organizations in the banking and financial, healthcare, airlines, insurance,
transportation and hospitality sectors. The company focuses primarily on marketing three technology practices
- PeopleSoft Services, Application Management Solutions and e-Solutions. Hexaware also offers offshore R&D
solutions practice comprising embedded software, chip development and testing services.
Company Strategy
Hexaware has followed a strategy of identifying under-served using systems other than PeopleSoft in this space. Hexaware
but scalable markets and making substantial upfront is making a conscious effort to de-risk its business from only
investment to create market leadership status in these focus one or two services, by bringing in services like asset
areas. management, testing services and leasing.
+ Niche Focus: Hexaware differentiated itself by focusing The company has seen 41% growth in revenues over the last
on niche areas such as ERP Offshoring, HR IT and the three years and its EBITDA and PAT margins were recorded at
airline industry. More recently, they have been trying to 17% and 12% respectively for FY05 as illustrated in the Exhibit
make a mark in the testing and asset management below.
solutions space as well.
Exhibit C: Hexaware Financial Performance
+ Expanding into under-served markets: Hexaware has

established a leadership position in the German market
300 20%
and has also expanded their global footprint in the
Australian and Netherlands market. This is in line with 15%
200
their strategy to make a mark in relatively under-served
10%
markets and create market leadership.
100
5%
+ Alliances: The company has managed to form alliances
0%
with partners who serve Fortune 500 clients, including 0 FY03 FY04 FY05 FY06(E)
PeopleSoft, IBM, Unisys, and Valtech. Market Cap Revenue EBITDA Margin PAT Margin
Revenue,
ExhibitMarket Cap in USD
C : Hexaware Million Performance
Financial
+ Client Mining: There is a clear focus on mining the top 35 Source: Avendus Research, CMIE Database
accounts of the company who contribute close to 80% of

the revenues. Hexaware has been able to achieve
significant growth by purely by focusing on their top
customers.
Since Oracle's acquisition of PeopleSoft, there has been a

slowdown in outsourcing from this platform, which has
resulted in the poor performance of the Hexaware scrip in the
last year. However the release of PeopleSoft version 8.9 by
Oracle has seen a regaining of confidence among PeopleSoft
users, especially in North America, leading to a revival in the
PeopleSoft market. Also, Hexaware is simultaneously trying to
expand its portfolio in the ERP space. They have 14 clients
21
APPENDIX
Subex Systems Ltd.
Subex is ranked number four on our list of best performing Mid-Cap companies with a three-year CAGR in
Market Cap of 99%.
Subex was established in 1992 as a telecom hardware system integrator. In 1998 they diversified into
software development and started focusing on developing products in the fraud management and revenue
maximization space. Its clear focus on the telecom vertical and the domains within it has enabled the
company to emerge as the number 1 player in this space.
Company Strategy
Subex's organic strategy has been three-fold -- domain focus, Exhibit D: Subex Financial Performance
product focus and market focus.
+ Domain Focus: Subex has not only been focused on the 80 35%
telecom vertical but within it on the fraud management 30%
60 25%
and revenue maximization space. This has helped the
20%
company emerge as a leader in this space. 40
15%
20 10%
+ Product Focus: Since inception, Subex has been focusing 5%
on developing products in its specialized domain. 0%
0 FY03 FY04 FY05 FY06(E)
Towards this end, Subex has developed Ranger, a fraud PAT Margin
Market Cap Revenue EBITDA Margin
management software and INcharge, a revenue
assurance system. The company derives 36% of their Revenue, Market Cap in USD Million
revenue from the product business.
+ Developing Markets Focus: Subex follows a unique

strategy of focusing initially on the developing markets
in order to a build a good client list. With an availability
of an excellent reference base and suite of products, the
company later enters the developed markets.
+ Inorganic Focus: Subex has launched a proactive

acquisition program in order to fill gaps in its technology
offerings and also expand its geographical reach.
+ Subex acquired IVth Generation Inc, USA in 2000 and

