company update | sector: technology zensar...

16
1 12 th Annual Global Investor Conference BSE Sensex S&P CNX 29,045 8,953 Stock Info Bloomberg ZENT IN Equity Shares (m) 44.6 52-Week Range (INR) 1136/755 1, 6, 12 Rel. Per (%) -11/0/14 M.Cap. (INR b) 45.7 M.Cap. (USD b) 0.7 Avg Val, INRm 71.0 Free float (%) 52.1 Financial Snapshot (INR b) Y/E Dec 2016 2017E 2018E Net Sales 29.6 32.2 37.2 EBITDA 4.3 4.8 6.2 PAT 3.1 3.5 4.4 EPS (INR) 68.2 77.0 98.0 Gr. (%) 17.0 12.3 27.3 BV / Sh (INR) 314.4 373.8 448.0 ROE (%) 24.0 22.3 23.9 ROCE (%) 28.5 27.1 29.5 Payout (%) 17.6 21.3 20.8 Valuations P /E (x) 14.8 13.1 10.3 P / BV (x) 3.2 2.7 2.2 EV/EBITDA 10.2 8.3 6.0 Div. Yield (%) 1.2 1.6 2.0 Shareholding pattern (%) As on Jun-16 Mar-16 Dec-15 Promoter 47.94 47.84 47.94 Public 52.06 52.16 52.06 Others -- -- -- Relative to Index Setting the stage right… …With focused execution in Digital, Cloud and IMS ZENT has been taking several transformation measures post the recent investor and leadership change. The key ingredients of its strategy are: [1] Focus on Digital, [2] Attention towards 65 key accounts, and [3] Rejigging presence in Infrastructure Management (IM) towards Services and Cloud. While the first two are revenue drivers, the third leg of its strategy is a driver of margins. Progress in these areas has been substantial, but simultaneous pruning of low-yield accounts and trimming of the Product business is likely to limit revenue growth at 5% in FY17. The churn in the portfolio lays a better foundation for growth beyond FY17, driving our estimate of 12% revenue growth in FY18. This should be seconded by margin expansion from scaling up of newer areas and reconstitution of IM portfolio. Favorable Digital skew…: Digital constitutes 27% of ZENT’s revenue, amongst the highest in the industry, facilitated by acquisition of Professional Access (PA). All segments in Digital grew in the range of 21-37% YoY in FY16, and will continue with similarly significant contribution to overall growth. PA is the third largest implementer of Oracle Commerce globally. Its success with large retailers provides ZENT with marquee clients that can be mined extensively. …limiting pressure on Legacy: On the 77% revenue from Application Services, strong Digital presence and high proportion of Maintenance revenue have capped the risk on portfolio from cloud shift of on-site implementation. Less than 20% of the portfolio is likely to be at risk from cloud migration and smaller deal sizes. Also, ZENT’s bet on the Oracle Cloud ecosystem has been paying off – Oracle’s strides in SaaS and PaaS are reflected in its 65% YoY growth in these areas. IM restructuring, a key margin lever: The management’s three-pronged strategy for the IM business is likely to lead to higher revenue from Services (60% v/s 40% earlier), higher profitability in MVS and reduction of the Product portfolio (10% v/s 30% earlier). This will aid expansion of margins in the IM business from 5% in FY16 to ~10% in FY17 (~115bp improvement in overall EBITDA), providing headroom for reinvestments in focus areas and also for booking some gains in the P&L. Continued strategy execution offers re-rating potential: We expect 5% revenue growth in FY17 because of pruning of non-core areas. That said, execution progress in focus areas lends confidence on gradual growth improvement (12% estimate for FY18). Despite reinvestments, portfolio reconstitution and revenue growth revival will potentially aid margin expansion of ~200bp over the next two years. Given ZENT’s improved positioning and our expectation of consequent improvement in financials, we see potential for growth acceleration and stock re-rating. Maintain Buy, with a price target of INR1,300, which discounts forward earnings by 13x. Company update | Sector: Technology Zensar Technologies CMP: INR1,005 TP: INR1,300 (+29%) Buy Sagar Lele ([email protected]); +91 22 6129 1531 Ashish Chopra ([email protected]); +91 22 6129 1530 Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

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Page 1: Company update | Sector: Technology Zensar Technologiesbsmedia.business-standard.com/_media/bs/data/market... · 2016-09-14 · Zensar Technologies September 2016 4 12th Annual Global

