IT Sector Final.cdr - Edelweiss

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Executive SummaryExecutive SummaryAs we peer into the future of the Indian IT industry landscape we see there are fundamentaland tectonic changes underway that will alter the way Indian IT companies operatehenceforth. The current surge in optimism could be pent-up demand reflecting in a jump inFY11, but we would caution against extrapolating it to mean secular demand beyond FY11.We still believe that the crisis could change the buying behavior of customers in fundamentalways. While the opportunity size continues to be appetising, service providers (TCS, Infosys,Wipro, and Cognizant) will have to refashion their offerings in some cases. Tremendousdisruption is likely, both in demand and supply. Such eventualities impose stringent demandson the ability of Indian IT to manage on multiple planes or dimensions simultaneously. Nolonger will an incremental approach work because what worked in 2004-08 may not workafter 2010 (assuming that 2008-10 is the period of painful adjustment, transition, andsubsequent flush). In such an emerging scenario, service providers who exert a ‘pull’ aroundtheir offerings as opposed to a ‘push’ will have an edge.Is leadership shifting? We take a searching look at where the industry is headed in the nextthree-five years, exploring virtually every dimension of the emerging IT services model of thefuture. We analyse in depth how each of the Big 3 (Infosys, Wipro, and TCS) are comparativelyplaced in the evolving competitive scenario. Our research reveals that many of the strengths ofInfosys (premium pricing, leading margins, leadership in select service lines, organic nature ofgrowth) that have manifested in industry-leading performance till today may not necessarily playto the same extent in the changing world. The crisis has given an equal, if not better, opportunityto TCS and Wipro to emphasise their strengths and play the offensive game to their advantage.Cognizant has shown how the right systematic investment programme can continue to givedifferentiated gains even in difficult times.We expect the Big 3 to grow top line in late teens (18-20% CAGR in USD over FY10-13E).However, in our view, FY10-13 will see Wipro and TCS at least match, if not exceed, Infosys’growth. Also, they have worked to build defensible margin structures in their operatingmodels fixing what we believe have been issues with margins for them (especially with TCS)in the past. We believe it will be the period for Infosys to make investments to a greaterdegree than the other two to play catch-up in a few areas—end-to-end service provisioning,presence and manner of executing in new hot spots of opportunity, viz., emerging marketsand building in a culture of acquisition assimilation.Technology is a leveler. Equally important, several emerging technologies (cloudcomputing, collaborative computing, Web 2.0) that promise to transform the way businessprocess solutions/infrastructure management services are delivered are a great technologyleveler, taking away some of the bite in the intrinsic superiority of Infosys’ efficiency inexecution. There is still considerable value in the Infosys business model for the investoreven at these rich valuations, but, as our analysis shows, manifestation of that value willrequire an aggression from the company which it has traditionally shied away from for fear ofdiluting its handsome return metrics and margins. It has the latitude to do so.To sum up, our long-term position is that Infosy s’ leadership and its ‘must own stock’ statusin the sector will be increasingly distributed towards the others (TCS and Wipro). We believethat stock returns from both TCS and Wipro could be double that of Infosys # on a12-18 month horizon, also partly reflecting the narrowing of the valuation gap. Therisk to our thesis is that the crisis/downturn is short and cyclical in nature as opposed to astructural and secular one. If the former, then client buying habits may revert to pre-crisis, inwhich case Infosys’ traditional and considerable strengths will steer the company towardscontinued leadership. Else, it’s carpe diem – the era of challengers*.* Challengers studied in detail in this report include TCS (BUY), Wipro (BUY) and Cognizant (Not Rated) # Infosys (HOLD)Edelweiss Securities Limited 1

Information TechnologyTable of contentsA. The story in brief ........................................................................................................................................5B. Structure is hygiene but culture is not .......................................................................................................9C. Yesterday, today and tomorrow................................................................................................................12a. Leadership: Is it shifting? ....................................................................................................................... 12b. There is no dearth of opportunity even in affected verticals ........................................................................ 14c. Addressing opportunity needs a tailored go-to-market strategy .................................................................. 15d. Soups-to-nut offering: Advantage Wipro and TCS? ....................................................................................16e. Sales and marketing: Infosys still leads.................................................................................................... 17f. Have players read the market correctly well in advance? ............................................................................ 18g. Are players building enough defensiveness in their business models? .......................................................... 18h. Is there a case for pricing premium in favor of any one player?................................................................... 18i. Non-linearity: It’s no one’s game as yet ................................................................................................... 19j. Infosys acquisitions: Is it too little for Infosys?.......................................................................................... 20k. Margins: Are there new margin-aiding discoveries on the horizon? .............................................................. 21l. Valuations: Today and tomorrow ............................................................................................................. 25D. Five business truths..................................................................................................................................30a. The Big 3 may not grow faster than the industry ...................................................................................... 30b. Technology, process and quality no longer differentiators ........................................................................... 31c. No new service lines in sight to drive growth............................................................................................. 32d. No new market is too early to be invested in............................................................................................. 33e. Fixed price will give way to new engagement models ................................................................................ 33E. Five financial and valuation truths............................................................................................................35a. Pricing on knife’s-edge ........................................................................................................................... 35b. Viewing competitive advantage, value-add via margins lens not enough....................................................... 35c. ROAE only a weak factor impacting valuations ......................................................................................... 37d. Pent-up opportunity versus secular opportunity ....................................................................................... 38e. How much valuable can Infosys get in replicating Accenture?...................................................................... 39F. Pricing: How can one establish premium? ................................................................................................42G. The IT enterprise of tomorrow..................................................................................................................46H. Non-linearity: Stern test of commitment ..................................................................................................61a. Level-1 elementary non-linearity: TCS clearly the leader ............................................................................62b. Level-2 non-linearity: A quick win; will soon be table-stakes....................................................................... 632 Edelweiss Securities Limited

Contentsc. Level-3 non-linearity: Outcome-based pricing still some time away ............................................................ 64d. Level-4 non-linearity: Solutions that can showcase expertise ...................................................................... 66e. Key challenges in driving non-linearity ..................................................................................................... 68f. Infosys versus Wipro in non-linearity and solutions.................................................................................... 69I. Making a mark in India and emerging markets.........................................................................................72a. India a peculiar market for IT services ..................................................................................................... 73b. Case study - IBM in India: Applying principles of lean management ............................................................ 77c. The much touted China opportunity likely to be a long range one ................................................................ 78J. Sales & marketing: Reaching the next league...........................................................................................81a. The Big 3 in brief................................................................................................................................... 82b. What ails SG&A in Indian IT? .................................................................................................................. 83c. The Big 3 in detail ................................................................................................................................. 85K. SMB segment: Execution critical for good gains........................................................................................93a. Case study: TCS has a two-year head start over others ............................................................................. 95L. Healthcare: Near-to-medium term opportunity ........................................................................................97a. Addressing the provider opportunity ........................................................................................................ 99b. The other sweet spot lies in big pharma ................................................................................................. 100c. Acquisition of captive or enterprise business unit..................................................................................... 101M. Public services: Tougher than it seems...................................................................................................102a. Can Indian IT tap a significant share of government opportunity? ............................................................. 103b. Govt. practice significant for global system integrators; profitable for very few .......................................... 104c. Case study: Accenture in public services: It’s a mixed picture .................................................................. 106d. Risks associated with government projects could weigh on Big 3 ............................................................... 107CompaniesInfosys: Walking the fine line between growth and profitability.............................................................................. 109TCS: Geared for new rules of the game .............................................................................................................. 115Wipro: Market share gains to come through ........................................................................................................ 121AppendixThe rise of Cognizant: Lessons for Indian IT ........................................................................................................ 127To bulge or not to bulge? .................................................................................................................................. 143Accenture: Acquisition history ........................................................................................................................... 153Edelweiss Securities Limited 3

Information TechnologyLarge Indian IT services companiesRatingFinancials (INR bn) CAGR (%) (FY10-12E)Valuations (x)Absolute Relative Price Market Cap Year Revenue EBITDA PAT EPS Revenue EBITDA PAT EPS P/E EV/ EV/(INR) (USD mn) EBITDA RevenuesInfosys HOLD SU 2,240 26,402 FY09 217 72 60 104.4 21.5 16.5 5.5FY10E 223 74 60 103.9 21.6 15.5 5.2FY11E 258 86 69 119.8 18.7 12.8 4.3FY12E 303 98 82 141.3 16.7 14.9 17.4 16.6 15.9 10.9 3.5TCS BUY SO 557 22,422 FY09 278 72 52 26.4 21.1 14.9 3.8FY10E 300 79 58 29.4 18.9 13.3 3.5FY11E 352 93 69 35.0 15.9 11.0 2.9FY12E 424 114 84 42.2 19.0 20.5 20.2 19.8 13.2 8.8 2.4Wipro BUY SP 544 16,293 FY09 255 51 34 23.6 23.5 15.8 3.2FY10E 254 57 40 27.6 20.2 13.8 3.1FY11E 292 64 46 31.5 17.7 11.9 2.6FY12E 341 76 55 37.6 15.8 16.1 17.0 16.6 14.8 9.6 2.2Note: SU - Sector underperformer, SP - Sector performer, SO - Sector outperformer4 Edelweiss Securities Limited

The Story in BriefTheStoryinBriefWe believe that the next three years, FY10-13, will present a fairly different picture fromwhat it has been since 2002 when Indian IT emerged strongly from the previous downturn.We examine the adaptation strategies of major players in the Indian IT offshore services ecosystemamidst the changing landscape. Our exhaustive, no-holds barred study positionscompanies not just where they stand in today’s context, but also where they are likely tograduate to in two-three years’ time. Our conclusions are revealing and powerful. We presentsome notable ones below:(a) Non-linear strategies will take hold hereon, but the ones who have the early advantageon this have started well ahead of the slowdown. We believe that TCS holds the earlyadvantage in pockets of non-linearity, but it will take time to impact a company of itssize. Infosys is beginning to leverage its traditional solution selling skills via Finacle tomake a greater dent. Without credible non-linear execution, margins are likely todecline after FY11 because pricing (realization) increase is not likely to sustainthe trend of 2004-08 amidst a period of lower future growth relative to the past.(b) Themes will take centre-stage in Indian IT henceforth with integration emerging as thedominant theme among others. Wipro and TCS are playing these themes via acquisitionsas well while Infosys still favors its traditional BUILD approach. Our checks indicatethat Wipro and TCS are winning their fair share of integrated deals with Infosyson the offensive.(c)New verticals of opportunity such as public services and healthcare do not necessarilylend themselves to offshorisation like BFSI, telecom, and others. Firms that are likely topenetrate such verticals are those willing to make the investments in crafting specific,tailored go-to-market strategies. The advantage, we believe, lies with those whodemonstrate greater willingness to partner and ally with what we call complementors(not just partners). Complementors will cover not only go-to-market, but equallyimportant technology and R&D aspects as well (case in point - cloud computing ispartnership-intensive). Wipro and Cognizant have shown the needed flexibility toaccommodate such arrangements.(d) The India market is easy to address from the revenue perspective, but implementation isnot straightforward. Wipro’s years of investments (infrastructure, subcontractingpartnerships, support, and service centres) cannot be closed in a hurry. Whileconsiderable bench exists today in Infosys to address the India opportunity inthe near-term, we believe moving to a structurally lower-cost delivery modelentails a mind-set change that Infosys and others will have to contend with.(e) Making good on the appetising opportunity size will require more sophisticated marketand customer segmentation strategies than before, more so when capability andreferences in traditional verticals such as BFSI, telecom, and manufacturing arebecoming more equalised. Among our set of companies, Infosys has displayedfinesse in customer segmentation, but the others are not far behind. For example,Wipro is now targeting its prospective offerings to specifically attack energy costs ofclients (beyond operations and IT).(f)Squeezing the lemon for incremental gains yields diminishing returns. To continue tooffer productivity gains beyond traditional fixed price, onsite-offshore leverage, firms willhave to enhance and leverage proprietary productivity models or platforms that haveorganization-wide impact. Some of these platforms by drawing on collaborativecomputing technologies such as Web 2.0 can unleash an order of magnitude productivitygain. This is an expensive and time-consuming investment. For example, Cognizantinvested nearly 700 person-years in the development and implementation of Cognizant 2.0(including testing) and has over 300 professionals managing this on a full-timeEdelweiss Securities Limited 5

Information Technologybasis. This is an impressive scale of commitment to the process. Also, such a platformwill be an enticing engagement model for partners/complementors to come aboard.(g) Infosys has performed at the frontier of the efficiency and optimization curve, but we seeWipro and TCS closing the gap. In our view, revolutionary technologies such as cloudcomputing enables others to narrow the gap even faster as technology plays the role of aleveler.(h) Valuations will favor those who exhibit highest growth at sustainable margins. Ironically,what is perhaps overlooked in the margins versus growth debate is that growth itself is apowerful margin driver. Cognizant’s propositio n of offering industry-leading growth atnon-GAAP margins of 19-20% is in part helped by its aggressive growth itself. Intrinsicvaluations suggest that Infosys has most to gain in trading off its abnormally high ROCE(>70% average ex-cash) in favor of growth. We see TCS and Wipro closing thevaluation gap with Infosys even further, notwithstanding that they haveoutperformed Infosys YTD.(i)Infosys, in making the transition to where Accenture is today (in business model strengthand size), could yield annualised mid-single digit percentage (5-6%) returns over thelong term. These returns may seem modest to investors, but investments and capabilitybuilding to reach there are immoderate. Status quo will not get Infosys there.Lessons from the pastBefore we discuss some of the above and many other sub-themes in much greater detail,it is worthwhile to look back in history to understand how Infosys emerged from theprevious slowdown. The previous downturn tells us not to extrapolate in astraightforward fashion. It is tempting to draw a correlation with Infosys’ stock andfinancial performance as it emerged from the slowdown in FY02 and extrapolate thatstrength to the emergence from this crisis this time as well. This is a bit misguided andwe explain whyChart 1: Resurgence of Infosys from 2002 downturn driven by non-tech sectors140.0112.0(%)84.056.0Overall company revenue growth28.00.0Telecom Banking & finance Energy &utilitiesCAGR (FY02-FY04)TransportationSource: Company, Edelweiss research6 Edelweiss Securities Limited

The Story in BriefChart 2: Infosys’ resurgence from 2002 downturn driven by enterprise solutionsand testing90.072.0Overall company revenue growth(%)54.036.018.00.0SoftwaremaintenanceConsulting service&PIOtherservicesTestingCAGR (FY02-FY04)Source: Company, Edelweiss researchThe three verticals that showed strength and drove Infosys’ resurgence from theprevious slowdown were BFSI, energy and utilities, and transportation (chart 1).Transportation, since then, has underperformed the rest of the business (especially overFY04-09). The strength in BFSI over 2002-04 does not surprise since it was not the weaksector in the previous slowdown (technology and telecom was). Thus, resurgence wasdriven largely by sectors that were unaffected.Today, while revival in BFSI will provide part of the thrust, we believe that much of thecase for a protracted revival will have to be driven by traction in manufacturing andenergy & utilities – Infosys’ two verticals of recent strength, and by retail that is roaringback. If telecom and technology strongly revive, then the possibility of USD revenuegrowth in FY11 of near 20% (or above it) is bright. Also, it was enterprise solutions(package implementation) and testing (chart 2) that fared the best among service linesas Infosys emerged from the previous downturn. Today, enterprise solutions while stableis not exhibiting healthy growth. Thus, we believe that the baton for revival will have tobe picked up largely by infra management. Thus, a straight extrapolation of revival fromthe previous slowdown to today’s circumstance is not wholly appropriate. Stock returnfrom January 2002 through January 2004 was 150% from the low point during thisperiod, tracking a PEG of 0.8-0.9. Infosys has already recovered two-thirds of this return(over 100% since its near-term lows post Lehman) at a comparable PEG.Whatelsedowecover?Our report takes an extensive look at the Indian IT enterprise of tomorrow. “The ITcompany of tomorrow” describes our 10 predictions of the Indian IT model as weenvisage them. Not all of our predictions may materialize, but we believe that the journey tothe next league entails far-reaching ramifications in the way Infosys and others will haveto manage on both the demand (customer and market) and supply (employees, partners,and sub-contractors) side. As a teaser, on e of our important predictions is thatredirecting the skill profile at short order will be an agenda that will exercise the IndianIT firms. It is possible that the pyramid will cease to be a less relevant parameterhereon, especially as companies decide what it is core and non-core to them. Anotherprediction is that firms that manage the uncomfortable duality of protecting the corewhile gearing for expansion extend their leadership position.Edelweiss Securities Limited 7

Information TechnologyWhat else is inside the reportWe offer a comparative matrix below that encapsulates our assessment of how firmsstand on sub-themes.Table 1: How do the Big 3 stack up? Relative summary ratings on fifteen dimensionsSr no Parameter TCS Infosys Wipro1 Premium pricing No Yes but diminishing No2 End-to-end full-service offering Strong Improving Strong3 Traction in emerging markets Moderate Low but picking up Best4 Customer segmentation finesse Could be better Best Good and improving5 Differentiated/innovativecontract structuring6 Defensiveness ofservice/vertical portfolio7 Non-linearity/solution/newengagement model focus8 Readiness to experiment withdifferent go-to-market modelsGood Could be better GoodModerately defensive Moderately defensive Most defensiveHigh though recent High though recent* High but no industrystandardsolution yetGood Low Good9 Strength atexploiting/leveraging alliancesand partnerships fortechnology/R&D/innovation andmarket penetrationMedium Low Good10 Ability to roll up acquisitions(large/small)Beginning to pay offwith lagUntestedChequered but improvingwith experience11 Defensible cost structure incase of revenue shortfall12 Willingness to take multiple bigbets and face risk13 Venturing into new verticals ofopportunity such as publicservices, healthcareImproving with recentfocusBestGoodReady Conservative ReadyWilling Guarded Willing14 Ability to change the revenueprofile over the medium-tolongtermImproving withacquisitions15 Sales & marketing prowess Catching up Best Catching upGoodBest (with inframanagement, BPO,enterprise IT leading theway away from historicalbias towards tech andtelecom)Source: Edelweiss researchNote:*Excluding FinacleBefore we explore these sub-themes in detail, we present our feedback on how specificmanagement challenges and issues such as restructuring have impacted/will likelyimpact the companies in our study (refer to the next section, Structure is hygiene butculture is not).8 Edelweiss Securities Limited

Structure is Hygiene but Culture is NotStructure is Hygiene but Culture is NotInfosys, TCS, and Wipro are at an interesting point in their history—not only are theyemerging from a difficult crisis, but they also have to cope with changes in management/lossof key personnel that could impact their presence in the market.Infosys, a well democratised and institutionalised engine, will still miss Mr. NandanNilekani—one of the chief architects of the company’s global transformation practice. Ourview is that Mr. Nilekani personally handled several of Infosys’ key client relationships at thevery highest levels and enjoyed boardroom access that few in the company (indeed in theindustry) can match. We believe the executive council at Infosys and select members of theboard (who have assumed the responsibility to review the company’s strategic accounts) willhave their task cut out. How the company manages this transition seamlessly will be watched.Leadership transition to behealthy for TCSTCS, on the other hand, faces a different kind of challenge. Mr. S. Ramadurai, CEO andManaging Director, will step down in October 2009 and hand over the reins to the muchyounger Mr. N Chandrasekharan (or Chandra) . As the COO, Mr. Chandra was alreadyhandling the company’s large customers. He is known to be aggressive and results-driven.With the handover of the baton to a younger generation comes a change in style ofmanagement. Mr. Chandra may not be a “more of the same” style leader. He shepherdedthe entry of TCS, in the past five years, in infrastructure management, BPO, consulting, andemerging markets. He also pushed through and presided over a massive shakeup/reorganisationwithin the organisation through FY08, wherein geography-based structuresgave way to business unit driven customer-facing structures.The problem Mr. Chandra faces is one that al l young leaders face—managing business unitand country heads who have been in the TCS system for longer than he has been and whoare older than he. It is tricky and we would not rule out departures at the senior level asenergy, youth, and results take precedence over experience and longevity. How TCSmanages this will be closely watched. We believe that Mr. Chandra is the appropriate man tosteer the giant TCS ship in these times.Wipro has engaged in another recent reshuffle in keeping with its philosophy of rotation ofmanagement once in three-five years. What we find impressive is its willingness to commitdedicated senior management’s time to new key initiatives such as non-linearity, healthcare,and large deal programme management, among others. In this respect, this contrasts withInfosys, which has vested its Executive Council with additional strategic responsibilities foremerging areas.Among the Big 3, we find that TCS is endeavoring to increase comfort, on a comparable basiswith the other two, with decentralised customer-owning multiple P&L owners, breaking therules of engagement away from the delivery units and geographic fiefdoms to individualbusiness units. Notably, even today, TCS’ primary reporting segment is geography (and notvertical) unlike Infosys.On a broad level, the organisation structure of the three players is similar to verticalisedbusiness units, special carve-outs for new initiatives such as emerging markets, new offeringssuch as BPO platform and small and medium business (a focus area for TCS). Structure perse is unlikely to be a tangible differentiator.What’s more important is the flexibility built-in within the broader organisation structure thatpromotes a sense of entrepreneurship, customer-centricity, and autonomy. Feedback that wegot from the industry is that while Wipro has married an entrepreneurial flavor with goodprocess discipline, it has tended to be less customer-centric than Infosys. Infosys, on theEdelweiss Securities Limited 9

Information Technologyother hand, has tended to be rather restrictive in the leeway it has given to individuals toshape the market facing and client engagement agenda. Its insistence on making a projectstand on its own to the extent possible has also interfered in some way in the past in itsability to penetrate markets and clients and to take strategic decisions with regard todistributed (global) delivery.Well percolated organisationalrestructuring yielding tangiblegainsThe feedback on TCS is that the new structure is working well (see table 2). Hiccups werenumerous initially as we would expect after any new comprehensive structure takes hold in acompany when it had already over 100,000 employees. Our discussions with business unitheads at TCS suggest that responsiveness to the customer has vastly improved since theteething troubles. However, we also note that TCS is losing middle to senior level talent tocompetition.Table 2: Gains accruing from TCS’ restructuring have been tangibleOrganisational improvementsGrooming of a large bench of second-rung leadershipEmpowermentDecentralization of decision-makingResultant outcomesAgilityGreater sales agility (which shows up in higher win rate especially in large deals)Speedier exercising of operational levers e.g.: the rapid, drastic offshoreshift in Q4 and Q1 would have been very difficult to pull off in any other structure onsuch a scaleAccountabilityNarrower spans of control, allowing better executive oversight for the COO and othersUnambiguous ownershipSuperior customer managementBetter tracking of account-level metrics allowing better operational optimization, crossselling,up-sellingSingle point of executive contact for customers leading to richer relationships(proofpoint: consistent upward migration of clients across different buckets)Source: Edelweiss researchTCS has progressed inpresenting an unified view tocustomersOn the negative side, TCS’ large size and breadth sometimes make knowledge managementand leveraging resident domain/project experience an uphill task. One common refrain is that“TCS is an engine of so many great moving parts that they do not always move in tandem.”So while the company is making substantial progress on presenting a unified view to thecustomer (One TCS), it still needs to work internally on how best to codify, integrate, andleverage internal knowledge.Cognizant’s high degree of customer-centricity has restricted organisation-widestandardization of methodologies and systems. However, its proprietary platform for distributeddelivery and project management (Cognizant 2.0), developed after sustained, sizableinvestments, is rapidly enabling Cognizant harness both dimensions (an ethic ofentrepreneurship and a culture of discipline).10 Edelweiss Securities Limited

Structure is Hygiene but Culture is NotChart 3: Companies high on standardisation, discipline score low on autonomy*Spirit of entrepreneurship/ AutonomyCognizantXWiproXTCSXInfosysXCulture of discipline, standardization and tight oversightSource: Edelweiss researchNote: * Marking within the grid is done for the sake of readabilityEdelweiss Securities Limited 11

Information TechnologyYesterday, Today and TomorrowLeadership: Is it shifting?Chart 4 lays out how revenues of the Big 3 have grown relative to the industry overFY04-09. Chart 5 highlights the superiority of Infosys’ EBIT growth over FY04-09 to allexcept Cognizant. The same is largely true of stock returns over 3-year and 5 year CAGRperiods (Cognizant’s stock performance is compared with Infosys ADR).Chart 4: Revenue CAGR over 5 year for Big 3, Cognizant and industry55.044.0Cognizant and Infosys the clearoutperformers(%)33.022.011.00.0Infosys TCS Wipro Cognizant India ITexports5-year revenue CAGR (04-09)Source: Company, Nasscom, Edelweiss researchChart 5: Infosys has superior EBIT CAGR (04-09) to its Indian peers50.040.030.0(%)20.010.00.0Infosys TCS Wipro Cognizant5-year EBIT CAGR (04-09 )Source: Company, Edelweiss research12 Edelweiss Securities Limited

Yesterday, Today and TomorrowChart 6: Stock returns over 3 yr CAGR and 5 yr CAGR*25.020.015.0(%)10.05.00.05-year CAGR3-year CAGRInfosys (local) Wipro Infosys (ADR) CognizantSource: Bloomberg, Edelweiss researchNote: *average price over closing week of August takenFive forces that favored Infosysin the pastMacro drivers operating in the current environment for tech services increasingly havespecific micro-implications for individual players. Viewed against this new backdrop ofshifting equations, we identify five forces that have favored Infosys over FY04-09:• Organic growth (a BUILD approach heavily favored vis-à-vis BUY).• Premium pricing and above-trend pricing increases, especially over FY06-08.• Ability to defend industry-leading margins at industry-beating growth rates.• A sales and marketing approach that has focused disproportionately on farming andmining and selecting the “right, must-have” accounts.• Focus on developed markets with three verticals (BFSI, manufacturing, and telecom)contributing over 75% of incremental revenues over FY06-09.… but they could change goingforwardWhat may be more decisive in future may be a different set of factors such as:• Integrated end-to-end positioning or full-service capability for pricing and servicedifferentiation.• Ability to execute on a portfolio of business models which co-opt differentiated andinnovative deal structuring, non-linearity.• Innovativeness and speed at fashioning tailored go-to-market approaches to addressspecific opportunity areas.• Accelerated or increased probability of success in new ventures spanning newverticals and/or emerging geographies.• Clever market segmentations thereof to spot opportunities of profitability versusopportunity of revenue growth (Infosys has done well on this in the telecom serviceprovider segment in Continental Europe and in exploiting nascent opportunity inresources).• To a lesser extent, a chequered history of acquisitions that enables firms to come upthe maturity curve on the next acquisition they make.Level playing field for Big 3 postfinancial crisisTCS and Wipro are equally well-placed, if not better placed, than Infosys (beyond FY10)on all these emerging rules of the game. Cognizant has already set the tone and led thethinking in some of them. Sections below offer our thoughts on the likelihood of a changein guard.Edelweiss Securities Limited 13

Information TechnologyThere is no dearth of opportunity even in problem or affected verticalsTraditional verticals such as banking and financial services, telecom, and manufacturing(which collectively account for nearly 75% of export revenues of Indian IT) are likely toreset their spending levels in developed markets (we distinguish secular spending fromnear-term pent-up spending). However we still see areas of opportunity in these verticals(please see table 3 for opportunity areas). Much has been said about burgeoningopportunity in other segments such as healthcare, public sector, en ergy and utilities andmore generally emerging markets.Table 3: Opportunity exists even in predominantly troubled verticalsEmerging/tactical opportunity areaGeography of burgeoning/new opportunityBFSI Risk, compliance, audit, integration, analytics Asia, Continental EuropeManufacturing Extended supply chain integration, consolidation/restructuring using Asia (particularly China), US,packages, product development & engineering; integration of the shop Australiafloor into enterprise IT applicationTelecomIP-based solutions such as Telco in a box, customer analytics and revenueenhancementAsia, Continental EuropeSource: Company, Edelweiss researchSubstantial under penetration ofBig 3 in F-500 existsInfosys, the leader over the years, in targeting global biggies in the F-500 (Fortune-500)or G-500 (Global-500) category works with only about 25% of the F-500 companies thatuse India as a sourcing hub (see chart 7). (Infosys works with 97 F-500 clients, about athird of its US client base, while about 375 F-500 companies have used off-shoring eitheras a captive or with third parties). This tells us that there is still substantial underpenetrationof the Big 3 even within F-500 clients who have used India.Chart 7: Fortune 500 firms using India to source tech, business services 2008Not using Indiaas a sourcelocation, (25%)Using India as asource location,(75%)Source: NasscomHigh opportunity in low level CISand retail (low barrier to entry)areasClearly, there is no lack of opportunity; though, we caution that only some part of thisopportunity is likely to be profitable at levels that the Big 3 would deem appropriate. Forexample, over 40% of the BPO opportunity as identified by Nasscom Mckinsey lies incustomer interaction services (low-level commoditising call centre and elementary dataentry). Likewise, over 75% of the addressable market in banking and financial servicesaccrues from retail banking, which is characterised by lower barriers-to-entry thanspaces such as unified (integrated) banking, asset management.14 Edelweiss Securities Limited

Yesterday, Today and TomorrowThe good way to play the value-added opportunity for existing customers (evenin these troubled verticals) would be around themes. Two revenue themes thatwe indentify relate to analytics and integration (refer to case study Playing farreachingthemes).Case study: Playing far-reaching themesAnalytics still has restrictedmeaning within Indian IT… butMNCs off-late have put greaterfocus on itAnalytics married with consulting or business process is likely to be apowerful combination theme across verticals. Analytics, at the Big 3, have beenlargely business intelligence and data warehousing implementation of packages suchas SAS, Hyperion (or Oracle) and Cognos (of IMB). However, they have not used it ina predictive or real-time manner that impacts budgets (e.g., marketing andadvertising budgets of companies), business processes and strategies of companies.Notably, both IBM and Accenture have emphasised analytics rollouts in their mostrecent quarterly earnings call as “drivers” for the future with IBM, in particular,making repeated references. IBM has recently set up its business analytics andoptimisationengine.Surprisingly,innootherquarterduringthepastsevenyears,forwhich we have studied their pronouncements, have they explicitly cited ‘analytics’ asa thrust area necessitating a dedicated carve-out.Accenture’s ‘analytics’ framework is primarily built around consulting, while IBM’sanalytics practice is built around software solutions that were either developed(master data management solutions) or acquired (Cognos). Cognizant is rapidlyscaling up its proprietary analytics platform to bolster its business process practice,helped by its acquisition of marketRx in October 2007. Drug discovery in healthcareturns on a high degree of analytics capability married with domain. Infosys’ retailsolution Shopping Trip 360 degree runs on an analytics engine at the back end. TheBig 3 are, however, yet to roll out an en terprise-wide offering around analytics,geared to multiple verticals like Accenture.Where the Big 3 in Indian IT should be able to make a much greater impression in thefuture is integration of services (or ‘integration’ as we refer to it). We see the Big 3play the integration theme in services much like IBM with the entire IT stack. We visitthis theme repeatedly in this report.Collaborative go to marketstrategy has yielded success forWipro and CognizantAddressing opportunity needs a tailored go-to-market strategyWhat is needed from the Big 3 is a customised go-to-market strategy. Increasingly, suchstrategies will need to draw on collaboration within the eco-system from variousconstituents—alliance partnerships, customers, and acquired entities. Standalone go-tomarketstrategies will be less useful going fo rward. Wipro has seized the initiative and itsextensive partnership alliance programme has paid rich dividends in its Middle East/Indiastrategy. Also, several of Cognizant’s multi- year contract wins (e.g., Rabobank) havebeen won through joint go-to-market partnerships with local (foreign) smaller players.Large deals more often today than before entail elements of pass-through/hardware andemployee re-badging (taking on board employees of the client) in case of captivedeals/engagements that get divested from the client. The buy-out of Invensys’ OperationsManagement’s offshore product development centre (of 400 employees) in Hyderabad by Cognizantis a good example of how to kickstart capability in a new area of manufacturing where it has beenhitherto absent. These are elements that TCS and Wipro have taken on board to a muchgreater extent than Infosys.Infosys has been relatively guarded in its go-to-market strategy. Its strategy of late hasbeen to penetrate spaces that have not adopted offshore mainstream for example,mining and resources is the new sub-segment of focus for Infosys where it has madesome progress and is investing resources. (In fact, we see that resources have beenEdelweiss Securities Limited 15

Information TechnologyWipro and Cognizant addedhigher revenues during crisisamong the best performing operating groups for Accenture over FY04-08, over whichperiod it has not had competition from offshore peers). While this is a good strategy forthe near term, we believe it is important to protect the core (viz., BFSI, telecom, andretail) which is likely to come under attack from offshore competitors. It has not donenearly as well on this dimension. “Protect the core while breaking new ground” is atheme that we visit later in this report. Infosys is less likely to penetrate verticals thatpresent a lower opportunity of offshore outsourcing (say the public sector in developedmarkets which may mandate greater local presence) or where its value proposition couldconflict with a much stronger player e.g., in healthcare against Cognizant.Chart 8 shows how the TTM (trailing twelve months’ revenues) of companies have faredin various verticals versus the preceding period (June 2008–09 versus June 2007-08revenues for various verticals).Chart 8: Only Wipro & Cognizant defended their positions during crisis600400Infosys showed strength inmanufacturing vertical while TCScaptured share in retail(USD mn)2000(200)(400)TCS Infosys Wipro CTSHBFSI Mfg. Telecom Retail Healthcare OthersSource: Company, Edelweiss researchGo-to-market strategies in healthcare and public sector verticals will not worktraditionally as we describe in the respective sections in this report.Also, it is becoming essential for companies to invest in demonstrating commitment forbagging transformational/large contracts. For example, Cognizant is known to even hireexpert resources (if not available in-house) well in advance of a deal and commit them toits pursuit. It presents the perspectives of its own domain advisory councils (composedof CIOs of client organisations) to prospective customers.Infosys is known to be cautious on joint ventures. TCS, on the other hand, is reportedlyclose to finalising a 10-year joint venture with the Government of Maharashtra (74%stake with TCS) that gives it exclusivity for an ambitious project floated by thegovernment for providing citizens online access to government services (venture to becalled MahaOnline). This could be the gateway for other IT projects funded byMaharashtra.Infosys, in our view, needs to do more in crafting flexible and customised goto-marketstrategies.Soups-to-nut offering: Advantage Wipro and TCS?Wipro’s strength in BPO and infrastructure management (IM) (collectively about 30% ofIT services revenues) positions itself well when it comes to soups-to-nut (or end-to-end)16 Edelweiss Securities Limited