Magardi Inc, Canada in 2001. In 2004, Subex
acquired Alcatel's Fraud Management Group and
Lightbridge's Fraud Centurion, making it the largest
fraud management system vendor in the world.
The company has seen 34% growth in revenues over the last
three years, testimony to the success of its strategy. It also
commands high EBITDA and PAT margins at 31% and 22%
respectively for FY05 as illustrated in Exhibit F.
22
APPENDIX
Aptech Ltd.
Aptech is ranked number five on our list of top performing Mid-Cap companies with a three-year CAGR in
Market Cap of 68%.
Aptech commenced its IT education and training business in 1986. Since its inception, the company has been
successfully addressing business opportunities in the retail training and education segment in information
technology, multimedia and soft skills. In 1998, with the slowdown in the domestic education and training
markets, Aptech expanded its portfolio to include software exports, ERP and knowledge management.
However, in 2001, Aptech Limited de-merged the Training and Software businesses as these markets had
different customer and growth profiles, as well as target markets. The training arm became Aptech Ltd.
Company Strategy
+ Training focus: Aptech has been traditionally an IT Exhibit E: Aptech Financial Performance
training company till they entered the software services
space in 1998. However, with the de-merger in 2001, the
company has focused exclusively on training. 40 60%
40%
30
+ Brand Buiding: Thanks to the customer-centricity of the 20%
20 0%
training business, the company realized early on the need
-20%
to spend time and money on brand- building. This 10
-40%
strategy has paid off immensely for the company as they
-60%
have emerged as the second-largest Indian IT training 0 FY03 FY04 FY05 FY06(E)
company. Market Cap Revenue EBITDA Margin PAT Margin
+ Global Markets: Since its first foray into the Bahrain Revenue, Market Cap in USD Million
market in 1993, the international business has grown
exponentially. Aptech has been aggressively expanding
its international business. It now has training centers in
China, Africa, Bangladesh, Latin America and Vietnam.
Aptech has maintained leadership position in China,
Bangladesh and Nigeria.
+ Alliances: Aptech has formed alliances with education

institutes as well as corporates for IT training. On the
education institutions front, they have formed
collaborative alliances with Southern Cross University -
Australia, Beijing University - China, IIT - Allahabad and
Sikkim Manipal University - Mangalore. Corporate
training is focused only on IT and non-IT Fortune 500
companies in developed countries.
However, the company has not done very well in terms of top
and bottom line growth in the past few years. We believe that
Aptech has done well on the indices because of its distinct
position in the Indian IT training industry and the future
global opportunity.
23
APPENDIX
K P I T Cummins Infosystems.
KPIT Cummins Infosystems is ranked number six on our list of best performing companies with a three-year
CAGR in Market Cap of 62%.
KPIT Infosystems, incorporated in 1991, was focused on providing software services to the Financials Services
and Manufacturing Verticals. The promoters started with these two verticals because of their accounting
backgrounds, and the fact that the company was based in Pune - a strong manufacturing hub. In 2002, KPIT
merged with Cummins Infotech, a captive IT service unit for Cummins group. This merger provided greater
stability to the combined entity's earnings stream and a stronger presence in the market for the
manufacturing vertical. Recently Lehman Brothers acquired an 8% stake in company.
Company Strategy
Since its inception, KPIT's strategy has been to be vertical and margins of 13% and 11% respectively for FY05 as illustrated in
domain- focused, as well as focused on client relationships for the Exhibit below.
growth.
Exhibit F : KPIT Financial Performance
+ Vertical and Domain-Focused: The company has not only
been vertically focused in the BFSI and manufacturing
80 20%
but also domain-focused in advanced technology
solutions, information risk management and control, SAP 60 15%
and BPO. Its exclusive focus on these verticals as well in
40 10%
these segments has helped the company create a niche
in this space and grow rapidly. 20 5%
0%
+ Focus on strengthening client relationships: With only 24 0 FY03 FY04 FY05 FY06(E)
active clients as of March 2005, its STAR customer Market Cap Revenue EBITDA Margin PAT Margin
approach of focusing on a few clients has helped the
Revenue, Market Cap in USD Million
company mine client relationships better. It has focused Source: Avendus Research, CMIE Database
only on a few clients as it aspires to be the number one
vendor of choice for at least five of its top 10 clients.
+ Inorganic Focus: KPIT's acquisitive strategy has been

either to fulfill gaps in service offerings or to expand
service offerings or to enter new geographies.
+ Following this strategy, KPIT expanded its service

offering and added Business Intelligence expertise
through the acquisition of SolvCentral, and
established a stronger foothold in the French market
through the acquisition of Pivolis. These acquisitions
are also an effort to bring down the proportion of
revenue from Cummins.
The company has been extremely successful at its strategy, as

can be seen from its more than 62% growth in revenues over
the last three years. The company has seen a decrease in its
margin over the last year and recorded EBITDA and PAT
24
APPENDIX
Nucleus Software Exports Ltd.
Nucleus Software is ranked number seven on our list of top performing Mid-Cap companies with a three-year
Incorporated in 1989, Nucleus Software provides products and solutions to the Banking and Financial Services
industry. For long, Banking and Financial Services have been one of the most competitive segments in the
industry. However, Nucleus' strong domain knowledge, constant investment in IP creation, focus on niche
segments within the banking sector and efforts towards exploring untapped geographies have paid off. The
company has seen a 250% year-on-year increase in Market Cap and is well poised to leap into the next level of
growth through its distinctive strategy.
Company Strategy
Nucleus has been providing customized solutions to the three years. The company has also seen an increase in its
banking sector since its inception. The company's flagship EBITDA and PAT margins, which were recorded at 24% and
'FinnOne' suite of products has been competing with larger 20% respectively for FY05 as illustrated in the Exhibit below.
peers such as Infosys' 'Finnacle' and i-Flex's 'Flexcube' for some
time now. In order to avoid being squeezed by these larger Exhibit G: Nucleus Fiancial Performance
players, the company adopted a differentiated strategy as
mentioned below:
40 40%
+ Domain focus: As a distinctive focus, the company 30 30%

