SECTOR COVERAGE Date: - 16 th June 2015 SECTOR-I.T

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1 SECTOR-I.T IT industry, which is the uncrowned king in the outsourcing software services remains to be major driver of the country's GDP, with 55% share of global sourcing market. The industry which accounts for around 7% of gross domestic product (GDP), contributes to around 57.9% of total IT exports (excluding hardware). This contribution comes on the back of a mere 10 million people employed directly or indirectly, makes it a vital driver for the economy. The industry which has been tirelessly re-inventing itself for the past three decades, growing from writing basic code for monolithic mainframe machines to writing code and solutions for mobile apps in your handset, further continues to evolve over the year by prioritizing on enhancing efficiency, enabling transformation and agility and partnering for digital initiatives. However, the future growth in the sector is expected to be fueled by growing demand of global corporations for new services such as digital technology, mobile applications and cloud computing. However, the industry would have to focus on building a large pool of skilled workforce to tap opportunities in the emerging high-end services segment. Co-Relation with the Economy: IT industry has significant co-relation with the economy. The sector, whose contribution to Indian GDP stands at 7%, employees about 35%-38% of total workforce and attracts around $2.40 billion of PE/VC Investments. The Industry offsets nearly 45% of India's import bill, by contributing to 38% share in country's total exports. Contribution in Overall FDI: SECTOR COVERAGE Date: - 16 th June 2015 Foreign Direct Investment (FDI) in Computer Hardware and Software grew by nearly two folds at Rs 12,594 crore for April- February, 2015 as compared to 6608 crore witnessed during the same period of the previous year, the contribution to the sector in the overall FDI remained at 6%. Meanwhile, cumulative inflows of Computer Hardware and Software industry from April Feburary 2015 stand at Rs 72,265 crore. Interdependence on Indian Currency: Rupee's momentum has significant bearing on the revenue margins of the industry. While, a weak currency pressurizes the already-stressed trade deficit, it augurs well for Indian software firms, most of whom derive over half of their revenue from the US. Indian rupee has been on depreciating streak since January The Indian currency has been trading in a range of levels over the past three to four months. Recently, it has come under pressure due to stronger-than-expected economic data coming out of the U.S. As per reports, the U.S. Federal Reserve may now look at hiking interest rates in September

2 BSE IT index Performance: The information technology (IT) sector which for long has been considered as a safe bet, although continues to show good performance on Year on Year (Y-o-Y) basis has been contraction spree since March, BSE IT index, which grew by 29.75% on Y-o-Y basis for the month of March, witnessed contraction of -4.72% for the month under review, mainly in anticipation of weak earnings of IT companies for the quarter ended March 31, 2015 and then further decelerated to -8.71% for the month of April when these companies actually reported their earnings, which mostly missed street estimates. Financial Performance: Most of IT firms reported disappointing earnings for Q4 mainly on account of cross current tailwinds which impacted the earnings of these companies. Tata Consultancy Services (TCS), country's largest software exporter, has recorded a 30.7% fall in net profit for the fourth quarter ended March 31, 2015 at Rs crore, by a one-off bonus paid to employees, cross currency-movements and overall weakness in key sectors, while Infosys, India's second largest information technology service posted net profit of Rs 3097 crore for March quarter, 2015, up by 3.51% on Y-o-Y basis, but down by -4.71% on sequential basis. Besides, Wipro, country's third largest software service exporter, missed street expectation by reporting consolidated profit jump of 2.04% on Y-o-Y basis at Rs 2, crore. 2

3 Consolidated Performance of IT majors for March'15 quarter: (Rs in crore) Challenges faced by the sector: Stumbling Exports: Software exports during FY'15 is estimated to meet its lower guidance of 13.1% at $100 billion, with domestic revenues rising by 14% at $48 billion, as per the figures released by National Association of Software & Service companies (Nasscom), India's IT lobby body. This domestic growth is faster than the average industry growth and is largely being driven by the booming e-commerce segment. Stable government with a technology focused growth agenda is further boosting technology adoption in the domestic market. Industry body has pointed that exports to USA, the largest market grew above industry average, aided by an economic revival and higher technology adoption. Meanwhile, demand from Europe remained strong during the first half of the year, but softened during the second half due to currency movements and economic challenges. National Association of Software and Services Companies (Nasscom), however has marginally lowered its estimates for IT and back-office services exports to per cent for the year ending March 31, 2016, as against the 13-15% estimated for on account of macro-economic challenges, geopolitical tensions and currency headwinds. Also, the guidance has been revised to concerns related with the economic fluctuations in Europe, China and Brazil - regions on which a lot of hope had been pinned. Conservative approach on IT spending: With Europe continuing to face economic challenges and oil-producing countries facing a crunch, global IT spending and offshore spending is unlikely to increase significantly and since industry's most of the income is from foreign contracts this would definitely hit the bottom line of the industry. Nevertheless, for Indian IT firms, the home market has been far more challenging than the US or Europe. Dysfunctional policies, lack of project management and delayed payments are turning out to be huge problem for IT companies in bagging contracts from the government. Increasing number of companies setting up in-house centers in India: For Indian software companies which are recovering from the global economic slowdown, the next big worry that country's biggest software firms are facing is the threat of losing high-value projects to customers, who are incrementally setting up in-house centres in India to ensure they keep tabs on critical work involving the latest technologies. For example, later this year, Lowe's -the second-biggest US home improvement chain with $53 billion (Rs 3.2 lakh crore) in annual revenue will shift high-end analytics and ecommerce projects from companies, including Cognizant, Wipro and Infosys to a new centre in Bangalore. Lowe's move, which spends over $1 billion annually on IT, reflects a growing trend of customers shifting their most important work to their own centres, leaving chores such as maintenance to Indian service providers. 3