Yesterday, Today and TomorrowIntegrated service providers atadvantageofferings. Likewise, TCS’ investments in full-service offerings are bearing fruit in largedeal wins. Such investments were made in the past. Wipro incubated its integratedofferings for the India market after setting up a dedicated team in mid-2004 to targetthe total outsourcing proposition.Integration (and transformation) is likely to emerge as a strong theme in the industry inthe next two-three years. The days of standalone services such as BPO, IM, and ADM arenumbered. For example, BPO increasingly can be leveraged only by IT companies thatcan build in the automation necessary to offer it as a utility or platform.Our view is that inorganic moves and/or India focus have helped both TCS and Wiprotake an early advantage in integrative deals, especially those that involve a seriouscomponent of BPO and IM. It is notable that Wipro’s three largest deals have all accruedfrom India. Also, TCS has built full-service capability in advance of the crisis.Sales and marketing: Infosys still leads, but Wipro/ TCS are fast catching upTCS and Wipro focusing onimproving farming whilecontinuing aggressive huntingInfosys has traditionally preferred a farmer’s approach to its sales and marketing—focuson existing accounts and mine them as optimally as possible. Wipro and TCS havetended to scatter their sales and marketing resources to a greater degree acrossgeographies than Infosys.However, convergence takes place on mining, (see chart 9) which shows that TCS andWipro are fast catching up on account management. Wipro has already matched Infosyson localisation of sales staff (over a third of its sales staff is foreign nationals).Chart 9: No. of clients added in different revenue buckets over past two years2520TCS leads large scale accountadditions(Nos.)151050TCS Infosys Wipro TCS Infosys Wipro TCS Infosys WiproNAUSD 20 mn + USD 50 mn + USD 100 mn +Source: Company, Edelweiss researchChanging S&M dimensionsThe name of the sales and marketing game shifts to other dimensions: (a)transformative selling; (b) recalibrating key performance indicators and compensationbenchmarks; (c) a successful hunter strategy (practice specialists /new marketspecialists); (d) selling bundled solutions; and (e) partner-level interventions. On thesedimensions, we note that there is much work for the Big 3 to do. Our section, Sales &marketing: Reaching the next league sheds light on the deficiencies in the sales andmarketing structure in Indian IT and explores in detail the models of each of the Big 3 incomparative context.The leader in setting standards on sales & marketing and relationship management practicesis undoubtedly Cognizant as we explain later on.Edelweiss Securities Limited 17

Information TechnologyHave players read the market correctly well in advance?We credit TCS with making visionary moves much ahead of the crisis to build a fullservicesmodel. It was early in:(a) Branching out to emerging markets along with Wipro and such advantages cannotbe closed in a hurry, especially on the mechanics of delivering on a structurallylower-cost platform.TCS has made long-termvisionary moves(b) Acquiring a BPO platform for insurance (from Pearl BPO) in 2005 at a time whenIT/BPO platforms had not gathered hype as they have done today.(c) Investing in end-to-end service provisioning, well ahead of the crisis and is able toshow client references in the current environment to advantage.(d) Accelerating time-to-market in building end-to-end finance and accountingoutsourcing (FAO) capability through the acquisition of the Citi BPO (formerly,eServe); such a positioning takes time to build organically.(e) Building global delivery capability and greater marketing presence than peers.(f)Innovating contract structuring for clients that would like vendors to assume morerisk, especially in larger/crucial projects.Some of these advantages should favor TCS in the emerging scenario. This is not tosuggest that Infosys has not read market trends, but the BUILD approach that Infosysfavors in contrast to the BUY model of TCS is likely to afford the latter an initialadvantage. TCS has also marked out a business unit separate from the parent companyto address the needs of the small and medium business (SMB) segment.Comment: Advantage does not lie with those who begin anew, but with those who have,in hindsight fortuitously, even if unwittingly, invested in building capability of a broadbasednature that the post-crisis order will call upon. In this respect, we believe firmslike TCS, that have been less conservative in the past in the way they view clientengagement models, markets, ve rticals, delivery models do have a head start, even ifnon-enduring, in this constant game of adaptation.Are players building enough defensiveness in their business models?Wipro has emerged as having the most defensive portfolio among the Big 3 with: (a) nosingle vertical contributing more than 30% to revenues; (b) no client contributing morethan 3% to revenues; and (c) infra management and BPO (stable service lines) accountingfor about 30% of revenues. What is also creditable is the management’s ability totransform the revenue profile away from legacy technology and telecom (over 60% ofrevenues in 2001) to a slew of enterprise verticals, powering growth (financial services,manufacturing, retail, energy and utilities) through a combination of clever segmentation(e.g., insurance in Europe) and service-line positioning via BPO.Also, noteworthy is Wipro’s success in transforming BPO from a FTE-based revenuemodel to a transaction- or risk-reward-based revenue model (we believe that about 60%of Wipro’s BPO revenues come from this model). Wipro has, thus, shown its ability toovercome challenges and move with times.Is there a case for pricing premium in favor of any one player going forward?Infosys’ pricing premium isnarrowingWhile pricing pressures abate and are not as bad we expected, we would wait for aquarter to proclaim that the worst of pricing pressures is behind us, despite theencouraging commentary of the Big 3. What is more notable is that the case for apremium for any one player, going forward, is considerably diminished. Premium can becommanded only by value and on the value-map, the Big 3 are not different from eachother as yet. Historical premiums enjoyed in the past on certain accounts such as BT byInfosys may still exist, but stand diminished today relative to where they stood even18 Edelweiss Securities Limited

Yesterday, Today and Tomorrowfour-five quarters ago. In other words, going forward, we do not see a case for pricingpremium in favor of any one player, unless the offering is differentiated. In our view, thecrisis has partly undermined Infosys’ pricing premium by client focus on attributes suchas pricing for differentiation and value to customer.The Big 3 are making select strategic interventions to improve pricing power, but webelieve it will be hard to see that on a holistic, recurring basis.Hereon, pricing power will likely accrue only with some measure of risk. Please refer toour section, Pricing: How can one establish premium? for details on how and who amongthe leaders we believe are sowing the seeds of differentiated pricing power for the future.Chart 10: Wipro has closed billing rate gap with Infosys17.0Peak discount13.0Wipro is now at par with Infosyson offshore rates(%)9.05.01.0(3.0)Q1 FY07Q2 FY07Q3 FY07Q4 FY07Q1 FY08Q2 FY08Q3 FY08Q4 FY08Q1FY09Q2 FY09Q3 FY09Q4 FY09Q1FY10OnsiteOffshoreSource: Company, Edelweiss researchNon-linearity: It’s no one’s game as yetOur section, Non-linearity: Stern test of commitment, discusses in detail four levels ofnon-linearity in the industry (Level 1, the most elementary all the way through to Level 4,the highest order of non-linearity which relates to licensable IP/solutions andplatform/utility offerings).Table 4: Different levels or orders of non-linearityNon-linearity Description Manifestation Who's aheadLevel 1Solution accelerators covering technology Cost savings and annualised TCS ahead in technology andbusiness process engineering andproductivity improvement engineering solutionindustry processesaccelerators; some success inconverting matureaccelerators into productsLevel 2Ticket-based, device-based pricing insupport and IM; shared servicesAs frequency of transactionincreases, gross marginsupwards of 50% possibleWipro by virtue of presence ininfra managementLevel 3Outcome-based pricing; make pricing akey driver of the client's businessmeasure. Very deal specificVery powerful multipliereffect if cost profile and risksare containedWipro (Unitech Wireless,Aircel) and TCSLevel 4IT/BPO platforms, full scale processingplatforms (horizontal and vertical)Revenues (licence, % oftransactions, subscriptionbased)Infosys (traditional advantageof Finacle), TCS (SMB)Source: Company, Edelweiss researchEdelweiss Securities Limited 19

Information TechnologyTCS relatively better placed ondriving non-linearity on preliminaryindicationsOur conclusion is that TCS and Infosys are doing well on Level 4, though revenue offtakeis slow from recently developed platform solutions. Wipro and TCS are ahead on drivingnon-linearity through output and outcome-based pricing. TCS leads when it comes tooffering productivity improvements through solution accelerators, though it needs tosystematise and pull this together in a holistic manner to cover more challenging andstrategic client engagements. That transformation is underway at TCS.Who is marching ahead will be clear in about 9-12 months as we track the Big 3’sfrequency of announcements of outcome-based deals (such as Unitech Wireless) andclient wins in platforms/utility offerings. Following a prolonged period of tireless salesefforts after development of Infosys’ retail solution (Shopping Trip 360), Infosys has wonsome pilot projects. TCS has won several orders from large corporates for its HROplatform. Its platform for the pension and insurance vertical is likely to be ready forrelease by FY10 end. Its recently launched offering for the SMB segment in Indiacould be over USD 200 mn in revenues by 2013, if well executed (refer to thesection, SMB Segment: Execution critical for good gains).Our analysis in section, Non-linearity: Stern test of commitment explains that tokeep gross margins steady at 45-46%, Infosys will have to raise level 4 nonlinearityfrom currently 4% of revenues (Finacle) to ~10% (Finacle + others)over three years (or 15-16% of incremental revenues over FY10-13E).Cloud computing could be agame changer for Indian ITNon linearity as a theme could get a leg up if technologies such as cloud computingbecome mainstream. In which case, the balance of advantage could shift to those whoare thinking proactively about the cloud and how it can shape delivery and hosting ofbusiness process solutions. Our discussions with the Big 3 suggest that Wipro and TCSare seeing the cloud as a disruptive medium to offer both infrastructure as a service (andinfrastructure as a utility) and business process-oriented solutions (e.g., cash-to-order orprocurement). In the case of Infosys, the focus is largely on the latter (primary focusremains on business process).Infosys and acquisitions: Is it too little for Infosys?We believe that a history of acquisitions helps in making the right decision regarding thenext acquisition. To be sure, not all acquisitions of Wipro have delivered intendedbenefits (there have been some early ones such as Nervewire where there has beenattrition of key management). But with failure/mistakes comes learning and acquisitionfailures are no different in imparting a great element of learning.Acquisitions are required to getaleg-upIt is instructive to compare acquisition strategies of TCS, Wipro, and Cognizant. TCS hasgone for the jugular through big-sized acquisitions which pitchforks TCS in the reckoningfor large-scale deals (especially in BPO). On the other hand, Cognizant, like Accenture,has a neat tuck-in strategy where the chief criteria of acquisition include: (a) newcapabilities/niches that Cognizant can use to prise open a new segment/geography; (b)improved ability to offer process innovation/process consulting (Accenture’s acquisitionof George Group as a case in point); and (c) new engines that can drive non-linearity.Experienced now, Wipro has hadmixed success with acquisitionsWipro has preferred a mix of the small and the big, and is getting more comfortable withsize. It believes that its 12 acquisitions since the 2002 acquisition of Spectramind (itsBPO venture) have given it a unique picture of its successes and failures and hasincreased its confidence and probability of success in acquisitions over time. Notably, oneof its most recent acquisitions, Infocrossing , was also its biggest. An acquisition historyhas enabled Infosys’ peers to have come up on the maturity curve on acquisitions.20 Edelweiss Securities Limited

Yesterday, Today and TomorrowTable 5: Cognizant’s acquisition philosophy has helped it enter new spaces/nichesAcquired firmCertain assets ofAmerican Express Travelrelatedservices company(from Silverline)Month ofacquisitionConsideration ofpurchase andfinancials ofArea of business/operationStrategic rationaleSep-02 USD 10.4 mn BFSI Strengthen CTSH's financialservices practice; this also helpedCTSH them launch their localdevelopment center in Phoenix, AZ,and Hyderabad, IndiaPerformance since acquisitionIts BFSI practice has since grown to a leadershipposition and Amex is one of CTSH's strategic clients.The Phoenix development center has since grown tobecome its largest local development center in theUS, helping it service many other clients acrossindustryAces International Apr-03 CRM Strengthen CTSH's CRM practice Cognizant topped the list of Tier 1 offshore playersin “ability to execute” CRM in the latest Gartner MagicQuadrant report for CRM in NAInfopulse Dec-03 USD 6.4 mn BFSI, IT Services Expand CTSH's ContinentalEuropean footprint, strengthen itsBFSI consulting and practice inEuropeContinental Europe is approximately 40% ofCTSH's European revenues. This acquisition alsohelped them win a recently announced 7-yearengagement with RaboBank.Ygyan Consulting Feb-04 USD 1.7 mn SAP Strengthen and deepen CTSH's SAPexpertiseFathom Solutions Apr-05 USD 23.3 mn Consulting forTelecomAimnet Sep-06 USD 14.8 mn IT InfrastructureServicesStrengthen CTSH's consultingcapabilities in thetelecommunications sectorStrengthen its capabilities in ITISCognizant is clearly seen as a strengthning player in theSAP space, with SAP recently recognizing Cognizantas a global services partner. Cognizant hasestablished a SAP Netweaver Testing Center inBangalore within Cognizant's premises. It has grownto many hundreds of professionals. Cognizantbelieves that this is one-of-a-kind center for SAPLabs outside of Waldorf.Consulting capabilities obtained through thisacquisition have helped Cognizant establishthought leadership. Recently, AT&T, Alcatel-Lucent,BEA, Cognizant, IBM, Motorola, and Microsoft jointlycreated groundbreaking content commercestandards under the aegis of TM Forum[http://www.thefreelibrary.com/AT&T,+Alcatel-Lucent,+BEA,+Cognizant,+IBM,+Motorola,+Microsoft+and...-a0170136912]This acquisition gave Cognizant a NetworkOperations Center (NOC) in Boston, which is todayseamlessly integrated with its NOC in Bangalore. ItalsogaveCTSHa"platform"calledOnTargettodeliverRIM services. In their recent research reports,Gartner and Forrester have recognized Cognizant asbeing in the same league as Wipro and HCL for RIM.marketRx Oct-07 USD 135 mn High-end analytics,specifically in salesand marketing inthelifesciencesspaceStrengthen Cognizant’s full-suite ofofferings across all areas of the lifesciences value chain and strengthenCTSH's capabilities in high-endanalyticsThis acquisition gave Cognizant unique end-to-endcapabilities (from discovery, to clinical, tomanufacturing, to commercial operations) in the lifesciences space. It has deepened its high-endanalytics capabilities, strengthened its know-how fornon-linear growth, and so on.Strategic VisionConsultingJun-08Media &EntertainmentConsultingExpand CTSH's consultingcapabilities in the media &entertainment industryThis acquisition brought to CTSH the capability towork with "media studios". SVC was working with 6of the Top 10 media studios in LA and surroundingregions.Active Intelligence Feb-09 Oracle RetailSolutionExpand CTSH's Oracle Retailportfolio servicesThis acquisition helped the company to strengthenits Retek (Oracle Retail) capability and service itsretail customers effectively. In the last few quarters,retail has been one of the fastest growing industrysegments for Cognizant.Notes:In March 2008, Cognizant, as part of a global systemsintegration alliance with T-Systems, took over T-Systems Indiaand its approximately 1150 employees. The alliance isprimarily aimed at catering to European corporations withglobal delivery requirements for system integration services.In July 2009, Cognizant, as part of a global product researchand development relationship with Invensys OperationsManagement, gave offers to join Cognizant to over 400Invensys Operations Management professionals from Invensys'R&D center in Hyderabad.Approximately 39-40% of European revenues comefrom Continental Europe, T- Systems has contributedto it to a certain extent.This alliance will help Cognizant strengthen itscapabilities in plant floor applications and help stitchthem with enterprise applications.Source: Company, Edelweiss researchMargins: Are there new margin-aiding discoveries on the horizon?INR depreciation protectedmargins during the crisis phaseWe see a different set of challenges today: Unlike 2002-04, the current crisismay not play havoc with margins of Indian IT players in the near term in FY10-11,thanks to the much weaker INR (versus the USD), excess bench which can be absorbedright through FY11, and some element of flexibility in a firm’s cost structure. But,Edelweiss Securities Limited 21

Information Technologystripped of the gains from the INR depreciation vis-à-vis the USD and resetting it toaverage FY08 INR-USD levels, Infosys’ FY09 EBITDA margins would have declined by asmuch as 400-450bps (at same average INR-USD exchange rate as FY08). This compelsthree observations:Crisis has reduced economicattractiveness of Indian IT tosome extent(a) Unquestionably, there has been a fair loss of economic attractiveness of the IndianIT industry during the current crisis, primarily because pricing is likely to settle backto levels where it was about six-eight quarters ago. Client contracts will carry morerisk going forward and historical real pricing increases of 3-4% will be hard to obtain.It is largely the INR-USD equation that masks this reality. How steep is this negativeslope of economic attractiveness, only time can tell. Also, what may add to thenegativity of the slope is our view that Indian IT firms will have to step up their S&Mexpenditure to penetrate new markets and domains (verticals). The bang for theS&M buck in emerging markets, in particular, is low relative to developed markets.(b) Can Indian IT find new levers to stabilise this fall in economic attractiveness this timearound as well? We believe that broadening of the pyramid is possible only withgrowth and critical mass of expertise/capability in established verticals (e.g., BFSIand telecom service providers) and application management (includinginfrastructure management) which will take time to build in new areas/verticals afterthe current crisis.(c) Thus, the slope of the margin after the crisis will show a contained/controlledtrajectory this time around after FY11 (stripped of impact of the exchange rate) likeit did the last time, only if new “margin-aiding discoveries” manifest themselves (seechart 11).Chart 11: Studying margin movement over several phases since 2001Need for new margin levers hasarisenNew service linepenetrationGreater offshoringBroadening ofemployeepyramidSG&A leverageControlling trajectory ofmargins after current crisisrests on finding new“margin – aidingdiscoveries”Marginshelped byweakerINRand tightcostcontrolsEarlier crisis(2001-04)Post crisis(2004-08)FY10-11Further; after thecurrent crisis, beyondFY11Source: Edelweiss researchWe have identified four margin aiding discoveries:(a) Growth itself is a margin driver: Growth affords G&A leverage and pyramidexpansion opportunities, but the industry is reset downwards to 18-20% growthover FY10-12E. Consulting has been talked of as a lever for a while, but successhere for Indian IT has been limited. Companies that grow faster withoutcompromising unduly on margins have some headroom for maintaining marginsparadoxical, as it may sound.22 Edelweiss Securities Limited

Yesterday, Today and TomorrowReal time hiring is the newstrategy(b) Zero cost of bench: Wipro operates on a “zero cost of bench” principle for its Indiabusiness. It does this through a combination of internal discipline i.e., reducing cycletimes at every stage, right from sourcing (applying Toyota’s principles of lean tosoftware development) to shared services for its India clients. It believes that replicatingthe same to its global bench is the next big margin-saving game. We believe that whileexecuting this for global clients (exports) will be challenging, there is some marginupsidecapture. Also, as firms get smart on just-in-time hiring (e.g., hiring engineeringstudents in the fourth year versus in the third), they can hire as per near-term demand.(c)Wage hikes will moderate going ahead, but how much relief will thatprovide? Offshore wage hikes will dampen for the next two-three years, moving to8-10% p.a., but managing per capita costs over FY04-08 has depended heavily onthe employee pyramid. So, while like-on-like offshore wage hikes dampen from 13-15% down to 8-10% for the next two-three years, the real impact on margins maynot be positive unless the employee pyramid widens.(d) Non-linearity: This is the real game, in our view. But unless firms floor the pedalon non-linearity to obtain 300-400bps of margin benefits in the next three years wesee margins trending down after FY11, though we expect margins to be stable-torisingin FY11 on the back of utilisation of the existing bench.An engine that drives non-linearity on an increasing scale is the only enduring marginaidingdiscovery (See case study How much further can the Big 3 squeeze the samelemon?).On this dimension no one player is winning overall, though in pockets TCS and Wipro areahead in levels 1-3 and Infosys in level 4 through Finacle (please see section, Nonlinearity:Stern test of commitment). The opportunity is available to the three equallyand all three have given it high visibility and commitment within the organisation.Case study: How much further can the Big 3 squeeze the same lemon?Chart 12 shows how people costs at Infosys have risen in almost inexorable fashionthrough the recent years peaking at about 52-53% of revenues. On the other hand,other costs (non-people related excluding depreciation) have shown a consistentlydeclining trend as % of revenues, partly due to economies of scale and amortization ofother fixed expenses. How much further can the Big 3 squeeze the same lemon?Chart 12: People and non-people costs at Infosys; per capita offshore costs have risen by 4% over FY04-0954.024.05.450.022.05.1(%)46.042.038.020.018.016.0(%)(INR lakhs)4.84.534.014.0FY01FY02FY03FY04FY05FY06FY07FY08FY09Q1FY10Total people cost as a % of revenues (LHS)Other costs (ex-depreciation) as a % of revenues(RHS)4.23.9FY 04FY 05FY 06FY 07FY 08FY 09Q1FY10Source: Company, Edelweiss researchEdelweiss Securities Limited 23

Information TechnologyOur view is that once growth and hiring resume, offshore wage inflation of 10-15%will be back even if with a lag. All the four main companies (the Big 3 and Cognizant)hardly differ in the matter of wages for less-experienced people (< 3 years, notably,the pay at the engineering campus is within a 5% band at INR 3-3.2 for the four).Thus, if any one company moves out of lockstep in being generous on pay to attracttalent, sooner or later the others follow to retain the favored campus slot.In this context, it is interesting to note that margins will respond not just to realization(pricing) and wages, but also to bulge (or pyramid) and growth (growth enablespyramid). Our model reckons that under assumptions of (a) current leverage (~80% ofgross hires are freshers), (b) base-case wage inflation of 12.5% (like-on-like for existingstaff) and (c) real annual pricing increase of 3% (constant currency) through FY11-13,Infosys will keep its current gross margins intact in FY12-13 (at existing exchange ratesof the INR versus the USD and others) only if revenues grows at a threshold 18-19%CAGR beyond FY10 (see grid). In addition, our assumptions of other costs remaining atcurrent levels (14.8% of revenues) and real annual realization increase of 3% are strongones. It’s a tall order if the Big 3 continue to operate status quo.Table 6: Gross margin movement, in FY13 from current levels under variousscenarios of realization improvement and growthRevenue (USD) CAGR (FY11-13)12% 14% 16% 18% 20% 22%- (6.1) (5.6) (5.1) (4.7) (4.2) (3.8)1.0 (4.4) (3.9) (3.4) (3.0) (2.6) (2.2)2.0 (2.7) (2.3) (1.8) (1.4) (1.0) (0.6)3.0 (1.2) (0.7) (0.3) 0.1 0.5 0.94.0 0.3 0.7 1.1 1.6 1.9 2.3Source: Edelweiss researchRealizationincrease (%)On taking more realistic estimate of realization improvement (1.5-2.0% excludingincremental non-linearity) rather than 3%, and other costs moving up 50bps (as % ofrevenues), our model shows Infosys’ gross margins declining more than 200bps by2013 (not to mention higher SG&A costs % of revenues on an ongoing basis forInfosys).To offset all these headwinds and maintain operating margins, the game must shift tonon-linearity. Non-linearity must provide a thrust of 300-400bps at the operatingmargin level to sustain current margins three years out.Non linearity could be the onlypotent margin aiding forceWe believe that the pressure on Infosys to sustain margins will be greater than it is forthe others and, hence, the lead it has on Wipro (difference of 13 percentage points inFY09 EBIT margins) and TCS (difference of 6 percentage points in FY09 EBIT margins)could narrow over time. This is because we do not see any proprietary or hard-toreplicateadvantages with Infosys (indeed with any of the Big 3). We would not see thisas a worry. Indeed, firms must manage for the over-arching business model than formargins as our section, Five business truths discusses.24 Edelweiss Securities Limited

Yesterday, Today and TomorrowTable 7: Dynamics of margins play*= Interplay between +ve and -ve factorsMargin aiders(+) Margin detractors (-)Non-linearityPricing improvement of the past not sustainedModerating wage inflation Limited employee pyramid exploitation due to lackof growthZero/lean benchHigher SG&A (more so, higher S&M)Margins from services in emerging geographiesGlobalisation of delivery centersUnless non-linearity compensates, net impact is likely to take margins downwardpost FY11Source: Edelweiss researchNote: * INR-USD equation is omitted though it is perhaps the most important variable, as this isextraneous over which companies have no control/discretionValuations: Today and tomorrowQuestion 1. Is there a case of valuation premium for any of the Big 3?Flight to safety of margins during crisis: At the onset of a crisis, the focus movesback to players who are able to defend margins with minimal hit to the bottom line. ThiswasseeninInfosys’valuationpremiumthatopeneduprelativetootherplayersattheonset of the crisis. We also see that this was the case during the last tech crisis whenInfosys’ relative P/E premium opened up during late CY01. Wipro has traditionallyenjoyed valuation premium to Infosys, which has reversed with this slowdown.Chart 13: TCS and Wipro’s P/E discount to Infosys widened post Lehman105.075.0TCS and Wipro’s P/E discount toInfosys has narrowed post crisis(%)45.015.0premium(15.0)discount(45.0)Aug-01Dec-01Apr-02Aug-02Dec-02Apr-03Aug-03Dec-03Apr-04Aug-04Dec-04Apr-05Aug-05Dec-05Apr-06Aug-06Dec-06Apr-07Aug-07Dec-07Apr-08Aug-08Dec-08Apr-09Aug-09Wipro premium over InfosysTCS premium over InfosysSource: Bloomberg, CompanyRelative premiums re-orient when the crisis fades away. Relative premiums can reorientaway from margin leaders towards others whose prospects look up in the wake of a crisis.When focus moves back to growth at sustainable margins, relative premiums are likelyto move in favor of players that demonstrate higher sustainable growth. Infosys hasshown that over FY04-08, but Wipro/TCS could match/exceed Infosys here on for variousreasonswehavehighlighted.The Big 3 have surprised us with their margin resilience in this environment. They havenot desisted from taking tough measures and ruthlessly exploiting the slightestEdelweiss Securities Limited 25

Information TechnologyCommendable margin resilienceshown by Big 3opportunities to move personnel and business offshore. Also, it has been shown byothers (TCS, Wipro, Cognizant, and HCLT) that in times of crisis such as today, marginscan be readily defended (see case study: Wipro closes the operational margin gap withInfosys). Thus, we believe that investors are unlikely to pay premiums for more-thanneededmargin management (more so from Infosys) in good times. As an additional datapoint, we also note that Cognizant (CTSH on Nasdaq) has traded at a premium to Infosysduring “normal” periods, but this has turned into a discount following Lehman collapse,which is beginning to reverse now.Chart 14: Cognizant has been trading at a premium to Infosys pre-crisis90.070.0Cognizant’s historical P/Epremium to Infosys driven byhigh growth(%)50.030.010.0(10.0)Aug-01Mar-02Sep-02Mar-03Sep-03Mar-04Sep-04Mar-05Sep-05Mar-06Sep-06Mar-07Sep-07Mar-08Sep-08Mar-09Sep-09Cognizant premium/(discount) over InfosysSource: Bloomberg, CompanyThus the BIG CALL: We believe that over the next two-three years, Wipro andTCS should be able to establish valuation parity (even occasional premium) toInfosys in accordance with our thesis of higher growth rates at sustainablemargins.Chart 15: TCS/Wipro trading at discount to Infosys26.022.0InfosysTCS, Wipro could establishvaluation parity with InfosysFY11 - P/E18.014.0CognizantWiproTCSAccenture10.06.08 9 10 11 12 13 14 15 16 17 18EPS CAGR % (FY09-12)Source: Bloomberg, Edelweiss researchNote: * Size of bubble represents current market capitalization26 Edelweiss Securities Limited

Yesterday, Today and TomorrowCase study: Wipro closes the operational margin gap with InfosysThe difference in standalone EBIT margins between Infosys and Wipro (for ITservices) six quarters back (in Q4FY08) stood at ~8.5 percentage points, whichremainthesameinQ1FY10.So,onthefaceofit,itappearsthatWiprohasnotclosedthe gap.Digging into the details we find net average realised exchange rates (a derivative ofthe hedging policy) explain part of the gap. In Q4FY08, Infosys’ average realisedexchange rate was 39.76, while that for Wipro was 40.85. The tailwind for Wipro inQ4FY08 from a higher realised exchange rate versus Infosys was 60bps (as Infosyswas less hedged during FY08, when the INR appreciated versus the USD; it is still lesshedged than Wipro). So, operationally, Info sys had a clear 9.1 percentage points(910bps) lead over Infosys five quarters back. This was attributable to:(a) Much superior billing rates of Infosys in Q4FY08 (Infosys’ onsite and offshorebilling rates were at 8.4% and 18.4% premium, respectively, to that of Wipro).(b) Broader pyramid of Infosys (its average per capita offshore costs in Q4FY08 wasalmost 15% lower than for Wipro).Today, Wipro has closed the operational ga p, as we explain below (also see chart16). Decomposing the Q1FY10 margin gap of 8.5% points we see that:(a) 3 percentage points of this gap is due to forex (as depreciation of the INR hashelped Infosys more than Wipro due to the relative hedging policy). On thiscount, the gap should close, as increasingly Wipro’s realised exchange rate ismoving to spot (due to lower incremental hedging).5.5% is the operational gap that exists now (versus 9.1% in Q4FY08)Of this, 2.5% is still due to traditional superiority of Infosys (broader pyramid, thoughWipro has closed the gap on this score and has followed a policy of no hiring rightthrough FY09; also, departures have taken place at higher levels). Wipro is nowalmost at par with Infosys on realisations/pricing.3% of the gap exists because of Wipro’s acquisitions and higher India/Middle Eastpresence. To the extent that it is the former, the gap can close as profitability ofacquisitions picks up with scale and synergy.From this analysis, we believe that Wipro is closing the gap plugging inefficiencies inits system. Furthermore, the gap looks set to close a little, going forward, as well as:(a) Infosys looks to scale up in the emerging geographies and Wipro tightly integratesits acquired entities and extracts synergies; and (b) Wipro’s average realisedexchange rate inches up towards spot.Edelweiss Securities Limited 27

Information TechnologyChart 16: Decomposing Q1FY10 EBIT margin gap between Infosys & Wipro11.08.86.63.0(%)4.42.58.52.23.00.0Margin gapattributableto forexAttributableto pyramid andbilling ratesAttributable toacquisitions/India/ME businessTotalmargingap (EBIT)Source: Company, Edelweiss researchSteady state P/E multiples forIndian IT could be 16-17xQuestion 2. Is there a ‘trend’ valuation band and reversion to trend phenomenon?As the Big 3 grow in late teens (17-18% CAGR in USD) in revenues over the next twothreeyears, we believe that their revenue growth patterns will increasingly mirror that ofAccenture in the pre-slowdown years. Over FY05-08, Accenture grew revenues andoperating profits at 14.6% and 12.6% CAGR, respectively. Its median one-year forwardP/E ratio stands at 15.1x over this period (FY05-08). As a secondary check, Accenture’spre-slowdown PEG (price earnings to growth) traded in band of 1.0-1.3x 50% of the time.Applying this to steady state earnings growth of 13-15% for the Big 3 gives usan indicative benchmark of 16-17x.Chart 17: Accenture has traded at a median P/E of 15x pre Lehman - collapse40.032.024.0(x)16.08.00.0Aug-01Mar-02Sep-02Mar-03Sep-03Mar-04Sep-04Mar-05Sep-05Mar-06Sep-06Mar-07Sep-07Mar-08Sep-08Mar-09InfosysACNSource: Bloomberg, Edelweiss researchQuestion 3. How do we compare ‘momentum’ multiple versus ‘trend’ multiple?Valuations react in a yo-yo manner in response to near-term earnings (even quarterlyearnings) and margin outlook. Thus, we have seen valuations violently over- and undershootthe median of our suggested valuation band. We believe that such sharpfluctuations around the median should provide signals to the investor with regard to alonger-term position. Current momentum of 18-20x is unlikely to sustain unless earningsgrowth beyond FY11 is ~20%.28 Edelweiss Securities Limited

Yesterday, Today and TomorrowTCS needs to show consistentperformance for upward P/E reratingRelative valuation premiums/discounts among the Big 3 (e.g., a 10% premium of Wiproto TCS today) could be momentary depending on relative quarterly performances andcould shift in a +/-10% band purely running on quarterly performance. Sustainedpremium conferred by the market will need sustained consistency as Infosys has shown.In this respect, we believe TCS has to manage better.Our model, as discussed in section, Five financial and valuation truths , argues thatamong the Big 3, Infosys has the maximum to gain in trading off higher ROCE (ex-cash)or margins for growth to influence its ‘trend’ multiple. As we explain in this section,intrinsic valuations are much more sensitive to growth than to ROCE (providedROCE/margins are above a certain sustainable benchmark).Also, we note that FY11 is likely to be a bounce-back year of earnings growth (on theback of pent-up demand coming through and soak-up of current bench at near-zeroadditional people costs) but we would caution against extrapolating the FY11 momentumto FY12 and beyond.Question 4. How should we view valuations of IT relative to benchmark index?Our self-constructed tier 1 IT index (comprising the Big 3) has traded at an average 38-40% premium to the BSE Sensex on one-year forward P/E ratio over FY06-08 (April2006–April 2008). As growth sharply declined in after FY08, the premium turned intodiscount. Over the past 12 months, the IT index has traded at an average discount of7% to the Sensex. However, now the IT index is back in the premium zone (6%currently) reflecting expectations that tier 1 earnings growth will exceed Sensex earnings.The valuation of tier 1 IT (Big 3) relative to the broader market (premium/discount)should depend not just on the earnings power relative to the Sensex, but also on thequality of earnings growth (high ROEs and significant cash generation of the Big 3). Thesecond factor should not be ignored while comparing and investigating under- or overvaluationof the sector (or the Big 3) relative to the Sensex.Currently, consensus expectation of the Sensex earnings growth in FY11 (over FY10) ofabout20-22%isaheadthatoftheBig3(at17-20%)evenasthelatteraretradingata10-20% P/E premium to the Sensex (with Infosys’ premium at the upper end).Chart 18: Tier 1 IT index’s P/E premium over BSE Sensex has faded30.025.0(x)20.015.010.05.0Aug-04Nov-04Feb-05May-05Aug-05Nov-05Feb-06May-06Aug-06Nov-06Feb-07May-07Aug-07Nov-07Feb-08May-08Aug-08Nov-08Feb-09May-09BSE SensexIT index medianTier-1 IT indexExpected reset medianSource: Bloomberg, Edelweiss researchEdelweiss Securities Limited 29