forayed into development of solutions in niche segments
20 20%
like cash management and retail lending.
10 10%
+ Geographic focus: Nucleus has made inroads into new
0%
untapped markets like Asia, Philippines and Japan in 0 FY03 FY04 FY05 FY06(E)
particular, Middle East and Europe. One reason for this Market Cap Revenue EBITDA Margin PAT Margin
dive into new markets is the fact that most Tier I
companies have a limited presence in these markets, ExhibitMarket
Revenue, E : Nucleus
Cap inFinancial Performance
USD Million
which has enabled Nucleus to bag contracts at
competitive prices.
+ Investment in IP creation and new product offerings:

Nucleus plans to invest up to 10% of annual revenues to
bolster its R&D and new product offerings. The company
introduced three new products in fiscal year 2005 to
position itself as a leader in the banking space.
+ Strategic alliances: The company recently signed a joint

marketing agreement with Sun Microsystems, under
which both companies would create joint marketing and
sales initiatives, apart from interoperability of Nucleus
products on Sun Microsystems' applications. Such an
arrangement would give Nucleus scalability and
flexibility in the choice of platform.
The company has seen a 20% growth in revenues over the last
25
APPENDIX
Aftek Infosys
Aftek Infosys is ranked number eighth on our list of best performing Mid-Cap companies with a three-year
Five technocrats from PCS incorporated Aftek in 1986 with a focus on the hardware business - distribution and
servicing of computers and microprocessor-based terminals. With the changing IT scenario and dwindling
margins in the hardware business, Aftek changed its focus to developing software products for export
purposes in addition to providing application development services.
Company Strategy
The guiding principles of Aftek's growth strategy include + Inorganic Focus: Aftek's acquisitive strategy has been to
embedded focus, creation of IPR, movement up the value expand its service offering, and its geographical reach.
chain, and scalability.
+ Aftek acquired 49% stake in Arexera Information
+ Embedded Focus: Aftek has always been focused on Technologies in 2003 in order to expand its service
embedded software services and products. As they offerings in the knowledge management space. In
acquired expertise in the embedded space they also 2005 Aftek invested in V-Soft Inc to enhance its
began focusing on the wireless and mobile space - big footprint in the professional services arena in USA.
markets for deployment of embedded technologies. The company has used these acquisitions effectively
to tap the European and US markets.
+ Product focus: Although the products revenues account
for only 10% of the total, this share has been growing The company has recorded high EBITDA and PAT margins at
steadily. The company has a UPS monitoring product 45% and 35% respectively for FY05 as illustrated in the Exhibit
called Powersafe as well as a road transportation product below.
called 'Depot Manager'.
Exhibit H: Aftek Financial Performance
+ Moving Up the Value Chain: The company is also moving

up from maintenance/data conversion to design, 120 60%
development, implementation, consulting, products and 100 50%
IPR. In the services area, while Aftek believes that 80 40%
reusable and patentable modules and components can 60 30%
and should be created in the areas of domain expertise, 40 20%
IPRs on products (integrated or stand-alone) are the most 20 10%
valuable. 0%
0 FY03 FY04 FY05 FY06(E)
Market Cap Revenue EBITDA Margin PAT Margin
+ Scalability: Aftek believes that rapid and global level
scalability can be achieved through products, alliances
Revenue, Market Cap in USD Million
and partnerships. Aftek has formed alliances with Source: Avendus Research, CMIE Database
companies like Computer Associates and Hewlett-
Packard. These alliances have helped it market its
products to a large customer base of quality clients.
+ Future Growth Drivers: The company has identified

knowledge management and energy management as
high potential growth areas. It is planning to
acquire/enter into joint ventures with companies with
IPRs and a large client base and strong domain
knowledge in these areas.
26
APPENDIX
Aztec Software & Technology Services Ltd
Aztec is ranked number nine on our list of top performing Mid-Cap companies with a three-year CAGR in
Market Cap of 45%.
Founded in 1995, Aztec Software provides a comprehensive suite of outsourced software product
development life cycle services to ISVs and Enterprise Software product companies. These include
development, testing, professional services and sustenance engineering covering the entire life cycle.
Company Strategy
+ Domain Focus: The company has a singular focus on Product development while maintaining
software product engineering services. This strategy has independence in testing.
paid off for Aztec as this space has seen a great deal of
interest lately. The Company has been successful at its strategy as it has seen
75% growth in revenues over the last three years. The
+ Technology Focus: The company has focused on providing company has also seen an increase in its EBITDA and PAT
total technology solutions and building robust and margins, which was recorded at 24% and 18% respectively as
highly scalable solutions. Aztec has built distinctive illustrated in the Exhibit below.
competence in core technologies like data management,
Exhibit I: Aztec Financial Performance
integration engineering and web services, security and
identity management, and mobile applications. It is also
expanding its technology focus by entering into the 50 30%
wireless and networking and embedded and device 40 20%