September 2016 1

12th Annual Global Investor Conference

BSE Sensex S&P CNX 29,045 8,953

Stock Info Bloomberg ZENT IN Equity Shares (m) 44.6 52-Week Range (INR) 1136/755 1, 6, 12 Rel. Per (%) -11/0/14 M.Cap. (INR b) 45.7 M.Cap. (USD b) 0.7 Avg Val, INRm 71.0 Free float (%) 52.1

Financial Snapshot (INR b) Y/E Dec 2016 2017E 2018E

Net Sales 29.6 32.2 37.2 EBITDA 4.3 4.8 6.2 PAT 3.1 3.5 4.4 EPS (INR) 68.2 77.0 98.0 Gr. (%) 17.0 12.3 27.3 BV / Sh (INR) 314.4 373.8 448.0 ROE (%) 24.0 22.3 23.9 ROCE (%) 28.5 27.1 29.5 Payout (%) 17.6 21.3 20.8 Valuations P /E (x) 14.8 13.1 10.3 P / BV (x) 3.2 2.7 2.2 EV/EBITDA 10.2 8.3 6.0 Div. Yield (%) 1.2 1.6 2.0

Shareholding pattern (%)

As on Jun-16 Mar-16 Dec-15

Promoter 47.94 47.84 47.94

Public 52.06 52.16 52.06

Others -- -- --

Relative to Index

Setting the stage right… …With focused execution in Digital, Cloud and IMS

ZENT has been taking several transformation measures post the recent investor and leadership change. The key ingredients of its strategy are: [1] Focus on Digital, [2] Attention towards 65 key accounts, and [3] Rejigging presence in Infrastructure Management (IM) towards Services and Cloud.

While the first two are revenue drivers, the third leg of its strategy is a driver of margins. Progress in these areas has been substantial, but simultaneous pruning of low-yield accounts and trimming of the Product business is likely to limit revenue growth at 5% in FY17.

The churn in the portfolio lays a better foundation for growth beyond FY17, driving our estimate of 12% revenue growth in FY18. This should be seconded by margin expansion from scaling up of newer areas and reconstitution of IM portfolio.

Favorable Digital skew…: Digital constitutes 27% of ZENT’s revenue, amongst the highest in the industry, facilitated by acquisition of Professional Access (PA). All segments in Digital grew in the range of 21-37% YoY in FY16, and will continue with similarly significant contribution to overall growth. PA is the third largest implementer of Oracle Commerce globally. Its success with large retailers provides ZENT with marquee clients that can be mined extensively. …limiting pressure on Legacy: On the 77% revenue from Application Services, strong Digital presence and high proportion of Maintenance revenue have capped the risk on portfolio from cloud shift of on-site implementation. Less than 20% of the portfolio is likely to be at risk from cloud migration and smaller deal sizes. Also, ZENT’s bet on the Oracle Cloud ecosystem has been paying off – Oracle’s strides in SaaS and PaaS are reflected in its 65% YoY growth in these areas. IM restructuring, a key margin lever: The management’s three-pronged strategy for the IM business is likely to lead to higher revenue from Services (60% v/s 40% earlier), higher profitability in MVS and reduction of the Product portfolio (10% v/s 30% earlier). This will aid expansion of margins in the IM business from 5% in FY16 to ~10% in FY17 (~115bp improvement in overall EBITDA), providing headroom for reinvestments in focus areas and also for booking some gains in the P&L.

Continued strategy execution offers re-rating potential: We expect 5% revenue growth in FY17 because of pruning of non-core areas. That said, execution progress in focus areas lends confidence on gradual growth improvement (12% estimate for FY18). Despite reinvestments, portfolio reconstitution and revenue growth revival will potentially aid margin expansion of ~200bp over the next two years. Given ZENT’s improved positioning and our expectation of consequent improvement in financials, we see potential for growth acceleration and stock re-rating. Maintain Buy, with a price target of INR1,300, which discounts forward earnings by 13x.

Company update | Sector: Technology

Zensar Technologies

CMP: INR1,005 TP: INR1,300 (+29%) Buy

Sagar Lele ([email protected]); +91 22 6129 1531 Ashish Chopra ([email protected]); +91 22 6129 1530 Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

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Higher Digital, lower Legacy and revamped Infrastructure Management >> WIP in FY17 and reasons for outperformance in FY18

ZENT has been going through a portfolio reconstitution since the new investorand new leadership got on board. While these corrective measures are likely tobe implemented through FY17, the portfolio is likely to be in much better shapein FY18, enabling industry-leading growth.

The key drivers of this outperformance are going to be: [1] 30% of total revenuefrom Digital, [2] Lower exposure to Legacy because of higher Digital,Maintenance and Cloud revenue (<20% of total revenue), and [3] Reconstitutionof Infrastructure Management (IM) revenue to Services and Cloud (20% of totalrevenue).