Information TechnologyFive Business TruthsAs we look at the IT landscape over FY10-13, we see five aspects that are increasinglybecoming evident in the way the industry should be viewed:The Big 3 may not grow faster than the industryThe market leaders will grow ahead of the industry is a common conclusion (else, theywould not have emerged market leaders). However, in FY09, Infosys (11.7% revenuegrowth) and TCS (5.1% organic revenue growth) grew considerably slower than theindustry (as estimated by Nasscom), while Wipro (ex-Infocrossing) just about kept paceorganically (IT industry exports as per Nasscom grew at about 17% to USD 47 bn inFY09 from USD 41 bn in FY08). Slower-than-industry growth for the Big 3 is likely torepeat in FY10 as well.Big 3 could lag growth projectedby NasscomWe see an increasing disconnect between the growth of the leaders in Indian IT and thatof the industry as classified by Nasscom. Going forward, we believe the Big 3 could lagthe industry in growth. This is because Nasscom takes an all-inclusive view ofoutsourcing exports, which includes many constituents that are not representative of thespaces the leaders participate in. We explain why this is so as follows:Fig. 1: Industry dynamics at play will determine whether Big 3 grow ahead of industryWhat determinesindustry growth?Gaining from vendorconsolidation duringFY10-11Emergence of specialists infast growing areas: BPO/IMS(WNS, Genpact)1Gaining from end-to-endand comprehensivesolution capabilityGrowth of Tier-I players(Big. 3, Cognizant & selectothers)Ramp-up of third party MNCcaptives in India (e.g.Accenture, IBM)Ramp-up of MNC in-housecaptives in India (GE, Fidelity,Tesco)2Bold moves by mid-tiers andothers through aggressiveoverseas M&AEffect of 1> effect of 2 = Big 3 will grow ahead of industryEffect of 2> effect of 1 = The Big 3 will lag behind the broader industrySource: Edelweiss research(a) BPO or ITES is forecasted to grow faster than pure IT servicesPure play BPO players havegrown faster than IT servicesplayersThe BPO/ITES piece of the total outsourcing pie is likely to grow faster than IT services.In fact, BPO exports (USD 13 bn in FY09 or less than 30% of total IT exports today) areforecast to be larger in absolute dollars than IT services (currently about 60% of totalexports) by 2020 as per Nasscom, Perspective 2020. This implies that the BPO/ITES piewill grow about one and a half times as fast as IT services over a sustained period (FY09-20). Also, the lion’s share (over 40%) of the ITES/BPO opportunity continues to be inrelatively lower-value customer interaction services (call centre, elementary data entry),which is not an area of focus for the Big 3. Their area of focus is/will be combined IT/BPOplatforms and end-to-end FAO (finance & accounting outsourcing) positioning.Given this, it perhaps does not surprise that larger third-party BPO players such asGenpact and WNS are growing ahead of the industry and much faster than the Big 3 inpercentage terms.30 Edelweiss Securities Limited

Five Business Truths(b) Industry today is increasingly composed of MNCsThe MNC (development offices of third-party global IT MNCs such as IBM, Accenture,HP/EDS and back-offices of corporates such as Amex, HSBC, and JP Morgan) is aconstituent group that has aggressively ramped up over 2004-08. IBM (72,000), HP/EDS(73,000 including Mphasis), and Accenture (44,000) have nearly 200,000 people in India(not much lower than the combined India strength of TCS, Wipro, and Infosys). The MNCgroup is now focused on driving revenues from India through better utilisation andproductivity. We estimate that IBM could be deriving as much as USD 2 bn from India(both exports + India market), while Accenture’s export revenues from its Indiapresence could be between USD 1.5 bn and 2.0 bn (nearly 7-9% of Accenture’s FY09revenues of about USD 23 bn).Third party MNCs and captiveMNCs have gained weight inoverall industryTechnology process and qualityhave become hygiene factorsConclusion: The “nature” of the industry has changed; it has become moreheterogeneous and diverse, with MNC captives (back offices of companies anddevelopment centres of MNC IT biggies) gaining weight in the overall industry system.AddtothisthefastgrowingBPOsegment(andtheBig3inIndianITdonotparticipatein a good portion of this segment), we see that the centre of gravity of the Indian ITindustry is moving from the likes of TCS, Infosys, and Wipro to other constituents. Thus,it is possible that the Big 3 may not necessarily keep pace with industry growth. Thishappened in FY09 and is likely to repeat in FY10. In our view, this possibility should notnecessarily be perceived as negative, it should perhaps be appreciated as a continuingchange in the structure of Indian IT. Thus, on account of these factors, there may be nosuch performance benchmark as beating the “industry”. Wipro does not provide annualguidance, but in the past it did enunciate an intent to grow at least as fast as theindustry. It may not do that going forward.Technology, process and quality no longer differentiatorsOver two-thirds of the world’s SEI-CMM level 5 firms are based out of India (chart 19).Quality and process have become hygiene factors. The Big 3 and indeed several othershave become factory-like in the way they handle repeatable components of commodityofferings (ADM, packaged implementation support, and BPO). There is a substantialelement of standardisation of technical and process mapping.Chart 19: Two-thirds of world’s SEI-CMM level-5 firms are in IndiaFirms assessed for CMM* Level 5, 2007Others(35%)Indiabasedfirms(65%)Source: NasscomThe differentiation will occur in the way the Big 3 and others apply intervention at thebusiness process level using technology and driving an element of integration andbundling of service lines—themes that we repeatedly turn to later in this report.Edelweiss Securities Limited 31

Information TechnologyFig. 2: Value-addition is much beyond factory-based, technology-led interventionValue addition provided toclients is the only differentiatingfactorTechnology-ledValue addition = Business process-ledintervention + +interventionIntegrationSource: Edelweiss researchThe integration theme is becoming important across verticals, notably manufacturing,retail, and telecom (these three verticals will collectively account for about 35-45% ofthe Big 3’s revenues going forward). Integration is probably the best theme for Indian ITto establish client lock-in as many more in the C-level executive suite have a stake inthis—CEO (transformation), COO (operations), in addition to the CFO/CIO. Also, thistheme gains particular currency and resonance because consulting per se as a powerfullead-in has largely not delivered as per expectations for Indian IT.The integration theme presupposes maturity of service lines. It is hard to see how a firmwith fledgling strength in BPO can make a unified IT/BPO proposition credible. Firms willcontinue to make acquisitions that rapidly stretch capability in such service lines (likeTCS’ acquisitions of CGSL, the captive Citi BPO). This may not be a bad idea if rapidmaturity in such specific service lines helps them play the integration theme ahead ofothers. With this acquisition, not only does TCS become a comprehensive BPO solutionsprovider in FAO, but also it is well placed to drive the integration theme in engagementswhich involve a fair share of BPO-intensive or BPO-led intervention.Integration is the new theme…but not any new service lineNo new service lines in sight to drive growthOver 2004-08, Indian IT has seen the flowering of various service lines in conjunction–BPO, enterprise solutions, infrastructure management (IM), and testing. All these servicelines have tremendous offshoreability which has enabled the expansion of the employeepyramid to include youth and aided the margin trend over FY04-08. IM, in particular, hastremendous headroom for growth, but there is also a much greater chance ofcommoditisation in this segment unless the Big 3 execute on different engagementmodels on a war footing.However, we do not see any new service line on the horizon that has offshoring potential.Network or system integration, a recent service line for Infosys, is likely to have anonsite bias.Table 8: Only infra management and system integration seem to be able to provide standalone growthCAGR(USD mn) FY05 FY06 FY07 FY08 FY09E (FY05-09) (%)Project oriented 5,580 7,708 9,860 11,980 13,514 24.7IT consulting 250 348 600 650 715 30.0Systems integration 200 374 580 680 782 40.6Custom appln development 4,980 5,923 7,170 8,808 9,865 18.6N/w consulting & integration 150 167 230 280 322 21.0Software testing - 896 1,280 1,562 1,830 26.9Outsourcing 3,290 4,364 6,330 9,250 11,313 36.2Application mgmt 2,690 1,589 2,400 3,550 4,260 12.2IS outsourcing 600 840 1,700 3,300 4,125 61.9Others - 1,935 2,230 2,400 2,928 14.8Support and training 1,100 1,233 1,660 1,870 2,081 17.3S/w deployment & support 1,100 986 1,330 1,440 1,584 9.5H/w deployment & support - 80 100 120 139 20.2Education & training - 167 230 310 358 28.9Total 9,970 13,305 17,850 23,100 26,908 28.2Source: Nasscom32 Edelweiss Securities Limited

Five Business TruthsGrowth FY10 onwards, therefore, will have to be driven by greater maturity of servicelines, particularly of infrastructure management, but more pertinently, by the integrationof all these service lines.Middle East and other emergingmarkets are under focus withgrowth under pressure fromdeveloped marketsNo new market is too early to be invested inFor many years, Infosys desisted from addressing the domestic market due to marginissues. As growth from developed markets (US and Europe) is under pressure, thewisdom of long-entrenched investments in India and elsewhere has never been clearer.This is not to suggest that Infosys will lose out on deals in India, far from it. What weinstead believe is that Infosys is still some time away from replicating the structurallylower-cost delivery model that peers like Wipro and TCS have institutionalised over theyears. A structurally low cost model to maintain acceptable margins includes anoutcome-based engagement model and strong programme management offices thataccess commodity skill-sets from external tier II and III vendors/sub-contractors.We believe that investments in developing economies other than India will take threefiveyears to show for players who are not invested (e.g., Infosys is relatively absent inthe Middle East), as the opportunity basket needs to grow and it takes time to craft localgo-to-market relationships and make them fruitful. Whereas, in developed markets(Germany, France, Australia), where Indian pe netration is comparatively less, the leadtime is 1.5-3 years.Cognizant’s experience suggests that the intensity of desired investments is bettermaintained consistently rather than taken up suddenly as investments have to bemapped appropriately to opportunities, which may not be effectively ensured if done in ahurry or in step changes.Also, it will be unfortunate if companies allow their view of the length of the crisis todetermine the intensity of their investments before the environment turns decisively. Itmay then be a story of costly misses. Also, we believe that further cuts may push the Big3 to cost structures that are ‘artificially’ too low and non-conducive for building improvedrevenue base scenarios. No new market is too early to be invested in.Newer engagement models areevolving from traditional fixedprice and T&MFixed price will give way to new engagement modelsThe current downturn has seen the come-back of fixed price (FP). FP had also come intothe limelight in the previous tech downturn, but was soon eclipsed by time and material(T&M), a phenomenon that helped the growth of four new service lines. The currentdownturn will be different. FP will increasingly give way to new client engagementmodels based on delivery of output (which is simple) and business outcome (which ismuch harder).We have identified four distinct leve ls of non-linearity in our section, Non-linearity: Sterntest of commitment. In our view, non-linearity at level 1 (solution accelerators) and level2 (ticket-based pricing in application maintenance or device-based pricing in IM nonlinearity,shared-services) are elementary margin aiders. This is a two-three year gamebefore advantages enjoyed by TCS will be closed by the others in due course(Infosys/Wipro). The sterner test will be seen in “skin in the game” engagements (e.g.,Unitech Wireless of Wipro) which bases outcomes on business drivers for the client.Level 4 is the ultimate form of non-linearity envisaging the co-existence of various typesof IP-based solutions—pure products (Finacle of Infosys), point-solutions, proprietarytransaction platforms (covering business processes such as order-to-cash, procurement,HR, payroll, etc.). Many of them entail co-creation of new business models that rest onnew technologies such as cloud computing, collaborative communication, socialcomputing, etc. Accenture has played this high game in insurance andEdelweiss Securities Limited 33

Information Technologycommunication/high-tech; nearly 40% of its revenues in insurance accrue from its ownproprietary solutions.Smaller companies in particular are placing large bets on such potentially revolutionarytechnologies viewing them as levelers in a game in which they are continually fallingbehind. We, however, take the view that evol ving technologies should be seen primarilyas a medium for more effective delivery of business process-related solutions. Suchtechnologies offer improved ability to offer economies of reach, and dispersion to newerand smaller customer segments such as the SMB.34 Edelweiss Securities Limited

Five Financial and Valuation TruthsFive Financial and Valuation TruthsCompetitive force is keepingpricing under checkPricing on knife’s-edge; dynamics determined by MNCs as by Indian playersMNCs such as Accenture and IBM increasingly figure in the final stages of multi-service,large offshore deals today. This may not have been the case four-five years ago whentheir India delivery models were less mature. In fact, clients prefer to keep Indianvendors temperate in their expectations by including MNC player(s) all the way to thefinal stage in RFP-contested deals. Also, some MNCs are more aggressive than theirIndian peers on pricing, not surprising, given that the benchmark gross margins theywork with in India are lower than those for Indian peers. There is a much larger marginband available to MNCs to play in, which could be a spoiler.With no single Indian player commanding such a disproportionate share of the ITservicesexports market (TCS is the largest at 11-12%, Infosys follows at about 9%), noone is in a position to command favorable pricing in undifferentiated engagements. Thus,on the one hand the predatory tactics of any one player can potentially upset the pricingapple cart, while on the other, it takes true differentiation to obtain pricing premium.Thus, pricing in this industry is on the knife‘s edge—requires co-operation of all relevantplayers in the eco-system to remain on track, while potentially remaining hostage topredatory tactics of one or two influential players. We model in a 2% annual pricingincrease for the industry in the next five years. This will be possible only whenall relevant players act in sync. We do not model an out-of-turn increase for anyone player among the Big 3, believing it to be a remote possibility.Margins alone do not indicatecompetitive advantageViewing competitive advantage, value-add via margins lens not enoughHigh operating margins of a business could be an indicator of its offshore-centricity.Infrastructure management and testing are offshore-centric service lines, fetching highmargins. While these are stable from the volumes perspective, they tend to commoditiserapidly if standalone unless the engagement model is changed from an input-basedmodel (people) to one that is hosted and on-demand based.In an industry which the investor community has traditionally analysed in terms ofgrowth rates and operating margins, we believe operating profit per employee maybetter define how well the Big 3 preserve the durability of their business model and offerreturns to investors to beat the law of large numbers as they scale.From chart 20, we see that the Big 3 have broadly kept their per capita EBIT intactthrough FY06-09 (Infosys leads on EBIT/employee at about USD 14,000).Edelweiss Securities Limited 35

Information TechnologyChart 20: Per capita EBIT has been broadly constant for Big 3 over FY06-091613Big 3 have maintained their percapita EBIT(USD '000)10630FY06 FY07 FY08 FY09Infosys TCS WiproSource: Company, Edelweiss researchContinued traditional and exclusive focus on operating margins as a measure ofcommoditisation is insufficient and even perhaps misguided. Closer-to-the customer,higher-value solutions such as consulting and system integration may not fetch marginscomparable with such offshore-centric service lines but they tend to be higher per capitaprofit businesses. We argue that even if a significant move towards such solutions mayentail a shift in the cost structure towards lower operating margins, incremental valueaddition results from such a move. This becomes clear as we shift focus to returns ontalent (people), keeping in mind that consulting, integration and other value-addedservices reflect in a higher operating profit per employee, better sustainability of thismetric through predictable downstream and consequently incrementally improvedoperating profit/employee.Taking this further for greater insight:Operating profit = Operating profit/employee (1) x No. of employees (2).Pure product stories that have a track record of great innovation and value-addition maydepend primarily on (1) rather than (2) for value creation.Employee addition not theanswer to increasing operatingprofit…In our view, if Indian companies merely add employees (i.e., add numbers) withoutclimbing up or demonstrating success of non-linear initiatives, (1) could decrease.Increase in (2) (i.e., employees) will not help in sustainable increase in operating profit.The company will always be under pressure to ensure that increase in (2) overcomesdecrease in (1) to increase operating profit. The ideal way to realise sustainable growthwill be to increase both (1) and (2) or at the very least ensure that (1) does not exhibit adecliningtrendandismaintained.(1) can decrease even if operating margins are healthy but per capita revenues fall,reflecting the predomination of offshore-centric business lines such as maintenance andIM.… success of non-linearinitiatives is the answerThe question is, can Infosys and others increase (1)? That there will be employeeaddition is certain; hence, (2) is ensured but is that enough? Merely (2) will always meanthat the company is running the treadmill of commoditisation and fighting higher wageinflation once the demand environment improves. To illustrate, to grow EBIT at 20%, acompany will have to hire 25% more people, which multiplies in the next year and so on.36 Edelweiss Securities Limited

Five Financial and Valuation TruthsNote: The whole argument is analogous to the stock return principle (Price [P] = P/E xEarnings [E]). Maximum price appreciation is possible if both P/E and E increasesimultaneously. If firms commoditise, maybe E will increase, but P/E could suffer. Thenet impact on P is not always clear. P could increase in the near term, but soon enoughthe P/E decline could overpower the role of expanding E and longer-term sustainability ofP would itself be in question.Higher ROAE does not ensurehigher valuationROAE only a weak factor impacting valuationsThe theory that stocks are reasonable when viewed in the context of historical tradingmultiplies assumes less relevance in the event of reset of growth. A reset of the P/Emultiple should logically accompany that of growth. But, is the possibility of improvedROAE (return on average equity) as an offsetting factor to lower growth tangible? Whatimpact would much improved ROAE have on valuations?We note that ex-cash Infosys’ return on average equity is ~65% for over FY07-09.Chart 21: Average ROAE (ex-cash) for the Big 3 and Accenture100.080.0Core ROAE is highest for Infosys(%)60.040.020.00.0Infosys TCS Wipro AccentureFY07 FY08 FY09Source: Company, Edelweiss researchOur analysis suggests that ROAE is a weak factor at best in shoring up valuations (seetable 9) provided ROAE (ex-cash) is above a respectable benchmark (say, 35-40%). Our base case steady-state ROAE (starting FY16) for Infosys is 50% (excash,Infosys’ return on average equity for a five-year period of FY04-09 standsat 65-70%). The impact of an increase of steady-state ROAE by 15 percentagepoints to 65% does note beneficially affect valuations if growth dips.Table 9: It may be better to judiciously compromise return ratios in favor of growthUpside to our base-caseFY11E-16E earnings CAGRof 13%Steady-state ROAE (ex-cash)0.0% 25% 30% 35% 40% 45% 50% 55% 60% 65%-5% (26.4) (23.0) (20.5) (18.6) (17.1) (15.9) (14.9) (14.1) (13.4)-3% (21.9) (17.9) (15.1) (12.9) (11.2) (9.9) (8.7) (7.8) (7.0)-1% (17.0) (12.6) (9.3) (6.9) (5.0) (3.4) (2.1) (1.0) (0.1)0% (14.5) (9.7) (6.3) (3.7) (1.7) 0.0 1.4 2.5 3.51% (11.8) (6.8) (3.2) (0.4) 1.8 3.5 5.0 6.2 7.23% (6.3) (0.7) 3.4 6.5 8.9 10.9 12.5 13.9 15.15% (0.5) 5.8 10.4 13.8 16.6 18.8 20.6 22.2 23.5Source: Edelweiss researchEdelweiss Securities Limited 37

Information TechnologyDropping ROAE for growth willexpand valuations for InfosysThe conclusion for Indian IT, in particular for Infosys, is: So long as ROAE remainsabove a comfortable benchmark (say 35-40%), operating at current ROAE (ex-cash) at65-70% as Infosys currently does only adds rather moderately to intrinsic value. It willbe judicious to trade off in favor of growth at the expense of lowering operating marginsand ROCE. If Infosys can drive greater EPS growth per year through FY11-16 by 3-4percentage points than our base case assumption of 13% (FY11-16E earnings CAGR),through lowering ROAEs by 10-15% per year, intrinsic value increases by ~10%.Admittedly, this exercise is theoretical, but the message is important.Conclusion: Dropping ROAE by 10-15% to unlock a higher, compounded growth spiralof 3-4 percentage points per year through the next five years is beneficial for Infosys.The big message: There is great option value embedded in favor of growth that IndianIT companies (notably Infosys) have in current ROAEs/operating margins. Above all, it isa mindset change that Infosys will have to conquer. An acquisition strategy that dilutesmetrics over the long term within an acceptable band, but propels trajectory of annualgrowth to a higher level (by even 3-4% per year) is beneficial for shareholders in thelong run. Tweaking the balance sheet and operating margins in favor of better operatingmetrics and return ratios yields diminishing returns beyond a point as our analysisconclusively proves.Pent-up opportunity versus secular opportunityFY11 could see significant growth (over FY10) largely as pent-up and tacticalopportunities are unleashed and serviced without fresh hiring (as current utilisation iswell below optimal). These are three-four quarters games, in our view, but it becomestempting to extrapolate this to FY12 and beyond. Growth in FY12 will necessarily bedriven by a secular improvement in the demand environment and more important, theability of the Big 3 to exploit the spaces/niches of value opportunity. This requiresheightened investment in specialists and knowledge.Growth versus margin paradoxof Infosys to be morepronounced nowAt this point, we believe that while such longer-term revenue opportunitiespresent themselves (such as healthcare, BPO, emerging markets, and publicsector), lower returns in the market from such areas may not translatecommensurately into profitability. The trade-off of revenue growth versus margins—an old debate that particularly surrounds Infosys—is likely to come to the fore and bepronounced. As we prove and believe, companies should go with growth at acceptablemargins in this debate. More important, they may have to redefine their benchmark ofacceptable margins as Infosys may do in India.38 Edelweiss Securities Limited

Five Financial and Valuation TruthsFig. 3: When will risk in current valuations manifest itself?EPS growth in FY11 is robustSecular growthPent-upgrowthinFY11Evaluating current valuation riskSustain throughFY12 and beyondGrowth does notsustain to the samedegree throughFY12 and beyondNo risk in currentvaluationsRisk in current valuationwill manifestdown the roadSource: Edelweiss researchCase study: How much valuable can Infosys get in replicating Accenture?We model in sustained 15% revenue CAGR (in USD) through FY10-20 by end ofwhich, Infosys’ revenues will be close to USD 20 bn (ex-acquisitions). We noteAccenture was growing at close to 12-13% through FY04-07.This is an aggressive revenue growth assumption, in our view, as Indian IT does notaddress as large a market as Accenture does yet. While there is considerable andgrowing intersection between offshore services of both Accenture and Infosys, thereare several areas related to specialist consulting, system integration, corporate risk,performance management, vertical groups such as resources and the public sector,etc. which Indian peers do not address or address meaningfully (fig 4). The premiseis that business models of Infosys and its peers will continue to mature goingforwardaswell.Fig. 4: Accenture has vertical and consulting islands of exclusivity where the Big 3 are not presentIndian ITAccenture’s island of exclusivityVerticalConsulting-Publicservices-Strategy- Resources*- Corporate performance management- Talent performance management- Process and innovation performance- Business analyticsSource: Company, Edelweiss researchNote: *Infosys has presence in the resources segmentWe believe it will be difficult for Infosys to grow ahead of the industry on asustainable basis (industry growth forecast by Nasscom-Mckinsey to be 13-14%through FY20), unless it makes some margin compromises.Edelweiss Securities Limited 39

Information TechnologyAccenture’s current EBITDA margins stand at 18-19% (before depreciation and stockamortisation). We reflect our prediction in our assumptions of EBITDA decline to 23-24% from the current 32% for Infosys. We believe the gap in operating marginsbetween the two should remain (even if it narrows from the current level) for thefollowing reasons:(a) Infosys is not likely to replicate Accenture’s partner-heavy sales structure, whichwill keep its S&M low relative to Accenture (though higher than it is for itselftoday).(b) Infosys’ primary centre of gravity is India, even though there will likely beparallel smaller centers of gravity globally.(c)Credible non-linearity from Infosys should provide a cushion of 300-400bps (seetable 10).A steady-state, perpetual-growth multiple would be close to 15x by our valuedriverformula (P/E = (1-g/ROAE)/(CoE-g). As an added check, the median P/Emultiple for Accenture in normal pres-slowdown years was 15-16x. Thus, webelieve that Infosys’ longer-term multiple should track this band as it reachesAccenture’s current size.Table 10: Theoretical steady-state multiple should be ~15xg(%) 6.0CoE (%) 12.0ROAE (%) 50.0Implied Steady state multiple14.7 xFrom the formula(1-g/ROAE)/(CoE-g)Source: Edelweiss researchApplying this multiple to Infosys’ estimated profits in the year when Infosysapproaches Accenture’s current size, we arrive at a fair market cap of USD 50-55 bnby 2020, almost 2.2-2.4x that of Accenture’s current (this represents a 5-6%CAGR of stock return through the next 10 years).Chart 22: Infosys’ implied return to shareholders replicating AccentureImplied CAGR stock return of mid single digit (5-6%) in making this transition(EBITDA margin (%))32 Infosys (today)Infosys (in 2020)2418 Accenture (today)4.6 20Revenues (USD bn)Source: Edelweiss research40 Edelweiss Securities Limited

Five Financial and Valuation TruthsTo be sure, uncertainties about assumptions and judgments increase as we lookfurther, but this back-of-the-en velope exercise tells us that:(a) Infosys will create value by replicating Accenture’s business model only if itmanages much higher margins that Accenture operates at today (at least 500-600bps higher). Such a scenario in the absence of discretionary pricing power ofthe past is possible only with a relentless non-linear agenda.(b) Given capacity for growth and margin defence of the Big 3, we still see longtermstock returns (%) in slightly above mid-single digits. In our view, thisshould not be seen as a negative, but as a consequence of the natural law oflarge numbers. Also, as Infosys scales up further, it will be seen more as aninstitutional holding across many more investor types and sets. Returnexpectations from institutional holdings are typically moderate.(c)The impact of an additional 1.5% of compounded growth. If Infosys isable to lock in an additional 1.5 percentage point in annual revenue growth from15% to 16.5% through FY10-20 even at the cost of a further 200-250bps tomargins (EBITDA margins of 21-22% in FY20E versus base-case of 24%), itwould still be a better outcome for shareholders, increasing implied compoundedannual returns by nearly 1 percentage point through a sustained period.Edelweiss Securities Limited 41

Information TechnologyPricing: How Can One Establish Premium?What has determined pricing in the past? We believe there have been six factors:• Demonstrated or demonstrable domain or technology leadership.Comment: Today, this is undiffere ntiated among the Big 3.Six factors that have determinedpricing premium• Contract signed at what stage in the evolution of the IT industry, company (e.g. Infosyssigning the BT contract and BT strongly ramping up through FY06-08).Comment: Such differences will narrow going forward. Right place at the right time andat the right price will be arbitraged away as competitive intelligence picks up. Today,Infosys enjoys a slight pricing premium on the strength of its presence in ContinentalEurope.• Competitive dynamics or the lack of it.Comment: With rapid offshore maturity of the business model of Accenture and IBM,the room to demand pricing premium has got squeezed relative to the previousdownturn when the MNC incumbents did not have a competitive India presence.• Service mix and contribution of value-added service lines.Comment: Among the Big 3, Infosys enjoyed a pricing premium as it was early ininvesting and reaping fruits in enterprise solutions. However, over time, peers have builtcomparable strength in higher-value service lines, thus diminishing the premium. Today,all three derive over half of their revenues from non-ADM service lines.• Areas of specialisation within a client.Comment: Certain premiums could depend on special knowledge of technology,geography, domain, or the client’s portfolio , within the pie distributed (e.g. businessprocess optimisation and integration); such areas of specialisation constitute a smallpercentage of revenues.Sometimes size of the revenue pie with a vendor could be a bargaining tool for theservice provider to command pricing power. Aware of this, clients generally diversifyacross service providers to reduce vendor dependency. It will be difficult to have anunfettered run on a single account if capability exists elsewhere.• Governance, relationship, brand and trust.Comment: For the tier-1 vendors, this is a hygiene factor as all three rank high on thisparameter.Much has been said about Infosys’ ability to manage pricing premium through theenvironment. It is a result of several things that we discuss below:Location based low competitivepressure and service mix haveyielded pricing premium forInfosys(a) Location based and sub-vertical based premium: Infosys derives pricing premium inthose clients that have not been largely penetrated by the rest of its competition. Inmanufacturing and retail & utilities, where there is less of an overlap between its clientset and that of its offshore peers, it enjoys higher-than-company average pricing. Also,Infosys’ penetration in Continental Europe has helped it beat price commoditisation tosome extent.However, in the absence of proprietary solutions and offerings that aredistinctive, it remains to be seen for how long such geography-based premiumsdue to lower penetration might endure. Other players will sooner or later penetratesuch geographies. From our conversations, we gather that a significant flattening of pricecurve in the BFS sector has already taken place with this being the most penetrated42 Edelweiss Securities Limited

Pricing: How Can One Establish Premium?segment among the Big 3 and Cognizant. Our view is that location-based pricingpremium is likely to be short-lived relative to expertise-based premium. This is a twothreeyear game to play and, hence, the onus is on companies to find new sub-verticalsor geographies of lesser penetration to keep the pricing advantage intact. We find thatwhen catch-up takes place, and two or more top-tier companies are present in a client, itis difficult for one to get a premium over the other, unless there are special skillsinvolved.Consulting practice hasinfluenced client perception forInfosys(b) Consulting and enterprise solutions over 2003-08: Even if Infosys’ consulting hasfallen short of creating the expected impact, it has played its role in influencing clientperception of Infosys, clearly attempting to make the transition from being techsolutionsfocused to business outcomes based (via transformational and process reengineering).Sometimes, perception can also drive client billing.To Infosys’ credit, it invested early in higher-value enterprise solutions (mainly Oracleimplementations); but, as peers (TCS, Wipro and others) closed the gap, pricingpremium narrowed.Brand may not necessarily fetchpremium pricing in B2BbusinessesDoes brand fetch pricing power? Infosys has positioned itself consciously as a brandover the years. Is a superior brand helpful in fetching superior pricing, going forward?We think not. Accenture has an unrivalled brand in consulting and system integration,but this has not stopped clients from chipping away at their engagements in consulting.Indeed, if anything, Accenture’s quarterly results in 2009 have shown that clients do notnecessarily revert to a strong brand in a tough economic climate. Brand is perhapsuseful to establish pricing differentiation and extended relationships (whichtend to be fickle) in B2C businesses (and in B2C contexts).The strength of brand is unlikely to play out in a scenario where technologydifferentiation among the Big 3 is subtle, if it exists at all. The tough economicenvironment has shown clients that when it comes to processes, quality, on-timedelivery and TCO-based value propositions, the Big 3 are hardly different from oneanother. These attributes over time have been rendered table-stakes for the client, thusmaking it difficult for any one offshore service provider to obtain sustainable premiumpricing.Edelweiss Securities Limited 43

Information TechnologyFig 5: Pricing premium obtained only in a small portion of overall portfolioPricingValue-addition pricingPricing based on specificgeography/sub-vertical focusPricing by commondelivery capabilityThemes: Integration,business processconsulting/transformation,bundling, outcome-basedGeographic premiums e.g.(Infosys in Continental Europe)couldbearbitragedasotherscatchup;premium because of sub-vertical/specific industry focusis relatively more enduringVendor 1Vendor 2Vendor 3Vendor 4Vendor 5Discretionary pricingthat enduresUndifferentiated pricing;volume is the moreimportant determinant(

Pricing: How Can One Establish Premium?IBM regained pricing power dueto its value-added integratorrolebundling enables the Big 3 to avoid direct services and price comparisons.Transformation engagements incorporating a unified, bundled strategy, discretionarypricing to the service provider as the integrated solution (and not the price) is thefocus.Not for nothing did IBM regained pricing power and along with it the control of thecustomer when despite cries for its break-up, it decided to keep itself intact andcontinued to play the role of a value-added integrator of all elements (hardware,software, services).TCS and Wipro have made earlyprogress in transforming theengagement model to outcomebased(b) Transforming the engagement model to outcome-based: Such a modelbecomes worthwhile and fetches pricing premium only after set-up and transitionphases of the engagement (or project). Here, the service provider changes theterms of the engagement from T&M/fixed price basis to pricing on businessoutcomes (going well beyond output that could be defined more narrowly as thetotal cost of ownership or TCO). The power of pricing with compounding marginskicks in only after a certain threshold is crossed and when companies are past theirinitial failures and can look to increased probability of success in making this modelwork. This requires players to work with a different risk-reward profile from whatthey have been used to during 2004-08.From our conversations/interviews and deals announced, we gather that TCS andWipro have made early progress. Infosys has been relatively guarded in adoptingsuch models (also referred to as level-3 linearity in the section, Non-linearity: Sterntest of commitment).(c)Be the go-to authority for a business process/vertical: To some extent,Infosys is attempting to position itself as an F&A powerhouse. TCS, with itsacquisition of the Citi BPO captive (CGSL), has accelerated its positioning. However,unless TCS/Infosys can truly re-engineer clients’ existing finance and accounting(F&A) process, consolidate and automate to an over-arching platform, it is hard tosee how they can get away from the T&M/input-based mentality.Specialisation in a businessprocess/vertical will yieldpremium pricingThis requires skillsets spanning process re-design and re-engineering, demandanalysis through extensive use of analytics, consolidation, systems replacement andautomation and finally a differentiated pricing model. Genpact has found it difficultto create such a proprietary platform despite its scale in F&A largely because itrelatively lacks technology automation skills. As our section, To bulge or not tobulge? explains, companies that have built proprietary, go-to positions in keybusiness processes enjoy stable revenue lines, high profit margins and highervaluations. For example, ADP in payroll processing, Exult in HR, amongst others.None among the Big 3 (TCS, Infosys and Wipro) have marked themselves out in thisarea. Again, TCS has attempted to buy this capability in insurance through theacquisition of the insurance BPO platform from the Pearl Group.Of the three factors that we have laid out above, we believe that companies havebetter chance at the first two. Integration is a longer-term theme, while play onworking with outcome-based engagement models is a two-year game for earlyadvantage.Edelweiss Securities Limited 45