segments, which will be key enablers for the company in 30 10%
achieving rapid revenue growth. It has set up R&D teams 20 0%
to track and test emerging technologies.
10 -10%
-20%
+ Selective client engagements: Since inception, Aztec has 0 FY03 FY04 FY05 FY06(E)
been selective with respect to the clients it serves and Market Cap Revenue EBITDA Margin PAT Margin
focuses on a few customers with prolonged relationships.
As a result, Aztec's clients include stable product Revenue, Market Cap in USD Million
companies with annual revenues in excess of $1 billion. Source: Avendus Research, CMIE Database
+ Annuity Revenue Focus: The company has focused on an

annuity business, allowing for predictable and
sustainable revenue model. This has allowed Aztec to
achieve 75% of the business on annuity mode with long-
term customer relationships.
+ Inorganic Focus: Aztec has a clear strategy of pursuing

opportunities for inorganic growth in order to diversify
into segments complementary to its existing service
offerings. Aztec has identified related areas in storage
management and embedded systems where it plans to
acquire expertise.
+ In 2004, Aztec acquired Disha Technologies, a

software product testing company as a strategic
response to their customers' needs to manage rapid
27
APPENDIX
Geometric Software Solutions
Geometric is ranked number ten on our list of top performing Mid-Cap companies with a three-year CAGR in
Market Cap of 37%.
Geometric was founded in 1985 as a division of Godrej & Boyce and spun into an independent entity in 1994.
Organic Strategy
+ Product Lifecycle Management (PLM) Focus: It has been Exhibit J: Geometric Financial Performance
focused on CAD/CAM/CAE/PDM and MPM for the past 21
years and has emerged as a leading global PLM services
provider. Its clear focus on PLM has enabled it to create a 100 35%
30%
niche for itself. 80
25%
60 20%
+ Intellectual Property: Geometric's strategy of providing 40 15%
services revolving around its intellectual property in the 10%
20
PLM space has allowed the company to differentiate 5%
0%
itself from the other players. It was one of the first 0 FY03 FY04 FY05 FY06(E)
companies to go on the path of IP licensing when it Market Cap Revenue EBITDA Margin PAT Margin
licensed its geometry-based algorithms to other
companies for improving their CAD/CAM processes. Revenue, Market Cap in USD Million
+ Expanding offerings in the PLM space: Since PLM is a

highly specialized space, Geometric has been trying to
grow the market by adding more services. In late 2000
the company added Product Data Management (PDM)
services and visualization services to its focus. In early
2002, Geometric started focusing on partners with a
view of addressing more PLM software companies. In
2004 it started to offer end-to-end PLM solutions by
offering services such as help desk and technical support.
+ Product focus: Till 2003 Geometric banked only OEM

