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EQUITY RESEARCH 7 October 20

INDIAN SOFTWARE & IT SERVICES

Adjusting to the new normal; initiate coverage

We initiate coverage of the Asia ex-Japan Software & IT services sector with a

2-Neutral view. For the Indian IT companies we bring under coverage, we assign

ratings of 1-Overweight on Infosys (PT INR3,050, +24% potential upside) and HCL

Tech (PT INR485, +23%), 2-Equal Weight on Tata Consultancy (PT INR1,150, +10%)

and 3-Underweight on Wipro (PT INR340, +4%).

The new normal of growth: Compared with typical 30-40% revenue CAGR in the

previous cycle (2003-07), growth rates over the next five years could be in the high

teens for the large Indian IT vendors. Growth will likely be driven by: 1) increased

outsourcing as customers seek a more flexible cost model; 2) limited availability of

technical staff in the developed world; and 3) a shift to new business models led bythemes of cloud, mobility and social networking, among others.

Assuming weak economies but not a recession: Indian IT vendors generate more than

90% of revenues from the developed world, hence the health of these economies is

important for the health of the sector. While we accept that current economic uncertainty

limits visibility, our economists argue that uncertainty is unlikely to turn into recession.

CIO survey indicates reasonable growth in 2012: A survey of 100 CIOs by Barclays

Capitals technology team indicates expectations for low single-digit y/y growth (1.8%

y/y) in overall tech budgets in 2011 and 2012. Recent results from Accenture and

Oracle also suggest the uncertainty has failed to impact software and services spend.

Uncertainty takes its toll on sector multiples: Uncertainty in the global macro

environment is reflected in share prices of Indian IT companies. While cuts in consensus

earnings estimates have been modest (the worst so far is a drop of 8% for Infosys),

multiples have compressed as investors worry about future growth. Despite our comfort

with high-teens revenue and EPS CAGR for large Indian IT vendors for the next five years,

we believe valuation multiples could remain depressed in the current environment.

Infosys and HCL Tech 1-OW; Tata Consultancy 2-EW; Wipro 3-UW: A significant

decline in revenue from one client of Infosys (1-OW) has led to low expectations and

hence a return to reasonable valuations (15.6x 12-month forward P/E). We believe a

recovery in the EPS growth trajectory could be a catalyst for strong share price

performance for Infosys. We also highlight HCL Tech (1-OW) on the back of its good

revenue growth and valuations (12.2x 12-month forward P/E). While TCS (2-EW)

should continue to deliver growth near-term, further margin expansion looks unlikely

and, thus, a 10% valuation premium to Infosys is not justified, in our view. While we

consider Wipro (3-UW) a strong Indian IT company, we believe it could face challenges

in growth and margin as it executes its new go-to-market strategy. Sustained local

currency weakness would provide room for EPS upgrades across the sector.

Barclays Capital does and seeks to do business with companies covered in its research reports. As aresult, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.

This research report has been prepared in whole or in part by research analysts based outside the USwho are not registered/qualified as research analysts with FINRA.

PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 44.

INITIATING COVERAGE

Asia Ex-Japan Software & IT Services

2-NEUTRALfrom N/A

For a full list of our ratings, price targets andearnings in this report, please see table onpage 2

Asia Ex-Japan Software & IT Services

Bhuvnesh Singh

+91 22 6719 6314

[email protected]

BSIPL, Mumbai

Vaibhav Dhasmana

+91 22 6719 [email protected]

BSIPL, Mumbai

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Barclays Capital | Indian Software & IT Services

7 October 2011 2

Summary of our Ratings, Price Targets and Earnings Estimates in this Report

Company Rating Price Price Target EPS FY1 (E) EPS FY2 (E)

Old New 05-Oct-11 Old New %Chg Old New %Chg Old New %Chg

Asia Ex-Japan Software & IT Services 0-NR 2-Neu

HCL Technologies (HCLT IN / HCLT.NS) N/A 1-OW 395.10 N/A 485.00 - N/A 32.23 - N/A 37.75 -Infosys Ltd. (INFO IN / INFY.NS) N/A 1-OW 2454.30 N/A 3050.00 - N/A 136.60 - N/A 158.04 -

Tata Consultancy Services (TCS IN / TCS.NS) N/A 2-EW 1043.50 N/A 1150.00 - N/A 54.15 - N/A 60.80 -

Wipro Limited (WPRO IN / WIPR.NS) N/A 3-UW 327.90 N/A 340.00 - N/A 22.10 - N/A 25.49 -

Source: Barclays Capital Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.

FY1(E): Current fiscal year estimates by Barclays Capital. FY2(E): Next fiscal year estimates by Barclays Capital.

Stock Rating: 1-OW: 1-Overweight 2-EW: 2-Equal Weight 3-UW: 3-Underweight RS: RS-Rating SuspendedSector View: 1-Pos: 1-Positive 2-Neu: 2-Neutral 3-Neg: 3-Negative
http://my.barcapint.com/ERG/displayCompany.jsp?ticker=HCLT.NShttp://my.barcapint.com/ERG/displayCompany.jsp?ticker=INFY.NShttp://my.barcapint.com/ERG/displayCompany.jsp?ticker=TCS.NShttp://my.barcapint.com/ERG/displayCompany.jsp?ticker=WIPR.NShttp://my.barcapint.com/ERG/displayCompany.jsp?ticker=WIPR.NShttp://my.barcapint.com/ERG/displayCompany.jsp?ticker=TCS.NShttp://my.barcapint.com/ERG/displayCompany.jsp?ticker=INFY.NShttp://my.barcapint.com/ERG/displayCompany.jsp?ticker=HCLT.NS

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7 October 2011 3

CONTENTS

INVESTMENT SUMMARY.................................................................................................................. 4Companies could still deliver growth despite weak economies...................................................... 4Initiating coverage: Infosys (1-OW), HCL Tech (1-OW), Tata Consultancy (2-EW), Wipro (3-

UW)................................................................................................................................................................ 5Valuation and risks..................................................................................................................................... 6THE NEW NORMAL OF GROWTH................................................................................................ 9Expect a slowdown in growth................................................................................................................. 9Indian IT value proposition remains strong ......................................................................................... 9Shifting to a more flexible financial model ......................................................................................... 10New frontiers for IT services .................................................................................................................. 12HIGHLY CORRELATED TO US ECONOMIC GROWTH ................................................................ 14US is the largest end-market ................................................................................................................. 14Global outlook........................................................................................................................................... 16However, uncertainty does not result in a recession ....................................................................... 16CIO SURVEY BUILDS A STRONG BOTTOM-UP CASE FOR IT SERVICES SPENDING .............19CIOs are still building growth................................................................................................................ 19Software and services remain top priorities....................................................................................... 20Recent results of global software and IT services companies support findings ........................ 21VALUATIONS .................................................................................................................................... 22Valuations have corrected significantly .............................................................................................. 22Currency impact ....................................................................................................................................... 24

INFOSYS (1-OW, PT INR3,050, +24%): OUTPERFORMING LOWERED EXPECTATIONS......25HCL TECH (1-OW, PT INR485, +23%): INDUSTRY LEADING GROWTH ................................. 29TATA CONSULTANCY (2-EW, PT INR1,150, +10%): HEADWINDS AHEAD........................... 35WIPRO LTD (3-UW, PT INR340, +4%): EXECUTION WOES....................................................... 39

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7 October 2011 4

INVESTMENT SUMMARY

We initiate coverage of the four large-cap Indian IT vendors with 1-Overweight ratings

on Infosys (PT: INR3,050 for potential upside of 24%) and HCL Tech (PT: INR485 for

potential upside of 23%), a 2-Equal Weight rating on Tata Consultancy (PT: INR1,150,

potential upside of 10%) and a 3-Underweight rating on Wipro (PT INR340 for potentialupside of 4%). We believe that Indian IT companies should be able to weather the

impact on their revenues of the weak global economic environment and deliver a CAGR

for revenue of 16-19% for the next three years. Low operating leverage should lead to

stable operating margins. Furthermore, depreciation of the Indian rupee could lead to

margin expansion and EPS upgrades. On the other hand, heightened macro uncertainty

could keep valuation multiples depressed for these names. Thus, we initiate coverage of

the Asia ex-Japan Software & IT Services sector with a 2-Neutral view.

Companies could still deliver growth despite weak economies

The new normal of growthIncreased penetration of offshore services, coupled with weak economic growth in the

developed world, should lead to a lower growth trajectory for Indian IT services companies.

Compared with the typical 30-40% y/y revenue growth in the previous cycle (2003-07), we

believe that growth rates in the current cycle, over the next five years, could be in the high

teens for the large Indian IT services companies. Growth will likely be driven by: 1) increased

outsourcing as customers seek a more flexible cost model; 2) limited availability of technical

staff in the developed world; and 3) a shift to new business models led by themes of cloud

computing, mobility and social networking, among others.

