1

Edelweiss Securities Limited

October 01, 2014
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

Edelweiss Securities Limited
IT
Growth momentum to continue

India Equity Research| IT

We expect Q2FY15 to extend the growth momentum seen in Q1FY15,
riding improving visibility in the US markets and higher off-shoring from
Europe. This, coupled with a seasonally strong quarter, induces us to
forecast sequential growth of 3.0-7.2% for the top-4 IT players Tata
Consultancy Services (TCS), Infosys, Wipro and HCL Technologies (HCLT)
in Q2FY15. TCS is expected to lead the pack with ~7.2% QoQ growth (4.5%
organic plus 2.7% from consolidation of IT Frontier Corporation). HCLT is
likely to post 3.6% growth, while Infosys and Wipro are likely to clock 3.0%
growth each. We expect Infosys to maintain its annual revenue guidance of
7-9%. Investors will keenly track Infosyss commentary regarding changes
in its strategy going ahead under the new CEO, Dr. Vishal Sikka. As for
sector commentaries on demand outlook for the year, deal pipeline,
discretionary spend particularly on consulting side remain key
monitorables.

Q2FY15: Growth momentum to sustain
While Q1FY15 set the tone for a better FY15 than FY14, Q2FY15 (a seasonally strong
quarter) is likely to witness the growth momentum to continue backed by improving
visibility in the US and higher off-shoring from Europe. For the top-4 IT players, we
have built in 3.0-7.2% growth. TCS is likely to grow 7.2% QoQ (4.5% organic plus 2.7%
from consolidation of IT Frontier Corporation), driven by broad-based growth across
verticals (unlike Q1FY15 where growth was driven by smaller verticals). HCLT is likely to
maintain its growth momentum and grow 3.6% QoQ with IMS and BPO being the
growth drivers. Infosys and Wipro are likely to post 3.0% growth each owing to
seasonally strong quarter and ramp up of the deals won earlier. Tech Mahindra
(TECHM) is expected to grow 3.6% QoQ.

Wage hikes to singe margins
EBITDA margins of the top-4 IT companies (except Infosys) are likely to decline by 30-
80bps impacted by wage hikes (HCLT and Wipro), while consolidation of IT Frontier
Corporation will impact TCS margin (60bps). Wage hikes are likely to mar Wipros and
HCLTs EBITDA margin by 80bps and 30bps, respectively. Infosyss margins are likely to
improve by 150bps as it ramps up deals won earlier thereby improving operational
metrics. Commentary by players on margin trajectory and levers available, particularly
in wake of the stable currency scenario, will be keenly monitored by investors.

Outlook: Gearing up for growth
Q2FY15 is expected to maintain the momentum seen in Q1FY15, riding improved
demand momentum in the US (driven by digital technologies), while cost pressures will
continue to drive higher outsourcing in Europe. Investors will keenly track the deal
pipeline (particularly in the large integrated deals) and discretionary spending. We
continue to prefer Infosys, HCLT, TCS and Tech Mahindra in the large-cap space.








Sandip Agarwal
+91 22 6623 3474
sandip.agarwal@edelweissfin.com

Omkar Hadkar
+91 22 6620 3147
omkar.hadkar@edelweissfin.com
RESULT PREVIEW



2

Edelweiss Securities Limited
IT
Table 1: Hedge position as at Q1FY15 end

Source: Companies

Table 2: Quarterly average exchange rates for INR vis--vis global currencies

Source: Bloomberg, Edelweiss research

Table 3: Quarter end closing exchange rates for INR vis--vis major global currencies