deals for its products. However, in 2004 with the launch
of eDrawings for the Pro/Engineer platform, Geometric
forayed into the end user space.
The company has seen 37% growth in revenues over the last
three years. It commanded very high margins a couple of
years ago, but in the last year, the company has seen a decline
in its EBITDA and PAT margins, which were recorded at 27%
and 16% respectively for FY05 as illustrated in the Exhibit
below.
28
Appendix B :
Financials , Growth & Margins And Valuation
29
APPENDIX
Financials
FY06E (US$ Mn) FY05 (US$ Mn) FY04 (US$ Mn) FY03 (US$ Mn)
Company Name Revenue EBITDA PAT Revenue EBITDA PAT Revenue EBITDA PAT Revenue EBITDA PAT
Mid-Cap Companies
3i Infotech Ltd. 89.6 19.2 11.8 64.9 10.5 3.9 51.6 10.2 2.6 40.3 5.9 2.8
Aftek Infosys Ltd. 53.9 19.4 15.2 39.4 17.8 13.7 28.8 13.6 11.2 19.0 9.5 8.9
Aptech Ltd. 26.3 11.5 5.2 25.7 (7.7) (12.7) 31.1 7.0 2.9 34.0 5.0 1.6
Aztec Software
& Technology 42.5 10.0 7.8 21.8 5.2 4.0 9.2 1.1 0.3 10.8 (0.1) (0.9)
Services Ltd.
Cranes Software
44.4 27.1 12.5 36.3 20.1 10.2 25.3 11.9 7.2 13.7 6.7 3.1
Intl. Ltd.
Geodesic Informa-
tion Systems Ltd. 19.4 11.8 8.8 9.1 5.6 4.2 4.0 2.6 1.7 2.2 1.4 0.8
Geometric Software
48.1 10.7 4.5 38.5 10.5 6.1 25.0 7.1 4.6 19.5 6.0 3.8
Solutions Co. Ltd.
Hexaware
Technologies Ltd. 145.0 22.7 17.8 134.4 22.8 16.7 87.0 9.9 9.5 58.5 5.3 2.5
Igate Global
138.8 13.2 2.5 132.9 11.9 4.7 127.8 5.1 0.0 95.8 10.4 6.3
Solutions Ltd.
Infotech
Enterprises Ltd. 75.7 14.3 8.4 58.1 12.2 6.1 42.4 7.8 2.0 36.6 8.7 3.3
K P I T Cummins
Infosystems Ltd. 67.6 9.2 6.6 56.1 7.6 6.3 28.2 4.3 3.2 15.2 2.3 1.4
Mastek Ltd. 143.4 26.0 13.6 119.9 20.8 11.3 85.2 10.0 4.4 84.0 19.7 15.1
Mphasis B F L Ltd. 204.3 57.2 34.0 171.1 36.6 27.5 129.9 30.0 21.9 96.0 21.8 14.9
NIIT
130.8 24.4 14.0 120.5 23.6 13.0 109.4 17.8 7.3 - - -
Technologies Ltd.
N I I T Ltd. 99.3 12.9 9.4 88.4 16.4 7.9 157.0 0.3 (17.2) 144.9 14.4 (4.3)
Nucleus Software
Exports Ltd. 31.4 11.5 7.8 23.5 5.7 4.6 18.1 3.7 2.2 20.0 3.1 1.9
Polaris Software
185.5 19.5 5.7 176.2 25.4 12.9 142.3 26.7 15.5 95.8 21.6 12.1
Lab Ltd.
Rolta India Ltd. 90.4 42.3 27.2 76.8 35.2 20.0 61.7 32.3 14.2 85.2 55.0 29.5
Sasken
Communication 68.2 8.9 4.9 53.3 8.9 5.1 22.3 7.9 4.1 - - -
Technologies Ltd.
Scandent Solutions
Corporation 72.3 12.4 7.2 54.8 8.2 4.0 10.9 - - 40.3 - -
Subex Systems Ltd. 39.8 11.9 9.1 26.1 8.2 5.7 19.8 5.6 3.9 15.7 3.7 2.2
Visualsoft
Zensar
*Certain companies among the Large-Cap and Mid-Cap segments do not follow a Financial Year end (April-March).
For such companies, we have aggregated their financials for such period based on their published quarterly reports
Source- Avendus Estimate, Company Annual Reports, CMIE Database.
30
APPENDIX
Financials
FY06E (US$ Mn) FY06E (US$ Mn) FY06E (US$ Mn) FY06E (US$ Mn)
Company Name Revenue EBITDA PAT Revenue EBITDA PAT Revenue EBITDA PAT Revenue EBITDA PAT
Large-Cap Companies
HCL Technologies 874.7 196.9 152.2 755.0 208.4 146.0 542.7 132.2 89.8 412.2 101.8 75.9
i-flex Solutions 280.5 39.6 22.0 258.8 69.8 54.1 180.0 49.5 39.7 141.1 46.9 38.0
Infosys Technologies 2,043.7 685.1 529.5 1,584.4 518.9 420.4 1,078.4 354.3 276.4 808.9 282.2 212.2
Patni Computers 444.9 82.7 59.7 353.8 86.7 63.0 276.1 62.9 43.9 99.6 49.5 36.5
Satyam Computers 1,124.7 351.9 272.8 801.7 212.2 158.1 585.7 167.2 114.1 502.6 124.9 77.1
Tata Consultancy 2,590.9 2,183.2 1,614.1 1,243.5

797.0 615.5 646.7 439.3 402.2 358.3 293.4 243.1
Services
Wipro Technologies 2,140.4 549.1 418.1 1,834.5 476.9 361.9 1,327.0 311.2 229.2 978.8 260.8 182.3
Source- Avendus Estimate, Company Annual Reports, CMIE Database.
31
APPENDIX
Growth & Margins
Revenue Growth EBITDA Margin PAT Margin
Company Name FY04 FY05 FY06E FY03 FY04 FY05 FY06E FY03 FY04 FY05 FY06E
Mid-Cap Companies
3i Infotech Ltd. 28% 26% 38% 15% 20% 16% 21% 7% 5% 6% 13%
Aftek Infosys Ltd. 52% 37% 37% 50% 47% 45% 36% 47% 39% 35% 28%
Aptech Ltd. -9% -17% 2% 15% 23% -30% 44% 5% 9% -49% 20%
Aztec Software &