We remain cognizant of the fact that the four large-cap Indian IT vendors together now

employ more than 500,000 staff. Along with demand issues, scalability could be another bigfactor driving growth rates.

Assuming weak economies but not a recession

Indian IT vendors are largely focused on providing IT services to corporates in the developed

world, with the US and the UK accounting for more than 60% of the revenues of the large IT

vendors. The companies strong value proposition could keep revenue growing despite a

weak macroeconomic backdrop; however, a recession could significantly impact revenues

and profits. While we agree that the economic outlook remains uncertain, Barclays Capitals

economists believe uncertainty is unlikely to turn into recession. We are thus comfortable

with our forecasts of revenue growth in the high-teens for the Indian IT vendors for the next

five years.

CIO survey indicates reasonable growth in 2012

A bottom-up survey of 100 CIOs by Barclays Capitals technology team in September

indicates expectations for low single-digit y/y growth (1.8% y/y) in overall tech budgets in

2011 and 2012. Despite the current economic uncertainty, the confidence in positive

growth for 2011 indicates that underlying business is suffering more from low visibility than

actual revenue pressure. This is also reflected in the recent quarterly results of global

software and IT services companies that have continued to report strong and above-

consensus results.

Our top picks in the sector are

Infosys and HCL Tech

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7 October 2011 5

Figure 1: Indian IT Services revenue growth comparisons, % y/y

0%

5%

10%

15%

20%

25%

30%

FY12E FY13E

Infosys TCS Wipro HCL

Source: Barclays Capital estimates

Initiating coverage: Infosys (1-OW), HCL Tech (1-OW), TataConsultancy (2-EW), Wipro (3-UW)

We initiate coverage of Indias four largest IT services companies within the Asia ex-Japan

software & IT services sector. While the sector drivers are common to the group, we believe

that share performance could vary significantly on the back of differing investor

expectations and company-specific issues.

Infosys Limited (1-OW): We initiate coverage of Infosys with a 1-Overweight rating and

12-month price target of INR3,050, implying a target multiple of 17.5x and potential

upside of 24%. A significant decline in revenues from one of its largest clients, British

Telecom, is likely the key factor behind weak revenue performance in the past six

quarters. However, we expect this decline to end soon as BTs share of the total revenuepool becomes much lower. This should aid EPS growth. Furthermore, we find Infosyss

margin guidance for FY2012 (fiscal year ending March 2012) conservative and we

expect actual numbers to come in ahead of guidance. Finally, limited use of currency

hedging could help Infosys in the current environment of rupee depreciation.

HCL Technologies (1-OW): We initiate coverage of HCL Tech with a 1-Overweight

rating and 12-month price target of INR485, taking a 30% discount to Infosyss target

multiple, for a target P/E of 12.5x. We believe HCL should be able to maintain its

industry-leading growth on the back of strong performance in its infrastructure services

business. HCL is also well positioned to exploit any resurgence in growth in the

enterprise solutions business through its recent acquisition of UK-based Axon.

Furthermore, a turnaround in its BPO (Business Process Outsourcing) business could

lead to some margin expansion for HCL while its peers face margin pressure. HCL is also

a beneficiary of current rupee depreciation on account of its low hedge positions.

Tata Consultancy Services (2-EW): We initiate coverage of TCS with a 2-Equal Weight

rating and a 12-month price target of INR1,150, implying a target multiple of 17.5x.

While we like TCS, we find it difficult to justify its 10% P/E multiple premium over

Infosys and expect this to correct going forward. We also believe TCS could now face

headwinds in margin expansion, except if the rupee depreciates, and hence operating

profit growth should be largely in line with growth at Infosys.

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7 October 2011 6

Wipro Limited (3-UW): We initiate coverage of Wipro with a 3-Underweight rating and

a 12-month price target of INR340, taking a 30% discount to Infosyss target multiple

for a target P/E of 12.5x. While we believe that Wipro has strong domain and vertical

knowledge, execution has been a drag on the companys performance. Recent

management restructuring has focused on improving execution but comes at a time

when the overall growth environment could be weakening. We thus believe that there is

a high probability of slippage in Wipro achieving its growth targets and hence advise

investors to be cautious on this name.

Figure 2: Indian IT services companies EPS growth comparisons

(y/y) FY09 FY10 FY11 FY12E FY13E FY14E

Infosys 28% 5% 9% 14% 16% 17%

TCS 3% 33% 26% 22% 12% 21%

Wipro 15% 24% 15% 2% 15% 16%

HCL Tech -5% 5% 33% 23% 22% 17%


Valuation and risks

We use P/E as our primary valuation method for the Indian IT vendors. We look at the

historical P/E multiple range and future growth prospects to determine an appropriate

forward multiple for our price targets. Our price targets are 12-months forward, hence we

apply our target P/E multiple to 24-month forward EPS (an average of our EPS forecasts for

FY13 and FY14) to derive our price targets. For Infosys and TCS, we apply target P/E

multiples of 17.5x, which is in line with their past five-year averages and appropriately

adjusted for our growth expectations for the companies over the next three years. In the

case of HCL Tech, we use a 30% discount to Infosyss target multiple, in line with the

historical average trading discount for the shares. For Wipro, our 30% discount to Infosyss

multiple is at the low end of its historical discount because we perceive a higher risk to the

companys earnings growth going forward.

Downside risks for the group: 1) a sharp deceleration in the global economy with a

possibility of recession, which could impact the demand for IT services; 2) restrictions on

the issuance of work visas in the companies key markets; 3) significant price competition

from other offshore and global IT vendors and 4) significant rupee appreciation.

Upside risks for the group: 1) a stronger-than-expected recovery in demand; 2) a reduction

in macroeconomic uncertainty, leading to multiple expansion; and 2) significant

depreciation of the rupee.

Figure 3: India IT services comparative valuations

P/E (x) EPS (INR) ROE (%)

Ticker RatingPrice

INRPrice target

INR

Potentialupside to PT

(%)

MarketCap

US$ bn FY12E FY13E FY12E FY13E FY11E FY12E

Infosys INFO IN 1-OW 2,454 3,050 24% 28.47 17.9 15.5 136.6 158.0 27% 27%

HCL Tech HCLT IN 1-OW 395 485 23% 41.39 12.2 10.5 32.30 37.75 23% 23%

TCS TCS IN 2-EW 1,044 1,150 10% 5.53 19.3 17.2 54.2 60.8 37% 34%

Wipro WPRO IN 3-UW 328 340 4% 16.33 14.8 12.9 22.1 25.5 20% 19%

Note: Prices as of 5 October 2011. Stock ratings: 1-OW: 1-Overweight, 2-EW: 2-Equal Weight, 3-UW: 3-Underweight.Source: Bloomberg, Barclays Capital estimates

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7 October 2011 7

Figure 4: India IT services summary of relative share price performances

3-month 12-month YTD

Infosys -13% -18% -27%

TCS -12% 9% -10%

Wipro -18% -27% -29%

HCL Tech -17% -6% -10%

Nifty 50 -12% -20% -20%

MSCI Asia ex Japan -22% -18% -22%

MSCI Asia Tech -16% -12% -22%

Note: Prices as of 5 October 2011.Source: Bloomberg, Barclays Capital

Figure 5: Infosys 12-month forward P/E based on

consensus estimates

Figure 6: Infosys valuations relative to Nifty 50 positive

indicates Infosys at premium

0

5

10

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35

40

Oct-01

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Apr-11

Jun-11

Aug-11

Source: Datastream, Barclays Capital Source: Bloomberg, Barclays Capital

Figure 7: TCS 12-month forward P/E based on consensus

estimates

Figure 8: TCS valuations relative to Infosys positive

indicates TCS at premium

0

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10

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20

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Source: Datastream, Barclays Capital Source: Datastream, Barclays Capital

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7 October 2011 8

Figure 9: HCL Tech 12-month forward P/E based on

consensus estimates

Figure 10: HCL Tech valuations relative to Infosys negative

implies HCL Tech at discount

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25

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Figure 11: Wipro 12-month forward P/E based onconsensus estimates

Figure 12: Wipro valuations relative to Infosys Wipro nowat a discount

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7 October 2011 9

THE NEW NORMAL OF GROWTH

Despite the strong value proposition of the Indian IT services companies, weak economic

growth in the developed world should lead to a lower growth trajectory for the large

Indian companies. Compared with the prior cycles (2003-07) average y/y revenue

growth of 30-40%, growth rates over the next five years could be in the high teens.Growth is likely to be driven by: 1) increased outsourcing as customers seek a more

flexible cost model; 2) limited availability of technical staff in the developed world; and 3)

a shift to new business models led by themes of cloud computing, mobility and social

networking, among others.

