INDEX Executive Summary Overview Takeover Track SMAC as a game changer Common Stock Comparison

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2 INDEX Executive Summary Overview Evolution of Indian IT Industry Current Industry Size Domestics Industry vs. Exports (FY2013) Industry Growth Drivers IT Exports Domestic IT Industry Porter s Five Force Analysis Takeover Track Acquisitions to play a key role in growth Key Acquisitions by Indian IT Player SMAC as a game changer Common Stock Comparison 2

3 EXECUTIVE SUMMARY Despite the economic uncertainty around the globe, the Indian IT-BPM (Information Technology Business Process Management) sector has maintained its growth with a CAGR of 11.5% over the last five years was a land mark year for the Indian IT-BPM sector with revenues crossing the US$ 100 billion mark The Indian IT-BPM sector remains a high impact sector and has played an important role in putting India on the global map. It accounts for 8% of India s GDP and gives employment to 9.5 million people The first $100 billion revenues were achieved due to India s arbitrage advantage and the linear model for revenue generation, the next phase however will be different Exports accounted for more than 70% of revenues in 2012 and the US remained the favorite outsourcing destination for the Indian IT sector. Exports to US accounts for 61.60% of the total exports, followed by Europe which account for 28.50% of the exports. Banking and Financial Service is a biggest segment for the exports and accounts for 41% of the total exports Going forward, as the linearity in the industry diminishes, the Indian IT companies will have to move up the value chain and provide their clients with quality solutions in addition to the low cost advantage. The companies need to shift from standard lift and shift enterprise services to enterprise solutions which impacts not only the cost, but also revenues, profit margins and cash flows Solutions incorporating SMAC ( Social, Mobile, Analytics & Cloud) are driving this change According to a recent survey by Gartner, Analytics, Mobile technologies and Cloud computing have become the three top most priorities of CIOs world over and these services are set to change the face of the global IT-BPM market drastically over the course of the next few years The Indian IT players need to capitalize on their well established IT/BPM market presence by increasing their service portfolio beyond the standard enterprise services to SMAC services 3

4 OVERVIEW Evolution of Indian IT Industry 2005 onwards Pre By early 90s, US based companies began to outsource work due to low cost and skilled talent pool of India IT Industry starts to mature with increased investment in R&D and infrastructure India seen as product development destination Number of Indian firms grow in size and start offering complex services like product management, go-to market strategies etc. Western firms set up captive units in India Indian firms become Multi National Companies with delivery centers across the globe Indian firms make global acquisitions Industry employs 3 million people directly and gives indirect employment to ~9.5 million 4

5 USD in Billions OVERVIEW Current Industry Size The Indian IT industry has played a vital role in putting India on the global map. It has evolved dramatically over the last decade it terms of its scale, key service offerings and value provided to its customers. Having grown at a CAGR of 25% during FY , the sector has become one of the dominating forces in the global IT-BPM market As per NASSCOM (widely acknowledge as the go to Industry body for IT), the industry touched revenues of US$ 108 million in FY13 with exports at US$ 76 billion, accounting for more than 70% of the total revenues IT-BPM is a high impact sector in India as is accounts for ~8% of the countries GDP and ~24% of the total exports of the country The Indian IT industry can be segregated into IT Services, Business Process Management, Engineering and R&D & Software Products and Hardware with each having the following share in the total industry :- Indian IT-BPM Industry (FY E) Indian IT-BPM Break-up (FY2013E) CAGR % FY2008 FY2009 FY2010 FY2011 FY2012 FY2013E Software products and ER&D 17% Hardware 12% BPM 19% IT Services 52% Total Industry Size ~ $108 billion 5

6 OVERVIEW Domestic Industry vs. Exports (FY2013) Domestic Exports IT Services (US$ 56 billion) Indian IT Industry (US$ 108 billion) Business Process Management (US$ 21 billion) ER&D & Software (US$ 18 billion) Hardware (US$ 13 billion) Source: NASSCOM USD in billions 6

7 OVERVIEW Industry Growth Drivers Components Growth Drivers IT Services (US$ 56 billion) Project based services IT outsourcing Support & training Applications and services built around social, mobile, cloud & analytics Indian IT Industry (US$ 108 billion) Business Process Management (US$ 21 billion) ER&D & Software (US$ 18 billion) Customer Care HR F&A Procurement Application development and engineering/design Platform solutions, bundling BPM with analytics, mobile engagement of business processes Software as a service, technological advances, low cost consumer preferences Hardware (US$ 13 billion) Personal computers Servers Network equipment Storage and security Printers New users from rising lower/middle class Source: NASSCOM 7