Technology Services Ltd. -15% 137% 95% -1% 12% 24% 24% -9% 3% 18% 18%
Cranes Software Intl. Ltd. 85% 43% 22% 49% 47% 55% 61% 23% 29% 28% 28%
Geodesic Information
Systems Ltd. 82% 129% 144% 65% 65% 62% 61% 36% 44% 47% 45%
Geometric Software
28% 54% 25% 31% 28% 27% 22% 19% 19% 16% 9%
Solutions Co. Ltd.
Hexaware Technologies Ltd. 49% 54% 8% 9% 11% 17% 16% 4% 11% 12% 12%
Igate Global Solutions Ltd. 33% 4% 4% 11% 4% 9% 10% 7% 0% 4% 2%
Infotech Enterprises Ltd. 16% 37% 30% 24% 18% 21% 19% 9% 5% 10% 11%
K P I T Cummins
Infosystems Ltd. 86% 99% 20% 15% 15% 13% 14% 9% 11% 11% 10%
Mastek Ltd. 1% 41% 20% 23% 12% 17% 18% 18% 5% 9% 9%
Mphasis B F L Ltd. 35% 32% 19% 23% 23% 21% 28% 15% 17% 16% 17%
N I I T Technologies Ltd. NA 10% 8% NA 16% 20% 19% NA 7% 11% 11%
N I I T Ltd. 8% -44% 12% 10% 0% 19% 13% -3% -11% 9% 9%
Nucleus Software
Exports Ltd. -9% 30% 34% 16% 21% 24% 37% 9% 12% 20% 25%
Polaris Software Lab Ltd. 49% 24% 5% 23% 19% 14% 10% 13% 11% 7% 3%
Rolta India Ltd. -28% 25% 18% 65% 52% 46% 47% 35% 23% 26% 30%
Sasken Communication
Technologies Ltd. NA 139% 28% NA 36% 17% 13% NA 18% 10% 7%
Scandent Solutions
Corporation NA 403% 32% NA 31% 15% 17% NA 4% 7% 10%
Subex Systems Ltd. 26% 31% 53% 23% 28% 31% 30% 14% 20% 22% 23%
Visualsoft Technologies Ltd. 23% 24% -7% 36% 36% 27% 24% 25% 24% 15% 12%
Zensar Technologies Ltd. 18% 28% 17% 10% 10% 16% 12% 4% 5% 11% 5%
Average 28% 59% 28% 26% 25% 23% 26% 14% 13% 13% 16%
Median 27% 32% 20% 23% 21% 20% 21% 11% 11% 11% 12%
32
APPENDIX
Growth & Margins
Revenue Growth EBITDA Margin PAT Margin
Company Name FY04 FY05 FY06E FY03 FY04 FY05 FY06E FY03 FY04 FY05 FY06E
Top 10 Mid-Cap Companies
Aftek Infosys Ltd. 52% 37% 37% 50% 47% 45% 36% 47% 39% 35% 28%
Aptech Ltd. -9% -17% 2% 15% 23% -30% 44% 5% 9% -49% 20%
Aztec Software &

Technology Services Ltd. -15% 137% 95% -1% 12% 24% 24% -9% 3% 18% 18%
Cranes Software Intl. Ltd. 85% 43% 22% 49% 47% 55% 61% 23% 29% 28% 28%
Geodesic Information
Systems Ltd. 82% 129% 114% 65% 65% 62% 61% 36% 44% 47% 45%
Geometric Software
28% 54% 25% 31% 28% 27% 22% 19% 19% 16% 9%
Solutions Co. Ltd.
Hexaware Technologies Ltd. 49% 54% 8% 9% 11% 17% 16% 4% 11% 12% 12%
K P I T Cummins
Infosystems Ltd. 86% 99% 20% 15% 15% 13% 14% 9% 11% 11% 10%
Nucleus Software Exports