Expect a slowdown in growth

We believe that the revenue growth of the top four Indian IT services companies could be

limited to the high teens over the next five years. This compares with average 30-40% y/y

revenue growth from 2003 to 2007. We believe that change in the global economy and the

increasing scale of the companies will lead to this downshift in the growth trajectory. We

also note that as offshore penetration increases, the growth rate of the industry overall

should slow. This is visible in data for the past 15 years.

Figure 13: Infosys revenue growth rates, CAGR for each period

80%

39%

19%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

FY1995-2000 FY2001-07 FY2007-13E

Increased scale of business and macro

concerns causing growth downshift


Indian IT value proposition remains strong

Nevertheless, the value proposition of offshore delivery is clearly visible in the lower cost of

offshore resources compared with onshore resources in developed economies. Taking

Infosys as an example, we note that the companys offshore billing rates are close to one-third of its onsite billing rates.

This gap is also visible in the revenue per employee of offshore IT firms compared with firms

that offer IT services onsite at client locations. Taking Infosys and Accenture as examples,

we find that Infosyss revenue per employee is only 33-35% of Accentures revenue per

employee, per company data. Sceptics might argue that this gap is largely on the back of

differing value addition of the two companies we disagree. Infosys EBIT per employee is

US$3,300/annum compared with US$4,300/annum for Accenture, indicating significantly

lower gap in value addition between both companies.

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7 October 2011 10

Figure 14: Infosys onsite and offshore billing rates

0

20,000

40,000

60,000

80,000

100,000120,000

140,000

160,000

180,000

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Onsite Offshore BlendedUS$ per annum

>60% discount between onsiteand offshore billing rates

Source: Company data, Barclays Capital

Figure 15: Revenue and margin gap highlights the pricing advantage of Infosys vsAccenture (based on last reported quarter)

32.3

12.5 3.3 4.3

0

5

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15

20

25

30

35

40

Revenue Operating profit

Infosys Accenture

per employee items (US$ 000 per quarter)


Shifting to a more flexible financial model

Clients are increasing the proportion of outsourcing in their overall mix of IT services work,

which has been one of the main reasons for the sectors growth, which we still expect to be

at a mid- to high-teens rate for the next five years. While greater efficiency and capabilities

of IT vendors could be one reason for growth in outsourcing, a more important factor couldbe a desire by clients to shift to a more flexible financial model.

We note that Indian IT vendors have business models with very low leverage. This allows

them to weather fluctuations in revenues better than their customers, which may be more

leveraged. In particular, IT services vendors have:

Low operating leverage: The margins of Indian IT vendors have remained in a narrow

range despite significant fluctuations in their revenue expectations. Vendors have

managed to reduce operating leverage by: i) greater use of variable pay; ii) shifting

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7 October 2011 11

resources from high-cost onsite locations to low-cost offshore locations; and iii)

reducing various discretionary costs (eg, travel, G&A) during periods of weak growth.

Low financial leverage: The balance sheet of most Indian IT vendors is largely debt-free

and holds significant amounts of cash.

Figure 16: Infosys EBIT margins for the past decade

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10%

20%

30%

40%

50%

FY2000

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY2008

FY2009

FY2010

FY2011

High margins, fairly stable in a narrow range


Figure 17: Indian IT vendors Net cash levels as of FY2011

0

20

40

60

80

100

120

140

160

180

Infosys TCS Wipro HCL Tech

INR bn


Staffing constraints in the developed world

The lack of trained technical staff in the developed world is now encouraging many

customers to focus on India (and to some extent China, Eastern Europe and Latin America)

to source skilled resources. We note that companies like Microsoft and Google, among

others, have established large centres in offshore locations largely to source the best talent

rather than to save costs.

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7 October 2011 12

Figure 18: US unemployment rates overall and for graduates 25 years and older

0

2

4

6

8

10

12

Jan-06

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May-11

Overa ll Graduates 25 yr and older

%

Source: Bureau of Labor Statistics, Barclays Capital

New frontiers for IT services

The Indian IT services industry, which cut its teeth at the beginning of this decade on

modernization and implementation of legacy code (old code that was written for different

requirements), is now faced with incremental opportunities in the form of cloud computing,

virtualization and mobility application development.

This does not undermine the importance of application maintenance (largely for legacy

code) as this still retains an important role, at between 18% and 46% of revenues for the

top-four Indian IT services vendors. This situation is likely to continue, we believe, since

upgrades to new platforms are not always beneficial or necessary, and even when an

upgrade is necessary, incremental business flows the way of the IT services vendors.

Figure 19: India IT Services Application development and maintenance as % of total

revenue (last reported quarter)

0%

5%

10%15%

20%

25%

30%

35%

40%

45%

50%



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7 October 2011 13

New opportunities for the sector are likely to come from developing solutions around

shared services on the cloud, infrastructure, platforms for new processes and virtualization.

The shared nature of these services could also provide penetration into the small and

medium-size business market (SMB), the first success in which has been seen with the SaaS

(Software as a Service) model, a US$8.5bn market in 2010 with an impressive growth rate

of 15.6% CAGR in 2010-14E, according to industry researcher Gartner.

Figure 20: Global SaaS (software as a service) market

0

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4,000

6,000

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14,000

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2007 2008 2009 2010 2011E 2012E 2011E 2012E

Content, communications, collaboration Office Suites

Digital Content Creation CRM

ERP SCM

Pro jec t & port fo lio management Other Applicat ion So f tware

US$m

Source: Gartner estimates

Virtualization is another area that is providing incremental growth opportunities, where

labour-based services like assessment, design and planning, testing, optimization and

change management are all under the purview of IT services companies, already a US$4bn

opportunity worldwide, according to Gartner.

Figure 21: Global virtualization consulting and implementation services

0

1,000

2,000

3,000

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5,000

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2008 2009 2010 2011E 2012E 2013E

Server DesktopUS$m

Source: Gartner estimates

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7 October 2011 14

HIGHLY CORRELATED TO US ECONOMIC GROWTH

The US remains the largest end-market for Indian IT companies. Clearly, the health of the

US economy is the key for Indian vendors. Thus, revenues of these vendors remain highly

correlated to US GDP growth.

Our base case scenario is of slow US economic growth but not a recession. While the

current uncertainty is disconcerting, our economists clearly show that there is a limited

chance of this turning into a full-blown recession in the US.

US is the largest end-market

Indian IT Services companies generate more than half their revenues from the US. The

European exposure is close to 20% with more than half of this exposure to the UK rather

than Eurozone countries. Taking Infosys as an example, we note that the companys

revenue growth has a high correlation to US economic parameters (Figures 24-27).

Figure 22: Revenue exposure to various geographies US has a dominant share, June2011 quarter

0%

10%

20%

30%

40%

50%

60%

70%

North America Europe India RoW



Figure 23: Real GDP % over previous period, saar

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12

US 3.9 3.8 2.5 2.3 0.4 1.3 2.0 2.5 2.5 2.5 3.0 3.0

UK 1.4 3.7 1.5 1.2 3.1 0.6 0.5 0.5 1.1 1.2 1.4 1.5Euro area 1.4 4.3 2.5 -2.0 1.9 0.7 0.6 0.9 1.4 1.8 2.6 2.9


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7 October 2011 15

Figure 24: US GDP growth vs. Infosyss revenue growth rate

Figure 25: US investment in equipment and software vs.

Infosyss revenue growth rate

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

-5%

0%

5%

10%

15%

20%

25%

30%US Real GDP growth QQ

Infosys QQ growth rate RHS

-10%

-8%

-6%

-4%

-2%

0%

2%4%

6%

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

-5%

0%

5%

10%

15%

20%

25%

30%

US Investment in equipment and software QQ


Source: Bloomberg, Barclays Capital Source: Bloomberg, Barclays Capital

Figure 26: US industrial production vs. Infosyss revenuegrowth rate

Figure 27: US personal consumption vs. Infosyss revenuegrowth rate

-20%

-15%

-10%

-5%

0%

5%

10%

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

-5%

0%

5%

10%

15%

20%

25%

30%

US Industrial production YY


-6%

-4%

-2%

0%

2%

4%

6%

8%

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

-5%

0%

5%

10%

15%

20%

25%

30%

US personal consumption QQ



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7 October 2011 16

Global outlook

With such high correlations to the developed world economies, the key question for

investors in Indian IT services companies is the health of the global economy.

Barclays Capitals house view is of weak US growth in 2011, with some recovery expected in

2012. We agree that the current uncertain environment limits our visibility; however, we

believe that policymakers are more sensitized to the current slowdown, leaning on the

experience from 2008 and hence likely to be more proactive with fiscal and monetary

measures. According to US economist Troy Davig1, the scope and need for further fiscal

and monetary stimulus is clearly more constrained than in 2008, but additional measures

on both counts are likely.