While Digital has been growing at ~30% YoY, and IMS and Cloud have beengaining scale, there is a simultaneous pruning of low-yield accounts andProducts business in IM. This has been leading to lower growth in FY17.However, with this exercise far into implementation by the end of FY17, thebase would be set right for 12% YoY growth in FY18.

Exhibit 1: Portfolio reconstitution to aid growth FY18 onwards

Source: MOSL, Company

This would naturally lead to better margins, given better profitability in Digital and pruning of lower profitability MVS and Products businesses in Infrastructure Management, and termination of low-yield accounts.

We expect these measures to result in headroom for the company to reinvest into the business to augment capabilities in newer areas, and sales and marketing functions. However, once the newer areas gain critical mass, margins are expected to follow suit.

Take for instance, the IM business. Restructuring is likely to result in flat revenue in FY17. However, the portfolio is likely to undergo a change to Services:Maintenance:Products::60:30:10 in FY17 from 40:30:30 in FY16. This is likely to improve profitability in the IM business from ~5% in FY16 to ~10% in FY17, and further improvement is likely in FY18, as the MVS business gets on track.

389 383 399 427 475 532

4.9

(1.7)

4.2

(0.7)

4.9

12.0

FY13 FY14 FY15 FY16 FY17E FY18E

Organic revenue (USDm) Growth (YoY, %)

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Exhibit 2: Restructuring of IM business – a key margin driver

Source: MOSL, Company

Vector #1: Well-placed in Digital ZENT has been shifting its business model from traditional IT services to Digital by realigning its focus on Digital transformation/enterprise. Traction in Digital has been evidently moving the needle in its overall performance. Contribution of Digital as a % of revenue has risen from 5% in FY14 to 27% in FY16, and the company expects it to reach 30% in FY17. The contribution of Digital to total revenue is among the highest in the industry, and could help ZENT to record industry-leading growth.

Exhibit 3: Portfolio favorably skewed towards Digital

Source: MOSL, Company

In Digital, ZENT has carved out a niche through its focus on eCommerce enablement. The presence in this area was brought about by its acquisition of Professional Access (PA) in August 2014. This contributes to half of ZENT’s Digital revenue. The remainder is contributed by Other Digital Services, and the cross-over between Legacy and Digital.

Betting on success of Oracle Commerce… Oracle Commerce is an eCommerce platform for online retailers, which spans across multiple channels, and facilitates purchasing transactions. PA is one of the largest Oracle ATG and Endeca partners in the world (implementation and maintenance). It is an Oracle Platinum partner with presence in the US, the UK, Latin America, Middle East and Africa. The company works with several large and mid-sized retailers in these geographies to build and implement their eCommerce strategies.

13.7

14.7

13.9 14.4

14.9

16.5

FY13 FY14 FY15 FY16 FY17E FY18E

EBITDA margin (%)

98 99

(81)

52 55

160

FY13 FY14 FY15 FY16 FY17E FY18E

EBITDA margin change (YoY, bp)

2,154 1,252 256 122 104 61 59

13% 17%

36%

27% 30%

15% 12%

TCS WPRO MTCL ZENT PSYS NITEC KPIT

Digital revenue (USDm) Digital (% of total revenue)

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Exhibit 4: Revenue break-up of PA (by service line and vertical; % of revenue)

Source: MOSL, Company

Oracle Commerce combines ATG and Endeca – two companies Oracle acquired. ATG's solutions enable enterprises to provide a cohesive online customer experience with sophisticated merchandising, marketing, content personalization, automated recommendations, and live-help services. Endeca was recognized as a pioneer of faceted search, particularly in the context of electronic commerce and online libraries.

Oracle Commerce has a dominant market share among eCommerce platforms for online retailers. The other dominant players in the market are IBM WebSphere, SAP Hybris and Magento. Other players in the market with a lower share include Digital River, Elastic Path, Apttus and CloudCraze.

Oracle Commerce has seen particularly high success in larger retailers. Some of the largest retailers using the Oracle Commerce platform are Neiman Marcus, Walgreens, Macy’s, Express, CVS, Kohl’s, Blue Nile, American Eagle, OfficeMax and Chico’s.