-9% 30% 34% 16% 21% 24% 37% 9% 12% 20% 25%
Ltd.
Subex Systems Ltd. 26% 31% 53% 23% 28% 31% 30% 14% 20% 22% 23%
Average 37% 60% 41% 27% 30% 27% 34% 16% 20% 16% 22%
Median 38% 49% 29% 19% 25% 26% 33% 12% 15% 19% 21%
Large-Cap Companies
HCL Technologies 32% 39% 16% 25% 24% 28% 23% 18% 17% 19% 17%
i-flex Solutions 28% 44% 8% 33% 27% 27% 14% 27% 22% 21% 8%
Infosys Technologies 33% 47% 29% 35% 33% 33% 34% 26% 26% 27% 26%
Patni Computers 177% 28% 26% 50% 23% 24% 19% 37% 16% 18% 13%
Satyam Computers 17% 37% 40% 25% 29% 26% 31% 15% 19% 20% 24%
Tata Consultancy Services 30% 35% 19% 24% 25% 30% 31% 20% 22% 20% 24%
Wipro Technologies 36% 38% 17% 27% 23% 26% 26% 19% 17% 20% 20%
Average 50% 38% 22% 31% 26% 28% 25% 23% 20% 21% 19%
Median 32% 38% 19% 27% 25% 27% 26% 20% 19% 20% 20%
Source : Avendus Estimate, Company Annual Reports, CMIE Database.
33
APPENDIX
Valuation
Market Cap/Sales Market Cap/EBITDA Market Cap/PAT
Company Name FY03 FY04 FY05 TTM Dec 05 FY03 FY04 FY05 TTM Dec 05 FY03 FY04 FY05 TTM Dec 05
Mid-Cap Companies
3i Infotech Ltd. NA NA NA 2.2 NA NA NA 10.5 NA NA NA 17.9
Aptech Ltd. 0.4 1.0 1.2 4.3 2.6 4.4 NA NA 8.3 10.7 NA NA
Aztec Software
& Technology 2.9 2.4 2.1 4.1 NA 19.8 8.9 17.4 NA 75.2 11.6 22.7
Services Ltd.
Cranes Software
NA 1.8 2.8 6.1 NA 3.9 5.1 9.3 NA 6.4 10.1 20.1
Intl. Ltd.
Geodesic
Information 4.0 5.7 7.9 17.0 6.2 8.8 12.8 28.0 11.3 13.0 16.9 37.4
Systems Ltd.
Geometric
Software 2.7 2.1 2.1 2.8 8.8 7.3 7.7 12.1 13.9 11.1 13.3 26.3
Solutions Co. Ltd.
Hexaware
Igate Global 1.0 0.9 1.2 1.2 9.6 23.6 13.4 12.1 15.8 NA 33.8 48.3
Solutions Ltd.
Infotech
Enterprises Ltd. 1.8 1.0 0.9 2.2 7.7 5.5 4.2 11.3 20.2 21.2 8.4 19.2
K P I T Cummins
Infosystems Ltd. 1.2 1.0 1.1 1.7 8.1 6.5 8.2 12.4 12.8 8.8 9.8 16.7
Mastek Ltd. 1.6 1.0 0.8 1.2 6.8 8.2 4.7 6.9 8.8 18.7 8.6 12.7
Mphasis B F L Ltd. 2.3 2.8 2.6 2.6 10.2 12.2 12.2 10.6 15.0 16.6 16.2 16.3
NIIT
Technologies Ltd. NA NA 1.1 1.3 NA NA 5.6 6.4 NA NA 10.1 11.0
N I I T Ltd. 1.1 0.9 0.8 1.4 10.8 NA 4.4 10.7 NA NA 9.1 16.4
Nucleus Software
Exports Ltd. 1.0 0.8 1.6 4.5 6.7 4.1 6.5 12.4 11.1 7.0 8.0 18.0
Polaris Software
2.3 1.9 1.8 1.6 10.2 10.3 12.6 16.1 18.1 17.8 24.9 60.7
Lab Ltd.
Rolta India Ltd. 1.6 1.8 1.4 3.3 2.5 3.4 3.0 6.9 4.7 7.6 5.2 10.9
Sasken
Communication NA NA NA 4.6 NA NA NA 35.5 NA NA NA 63.8
Technologies Ltd.
Scandent
Solutions NA NA 2.2 1.9 NA NA 14.4 10.9 NA NA 29.3 18.0
Corporation
Subex
Systems Ltd. 1.0 1.9 2.4 4.9 4.2 6.7 7.7 16.2 7.0 9.4 11.1 21.6
34
APPENDIX
Valuation
Mid-Cap Companies
Visualsoft
Zensar
Average 1.8 1.8 2.0 3.4 7.4 8.7 8.0 13.1 12.8 15.9 13.4 23.7
Median 1.6 1.8 1.6 2.6 7.7 7.0 7.1 11.2 13.0 11.1 10.1 18.0
Top 10 Mid-Cap Companies
Aptech Ltd. 0.4 1.0 1.2 4.3 2.6 4.4 NA NA 8.3 10.7 NA NA
Aztec Software &

Technology 2.9 2.4 2.1 4.1 NA 19.8 8.9 17.4 NA 75.2 11.6 22.7
Services Ltd.
Cranes Software
Intl. Ltd. NA 1.8 2.8 6.1 NA 3.9 5.1 9.3 NA 6.4 10.1 20.1
Geodesic
Information 4.0 5.7 7.9 17.0 6.2 12.6 11.5 13.2 15.2 13.2 15.7 17.0
Systems Ltd.
Geometric
Software 2.7 2.1 2.1 2.8 8.8 7.3 7.7 12.1 13.9 11.1 13.3 26.3
Solutions Co. Ltd.
Hexaware
K P I T Cummins
Infosystems Ltd. 1.2 1.0 1.1 1.7 8.1 6.5 8.2 12.4 12.8 8.8 9.8 16.7
Nucleus Software
Exports Ltd. 1.0 0.8 1.6 4.5 6.7 4.1 6.5 12.4 11.1 7.0 8.0 18.0
Subex Systems
1.0 1.9 2.4 4.9 4.2 6.7 7.7 16.2 7.0 9.4 11.1 12.6
Ltd.
Average 1.8 2.0 2.6 5.2 6.1 7.9 8.3 14.7 10.6 16.1 11.6 21.6
Median 1.2 1.9 2.1 4.2 6.4 6.6 7.7 12.4 11.2 10.1 11.1 20.1
35
APPENDIX
Valuation
Large-Cap Companies
HCL Technologies 3.1 2.5 2.9 4.5 12.5 10.5 10.6 19.8 16.7 15.4 15.1 25.4
i-flex Solutions 4.0 5.8 3.8 5.7 12.1 21.1 14.0 25.5 14.9 26.3 18.0 39.2
Infosys
Technologies 7.0 5.8 6.5 8.9 20.1 17.7 19.8 26.0 26.8 22.7 24.5 33.9
Patni Computers NA 2.3 2.5 3.6 NA 10.0 10.2 17.2 NA 14.4 14.0 24.1
Satyam
Computers 3.3 3.1 3.2 4.7 13.3 10.8 12.1 16.1 21.5 15.8 16.2 21.2
Tata Consultancy NA NA 6.0 7.0 NA NA 20.2 24.1 NA NA 29.7 31.2