Information TechnologyThe IT Enterprise of TomorrowThe model of the IT enterprise of tomorrow cannot be aspirational, it will have to be a realityif Indian IT has to come out of the current downturn to play a much more enhanced role intimes to come. In our view, a company that delays or bypasses some of the most essentialelements of the model that we discuss here, run the risk of being overtaken and relegated bypeers willing to invest in making the transition to broad-based differentiation.Fig. 6: Nobody in the magic quadrant yet among the Big 4 (Infosys, TCS, Wipro, and Cognizant)Competitive advantageLower costDifferentiationTarget marketBroad targetNarrow targetCost LeadershipTCS (fixed price, solution accelerators)Cost FocusWipro (6 sigma, lean mfg.)Infosys (Pyramid)Sustained broad-based differentiation:Nobody yet (aspirational positioning)Differentiation FocusCognizant (Healthcare, S&M focus)Source: Edelweiss researchThe key elements of our model include:• Value chain optimisation at every point of the vertical followed by integration.• Irrelevance of location to competitive advantage.Essential elements of our modelof tomorrow’s IT enterprise• A much greater degree of co-operation and working flexibility in working with partners inthe ecosystem.• Organisational flexibility to manage a hybrid of business models and multiple growthagendas.• Sharper customer segmentation practices.• A partnership-driven sales model.• Greater branding of specific offerings as opposed to general, undifferentiated companywidebranding.• Protecting the core while still breaking new ground.• Aggressive pursuit of tactical opportunities to build long-term relationships.• Sub-verticalisation, ongoing employee skill upgradation accompanied by reversal of theemployee pyramid.46 Edelweiss Securities Limited

The IT Enterprise of TomorrowFig. 7: Highlights of our vision of Indian IT company of tomorrowAggressive pursuitof tacticalopportunitiesfor long term gainsSpecific brandingversus undifferentiated,generic brandingSub-verticalizationand re-trainingin an era of specialistsValue chainoptimization/integrationThe IT Enterpriseof tomorrowIrrelevance oflocation tocompetitiveadvantagePartnership-intensivein view of emergingtechnologies and othersProtectingcore whilebreakingnew groundPartnershipdrivensalesmodelSharpercustomersegmentationpracticesOrganisationalflexibility to managemultiple businessmodels and growthagendasSource: Edelweiss researchNo new service line to powergrowth going forwardValue chain optimisation at every point of vertical followed by integrationThe days of new service lines boosting growth are perhaps behind us. The industry hasuncovered a stack of service lines over 2002-08 that hardly existed during the previousdownturn (viz., BPO, infrastructure management, enterprise solutions or packageimplementation, testing, system integration). But now, with no new service line in sight(see IDC classification of service lines in table 11), there is unlikely to be a single serviceline that powers growth for the Big 3 (more so given their revenue base today).Table 11: No new service line in sight for the Big 4(USD bn) 2006 2007 2008 2009 2010 2011 2012IT Outsourcing (ITO) 170 197 211 223 238 256 275The big 3present (Y/N)IS outsourcing 92 100 106 110 116 122 129 YNetwork & desktop outsourcing 33 39 41 44 47 50 55 YApplication management 23 31 34 36 40 43 47 YHosted application management 3 4 5 6 7 8 9 YHosting infrastructure services 19 23 25 27 29 32 35 YProject based services 160 187 196 202 210 220 231IT consulting 26 30 31 31 32 33 35 YSystems integration 81 97 102 105 109 114 120 YNetwork consulting and integration 30 30 32 34 35 37 39 YCustom application development 24 30 31 32 33 35 36 YSupport & training 137 144 149 153 157 161 166Hardware deploy and support 54 58 60 61 62 63 64 #Software deploy and support 60 61 64 66 69 71 74 NIT education and training 22 24 25 26 26 27 27 NTotal 467 528 557 578 605 636 672Source: IDC, Edelweiss researchNote: # Infosys and Cognizant not present; standalone low margin businessEdelweiss Securities Limited 47

Information TechnologyA standalone offering is likely to commoditise and one way to build differentiation andboost client lock-in with the same set of service lines is to bundle/integrate them (seemore on this in our appendix, To bulge or not to bulge).Bundled/ integrated offeringswill ensure increasing CXOinvolvementThe merits of bundling/integration apart from opening up the market for the Big 3 alsoinclude the ability to address all decision-makers in the organisation. Yesterday it wasthe CIO (through tech spending) and the CFO (BPO), today it is increasingly the COO(through unified IT/BPO/IM offerings) and tomorrow the norm of interaction may well bethe CEO (who is concerned with transformation agendas and the role of IT therein) andthe CMO (chief marketing officer) to whom a combined analytics/consulting/BPO offeringis likely to be attractive. As we discuss in our section, Pricing: How can one establishpremium?, bundling helps avoid price traps because it distinguishes the service providerof tomorrow as a solution and system provider, removing competition from the individualservice line level to the systems level.Consulting has yielded only limited gains. Also, this is a better opportunity thanconsulting to create client lock-in at elevated levels because others (notably Accenture)have already taken the high ground in consulting and it will be difficult for the Big 3 tomake a globally recognizable mark in this area, in our view.Thus, for several reasons, bundling or integration of these service lines represents thenext big opportunity, in our view. Today, revenues from bundling/integration are in lowto-midsingle digits as a percentage of services revenues. Over the next five years, itcould account for as much as 25-30% of revenues. In course of time, we expect the Big3 to report on a regular basis the contribution of integrated or multi-servicesolutions/services to their revenues (as %).Playing in every element of the value chain of the vertical is key to establishing acredible integration strategy. A good example of an integrated telco solution would be“telco-in-a-box” that can be taken as a ready-to-deploy solution for operators. Such asolution developed by Wipro and TCS for smaller operators in emerging markets claimsto comprehensively meet the needs of telcos going beyond network deployment andsupport, unique platforms for collection, billing, aggregation to revenue management,and fraud analytics.Current offshore mindset will berendered obsoleteIrrelevance of location to competitive advantageOpportunities of value chain optimisation may reside locally away from offshore centres.Also, higher-value, closer-to-the customer components of the total integration solutionrequire to be locally addressed for reasons of availability of requisite skill-sets and/ormindset of the customer. For example, the Big 3 will have to drive interventions in ageography-agnostic manner (e.g., extended supply chain managementsolutions). The current offshore mindset will be rendered obsolete.Pricing premium will be location neutral as expertise is location neutral. Customermindset is also an issue. Nowhere is this more evident than in penetrating the culturallystrong and somewhat closed Continental Europe. Much greater flexibility is needed toinvest in local delivery centres to service this geography (which includes local sharedservices as well such as local marketing, finance, HR, etc.). IBM in Germany is culturallyand nationally very different from IBM in the US.As this extends to new geographies, it is easier to understand why a typically 25-75model (by onsite:offshore effort that works for US/UK) may not work elsewhere. Overtime, as Indian IT firms develop breeding grounds for talent outside India, they will haveto learn how to manage the entire recruitment and training process on a mass scaleoutside India as opposed to selective local recruitment today. Such labour supply chains48 Edelweiss Securities Limited

The IT Enterprise of Tomorrowwill have to be globally, tightly integrated. Those that adopt the view that the Indialocation will continue to have the same workforce proportion in the future as today(30/70) will enjoy lower people costs. However, they will fail to develop the clearstrategic positioning across the integrated value chain of clients that are fundamental tolong-run profitability.Proprietary platforms could be apull factor for clientsBut a precursor to going global is how well the Big 3 have established proprietary modelsfor global talent management, knowledge management, distributed delivery and dynamicwork allocation with expertise taking precedence over location. Such a collaborativeplatform is typically web-enabled, say by using Web 2.0. Cognizant developed such aplatform Cognizant 2.0 to which incrementally all the new projects are migrating andon an increasing basis, the existing ones too. The use of the platform as a model forcollaborative product development served as a pull factor for Invensys which Cognizantbelieves helped it pull off the Invensys deal. Moreover, Cognizant can also explore thepossibility of opening this up to clients and alliance partners, creating an ecosystem ofshared development and implementation of high-value and high-impact engagements.Business mix to shift in favour ofnearshore deliveryWe believe within three-five years the traditional 25:75 (onsite:offshore) model of IndianIT will give way to 25:15:60 (onsite:near-shore:offshore). In the long term (beyond fiveyears), this is likely to be 50:50 (with onsite and near-shore effort likely to have a 50%share of the total effort pie). Over the medium term (FY10-13), such a transition shouldhave an adverse impact of 100-200 bps on gross margins (all else being the same).Today, TCS is ahead of Infosys/ Wipro in scale of global delivery and alignment, but it is anon-enduring advantage that can be closed by the two over 12-18 months.TCS and Infosys are underleveraged in the use ofpartnerships and alliancesGreater degree of co-operation, working flexibility with partnersThe Big 3, as of today, have leverage d partnerships largely for delivery andimplementations (e.g., clients of SAP/Oracle for packaged implementations). Inparticular, Infosys and TCS are under-leveraged in the use of partnerships/alliances. Onesmaller technology company mentioned how difficult it found the experience of trying tostitch an alliance with one of the Big 3. In the end, it went with Accenture—a muchlarger company and with much less fuss.“Co-partner with the small player” is a mindset that the Big 3 have to co-opt in theirworking (with the exception of Wipro). Newer technologies such as cloud computingthat all three have a stake in and are increasingly deploying resources andpriority are unlikely to take off unless a well-ingrained, partnership-intensiveapproach takes root in the ways of working of the Big 3. The COIN programme atTCS does well in identifying small-to-mid sized partners for joint innovation and plan-toexecutemodels across emerging technologies.“Do I have to myself operate and implement at every level of the value chain?”The answer is NO. Increasingly, the commodity, low-value offerings should be subcontractedto other tier 2/3 vendor partners. This is one of Wipro’s hallmarks ofoperating in the Indian market as we discuss in the section, Making a mark in India andemerging markets. Building a robust programme management office with an elaborateimplementation partner set-up is a non-trivial advantage. One such arrangement is amany-to-one setting (many partners attached to one company; more like a hub andspoke partnership model) (see fig 8).Edelweiss Securities Limited 49

Information TechnologyFig. 8: Different models of partnership depending on intimacy will emergeCompletely networked partnership model, very collaborativePartner 1Partner 3 Core entityPartner 2Hub and spoke model, less collaborativePartner 1Partner 3 Core entityPartner 2Source: Edelweiss researchAccenture’s alliances are fairlydiversified across categoriesunlike restrictive for Infosys andTCSAlliances and partnerships: Infosys has 19 alliances (as listed on its website) but onlyfour of them are unique to Infosys (who are not with Wipro, TCS, and Accenture) (seetable 12 for more details). Accenture has over 50 alliance partners listed on its websiteand we see a fair representation of nature of alliances across several categories—tech/R&D, go-to-market, augmentation of specific vertical solution sets, promoting nonlineardelivery through co-development of reusable tools/assets, specific co-developedenterprise offerings such as risk, productivity management, etc. It seems that Accenturetruly sees alliances/partnerships as a way to add value to the business model in manydistinctive ways besides implementation and go-to-market (see table 12).50 Edelweiss Securities Limited

The IT Enterprise of TomorrowTable 12: Infosys has the fewest number of alliances (both non-exclusive and exclusive)Accenture TCS Infosys Wipro CognizantAcxiom Adobe Mantas Actuate ChordiantAlcatel Lucent Amdocs Netegrity Inc. Amber Point SwordCiboodleAprimo Cordys Siemens Archer ClearStory systemsAspen Technology Mercury Interactive Wavecom ARM EDIFECSAsset Control Red Hat Artisan EMC documentumAvanade Autonomy ENDECACallidus Software Axiom iCMGCalypso Blockade ILOGCitrix Systems Blue Titan INGRESSource: Company, Edelweiss researchNote: Accenture, Cognizant and Wipro have more than 25 exclusive alliances, only some of them shown above in tableIn contrast, Infosys and TCS have used alliances in a rather self-limiting manner, largelyfor go-to-market and implementation. This has certain drawbacks, more so when otherpeers craft similar alliances of a non-exclusive/competing nature. For example, Cognizanthas recently initiated a global vendor partnership alliance with SAP, which could render theBig 3 alliance status with SAP less exclusive. Cognizant can leverage this alliance better asa result of its superior go-to-market strategy. It is also possible that proprietarycollaborative platforms such as Cognizant 2.0 makes co-operation within the ecosystemwith alliance and venture partners and others much more effective and seamless.Table 13: The Big 4 do not tick all (or most) checkboxes yet (illustrative only)Do you use optimally alliances for:a) Implementation ✓b) Go-to-market ✓c) R&D/Technology Xd) Augmentation of domain capability Xe) Non-linearity Xf) Corporate performance improvement (business process transformation) ✓g) Customization for specific markets XDo you havea) Collaborative platform to manage interaction? Xb) An engagement model for extended collaboration/alliances? XSource: Company, Edelweiss researchOne company among the Big 3 has stated that its model of the future will envisage atrifurcation of implementation:(a) One-half of the work will be done in-house.(b) One-quarter managed by the partner-alliance grid.(c)One-quarter managed by co-development with the customers/clients.All the three elements should be managed by a web-based collaborative platformthat allows multi-thread collaboration far beyond the boundaries of the enterprise.Vertical alignment is critical toclient miningFlexibility to manage hybrid business models and multiple growth agendasCognizant’s agility relative to the Big 3 partly stems from the fact that it had alreadyorganized itself along verticals (by both sales and delivery) way back in 1998-99 when itwas just four years into existence. Its vertical focus is creditable. Even its consultingpractice is aligned along verticals with only a small, niche group outside the 1,800consultants acting as a common transmission belt to the vertical units, i.e., those withEdelweiss Securities Limited 51

Information Technologyspecialist skill sets such as portfolio management rationalisation and high-endtransformation.TCS today has more P&L ownersthan beforeToday, on the face of it, all the Big 3 align th eir strategy by vertical markets in their goto-marketapproaches. They have moved to customer-centric structures (vertical) andhence, there is similarity. TCS, which has struggled with geographic (or centre-based)P&Ls, undertook a difficult internal re-organisation through FY08 to position itself alongcustomer and vertical lines. There are many more empowered P&L owners today in TCSthan before. Also, it has become easier to view multiple opportunities to sell into acustomer from an integrated standpoint than before. What we find impressive in therevamped TCS structure is a separate organisational carve-out of the Strategic InitiativesGroup which ensures the complete separation of new initiatives (e.g., the SMB segmentand BPO platform) from the parent group. This is apt because the SMB segment has itsown rhythm and pulse, which is almost completely disconnected with that of thetraditional approach towards larger enterprise clients (Fortune 1000 or Global 1000).However, the evolution of the structure to accommodate growing priorities can presentother complexities, e.g., the Infosys structure (see fig 9) shows that the earlier verticalheads are now in charge of a horizontal business unit or additional organisation function(such as sales & marketing) as well. This means that they have to simultaneously playthe role of ensuring adoption of the service line (of which they are in charge) acrossother verticals, while at the same time managing their own vertical as they have beendoing over time. It could be an uneasy dualism. Consulting at Infosys (like in Accenture)is a separate business unit and is not integrated into the respective vertical units as it isin Cognizant’s case.Fig. 9: Infosys org structure shows dual responsibilities for senior managersChief Operating Officer&DirectorBanking &Capital Markets (BCM)Independent ValidationSolutions (IVS)Strategic Global SourcingConsulting Solutions (CS)Enterprise Solutions (ES)India Business Unit (IND)Manufacturing (MFG)Insurance, Healthcare&LifeSciences(IHL)Product Engineering (PE)Energy, Utilities &Services (EUS)Product Lifecycle andEngineering Solutions (PLES)Systems Integration (SI)Communications, Media& Entertainment (CME)Retail, Consumer PackagedGoods&Logistics(RETL)Global Sales,Alliances & MarketingInfrastructureManagement Services (IMS)New Markets &Services (NMS)Source: Company52 Edelweiss Securities Limited

The IT Enterprise of TomorrowFlexibility and autonomy arecritical parts of tommorow’s ITenterpriseMore than anything, the organization structure of tomorrow should ensure maximumflexibility and autonomy to accommodate the upheavals of tomorrow (non-linear growth,multi-vertical solutions, partnerships & joint ventures, and at the extreme a portfolio ofacquisitions). For example, does the company have a crack unit that specializes insynergy realisation from acquisitions? Sometimes, organizational flexibility kicksin only from some previous failures as Wipro is trying to learn from its history ofacquisitions. Infosys, with its relative absence of acquisition history, is yet to be tested onthis score. Also, with verticalised set ups today to ensure customer-centricity what are thestructures to ensure the creation and sales of solutions that cut across verticals. It seemsparadoxical but as the Big 3 become larger, the need to find reconciliation betweencentralization and de-centralization becomes greater. The IT company of tomorrow is ahybrid company that plays a balancing act to get the best combination of responsiveness(customer-centricity) and leverage (shared services and back-office).Cognizant has an interesting way to view its organization structure of the future—envisage positioning in the future and see how growth initiatives must play out. Shouldthe ownership of those initiatives (e.g., acquisitions/new markets/new solutions) restwitht he vertical or with any specific horizontal practice or any other over-archingcoordinating group? Based on this analysis, build the structure today to accommodatesuch flexibilities with minimal disruption (in a manner of speaking, retropolation from thefuture to the present against extrapolation from the present into the future).The Big 3 have crafted current, medium-term and longer-range objectives for most (ifnot all) business units in the structure (see fig 10).Fig. 10: Managing for multiple growth agendas across time horizonsRisksExample:Current ADMmodel1 2 3Low45Example:India6Example:Saas-enabledSMB7 8 9HighBusinessprocessconsulting1yearMeet current earningsexpectationsExtend and defendcore businessOutcomebasedprojects2-3 yearsCreate mediumtermgrowthOutcome basedrelationships(beyond projects)3+ years TimelineGenerate portfolio ofhigh-return optionsCreate long-term growthSource: Nasscom, Edelweiss researchEdelweiss Securities Limited 53

Information TechnologyIt is important to align incentives of key business unit heads in accordance with theseobjectives in conjunction. For example, a unit that met its near-term goals but did notshow minimum progress on longer-term initiatives should be judged as only partlysuccessful and incentives of senior leaders in that unit be accordingly decided. Wiprohas already moved to such a compensation structure.Strategy of the past was toaddress uncontested subsegments…Sharper customer segmentation practicesOver the years, Infosys has distinguished itself by the ability to choose the right set ofcustomers. Its sales strategy targets micro-verticals within a major vertical (say miningwithin energy) that are less penetrated by offshore peers where it can establish headwaytill others catch up. This has been the success story of Infosys’ retail vertical over thepast decade, wherein it established relationships with the who’s who in the retailingworld. More recently, it has also been successful with this strategy in manufacturingwhere it leveraged its early leadership in enterprise solutions for manufacturing clients inEurope and in resources where it has invested ahead of the industry.Wipro has also followed sound customer segmentation principles in growing the financialservices practice post the previous downturn (in 2002) when its presence in financialservices was negligible. It initially targeted clients in insurance (less in the BFS) outsidethe US (primarily in Europe) and in insurance where peers (Infosys/TCS) were lesspresent. It used BPO as an entry strategy in many of its larger BFSI accounts.… whereas, the current one is tooffer end-to-end servicesOf late, TCS has broken ground in retail on the back of a credible customised end-to-endoffering specially targeted at mid-sized retailers yet to adopt offshoring, yet willing toembrace it with a comprehensive integrated offering as opposed to a tentative, smallscale application development starter.Wipro is now assessing which of its IT clients in the future may be responsive to its pitchfor significant energy savings afforded by its green IT offerings. This is something to bewatched out for, but segmenting customers in old-economy industries according toenergy-intensity is a good first step. Our view is that Wipro and TCS are gettingincreasingly smart about customer segmentation and closing the gap with Infosys.Table 14: Recent select success of several customer segmentation by the Big 4Company Geography SegmentInfosys Continental Europe Telecom service provider & manufacturingWipro Europe Insurance/BPOTCS US/Europe Retailer (total outsourcing for mid-sized retailers)Cognizant Middle East/ Europe Manufacturing, retailSource: Company, Edelweiss researchNote: * Segmentation tomorrow based on attacking costs outside of IT and G&ACustomer segmentation does not stop with client selection and market penetration.Equally important, it determines how the Big 3 assess and grade costs and efforts-toservefor clients. All clients do not need the same level of service levels. A sensibleservice level reduction strategy for clients is necessary, especially in commodity offerings.Clients for commodity services need servicing along the lines of “just being good enough.”Not all clients need platinum servicing.To be sure, astute customer segmentation does not by itself contribute to strong clientrelationships. It is necessary and can make an initial difference but hardly sufficient.54 Edelweiss Securities Limited

The IT Enterprise of TomorrowA partnership-driven sales modelAccenture’s partner-driven sales model is the ultimate form of client engagement. Itspartner-driven market approach facilitates relationships with C-level decision-makerscreating powerful barriers to entry that others will find hard to replicate.Partnership driven sales modelcould be used to create entrybarriersToday, the common sales structure of the Bi g 3 is typically a three-tiered structure—overall vertical head, client director in overall charge of client relationship, and multipleaccount managers handling different facets of the relationship. What’s missing is asupreme partner who the client can look to as a trusted advisor.The profile of such a partner is not easy to find—typically he has spent decades inconsulting at the partner level or has hard-to-match industry experience with significantP&L responsibility in a company. Such a partner engages with the client at the highestlevels and envisages the transformational journey it must take in the future for the clientthat fits with the client’s competitive positioning.Recently, Cognizant has identified a few high-potential strategic accounts that it can turbocharge and take to another level by investing in them. These are expensive investmentsthat must be made. To illustrate, if Infosys were to cover a mere 5% of its accounts bypartner profiles, we estimate the impact on S&M at 0.5% of revenues (50 bps).Protecting core while still breaking new groundOne of the great challenges for enterprises is to protect their hard-won leadershipposition in segments while still breaking new ground. On analysing the recent financialperformance of the Big 3, we observe that:(a) Infosys has lost market share in retail, its flagship vertical in the past, with TCS,Wipro and Cognizant gaining. The same is true in financial services and telecom(largely BT led). On the positive side, the company has consistently gained strengthin manufacturing and in energy and utilities.(b) TCS’ position in financial services, telecom, and manufacturing has weakened, but itis breaking new ground in retail and life sciences.(c)Wipro has managed relatively well to catch up in financial services (opposed to trendin this segment of the other two) and increasing traction in retail and healthcare. Itstill has leadership position in utilities, though Infosys has been closing the gap of late.Table 15: Who has strengthened/retained existing position?(a) Across verticals and geographiesTCSInfosys(+) Retail, America (+) Mfg, Retail, & Utilities(-) Telecom, BFSI, APAC+ROW (-) BFSI, TelecomVertical and geographicalanalysis of Big 3WiproCognizant(+) BFSI, Mfg, India and MiddleEast(+) BFSI, Healthcare, Retail andmanufacturing and the US(-) None (-) None(b) VerticallyBFSIManufacturing(+) Cognizant, Wipro (+) Infosys, Cognizant, Wipro(-) Infosys (-) NoneRetailHealthcare(+) TCS, Infosys, Cognizant (+) Cognizant(-) None (-) NoneSource: Company, Edelweiss researchEdelweiss Securities Limited 55

Information TechnologyOf the Big 3, Wipro is doing better at not losing momentum in its important verticals inthe enterprise division (financial services, utilities, and retail) while increasing traction inretail and healthcare. It has been dragged down by technology. Overall, Wipro ismanaging the balance.Cognizant clearly breakingground in new areasOf the four, Cognizant stands out in penetrating new markets and verticals whilestrengthening the core. The company has managed to improve market share and grow infinancial services and healthcare (on absolute dollar basis). The former is particularlycreditable given sector-specific difficulties and declines in run-rate exhibited by TCS andInfosys. It tells us that if Cognizant can manage to grow in a bedeviled sector, it must beenjoying pole position with some of its ex tremely troubled clients (HBOS, Wachovia, andIndy Mac). While it protects its core, its ability to ratchet up the growth engine is notmatched by the Big 3 in Indian IT. With Co gnizant, the probability of rewards of newinvestments is high. The following explains why:• Cognizant has managed to grow BPO/remote infrastructure management (RIM) toover 11-12% of revenues from virtually zero base over three to four years.• It has successfully ventured outside its traditional strengths (financial servicesandhealthcare,collectivelyaccountingfor70%ofrevenues)tofindaggressivegrowth in retail/manufacturing/logistics/transportation, which now account forover 17% of overall revenues.• Cognizant’s European revenues grew by 86% in 2007 and 58% in 2008, and itsproportion of European revenues grew from 12-13% to about 18-19% in justthe last couple of years. Likewise, for the June 2009 quarter, its revenuecontribution from outside the US/Europe grew 65% Y-o-Y. This is admittedly offa low base, but it highlights an important point that we have made-thecompany makes its investments work.To sum up, protecting the core while investing effectively elsewhere is a difficult dualityto demonstrate. Wipro has managed it better than Infosys/TCS, but Cognizant is theclear standout performer in its own league.Greater branding of specific offerings as opposed to general brandingIn the past, image promotion has advanced over specific product/service promotion. Oneof the reasons could be that the Big 3 have developed few proprietary solutions that theycan distinctively brand and take to market (Finacle of Infosys being one exception).Some of IBM’s most notable marketing messages revolve around landmark offerings andthemes such as e-business (IBM coined the term), on-demand computing, solutions for asmall planet or Green IT, as opposed to generic branding.Need to establish brand for specificofferings or themesInfosys views branding as a much more holistic exercise than the other two. Itdoes not surprise us that almost all references to brand in TCS’ FY09 annual reportpertain to two aspects: (a) ‘Experience Certainty’ positioning or the delivery; and (b)references to the overall Tata brand. In our view, TCS primarily views itself as a deliveryorientedbrand. Infosys, on the other hand, takes a much more holistic view of itsbranding paradigm. In fact, the word ‘brand’ or ‘branding’ appears over 70 times inInfosys’ FY09 annual report; about 40 of these references appear in the page on brandvaluation versus 13 in the TCS annual report.With specific reference to brand, Infosys’ FY09 annual report mentions brand as a trustmark- the promise of quality and authenticity that clients rely on, and not just a logo ortrademark. In addition, the company also believes that better brand enjoys financialpremium that a buyer is ready to pay over other less worthy brands.56 Edelweiss Securities Limited

The IT Enterprise of TomorrowAmong other things, Infosys defines brand as the composite outcome of:(a) Rankings on surveys of performance, capabilities and reputation/governance.(b) Mention in publications of repute and prestige such as (Business Week, TheEconomist, The Times, Financial Times, Information Age, The Wall Street Journal,and The Banker).Infosys’ definition of brand(c) Association with the flat world theme and engaging in high-profile forums such asthe World Economic Forum.(c) Tie ups with world-class institutes in sponsoring award-winning IT innovations(Wharton Infosys Business Transformation Award).(d) Being able to enhance brand reach through launch of own channel on YouTube anduse of Twitter, SlideShare, and AdWords.(f)Participation in premier industry events such as Oracle Open World, Sapphire, andpartner sourcing summit.We, however, believe that in the current economic climate, such generalized eventassociatedbranding is less of a differentiator in gaining incremental market share. Theenvironment may be flattening the advantages of brand/branding in the absence oftechnological differentiation among the Big 3 in Indian IT.Fig. 11: Generic branding will have to give way to specific, theme-based brandingSub-brandingoffering 1Theme-based branding to bemore powerfulBrandingsubofferingsSub-brandingoffering 2Sub-brandingoffering 3UndifferentiatedbrandingDifferentiatedbrandingSub-brandingoffering 4ThemebasedbrandingIntegrationGreen ITSource: Edelweiss researchWhere could umbrella branding be useful in the absence of proprietary ortheme-based solutions? It could be useful in attracting talent but again ourintelligence suggests that Infosys does not necessarily enjoy a better slot in the campusthan TCS (engineering/technical) or Cognizant (MBA). Where we find umbrella brandingperhaps useful would be in the matter of alliances, in emerging markets where trust forlocal service providers is somewhat lacking and for the SMB segment for whom trust andtransparency are important.Branding should do more than communicate cost reduction and/or newtechnology roll-out propositions. Certainly, we see branding around strong themes toEdelweiss Securities Limited 57

Information Technologybe useful, e.g., customised offerings for emerging markets, marketing messages aroundservice integration could be credible for the Big 3 going forward. It is amazing howconsistent Accenture is in articulating business benefits to clients. In virtually all of itsmarketing and messaging, Accenture conveys its belief that its individual technologyexpertise matters less than the business value it provides. This message is consistent inits public filings, its product offerings, and its marketing material.Aggressive pursuit of tactical opportunities to build long-term relationshipsEvery downturn will throw up tactical opportunities that must be aggressively pursuedbecause the lead-in through such pursuits can create a platform for an enduringrelationship. The Big 3 (Wipro to a lesser extent) jumped aboard the financial servicesspace through the Y2K opportunity, a tactical opportunity that IBM deemed unnecessaryto address directly.Downturn has opened up severalopportunitiesThis downturn is no different—it has spawned opportunities in themes relating tocompliance, regulation, integration and risk management for several sectors such asBFSI, public sector, and healthcare. Some of them (like in healthcare) could be morelong term in nature while a few others may last three-four quarters. We believe thatfirms will do well to capitalise on short-term tactical spends. Cognizant has set up acrack team of consultants charged with surveying and grabbing opportunities in techspending emanating from corporations that received TARP funding. Apart from giving ashort-term boost to onsite revenues, such tactical moves may well sow the seeds for alonger-term fruitful relationship.Cognizant’s progress in Germanyis partly attributed to T-SystemsCognizant’s progress in Germany can be partly attributed to an alliance with T-Systemswhich is in the nature of a sub-contracting relationship to some extent. Infosys typicallywould stay away from such partnerships deeming them “not value-additive”. Cognizanthas reported that it has had direct access to many more clients in the notoriously toughand fragmented German market (T-Systems has the largest market share at 16% inGermany, Accenture is just 3.8% of the market, three of the top five players in Germanyare locals, see table 16).Table 16: IT services vendors by revenues, market share in GermanyVendor2007 2007 revenue(USD mn) share (%)T-Systems 5,317 15.9Siemens IT Solutions and Services 2,900 8.7IBM 2,550 7.6Accenture 1,284 3.8SAP 822 2.5Fiducia 818 2.5HP 816 2.4Atos Origin 761 2.3EDS 653 2.0Capgemini 634 1.9Source: Gartner (May 2008)T-Systems and Cognizant are crafting joint go-to-market strategies and have acquirednew clients jointly. Also, the alliance has introduced T-Systems to healthcare clients inthe US (courtesy Cognizant’s differentiated expertise in this segment) while Cognizantunderstands the telecom domain much better (Cognizant is less present in telecom whichis T-Systems’ mainstay). What began as a sub-contracting relationship and seemed58 Edelweiss Securities Limited

The IT Enterprise of Tomorrowmyopic at first is nowperspective.much more front-ended and collaborative from Cognizant’sDeveloping specialists and re-training the workforce will be more importantThe theme of sub-vertical specialisation is gaining prominence (e.g., within insurance, itis necessary to verticalise along life, property, casualty, and healthcare). Likewise, inretail, it has become essential to develop expertise in sub-segments such as hospitality,groceries, discounting retailers, luxury goods/fashion retailers, FMCG brands, etc.Theme of sub-verticalisation isgaining prominenceTomorrow is likely to be the age of engaging specialists (e.g., the use of consultantsfrom outside in innovative deal structuring; TCS is known to employ outsourcingconsultants in large deals). Career paths will become even more specialised not only bydomain expertise, but also by role (e.g., today there is clearly delineated role of solutionarchitect versus client advisor versus programme manager). We believe companies thatincrease the intensity of their training to groom and develop specialists in-house have amore sustainable model than merely hiring specialists per se as issues of culture fit ariseso often.It becomes necessary to retrain large segments of the workforce in newtechnologies/initiatives to redirect the skill profile. IBM has already established a 4,000strong division for its Business Analytics and Optimization Unit; this has beensubstantially done with retraining rather than hiring. It is instructive to note thatAccenture has trained nearly 20% of its workforce (over 30,000) professionals in SOAtechnology, ready to have them absorbed into projects within two years of identifyingSOA as a technology theme.Also, companies will spend more on getting a much larger proportion of their workforcetrained and certified externally (not internally) from well-regarded industry accreditationsattesting to domain strength (e.g. the Life Office Management Association orLOMA certification for life insurance). Cognizant believes that it has the highest numberof highest level LOMA certifications; almost all companies that have this certificationglobally (fifteen global category winners) are insurance companies, with Cognizant beingthe only technology company among them (source:http://www.loma.org/EdAchieveAwards.asp; Infosys is a regional category winner for thefirst time in Asia Pacific).Accenture spends >3x that ofInfosys on per capita trainingAccenture spends over USD 1 bn per annum on training and development (Infosys’training expenditure was USD 170 mn in FY09, much of which was on initial training offreshers on joining Infosys). On per capita basis, Accenture spends more than threetimes Infosys on training, despite its recruitment number being on the lower side relativeto Infosys. Also, much of the recruitment for Accenture in recent years has been in itslower costs centres, which puts in context the significance of its much higher per capitatraining expenses vis-à-vis Infosys (>3x).Accenture’s annual R&D expenditure of USD 400 mn is largely earmarked towards itsfour technology labs (in the US, India, and France), technology centres of excellence andits high performance group.Edelweiss Securities Limited 59

Information TechnologyChart 24: Accenture’s training expenses have risen twice as fast as revenues30,0005.024,0004.2(USD mn)18,00012,0003.42.6(%)6,0001.801.0FY03 FY04 FY05 FY06 FY07 FY08Revenues (USD bn) (LHS)Training as % of revenues (RHS)R&D spend as % of revenues (RHS)Source: Company, Edelweiss researchIncreasing spend on training &R&D critical to building scalable skillset modelThe Indian IT enterprise of tomorrow intensifies spending on training and R&D and doesnot resort to hiring specialists en masse per se in building a sustainable model.Retraining the workforce to embrace the changing order and catch inflection points is afar more difficult task than merely taking new hires through a set training programme(the latter generally tends to be the case in Indian IT).Aware of this imperative, in several cases, senior-most leaders get engaged in retraining/coaching.Wipro has instituted a consultant training academy in the US. Thesenior management at Infosys is engaged hands-on in the extensive re-training of thesales staff and preparation of augmentation guides for them to help them cope with thecrisis. While this is welcome, this may not be advisable if hiring from outside can kickstartclient discussions/engagements sooner.Also, it is possible that with: (a) growing maturity of solution accelerators andautomation of business processes; and (b) outsourcing of lower-level work (or parts ofthe maintenance factory) to smaller vendors, gross hiring is likely to have a lesspredominant share of fresh graduates (as % of employee base), going forward, unliketoday. Also, as growth rates in future are expected to be much lower than in the past,the employee pyramid is unlikely to be as broad as it was during FY06-08 (as growthitself was an enabler for the pyramid in better times). However, we point out this couldbe the case only after at least two-three years into the future.Conclusion: Not all of our ten predictions may materialize, but we believe that the journeyto the next league entails far-reaching ramifications in the way Infosys and others will haveto manage on both the demand (customer and market) and supply (employees, partners,and sub-contractors) side.60 Edelweiss Securities Limited