8 USD in billions OVERVIEW IT Exports Indian IT-BPM Exports Category Wise Exports (FY2013E) CAGR - 13% FY2008 FY2009 FY2010 FY2011 FY2012 FY2013E Software products and ER&D 19% BPM 23% Hardware 1% IT Services 58% Total Exports $76.2 billion Region Wise Exports (FY2013E) Vertical Wise Exports (FY2013E) Continental Europe 11.40% Hardware 12% ROW 2.20% Total Exports $76.2 billion Hardware 12% Other 15.00% BFSI 41.00% Total Exports $76.2 billion UK 17.10% US 61.50% Manufacturing 16.00% Telecom 18.00% Source: NASSCOM and Broker Research Reports in FY

9 USD in billions OVERVIEW Domestic IT Industry Indian Indian IT-BPM IT-BPM Domestic Exports Industry CAGR - 8% Category Wise Domestic Industry (FY2013E) Total Domestic Industry $32.2 billion Hardware 1% IT Services 39% FY2008 FY2009 FY2010 FY2011 FY2012 FY2013E Software products and ER&D 12% BPM 10% Region Wise Exports (FY2013E) Domestic IT-BPM market by Ownership (FY2013E) Total Domestic Industry $32.2 billion SMB 26% 16% 16% Government 15% Large Enterprises 47% 84% 84% 68% 32% Consumers 12% Hardware Software Products IT Services Foreign Indian Source: NASSCOM and Broker Research Reports in FY

10 OVERVIEW Porter s Five Forces Analysis ENTRANTS RIVALS BUYER POWER SUBSTITUTES SUPPLIERS Threat of New Entrants Capital Requirement Support of Government Policy Expected Retaliation Degree Low Medium High IT start-ups in India Switching Cost Small Clients High Large Clients Low Entering into the industry is not difficult and this is evident from the large number of players in the industry Liberalized FDI policies, tax exemptions, basic infrastructure, subsidies etc. from the government has definitely given a boost to the establishment of the industry in India Government spending polices are also promoting the growth of the sector. The expected government spending on IT is expected to be $4.78 billion in FY13-14 Venture Capitalists have also shown a keen interest in the Indian tech startups which have unique products/ideas or are working on disruptive technologies such as Social, mobile, cloud and analytics, thus providing them with the required capital in order to expand their businesses Threats of new entrants is HIGH 10

11 OVERVIEW Porter s Five Forces Analysis ENTRANTS RIVALS BUYER POWER SUBSTITUTES SUPPLIERS Rivalry Degree Market Share of Top 5 Players (FY2012) 1 Industry Concentration High Industry Growth High Diversity of Rivals High Intermittent Over Capacity Product Differences Fixed Cost Medium Low Medium 9% 6% 5% 6% 4% Entry Barriers Low With large number of small and medium players together with a few big domestic as well as international players, the industry is marked with high competition Top five* companies account for ~33% of the total industry revenues With decreasing margins, increasing number of firms and the ever changing requirements of clients, the present industry participants need to be at their innovative best in order to survive and grow Degree of rivalry in the industry is HIGH 1. Angel Broking Research Report 11

12 OVERVIEW Porter s Five Forces Analysis ENTRANTS RIVALS BUYER POWER SUBSTITUTES SUPPLIERS Bargaining Power of Customers Degree Switching Cost Differentiation of Outputs Presence of Substitutes -Small Clients -Large Clients Industry Concentration relative to buyer concentration High Low Low Medium High Customers in the IT sector have a distinct edge relative to other industries given the numerous high quality options available to them Large customers have a comparative advantage in relation to small customers in terms of switching cost (no player wants to lose a sizable contract given their long nature and visibility of revenue) Increasingly competition is shifting the power towards the buyer making it difficult for the companies to survive without a good strategy and differentiated product / service offering Bargaining Power of Buyers is MEDIUM 12

13 OVERVIEW Porter s Five Forces Analysis ENTRANTS RIVALS BUYER POWER SUBSTITUTES SUPPLIERS Threat of Substitutes Relative Price Performance of Substitutes Switching Cost Degree High Medium Operating Cost per FTE for IT Services (USD '000/per annum) Pune Bengaluru Comparative cost advantage Buyer Propensity to Substitute Medium Metro Manila 26 Information Complexity Low Buenos Aires 31 Bangkok 32 Beijing Countries such as China, Philippines, South Africa, Vietnam, Korea, Eastern Europe and Israel are growing in the field of IT outsourcing and are increasingly posing a threat to the Indian IT Sector (global outsourcing pie $400bn) The Indian IT Sector needs to innovate constantly to have an edge over these countries Threat of substitutes is MEDIUM 13