Services
Wipro
Technologies 7.7 4.8 5.2 6.4 28.7 20.6 20.0 25.5 41.1 28.0 26.3 33.7
Average 5.0 4.1 4.3 5.8 17.3 15.1 15.3 22.0 24.2 20.4 20.6 29.8
Median 4.0 4.0 3.8 5.7 13.3 14.2 14.0 24.1 21.5 19.2 18.0 31.2
36
Avendus Advisors Pvt. Ltd.
Disclaimer :
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contained in this report is based on the information available with the
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IT Mid Caps The Untold Story

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IT Mid Caps The Untold Story

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FEBRUARY 2006

Sector Report : IT Industry

Lakshmi Nambiar, Senior Associate

Lakshmi Nambiar, Senior Associate

Recent Reports + Strong Growth Driven By Structural Shifts In Global IT Industry:

+ Drivers Of Mid-Cap Growth:

+ Differentiated Mid-Caps - A Compelling Proposition:

+ The Road Ahead:

The Indian IT Industry: A Snapshot 03

Mid-Caps: Building Market Competitiveness 06

Mid-Caps: Drivers for Growth 09

Differentiated Mid-caps: A Compelling Value Proposition 15

Mid-Caps: The Road Ahead 17

Appendix A: Company Specific Strategy of Top Ten Performers 18

Appendix B: Financials, Growth & Margins and Valuation Analysis 29

Exhibit 3: IT IPO's in Calendar Year 2005 07

Exhibit 4: Overview of Mid-Cap Landscape 07-08

Exhibit 5: Market Cap CAGR Comparison for Mid-Cap Companies 09

Exhibit 6: Strategies of Top Performers 10

Exhibit 7: Emerging Service Offerings for Products 12

Exhibit 8: Acquisitions by Mid-Cap Companies in the Last Twelve Months 13-14

Exhibit 10: Median EBITDA and PAT Comparison 15

Exhibit 11: Median PAT Margin Comparison 15

Exhibit 12: Median Market Cap/Sales comparison 16

Exhibit 13: Median Market Cap/EBITDA Comparison 16

Exhibit 14: Median Market Cap/PAT Comparison 16

As the industry assumed a larger scale, many predicted a

illustrated in Exhibit 1. This growth is underlined by certain Source: Avendus Research

a. Offshore outsourcing of IT requirements has

b. Leading Indian IT companies have developed an

Some examples of this trend include ABN Amro awarding a

The significance of these contracts goes beyond size and

Movement up the Value Chain

3. Consolidators: There seems to be an emerging segment

*Revenue and PAT are for fiscal year prior to listing

Exhibit 4: Overview of Mid-Cap Landscape

Company Segment Key Focus Area Market Cap Revenue EBITDA

3i infotech Product/Solution Provider IT services company focused on BFSI, 189 85 17

Aptech Ltd. Niche Service Provider IT training company 115 27 (5)

Cranes Software Product/Solution Provider Product-centric company in 268 44 28

Geodesic Information Product/Solution Provider Product company in the 299 17 10

Company Segment Key Focus Area Market Cap Revenue EBITDA

Geometric Software Niche Service Provider PLM software company 135 47 11

Mastek Multi-domain Player IT services company focused on BFSI, 168 140 24

NIIT Technologies Multi-domain Player IT services company focused on 140 109 22

Polaris Software Lab Product/Solution Provider Product-cum-services company 290 183 18

Rolta India Niche Service Provider IT services company in engineering 288 88 41

Sasken Communication Product/Solution Provider IT services company focused on 235 51 6

Scandent Solutions Consolidator IT services company focused on 136 71 12

Market Cap is a 30-day trailing average, as on December 30, 2005.

Exhibit 5: Market Cap CAGR Comparison for Mid-Cap Companies

Rolta India 6% 33% 70%

All figures in USD Million

Source: Avendus Research

Hexaware has leveraged its HR IT niche positioning to get

Strategy #3: Target Under-Served Markets

Offshore Product Development (OPD)

Market Size Market Drivers Service Providers

Outsourced Testing Service

Market Size Market Drivers Service Providers

Stringent compliance norms set by regulatory bodies in

Engineering Design Services