Non-linearity: Stern Test of CommitmentNon-linearity: Stern Test of CommitmentIndian IT companies have long talked about incorporating non-linear delivery models, butwith little success. To some extent, only Wipro has tried to break the one-to-one correlationbetween revenue growth and employee addition as it so demonstrated through FY09 - aneffort initiated before the crisis intensified in September 2008 with the collapse of LehmanBrothers.We believe that the degree of pressure, which Indian IT companies feel to incorporate nonlinearaspects of growth, significantly depends on the duration of the downturn. If thedownturn turns out to be less severe in intensity and of much shorter duration, we believethat complacency could set in and the industry could be back on track of driving revenueswholly through employee growth (non-linearity is likely to be put on the backburner). In sucha scenario, strong advantages rest with companies that plow up their non-linear agendaregardless of the state of the environment, which, we believe, could yield them differentiatedreturns over the medium-to-long term.Not one company is clearlywinning the transformationchallenge as of nowTo be sure, one of the features of factory models of the Big 3 has been their relentlessfocus/success in consistently delivering annual productivity improvements to clients on theback of productivity enhancers or solution accelerators (what we call level 1 non-linearity).However, this does not transform the engage ment model and is still a TCO-based play.However, building traction in true solutions by transforming the client engagement model is athree-year game at the least. Not one company is clearly winning this transformationchallenge, though Wipro has also taken the lead in tying pay-offs to business outcomes inhallmark transformation deals such as Aircel and Unitech Wireless (interestingly, both thesedeals emanated from India).In this section, we profile non-linear moves of companies and comment on probability ofsuccess in case of those making a reasonable fist of such activities. Our assessment is thatTCS leads in this game in patches, while Wipro has managed to impressively extend nonlinearityto a cover a growing percentage of stable, predictable service lines viz.infrastructure management and BPO. Infosys needs to do more outside Finacle, its bankingproduct suite.The Big 3 are fervently enthusiastic about the use of cloud computing in driving non-linearity.New technology on the horizon is a leveler and can serve to bring laggards to an even keel indriving non-linearity and penetrating new customer segments. We do not evaluate the cloudin this section for lack of data points and, hence, our analysis of non-linear growth does notincorporate the cloud.Fig 12 lays out the evolution of TCS’ business model over time. As may be seen, one of thekey elements of the next generation strategy is driving greater degree of non-linear growth.Edelweiss Securities Limited 61

Information TechnologyFig. 12: Charting TCS’ evolution - Non-linear growth now tops its agenda2008 onwardsAspiring non-linear growthIntegrated customer centric unitsStrategic growth business unitsOrganisational infrastructure groups2000 - 2008Continuous productivity improvementMaturity of solution accelerators across service linesMighty initiative & knowmaxInvestment domain labs and competency centers1990 - 20001968 - 1990Expansion - Market presence & service spreadEnd-to-end solutions deliveryDomain-led organisational model (1998)GDCs in Hungary, China, Uruguay, Brazil, Japan and CanadaDefining world-class quality systemsDomain-specific product focusCreation of industryFirst assignments in US, UKSoftware engineering research in IndiaOffshore delivery modelDevelopment of case tools and productivity enablersSource: Company, Edelweiss researchLevel-1 elementary non-linearity: TCS clearly the leaderElementary non-linearity is not new - the Big 3 have been focused, with varying intensity,on building solution accelerators and productivity enhancers over the past five-six yearsas repository of data in projects builds up. On the technology side, Indian IT companiesare closing the gap relative to Accenture/IBM on this dimension.TCS leads in elementary nonlinearityThe game has moved beyond technology service lines to now embrace automation ofbusiness processes such as business intelligence, supply chain management, and HR(these are core to any transformation program) and domain (vertical solutions). TheHoly Grail has, thus, now moved to componentising business processes (e.g.procurement, fulfillment, inventory management, production etc). “How can wemodify and codify vertical-aligned business processes?” Better still, how can wedynamically program or model business processes? This requires a close marriageof consulting and IT and helps piece together valuable components for business processre-engineering. Part of the reason that the likes of IBM and Accenture are much ahead ofthe game of Indian IT in transformation-type services is their greater use of prepackagedindustry sub-solutions (riding on process or domain), impacting the businessprocess and their ability to stitch such components together with their layer ofintegration.These reusable components/tool-kits are not commonly sold as commercial, licensableIPs, but are deployed to crash time-to-deliver and reduce manpower intensity. Themeasurable impact is cost savings. TCS claims that cost savings from well-provencomponents can typically generate cost savings of 30-40% through re-use. Fig 13 showssnapshots of typical solutions that find their way to the solutions/tech-services landscape.We believe that TCS and the industry need to step up their emphasis on developingaccelerators that are industry-specific (as opposed to those that are technology- orengineering- specific).62 Edelweiss Securities Limited

Non-linearity: Stern Test of CommitmentFig. 13: Solution accelerator at TCS extensive; needs to cover industry-specific areasSolution accelerator that automates aspecific business processIndustryspecificRequires incorporation of functionalknowledge and capability in constructionand implementationEg.: Digigov, VATIS for government,En’rgise for utilities, HMS for healthcareOver 150SolutionacceleratorsTechnologyspecificSolution accelerator that automates aspecific service line capabilityApplicability for specific stages during theSDLC for the service line implementationEg.: Frameworks for implementingsolutions like BICC, BIBPOver 300ProductivityengineeringEnables implementation of a definedprocess, methodology or process step indelivering the solution to the customerSpans across industry verticals and servicelinesEg.: Masketeer for data masking, Jensorfor java profilingOver 250Source: Company, Edelweiss researchWho is ahead? Our research indicates that among the Big 3, TCS has the most robustprogram to roll out such productivity enhancements. This is a result of a superiorgovernance program, which has been nurtured and managed by the business excellencegroup at TCS. The business excellence program at TCS, with the help of the CTO’s officein conjunction with the industry units (which help identifying technologies and solutiontrends that should be covered) and the respective business units (vertical groups), hasdeveloped over 700 solution accelerators/productivity components across the threeareas: (a) technology services; (b) business processes; and (c) vertical domain. Thishas enabled TCS to be aggressive in effort estimation for larger projects, thus, helping itmark out its cost competitiveness. Several of TCS’ patents have been obtained inthe area of software engineering.TCS’s challenge remains tointernally market itsdevelopment on non-linearityChallenge is also an opportunity. The main challenge for TCS is internally marketingits development to client account managers and delivery managers for their use in clientprojects. TCS’ two-three year goal is to ensure coverage of 100% of its strategicaccounts to deploy these tool-kits. Also, TCS is solidifying its value measurementframework to ensure that the impact of its program from deployment of its acceleratorsin client engagements across business units is measured, monitored and communicatedto clients. We believe that for TCS, accomplishing monetisation and collaborationacross business units is the relatively harder part.Level-2 non-linearity: A quick win; will soon be table-stakesIn our view, the best bet for Indian IT companies to work on non-linearity is to transformthe engagement model with their customers for essentially the same services that theyhave been offering on a T&M basis. This is a relatively softer challenge as with maturityin predictable, low-complex service lines (infrastructure management, BPO, applicationand process management), it is easier to transform the terms of revenue engagementfrom a T&M model to a per transaction/ticket/device basis. Infosys believes that a fairproportion of its support work (enterprise solutions, applications and BPO) can move tothis engagement model. This is a quick-win, in our view. The game could be over intwo-three years if companies do not act urgently.Shared services is another example of driving towards quick outcomes in non-linearity.Wipro indicates that it has been servicing its domestic infra management clients (inIndia) under this model from its Global Service Management Centre in India for nearlyEdelweiss Securities Limited 63

Information Technologyfour-five years now. Clearly, there is gain in extending level-2 non-linearity to globalclients. This partly explains how Wipro has been growing its India revenues well ahead ofits India headcount (profiled later in the section, Making a mark in India and emergingmarkets).Today, Infosys derives less than 4% of its services revenues from such pricingarrangements.Process of defining a businessdriver is stressful in outcomebased pricingLevel-3 non-linearity: Outcome-based pricing still some time awayUnlike Level-1 and Level-2, we note that Level-3 is not the game of internal software reengineering,rather it is a game of defining the revenue outcome for theproject/engagement making it dependent on business drivers that matter to the client.The greater challenge here for Indian IT is to define measurable business drivers andagree with the client on how the project or engagement can specifically influence thesedrivers (separating out the influence of other client partnerships on key businessdriver(s). The process of definition of the business driver (key performance indicator orKPI) is stressful. To give a simplistic example, it would be unwise to incentivise seniormanagement of a company on the basis of stock price alone as many other factors couldinfluence the stock price (such as general equity market conditions). Or it might beunwise to link pay-offs in implementing a supply chain solution to lead-time ofprocurement if lead-time is also a function of how other vendor partners’ system link upto the client’s systems. Thus, it becomes difficult to determine and isolate cause-andeffectto the scope of the engagement. We lay this out in fig 14.Fig. 14: Success in Level-3 depends on being able to identify, measure and isolate business driversBusiness driver 1T&M/ Fixed priceOutput-basedmodelsOutcome-basedmodelsBusiness driver 2Business driver 3(Total cost of ownership)Business driver 4Source: Edelweiss researchOutcome-based pricing is very attractive for the client for it pays only as per usage (thus,costs can be rendered as variable as possible with agreement of the service provider).Equally important, it makes resource allocation, vendor efforts and, hence, vendormargins opaque to the client from the perspective of TCS/Infosys/Wipro. Thus, level-3transforms the engagement model.Outcome based models can beperfected only with experiencecurveOutcome-based pricing models can be perfected only with requisite data points and theexperience curve, which we hear from Indian IT vendor could vary anywhere from 6-12months. The Big 3 do not have the data sets going back in time like the way Accentureand IBM have. Also, identifying the business KPIs is possible only though a strong layerof consultative analytics. We gather from our interviews that the extent of replication ofthis type of non-linearity is less as this addr esses very specific issues of the client (withor without consulting the client’s partners who also impinge on the client’s businessdrivers). Every installation is potentially unique, taking specific cognizance of how theclient’s business drivers operate in conjunction with the IT architecture.Unlike level-1 and level-2, level 3 requires serious commitment and buy-in for the client.The client and vendor typically establish a joint team that identifies engagements orprojects which can be transformed from merely T&M/fixed price to outcome-based and64 Edelweiss Securities Limited

Non-linearity: Stern Test of Commitmenthow should measurement processes be set up accordingly. It could also require the likesof Wipro to make some initial investments in re-drawing technology and businessarchitectures/hierarchies and demonstrate to the client how this is done. We gather thatInfosys is more reluctant to fund such initial investments to showcase proof-of-concept.Traditionally, Big 3 are more comfortable at linking their pricing to the total cost ofownership (TCO), given that cost has been the primary selling proposition in the past. Insuch cases, their additional pay-offs are determined by the excess of cost savings abovethe agreed-upon base-line (fig 15).Fig. 15: Engagements can sometimes toggle between TCO and T&M depending on successT&M models/FPPT&M/Fixed measurecost savings (TCO)Exceedscost savingsbaseline?YGain share in excesssavings by a fixed orvariable distributionNCurrent billing engagementmodelSwitch to T&M model oractivate penalty clausesSource: Edelweiss researchThe pay-off in level 3 can be dramatic. Margins rise exponentially once revenues cross athreshold as costs in investing in the new engagement model are substantially incurredin the early stages of the relationship. (see chart 25). Potentially, the revenue curve canbe upward sloping as volumes reach maturity, but the slope of margin curve can powerahead of the revenue curve. This is why Level-3 non-linearity can be such a powerfulmargin kicker with maturity of the relationship.Chart 25: Profit/transaction can show exponential curve with volume maturity100.060.020.0(%)(20.0)(60.0)(100.0)Cost/transaction Revenue/transaction Profit/transactionSource: Edelweiss researchWho is ahead in the level-3 game?The Big 3’s global peers (Accenture and IBM) lead when it comes to data sets generationand codification. Accenture and IBM also use their superior consulting-cum analyticscapability to define key business drivers for clients and solutioning/structuring theengagement. On the execution plane, Indian IT companies match their ability, thoughthe consultative gap that crucially changes the nature of engagement model is stilllacking.Edelweiss Securities Limited 65

Information TechnologyGoing by announcements of large outcome-based transformation-based engagements inIndia of Aircel and Unitech Wireless, Wipro has clearly demonstrated that in the telecomdomain it is prepared to put on line its expertise in telecom and risk its pay-offs tobusiness drivers such as subscribers and ARPUs. If projects are greenfield in nature(such as Unitech Wireless), it becomes easier to define such outcomes and take on suchrisk since problems of co-ownership and co-ordination with other vendors of the client inthe ecosystem are less cumbersome. Thus, Wipro has taken the early lead and shown itsskin in the game with landmark deals.Level-4 non-linearity: Solutions that can showcase expertiseThis refers to:(a) Solutions or licensable IP built to address specific pain points oropportunity areas of clients in financial services and healthcare that openup in the wake of regulation: Some of these could be regulatory/compliancemodules that are co-opted into the clients’ application architecture. The Big 3 areinvolved in such point solutions; e.g. Infosys has deployed point solutions in BFS,manufacturing and retail.(b) Ready-to-market platform-based offerings using SAP/Oracle as thebackbone: This includes integrated IT/BPO solutions that can be implemented onan ASP or transaction-based model. Wipro, for example, has an order-to-cashplatform for manufacturing companies that it monetises based on the number ofconcurrent users.Specific point solutions unlikelyto move the needleIn our view, specific point solutions are unlikely to move the needle on financials sincethe size of deployment tends to be small. More promising are platform-based proprietarysolutions that automate or streamline business process for clients. Infosys is ready to goto market with its BPO/IT solution (using the SAP platform) to address the procurementfunction. Wipro has a ready-to-market hospital management solution on SAAS model.Revenues are linked to transactions through the platform in addition to a possiblemonthly rent for hosting the solution.TCS is betting on more comprehensive platforms that affect many more processes forthe client (like life and pension processing and HR outsourcing or HRO). It has severalglobal customers for its HRO offering, while it targets to get its life and insuranceprocessing platform ready to hit the market by end of FY10.Why is level-4 different? Typically, level-1 non-linearity tools focus on increasing theproductivity of a systems integrator itself and, in turn, attempt to lower client costs. Forexample, TCS has built a rich tool kit ranging from application rationalisation to testingautomation. These tools often focus on delivery or operations issues such as timerequired for a task by a developer or reduction of wastage or bugs. Level-4 solutions, onthe other hand, focus on processes that are outward-looking or client-facing and attemptto address critical business issues such as supply chain management or RFID adoption.SMBs more likely to adoptIndian IT’s platform solutionsThe challenge in level-4 linearity is to develop a marketing program around it. Also, webelieve that larger enterprises (Fortune 1000 or Global 1000) are unlikely to see platformsolutions from Indian IT companies as a must-buy offering since they are relatively morereluctant to use vendors’ proprietary platforms and infrastructure. The more readyadopter is likely to be the small and medium business segment (SMB) – a segment thatthe Big 3 have largely stayed away from. It also requires localisation of selling effortswhich the Big 3 are not used to.66 Edelweiss Securities Limited

Non-linearity: Stern Test of CommitmentLevel-4 is sometimes needed to showcase expertise and can contribute tobranding. In our view, licensable solutions by showcasing domain-centric and/orproductisation ability could act as a pull for the client to push through downstream (flowthrough)implementation-oriented work. It can serve as a useful branding exercise evenif actual revenue per se from level-4 non-linearity is modest. This can, thus, be adifferentiated client lead-in.In the past three years, none of the Big 3 players have made incremental progress inlevel 4 non-linearity (besides Infosys’ Finacle). In our view, Level-4 non-linearity isunlikely to be a game-changer for the Big 3 unless they can get it to account for ~9-10%of revenues by end FY13. Else, it might be more of a door-opener when all else is thesame. Table 17 summarises the discussion around the four levels of non-linearity.Table 17: Non-linearity at a glance for the Big 3Non-linearity Description Manifestation Who's aheadLevel 1Solution accelerators covering technology Cost savings and annualised TCS ahead in technology andbusiness process engineering andproductivity improvement engineering solutionindustry processesaccelerators; some success inconverting matureaccelerators into productsLevel 2Ticket-based, device-based pricing insupport and IM; shared servicesAs frequency of transactionincreases, gross marginsupwards of 50% possibleWipro by virtue of presence ininfra managementLevel 3Outcome-based pricing; make pricing akey driver of the client's businessmeasure. Very deal specificVery powerful multipliereffect if cost profile and risksare containedWipro (Unitech Wireless,Aircel) and TCSLevel 4IT/BPO platforms, full scale processingplatforms (horizontal and vertical)Revenues (licence, % oftransactions, subscriptionbased)Infosys (traditional advantageof Finacle), TCS (SMB)Source: Company, Edelweiss researchCase study: Governance structure at Infosys to enforce non-linearityThough we believe that Infosys is a little behind TCS and Wipro on level 1-3 nonlinearity,Infosys has instituted a sound program for the level-4 non-linear model. Wediscusssomeelementsofthisatlengthbelow:1. Have a member of the decision-making council of the company in charge of nonlinearagenda.Infosys has created the most visibility around its ambitions in this respect. It hascharged a member of its executive council with responsibility of driving non-lineargrowth. The council:(a) Targets to identify and architect the solutions blueprint in those verticalswhere Infosys has leadership and/or critical mass (BFSI, telecom,manufacturing and retail).(b) Tracks on a regular basis progress towards 1-year, 3-year and 5-yeartargets. The challenges of making non-linear growth even 20% of thecompany’s revenues by 2014 (five years from now) are formidable as thishas to virtually start from ground zero.Edelweiss Securities Limited 67

Information Technology2. Invest adequately ahead of the curve in running the agenda.Infosys has identified hiring and training for each of the industry vertical and isnow engaged in setting targets across verticals. The specific solutions groups(vertical-wise) are supported by a core engineering services team comprising afew technology and engineering-centric professionals. This team brings in thebest practices of wrapping a horizontal vertical-agnostic accelerated approachtowards various verticals it caters to. In other words, it has a role to play in thosesolutions that lend themselves to an engineering ‘platformised’ approach. In ourview, this requires disaggregation of solutions by vertical and horizontal layers.3. Drive standardisation and collaboration across business units.This is perhaps the biggest role for the champion evangelising non-linear deliveryin the company. We recognise that there will always be early leaders amongbusiness units driving non-linearity, such as financial services for Infosys andtelecom for Wipro. It is important for the champions to drive re-use of ITsolutions across verticals.Some IT solutions at Infosys can be leveraged across multiple verticals,billing/invoicing in telecom being an example that can extend to energy andutilities (as Wipro has shown sparingly). While re-use and inter-verticalapplicability are steps in the right direction, they have their pain points such asIntellectual Property Rights issues, decustomising the original solution (i.e.removing the domain specific components) and customising for the new solution.Hence, repetition is perhaps less than desirable. This is mindset change fromthe factory model that dominated shape of the delivery engine of IndianIT in 2003-08.Key challenges in driving non-linearity1) Monetising solutions is equally hard as creating them; build solution-specific KRAsfor the selling and marketing team.Solution marketing is morecomplex due to its unclear costbenefit equation in the beginningIt is far easier for sales to sell services over solutions. Solutions have to bemarketed in a specific manner to clients, for the clients themselves are not surewhat the cost-benefit equation is. Innovative ways have to be found to monetisesolutions even if companies have perfected creating some of them. Why wouldclients pay for such services? How should the pricing models work? How can salesand marketing create a market for such non-linear solutions in the first place? Wehave the following two thoughts here:(a) Clients themselves demand solutions: This could be in the areas of risk,regulation and compliance management - areas that have gained heightenedimportance in the wake of credit crisis. Here, the onus is on the developmentrather than selling.(b) Indian IT companies have to sell solutions to clients: Here, the onus ofmonetisation of solutions is as much on the sales force as it is on development.A good example of this is Infosys’ development of the Shopping Trip 360. This isa brave initiative on the part of Infosys to create a solution in its most‘verticalised’ vertical. The solution required four years to develop to somedegree of finality with the dedication of a dozen specialists to it. Today, Infosysmust learn to develop a marketing program around it. One way of doing is toarticulate an elaborate pay-off profile for each solution.(c)Weaning away sales force from its comfort zone and incentivise it tosell a mix of solutions and services: Accenture’s sales force has learnt overtime to manage its KRAs linked to selling of both consulting and services, when68 Edelweiss Securities Limited

Non-linearity: Stern Test of Commitmentconsulting alone may have been easier to sell. Likewise, Indian IT players haveto learn how to structure KRAs of their sales force around selling a mix ofservices and solutions. In reality, there could be a pushback from the salespersonnel themselves, for at least initially they are likely to find it much easierto sell services (perhaps even exceed their targets) than solutions as part of thetotal mix.To some extent, Infosys should be able to leverage its experience of selling itsbanking product suite (Finacle) in plugging the gap in solution selling.(d) Dedicated sales specialists for solution selling: None of the Indian ITcompanies have approached this level of dedicated selling yet. We believe thatas non-linear initiatives take the centre stage, Indian IT companies may wellneed to envisage setting up dedicated sales specialists and partnerships for thispurpose; these specialists and partners understand the domain and are,therefore, able to provide a customised approach to selling solutions as opposedto the relatively more generic approach to selling services. Product managers inproduct companies like SAP/Oracle are better equipped to sell higher-valuesolutions impacting client systems and build their selling pitch around ‘high-leveloutcomes’ and operating business parameters going beyond ‘cost reduction’.Ideal IT model will be a hybridservicesand service-led-solutionmodelThe ideal model is that of a hybrid. All of the above outlined steps require sustained,high-level commitment that goes well beyond what the Big 3 are currently committed to.Creating a broader solutions footprint necessitates replicating nearly the samecomprehensive approach these players have followed with respect to IT-services viz.dedicated resources for development, specialised selling, along verticalised lines andperhaps even dedicated P&Ls for solutions. In a sense, three-five years down the line,Indian IT companies ideally approach this as an independent business unit solutioncentre carved along lines of verticals with practices feeding into them. The model is thatof a hybrid – services and service-led solutions that co-exist.It is possible with focus. 40% of Accenture’s insurance revenues come fromsolutions (about 2-3% of overall revenues, not to mention Accenture’s billingsolutions around vertical segments such as communication and high-tech,covering about 25% of Accenture’s revenues from this vertical).Non-linear growth agenda is atthe center-stage for Infosys andWiproInfosys versus Wipro in non-linearity and solutionsBoth Infosys and Wipro have placed non-linear growth on their central agenda, with ateam of champions reporting to an authority that drives company-wide and unit-wisetargets (for both practices and verticals). Where they differ in their emphasis is in thelinkages they have to their past. Some of Wipro’s testing labs that it has built for clients(like R&D clients including Cisco), are well operationalised to test the compliance andcompatibility of hardware devices and technology standards (such as Wifi). Such labs cannow serve as certification centres that test-proof compliance and compatibility. Pricinghere can take non-linear forms such as a fixed fee per test (or fixed fee per device,pricing as per technology) and other arrangements. This is small, but we believe thatWipro is unique in charting this particular course, courtesy its strong tech R&D heritage.Again, as in level-4 non-linearity, these can be valuable and differentiated lead-in to amuch larger scale of engagement later on.Edelweiss Securities Limited 69

Information TechnologyCase study: Infosys Shopping Trip 360: A good product, but slow in revenueofftakeShopping Trip 360 is the first indigenous ready-to-market vertical (retail) independentsolution outside of Finacle. It is a solution that leverages Infosys’ IP in the space ofwireless sensors to transform the physical retail store into a measurable medium ofshopper marketing. It analyses the behavior, time spent, and physical actions of shoppersto offer actionable insights to retailers and stores, helping them improve customerexperience and plug revenue and working capital leakages.The business model for this service enables Infosys to engage as a participant in clients’business ecosystem to facilitate new revenue streams, and then access a revenue sharemodel based on results:• Infosys deploys the in-store technology as a full investment (and charges a one-timelicense fee for it). This is likely to be viewed less favourably as it is not based onoutcomes.• Information and insights syndicated in a monthly subscription fee per store (capex forclient is converted into opex).• Revenue share from in-store mobile marketing.Shopping Trip 360 has received recognition in the trade and analyst media, but clientofftake has been slow. Some of the early adopters of the solution include a few globalretailers and FMCG brands, evaluating Infosys’ offering in Europe, US, and India. However,this has taken almost a year since the product, in its basic form, was ready to launch. Mostof the above deployments are still pilots, where customers are charged a certain sum forusage over a certain period to enable them to ascertain business benefits.Converting pilot customers into permanent converts for ongoing IPR deploymentrepresents the greater challenge. It is hard to estimate what the revenue potential of thisproduct could be, though we believe that it could be an easier sell in developing markets(with retailers still developing their infrastructure).Can non-linearity shore up margins in medium term; if so, how much?We take Infosys as the test case. Our analysis takes cognizance of the following factors:(a) Level-1 and level-2 non-linearity fetch gross margins 5% higher than the companyaverage. This is more easily accomplished in stable or maintenance-oriented productlines such as infra management, application maintenance and BPO. We assume 20%coverage by 2015.(b) Level-3 non-linearity can apply to new implementations/development-oriented work,but is harder to accomplish. Also, since, pay-offs are directly related to volume oftransactions (which takes a while to peak/reach steady-state; refer back to the payoffprofile), in the first couple of years, margins on this type of non-linearity is likelyto trail the company-average margins. In steady state, gross margins for projectsunder level-3 could be about 5-10% higher than company average. However, overthe life of the project (say, five years), ma rgins would only be moderately higher, inour view. Large deals, which are transformation-led, always carry liability risks thatmust be normalised. We assume 10% coverage of development-oriented work.(c)Level-4 non-linearity can fetch gross margins of upwards of 60-65% (e.g. Finacle forInfosys). However, we still see this be ing modest as a percentage of overallcompany revenues (about 4%). We assume that over the next five years, this can70 Edelweiss Securities Limited

Non-linearity: Stern Test of Commitmentreach 9-10%. This is a non-trivial assumption as on an incremental business, itbuilds in an optimistic 14-15% of revenues coming in from level-4 (see table 18).Table 18: Nearly 10% of FY13 revenues (or 15% of incremental revenues) must derive from highest order nonlinearity(Level-4) to keep gross margins constantCase 1: Without additional non-linearity (or status quo)Today (2010) Tomorrow (2013)Revenues 100160 (assume 17% CAGR inrevenues over FY10-13)Gross margins 45% 42.5-43% (200 bps down) (a)Gross profits 45 69 (b)Case 2: With non-linearity tokeepgrossmarginsconstantinFY13Today (2010) Tomorrow (2013)Revenues 100 160Gross margins 45%45% (non-linearity kicking in tokeep gross margins constant)Gross profits 45 72 (c)Contribution of non-linearity to gross profits 3.2 (d) = (c) - (b)Average gross margins of Level 4 65 (e)Differential in gross margins between Level-4 nonlinearityand company average20 (f) = (e) - (a)Implied incremental contribution of non-linearity(or level 4) (over FY10-13 )16 (g) = (d)/(f)Implied contribution of non-linearity (or level 4)(as % of overall FY13 revenues)~9-10Source: Edelweiss researchAcquisitions may be the bestway to power non-linear growthConclusion: Non-linearity is a difficult proposition. TCS has superior ability in level-1 andleve-2 non-linearity and an aggressive execution of game plan to accomplish level 3 and level4 non-linearity (through use of acquired platforms like insurance BPO from Pearl group). Also,TCS has an ambitious agenda around BPO platforms to service the SMB segment (which, webelieve, can scale upwards of USD 200 mn by 2013 if the right go-to-market approach issecured particularly outside India). Wipro has shown much greater willingness to play inlevel-2 and level-3 non-linearity. We believe that Infosys needs to incubate more successstories such as Finacle to catch up. Finacle provides Infosys an advantage though acquisitionsmay be the best and quickest way to power non-linear growth on a much larger scale thannow. Infosys has the most to gain from inorganic moves to power this agenda.Edelweiss Securities Limited 71

Information TechnologyMaking a Mark in India & Emerging MarketsInfosys has stayed away from addressing the Indian market for a long time for fear thatIndia business comes at lower margins. It is ironical that MNCs such as IBM are so muchmore focused on the Indian market than Indian companies are. Accenture has recentlystarted a dedicated delivery office in India to service the public sector (government). ITservices in India is separately a USD 12 bn opportunity in India that is there for thetaking (see Chart 26). Nasscom-Mckinsey forecasts the addressable India servicesopportunity to rise four-fold to USD 50 bn by 2020 (see Chart 27) with about two-thirdsof this accounted for by BPO and a third by IT.Chart 26: India USD 12 bn services market; BPO growth ahead of services14.0CAGR over FY05-09IT services 24%BPO 34%11.2S/w products 33%(USD bn)8.45.62.80.0FY05 FY06 FY07 FY08 FY09EIT services ITES-BPO S/w products & engg servicesSource: NasscomChart 27: Services in India to rise 4x in FY09-20; BPO to account for 2/3 rd of pie10080(USD bn)604060-65201830-35052 8FY00 FY08 FY20Technology servicesBusiness servicesSource: NasscomIn our view, the Indian economy is throwing up incrementally greater commercialopportunity (see Chart 28), too compelling to ignore on the following three counts:72 Edelweiss Securities Limited

Making a Mark in India & Emerging Markets• Decisive Indian IT market growth driver is the economy rather than anychange in buying behavior: IT infrastructure of the incumbent Indian companieslag foreign entities. Consequently, a major wave of IT investments has begun acrossbanks, financial services institutions (FSIs), telecom, manufacturing, government,resource, education and other industries. When the economy grows at ~6%, only afew verticals in the private sector drive spending (BFSI, telecom); but when theeconomy grows ahead of 7%, many more opportunities arise in several verticalssuch as retail, manufacturing and even real estate. Also, these verticals are still notsophisticated in using IT as a productivity driver and present opportunity all the wayfrom even optimising the data capture process.• IT phase II - Consolidation, virtualisation and SOA: Enterprises in India havematured to the extent of consolidating their IT infrastructure acquired over the years.Cost pressures are forcing large enterprises to evaluate and closely assess utilisationand productivity of these IT assets. Key technology components that would come tothe fore, to attain this state, will be virtualisation, SOA and application integration.• SMB end market focus: Global vendors are focused on India to capture the smalland medium business (SMB; expected to contribute 50% to the enterpriseapplication market) segment. Vendors like SAP, Oracle and Microsoft have expandedtheir ‘software as a service’ (SaaS) offerings with ‘go-to-market strategies’ like onpremisehosted applications and hardware on lease. TCS and Wipro have alreadydeveloped their templatised ERP solutions for SAP-SMB. Unfortunately, the collectivebuying market for SMB in India (and Asia) is underestimated and underleveraged.TCS is the only player, which we know, ha s a running go-to-market strategy in theSMB segment in India.Global majors such as IBM are increasingly seeing India as a beachhead (not just asamarketfortalent,butalsofortheirofferings),asseenfromtheirmulti-yearmultimilliondollar strategic IT relationships with Indian companies such as Bharti andReliance. An added benefit of penetrating the Indian market is insulation against theINR-USD equation. Also, the earlier relative disadvantage of India profits being fullytaxable will disappear with the 10A and 10B benefits coming to an end, effectiveFY12.India a peculiar market for IT servicesUnlike several developed markets, which saw implementation of IT through the classiccycle of ‘application development, integration and then support’, enterprises in India aretaking an accelerated view of IT by opting straightway for a package-led implementation(e.g. SAP and Oracle) and subsequent consolidation.Edelweiss Securities Limited 73

Information TechnologyChart 28: India business as a % of revenues for Big 3 for past two years10.08.06.0(%)4.02.00.0FY08TCS Wipro InfosysFY09Source: Company, Edelweiss researchAddressing India opportunity to drive margins; how can Infosys do it?Adopting a structurally lowcostmodel is key to makingacceptable margins in IndiaWhile the India opportunity has been well highlighted, we ask a more pertinent question:‘Has Infosys missed the bus when it comes to India?’ In our view, advantages thatincumbents like Wipro and TCS have by virtue of their long-standing presence in Indiaare not easily replicated. Yes, to the extent that Infosys does not need to work to createrecognition in India, it will almost inevitably get invited for bids in the public and privatesector and win its fair share of deals (as has been happening recently). The realchallenge facing Infosys, in our view, is making acceptable margins (>20%) on servicesin the Indian market by adopting a structurally low-cost model. We lay out our thoughtson what Infosys and, more generally, Indian companies can do to mitigate commonconcerns on low margins in India and in other emerging countries.Fig. 16: Addressing the India opportunity entails several aspectsMove from ‘own the process’ to ‘own the customer’ mindsetUse India as a breeding ground for outcome-based pricingefforts and for turnkey end-to-end dealsRun round the clock alliances and partnerships (forimplementation and delivery)Participate in end-to-end integrated dealsUse shared services modelSource: Edelweiss research74 Edelweiss Securities Limited