14 OVERVIEW Porter s Five Forces Analysis ENTRANTS RIVALS BUYER POWER SUBSTITUTES SUPPLIERS Bargaining Power of Suppliers Differentiation of Inputs Supplier Concentration relative to the Industry Substitute Product Degree Low High High Quality human resources is the largest requirement for the IT sector and low-cost availability of human capital has beenthe reason that the Indian IT companies have been able to provide quality services to their clients India s talent base is expanding rapidly with an annual addition of nearly 4.74 million graduates and post graduates The industry has now entered a non-linear phase, which means addition of new talent does not mean increase in revenues As competition intensifies for skilled professionals, employee costs could rise rapidly in the next few years (body shopping cannot be the only play) Threat of substitutes is Low 14

15 TAKEOVER TRACK Acquisitions to play a key role in growth Over the past decade, India s top software companies have acquired foreign and domestic firms to increase their local presence in the US and Europe, their main markets, or to acquire employees with a specific skill set or strengthen their capability in a particular sector Most acquisitions by Indian IT companies have not been very expensive on a multiples basis and have been targeted at penetrating new geographies, especially Europe Another driver of acquisitions by Indian IT firms is the large pile of cash that many IT companies have been sitting on. At the end of 2012, Tier 1 Indian IT providers such as Wipro, Infosys and TCS were sitting on billions of dollars each. With that much cash and an improving macroeconomic environment, these firms will continue to spend some of their reserves to buy companies that drive growth as a way of delivering more value to their shareholders For instance TCS s recently announced the acquisition of French technology services company, Alti SA, for $97 million (Rs. 530 Cr.) which is expected to provide TCS with an extra edge in the European market. Through the acquisition TCS has brought in 1,200 employees and reputed clients such as Banque De France( French Central Bank), BNP Paribas, Credit Agricole, and Societe Generale among its clients in banking sector besides others such as Air France, L'Oreal and telecom company Orange We will continue to see a rising wave of M&A in FY in the sector both on the domestic and overseas front 15

16 TAKEOVER TRACK Key Acquisitions by Indian IT Players Co. Name Recent Acquisitions TCS Infosys Wipro HCL 16

17 Common Stock Comparison USD in millions Sales EBITDA Net Income Company Share Name Price Market Cap Net Debt EV E E E $25.30 $49, ($1,347.25) $48, $8, $11, $13, $2, $3, $3, $1, $2, $2, , ($4,320.52) 19, , , , , , , , , , , ($2,033.07) 13, , , , , , , , , , , ($57.62) 9, , , , , , EBITDA Margin PAT Margin EV/Sales EV/EBITDA P/E Company Name E E E E E 29.52% 28.64% 28.67% 21.30% 22.09% 21.98% 5.36x 4.16x 3.55x 18.15x 14.53x 12.37x 25.87x 19.35x 16.59x 31.77% 28.64% 28.60% 24.65% 23.35% 21.38% % 21.35% 20.14% 17.56% 17.82% 15.06% % 21.77% 20.53% 11.63% 14.70% 14.06% Mean 25.40% 25.10% 24.49% 18.79% 19.49% 18.12% 3.30x 2.68x 2.24x 12.90x 10.49x 8.99x 19.33x 14.82x 13.25x Median 25.61% 25.20% 24.57% 19.43% 19.96% 18.22% Maximum 31.77% 28.64% 28.67% 24.65% 23.35% 21.98% Minimum 18.63% 21.35% 20.14% 11.63% 14.70% 14.06% Source : Company Filings, Bombay Stock Exchange (Exceptional items have not been adjusted) Note : 1. Market Data as of 30 th April 2013 (Except for HCL which has a June end. Market data taken as of 30 th June 2012) 2. Exchange Rate USD-INR = Non- Operating income has been excluded from EBITDA and included in Net Income 17

18 SMAC as a Game Changer Our Next Focus Services incorporating Social, Mobility, Analytics and Cloud (SMAC) are reshaping the traditional way the IT-BPM industry has been providing services till now These individual technologies and platforms which have risen during the past few years have shown immense potential, but are barely understood While each of these four components have been evolving individually, companies are beginning to treat them as an integrated whole The convergence on these technologies means dismantling the traditional business design: No longer is it required to keep people and information in the same location or to spend big money to support information sharing, communication and collaboration These provide an opportunity for the Indian IT players to move into a higher margin business as compared to the typical IT contracts SMAC can turn out to be a game changer for the $108 billion Indian IT industry and keep India ahead of its competition. The first $100bn of revenues in the IT Industry took over a decade, the next might happen in a matter of a few years if the IT players can understand, adapt and leverage these disruptive technologies quickly Stay tuned for our next report The Game Changers for the Indian IT Industry which will highlight the impact and immense potential of these 4 disruptive technologies 18

19 How Dinodia Capital Advisors can help With our deep understanding of the IT industry and our professional network, we can help you: Indentify businesses to be acquired or sold Bring strategic and financial investors into your Technology business (Domestic and International) Help your business find the most suitable technology partners Provide advice on any related transaction terms, valuation and pricing 19

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