Source: Bloomberg, Edelweiss research
Companies Total hedge position (USD mn equivalent)
TCS 6,246
Infosys 1,035
Wi pro 1,852
HCLT 1,150
Tech Mahi ndra 1,294
Cyi ent 131
Hexaware 127
eCl erx 89
Mi ndTree 38
Persi stent 91
Q2 FY13 Q3 FY13 Q4 FY13 Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15
USD 55.1 54.2 54.2 55.8 62.0 62.0 61.8 59.8 60.6
Q-o-Q change (%) 2.1 (1.8) (0.0) 3.1 11.1 (0.1) (0.3) (3.2) 1.3
Y-o-Y change (%) 20.5 6.6 7.8 3.4 12.5 12.5 14.1 7.1 (2.4)
GBP 87.1 87.0 84.1 85.8 96.3 100.4 102.3 100.7 101.2
Q-o-Q change (%) 1.9 (0.1) (3.3) 2.0 12.2 4.2 1.9 (1.6) 0.5
Y-o-Y change (%) 18.2 9.0 6.5 0.4 10.5 15.3 21.6 17.4 5.1
EURO 69.0 70.3 71.5 72.9 82.2 84.4 84.7 82.0 80.3
Q-o-Q change (%) (0.5) 1.9 1.7 2.0 12.7 2.6 0.4 (3.1) (2.1)
Y-o-Y change (%) 6.7 2.6 8.4 5.2 19.2 20.0 18.5 12.5 (2.3)
Q2 FY13 Q3 FY13 Q4 FY13 Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15
USD 52.9 55.0 54.3 59.4 62.3 61.9 59.9 60.2 61.8
Q-o-Q change (%) (5.0) 4.0 (1.3) 9.4 4.9 (0.6) (3.3) 0.5 2.6
Y-o-Y change (%) 7.9 3.6 6.7 6.7 17.9 12.6 10.3 1.3 (0.9)
GBP 85.6 88.9 82.5 90.5 101.1 102.0 99.5 102.6 99.9
Q-o-Q change (%) (1.5) 3.9 (7.2) 9.7 11.7 0.8 (2.4) 3.1 (2.6)
Y-o-Y change (%) 12.2 7.9 1.2 4.2 18.1 14.6 20.6 13.4 (1.2)
EURO 68.3 72.5 69.5 77.7 84.4 85.2 82.3 82.2 77.7
Q-o-Q change (%) (2.5) 6.1 (4.2) 11.7 8.7 0.9 (3.4) (0.1) (5.5)
Y-o-Y change (%) 2.6 5.5 2.3 10.8 23.5 17.4 18.4 5.9 (7.9)




3

Edelweiss Securities Limited
IT
Chart 1: IT Index has outperformed the benchmark index during the quarter

Source: Bloomberg

Chart 2: Wipro has underperformed peers during the quarter

Source: Bloomberg















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4

Edelweiss Securities Limited
IT
Table 4: Quarterly estimates and comments






Stock Q2FY15E Q1FY15 Q-o-Q Q2FY14 Y-o-Y Key things to watch out for
(INR mn) (INR mn) growth (%) (INR mn) growth (%)
Revenues 133,369 127,700 4.4 129,650 2.9
Revenues (USD mn) 2,199 2,133 3.1 2,066 6.4
EBITDA 37,842 34,410 10.0 31,710 19.3
EBITDA margi n (%) 28.4 26.9 24.5
PAT 30,877 28,860 7.0 24,070 28.3
Revenues 240,132 221,110 8.6 209,772 14.5
Revenues (USD mn) 3,959 3,694 7.2 3,337 18.6
EBITDA 67,615 63,670 6.2 66,390 1.8
EBITDA margi n (%) 28.2 28.8 31.6
PAT 52,969 50,578 4.7 47,018 12.7
Revenues 116,526 111,358 4.6 107,727 8.2
Gl obal IT rev (USD mn) 1,792 1,740 3.0 1,631 9.8
EBITDA 25,757 25,507 1.0 22,845 12.7
EBITDA margi n (%) 22.1 22.9 21.2
PAT 21,025 21,032 (0.0) 19,321 8.8
Revenues 88,459 84,240 5.0 79,610 11.1
Revenues (USD mn) 1,458 1,407 3.6 1,270 14.8
EBITDA 23,026 22,160 3.9 20,930 10.0
EBITDA margi n (%) 26.0 26.3 26.3
PAT 17,536 18,350 (4.4) 14,160 23.8
Revenues 53,723 51,215 4.9 47,715 12.6
Revenues (USD mn) 886 855 3.6 758 16.8
EBITDA 10,745 9,284 15.7 11,110 (3.3)
EBITDA margi n (%) 20.0 18.1 23.3
Adjusted PAT 7,473 6,307 18.5 6,684 11.8
Revenues 1,529 1,449 5.5 1,230 24.3
EBITDA 538 493 9.3 436 23.4
EBITDA margi n (%) 35.2 34.0 35.5
PAT 438 398 9.9 333 31.6
USD revenue growth of ~7.2% QoQ, 4.5%
organi c pl us 2.7% from consol i dati on of IT
Fronti er Corporati on(ITFC), EBITDA margi n di p
of 60bps due to consol i dati on of ITFC. Growth
to be broadbased across verti cal s. Indi a
busi ness expected to do better than company
average. Commentary by TCS on demand
envi ronment, deal fl ows and di gi tal
technol ogi es are key moni torabl es.
TCS
Revenue growth of 3.1% QoQ i n USD terms.
EBITDA margi ns to expand 150bps QoQ due to
i mprovement i n uti l i sati on and currency
benefi t We expect Infosys to mai ntai n i ts 7-9%
gui dance for FY15. Commentary on any
changes i n the strategy of the company goi ng
forward, pl ans of capi tal al l ocati on,
di screti onary spend, and measures to control
attri ti on are key moni torabl es.
Revenue to grow 5.5% QoQ and EBITDA margi n
to i mprove 120bps due to l ower staff costs .
Upti ck i n recrui tment segment expected. Real
estate segment to conti nue strong tracti on.
InfoEdge's commentary on matri moni al portal ,
tracti on i n real estate segment and avenues
for al l ocati on of funds rai sed recentl y key
moni torabl es.
Infosys
Wi pro
HCL Tech Expect HCL Tech to post revenue growth of 3.6%
QoQ l argel y dri ven by IMS and BPO. EBITDA
margi n i s expected to di p by 30bps due to
wage hi kes and parti al l y offset by currency
benefi t. IMS to conti nue to be growth dri ver.
Management commentary on demand
envi ronment i n core software and margi n
outl ook for year need to be watched.
Wi pro to post USD revenue growth of 3.0%.
EBITDA margi n esti mated to di p by 80bps due
to two month wage i mpact. Q3FY15 revenue
gui dance, update on l arge deal wi ns and
di screti onary spend to be keenl y tracked.
Tech Mahi ndra Tech Mahi ndra revenues to grow 2.6% i n USD
terms. Growth to be dri ven by both tel ecom
and enterpri se segment. EBITDA margi n to
expand by 190bps QoQ due to absence of one
ti me cost that affected margi ns l ast quarter
and INR depreci ati on. Commentary on tel ecom
verti cal , l arge deal wi ns wi l l be keenl y
moni tored.
InfoEdge