Making a Mark in India & Emerging Markets(a) Institutionalise a robust program management office; move from ‘own theprocess’ mindset to ‘own the customer’Wipro reports that its India IT services division increased revenues in FY09 by over 40%without addition to headcount. It managed this through a focused program of minimisingthe length of the training program (which tends to be longer for fresh recruits for globalIT services), preparing back-up(s) for an employee in advance of leave (so that back-upscan progress even as the employee proceeds on leave) and setting a target bench lowerthan that for Indian IT services. Also, the lead-time of recruitment in its India/MiddleEast business is considerably lower than in its global business.Sub-contracting takes away theneed to manage benchWipro operates a robust program management office that de-layers the India work –it sub-contracts downwards the mundane, commodity portions of the overallassignment to sub-scale tier-2 Indian IT vendors. This obviates the need to managebench and shaves off almost 7-8% points in cost of bench in cases where suchoutsourcing is possible and well managed. This also helps manage peaks andtroughs of client volumes in India (where volumes are erratic) in a variable fashion.We highlight that this is not easy to accomplish as companies have to conquer the‘manage the process ourselves’ mindset and move to ‘own the customer, butnot necessarily the entire process’. Thisrequiresanexternallyorientedrobustprogram management office that manages workflow, but not necessarily the bitsand pieces of implementation. Infosys, we believe, has some way to go indeveloping such an office.Wipro indicates that between one-third and one-half of its volumes in India (exceptin assignments relating to transformation) can be outsourced to smaller ITcompanies. However, tasks such as selecting such companies, cultivatingrelationships with them and helping shape/perfect their delivery process are not tobe managed in short order. Th ey need time and patience.(b) Use India as a testing ground to measure the success of outcome-basedpricing efforts, unique commercial structuring and drive non-linearitythrough India-specific turnkey frameworksIndia market can be used totest-market innovation by Big 3This is one lever that Indian IT companies can use to beat the price consciousness ofclients. Wipro’s success in rolling out its aggressive cost management control andsome emerging innovativeness in pricing contracts stems from the success it hasseen in implementing some of those techniques in the Indian markets, particularly inhigh-profile deals such as the Aircel go-to-market penetration where it linkedoutcomes to revenue-and subscriber-based targets. This was key to solutioning andled to further success in bagging Unitech Wireless (see case study on page 79,Mechanics of a ground-breaking transaction).TCS is ready to roll out its e-governance framework to address the public sectoropportunity in India. This was developed by TCS to codify and leverage itsaccumulated experience with the Indian government in various spheres that spaneducation, bureaucracy, defence, infra structure and healthcare and commontechniques such as data extraction, master-data management, process reengineeringand process integration with an overlay of system integration. This canbe accordingly parameterised to cater to other similar markets as well.In a nutshell, we believe that India is a market that companies can gainfully use totest-market innovation of almost any kind – on both demand and supply sides. It ispossible to make decent margins in India by redefining the cost structure (byquestioning what is core and non-core in delivery), applying shared services andlinking pricing to transactions and outcomes.Edelweiss Securities Limited 75

Information TechnologyWipro has understood this game quite well, relatively speaking, in our view. TheIndia experience has also formed the basis of its relative strength in systemintegration and infrastructure management. It could also pave way for addressing anew customer segment (SMB) in future in the overseas market.(c) Run round-the-clock alliances and channel partnerships, not only forimplementation of go-to-market but also for deliveryReplicating an intricate alliance network takes time. Wipro has started its allianceprogram way back in 1990s. The company finds it easier to enforce its projectmanagement and execution practices on smaller but nimble players who areadaptable and can absorb varying utilisation. It also manages multiple competitivealliances at the same time (e.g. SUN, EMC, Cisco, and HP among others).As international players heighten their focus on India and other emerging markets,they will look at partners and local country affiliates to help them in their go-tomarketstrategy in various areas such as networking, storage, platform developmentand enterprise solutions. Wipro has stitched partnerships with several of such globalplayers to address India and other emerging markets.Big 3 have under-leveraged thepower of partnershipsIn consumer-oriented sectors such as retail banking and telecom, large deals inIndia are in the offing. Retail banking accounts for more than three quarters of thetotal BFS opportunity in India. However, th is requires distribution channels (eitherowned or partnered with) that reach out to consumers in rural areas as well. Wiprohas established a strong channel franchise network to reach out to thesmaller towns and rural destinations in India.In our view, it is important to be able to show flexibility in partnerships in variousareas and demonstrate commitment and track-record before acquiring rights tosetting terms of engagement in such arrangements. We believe that Infosys couldleverage the power of partnerships better than it has done so far in penetrating newmarkets.(d) Demand for end-to-end integrated deals with infra management as thebackbone; India increasingly becoming hot bed for large dealsOpportunities in Indian IT entail working with data in multiple outdated formats onnative platforms. Integration thus is the driving theme to address these diverseplatforms. Infosys needs to be able to fashion an elaborate partner network toaddress parts of this total solutioning (especially in hardware-intensiveimplementation, which Infosys tends to shy away from).Wipro set up a dedicated and independent total outsourcing group for India in mid-2004 whose only merit was to fashion and perfect Wipro’s go-to-market strategy inlarge, integrated deals in this geography. It was not until three years later that thecompany had its first end-to-end integrated deal. The company’s first significantcustomer win was one of India’s leading private sector banks for which it handled itsinfrastructure extending to branch management as well. This was possible byWipro’s data centre investments in Mysore (its Global Service Management Centre,GSMC), an investment for India.Largest 3 deals closed by WiproarefromIndiaIt is instructive to note that the three largest deals closed by Wipro in itshistory have all come from India. We believe that the long India experience hashelped both Wipro and TCS strengthen their credentials in the large deal space forglobal clients, especially in those entailing a strong end-to-end integration layer withinfrastructure rollout/management as the backbone.76 Edelweiss Securities Limited

Making a Mark in India & Emerging Markets(e) Shared services model used in IndiaCustomers in India are less concerned with exclusivity of resources. Hence, Wiproemployed the shared services model using its data centres and supportinginfrastructure centre. Shared services means using fungible resources acrossmultiple projects simultaneously. This requires non-intrusive, yet collaborativeinfrastructure to be put in place along with client approvals. Over time, Wipro willroll out shared services for its global clients as well.(f) Dedicate resources for in-house workInterestingly enough, Infosys does not have much dedicated delivery/technical stafffor its India business unit. It borrows technical resources for implementation from theglobal business units. This is fine for now when there is substantial bench, but whatwhen the environment turns? We could perceive the absence of ‘dedicated’ technicalresources as sign of Infosys’ caution/conservativeness. It could still be testing thewaters, so to speak, ready to invest as the going gets better in India and as the globalbusiness is ready to soak up the bench that exists today. On the other hand, Wiprohas a dedicated team of 15,000 professionals (technical and sales/marketing),catering to the emerging markets (primarily India and Middle East). Increasingly,many of Wipro’s advertisements issued in job sites for MBA graduates call for specialistfunctional knowledge for its India/Middle East (emerging markets) practice.(g) India still a ‘hit or miss’ market as most large deals are from governmentLarge deals in India areprimarily from the governmentWe believe that for the foreseeable future, the government will be key source of bigticketdeals as the large-scale transformation and infrastructure outsourcingoriented deals from the private sector such as Unitech Wireless/Bharati are still fewand far between. As the India business head of one of the Big 3 told us, “Mydependence on the government is so high that one deal lost is not made up by even20 smaller deals from the private sector.” If the government’s decision is commonlybased who emerges as the lowest bidder with the requisite technological capability(or L1 T1), then redefinition of the cost structure is even more important.Companies have to be choosy in deciding which projects of the government theywould like to participate in. This is because the provider of consulting/advisoryservices is not allowed to address implementation opportunities.Case study: IBM in India: Applying principles of lean managementIBM has over 72,000 professionals in India, largely catering to the export marketlike the Indian Big 3. What is perhaps less known is that IBM derives well overUSD 1 bn annually from the India market in IT services and system integration(including hardware) on a much leaner workforce. The company does notdeliberately hire for commodity skills and outsources the commodity work tosmaller tier-2 companies.The company keeps bench in low single digit in India and believes that largebench reflects inability to forecast business. We gather from our intelligence thatjust over 15,000 people are dedicated for the Indian market. If we assume thatpure services in India for IBM amount to at least 50% of its total domesticrevenues, then IBM derives over USD 500 mn from just about 15,000professionals. Given the pricing in India, this scale of revenues is not possiblewithout a high degree of sub-contracting of lower-level work to tier-2 and tier-3local vendors in India. Clearly, IBM sees itself as the value-added integrator atback-end and the face to customers at front-end.Edelweiss Securities Limited 77

Information TechnologyTable 19: Recent large deal wins from government by Big 3*Date Service provider Client/Partner Amount RemarksOct - 08 Tata ConsultancyINR 10 bn (USDServices (TCS)208 mn)Ministry of ExternalAffairs, Government ofIndiaThe Passport Seva Project will digitise theentire passport services lifestyle and allowonline filing of applications. The countrywideroll-out of the project will take place withinsix years, and the government will open 77passport filing centres across the country ina phased manner.March - 09 HCL Technologies National InsuranceCompany (NICL) IndiaINR 3.9 bn (USD76.5 mn)The contract entails HCL to deploy a coreinsurance solution (CIS) at one-fourth ofNICL’s 965 offices by July 2009 in the firstphase while the entire implementation of thesolution will be completed by April 2010. Thecontract covers both software applicationand hardware across NICL’s offices in thecountry .March - 09 Wipro Infotech Employees StateInsurance Corporation(ESIC)INR 11.8 bn (USD245 mn)Project Panchdeep, aimed at improvinghealth care services to its beneficiaries, byproviding online facilities to employers andinsured people for registration, payment ofpremium and disbursement of cash benefits.Other modules will provide HR, finance andgeneral administration programmes forincreasing the organisational efficiency.Source: Company releasesNote: * Recent deals won by Infosys not cited as size not disclosedAddressing China opportunityfrom India as a servicing hubremains difficultThe much touted China opportunity likely to be a long range oneNasscom estimates the China addressable opportunity to be more than 2x India over thelong haul. While China is seen as a market similar to India in many aspects andtechnology spending drivers, we believe that it is likely to be a far more difficult marketto penetrate. Local language is only one of the reasons. Another reason is that thegovernment is the second biggest spender of IT in China after manufacturing. Animportant factor that begs consideration is that nearly three-quarter of China’s Top 500companies are state owned enterprises (SOEs). Attracting this market is not easy for theBig 3, given the work they have to do to build recognition and equity with local decisionmakers.The Big 3 will have to build considerable local presence and relationships. The Chinaopportunity, in our view, cannot be addre ssed from India as a servicing hub. The Big 3will have to:(a) Demonstrate the same level of campus relationships and institutionalised hiring asthey have done in India. They will have to create the same eco-system in China overa period of time as they have done in India. Infosys has established its Chinasubsidiary in 2003 and yet today, it has just about 1,000 professionals. TCS hasinvested in China since 2002, but China accounts for only about 1% of its totalworkforce.(b) In addition to developing technology and localised solutions for local IT, providersalso need to demonstrate commitment to develop capability in China. For example,Microsoft, IBM and SAP have aggressively invested in China’s capability byestablishing full-fledged research centers. This would be one way to create afavourable public image with the government, necessary to survive in China.78 Edelweiss Securities Limited

Making a Mark in India & Emerging Markets(c)Stitch partnerships with key local companies in the geography to be able to offerboth bundled solutions and specific solutions (e.g. as SOEs in China upgrade theirhardware systems, partnerships with hardware companies in China is key). We learnthatIBMhaspartneredwithaleadingdomesticplayertolaunchanextgenerationmobile payment system. Again, in India, integration and consolidation is likely to bean overarching theme.(d) Be prepared for the long haul. It is difficult to make a dent in China in a reasonabletime frame. Fruits from a specific China strategy will take at least five years to showup; especially, revenues in this market will follow with a considerable lag.Case study: Unitech Wireless - The mechanics of a ground-breaking dealWipro’s Unitech Wireless deal (reportedly USD 550-600 mn) is unique for many reasons,not the least because the execution of its business model essentially depends on outcomethat Wipro can provide. Equally important is Unitech’s ability to establish subscriberpenetration as per timelines at acceptable ARPUs is critical to Wipro’s pay offs.The greenfield, end-to-end contract is uniquely structured and is split into two broadphases with the operations phase following the set up phase:a) Set up phase: 18 months or 1.5 years.b) Operations phase: 90 months or 7.5 years.As part of the set up phase, Wipro will build the entire technology platform for UnitechWireless over 18 months, split across multiple milestones. The commercial considerationhas been accordingly captured in the contract.The operations phase starts after the set up phase. Here, the commercial model is basedon the revenue share model. Wipro’s pay offs will be a derivative of Unitech’s: (a)subscriber base; and (b) revenues.Costs for Wipro will largely depend on the subscriber base (or planned subscriber base);hence, linking pay offs to subscribers is a cost plus pricing formula in spirit.Fig. 17: Revenues pay-offUnitech's revenues# subscribersDownside protected by setting thresholds forsubscribers and revenuesSource: Company, Edelweiss researchEdelweiss Securities Limited 79

Information TechnologyBy linking the pay off to revenues, Wipro has bet its success on that of its client. However,in such engagement, it is important to protect downsides or set the floor, which Wipro hasdone.It has guaranteed itself a certain minimum if targets on either count (number ofsubscribers and/or revenues) are not met by Unitech Wireless.Wipro expects that the deal margins should track company-average wide marginsby the end of the set up phase with strong upside possibility, depending on therevenue performance of Unitech Wireless. Its earlier work for Aircel has given itfamiliarity of experience of undertaking a similar transformation exercise in the Indianenvironment.On what Wipro will deliver: Wipro will implement most of the functional areas forapplication transformation in telecom services, covering key areas like retail billing,mediation, interconnect, revenue settlement, provisioning, CRM, revenue assurance &fraud management, data warehouse and business intelligence, besides others. It willdeploy component based Service Delivery Platform (SDP) for Unitech Wireless to deliverthe said range of services including Multi Channel Access, Real Time Information Delivery,Multimedia Content, and VAS. The design and functionality of SDP is key to scalability andtimeliness.80 Edelweiss Securities Limited

Sales & Marketing: Reaching the Next LeagueSales & Marketing: Reaching the Next LeagueTo make the most of the opportunity points amidst the crisis, Indian IT companies mustincrease the quantum and quality of their SG&A spending (more so their S&M). It isinteresting to note that emerging from the previous tech crisis in FY02, Infosyssignificantly raised its S&M in FY03. Why should today be any different?We distinguish between “dispensable” SG&A and “good or necessary” SG&A. We believethat while Indian companies are doing well to cut back on dispensable SG&A (such astransferring onsite support, pre-sales and G&A offshore, consolidating sales offices), theyare not uniformly well enough to step up the “good” SG&A (hiring practice/domainspecialists, hunters for new geographies, deal sourcing and structuring teams).Unfortunately, they have cut back on this aspect till now. To redress this, we believe thatincreased “good S&M” will account for about 100-125bps of additional S&M investments(as a percentage of revenues) over FY11-13. In this context, we also look at whatinnovative and investment-oriented companies such as Cognizant are doing in thecurrent environment to further break away from the pack. We note that only Cognizanthas added over 500 client partners/ account managers with P&L responsibility in the past three years.The comparative S&M snapshot at a glance:Table 20: Who leads in S&M?TCS Infosys Wipro CTSHS&M as % of sales NA 4.8 4.6 NAHunters versus farmers mix More hunters More farmers More hunters BalancedLocalisation of sales force Low Medium Medium HighLarge program management investments Medium Medium Medium HighPreference for heavy hitters Yes No Yes YesGood use of partnership/alliances No No Yes NoSMB focus Yes No No NoAbility to identify high-potential accounts Medium Good Medium GoodAccount mining strength Good Good Medium BestHunting new account-geography expansion strength Good Medium Good BestOverall Fair (4) Good (2) Fair (4) Best (1)Source: Edelweiss researchEdelweiss Securities Limited 81

Information TechnologyChart 29: Strength of sales and marketing force over past three years*900821 802(Nos.)7205403604986044994255373853404442702131800FY09 FY08 FY07 FY06Infosys Cognizant WiproSource: Company, Edelweiss researchNote: * Infosys’ numbers in FY09 include some internally reclassified personnel; definition of S&M iscompany-specific and hence, the wide discrepancy between Wipro’s and Infosys’ S&M people numbersSales focus has shifted fromfarming to hunting for InfosysTheBig3inbriefTo sustain leading growth, Infosys will intensify investments in practice specialists,early–stage verticalisation and new business development in under-penetratedaccounts/geographies. Selling in tough times implies demand creation as opposed toplaying to or capitalising on customer-created demand. Infosys’ SG&A has historicallybeen biased towards the farmer (client mining) in the hunter:farmer mix as opposed tothe relatively greater needs of a hunter (new business development) in sniffing outopportunities in a dynamic, pro-active manner with greater help of its domain solution orconsulting experts. This need has found recognition within Infosys with the clientengagement model getting more sophisticated with considerable thought given to theright hunting and pay for performance models. Infosys is involved in a thoroughretraining of its sales force, preparing augmentation guides and overhauling its salescompensation structure (discussed in detail later on in this section).TCS, while maintaining its stream of investments, needs to ensure greater effectivenessof its S&M spending. At over 1,000 S&M personnel (and over 850 quota-carrying salespeople), the company clearly has the most extensive on-the-ground presence of its salesforce (reflected in its higher SG&A spending) but falls short of holding them to manageaccounts of size comparable to what Infosys’ account managers do in general. TCS has,in the past, employed local consultants to help bag new clients in non-traditionalgeographies. However, we find account management and mining is perhaps not asrefined as it could be. The company needs to realign its marketing focus towards farmers(account managers), away from hunting, which seems to have found thrust through therecent restructuring. Also, we understand that TCS has tended to shift the delivery linepersonnel to manage sales. This has limitations in scaling up beyond sellingscale/capacity and lower costs.Wipro needs to leverage the combined strengths of its sales force with those of itsacquired entities (especially Infocrossing) to increase its competitive positioning for largedeals. The company has built a fair degree of sophistication in selling services such asinfrastructure management, BPO and testing (areas in which it has an edge over Infosys).It has stemmed some of the decline in its core R&D/technology segment throughimproved integration of R&D and IT programmes into the authority of a single individual.82 Edelweiss Securities Limited

Sales & Marketing: Reaching the Next LeagueLocal and difficult but high potential markets require local buy-outs or partnerships asCognizant, for example, has shown with the alliance of T-Systems in Germany or asWipro has shown in the Middle East. Infosys has struggled to make an impact on theGerman market (though it has done well in Switzerland), but a buy-out or partnershipwill do that much more easily than a fully-fl edged organic entry that it is currently doing.The last time Infosys took this route was its acquisition of Expert Systems to break intoAustralia and deepen penetration into the telecom service provider segment (via Telstra).Also, the SG&A structure of Infosys and to a lesser extent for the other two (TCS andWipro) is skewed to a single channel (i.e. large key account sales force). This needs toevolve over time to manage multiple sales models (e.g., internet, telesales, VAR,distributors) if Indian IT has to credibly reach out the burgeoning SMB. It is time to uptheanteinmorewaysthanone.What ails SG&A in Indian IT?SG&A practices in Indian IT are undergoing a sea change. We believe that Infosys amongIndian service providers leads the way in effecting this leadership change. The rules ofthe game on SG&A will have to change in some ways that we identify as follows:What is Indian IT lacking in sales and marketing?1. Sub-verticalisationIndian IT is reaching a juncture where it has to sub-verticalise by S&M and delivery.Companies generally take the first and easier route of clubbing the less important orsub-scale verticals under the “others” category and have a general, less-focusedapproach towards such verticals. For example, Cognizant has dedicated delivery, prospecting andsupporting teams for sub-verticals in retail such as consumer goods, speciality retailersand groceries even while each of these sub-verticals contributed little to the overall revenuemix (low single digit in percentage terms.)2. A proprietary engagement structure replicated throughout organisationInfosys comes closest to creating a proprietary yet flexible structure replicatedthroughout the company. It has three tiers of sales and marketing personnel, viz.,practice partners, account managers and programme managers. Programmemanagers, also partly billable, could identify opportunities within sub-segments of alarge customer and could combine their specialist knowledge with their technologicalconsultative mindset. However, the structure per se is not nearly as important asthe rules of engagement with the customer and delivery (back end). How muchdiscretion and accountability does delivery have in the relationship? How is jointaccountabilityestablished and how clearly are the compensation structures jointlyowned? Typically, in such a relationship of peers, both the delivery directors (inIndia) and the account directors have joint performance measures that enableoffshore managers to appreciate business realities.Cognizant’s trademarked “Two-in-a-box” mode l has worked well. It is now upgradingthis to “Three-in-a-box model” (discussed in Appendix: The rise of Cognizant:Lessons for Indian IT).3. Specialists who can change rules of the game: What are these rules?Wipro has a full-fledged global programme management team that aids efforts ofthe sales staff. This team is often instrumental in defining key outcomes as businessvariables that matter to clients. Some of Wipro’s bigger engagements in the recentpast, like the Unitech Wireless deal, transform terms of engagements to risk-rewardmodels basing payoffs on number of subscribers and subscriber growth whilelimiting downsides.Edelweiss Securities Limited 83

Sales & Marketing: Reaching the Next LeagueTheBig3indetailINFOSYSInfosys’ SG&A spending has moderated as a percentage of revenues, suggesting that thecompany is keeping a tight leash on its SG&A operations (more so S&M, see chart 30).Chart 30: Infosys’ S&M sharply scaled down; must pick up now10.08.0Infosys’ S&M expenses hadpicked up post the previousdownturn(%)6.04.02.00.0FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 Q1FY10G&A expenses as a % of revenuesS&M expenses as a % of revenuesSource: Company, Edelweiss researchWhat then explains the trend of lowered S&M spending (as % of revenues)This is reflected in the much lower per capita sales payout (included bonus), whichsuggests a greater intensity of offshore pre-sales personnel (movement offshore), lowerexperiencedresources and cutback of incentives of Infosys’ high-profile consultants (inInfosys consulting). Marketing (or event-driven expenditure) and branding expenditurehas virtually ground to a halt. Also, travel and communication expenses have comeunder the scanner, an uncomfortable duality in our view, because cutback in travelexpenses should ideally be made up for by increased communication expenses, in ourview. Infosys could have greater representation of quality local “heavy hitters” that canbring the company into play at the margin in new accounts. More so, when they areavailable in greater numbers and at lower costs in this environment.Chart 31: Per capita personnel S&M expenses have trended down275.0263.0(USD '000)251.0239.0227.0215.0FY07 FY08 FY09 Q1FY10S&M personnel cost for InfosysSource: Company, Edelweiss researchEdelweiss Securities Limited 85

Information TechnologyStrategic accounts reviewed at highest levels by Infosys’ executive councilInfosys has identified about 50 highest potential accounts for continual review byexecutive council members. Each member reviews five accounts on an average. Thereview covers: (a) specific resource allocation; (b) general resource allocation; (c) multitierrelationship status; (d) transformation services; and (e) increasing success inoffering bundled, integrated offerings on an ongoing basis, migrating beyond thesingle/two-service status.Full-scale verticalisation at Infosys still at bayOne of the unique features of Cognizant, as discussed in our Appendix, “The rise ofCognizant; lessons of Indian IT”, is that the company engages in full-scale verticalisation(including verticalising its sales force by industrial segments and even sub-segments);even in geographies and verticals it is sub-scale. Infosys has still not verticalised its salesforce in geographies where it lacks scale (such as APAC), preferring to organise sales byvertical in the more established geographies.Experienced and resourcefulhunters find need in currenttimesThe hunter versus farmer strategy at Infosys needs to be better optimised infavour of more experienced and resourceful hunters. Quality of strategy is moreimportant than a mere shift in emphasis. Infosys’ traditional strengths have been infarming (client mining) as opposed to client acquisitions and quick ramp-up. But, tillrecently, the company’s weakness in its co re top 10 client portfolio is manifestingexplicitly, spotlighting the need to focus on new client wins and quick ramp-ups (seechart 32 excluding BT, its top client).Chart 32: Revenues from top 10 clients (ex-BT) have dipped in past 4 quarters275.0250.0(USD mn)225.0200.0175.0150.0Q1FY07Q2FY07Q3FY07Q4FY07Q1FY08Q2FY08Q3FY08Q4FY08Q1FY09Q2FY09Q3FY09Q4FY09Q1FY10Top 10 clients (ex-BT)Source: Company, Edelweiss researchThe sales and marketing strategy needs an additional fusion of heavy-hitter hunters. Itstrack record in prising open new markets could be better, in our view. However, to thecompany’s credit, it is paying utmost strategy to the quality of new client sign ups. It haslaid down clear criteria such as:(a) The client must belong to the Fortune or global 1000/2000 group; Infosys has laiddown clear disincentives to opening non-scalable accounts.(b) The client, if small, must show heavy preference for technology spending.(c)The client must have potential to offer transformation/large deal revenues.Infosys has significantly bettered incentives for account managers for working withthe F-1000/2000 or G-1000/2000 accounts as opposed to many smaller accounts.86 Edelweiss Securities Limited

Sales & Marketing: Reaching the Next LeagueAlso, under-investment in existing accounts needs to pick up. It is all too easy toship overseas located relationship managers/account managers to India offices, butit comes at the expense of client mining. This is better accomplished through use ofprogramme managers in greater numbers.The growing S&M imperatives in FY10-11 at Infosys should also cover greaterrecruitment in continental Europe (e.g., Germany, France) and developingmarkets. Need to hire horizontal sales specialists is high and a good portion ofrecruitment in these geographies will comprise such specialists. We believe thatInfosys has fallen behind the curve in assigning dedicated sales and marketing footprintin Europe to cover verticals such as financial services telecom and retail—two of itsmainstay domains. The result has been a steady absence of contract wins in Europe indeals lost to competition during FY09. Also, we note that Infosys’ consulting subsidiaryhas a predominant US-centric presence with little footprint and traction in Europe. Hence,in our view, the company is likely to invest in building front-end and local consultingteams in Europe to address this lacuna. What is, however, more important in our view isthat it needs to build momentum in emerging markets such as APAC and India on acomparable scale as Wipro and TCS. Thus, there is increased focus in finding suitablehunters for these geographies. Also, the company may show less reluctance thanbefore in front-ending larger deals requiring flexible contracting structures.Build-out of horizontal salesspecialists along with verticalspecialist essential for clientminingOne of the more important elements in managing to fix the full-services modelis to fill out the growing need for horizontal sales specialists (IMS, BPO, productengineering, integrative consulting). Horizontal sales specialists are also subjectmatter experts. Vertical sales specialists (e.g., sales experts from verticals such as BFS,telecom, manufacturing) prefer to have horizontal sales specialists pitch their respectiveexpertise to help them win new service lines in existing accounts. Infosys has identifiedsales specialists in areas it needs to build strength (particularly in infrastructuremanagement, a big and growing area where Infosys is a bit behind the curve. e.g., howcan it win outsourced network management in follow-on business from an existingtelecom client in Germany?) To win this business, the proposition in addition to atelecom sales specialist, needs to include the consultative pitch of the infrastructuremanagement sales (IMS) specialist. The end-to-end services provisioning for Infosysgathers credibility with build-out of horizontal sales specialists who will help the verticalsales specialists sell more to a client. So far, the company has done reasonably well withsales specialists in enterprise solutions and testing.In essence, sales and marketing officers need a horizontal (practice) orientation as well(see fig 18).Fig. 18: A level of sales specialisation by horizontal, vertical is yet to emergePractice specialistBPO IMS TestingProductengg.PackagesAccountmanagers alongverticalsBFSIMfg.TelecomRetailHigh-level of sub-specialisation not yet(Sales professional meant for testing in telecom)Source: Edelweiss researchEdelweiss Securities Limited 87

Information TechnologyTo Infosys’ credit, it is leading the other two (versus Wipro and TCS) in rethinkingthe manner of SG&A functioning. It is undertaking three specificinitiatives to enhance the value of the portfolio managed by an accountmanager:(a) Incentivising the account manager on the quality of accounts opened.Infosys leads in rethinking themanner of SG&A functioningamong theBig3(b) Consistently pogramming the account manager to think in terms of business valuearticulation as opposed to cost reduction proposition—various business valuearticulation models are put together covering different programmes across verticals(e.g. calculating the plug on lost sales as a result of improved uptime of financialtrading platforms).(c)Improving the sales force productivity models that have been traditionally used thusfar—selling multiple service lines within the expected timelines has increasinglybecome an important measure of sales force productivity.Table 21: Infosys’ current sales and marketing imperatives at a glanceCovering new geographies (Continental Europe/Asia)Hiring new practice specialists in BPO, IMS, Product engineeringSet stricter account opening norms e.g. increased focus on F-1000/G-1000classification, high tech spending clientsMonitor and incentivize account managers on- adoption of new engagement model by client of outcome-based pricing- selling bundled solutions- "Transformation" deals- Implementing proprietary value articulation modelsSource: CompanyShould Infosys’ G&A (8% of revenues) leverage (or decrease) with size?Not necessarily so in linear fashion, as the predominant India delivery model gives wayto the global delivery model. Over time, as Indian IT companies get more global in theway they deliver, they will expand their GDC presence beyond India with greateremphasis. Therefore, it becomes unrealistic to expect G&A expenses to leverage asdelivery centres outside India cannot compare with India in expenses, size, scope, andpyramid. Infosys has already signaled a shift in thinking by preparing to set up a fullyfledgeddelivery centre in Germany (delivery and supporting functions) and will followthis up in France as well.TCSExtensive hunting nowaccompanied by better structureto enable improved farmingFeet on ground; restructuring working its way through the systemTCS has the most extensive on-the-ground sales and marketing presence (well over1,000 S&M personnel and over 850 quota-carrying personnel). However, like Infosys, ittoo has to think through its hunter and farming strategy. Prior to its restructuring, thesefunctions were not necessarily segregated and it was not uncommon to see peoplewhose predominant function was hunting do account management and vice versa. Whatcomplicated this further was the reporting authority. Farmers (account managers) usedto report to and be responsible to geographic heads rather than vertical heads. Thus, thereporting structure was not aligned along vertical lines. That has now changed. Hunters(new sales/business development personnel) are assigned to specific verticals and reportto the respective geographic heads, while farmers report to their respective verticalbusiness unit heads.Segregation of responsibilities has also allowed TCS to recruit professional salespersonsinto hunting roles. The company has been hiring only experienced locals in the past fourfiveyears, which seems to be in abeyance in the current environment.88 Edelweiss Securities Limited

Sales & Marketing: Reaching the Next LeagueConsolidation of sales force andsales offices underwaySales optimisation must as delivery managers are rarely demand creatorsNumerical strength of TCS’ sales force does not necessarily translate into superioreffectiveness. There is a case for monitoring the effectiveness of personnel, recalibrateand rotate responsibilities, especially if some are found wanting in building deal pipelineor obtaining RFPs. The company’s sales engine comprises a fair degree of professionalswho have risen through the delivery ranks within the company to take up sales andmarketing responsibilities (thus, they tend to be more technically oriented). We gatherfrom our sources that a consolidation exercise of the sales force and sales offices isunderway to present a meaner and more focused presence; over 15 overseas salesoffices have been shut down and consolidated to a larger presence. TCS has also beenrunning a revamped and more effective sales training program for the past two-threeyears, introducing concepts like sales coaching and a standard set of sales tools andtechniques that ensure the sales force is better placed to compete.Good hunters at TCS, but not so good farmersExtensive office presence to some extent ensures better market intelligence in areaswhere peers and geographies are not comparably present. Thus, TCS’ win rates in recentquarters are more numerous than peers (see chart 33).We, however, believe that account management and farming are much less strong atTCS than hunting. This can be partly attributed to experience and locality and partly tothe fact that the earlier structure did not clearly segregate hunters and farmers. Thisresulted in diffused attention to farming. Better farming lowers the associated cost ofsales and SG&A – an area where Infosys scores over TCS. But, TCS is confident that withthe new vertical alignment of its sales force and change in reporting structures, suchdeficiencies are getting addressed. The jury is out as difficult environment makes theverdict pending for much longer than expected.Chart 33: TCS has generally led Infosys in new client wins in the past7056(Nos.)4228140Q1FY07Q2FY07Q3FY07Q4FY07Q1FY08Q2FY08Q3FY08Q4FY08Q1FY09Q2FY09Q3FY09Q4FY09Q1FY10TCSInfosysSource: Company, Edelweiss researchIndependent customer P&Ls to cover much greater proportion of clientsAs opposed to the practice of having independent customer P&Ls covering top clients,TCS’ new sales and marketing infrastructure assigns even G&A resources (typically thosein shared services such as finance, HR) on a dedicated basis to customer groupings.Dedicated delivery resources for customers are recognised and their costs accounted forunder the respective customer P&Ls.Edelweiss Securities Limited 89

Information TechnologyWIPROS&M cuts have been even more severe than for InfosysWipro’s reduction of S&M has been harsh (see Chart 34), though the company clarifiesthat Q1FY10 should mark the bottom as its ‘good’ S&M spend will increase going forward.Chart 34: Y-o-Y reduction in absolute S&M spend; Wipro’s cuts ahead of Infosys208(USD mn)(4)(16)(28)(40)Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10InfosysWiproSource: Company, Edelweiss researchMaking important changes to incentivise sales forceRecalibration of compensationstructure resulting in betterorder book build-upWipro’s improved ability to build order books in the current environment has partly gotto do with the way it recalibrated the compensation structure of its sales force, especiallyof its hunters. Earlier, the most important element of the compensation structure wasrevenues. The company, however, now gives impetus to order book as a variable insetting compensation. For hunters, order booking is the key compensation variable.Even account managers (farmers) at Wipro are incentivised on order booking (newbusiness in existing clients), in addition to revenues and margins. The company’s orderbook has handsomely grown YTD, reflecting partly the success of the reset keyperformance indicator (KPI).Preference for local heavy-hitters vis-à-vis InfosysWipro has been ahead of Infosys in relaxing its compensation structures to accommodate“heavy-hitters” in its sales and marketing model. Several of them have found their wayinto Wipro’s impressive global management team, which has put the company in anadvantageous position in large deals that required innovative solution-cum-consultingskills. The costs of consultants, global programme management staff and businesstransformation team are included in the cost of revenues for Wipro (and not in S&M,which is the case in Infosys). Thus, the reduction in S&M expenses in Wipro does notmean lack of investments in these high-leverage areas. The company has been relativelysevere in cutting flab in S&M resources at the junior level. Also, there has beenconsiderable localisation of the work force in the recent past, with about a third of theonsite sales force being foreign nationals—on this dimension, Wipro matches Infosys.Global programme team has been the focus of Wipro’s recent investmentsThis team consists mainly of consultants who have an enhanced ability of consultativesolutioning. By virtue of the way the consultants structure deals (e.g., adjusting the costof operations in a particular programme for a customer in the energy vertical on a realtimebasis to the price of gas/oil, they variabalise the client’s cost structure for the90 Edelweiss Securities Limited