Exhibit 5: Oracle Commerce rated highly by Forrester and Gartner

Source: Forrester, Gartner

Implementation, 53.7

Maintenance &

support, 46.1

Others, 0.3

Retail and telecom,

90.8

BFS and public

sector, 5.2

Others, 3.9

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…In the fast-growing commerce suite technology market The market for commerce suite technology is mature, yet it is set to almost double from USD1.2b in 2014 to USD2.1b in the US alone by 2019. Although adoption of commerce technology in B2C verticals is already largely saturated, much of the anticipated growth over the next five years will be driven by re-platforming activities, as established online retailers look to fortify the scalability of their technology and branded manufacturers increase their focus on direct-to-consumer digital channels.

Exhibit 6: 12% CAGR expected in the US commerce platform market

Source: Forrester

Other Digital solutions are now up and running While eCommerce implementation comprises 50% of ZENT’s Digital revenue, the balance comes from other Digital and cross-over services. The company’s perspective on Digital is divided into two parts:

Enterprise Digital – (1) Digital agility (front-end), (2) cross-over of Digital and IT/business processes (cloud and hybrid infra/IT), and (3) stability of the core systems (ADM, back-end systems with APIs built in).

CMO-led Digital solutions – ZENT launched CMO-centric services on April 1, 2016. It sees a massive opportunity in tapping CMO budgets, with solutions around marketing analytics, digital analytics, content and creative solutions.

The company has seen strong growth across services in Digital, and is poised for further acceleration in FY17, given the progress it has made in building and launching new solutions over the current year. Given the 27% contribution of Digital to overall revenue, organic growth has the potential to accelerate further.

1.2

2.1

2014 2019

Commerce suite technology market in the US (USDb)

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Exhibit 7: Strong growth across the Digital solution stack

Source: MOSL, Company

Vector #2: Decreasing threat of cannibalization ZENT broadly classifies its revenue between Application Services and Infrastructure Management, not giving a further break-down between Application Development, Application Management, Package Implementation, Testing and BPO. This has been leading to a seemingly high perception of risk from the movement of on-premise applications to cloud, and from the foray of Digital in traditional application development. However, a further dissection (based on disclosure and guesstimates) gives more clarity on portfolio risks.

Exhibit 8: Revenue composition by services (% of total revenue)

Source: MOSL, Company

In Application Services (77% of revenue), 33% revenue is derived from the Oracle ecosystem, of which 37% is Digital. This leaves 63% of the Oracle ecosystem (21% of total revenue) exposed to Legacy.

In the rest of the Application Services business (44% of revenue), Digital forms ~15% of total revenue, and assuming Testing and BPO together form ~8%, it leaves an additional 21% of total revenue exposed to Legacy.

However, ZENT has a strong Maintenance presence (nearly half of the 42%), and has made significant in-roads in Cloud implementation in its Oracle practice. Effectively, this leaves less than 20% of total revenue exposed to on-premise implementation.

5

29 30 34

37

25

35

21

Company Big data &analytics

Cloud Designexperience

Digitalmarketing

services

B2CCommerce

B2BCommerce

Cybersecurity

FY16 Growth (YoY, %)

Application Management Services, 76%

IMS - Maintenance, 8%

IMS - Services, 16%

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Exhibit 9: Exposure to on-premise implementation is <20% of total revenue (1QFY17) Revenue (USD m)

Composition (% of revenue)

Application Services 88 77.2% Oracle 38 33.0%

Commerce 14 12.3% Legacy 24 20.7%

Digital 17 14.9% Legacy 23 20.5% Testing 5 4.4% BPO 5 4.4% Infrastructure Management 26 22.8% Maintenance 9 8.1% Services 17 14.7% Total 114 100.0%

Source: MOSL

Moreover, ZENT has been betting big on the Oracle ecosystem (33% of total revenue), and remains positive on the likelihood of Oracle’s success in the Cloud. Revenue from Oracle’s SaaS and PaaS reached USD690m in 4QFY16, up 66% YoY in USD terms and 68% CC. Year over year growth rates have steadily increased through FY16, and Oracle expects the momentum to continue in 1QFY17, wherein its expects SaaS and PaaS revenue to grow 75-80% YoY.

In FY16, while total revenue for Oracle was down 2% CC to USD37b, SaaS and PaaS revenue was at USD2.2b, up 52% YoY CC. The company’s Executive Chairman and CTO has mentioned Oracle of having a ‘fighting chance’ to be the first SaaS and PaaS company to grow to USD10b in revenue.

The proportion of cloud revenue in ZENT’s Oracle piece would see a rapid expansion of base, and contribute higher to incremental growth as this shift becomes more rapid and profound at Oracle.