What about the current lack of visibility?

Our US economist Troy Davig notes that uncertainty plays only a modest role in economic

decisions when confidence is high but can have a more negative influence when confidence

is depressed. We find that heightened uncertainty can cause firms to postpone hiring and

investment decisions, which often plays a role in slowing economic activity.

The current uncertainty has caused a downward revision to the forecasts of our economists

with their FY2011/12 growth rate forecast cut by 80/100bps over the past 6 months.

Figure 28: The US confronts another uncertainty shock

0

10

20

30

40

50

60

70

67 74 81 88 95 02 09

Uncertainty Index (Bloom / VIX)

Index August

2011

Source: Chicago Board Options Exchange, Nick Bloom, Haver Analytics, Barclays Capital

However, uncertainty does not result in a recession

Building on the analysis of the above section, our US economist Troy Davig finds limitedevidence that uncertainty could lead to a recession.

The resurgence in uncertainty and sovereign risk concerns in Europe, as well as any

attendant potential spillover to the US, has raised concerns about another recession in the

US. While our economics team is not forecasting a near-term recession, the slow pace of

growth so far this year and prospect for fiscal tightening pose some risk.

1 Please refer to the 14 September 2011 report Uncertainty shocks and recessionary risks (click here)

Back to the big question

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7 October 2011 17

Figure 29: An increase in uncertainty exerts a persistentweight on business confidence

Figure 30: and job growth

-4.5

-4.0

-3.5-3.0

-2.5

-2.0

-1.5

-1.0-0.5

0.0

1 3 5 7 9 11 13 15 17

Effect on NFIB smal l business optimi sm index of a

10 point increase in the VIX index (+/- 2 std devs)

Months after initial shock to the VIX

-70

-60

-50

-40

-30

-20-10

0

1 3 5 7 9 11 13 15 17

Effect on private non-farm payrolls of a

15% increase in the VIX index, thousands

Months after initial shock to the VIX

Source: Barclays Capital Source: Barclays Capital

Figure 31: Business confidence remains subdued Figure 32: Pessimism + uncertainty = weak job growth

85

90

95

100

105

110

115

120

Jan-86 Jan-91 Jan-96 Jan-01 Jan-06 Jan-11

NFIB small business optimism index

Index

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

10 20 30 40 50 60 70

NFIB small business optimism 110

Private nonfarm payrolls, % chg, m/m

Uncertainty Index

Source: NFIB, NBER, Haver Analytics, Barclays Capital Source: NFIB, CBOE, Nick Bloom, Haver Analytics, Barclays Capital

Figure 33: Forecast showing a recovery Figure 34: Even as absolute annual forecasts have seen adownward revision

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12

US Real GDP % over previous period, saar

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

12M ago 6M ago 3M ago 1M ago Current

2011 2012% YY US GDP

growth

Source: Barclays Capital estimates Source: Barclays Capital estimates

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7 October 2011 18

An analysis of the NBER model to predict the probability of a recession and Barclays

Capitals estimates is presented below, and can be referred to in detail in Troy Davigs report

14 September 2011 report Uncertainty shocks and recessionary risks(click here).

In contrast, recent economic data should allay some fears the US ISM and Chicago PMI

both continued to trend above the 50 expansion/contraction mark, with the August-

September ISM data especially showing strength in the non-manufacturing/services

segment. Even in the manufacturing segment, ISM data has continued to come ahead of

forecast with a rebound in production in the month of September.

Figure 35: Warning signals have risen, but do not indicate a

near-term recession

Figure 36: Forward-looking warning signals have also risen,

but do not indicate a near-term recession

0.0

0.2

0.4

0.6

0.8

1.0

Jan-87 Jan-93 Jan-99 Jan-05 Jan-11

Probabili ty of NBER-defined recession

0.0

0.2

0.4

0.6

0.8

1.0

Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10

Pro bability the US will be in an NBER-defined recession in 3 mo nths

Pro bability the US will be in an NBER-defined recession in 6 mo nths

Probability

Source: Bureau of Economic Analysis, NBER, Haver Analytics Source: Bureau of Economic Analysis, NBER, Haver Analytics

Figure 37: Monthly Chicago PMI Figure 38: US ISM index

0

10

20

30

40

50

60

70

80

90

100

Feb-00

Ma

r-01

Ma

r-02

Ma

r-03

Feb-04

Ma

r-05

Ma

r-06

Ma

r-07

Feb-08

Ma

r-09

Ma

r-10

Ma

r-11

Overall New orders

Inventory New employee

30

35

40

45

50

55

60

65

70

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Overall Non manufac Manufact

Source: Kingsbury International, Barclays Capital Source: Institute for Supply Management, Barclays Capital
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7 October 2011 19

CIO SURVEY BUILDS A STRONG BOTTOM-UP CASE FOR IT SERVICES SPENDING

Results from the Barclays Capital September 2011 survey of 100 CIOs in the US and

Europe (published 7 September 2011, Barclays Capital CIO Survey: September 2011;

click here) reflect the weak environment through pared down growth expectations

compared with the findings in the April survey. However, participants in the survey arebuilding a reasonable 1.8% y/y increase in tech spending in 2011, with a similar increase

expected in 2012.

CIOs are still building growth

Based on the analysis of our US and Europe-based technology analysts, for 2011,

respondents now expect spending to increase about 1.8% in 2011 compared with

expectations of 3.3% growth forecast in the April survey, and 55% expect growth in 2011

vs. 63% in the prior survey. With regard to 2012, respondents expect spending to increase

1.7%, with 54% expecting growth and 20% expecting declines.

Figure 39: Barclays Capital CIO Survey September 2011 What is your best estimate forwhat your overall IT spending will be in 2012 y/y?

0%

5%

10%

15%

20%

25%

30%

35%

Up 10%+ Up 5-10% Up 0-5% Flat Down 0-

5%

Down 5-

10%

Down

10%+

%o

fRespondents

54% expect growth

in 2012; 20%

expect decli nes

Responses still showexpectations for low-single digit

overall IT spending growth in

2012

Source: Barclays Capital CIO Survey September 2011

Figure 40: What is your overall IT spending trend for 2H11 y/y (prior survey vs current)?

0%

5%10%

15%

20%

25%

30%

35%

40%

Up 10%+ Up 5-10% Up 0-5% Flat Down 0-

5%

Down 5-

10%

Down

10%+

Apr-11 Aug-11

17% expect declines

vs. 16% last survey

47% expect growth in

2H11 vs. 56% last

survey

Overall 2H11 IT spending

expectations show some

moderation vs April 2011

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7 October 2011 20

Software and services remain top priorities

IT services, along with software applications, is the top relative priority for 2H11 IT

spending, which makes sense to us given these industries later-cycle nature (relatively

more defensive moving into a potential economic downturn). This is a positive 2H11 lateral

for Indias IT services sector overall (relative to other technology sectors), in our view, with

more than one-third of the respondents listing software and services as top priorities.

Figure 41: Of your current budget, what is your biggest IT spending priority for 2H11 vs 1H11?

0%

2%

4%6%8%

10%12%14%

16%18%20%

SW-

Applications

ITServices

NoPriorities

Storage

Networking

Servers

PCs

SW-

Infrastructure

Virtualization

Other

%o

fRespondents

Applications and IT Services are

top priori ti es; Storage

Continues to Rate Well

19% of respondents favour IT

services as top priority


With IT services a top relative priority for 2H11, companies appear to be hiring IT services

vendors for a number of reasons, with improved response rates across various tasks (cost-

cutting, ERP implementation, business transformation, risk management, analytics).

Interestingly, ERP implementation received the largest number of responses with cost

cutting remaining the next priority, which should likely provide initial resilience for most

outsourcing names going into a potential downturn.

Figure 42: Several reasons to hire an IT services vendor this year

0

10

20

30

40

50

60

Cutcostsfr

om

operation

s

Implement/upgrade

ERPorother

software/system

s

Transformb

usin

ess

model/strateg

y

Manageriskm

ore

effectively

Applypredictive

analyticsto

understand

customersbet

ter

#ofTotalRespondents

Apr-11 Aug-11

Focus on cost-cutting should

ensure resilience into downturn


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7 October 2011 21

Recent results of global software and IT services companiessupport findings

The strength of demand for IT services and software is also evident from the recent results

of global IT services and software companies. For example, Accenture showed good overall

growth across regions and industry verticals with its results for August 2011 and reaffirmed

its full-year guidance despite factoring in the macro slowdown. Oracle confirmed a strongincrease in large license deals during its results briefing for August 2011 in September 2011

showing a 45% increase in deals greater than US$3m, while IBM reported good execution in

software and services with improvement in new contract signings. In Europe, SAP too

reported similar positive trends with strong license growth and large deal signings.