Sales & Marketing: Reaching the Next Leagueprogramme to the extent possible). Thus, to some extent, the client should be able tolower the cost of operations in response to falling gas prices (though the reverse neednot take place).S&M: Positive for identifying growth areas; negative for inability to effectintegration of acquired entitiesCredit Wipro for hiring practicemanagers to play the large dealgameWe would credit Wipro with hiring practice managers in two areas, viz., infrastructuremanagement and BPO, ahead of Infosys. This has helped bolster Wipro’s positioning inlarge deals involving infra management and BPO. On the negative side, the company hasbeen somewhat late/ less successful in integrating the S&M and consulting specialists ofits multiple acquired companies into the global delivery framework. Several left, and ofthose who stayed back many continued to operate in silos for a while till theorganisation-wise restructuring came into effect, which ensured some integration ofpractice specialists across verticals.Local geography sales heads vs. vertical heads presents uncomfortable dualityThe local geography heads ideally drive the allocation of horizontal practice specialists(e.g., head of testing or infrastructure management in Europe) to the respective verticals,based on pipeline they see across verticals in their geography. Allocation of salesefforts/time across verticals is key and we learn that Wipro is still fine tuning its effortson this resource prioritisation exercise. The local geography head should also essentiallydrive standardisation of sales productivity models in his geographic domain. We still seesome issues in Wipro with dual reporting of the vertical sales staff in various geographiesto both vertical heads (who tend to be located offshore) and local geography heads.Sales integration underway to plug account management gap with InfosysWipro lags Infosys and TCS inUSD 50 mn plus accountsOver the past three years, Wipro has strenuously attempted to close the gap relative toInfosys in large account management with its focus on dedicated resources for itsmega/gamma accounts. Many of these accounts have dedicated G&A resources (besidesdelivery and sales) and enjoyed very periodic reviews under the oversight of thechairman himself. Wipro has comparable number of USD 20 mn and USD 50 mnaccounts as Infosys, but the deviation is seen in accounts of size exceeding USD 50 mnwhere Wipro still lags both Infosys and TCS. This is surprising because Wipro holds itsown in end-to-end positioning on the delivery side.We believe this has to do with the structure that limits cross-selling. We explain this asfollows:As recently as a year ago, revenue targets for R&D and IT divisions for the same R&Dclient (e.g. Nokia, Siemens, and Ericson) were managed separately by multiple accountmanagers. This has since been integrated under an overall sponsor who is charged withpenetrating the account using both R&D and IT services. This holistic view has helpedovercome the tepid pattern of R&D services revenues seen over the past three-five years,to some extent. In the larger R&D accounts, much of the follow-on is in mainstream ITservices. Thus, the company is working on driving integration in its sales structure,needing to keep pace with integration on the delivery side. Also, Wipro is investing manymore programme managers in its large accounts to ensure continued growth (asopposed to delivery managers managing the larger accounts in status quo fashion).Cognizant is adept in swarming its high-potential accounts with programme managers toexceed satisfaction and ensure greater mining, thereof.Edelweiss Securities Limited 91

Information TechnologyOther factorsWorking with the requisite hunter-farmer strategy; is there a desired mix?Ideally, the composition of hunters and farmers should be increasingly weighted infavour of farmers (existing account managers) as the installed base of clients builds up.However, we believe that the proportion of hunters (new account openers) should bemaintained at 10-15% of the total mix, else companies may not be doing enough on newmarkets/initiatives (see Cognizant’s proportion of hunters to farmers over the years inthe chart below).Chart 35: Cognizant’s hunters account for a decreasing proportion of totalquota-carrying personnel still at 10%100.080.0(%)60.040.020.00.076.923.174.425.661.039.076.423.679.320.716.7 83.381.518.585.214.888.611.490.39.7CY99CY00CY01CY02CY03CY04CY05CY06CY07CY08Sales personsAccount managersSource: Company, Edelweiss researchExperiments in hiring local consultants should be seen as temporary as bestOver the years, sometimes all the three have experimented with consultants andrainmakers who can help with quick wins. However, we see issues with this approach ofscalability and broader integration into the organisation. We learn that firms that haveused this approach to penetrate Japan (a difficult market) have not made headway. Thus,a hunting strategy that co-opts using local rainmakers to open doors in newergeographies may be a good first level experiment at best.92 Edelweiss Securities Limited

SMB Segment: Execution Critical for Good GainsSMB Segment: Execution Critical for Good GainsGartner reports that more than half of the worldwide technology spending is outside theGlobal 2000 corporations (G-2000) and this spending is growing more than two and a halftimes that of the G-2000.SMB segment in IndiaIBM estimates the total IT spending of Indian SMBs will touch USD 11 bn in 2009, ofwhich, USD 1.3-1.5 bn is expected to be spent on IT services alone. IBM has an SMBcustomer-base of nearly 2,000 in India and it expects IT spending from this segment togrow over 20% Y-o-Y.Mentality to cater to SMB is different and not easy to overcomeThe Big 3 have traditionally stayed away from the fast growing SMB segment becausetraditional ways of serving and selling large enterprise clients fetch much larger bang forthe buck than from SMB (economies of scale in delivery and selling do not exist in SMB).Also, addressing the SMB segment requires a granular and discretised approach. It alsomandates a methodical and reticulate network of channel partners such as value-addedresellers and distributors. In many ways, it must be run as a separate focus group withits own development and marketing resources, separated from the parent company asTCS is doing.Table 22: Go-to-market approach for SMB requires distinct focus and disciplineKey drivers for successDescriptionSMB needs assesmentUnderstand core needs and behaviours of SMB customersMicro-segment: The market and focus on most viable segmentsCreation of SMB-specific offeringsDevelop distinct offerings for SMB-specific needs, not scale down enterpriseproductsEnsure flexibility, ease of service and reliability in offeringsCreation of profitable sales modelLean infrastructure deploymentUnderstand channel economics to build visible ecosystem of partnersOperate multiple routes to market (e.g., web-based direct sales, sales throughpartners or sales through distributors)Use technology-enabled infrastructure to drive down costs (e.g., internet-basedself service)Apply CRM techniques to customers and partnersScalable lead generationDistinct organisation structureLeverage affiliated relationships to gain access to customersAggregate customers to sell face to faceInvest sufficiently in brand buildingBuild a distinct organisation aligned against actionable segmentsEnsure complete segment ownership of SMB organisation and tied up supportinfrastructure with field exeuctionSource: NasscomEconomics of SMB service providerInvestments in SMB are made upfront, like in products. As revenues build up throughvarious models: (a) subscription based (monthly fixed fee based on number of users);(b) pay-as-you go (on actual usage like an ASP); and (c) combinations thereof. Grossmargins in such a model tend to be high (>70%) as incremental investments in everyadditional sale are absorbed more in expenses in selling, distribution and revenue sharewith partners. The economic model of Salesforce.com, a SaaS-based hosted CRMsolutions provider, is instructive: Salesf orce.com has demonstrated robust revenueEdelweiss Securities Limited 93

Information Technologygrowth at gross margins of nearly 80% (a five-year revenue CAGR greater than 60% tohit USD 1 bn in revenues). Much of the gro ss margins of Salesforce.com are eaten awayby sales and marketing expenses (~50% of revenues). Salesforce.com has an installedbase of 60,000 companies that can be managed only with a partnership-intensiveapproach.Chart 36: Revenue growth, margin and SG&A profile of Salesforce.com90.085.080.080.070.075.0(%)60.070.0(%)50.065.040.02,005 2,006 2,007 2,008 2,009Revenue growth (LHS)Gross margin (RHS)SG&A expense as a % of revenues (RHS)60.0Source: Bloomberg, Edelweiss researchSMB is a SG&A intensive modelThis corroborates our belief that SMB is a SG&A intensive model. Companies have to beable to manage and streamline their SG&A set up to realise superior economics in thissegment. It involves, among many other things, developing an appreciation of whatmust be invested in-house in SG&A and what must be managed with partners (through avariable-cost model to the extent possible). To sum up, while revenue growth is not anissue (revenues spiral with increase in the installed base of SMBs), the appropriate Ownversus Partner strategy to manage SG&A assumes paramount importance in thissegment.Technology evolution is breaking down barriers to address this marketSAAS and cloud computing are proving cost effective to meet the processing andcomputing needs of enterprises in a hosted manner (thus converting the capex model toopex for the customer). Thus, we believe that it will become progressively easier toaddress smaller customer segments (such as SMB), going forward. In fact, TCS (asdiscussed in the case study) leverages its own cloud to address SMB.94 Edelweiss Securities Limited

SMB Segment: Execution Critical for Good GainsCase study: TCS has a two-year head start over othersTCS’ SMB focus is the outcome of a three-month effort initiated in January 2008,during which the company met several hundred enterprises in India of varying sizesand industries and ascertained their IT readiness. It assessed that the generalmaturity of IT adoption and buying behavior in SMB fell short of minimum. Severalenterprises (revenues of USD 100 mn) did not have even a network to link up theirsystems/hardware. Implementation of even elementary accounting software such asTally was absent. Enterprise packages were faraway bets.Given the huge gap in IT maturity, TCS concluded that total IT (IT-as-a-service) willbe the appropriate offering for the Indian market. (IT-as-a-service) is an elementarysoups-to-nut offering, covering hardware, software, applications (office) andbusiness process (HR, F&A, payroll, CRM and industry specific ERP solution) bundledas a utility to the SMB segment. It is configurable to a fine degree—addressing theneeds of a concern having “zero” IT maturity.IT-as-a-service is a catalogue-based model where the enterprise and service providercan choose compatible options within the mix (hardware, software, office and businessprocess after assessing current and future needs. We believe this is a good model as itcaptures maximum share of SMB wallet (unlike pure services) while also providing theflexibility to scale down the suite of offerings with more mature SMBs.Within a year of making the decision to hit this segment, TCS’ offering was ready tobe marketed, customised to various vertical groups—manufacturing, retail,professional services, education, and healthcare (primarily wellness). For example,customised modules for the retail segment included point-of-sale, warehousemanagement, store management, procurement, and supply chain. Manufacturing islikely to be TCS’ largest segment for SMB.Revenue modelThe revenue model is utility-based (per user monthly price based on capacity andnumber of users). Any future modules bought by the SMB customer is chargedalong the line. The SMB group within TCS has about 450 professionals drawn fromwithin the company and hired from outside.Challenges pertain to managing revenue traction and customer attritionIn our view, extrapolating the SG&A intensity of Salesforce.com to TCS’ SMB is notwholly appropriate. TCS has a much better chance of managing SG&A costs in amuch lower trajectory than Salesforce.com as such costs are India-based (while theIndian market is the focus). Also, TCS is likely to be able to have strong bargainingpower with channel partners given its size and strength in services and ability topush volumes. All told, the key is robust revenue growth to ensure above-averagecompany margins.Customer sign ups are proceeding at a fair clip (about 10-15 SMBs sign up permonth). TCS has already signed up well over 50 SMB customers. However, this hasbeen established only through direct sales. As TCS implements the foundation for itspartnership strategy, we believe that the ra te of customer sign-ups will multiplyseveral-fold (5-6x). The challenge will not be so much on delivery as the cloud withinTCS (private cloud) can host the capacity and infrastructure for servicing the SMB ona multi-tenancy model (many users at once). Challenge will be more around partnerand channel management.Edelweiss Securities Limited 95

Information TechnologyHowever, with an installed base of well over 4,000 customers by end of year four(this includes about 600-700 from direct sales and about 5-6x of that throughchannel partners), it becomes essential to develop economies of scale in deliveringand training (through hosted training sessions that involve many SMB participantssimultaneously). Towards this end, TCS has begun identifying value-resellers such astelcos/OEMs (telcos push TCS’ offerings when they deliver network to the SMB),existing MNCs such as Cisco, which primarily sell hardware elements.Will this make a dent on TCS’ financials? Yes, by 2013Table 23 highlights the revenue potential thre e years out. If focus is restricted toIndia, then annual revenue from SMB for TCS is likely to be USD 200 mn (by 2013),though breaking even by year two. Thus, it becomes essential to cater to marketsoutside India that have better pricing power and greater scale. TCS is implementingits go-to-market model for outside-India geographies.If TCS can exploit the market opportunity outside India, SMB can scale upwards of USD300 mn by 2013. Making good on the SMB strategy is a medium-to-long-term game.Table 23: SMB could spiral upwards on back of a well executed partnershipstrategyRevenue Model (Direct sales in India)Number of customers sign-up in year 1 (2010) 100Number of customers sign-up in year 2 (2011) 300Number of customers sign-up in year 3 (2012) 300Number of customers sign-up in year 4 (2013) 300Customer attrition (%) 10%Avg customer base by 2013 825Avg revenues per customer in 2013 (USD/year) 50,000(A) Annual revenues by 2013 (in USD mn) ~40(b) Revenue model (through channel partnerships)Number of customers sign-up in year 1 (2010) 100Number of customers sign-up in year 2 (2011) 750Number of customers sign-up in year 3 (2012) 2500Number of customers sign-up in year 4 (2013) 3000Customer attrition (%) 20%Avg customer base by 2013 4180Avg revenues per customer in 2013 (USD/year) 40,000(B) Annual revenues by 2013 (in USD mn) ~165Total 2013 revenues (USD mn) - (A) + (B)* ~ 205-210Source: Edelweiss researchNote: * Upside can accrue from a meaningful expansion outside IndiaAs per our revenue estimate of USD 200 mn by FY13, we see the SMBsegment breaking even during year two and registering well abovecompanyaverage margins towards the end of year three. Thus, it will takeclose to three years for SMB in TCS to emerge as a material non-lineartheme.96 Edelweiss Securities Limited

Healthcare: Near-to-Medium Term OpportunityHealthcare: Near-to-Medium Term OpportunitySummary: Healthcare as a vertical has perhaps never generated as much opportunity asbefore. In fact, IDC estimates that the explosion of opportunity in healthcare will significantlycompensate for the likely long-term decline in spending rates in the BFS segment. Whileopportunity in the big-pharma space (Pfizer, Astrazeneca) is not new to Indian IT,considerable excitement results from the burgeoning expenditure in healthcare reformundertaken by the government in developed markets. While the Big 3 can work their waythrough the payer side of the equation (payers are insurance companies that manage healthplans), working with providers is likely to be more difficult (as this is a considerably localisedand fragmented market, though huge). We profile the nature of opportunity addressable forIndian IT and conclude that only a very small portion of government-triggered healthcarespending can move offshore. The provider space is more dominated by EDS and AffiliatedComputer Services (ACS). With some additional investments, Wipro could leverageInfocrossing (an acquired company) to play more meaningfully in this space. Thiscould be a three-four year window of opportunity for select players to capturedisproportionate share.Fig. 19: US Healthcare IT spending has historically grown at twice that of GDP growth, fuelled by multiple driversUS national health expenditure 2004-08 (USD bn)2,5002,000Trends driving growth- Growing and changing healthcareneeds with aging of population- Greater awareness and expectationsof citizens- Increasing responsibilities of Governmentand healthcare providers(USD bn)1,5001,00050002004 2005 2006 2007 2008- Advanced technology and more information- Better access to health information- More treatment options- Advancing medical and technologyUS healthcare provider IT spending 2004-08 (USD bn)2017161615 1514(USD bn)128402004 2005 2006 2007 2008Source: NasscomOpportunity, yes, but how much can realistically be captured? Healthcare, ascommonly understood, consists of four segments. Of this, the sub-segment, creating themost buzz in this sector, is the provider space (with its linkages to the payer segment) –this is today a USD 17 bn opportunity in the US alone (refer to table 24) and is likely tobe the prime beneficiary of government-enabled spending that mandates hospitals andEdelweiss Securities Limited 97

Information Technologyhealth administrations to store and manage medical records as per defined standards.Towards this, healthcare codes are being st andardised and integration of hospitalmanagement systems is underway. This is also the space where the Big 3 are absent(barring Wipro to a degree).Table 24: Provider sub-segment to unleash opportunities; Big 3 traditionally present in payers and pharmaDescriptionKey trends that impact IT1. Provider Hospitals Hospital system transitioning from best-of-breed to integratedenterprise solutionsAmbulatoryElectronic health records are at an inflection point for adoption due togrowth at doctor officesOther healthcare*Greater need to secure, store and utilise patient data to improvepatient outcomesGreater push to share data across providers and create patient healthrecord (e.g. patients, technology venders, govt)2. Payer Integrated payer andproviders for-profitNot-for-profitSpecialistMore sophisticated data management required to improve medicaland performance management (e.g., disease management and careanalysis)Greater focus on cost-reduction particularly in reducing cost of noncoreITIntegration of legacy in-house systems with consolidationPayer IT systems need to accommodate new products (e.g.,CDHPs**)3. Pharma Infrastructure Proliferation of clinical data from multiple sources requires improvedanalytical tools (e.g., claims data, EHR #)ApplicationsPharmaceutical players exploring new models for R&D (e.g., greateruse of electronic data collections during clinical trials)Greater use of IT to enable sales and marketing4. Connectivity Financial (e.g., claims) Portion of claims that are electronic continues to increaseAdministrative (e.g.,practice management,elgibility verification,referrals, pre-certification)Desire to for greater technical sophistication to reduce cost andrework (e.g., auto redemption)Source: NasscomNote: *Homecare, long-term care; ** Consumer driven health plans; # Electronic health recordLarge-scale process automationrequired for addressing provideropportunityTapping the provider opportunity requires la rge-scale automation of processes within ahospital that Indian IT players could embark on as a promising opportunity. However, asshown in fig 20, there is only a narrow sliver of opportunity that can be offshoreoutsourced (some portions of IT and G&A of the typical expenses chart of a hospital).Local presence for the higher-value spaces such as diagnosis and treatment is requiredand this does not play to the natural advantages of Indian IT. So, Indian companies willhave to compete with a much wider array of local healthcare solution providers inUS/Europe who provide solutions as a platform which are particularly suited to the needsof smaller hospitals. We learn that even Accenture has a relatively limited presence inthe provider space.98 Edelweiss Securities Limited

Healthcare: Near-to-Medium Term OpportunityFig. 20: Only a narrow sliver of provider segment opportunity can move offshore (

Information TechnologyWipro could leverage Infocrossing as the latter has an in-house managed careplatform. However, real success will be determined by how Wipro makes theInfocrossing healthcare platform transplantable to other markets or local health systemsand craft tailor-made go-to-market strategies.Few healthcare specialists above USD 1 bn in revenues. www.healthcareinformatics.comprofiles the largest healthcare systems providers globally (see table 25).There are seven healthcare specialists over USD 1 bn in size (revenues). Wipro has leaptinto the Top 20, courtesy its acquisition of Infocrossing, while Cognizant, with nearlyUSD 700 mn from this segment (in CY08), is tenth in this list. It is notable that only twoof these seven are healthcare specialists – others are vertical practices of larger systemintegrators such as EDS, CSC and Perot or are captive healthcare practices ofconglomerate MNCs such as GE, Siemens and Philips. Also, we find that all specialistshave an aggressive M&A agenda to overcome challenges of localisation and limitedscalability thereof.Table 25: Very few healthcare specialists among Top 10; they are aggressively M&A-drivenSr No.CompanyRevenues 2 yr revenue Aggressive2008 (USD mn) CAGR (%) M&A historyNature1 McKesson Technology Solutions 2,984 27.2 Yes Healthcare specialist2 Cerner Corporation 1,676 10.3 Yes Healthcare specialist3 CSC 1,640 17.4 No BU within global SI4 Agfa HealthCare 1,583 (8.2) No Healthcare specialist5 Siemens Medical Solutions 1,400 NA No Captive medical unit of conglomerate6 Perot Systems 1,304 8.5 Yes BU within global SI7 GE Healthcare 1,000 NA No Captive medical unit of conglomerate8 Philips Healthcare 732 NA Yes Captive medical unit of conglomerate9 Allscripts-Misys Healthcare Solutions, Inc. 694 74.5 Yes Healthcare specialist10 Cognizant 688 44.2 No BU within global SISource: www.healthcare-informatics.com, Edelweiss researchNote: SI – system integrator, BU – business unitThe other sweet spot lies in big pharmaCognizant is uncontested leaderin services spanning the entiredrug development lifecycleAmong offshore players, Cognizant has an almost uncontested leadership position inhealthcare spanning payers, providers and pharmaceutical companies. The pharmaceuticalportfolio spans the entire drug development lifecycle-from discovery, clinical, manufacturing/productionto commercial operations (sales and marketing). Its sweetspot is particularly in drug development, covering analytics relating to clinical trials(straddling Phases 1 through 4) and submission management - an area in which Indiancompetition is relatively absent. The company also provides post-drug developmentanalytic support by way of an ongoing KPO. Where Indian IT competes with Cognizant inhealthcare is in handling post-research activities related to production, sales andmarketing support, and shared services support (finance & accounting, HR etc). IndianIT vendors have traditionally used SAP as their point of entry later on in the value chain.A good example is the recent AstraZeneca announcement for maintenance ofapplications over a five-year period. While Cognizant got the application maintenancepiece for discovery, clinic al and sales and marketing areas, Infosys got it formanufacturing and corporate applications (such as HR and finance). We observe thatCognizant’s growing capability in enterprise solutions could make it equally competitivepost-production opportunity, going forward. Ho wever, Infosys is making rapid strides inthe manufacturing side of pharma (such revenues are classified as part of itsmanufacturing).100 Edelweiss Securities Limited

Healthcare: Near-to-Medium Term OpportunityAcquisition of captive or enterprise business unitIt is possible for Infosys and others to plug this gap through the acquisition of a bigpharmacaptive, wherever such acquisition opportunities exist. It is notable thatAccenture boosted its presence in life sciences (pharma) through the acquisition ofCapgemini’s life sciences practice (a carve-out). Acquisition of captives could be the bestway to kickstart activity as Accenture has demonstrated. The USD 175mn buyout byAccenture is perhaps its largest acquisition by consideration in the last four-five years.To sum up, healthcare is an opportunity, but the burgeoning provider space does notyield to the traditional offshoring model to the same extent that BFSI and manufacturingdo. This can be a USD 1 bn revenue segment annually for select Indian ITplayers in five years’ time through penetration in the provider space, thoughmargins will be lower as this could be onsite-centric. Current margins aresustained only with platform-based turnkey solutions.Edelweiss Securities Limited 101

Information TechnologyPublic Services: Tougher Than it SeemsSummary: There is immense excitement over the government vertical opening up in acomprehensive fashion in developed and emerging economies. Tempting as it is to believethat the government is likely to be a robust growth segment for Indian IT, we are cautiousabout prospects of the IT industry making a mark in this segment in developed markets. Wesee a much better chance of it making a head way in the domestic (India) market.Making a mark in the public services arena in the developed markets (US, UK, WesternEurope) is likely to be difficult for Indian IT unless companies are willing to localise on a muchmore significant scale than they have done so far. To capture the public sector opportunity,Indian IT needs to tailor its go-to-market strategy in a fundamental way. An acquisition islikely to accomplish this much easier, but Acce nture’s challenged operating margins in thissegment (high-single digit) should highlight margin difficulties for the Big 3 in embracing thegovernment in the US/UK in a pronounced manner. The UK is relatively easier than the US topenetrate.Better way to address publicservices opportunities is throughhealthcareThe Big 3 can tap opportunities in the IT system and architecture design thrown up by newnorms around compliance, regulation, and risk management. However, offshoreability ingovernment work to support margins may be restricted for a host of considerations includingdata privacy. A much better way to address the public services vertical would be throughhealthcare, where opportunity not only exists as a result of regulation, but is also likely to bemore profitable than government services per se. Notably, Accenture has unified itsgovernment group with the healthcare group, as it sees government spending in healthcareas key to accelerate penetration through shared synergies. It is early advantage to Wiproamong the Big 3 due to the company’s acquisition of Infocrossing that works with a few stategovernments in the US in healthcare-related contracts. Infosys is likely to stay away.Government among top 3 verticals in terms of total IT spendingIt is clear that government is emerging as one of the largest spenders of IT. In 2008,worldwide IT spending in the government vertical stood at USD 169 bn (Source: IDC)and has grown fastest at 6.4% compared with any other vertical. Further, as per IDCestimates, spending by the vertical is expected to increase the fastest (CAGR of 5.5%over CY08-12). We note that a substantial portion of total government IT spend (~50-55%) is on software services, representing a large opportunity. Defence & homelandsecurity, education, health & human service, agriculture, among others, are largespending sub-verticals within the government space. Chart 37 presents the growth inworldwide IT spending by government vertical and Chart 38 shows the vertical-wiseworldwide IT spent for 2008.102 Edelweiss Securities Limited

Public Services: Tougher Than it SeemsChart 37: Worldwide IT spending for government vertical225.0180.0135.0(USD bn)90.045.00.02007 2008 2009E 2010E 2011E 2012EGovernmentSource: IDCChart 38: Vertical-wise IT spending for CY08 globally; govt. 3 rd largest spenderBFSI18%Heathcare2%TransportationUtilities &3%Const.4%Services7%Retail9%Mfg.17%Government12%Others15%Communication13%Source: NasscomCan Indian IT tap significant share of government opportunity?To capture the public sector opportunity, pr oviders need to tailor their go-to-marketstrategy (see table 26).Government vertical difficult topenetrateWe would note that government contracts are typically fixed price, outcome based andhave high entry barriers (difficult to secure). Further, the vendor selection process formost government projects are request for proposal (RFP)-driven and have pre-conditionssuch as requisite certifications for even participation. High priority is placed on prior workwith government at state, federal or local level in the past (primarily the USgovernment), thus restricting/barring companies from the bidding stage itself*. Thus,toqualify for bidding in government projects (outside India), an inorganic move (like HCLTech through Axon) enables to enter and kick-sta rt operations in this vertical. Further, topenetrate this vertical, companies need to have well trained sales force intimatelyfamiliar with the working methodologies and procedures of governments.* Navigating the complexity of the federal Multiple Awards Schedules (MAS) such as IT Schedule 70 as laid down by the Federal (used for suchareas as public key infra (PKI), software maintenance and equipment leasing) or Government-wide Acquisition Contracts (GWACs) such asSTARS, Alliant, ANSWER or Millennia can be daunting.Edelweiss Securities Limited 103

Information TechnologyAlso, government practice will primarily require local staff and presence, in which, Indianvendors are still far behind. Only TCS (due to its acquisition of Pearl BPO in 2005) andnow HCL (through acquisition of Axon work with the UK government), have made someprogress in tapping the public sector in the UK. We expect other Indian vendors to startworking with governments through the healthcare vertical, which could serve as aplatform to get into core government work.Table 26: Success factors for targeting public sector and defence customersSuccess factors for targeting public sector and defence customers1 Customer segment Focus on top 10 countries representing 80% of defence marketfocusCreate different value proposition for civillian government2 Sales approach Allign sales approach to longer sales cycles of government and defence customerBuild a local sales team familiar with government processesAcquire certification required for participating in government and defence RFP process3 Pricing and deliverymodelShift to a transparent cost plus pricing model given pressure on governments to getlowest pricingDecide an onsite mix based on security and proximity needs of governmentBudget for sufficient delivery lead time (e.g., obtaining necessary access permits andclearanceInvestment in developing relationships with local players focussed on defence andgovernment deals (e.g. Lockheed Martin)Source: NasscomGovt. practice significant for global system integrators; profitable for very fewOnly EDS operates at near-20% operating margins for the government segment. Wenote that margins for CSC and Accenture in this segment are in single-digits inpercentage terms. Of the three, we believe that EDS works with a much greater sharefrom the Federal government and defense, suggesting that longer-term contracts withthe Federal government in areas of defense could be more profitable in the governmentpie. One reason could be ability to price in outcomes over a longer-time period andhigher room for the likes of EDS to plug inefficiencies at the Federal set up throughoutsourcing. Notably, Accenture is absent from some parts of defense, except bordersecurity/patrolling.We note that for some global IT companies such as CSC and EDS, government/publicservice business is more profitable than rest of the business, despite higher quarterlyfluctuations.104 Edelweiss Securities Limited

Public Services: Tougher Than it SeemsChart 39: Operating margins in govt. segment higher than company average for EDS and CSCAccenture20.0EDS23.016.018.0(%)12.08.0(%)13.08.04.03.00.0FY03 FY04 FY05 FY06 FY07 FY08(2.0)CY03 CY04 CY05 CY06 CY07Govt.Overall companyGovt.Overall companyCSC8.57.5(%)6.55.54.53.5FY03 FY04 FY05 FY06 FY07 FY08Govt.Overall companySource: Companies, Edelweiss researchEdelweiss Securities Limited 105

Information TechnologyCase study: Accenture in public services: A mixed pictureAccenture’s public services group accounts for about 12% of its total revenues atoperating margins of 9.1%, below the company average. The company typically had amuch higher proportion of outcome-based (gain-share) revenues from this vertical. Ithas leveraged this ability elsewhere within it and this has contributed to its confidencein managing complex projects of such nature across other vertical groups.Interestingly, the current COO of Accenture was previously the head of the publicservices vertical within the company and was instrumental in driving Accenture’sbroad-basing of contract structuring incorporating gain-share and outcomes acrossthe company.Since considerations of transparency in government contracts are paramount,Accenture’s sole-sourced business in this segment is dramatically lower than itsoverall average (50%). Also, much of the company’s implementation is based onpartnership with state locals, government agencies and municipalities.The company derives 33:67 revenue mix from the Federal and state governments.Except for weapons development, Accenture is present in almost every other area forthe Federal such as health, postal, customs, immigration/emigration, public transit(railways/tolls), border management, education, etc. The company has a largedelivery centre in Texas, catering to th e Federal government work. Restrictions ontaking work out of the country get even more acute in Continental Europe, notablyGermany and France.Indian IT conceivably can match Accenture in re-architecting of IT systems anddefining boundaries of information and work flow exchange on account of emergingnorms from risk, compliance and regulation in this environment. However, it needs todevelop consulting and system architecting strength. Moreover, offshoreability of suchwork is limited.NHS: Accenture case portrays difficulties associated with govt. contractsAbout the programme: The NHS National Programme for IT (NPfIT) is an initiativeby the Department of Health in England to move the National Health Service (NHS)towards a single, centrally-mandated electronic care record for patients. Thisprogramme also aims to connect general practitioners to hospitals, providing access tothese records by authorised health professionals. NPfIT is the world's biggest civilinformation technology programme and known as Connecting for Health. This largesystems integration project programme was established in October 2002, withestimated total cost of GBP 12.4 bn. It was awarded to four vendors that includedAccenture, BT, CSC, and Fujitsu.Accenture withdrew from the GBP 1.9 bn NHfIT contract after three years of theprogramme award, as it was plagued with delays caused by software partner(Accenture’s version).Facts: In 2003, Accenture was awarded a 10-year contract of GBP 1.9 bn to be thelocal service provider (LSP) for this programme in the East and North East regions. InSeptember 2006, Accenture withdrew from the contract by agreeing to a pull-out feeof GBP 63 mn and handing over the contract to CSC.106 Edelweiss Securities Limited

Public Services: Tougher Than it SeemsRisks associated with government projects could weigh on Big 3a. Fixed price nature: Almost all government projects are fixed price, which increasesthe inherent risk for the vendor. Delays, uncertainty of completion, modification inscope of work etc., could affect the project’s profitability to a great extent.b. Delay in project completion: One of the key challenges a vendor faces withgovernments is that these entities typically fund projects through appropriatedmonies. While these projects are often planned and executed as multi-year projects,government entities usually reserve the right to change the scope of or terminatethese projects for lack of approved funding and at their convenience. Changes ingovernment or political developments could result in projects being reduced in scopeor terminated altogether. Also, in case of change in scope, it becomes difficult forthe service provider to charge for scope change or scope creep or even scopeoverhaul.c. Stricter contract terms: Government contracts tend to be more onerous and areoften difficult to negotiate than commercial contracts. They entail a greater degreeof scrutiny and publicity. At times, regardless of the precision, any negative publicitymay impact the reputation of the vendor in the marketplace.d. Extensive scrutiny on project update: Government contracts and proceedingssurrounding them are often subject to more extensive scrutiny and publicity thancontracts with commercial clients. This requires more than additional dedicatedresources to comply with the scrutiny and updating requirements.e. Changes in leadership: Political and economic factors such as pending elections,the outcome of recent elections, changes in leadership among key executive orlegislative decision makers, revisions in government tax policies and reduced taxrevenues can affect the number and terms of new government contracts signed.f. Heightened risk of reputation: An objection/issue raised by any of the stategovernments could not only affect the business with that particular governmentagency, but also business with other agencies of the same or other governmentalentities.Edelweiss Securities Limited 107