Exhibit 10: Oracle’s Cloud revenue growth increasing with scale

Source: MOSL, Company

33.8 34.1

56.7 65.9

1QFY16 2QFY16 3QFY16 4QFY16

SaaS and PaaS (USDm) Growth SaaS and PaaS (YoY, %)

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Vector #3: Reconstitution of IMS offerings ZENT has been de-focusing from the products business in Infrastructure Management. The company intends to include the products bit only where it is integral to the services portfolio of the organization. Revenue from Products has gradually inched lower to 6% of total revenue in FY16 from 11% in FY13.

Moreover, the company’s focus is on IMS & Cloud, which would mean the Services business in Infrastructure Management would grow, Maintenance would remain stagnant and Products would decline.

Exhibit 11: Services – the focus area in IM

Source: MOSL, Company

ZENT’s infrastructure business comprises of (1) MVS and (2) IMS & Cloud, which are run separately as focused businesses. The company intends to grow its IMS & Cloud business to 15% of total revenue over the next 12 months. The key focus areas in this business are:

Hybrid IT: Automated and orchestrated provisioning and management of public,private and on-premise infrastructure – ZENT’s focus is on an integratedplatform across technologies and hosting models that will enable it to target theG-1000.

Next-gen end-user experience: Focusing on predictive analytics and mobility –ZENT combined Aternity, Nano Heal, Lakeside and Service Now to build apredictive end-user management solution, which spans over user interface andbackend systems.

Network security: Design, implement and manage comprehensive IT securityframeworks.

Unified IT management: Driven by automation, orchestration and analytics.

40% 60%

30%

30% 30%

10%

IM composition at the end of FY16 IM composition at the end of FY17E

Services MVS Products

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Exhibit 12: IM portfolio growing in the right areas (USD revenue growth, YoY, %)

Source: MOSL, Company

Maintenance revenue for ZENT mainly stems from the acquisition of Akibia in November 2010. The proposition was for ZENT to provide total infrastructure outsourcing and for it to become the single point of contact for all infrastructure support. The profitability of this business has been hampered because of scale.

The fixed costs in this business are high because of limited manpower requirement, fixing of the supply chain, and the fact that warehouses are already set up. Any uptick in revenue would thus result in disproportionate increase in profitability. The company has recently hired new leadership for this segment, with a head who has prior experience in turning around a similar business.

All these measures (focus on scaling up Services + reduction of Products + profitability resurrection in Maintenance) are likely to result in flat revenue in FY17. However, margins have the potential to improve from ~5% in FY16 to ~10% in FY17, giving ample room for reinvestments in other parts of the business without hurting company-level margins.

-16% -15% -17%-21%

-8%

-13%

-2%

2% 4% 4%

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17

Maintenance Services

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Valuation and view

Execution for next leg of growth is in progress: Post the leadership change atZENT, execution has become fast-tracked, with several steps taken towardrealigning the organization with its growth engines. In line with this, severalservices/solutions have been launched, sales function has been augmented andthere is a renewed focus on client mining and large deals. These initiatives arecurrently in the investment mode and likely to start adding to growth along withDigital and IMS.

Riding the Digital wave: Digital accounts for 27% of ZENT's revenue and hasbeen seeing growth of 21-37% YoY. Half of Digital is constituted by eCommerceimplementation, where capabilities have increased post ZENT's acquisition ofProfessional Access, which in FY16 grew by 25% YoY. The rest of Digital revenuecomes from other Digital and cross-over services. Moreover, with increasedemphasis on Enterprise Digital and CMO-led solutions, Digital will only get afurther boost from current levels.

Re-constitution to continue for the better: ZENT had earlier laid focus onachieving the Diamond partnership with Oracle. However, elevation fromPlatinum partnership is a function of the work around Oracle's installed base,and not cloud services. Oracle has a managed cloud partner program, on whichZENT has turned its attention as this better aligns with changing marketdynamics, Oracle's strategy and ZENT's focus areas. Moreover, the realignmentof focus in infrastructure management toward IMS & Cloud too marks a step inthis direction.

Aggressive consolidation of non-core business: Over the last two years, ZENThas cut out non-core geographies, verticals and service lines. Since theleadership change, the company has renewed focus on strategic accounts, and isin the process of cutting its long tail of low-yield and non-scalable accounts.Over the last two quarters itself, the number of active customers has comedown to 183 from 217.

Expect rebound in revenue growth: On account of ongoing restructuring, weexpect revenue growth of 5% in FY17. However, with the implementation ofgrowth engines well in progress, we expect a revival in revenue growth to 12%in FY18.