Figure 43: Accenture, Oracle, SAP, IBM results commentaries takeaways for IT services

Company Key takeaways from latest results

AccentureAug11 quarter

Revenue growth of 14% y/y in constant currency, above consensus estimates

Reaffirmation of 2012 revenue and EPS target even after adjusting for a weak macro

Conversion of bookings to revenues showing an acceleration

Visibility remains strong contracted revenue was up 13% Y/Y, largely due to strong outsourcing

OracleAug11 quarter

New software license revenue was up 17% Y/Y, building off 25%Y/Y growth last year

Deals >US$3m, which form 21% of revenue, growing at 45% Y/Y

Deals >US$0.5m showing a 44% YY growth

IBMJun11 quarter

Services signings up 16% Y/Y (+8% in constant currency)

17% Y/Y increase in outsourcing signings from large deal closures in emerging economies

Services backlog increased 2% Y/Y

SAPJun11 quarter

22% Y/Y core organic license growth

New deal signings up 34% Y/Y, 17% of new deals >US$5m


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7 October 2011 22

VALUATIONS

Valuations have corrected significantly

Forward multiples for the four Indian IT vendors have corrected substantially for the year to

date. However, valuations remain significantly ahead of the previous cycles lowest

multiples.

Cuts in consensus EPS estimates have been modest; the worst was a cut of 8%. Wipro

suffered the biggest correct in consensus estimates with cuts of 5% for FY2012 and 8% to

FY2013, while HCL Tech has seen recent upgrades in the consensus view.

EPS estimates have also

corrected

Figure 44: Infosys 12-month forward P/E (consensusestimates) vs. maximum, minimum, average since Jan 2008

Figure 45: TCS 12-month forward P/E (consensusestimates) vs. maximum, minimum, average since Jan 2008

0

5

10

15

20

25

30

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40

Sep-01

Jun-02

Mar-03

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May-11

Max

Min

Avg

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Jun-05

Feb-06

Oct-06

Jun-07

Feb-08

Oct-08

Jun-09

Feb-10

Oct-10

Jun-11

Max

Min

Avg


Figure 46: HCL Tech 12-month forward P/E (consensusestimates) vs. maximum, minimum, average since Jan 2008

Figure 47: Wipro 12-month forward P/E (consensusestimates) vs. maximum, minimum, average since Jan 2008

0

5

10

15

20

25

Sep-01

May-02

Jan-03

Sep-03

May-04

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Feb-11

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Max

Min

Avg


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7 October 2011 23

Figure 48: Infosys year-to-date changes in consensus EPS

forecasts: -8% for FY12 YTD

Figure 49: TCS year-to-date changes in consensus EPS

forecasts: almost flat since May 2011

100

110

120

130

140

150

160170

180

n-11

eb-11

ar-11

pr-11

ay-11

un-11

ul-11

ug-11

ep-11

ct-11

FY12E FY13E

30

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65

n-11

eb-11

ar-11

pr-11

ay-11

un-11

ul-11

ug-11

ep-11

ct-11

FY12E FY13E


Figure 50: HCL Tech year-to-date changes in consensusEPS forecasts: upgrades post June 2011 results

Figure 51: Wipro year-to-date changes in consensus EPSforecasts: -6% YTD for FY12 EPS

15

20

25

30

35

40

Jan-

11

Feb-

11

Mar-

11

Apr-

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May-

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7 October 2011 24

Currency impact

The Indian rupee has depreciated -9.6% against the US dollar and -5.8% against the British

pound in the past three months. We note that most companies indicate that a 1%

depreciation in the rupee should lead to a 30-40bps expansion in their operating margins.

This implies that a 1% depreciation in the rupee should lead to a 1.5-2% increase in EPS.

While the Indian rupee is currently at INR49.15/US$1, Barclays Capitals economics team

expects the rupee to appreciate to INR47.2/US$1 by December 2011, INR45/US$1 by

March 2012 and INR44.50/US$1 by September 2012.

Our forecasts for Indian IT vendors build in these estimates for the currency. However, if the

INR/US$ exchange rate stays at the current level, we could expect an increase of more than10% in our EPS estimates for the four companies.

Figure 54: Forex hedge cover as a % of revenues, quarter ending Jun-11

0%

20%

40%

60%

80%

100%

120%



Could rupee depreciation lead to

EPS upgrades?

Figure 52: INR/USD exchange rate Figure 53: INR/GBP exchange rate

42

44

46

48

50

52

Jul-11

Aug-11

Sep-11

Oct-11

-9.6% depreciation of INRINR/USD

70

72

74

76

78

Jul-11

Aug-11

Sep-11

Oct-11

-5.8% depreciati on of INRINR/GBP


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7 October 2011 25

INFOSYS (1-OW, PT INR3,050, +24%): OUTPERFORMING LOWERED EXPECTATIONS

We initiate coverage of Infosys with a 1-Overweight rating and 12-month price target of

INR3,050, based on a target P/E multiple of 17.5x. A significant decline in revenue from

one of its major clients, British Telecom, could be the key factor behind the weak

revenue performance of Infosys in the past six quarters. This revenue decline could endsoon as British Telecom now has a lower contribution to revenue mix thereby leading to

a positive surprise on growth. Furthermore, we find Infosyss margin guidance for the

year ending March 2012 conservative and we expect actual numbers to come in ahead

of guidance. Finally, low hedging could help Infosys amid the current rupee

depreciation.

Investment summary

Best revenue growth amongst peers: Infosys has exhibited the best organic revenue

growth among the large-cap Indian IT companies in the past decade. This is largely a result

of strong execution by the company rather than lucky strategic breaks. For example, Infosys

was one of the last major Indian IT vendors to invest in BPO, but it has managed to buildone of the best BPO practices, in our opinion.

Strong margin focus: The capability of Infosys management is reflected in its ability to not

only deliver the best revenue growth but also to deliver it along with the strongest margins

and limited use of balance sheet. We believe this reflects companys strong internal

processes and systems, along with a top-tier sales team.

Near-term cautious commentary reflects conservative stance: Infosyss management

team has been cautious in the past few quarters on the back of its worries about the macro

environment. We note that Infosys is the only large Indian IT company to give guidance and,

hence, it is usually more transparent about its market views. Management has also been

clear that it has seen limited (if any) impact on the business but worries that macro

weakness could impact revenue.

Valuations look inexpensive: Infosys is trading at a mid-point of it P/E multiples for the

past five years a period that includes the financial crisis period of 2008-09. It is also

trading at its lowest premium to the Indian market and is actually at a 9.8% discount to

TCS. We base our target price on a P/E of 17.5x, which we view as fair despite market

uncertainty.

Figure 55: Infosys statistical abstract

Year to Net profit EPS EPS P/E P/B ROE Div. yield

31-March (INR mn) (INR) growth (%) (x) (x) (%) (%)

2011A 68,230 119.45 9.0 20.5 5.1 27.1 2.52012E 78,052 136.60 14.4 17.9 4.5 26.7 1.7

2013E 90,339 158.04 15.7 15.5 3.8 26.5 1.9

2014E 105,362 184.26 16.6 13.3 3.2 26.1 2.3

Source: Company data, Barclays Capital estimates

INFO IN / INFY.NS

Stock Rating

1-OVERWEIGHTSector View

2-NEUTRAL

Price Target

INR 3050.00

Price (05-Oct-2011)