5

Edelweiss Securities Limited
IT
Table 4: Quarterly estimates and comments (contd.)

Source: Company, Edelweiss research


Stock Q1FY15E Q4FY14 Q-o-Q Q1FY14 Y-o-Y Key things to watch out for
(INR mn) (INR mn) growth (%) (INR mn) growth (%)
Revenues 6,559 6,217 5.5 5,493 19.4
Revenues (USD mn) 108 104 4.0 88 23.2
EBITDA 1,052 877 20.0 1,088 (3.3)
EBITDA margi n (%) 16.0 14.1 19.8
PAT 937 685 36.8 725 29.2
Revenues 6,497 6,104 6.4 6,211 4.6
Revenues (USD mn) 107 102 5.0 99 8.4
EBITDA 1,176 1,017 15.7 1,478 (20.4)
EBITDA margi n (%) 18.1 16.7 23.8
PAT 865 765 13.1 988 (12.4)
Revenues 2,320 2,174 6.7 2,146 8.1
Revenues (USD mn) 38 36 5.7 34 12.2
EBITDA 887 800 10.9 928 (4.4)
EBITDA margi n (%) 38.2 36.8 43.2
PAT 652 534 22.1 672 (2.9)
Revenues 6,268 5,926 5.8 5,608 11.8
EBITDA 1,013 911 11.2 884 14.6
EBITDA margi n (%) 16.2 15.4 15.8
PAT 721 584 23.3 673 7.1
Revenues 4,725 4,350 8.6 4,324 9.3
Revenues (USD mn) 78 73 7.2 68 13.8
EBITDA 1,116 949 17.6 1,122 (0.5)
EBITDA margi n (%) 23.6 21.8 26.0
PAT 749 688 8.8 608 23.1
CMC Revenue growth of 5.8% QoQ i n INR terms,
dri ven by i nternati onal revenues (~6% QoQ
growth) whi l e domesti c busi ness i s expected
to grow by 5%. Strong momentum i n System
i ntegrati on (SI) and ITES segments. EBITDA
margi n to i nch up by 80bps to 16.2% due to
INR appreci ati on, hi gher offshori ng. CMC
management commentary on SI and ITES
segment and domesti c demand outl ook to be
keenl y watched as al so commentary on sub-
contracti ng costs.
Persi stent USD revenue of 7.2% QoQ dri ven by both
product engi neeri ng & pl atform sol uti ons and
IP-l ed busi ness . Margi n to expand by 180bps
due to hi gher uti l i sati on, IP l ed busi ness and
INR appreci ati on. Commentary on cl i ent
budgets, deal pi pel i ne and contri buti on from
IP-l ed revenue are key moni torabl es.
eCl erx Revenue growth to be 5.7% QoQ i n USD terms
dri ven by cabl e segment. EBITDA margi n to
i nch up ~140bps due to absence of one ti me
costs whi ch i mpacted margi ns i n Q1FY15,
uti l i sati on i mprovement and currency benefi t.
Demand outl ook, parti cul arl y i n BFSI space,
cabl e busi ness, pri ci ng and margi n outl ook for
FY15 to be watched.
CYIENT
USD revenue to grow of 5.0% QoQ on the back
of 6.5% growth l ast quarter. Growth to be
dri ven by upti ck i n top 10 cl i ents. EBITDA
margi n to i mprove by 140bps dri ven by
benefi ts from uti l i sati oni mprovement, other
operati onal effi ci enci es and currency.
Hexaware's outl ook on the top 10 cl i ents and
deal wi ns are the key moni torabl e.
Hexaware
USD revenue growth of 4.0% QoQ dri ven by
both EBITDA margi n i mprovment of 200bps
QoQ due to uti l i sati on upti ck. Softenti al
i ntegrati on on expected l i nes. Cyi ent's demand
outl ook, commentary on deal pi pel i ne,
sustai nabi l i ty of the growth and i ntegrati on of
Softenti al need to be tracked.