Margin comfort for FY17-18E: Revenue growth pick-up, profitabilityimprovement in the IMS business, and current investments should lead to a210bp EBITDA margin expansion over FY16-18. EBIT margins in the IMS business(18% of revenue) can improve from 6% in FY16 to 14% in FY18, led by higherrevenues from 'IMS and Cloud' and the restructuring in the MVS business. Thisalone has the potential to improve overall margins by 150bp. We expect an EPSCAGR of 20% over FY16-18.

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Key triggers Pick-up in Financial Services vertical and in the US Margin improvement despite investments Significant increase in deal wins and deal pipeline

Key risk factors Problems in top accounts Risk from slower spend on ERP Hindrances in structural recovery of margins

Exhibit 13: 1-year forward PE band Exhibit 14: 1-year forward PB band

Exhibit 15: Comparative valuation Company Mcap Rating TP Upside EPS (INR) P/E (x) RoE (%) FY16-18E CAGR (%)

USD b (INR) (%) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E USD rev. EPS Mphasis 1.7 Neutral 570 4.8 34.5 38.1 42.4 15.8 14.3 12.8 12.3 12.8 14.0 6.1 11.0 Mindtree 0.6 Neutral 550 6.8 35.9 29.9 39.6 14.4 17.2 13.0 27.4 19.9 23.1 13.1 5.0 KPIT Tech 0.4 Neutral 160 22.1 14.1 13.7 16.0 9.3 9.5 8.2 21.0 18.0 17.5 4.3 6.6 Cyient 0.8 Buy 550 15.5 30.7 34.2 41.6 15.5 13.9 11.4 16.5 16.2 17.4 12.9 16.4 Hexaware 0.9 Neutral 230 15.0 12.9 13.6 16.1 15.5 14.7 12.4 28.9 26.7 26.9 11.2 11.7 NIIT Tech 0.4 Neutral 530 34.5 45.8 41.3 53.4 8.6 9.5 7.4 19.0 15.2 17.4 7.8 8.0 Persistent Sys. 0.7 Neutral 710 16.0 37.2 37.7 47.4 16.5 16.2 12.9 19.5 17.3 20.0 19.5 12.9 Zensar 0.7 Buy 1,300 30.0 68.2 77.0 98.0 14.7 13.0 10.2 24.0 22.3 23.9 8.4 19.8

Source: Company, MOSL

11.8 14.6

6.1

4.9 1.1 0

5

10

15

20

Sep-

06

Dec-

07

Mar

-09

Jun-

10

Sep-

11

Dec-

12

Mar

-14

Jun-

15

Sep-

16PE (x) Peak(x) Avg(x)Median(x) Min(x)

2.5 3.1

1.5

1.3 0.4

0.0

1.0

2.0

3.0

4.0

Sep-

06

Dec-

07

Mar

-09

Jun-

10

Sep-

11

Dec-

12

Mar

-14

Jun-

15

Sep-

16

PB (x) Peak(x) Avg(x)Median(x) Min(x)

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Story in charts

Exhibit 16: Contribution of Digital to total revenue among the highest in the industry

Source: MOSL, Company

Exhibit 17: 21-37% YoY growth in all areas of Digital in FY16

Source: MOSL, Company

Exhibit 18: Expect organic revenue growth to pick up…

Source: MOSL, Company

Exhibit 19: …Coupled with margin expansion…

Source: MOSL, Company

Exhibit 20: …Assisted by portfolio reconstitution…

Source: MOSL, Company

Exhibit 21: …Compounding to earnings CAGR of 20%

Source: MOSL, Company

2,154 1,252 256 122 104 61 59

13% 17%

36%

27% 30%

15% 12%

TCS WPRO MTCL ZENT PSYS NITEC KPIT

Digital revenue (USDm) Digital (% of total revenue)

5

29 30 34 37 25

35

21

Com

pany

Big

data

&an

alyt

ics

Clou

d

Desig

nex

perie

nce

Digi

tal m

arke

ting

serv

ices

B2C

Com

mer

ce

B2B

Com

mer

ce

Cybe

r sec

urity

FY16 Growth (YoY, %)

389 383 399 427 475 532

4.9

(1.7)

4.2

(0.7)

4.9

12.0

FY13 FY14 FY15 FY16 FY17E FY18E

Organic revenue (USDm) Growth (YoY, %)

13.7

14.7

13.9 14.4

14.9

16.5

FY13 FY14 FY15 FY16 FY17E FY18E

EBITDA margin (%)

-16% -15%-17%

-21%

-8%

-13%

-2%

2% 4% 4%

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17

Maintenance Services

1.7 2.4 2.6 3.1 3.5 4.4

10.0

36.1

11.4 17.0

12.3

27.3

FY13 FY14 FY15 FY16 FY17E FY18E

Net profit (INRb) Growth (YoY, %)