INR 2454.30

Potential Upside/Downside

+24%

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7 October 2011 26

COMPANY SNAPSHOT

Infosys Limited Asia ex-Japan Software & IT Services

Income statement (INRmn) 2011A 2012E 2013E 2014E CAGR

Revenue 275,010 335,581 391,771 458,485 18.6% S tock Rating 1-OVERWEIGHT

EBITDA 89,640 104,142 119,234 135,480 14.8% S ector View 2-NEUTRAL

EBIT 81,020 94,992 109,114 124,340 15.3% Price (05-Oct-2011) INR 2454

Pre-tax income 93,130 109,085 124,816 143,798 15.6% Price Target INR 3050

Net income 68,230 78,052 90,339 105,362 15.6% Ticker INFO IN / INFY.NS

EPS (INR) 119.45 136.60 158.04 184.26 15.5%

Diluted shares (mn) 571.18 571.41 571.61 571.81 0.0% Investment case

Margin and return data (%) Average

EBITDA margin 32.6 31.0 30.4 29.5 30.9

EBIT margin 29.5 28.3 27.9 27.1 28.2

Pre-tax margin 33.9 32.5 31.9 31.4 32.4

Net margin 24.8 23.3 23.1 23.0 23.5

ROIC 48.5 47.0 49.2 52.1 49.2

ROA 23.1 23.2 22.5 21.8 22.7 Upside case INR 4000ROE 27.1 26.7 26.5 26.1 26.6

Balance sheet and cash flow (INRmn) CAGR

Fixed assets 57,170 59,680 61,560 62,420 3.0%

Cash and equivalents 168,780 191,823 245,253 300,941 21.3%

Total assets 312,630 359,875 442,599 523,171 18.7%

Current liabilities 36,230 44,819 68,913 81,106 30.8%

Long term liabilities 3,370 4,100 4,100 4,100 6.8% Downside case INR 1850

Total liabilities 39,600 48,919 73,013 85,206 29.1%

Net debt/(funds) - - - - NA

Shareholders' equity 273,030 310,956 369,586 437,965 17.1%

Change in work ing capi tal (5 ,550) (10,590) (824) (8,709) NA

Cash flo w f ro m o perat ions 71,300 76,613 99,635 107,792 14.8%

Capital expenditure (12,240) (11,660) (12,000) (12,000) NA

Free cash flow 59,060 64,953 87,635 95,792 17.5%

Upside/downside scenarios

Valuation and leverage metrics Average

P/E (x) 20.5 17.9 15.5 13.3 16.8

EV/EBITDA (x) 14.1 12.0 10.3 8.7 11.3

FCF yield (%) 4.2 4.6 6.3 6.8 5.5

EV/sales (x) 4.6 3.7 3.1 2.6 3.5

Price/BV (x) 5.1 4.5 3.8 3.2 4.1

Dividend yield (%) 2.5 1.7 1.9 2.3 2.1

Total debt/capital (%) 0.0 0.0 0.0 0.0 -

Net debt/EBITDA (x) - - - - -

Source: Thomson Reuters Datastream, Barclays Capital est.

Selected operating metrics EPS projections

Total headcount 113,796

Volume growth (%) 23.4 16.6 22.0 17.0

Pricing growth (%) 2.6 3.4 -1.1 -0.2

Onsite as % of revenues (%) 51.2 51.2 51.6 51.5

Source: Company data, Barclays Capital estimates Note: FY end Mar

Why a 1-Overweight? We expect Infosys to sustain

revenue growth in the high teens for the next five

years on the back of its strong value proposition.

This s hould allow t he s ha res to t rade at 1 7. 5x

forward P/E, leading us to our target price of

Rs3,050.

Strong rebound in discretionary IT spending could

l ead to a more positive revenue and margin

scenarios. This would improve both EPS (~15%) and

multiples (to 20x) and hence the shares could trade

close to R s4,000.

A weaker macro scenario could lead to both EPS

downgrades (down ~15%) and multiple

compression (to 12.5x), indicating a share price of

Rs1,850.

0

2

4

6

8

10

2011A 2012E 2013E 2014E

1.2

1.25

1.3

1.35

1.4

1.45

1.5Line item 1 Line item 2

DownsideCase

INR1850

(-20.2%) PriceTarget

INR3050

(31.5%)

Upside

Case

INR4000

(72.4%)

925

1925

2925

3925

4925

25-Oct-10 5-Oct-11

DownsideCase

INR1850


INR3050

(24.6%)

Upside

Case

INR4000

(63.4%)

925

1925

2925

3925

4925

25-Oct-10 5-Oct-11

0

50

100

150

200

2011A 2012E 2013E 2014E

INR

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7 October 2011 27

Figure 56: Decade-long EBITDA margins

15%

20%

25%

30%

35%

40%

45%

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

Infosys TCS Wipro HCL


Figure 59: Infosys Sept 2011 quarter estimates

INR mn Sep-11 est. YY QQ

Revenue 83,445 20% 11%

EBITDA 23,793 13% 20%

EBIT 23,793 13% 22%

Net profit 19,130 10% 11%

EPS (INR) 33


Figure 57: Infosys q/q revenue growth has seen limitedgap between the Top 4 in the past four quarters

Figure 58: Infosys 12-month historical forward P/E vsmaximum, minimum and average since January 2008

0%

2%

4%

6%

8%

10%

12%

14%

Sep-10 Dec-10 Mar-10 Jun-10

Infosys TCS Wipro HCL TechQQ

0

5

10

15

20

25

30

35

40

Oct-01

Jul-02

Mar-03

Dec-03

Sep-04

Jun-05

Mar-06

Dec-06

Sep-07

May-08

Feb-09

Nov-09

Aug-10

May-11

Max

Min

Avg

Source: Company data, Barclays Capital Source: Datastream, Barclays Capital

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7 October 2011 28

Figure 60: Infosys business mix

Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11

Geographical mix

North America 64.7% 65.9% 66.6% 66.1% 67.3% 65.8% 64.7% 63.7% 64.2%

Europe 24.7% 23.2% 21.9% 22.5% 20.3% 21.8% 21.8% 22.1% 21.3%

India 0.9% 1.2% 1.2% 1.4% 1.7% 2.1% 2.2% 2.7% 2.6%

ROW 9.7% 9.7% 10.3% 10.0% 10.7% 10.3% 11.3% 11.5% 11.9%

Industry mix

Insurance, Banking and Financial services 33.0% 33.5% 34.6% 34.8% 36.1% 35.4% 36.2% 35.7% 35.4%

Manufacturing 20.5% 19.3% 19.3% 20.2% 19.5% 18.9% 19.6% 20.4% 20.3%

Retail 13.2% 14.1% 13.1% 13.0% 13.2% 14.4% 14.5% 14.5% 16.1%

Telecom 16.9% 16.2% 16.2% 15.3% 14.1% 13.3% 12.5% 11.9% 10.6%

Utilities 5.7% 5.9% 6.1% 5.8% 6.0% 6.3% 6.1% 5.8% 5.7%

Transportation & Logistics 2.3% 2.3% 1.8% 1.8% 1.8% 1.8% 1.8% 2.1% 1.8%

Services 4.9% 5.0% 5.1% 4.9% 4.8% 5.2% 5.0% 5.2% 0.0%

Others 3.5% 3.7% 3.8% 4.2% 4.5% 4.7% 4.3% 4.4% 0.0%

Service offerings

Application development 19.3% 18.1% 17.8% 16.8% 16.9% 15.6% 15.6% 16.1% 16.1%

Application maintenance 23.2% 22.7% 24.5% 22.8% 23.9% 23.5% 22.5% 22.0% 22.3%

Business Process Management 6.1% 6.2% 5.9% 6.2% 5.7% 5.6% 5.6% 5.6% 5.4%

Consulting Services and Package Implementation 24.4% 23.8% 23.3% 26.0% 24.9% 25.8% 25.9% 25.4% 25.2%

Infrastructure Management 6.6% 7.8% 7.1% 7.2% 6.9% 6.2% 6.0% 6.1% 5.9%

Product Engineering Services 2.4% 2.3% 2.4% 1.8% 2.1% 2.5% 2.6% 2.4% 3.2%

System Integration 3.8% 4.4% 4.1% 4.5% 4.2% 5.7% 5.6% 6.1% 6.3%

Testing Services 6.2% 6.2% 6.5% 6.6% 7.3% 7.6% 7.6% 7.3% 7.5%

Others 4.0% 4.4% 4.5% 3.1% 3.4% 3.3% 3.3% 3.6% 3.3%

Product revenues 4.0% 4.1% 3.9% 5.0% 4.7% 4.2% 5.3% 5.4% 4.8%


Valuation

Our 12-month target price of INR3,050 for Infosys is based on a P/E of 17.5x, which we

apply to the average of our EPS estimates for FY2013 and FY2014, which is INR171. Our

target multiple for Infosys is in line with Infosyss past five-year average.

For the Indian IT vendors, we believe P/E is the most appropriate valuation method because

earnings best incorporate the two main drivers of the business: revenue growth that is a

result of new contract signings and margin resilience that comes from operational

efficiencies and the position in the IT services value chain.

We rate Infosys as 1-Overweight because our price target represents 24% potential upside

at the high end of its peers amid our expectations of positive surprises for revenue growth.

Risks

The risks that could keep our price target from being achieved, in our view, include the

following: 1) a weaker global macroeconomic scenario could slow down the process of

incremental business from new and existing customers; 2) management changes over the

past couple of years have caused some overhang, with any further shuffle in top

management being a risk; and 3) demand unevenness has caused some issues in

management of staffing levels that has had a margin impact and should be monitored.

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7 October 2011 29

HCL TECH (1-OW, PT INR485, +23%): INDUSTRY LEADING GROWTH

We initiate coverage of HCL Tech with a 1-Overweight rating and 12-month price target

of INR485, based on a 30% discount to our target multiple for Infosys. We believe that

HCL Tech should be able to maintain its industry-leading growth rate going forward on

the back of strong performance of its infrastructure business. HCL also appears wellpositioned to exploit any resurgence in growth of its enterprise solutions business

through its acquisition of Axon. Furthermore, a turnaround in its BPO business could

lead to small margin expansion for HCL going forward while peers face margin

pressure. HCL is also a beneficiary of the recent rupee depreciation on the account of its

low hedge positions.