4 Driving forces for the industry: Most preferred Outsourcing destination: 80% of European and US outsourcing firms ranked India as their preferred outsourcing destination, as per a recent survey. Further, the National Association of Software & Service Companies (NASSCOM) has too reported that almost half of all Fortune 500 companies choose to outsource software development to Indian outsourcing firms. Even though many other countries (including China, Mexico, Ireland and the Philippines) have emerged as major competitors, India has managed to outmaneuver all others and emerge as the top outsourcing destination. Major differentiators such as certain favorable government policies and an immensely talented work force are responsible for the Indian IT outsourcing industry continuing to witness a tremendous growth rate of 25-30% per year. New Service Offering: The Indian IT companies are expanding their service offerings to provide a complete basket of services to their clients. These new services include IT consulting, testing, business process management and IT infrastructure services, which in a way allow these IT companies to de-risk their business from pricing pressures and enter into newer areas which provide them with higher growth and profitability. Growing presence of MNCs: Cost arbitrage and the availability of a large talent pool have attracted several MNCs to India. Big players like IBM, Accenture, Google, Yahoo, Capgemini and Oracle among others have not only increased their headcounts in India but also outperformed their global performance in terms of revenue growth. Their Indian operations are witnessing strong growth as compared to their global business. Some of the major global companies like Intel, IBM and CSC are cutting jobs abroad and shifting their base to India. Factors fanning the potentials of IT outsourcing in India: India's human resources: Being the world's second highly populated country, human resources are a boon by itself. Just as the Gulf is renowned for its natural resource of crude oil, and South Africa for its diamonds, India is proud of the abundance and easy availability of its highly qualified and technically skilled English speaking computer professionals; who are key to success in the field of IT outsourcing to India. Cost efficiency of IT outsourcing in India: Significant cost saving can be achieved by IT outsourcing to India, owing to the wide gap between the personal costs in India and that of the developed countries. Offshore outsourcing to India offers considerable economical benefits for those who are prepared to exploit the advantages of outsourcing. Standard quality: The Indian companies involved in IT outsourcing in India provide high quality work, meeting international standards and complying with the ISO & SEI-CMM standards. Three out of every four SEI-CMM Level 5 companies worldwide is located in India. Thus India promises quality - IT outsourcing in India as it has the potential to furnish these services perfectly. Reliable communication facilities: Excellent telecom, ISP, and cellular networks are available in all cities & towns in the country. India prides in the reliable satellite and submarine communication links that facilitate good band connectivity with the rest of the world. Thus companies engaged in IT outsourcing to India, can be in touch with the vendors without any connection hurdles. This plays a significant role in determining the success of offshore IT outsourcing to India. Union Budget : Finance Minister Arun Jaitley during his Budget 2015 speech acknowledged the concerns of the $150 billion Indian IT industry. Even though he did not announce any big bang measures for the industry, it did managed to deliver few positive measures for the industry with the first one being Removal of customs duty on components and concessional structure of 2 per cent without CENVAT credit, which is an extremely positive step or domestic manufacturers of tablets. Also the government reduced withholding tax rates for payments royalties and technical services fees. With this, the tax on royalty on the sector would come down from 25% to 10%. The FM's speech also mentioned that concerns of IT industries for a more liberal system of raising global capital, incubation facilities in centres of excellence, funding for seed capital and growth, and ease of doing business etc. would be addressed for creating hundreds of billion dollars in value. Though, the minister did not divulge any further details. Outlook: Despite challenges in the global market, Indian IT industry is expected to sustain its growth trajectory and hence the outlook for the sector remains positive since India is the only country that offers depth and breadth of offerings across different segment of this industry ' IT Services, BPM, Engineering & R&D, Internet & Mobility and Software Products. The outlook for the industry also remains bright since changing factors like business models, emergence of new technologies, buyer segments and solutions for emerging markets are expected to help India retain its position as the global sourcing leader and an emerging trustworthy innovation hub. However, software-companies continue to face strong headwind in the form of moderating profitability amidst incremental pressure to optimize its cost. Nevertheless, some of the key growth drivers that are expected to open new opportunities for the industry are smart computing, 'anything'-as-a-service, technology enablement in emerging verticals and the SMB market, which would further fuel the growth of the sector. We like the following stocks from this sector with a long term view for a reasonable return from the current level. 4

5 SCRIP NAME CMP 52 WEEK HIGH/ LOW ENTRY POINT TARGET 1 TARGET 2 INFOSYS / TCS / WIPRO / HCL TECH / TECH MAHINDRA / MINDTREE / PERSISTANT SYSTEMS / KPIT TECHNOLOGIES / TATA ELAXI /

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