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Operating metrics

Exhibit 22: Operating metrics 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17

Geographic Mix (%) USA 75 75 76 78 78 74 75 78 75 Europe 11 11 9 10 10 12 12 10 11 ROW 14 14 15 12 12 14 13 12 15 Vertical Mix (%) Manufacturing 67 62 56 57 57 54 52 54 54 Retail and consumer services 11 14 18 18 20 23 21 24 24 Financial services 21 20 21 21 19 19 20 18 18 Emerging 2 4 6 4 4 4 7 4 4 Service Mix (%) Application Management Services 70 74 72 74 77 78 74 77 77 Infrastructure Management Services 30 26 28 26 23 22 26 23 23

Maintenance 12 11 10 10 9 8 8 8 8 Services 18 15 18 16 14 14 18 16 15

Project Type (%) Fixed price 48 46 52 45 47 50 54 53 50 Time & material 52 54 48 55 53 50 46 47 50 Revenue by delivery (%) Onsite 68 67 67 65 65 63 66 64 69 Offshore 32 33 33 35 35 37 34 36 31 Client metrics Client concentration (%) Top 5 37 38 31 39 38 37 35 38 37 Top 6-10 7 6 8 7 8 10 8 8 9 Top 10 44 44 39 46 46 47 43 46 46 Top 11-20 8 8 13 6 10 8 9 10 10 Top 20 52 52 52 52 56 55 52 56 56 Client brackets 1 Million dollar + 55 65 73 75 63 64 65 66 65 5 Million dollar + 7 9 11 9 4 5 4 5 6 10 Million dollar + 2 2 3 3 3 3 4 4 4 20 Million dollar + 1 1 1 1 2 2 2 2 2 Other metrics Repeat business (%) 85 82 75 83 79 86 84 85 77 Number of active clients 178 183 182 204 196 217 211 194 183 New clients added in the period 19 10 18 14 24 19 26 18 21 Employee metrics

Total headcount 6,894 7,846 8,037 8,174 7,895 8,050 8,192 8,256 8,238 Gross employees added during the period 695 742 709 573 1,531 844 730 588 662 Net employees added during the period 103 952 191 137 (279) 155 142 64 (18) Utilization 79 79 78 78 79 80 82 81 80 Attrition 15 12 12 13 16 16 16 16 18

Source: Company, MOSL

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Financials and Valuations

Income Statement (INR Million) Y/E March FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Sales 11,383 17,825 21,145 23,156 26,277 29,643 32,173 37,242 Change (%) 19.5 56.6 18.6 9.5 13.5 12.8 8.5 15.8 Cost of Services 7,906 12,337 14,809 15,957 18,329 20,366 22,440 25,314 SG&A Expenses 1,948 3,224 3,444 3,803 4,307 5,015 4,931 5,773 EBITDA 1,529 2,263 2,892 3,396 3,641 4,262 4,802 6,155 % of Net Sales 13.4 12.7 13.7 14.7 13.9 14.4 14.9 16.5 Depreciation 294 333 332 383 415 454 467 559 Interest 39 93 100 109 112 106 133 129 Other Income 305 527 332 290 364 181 337 471 Forex 0 0 -187 205 181 407 358 236 PBT 1,502 2,364 2,606 3,399 3,659 4,289 4,896 6,175 Tax 184 777 861 1,023 1,013 1,169 1,398 1,729 Rate (%) 12.3 32.9 33.0 30.1 27.7 27.3 28.6 28.0 Minority Interest 0 0 0 0 -1 -26 -24 -24PAT 1,318 1,587 1,745 2,375 2,646 3,094 3,473 4,422 Net Income 1,318 1,587 1,745 2,375 2,646 3,094 3,473 4,422 Change (%) 3.3 20.4 10.0 36.1 11.4 17.0 12.3 27.3