Investment summary

Strategy change to focus on revenues: HCL Techs management has been able to deliver

one of the strongest revenue growth rates in the Indian IT sector for the past eight quarters.

Its relentless focus on large contracts, the strong positioning of its IT infrastructure business

and its good execution capabilities could be key to this achievement. HCL Tech alsoannounced new contracts totalling US$2bn in past six months, indicating that business

momentum remains favourable for the company.

Margins could surprise near-term: HCL Techs EBITDA margin has expanded by 220bps in

past three quarters on the back of: 1) manpower rationalization that has expanded gross

margin by 110bps; and 2) reduced operating costs as a percentage of overall revenues.

Going forward, the company should be able to further leverage its margins on the back of:

1) changing employee mix towards more junior people; 2) its BPO business breaking even

and returning to profitability; and 3) a further reduction in G&A expenses.

Axon buy leverages HCL Tech to upturn in the market: The acquisition of Axon in 2008

allowed HCL Tech to enter the lucrative market of enterprise solutions. While the current

uncertain market environment could keep this business muted for a while, we believe thatany recovery in the market would lead to significant growth for HCL Tech.

Reasonable valuations: HCL Tech is trading at discounts of 24% to Infosys and 30% to TCS

despite HCL Techs higher operating profit growth rate. A part of this discount could be due

to perceived weakness in the business model, but we believe that valuations could be

supported around a P/E of 12.25x.

Figure 61: HCL Tech statistical abstract


30-June (INR mn) (INR) growth (%) (x) (x) (%) (%)

2011A 17,139 25.1 33.08 15.8 2.7 22.3 1.2

2012E 22,276 32.3 28.82 12.2 2.2 23.0 1.2

2013E 26,188 37.8 16.88 10.5 1.8 22.9 1.2

2014E 31,242 44.8 18.61 8.8 1.5 22.2 1.2


HCLT IN / HCLT.NS

Stock Rating

1-OVERWEIGHTSector View

2-NEUTRAL

Price Target

INR 485.00

Price (05-Oct-2011)

INR 395.10


+23%

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7 October 2011 30

COMPANY SNAPSHOT

HCL Technologies Asia ex-Japan Software & IT Services


Revenue 160,451 198,086 225,489 264,597 18.1% S tock Rating 1-OVERWEIGHT


EBIT 22,552 29,055 33,979 40,016 21.1% Price (05-Oct-2011) INR 395

Pre-tax income 22,004 29,286 33,979 40,016 22.1% Price Target INR 485

Net income 17,139 22,276 26,188 31,242 22.2% Ticker HCLT IN / HCLT.NS

EPS (R) 25.07 32.30 37.75 44.78 21.3%

Diluted shares (mn) 683.52 689.65 693.65 697.65 0.7% Investment case


EBITDA margin 17.2 17.6 17.9 17.9 17.6

EBIT margin 14.1 14.7 15.1 15.1 14.7

Pre-tax margin 13.7 14.8 15.1 15.1 14.7

Net margin 10.7 11.2 11.6 11.8 11.3

ROIC 19.8 22.8 25.8 28.6 24.2



Fixed assets 64,849 65,548 61,821 59,385 -2.9%


Total assets 148,073 167,380 185,404 214,367 13.1%


Long term liabilities 6,974 7,108 6,857 6,857 -0.6% Downside case INR 250

Total liabilities 62,668 60,954 59,341 59,875 -1.5%

Net debt/(funds) (1,186) (13,612) (28,733) (49,271) NA


Change in work ing capi tal (5 ,1 96) (7,525) (9,204) (10,326) NA

Cash flo w f rom operat ions 16,917 20,462 23,342 28,291 18.7%Capital expenditure (9,101) (4,613) (4,450) (4,450) NA

Free cash flow 7,816 15,849 18,892 23,841 45.0%



P/E (x) 15.8 1 2.2 10.5 8.8 11.8

EV/EBITDA (x) 9.0 7.1 5.6 4.4 6.5

FCF yield (%) 3.4 6.7 8.2 10.3 7.1

EV/sales (x) 1.6 1.2 1.0 0.8 1.1

Price/BV (x) 2.7 2.2 1.8 1.5 2.1

Dividend yield (%) 1.2 1.2 1.2 1.2 1.2

Total debt/capital (%) 20.1 14.8 12.4 10.3 14.4

Net debt/EBITDA (x) (0.0) (0.4) (0.7) (1.0) (0.5)



IT Services revenue (%) 71.2 69.8 69.2 69.0

Infrastructure revenue (%) 23.3 25.6 26.4 26.7

BPO revenue (%) 5.5 4.6 4.4 4.3

Source: Company data, Barclays Capital estimates Note: FY end Jun

Why a 1-Overweight? Good tracti on in the IT

Services business, strong infrastructure offering and

a turnaround i n BPO business shoul d l ead t o

industry leading revenue growth and an

improvement in margins. Valuing shares at a 30%

d iscount to In fo sys multiple gives us a target o f

Rs485.

A strong rebound in discretionary spending could

help EPS (+15%) and mult ip les (+16x). Thus, the

share could trade close to Rs725.

A significantly weaker macro scenario could lead to

both EPS downgrades (down 20%) and multip le

compression (to 8x), indicating a share price of

Rs250.

0

2

4

6

8

10

2011A 2012E 2013E 2014E

1.2

1.25

1.3

1.35

1.4

1.45


28

48

68

88

108

25-Oct-10 5-Oct-11

DownsideCase

INR250


INR485

(22.6%)

UpsideCase

INR725

(83.3%)

125

325

525

725

25-Oct-10 5-Oct-11

0

10

20

30

40

50

2011A 2012E 2013E 2014E

INR

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7 October 2011 31

Figure 66: HCL Tech Sept 11 quarter estimates

INR mn Sep-11 est. YY QQ

Revenue 47,836 29% 11%

EBITDA 8,005 33% 1%

EBIT 6,616 38% -1%

Net profit 5,211 58% 2%

EPS (INR) 7.57


Figure 62: HCL Tech y/y revenue growth accelerated in

past two years

Figure 63: HCL Tech BPO moving towards profitability; IT

services has seen a margin recovery in the past two quarters

0%

5%

10%

15%

20%

25%

30%

35%40%

45%

50%

2004 2005 2006 2007 2008 2009 2010 2011

-15%

-10%

-5%

0%

5%

10%

15%

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

15%

16%

17%

18%

19%

20%

21%

BPO IT services (RHS)

EBITDA margin (%)

Source: Company data, Barclays Capital Source: Company data, Barclays Capital

Figure 64: HCL Tech 12-month historical forward P/Ebased on consensus estimates

Figure 65: HCL Tech relative to Infosys, negative indicatesHCL Tech at discount

10

11

12

13

14

15

16

17

Oct-09

Dec-09

Feb-10

Apr-10

Jun-10

Aug-10

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Aug-11

-50%

-45%-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

Oct-09

Dec-09

Feb-10

Apr-10

Jun-10

Aug-10

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Aug-11

Source: Bloomberg consensus estimates, Barclays Capital, Bloomberg Source: Bloomberg, Barclays Capital

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7 October 2011 32

Figure 67: Enterprise Application Service (EAS) revenues saw a huge boost from Axonacquisition

0%

5%

10%

15%

20%

25%

30%

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11


Figure 68: HCL Tech Key business segments Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11

Geographic mix

US 58.9% 58.7% 57.0% 59.5% 61.5% 58.0% 57.1% 54.3% 54.4%

Europe 28.5% 29.0% 29.5% 26.7% 24.6% 26.7% 26.6% 27.0% 27.1%

APAC 12.6% 12.3% 13.5% 13.8% 13.9% 15.3% 16.3% 18.7% 18.5%

Service offering

Enterprise application services 23.6% 21.9% 22.4% 21.4% 22.2% 21.7% 21.3% 21.4% 20.9%

Engineering and R&D services 19.4% 18.7% 18.0% 19.0% 19.6% 18.7% 18.5% 17.7% 17.8%