6

Edelweiss Securities Limited
IT
Table 5: Valuation and recommendation snapshot

Source: Company, Edelweiss research





Company CMP Mcap
(INR) (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E
CMC 2,216 1,088 19.1 16.1 14.0 11.2 2.5 2.0
eCl erx 1,388 681 15.4 13.2 10.4 9.3 4.6 4.2
HCL Tech 1,715 19,480 17.7 15.6 12.3 10.6 3.3 3.0
Hexaware 201 980 18.7 15.3 12.1 10.5 2.5 2.4
Info Edge 851 1,653 52.0 41.2 38.9 28.6 16.3 12.5
Infosys 3,748 34,869 17.0 16.1 12.0 11.5 4.1 3.8
Cyi ent 449 816 13.6 11.4 9.7 8.0 2.0 1.7
Persi stent Systems 1,405 910 17.1 14.9 10.1 7.8 3.0 2.6
TCS 2,737 86,850 24.8 20.6 18.4 16.1 5.7 5.1
Tech Mahi ndra 2,490 9,498 19.4 16.8 12.2 10.4 2.8 2.6
Wi pro 597 23,862 17.8 16.0 12.9 11.5 3.2 3.0
P/E( x) EV/EBITDA(x) Mcap/Revenue (x)




7

Edelweiss Securities Limited
IT
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
Vikas Khemani Head Institutional Equities vikas.khemani@edelweissfin.com +91 22 2286 4206
Nischal Maheshwari Co-Head Institutional Equities & Head Research nischal.maheshwari@edelweissfin.com +91 22 4063 5476
Nirav Sheth Head Sales & Strategy nirav.sheth@edelweissfin.com +91 22 4040 7499
Coverage group(s) of stocks by primary analyst(s): IT
CMC, eClerx Services, HCL Technologies, Hexaware Technologies, Infosys, Info Edge, Infotech Enterprises, Persistent Systems, Tata Consultancy Services,
Tech Mahindra, Wipro

Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe

Rating Distribution* 151 44 9 205
* 1 stocks under review

Market Cap (INR) 144 56 5






















> 50bn Between 10bn and 50 bn < 10bn
Date Company Title Price (INR) Recos

Buy Hold Reduce Total

Recent Research
Rating Interpretation


Buy appreciate more than 15% over a 12-month period
Hold appreciate up to 15% over a 12-month period
Reduce depreciate more than 5% over a 12-month period
Rating Expected to

24-Sep-14 Accenture Inline quarter; demand uptick
in key geographies;
Global Pulse

15-Sep-14 IT Cognizant acquires TriZetto for
USD2.7bn;
Sector Update

08-Sep-14 TCS Maintains positive stance;
EdelFlash
2,643 Buy




8

Edelweiss Securities Limited
IT
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Edelweiss Securities Limited
IT

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