Balance Sheet (INR Million) Y/E March FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Share Capital 433 434 436 438 443 446 446 446 Reserves 4,027 5,325 6,853 9,017 11,127 13,812 16,420 19,767 Net Worth 4,460 5,759 7,289 9,455 11,570 14,258 16,866 20,213 Minority Interest - - - 11 12 39 39 39 Loan 2,392 2,755 2,353 2,032 1,396 1,878 1,628 1,378 Capital Employed 6,852 8,514 9,642 11,498 12,977 16,175 18,533 21,630 Applications Gross Block 5,480 6,045 6,341 6,503 8,201 8,889 9,289 9,739 Less : Depreciation -2,007 -2,269 -2,372 -2,287 -2,728 -3,182 -3,649 -4,208Net Block 3,473 3,776 3,969 4,215 5,474 5,706 5,639 5,531 CWIP 50 27 25 21 14 17 13 9 Other LT Assets 744 583 545 608 617 517 619 721 Curr. Assets 5,558 7,869 8,035 10,015 11,240 13,989 17,887 21,758 Current Investments 246 468 417 1,478 931 1,016 1,116 1,216 Inventories 836 950 1,049 1,288 1,226 1,259 1,234 1,326 Debtors 1,876 2,911 3,354 3,581 4,539 5,427 5,891 6,819 Cash & Bank Balance 1,100 1,745 1,420 1,458 1,960 2,823 5,888 8,052 Loans & Advances 916 1,142 856 817 880 1,072 1,163 1,346 Other Current Assets 584 654 937 1,392 1,704 2,392 2,596 2,998 Current Liab. & Prov 2,973 3,741 2,931 3,361 4,368 4,054 5,624 6,388 Current Liabilities 997 1,337 1,059 1,507 1,305 1,643 2,250 2,555 Other liabilites 1,682 1,884 1,556 1,385 2,426 2,118 3,000 3,407 Provisions 294 521 315 468 637 293 375 426 Net Current Assets 2,585 4,128 5,104 6,654 6,872 9,935 12,263 15,370 Application of Funds 6,852 8,514 9,642 11,498 12,977 16,175 18,533 21,630 E: MOSL Estimates

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Financials and Valuations

Ratios (INR Million) Y/E March FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Basic (INR) EPS 30.5 36.6 40.2 54.7 61.0 68.2 77.0 98.0 Cash EPS 37.3 44.2 47.8 63.6 70.5 78.2 87.3 110.4 Book Value 103.3 132.7 167.9 217.9 266.6 314.4 373.8 448.0 DPS 3.5 7.0 8.0 10.1 11.2 12.0 16.4 20.4 Payout % 11.5 19.1 20.0 18.4 18.4 17.6 21.3 20.8

Valuation (x) P/E 18.4 16.5 14.8 13.1 10.3 Cash P/E 14.9 15.1 11.9 6.5 4.9 EV/EBITDA 12.5 11.5 10.2 8.3 6.0 EV/Sales 1.8 1.6 1.5 1.2 1.0 Price/Book Value 4.6 3.8 3.2 2.7 2.2 Dividend Yield (%) 1.0 1.1 1.2 1.6 2.0

Profitability Ratios (%) RoE 34.0 31.1 26.7 28.4 25.2 24.0 22.3 23.9 RoCE 23.4 26.2 30.3 30.8 28.6 28.5 27.1 29.5 RoIC 39.7 22.1 24.4 25.8 25.1 24.7 26.0 33.8

Turnover Ratios Debtors (Days) 79 73 74 78 86 96 96 96 Fixed Asset Turnover (x) 3.3 4.7 5.3 5.5 4.8 5.2 5.7 6.7

Cash Flow Statement (INR Million) Y/E March FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E CF from Operations 1,014 2,281 2,212 2,720 2,823 3,805 4,074 5,109 Cash for Working Capital 392 -546 -1,152 -625 382 -1,218 737 -943Net Operating CF 1,406 1,735 1,060 2,094 3,206 2,587 4,811 4,166 Net Purchase of FA -272 -263 -334 -323 -372 -423 -396 -446Free Cash Flow 1,134 1,472 726 1,771 2,834 2,164 4,415 3,720 Net Purchase of Invest. -3,129 -190 87 -961 -1,448 1 -102 -102Net Cash from Invest. -3,401 -452 -247 -1,284 -1,819 -422 -498 -548Proc. from equity issues 11 10 16 59 62 42 0 0 Proceeds from LTB/STB 1,886 -320 -776 -422 -395 -375 -383 -379Dividend Payments -138 -329 -379 -411 -542 -969 -865 -1,075Cash Flow from Fin. 1,759 -640 -1,139 -774 -874 -1,302 -1,249 -1,454Exchange difference 36 6 8 10 0 0 0 0 Net Cash Flow -200 649 -318 46 512 863 3,065 2,165 Opening Cash Bal. 1,299 1,096 1,739 1,413 1,448 1,960 2,823 5,888 Add: Net Cash -200 649 -318 46 512 863 3,065 2,165 Closing Cash Bal. 1,100 1,745 1,420 1,458 1,960 2,823 5,888 8,052 E: MOSL Estimates

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Our

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