Custom application 29.7% 30.7% 30.5% 29.9% 29.6% 31.3% 31.8% 32.0% 31.8%

Infrastructure services 17.6% 19.4% 20.3% 22.2% 22.4% 22.3% 22.8% 23.4% 24.5%

BPO services 9.7% 9.3% 8.8% 7.6% 6.2% 6.0% 5.7% 5.4% 4.9%

Verticals

Financial services 24.8% 26.3% 26.1% 25.5% 24.9% 25.2% 24.6% 26.2% 26.0%

Manufacturing 30.9% 27.4% 25.6% 26.7% 27.3% 27.2% 27.1% 27.3% 28.0%

Telecom 12.5% 13.0% 12.5% 11.6% 10.9% 11.0% 10.8% 10.3% 9.1%

Retail 6.6% 7.0% 8.0% 7.5% 8.2% 8.5% 9.1% 8.7% 7.9%

Media and entertainments 5.6% 6.8% 7.2% 7.9% 7.4% 6.9% 6.8% 6.6% 7.1%

Life sciences 6.4% 6.4% 7.2% 7.5% 8.2% 8.4% 8.4% 8.0% 7.9%

Energy, utilities, public sector 7.6% 6.8% 7.3% 7.0% 6.9% 6.8% 7.2% 7.3% 8.3%

Others 5.6% 6.3% 6.1% 6.3% 6.2% 6.0% 5.8% 5.6% 5.7%


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7 October 2011 33

Valuation

Our 12-month target price of INR485 for HCL Tech is based on a P/E of 11.8x, which we

apply to the average of our EPS estimates for FY2013 and FY2014, which is INR41.30. For

HCL Tech, our target multiple is based on a 30% discount to our target multiple of 17.5x for

Infosys because of the inferior margin profile and smaller scale of business. Our target

multiple for Infosys is in line with Infosyss past five-year average.

For the Indian IT vendors, we believe P/E is the most appropriate valuation method because

earnings best incorporate the two main drivers of the business: revenue growth that is a

result of new contract signings and margin resilience that comes from operational

efficiencies and position in the IT services value chain.

We rate HCL Tech as 1-Overweight because our price target represents 23% potential

upside, which is at the upper end of its peer group. We believe that HCL Tech should be able

to maintain its industry leading-growth rate going forward on the back of the strong

performance of its infrastructure business.

RisksThe key risk that could keep our price target from being achieved, in our view, is the

weakening of the macroeconomic environment that could jeopardize revenue growth or

margins (or both) for the company. Also, HCL Techs margin profile has historically been

inferior to those of Infosys and TCS and, while it has delivered on top-line growth, profit

growth has not been matched. Margin performance and revenue growth are key factors in

stock performance and slip ups here would pose a risk.

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7 October 2011 34

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7 October 2011 35

TATA CONSULTANCY (2-EW, PT INR1,150, +10%): HEADWINDS AHEAD

We initiate coverage on TCS with a 2-Equal Weight rating and a 12-month price target

of INR1,150, based on a target P/E multiple of 17.5x. Although we like TCS, we find it

difficult to justify its P/E multiple premium of 9.5% to Infosys, and we expect this

premium to correct going forward. We also believe that TCS could now face headwindsin margin expansion (excepted due to rupee depreciation), and hence, operating profit

growth should be largely in line with that of Infosys.

Investment summary

Strong margin performance in past three years: TCSs strong focus on cost control led to a

400bps expansion in margins in the past three years. This has allowed TCS to close its

margin gap with Infosys to only 100bps in the June 2011 quarter. Going forward, we believe

that TCS would maintain its margins at only a 100bps discount to Infosyss margins.

Revenue performance is commendable: For the first time in its listed history, TCS has

outperformed Infosyss revenue growth for five quarters. To some extent, this has been led

by TCSs strong focus on financial services (c.44% of revenues vs Infosyss c.35%);

however, we believe the key reason behind this could be weakness in one of the large

clients of Infosys (British Telecom). Going forward, we believe that revenue growth of the

two companies could be similar, despite Infosys outperforming TCSs revenue growth by a

CAGR of 2.6% over the past decade

Valuations appear fair: TCS is trading at a P/E of 17.2x FY2013E EPS, implying a 10%

premium to the multiple for Infosys. We believe the market is expecting TCSs current

outperformance vs Infosys to continue. We believe that going forward, TCSs operating

profit should grow in line with Infosyss (despite headwinds of higher financial services

exposure) and EPS growth could be slower (largely due to tax and other income). Thus, we

base our price target for TCS on a similar multiple as for Infosys.

Figure 69: Tata Consultancy statistical abstract


31-March (INR mn) (INR) growth (%) (x) (x) (%) (%)

2011A 86,557 44.2 25.9 23.6 8.1 36.8 1.9

2012E 105,988 54.2 22.4 19.3 6.6 37.2 2.3

2013E 119,005 60.8 12.3 17.2 5.4 34.4 2.2

2014E 143,562 73.3 20.6 14.2 4.4 33.7 2.2


TCS IN / TCS.NS

Stock Rating

2-EQUAL WEIGHTSector View

2-NEUTRAL

Price Target

INR 1150.00

Price (05-Oct-2011)

INR 1043.50


+10%

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7 October 2011 36

COMPANY SNAPSHOT

Tata Consultancy Services Asia ex-Japan Software & IT Services


Revenue 373,245 476,158 561,405 667,322 21.4% S tock Rating 2-EQUAL WEIGHT


EBIT 103,904 132,690 150,653 177,205 19.5% Price (05-Oct-2011) INR 1043.5

Pre-tax income 108,875 138,539 156,573 186,533 19.7% Price Tar get INR 1150

Net income 86,557 105,988 119,005 143,562 18.4% Ticker TCS IN / TCS.NS

EPS (INR) 44.22 54.15 60.80 73.35 18.4%

Diluted shares (mn) 1,957 1,957 1,957 1,957 0.0% Investment case

DPS (INR) 20.00 24.50 22.50 22.50 4.0%


EBITDA margin 30.0 29.8 28.9 28.6 29.3

EBIT margin 27.8 27.9 26.8 26.6 27.3

Pre-tax margin 29.2 29.1 27.9 28.0 28.5

Net margin 23.2 22.3 21.2 21.5 22.0

ROIC 35.5 36.9 36.1 38.7 36.8



Fixed assets 52,340 61,833 70,391 77,048 13.8%


Total assets 332,608 396,340 477,731 585,327 20.7%


Long term liabilities 10,678 11,644 11,644 11,644 2.9% Downside case INR 700

Total liabilities 75,555 83,852 97,740 113,276 14.5%

Net debt/(funds) (47,361) (63,222) (103,482) (167,982) NA


Change in work ing capi tal 19 ,2 93 (37,390) (18,686) (20,903) NA

Cash flow from operat ions 113,840 77,982 111,762 136,002 6.1%Capital expenditure (18,624) (18,877) (20,000) (20,000) NA

Free cash flow 95,216 59,105 91,762 116,002 6.8%



P/E (x) 23.6 19.3 17.2 14.2 18.6

EV/EBITDA (x) 18.4 14.4 12.5 10.4 13.9

FCF yield (%) 4.7 2.9 4.5 5.7 4.4

EV/sales (x) 5.5 4.3 3.6 3.0 4.1

Price/BV (x) 8.1 6.6 5.4 4.4 6.1

Dividend yield (%) 1.9 2.3 2.2 2.2 2.1

Total debt/capital (%) 0.0 0.0 0.0 0.0 0.0

Net debt/EBITDA (x) (0.4) (0.4) (0.6) (0.9) (0.6)



Total headcount 198,614

Volume growth (%) 31.1 27.0 22.5 19.3

Pricing growth (%) -2.3 -0.1 -1.2 -0.4

Onsite as % of revenues (%) 44.0 44.5 44.4 44.4

Source: Company data, Barclays Capital estimates Note: FY end Mar

W hy a 2-Ne utral? Despite strong fundamental

performance, a 20% P/E premiumto Infosys implies

that valuations could be rich. We value the company

at a similar multiple to Infosys leading to a targetof

Rs1,150.

A strong rebound in discretionary IT spending could

lead to a more positive revenue and margin

scenarios. This would drive both EPS (+15%) and

multiples (to 20x) and hence the share could trade

close to Rs1,500

A signi ficantly weaker macro scenario or a

significant decline in the market could lead to both

EPS downgrades (down 15%) and multiple

compression (to 10x) for a share price of Rs700.

0

2

4

6

8

10

2011A 2012E 2013E 2014E

1.2

1.25

1.3

1.35

1.4

1.45


28

48

68

88

108

25-Oct-10 5-Oct-11

DownsideCase

INR700


INR1150

(10.2%)

Upside

Case

INR1500

(43.7%)

350

850

1350

1850

25-Oct-10 5-Oct-11

0

20

40

60

80

2011A 2012E 2013E 2014E

INR

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7 October 2011 37

Figure 74: TCS Sept 11 quarter estimates

INR mn Sep-11 est. Y/Y Q/Q

Revenue 116,284 17.7% -4.3%

EBITDA 35,393 26.9% 16.8%

EBIT 33,067 27.1% 17

it barclays 20111007

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