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India Equity Research | IT Company UpdateINFOSYS TECHNOLOGIES?Walking the fine line between growth and profitabilityGreater risk taking approach required to increase market shareInfosys Technologies (Infosys) has consistently increased its market share overFY02-08, ahead of the other two large peers. Going forward, with changing buyingbehavior, we see the need for Infosys to assume greater risk. Infosys’ aggressiveforay into the domestic Indian market, to some extent, highlights the company’sapproach to settle for lower margin/high opportunity business as well.Superior account management skills with improving focus on huntersInfosys’ SG&A has historically been biased towards the farmer (client mining) inthe hunter: farmer mix leading to strong organic scale-up of strategic accounts.Nevertheless, current environment demands relatively greater needs of a hunter.This need has found recognition within Infosys with the client engagement modelgetting more sophisticated with right hunting and pay for performance model.September 10, 2009Reuters : INFY.BOEDELWEISS 4D RATINGSAbsolute RatingRating Relative to SectorBloomberg : INFO INHOLDRisk Rating Relative to Sector LowSector Relative to MarketUnderperformerEqualweightNote:Please refer last page of the report for rating explanationBalance sheet strength provides opportunity to leverage inorganicallyInfosys has been very conservative in its approach for inorganic moves. It hasconserved and accumulated huge cash reserves (INR 107 bn i.e. USD 2.2 bn) thatcan be put to such use. Thus, it can establish presence in vertical/ geography/horizontal that is sub-scale and provides high growth opportunity.Management agility key to retaining leadership positionInfosys management has consistently demonstrated its ability to align itself withthe changing realities; be it in areas of organizational restructuring (first amongthe Big 3), displaying greater finesse in choosing customer segments andmanaging foreign exchange exposure among others. However, with the demanddynamics changing, we believe that management’s quick response to changingcustomer behavior , (even i f subtle) and early adaptation wil l be on test in retainingits leadership position.MARKET DATACMP : INR 2,24052-week range (INR) : 2,235 / 1,040Share in issue (mn) : 573.1M cap (INR bn/USD mn) : 1,284 / 26,402Avg. Daily Vol. BSE (‘000) : 2,049.4SHARE HOLDING PATTERN (%)Promoters* : 16.5MFs, FIs & Banks : 8.3FIIs : 35.7Others : 39.6* Promoters pledged shares : Nil(% of share in issue)Outlook and valuations: Need to change gears; recommend ‘HOLD’Infosys is the most preferred stock in the Indian IT sector. Margin managementthrough cost leadership and industry leading growth have contributed to Infosyscommanding sustained valuation premium. Going forward as peers demonstrateequal-to-higher growth rates and margin resilience we see Infosys’s P/E premiumnarrowing. At current levels the stock is trading at a P/E of 21.6x and 18.7x forFY10E and FY11E earnings, respectively. We recommend ‘HOLD’ on the stock. Ona relative return basis the stock is rated ‘Sector Underperformer’.RELATIVE PERFORMANCE (%)Sensex Stock Stock overSensex1 month 7.8 5.1 (2.7)3 months 4.6 21.6 17.012 months 10.4 24.7 14.3FinancialsYear to March FY09 FY10E FY11E FY12ERevenues (INR mn) 216,930 222,847 258,121 303,235Rev. Growth (%) 30.0 2.7 15.8 17.5EBITDA (INR mn) 71,950 74,216 86,471 97,945Net profit (INR mn) 59,880 59,588 69,176 82,099Adj. shares outstdg (mn) 572 573 575 579Diluted EPS (INR) 104.4 103.9 119.8 141.3EPS growth (%) 28.5 (0.5) 15.4 17.9Diluted P/E (x) 21.5 21.6 18.7 15.9EV/EBITDA (x) 16.5 15.5 12.8 10.9ROAE (%) 37.4 29.3 27.7 26.8Viju George+91-22-4040 7414viju.george@edelcap.comKunal Sangoi+91-22-6623 3370kunal.sangoi@edelcap.comEdelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL , Thomson First Call, Reuters and Factset.Edelweiss Securities Limited

Information TechnologyCompany DescriptionInfosys is the second-largest IT services company in India providing consulting and ITservices to clients globally. It is also among the fastest growing IT services organizationin the world and a leader in the offshore services space with a pioneer in Global deliverymodel. Infosys provides business consulting, application development and maintenanceand engineering services to 569 active clients spread across Banking, Financial Services,Insurance, Retail, Manufacturing, and Utilities verticals and 29 countries. The companyhas also its own proprietary core banking software - Finacle used by some of the leadingbanks in India, Middle East, Africa and Europe. Infosys’ IT services employee forcestands at 103,905 and the company’s revenues for FY09 stood at INR 216.9 bn (USD4.7 bn).Key Risksa) prolonged slowdown in US and Europe beyond FY10; b) faster than expected returnsfrom non-linear initiatives; and c) sharp appreciation of INR against US dollar, Euro andGBP.110 Edelweiss Securities Limited

Infosys TechnologiesFinancial StatementsIncome statement(INR mn)Year to March FY08 FY09 FY10E FY11E FY12ERevenues 166,920 216,930 222,847 258,121 303,235Cost of revenues 92,070 117,650 119,772 137,837 163,444Gross profit 74,850 99,280 103,074 120,284 139,791S&M expenses 9,160 11,040 11,969 14,197 20,620G&A expenses 13,310 16,290 16,890 19,617 21,226Total SG&A expenses 22,470 27,330 28,859 33,814 41,846EBITDA 52,380 71,950 74,216 86,471 97,945Depreciation & amortization 5,980 7,610 9,292 9,360 9,582EBIT 46,400 64,340 64,924 77,111 88,362Other income 6,920 9,140 8,969 11,576 14,261Foreign exchange gain/(loss) 120 (4,390) 310 0 0Others 0 20 0 0 0Profit before tax 53,440 69,070 74,203 88,687 102,623Tax 6,850 9,190 14,615 19,511 20,525Core profit 46,590 59,880 59,588 69,176 82,099Profit after tax 46,590 59,880 59,588 69,176 82,099Net profit after minority interest 46,590 59,880 59,588 69,176 82,099Shares outstanding (mn) 571 572 573 575 579EPS (INR) basic 81.5 104.6 103.9 120.2 141.7Diluted shares (mn) 573 573 574 577 581EPS (INR) diluted 81.3 104.4 103.9 119.8 141.3CEPS (INR) 92.3 118.0 120.1 136.5 158.2Dividend per share 33 25 28 30 35Dividend (%) 665.7 500.0 560.0 600.0 700.0Dividend pay out (%) 47.8 27.9 31.5 29.2 28.9Common size metrics - as % of revenuesYear to March FY08 FY09 FY10E FY11E FY12ECost of revenues 55.2 54.2 53.7 53.4 53.9Gross margin 44.8 45.8 46.3 46.6 46.1G&A expenses 8.0 7.5 7.6 7.6 7.0S&M expenses 5.5 5.1 5.4 5.5 6.8SG&A expenses 13.5 12.6 13.0 13.1 13.8EBITDA margin 31.4 33.2 33.3 33.5 32.3EBIT margin 27.8 29.7 29.1 29.9 29.1Net profit margins 27.9 27.6 26.7 26.8 27.1Growth metrics (%)Year to March FY08 FY09 FY10E FY11E FY12ERevenues 20.1 30.0 2.7 15.8 17.5EBITDA 19.3 37.4 3.1 16.5 13.3EBIT 19.7 38.7 0.9 18.8 14.6PBT 25.8 29.2 7.4 19.5 15.7Net profit 20.7 28.5 (0.5) 16.1 18.7EPS 20.2 28.5 (0.5) 15.4 17.9Edelweiss Securities Limited 111

Information TechnologyBalance sheet(INR mn)As on 31st March FY08 FY09 FY10E FY11E FY12EEquity share capital 2,860 2,860 2,867 2,877 2,897Share premium account 28,510 29,250 30,235 32,235 36,235Reserves 106,580 150,430 191,232 240,209 298,579Total shareholders funds 137,950 182,540 224,334 275,321 337,711Sources of funds 137,950 182,540 224,334 275,321 337,711Goodwill and other intangible asset 6,890 6,890 6,890 6,890 6,890Gross fixed assets 47,500 64,040 76,540 91,540 108,340Less: Accumulated depreciation 19,860 24,160 33,452 42,811 52,394Net fixed assets 27,640 39,880 43,088 48,729 55,946Capital WIP 13,240 6,770 7,070 7,720 7,220Investments 720 - - - -Deferred tax asset 1,190 1,260 1,260 1,260 1,260Cash & bank balances 69,500 96,950 136,654 178,479 227,851Debtors 32,970 36,720 35,221 39,602 45,693Loans and advances 27,710 32,790 40,988 48,365 58,038Total current assets 130,180 166,460 212,863 266,447 331,582Sundry creditors 19,120 20,040 24,048 28,377 32,917Provisions 22,790 18,680 22,790 27,348 32,270Total current liabilities 41,910 38,720 46,838 55,724 65,187Working capital 88,270 127,740 166,025 210,722 266,395Application of funds 137,950 182,540 224,334 275,321 337,711Book value per share (BV) (INR) 241 318 391 477 581Free cash flowYear to March FY08 FY09 FY10E FY11E FY12ENet profit 46,590 59,880 59,588 69,176 82,099Depreciation 5,980 7,610 9,292 9,360 9,582Deferred tax 150 50 0 0 0Others (8,490) (2,270) (8,859) (11,576) (14,261)Gross cash flow 44,230 65,270 60,020 66,959 77,420Less:Changes in working capital 3,400 12,020 (1,419) 2,872 6,301Operating cash flow 40,830 53,250 61,439 64,087 71,119Less: Capex 10,560 10,070 12,800 15,650 16,300Free cash flow 30,270 43,180 48,639 48,437 54,819Cash flow statement(INR mn)Year to March FY08 FY09 FY10E FY11E FY12ECash flow from operations 46,930 57,850 60,020 66,959 77,420Cash for working capital (6,100) (4,600) 1,419 (2,872) (6,301)Operating cashflow (A) 40,830 53,250 61,439 64,087 71,119Net purchase of fixed assets (15,950) (13,270) (12,800) (15,650) (16,300)Net purchase of investments (710) 680 0 0 0Others 5,460 10,560 8,859 11,576 14,261Investments cashflow (B) (11,200) (2,130) (3,941) (4,074) (2,039)Dividends (8,350) (24,940) (18,786) (20,198) (23,728)Proceeds from issue of equity 580 640 992 2,010 4,020Financing cash flow (C) (7,770) (24,300) (17,794) (18,188) (19,708)Free cash flow 24,880 39,980 48,639 48,437 54,819Exchange rate differences (D) 410 760 0 0 0Change in cash (A+B+C) + (D) 22,270 27,580 39,704 41,825 49,371112 Edelweiss Securities Limited

Infosys TechnologiesRatiosYear to March FY08 FY09 FY10E FY11E FY12EROAE (%) 37.2 37.4 29.3 27.7 26.8ROACE (%) 37.2 40.2 31.9 30.9 28.8Debtors (days) 63 59 59 53 51Payable (days) 37 33 36 37 37Cash conversion cycle 26 26 23 17 15Current ratio 3.1 4.3 4.5 4.8 5.1Fixed assets turnover (x) 6.7 6.4 5.4 5.6 5.8Total asset turnover(x) 1.3 1.4 1.1 1.0 1.0Equity turnover(x) 1.3 1.4 1.1 1.0 1.0Valuation parametersYear to March FY08 FY09 FY10E FY11E FY12EDiluted EPS (INR) 81.3 104.4 103.9 119.8 141.3Y-o-Y growth (%) 20.2 28.5 (0.5) 15.4 17.9CEPS (INR) 92.3 118.0 120.1 136.5 158.2Diluted P/E (x) 27.6 21.5 21.6 18.7 15.9Price/BV(x) 9.3 7.0 5.7 4.7 3.9EV/Revenues (x) 7.2 5.5 5.2 4.3 3.5EV/EBITDA (x) 23.1 16.5 15.5 12.8 10.9Dividend yield (%) 1.5 1.1 1.2 1.3 1.6Edelweiss Securities Limited 113

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India Equity Research | IT Company UpdateTATA CONSULTANCY SERVICESGeared for new rules of the gameLeadership transition to be healthy in the long termMr. N. Chandrasekharan (Chandra) will ta ke over as CEO from Mr. S. Ramodaraiin October 2009. Mr. Chandra has shepherded some of TCS’ key initiatives likeentry in IMS, BPO, consulting, emerging markets and also driven organisationalrestructuring (FY08). We believe this change will be healthy in the long run,despite likely near-term shake-out (at the senior level i.e. BU/country heads).Flexibility shown during tough times key to long-term relationshipsTCS has shown greater flexibility on adjusting pricing (TCO) in the currentenvironment (provided enough revenue commitment from client) andaccommodated free transitions. These become critical elements for clients inevaluating vendor relationships for long-term. Further, these adjustments maynot necessarily pressurise margins, as pricing adjustments are generallyaccommodated by change in offshore and employee mix as well.Serious contender for large deals; proven success in pastAbility to demonstrate value proposition (through client references), end-to-endfull service capability (domain skills) and global networked delivery model(GNDM) has enabled TCS to win maximum number of large deals comparedwith peers over the past two years. Further, frequent review and time devoted(creating list of ‘must win deals’) by senior management will ensure TCS’ largershare of big deals. Also, in our view, TCS has the best record when it comes tobe able to provide annual productivity increases and guaranteed cost savings.Focus on account farming taking precedence over huntingKnown for better hunting ability, TCS’ vertical alignment of its sales force andchange in reporting structures indicate its emphasis on account farming. Withfarming (relatively weak area) back in focus, client mining shall improve.Extensive office presence has ensured better market intelligence (and win rates)in areas that peers are not comparably present.Outlook and valuations: Geared up; upgrade to ‘BUY’TCS has continued to make long-term investments over the past three-fouryears and institutionalise a defensible margin structure, which is starting toyield positive outcomes. Consistent quarterly performance should help close thevaluation gap with Infosys. We expect TCS to grow its earnings by 20% CAGRover the FY09-12E. At current levels the stock is trading at a P/E of 18.9x and15.9x for FY10E and FY11E earnings, respectively. We upgrade the stock to a‘BUY’. On a relative return basis the stock is rated ‘Sector Outperformer’.FinancialsYear to March FY09 FY10E FY11E FY12ERevenues (INR mn) 278,129 299,785 351,998 424,217Growth (%) 23.0 7.8 17.4 20.5EBITDA (INR mn) 71,781 78,630 93,101 114,217Net profit (INR mn) 51,720 57,905 69,088 83,725Adj. shares outstdg (mn) 1,958 1,968 1,976 1,990Adj. EPS (INR) 26.4 29.4 35.0 42.2EPS growth (%) 3.1 11.3 18.9 20.7P/E (x) 21.1 18.9 15.9 13.2EV/EBITDA (x) 14.9 13.3 11.0 8.8ROE (%) 36.9 32.7 31.1 30.2September 10, 2009Reuters : TCS.BOEDELWEISS 4D RATINGSBloomberg : TCS INAbsolute RatingBUYRating Relative to Sector OutperformerRisk Rating Relative to Sector LowSector Relative to Market EqualweightNote:Please refer last page of the report for rating explanationMARKET DATACMP : INR 55752-week range (INR) : 570 / 209Share in issue (mn) : 1,957.2M cap (INR bn/USD mn) : 1,090 / 22,422Avg. Daily Vol. BSE (‘000) : 4,321.7SHARE HOLDING PATTERN (%)Promoters* : 75.1MFs, FIs & Banks : 7.5FIIs : 11.2Others : 6.2* Promoters pledged shares : 12.0(% of share in issue)RELATIVE PERFORMANCE (%)Sensex Stock Stock overSensex1month 7.8 4.0 (3.8)3 months 4.6 43.4 38.812 months 10.4 31.7 21.3Viju George+91-22-4040 7414viju.george@edelcap.comKunal Sangoi+91-22-6623 3370kunal.sangoi@edelcap.comEdelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL , Thomson First Call, Reuters and Factset.Edelweiss Securities Limited

Information TechnologyCompany DescriptionTCS is India's largest and one of its oldest IT companies. It commenced operations in1968 and provides a comprehensive range of IT services to industries such as bankingand financial services, insurance, manufacturing, telecommunications, retail, andtransportation. With a presence in 38 countries, TCS is positioned to deliver its servicesseamlessly. TCS has a large diversified client base (933 active clients), which includeseven Fortune Top-10 companies. TCS’ employee force stands at ~141,650 (includingsubsidiaries) and its revenues for the last twelve months (TTM) stood at INR 286 bn(USD 6.0 bn).Key Risksa) maintaining the margins, while pursuing large deals; b) execution risk because offixed price intensity; and c) sharp appreciation of INR against US dollar, Euro and GBP.116 Edelweiss Securities Limited

Tata Consultancy ServicesFinancial StatementsIncome statement(INR mn)Year to March FY08 FY09 FY10E FY11E FY12ERevenues 226,175 278,129 299,785 351,998 424,217Cost of revenues 122,344 150,774 160,590 189,729 224,520Gross profit 103,831 127,355 139,195 162,269 199,697S&M expenses 46,309 55,143 59,676 68,640 84,843G&A expenses 565 431 889 528 636Total SG&A expenses 46,874 55,574 60,565 69,168 85,480EBITDA 56,958 71,781 78,630 93,101 114,217Depreciation & Amortization 5,745 5,766 7,192 8,096 9,757EBIT 51,213 66,015 71,438 85,005 104,460Other income 6,888 (4,673) (750) 1,150 1,254Profit before tax 58,101 61,342 70,688 86,156 105,714Tax 7,494 9,012 12,123 16,370 21,143Core profit 50,607 52,330 58,565 69,786 84,571Profit after tax 50,607 52,330 58,565 69,786 84,571Minority int. and others - paid/(recd.) 416 611 659 698 846Net profit after minority interest 50,190 51,720 57,905 69,088 83,725Shares outstanding (mn) 1,958 1,957 1,968 1,976 1,984EPS (INR) basic 25.6 26.4 29.4 35.0 42.2Diluted shares (mn) 1,958 1,958 1,968 1,976 1,990EPS (INR) diluted 25.6 26.4 29.4 35.0 42.1CEPS (INR) 28.6 29.4 33.1 39.1 47.1Dividend per share 7.0 7.0 7.5 8.5 10.0Dividend (%) 7.0 7.0 7.5 8.5 10.0Dividend pay out (%) 32.0 31.2 29.8 28.4 27.7Common size metrics - as % of revenuesYear to March FY08 FY09 FY10E FY11E FY12ECost of revenues 54.1 54.2 53.6 53.9 52.9Gross margin 45.9 45.8 46.4 46.1 47.1SG&A expenses 20.7 20.0 20.2 19.7 20.2EBITDA margin 25.2 25.8 26.2 26.4 26.9EBIT margin 22.6 23.7 23.8 24.1 24.6Net profit margins 22.4 18.8 19.5 19.8 19.9Growth metrics (%)Year to March FY08 FY09 FY10E FY11E FY12ERevenues 21.4 23.0 7.8 17.4 20.5EBITDA 12.5 26.0 9.5 18.4 22.7EBIT 10.3 28.9 8.2 19.0 22.9PBT 20.1 5.6 15.2 21.9 22.7Net profit 21.4 3.4 11.9 19.2 21.2EPS 21.5 3.0 11.4 18.9 20.3Edelweiss Securities Limited 117

Information TechnologyBalance sheet(INR mn)As on 31st March FY08 FY09 FY10E FY11E FY12EEquity share capital 979 979 1,968 1,976 1,984Share premium account 24,372 24,372 24,372 24,372 24,372Reserves 98,468 131,193 170,846 220,279 280,788Total shareholders funds 123,819 156,544 197,186 246,627 307,144Borrowings 7,483 5,505 6,331 4,748 2,374Minority interest 2,300 3,098 3,755 4,453 5,299Sources of funds 133,602 165,147 207,272 255,828 314,817Goodwill and other intangible asset 14,738 34,146 34,152 34,152 34,152Net fixed assets 30,214 37,495 42,303 47,707 52,950Investments 26,503 17,271 22,448 26,934 32,319Other assets 10,399 28,194 35,242 42,291 52,864Cash & Bank balances 10,352 13,438 33,513 53,103 69,559Debtors 53,903 60,463 64,064 77,150 97,628Unbilled revenue 13,525 14,814 16,295 18,902 21,548Inventories 424 366 494 667 900Prepaid & other current assets 14,965 20,671 25,838 32,298 40,372Total current assets 93,169 109,751 140,204 182,120 230,008Sundry creditors 33,949 47,723 50,109 59,129 67,998Provisions 7,101 8,835 11,044 13,805 17,256Other liabilities 371 5,151 5,923 4,443 2,221Total current liabilities 41,421 61,709 67,077 77,376 87,476Working capital 51,748 48,042 73,127 104,744 142,532Application of funds 133,602 165,147 207,272 255,828 314,817Book value per share (BV) (INR) 63 80 100 125 155Free cash flowYear to March FY08 FY09 FY10E FY11E FY12ENet profit 50,190 51,720 57,905 69,088 83,725Depreciation 5,745 5,766 7,192 8,096 9,757Others (10,878) (549) (4,814) (9,084) (13,355)Gross cash flow 45,058 56,937 60,284 68,101 80,127Less:Changes in working capital 11,699 1,012 5,783 10,546 19,111Operating cash flow 33,359 55,925 54,501 57,555 61,016Less: Capex 12,340 10,661 12,000 13,500 15,000Free cash flow 21,019 45,264 42,501 44,055 46,016Cash flow statement(INR mn)Year to March FY08 FY09 FY10E FY11E FY12ECash flow from operations 45,058 56,937 60,284 68,101 80,127Cash for working capital (11,699) (1,012) (5,783) (10,546) (19,111)Operating cashflow (A) 33,359 55,925 54,501 57,555 61,016Net purchase of fixed assets (12,340) (10,661) (12,000) (13,500) (15,000)Net purchase of investments (13,330) 10,435 (5,177) (4,487) (5,384)Others 5,320 (29,128) (750) 1,150 1,254Investments cashflow (B) (20,349) (29,354) (17,927) (16,837) (19,131)Dividends (14,953) (16,124) (17,269) (19,647) (23,207)Redemption of preferred stock (268) (418) 773 (1,481) (2,221)Interest paid & other items (14,202) (16,503) (16,496) (21,127) (25,428)Free cash flow 21,019 45,264 42,501 44,055 46,016Exchange rate differences (D) (650) 5,121 0 0 0Change in cash (A+B+C) + (D) (1,193) 10,068 20,078 19,591 16,457118 Edelweiss Securities Limited

Tata Consultancy ServicesRatiosYear to March FY08 FY09 FY10E FY11E FY12EROAE (%) 47.0 36.9 32.7 31.1 30.2ROACE (%) 53.0 51.8 42.9 41.1 40.9Debtors (days) 78 75 76 73 75Payable (days) 47 54 60 57 55Cash conversion cycle 32 21 16 17 20Current ratio 2.2 1.8 2.1 2.4 2.6Fixed assets turnover (x) 8.5 8.2 7.5 7.8 8.4Total asset turnover(x) 1.9 1.9 1.6 1.5 1.5Equity turnover(x) 2.1 2.0 1.7 1.6 1.5Valuation parametersYear to March FY08 FY09 FY10E FY11E FY12EDiluted EPS (INR) 25.6 26.4 29.4 35.0 42.1Y-o-Y growth (%) 21.5 3.0 11.4 18.9 20.3CEPS (INR) 28.6 29.4 33.1 39.1 47.1Diluted PE (x) 21.7 21.1 18.9 15.9 13.2Price/BV(x) 8.8 7.0 5.6 4.5 3.6EV/Revenues (x) 4.7 3.8 3.5 2.9 2.4EV/EBITDA (x) 18.7 14.9 13.3 11.0 8.8EV/EBITDA (x)+1 yr forward 14.8 13.6 11.3 9.0Dividend yield (%) 1.3 1.3 1.3 1.5 1.8Edelweiss Securities Limited 119

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India Equity Research | IT Company UpdateWIPROMarket share gains to come throughPoised to address changing business dynamicsWipro is well poised to address the demand dynamics post the crisis. Ability tooffer full gamut of services (i.e. IMS, testing, BPO and PI), higher presence inIndia & Middle East, smart customer segmentation and diversified verticalpresence, position Wipro ahead of Infosys. Wipro has the most defensive portfolioamong the Big 3 (no client >3% and no vertical >30% of revenues).Ability to change revenue profile impressiveFrom early 2002, when technology and telecom accounted for over two-thirds ofrevenues, Wipro has come a long way. Today, this segment contributes less thana third of Wipro’s revenues, marking Wipro’s ability to effect a sustainedtransformation of its revenue profile. Wipro is drawing even with Infosys and TCSon financial services, manufacturing, retail while still maintaining leadership inenergy and utilities – a defensive vertical that it has penetrated quite distinctively.Recalibrated sales force aids order book accretionWipro’s improved ability to build order book in the current environment has partlygot to do with the way it recalibrated the compensation structure of its sales force(especially of its hunters). The company has now given impetus to order book(from earlier revenues) as a variable in setting compensation. Further, evenaccount managers (farmers) at Wipro are incentivised on order booking (newbusiness in existing clients), in addition to revenues and margins.Operating margin difference vis-à-vis Infosys getting pluggedOver the past two-three quarters, Wipro’s initiatives in the managing bench, bulgeand offshore mix, along with rationalisation of administrative expenses atacquired entities have yielded encouraging results. Operating margin difference(vis-à-vis Infosys) on account of operational parameters (bulge, utilisation, adminexp) have reduced to only ~5.5% vis-à-vis ~9% in past six quarters. Also, asprofitability of acquisitions picks up, the gap is set to further narrow.Outlook and valuations: Performance to improve; upgrade to ‘BUY’Wipro, has over past two years, begun initiatives such as large scale programmanagement, recalibration of sales, management restructuring and severaltechnology initiatives such as cloud computing. Impact of these initiatives willdrive improved performance going forward. We expect Wipro’s earnings to grow17% over FY09-12E. At current levels, the stock is trading at a P/E of 19.7x and17.2x for FY10E and FY11E earnings, respectively. We upgrade the stock to a‘BUY’. On a relative return basis the stock is rated ‘Sector Performer’.FinancialsYear to March FY09 FY10E FY11E FY12ERevenues (INR mn) 254,564 254,317 291,988 341,178Rev. growth (%) 28.9 (0.1) 14.8 16.8EBITDA (INR mn) 50,799 56,722 64,358 76,481Net profit (INR mn) 34,415 40,496 46,475 55,454Shares outstanding (mn) 1,455.3 1,462.2 1,470.2 1,472.2Diluted EPS (INR) 23.6 27.6 31.5 37.6EPS growth (%) 6.6 16.8 14.1 19.2Diluted PE (x) 23.0 19.7 17.2 14.5EV/EBITDA (x) 15.4 13.4 11.6 9.4ROAE (%) 24.6 24.4 23.2 22.9Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL , Thomson First Call, Reuters and Factset.September 10, 2009Reuters : WIPR.BOEDELWEISS 4D RATINGSBloomberg : WPRO INAbsolute RatingBUYRating Relative to Sector PerformerRisk Rating Relative to Sector LowSector Relative to Market EqualweightNote:Please refer last page of the report for rating explanationMARKET DATACMP : INR 54452-week range (INR) : 573 / 181Share in issue (mn) : 1,465.7M cap (INR bn/USD mn) : 797 / 16,293Avg. Daily Vol. BSE (‘000) : 1,993.1SHARE HOLDING PATTERN (%)Promoters* : 79.2MFs, FIs & Banks : 2.2FIIs : 6.3Others : 12.3* Promoters pledged shares : Nil(% of share in issue)RELATIVE PERFORMANCE (%)Sensex Stock Stock overSensex1month 7.8 5.7 (2.1)3 months 4.6 25.3 20.712 months 10.4 25.3 14.9Viju George+91-22-4040 7414viju.george@edelcap.comKunal Sangoi+91-22-6623 3370kunal.sangoi@edelcap.comEdelweiss Securities Limited

Information TechnologyCompany DescriptionWipro is a leading Indian company with business interests in export of IT & BPO services,domestic hardware, consumer lighting, and consumer care. It has the widest range ofservices, including systems integration, IT-enabled services, package implementation,software application development & maintenance, and R&D services. Wipro is the first PCMM Level 5 and SEI CMM Level 5-certified IT services company in the world. It hasmore than 830 clients spanning the BFSI, manufacturing, retail, utilities, and telecomverticals. Wipro has over 98,500 employees. The company’s revenues for the past twelvemonths stood at INR 258 bn (USD 5.66 bn).Key Risksa) sustained economic slowdown in the US and Europe beyond FY10; (b) maintainingmargins while pursuing large deals and (c) sharp appreciation of INR against the USD,Euro and GBP.122 Edelweiss Securities Limited

WiproFinancial StatementsIncome statement(INR mn)Year to March FY08 FY09 FY10E FY11E FY12ERevenues 197,428 254,564 254,317 291,988 341,178Cost of revenues 138,831 178,176 172,914 197,360 229,848Gross profit 58,597 76,388 81,403 94,628 111,330S&M expenses 8,506 10,893 10,264 13,335 14,379G&A expenses 10,585 14,696 14,417 16,935 20,471Total SG&A expenses 19,091 25,589 24,681 30,270 34,850EBITDA 39,506 50,799 56,722 64,358 76,481Depreciation & Amortization 5,917 8,357 9,341 10,192 10,942EBIT 33,589 42,442 47,381 54,166 65,539Other income 2,167 (1,272) 3,296 2,647 2,599Foreign exchange gain/(loss) 125 (1,596) (3,503) (1,300) (1,000)Profit before tax 35,881 39,574 47,173 55,512 67,138Tax 3,873 5,422 7,042 9,437 12,085Core profit 32,008 34,152 40,131 46,075 55,053Profit after tax 32,008 34,152 40,131 46,075 55,053Minority int. and others - paid/(recd.) (233) (263) (365) (400) (401)Net profit after minority interest 32,241 34,415 40,496 46,475 55,454Shares outstanding (mn) 1,451 1,455 1,462 1,470 1,472EPS (INR) basic 22.23 23.6 27.7 31.6 37.7Diluted shares (mn) 1,455 1,456 1,467 1,475 1,477EPS (INR) diluted 22.2 23.6 27.6 31.5 37.6CEPS (INR) 26.3 29.4 34.1 38.5 45.1Dividend per share 5.0 6.0 7.0 7.0 7.0Dividend (%) 250.0 300.0 350.0 350.0 350.0Dividend pay out (%) 26.5 29.9 29.7 25.9 21.8Commonsizemetrics-as%ofrevenuesYear to March FY08 FY09 FY10E FY11E FY12ECost of revenues 70.3 70.0 68.0 67.6 67.4Gross margin 29.7 30.0 32.0 32.4 32.6G&A expenses 5.4 5.8 5.7 5.8 6.0S&M expenses 4.3 4.3 4.0 4.6 4.2SG&A expenses 9.7 10.1 9.7 10.4 10.2EBITDA margin 20.0 20.0 22.3 22.0 22.4EBIT margin 17.0 16.7 18.6 18.6 19.2Net profit margins 16.2 13.4 15.8 15.8 16.1Growth metrics (%)Year to March FY08 FY09 FY10E FY11E FY12ERevenues 32.1 28.9 (0.1) 14.8 16.8EBITDA 15.9 28.6 11.7 13.5 18.8EBIT 12.4 26.4 11.6 14.3 21.0PBT 10.3 10.3 19.2 17.7 20.9Net profit 10.5 6.7 17.7 14.8 19.3Diluted EPS 10.3 6.6 16.8 14.1 19.2Edelweiss Securities Limited 123

Information TechnologyBalance sheet(INR mn)As on 31st March FY08 FY09 FY10E FY11E FY12EEquity share capital 2,923 2,930 2,937 2,944 2,951Share premium account 26,441 28,483 30,919 33,355 35,791Reserves 99,990 118,769 148,153 182,973 226,823Total shareholders funds 129,354 150,182 182,009 219,272 265,565Borrowings 47,767 60,751 48,619 26,976 13,488Minority interest 114 235 284 284 284Sources of funds 177,235 211,168 230,912 246,532 279,337Goodwill and Other Intangible Asset 51,423 67,106 65,214 63,002 60,540Gross fixed assets 47,837 57,389 67,480 77,639 86,739Less: Accumulated depreciation 21,559 28,428 35,877 43,857 52,337Net fixed assets 26,278 28,961 31,603 33,782 34,402Capital WIP 13,544 20,901 23,409 26,218 28,839Investments 16,506 18,188 20,506 24,206 28,565Deferred tax asset (1,308) (215) (215) (215) (215)Cash & bank balances 39,270 49,117 61,310 58,167 69,833Debtors 38,908 46,217 45,289 50,398 58,888Unbilled revenue 8,305 13,843 17,442 21,977 27,691Inventories 7,172 8,686 9,864 12,558 14,068Loans and advances 22,306 33,721 37,093 40,802 44,883Total current assets 115,961 151,584 170,999 183,903 215,364Sundry creditors 26,352 39,504 41,995 46,947 55,869Other liabilities 18,817 35,853 38,608 37,416 32,289Total current liabilities 45,169 75,357 80,603 84,363 88,158Working capital 70,792 76,227 90,395 99,540 127,206Application of funds 177,235 211,168 230,912 246,532 279,337Book value per share (BV) (INR) 89 103 124 149 180Free cash flowYear to March FY08 FY09 FY10E FY11E FY12ENet profit 32,241 34,415 40,496 46,475 55,454Depreciation 5,917 8,357 9,341 10,192 10,942Others (803) (5,602) 49 (0) (1)Gross cash flow 37,355 37,170 49,886 56,667 66,395Less:Changes in working capital 12,760 341 2,015 13,069 17,562Operating cash flow 24,595 36,829 47,872 43,598 48,833Less: Capex 47,463 23,271 12,599 12,968 11,722Free cash flow (22,868) 13,558 35,273 30,631 37,111Cash flow statement(INR mn)Year to March FY08 FY09 FY10E FY11E FY12ECash flow from operations 37,355 37,170 49,886 56,667 66,395Cash for working capital (12,760) (341) (2,015) (13,069) (17,562)Operating cashflow (A) 24,595 36,829 47,872 43,598 48,833Net purchase of fixed assets (47,463) (23,271) (12,599) (12,968) (11,722)Net purchase of investments 18,329 (1,030) (2,318) (3,299) (3,878)Investments cashflow (B) (28,505) (27,693) (14,917) (16,267) (15,600)Dividends (5,325) (6,811) (12,027) (12,055) (12,084)Proceeds from issue of equity 747 440 2,443 2,443 2,443Proceeds from LTB/STB 35,376 6,419 (11,178) (20,862) (11,926)Financing cash flow (C) 30,798 48 (20,762) (30,474) (21,566)Exchange Rate Differences (D) (30) 663 - - -Change in cash (A+B+C) + (D) 26,858 9,847 12,193 (3,143) 11,666124 Edelweiss Securities Limited

WiproRatiosYear to March FY08 FY09 FY10E FY11E FY12EROAE (%) 27.9 24.6 24.4 23.2 22.9ROACE (%) 28.9 24.0 23.5 25.0 27.7Debtors (days) 62 61 66 60 58Payable (days) 43 47 58 56 55Cash conversion cycle 19 14 7 4 3Current ratio 2.6 2.0 2.1 2.2 2.4Debt/EBITDA 1.2 1.2 0.9 0.4 0.2Fixed assets turnover (x) 9.3 9.2 8.4 8.9 10.0Total asset turnover(x) 1.4 1.3 1.2 1.2 1.3Equity turnover(x) 1.7 1.8 1.5 1.5 1.4Debt/Equity (x) 0.4 0.4 0.3 0.1 0.1Adjusted debt/Equity 0.4 0.4 0.3 0.1 0.1Valuation parametersYear to March FY08 FY09 FY10E FY11E FY12EDiluted EPS (INR) 22.2 23.6 27.6 31.5 37.6Y-o-Y growth (%) 10.3 6.6 16.8 14.1 19.2CEPS (INR) 26.3 29.4 34.1 38.5 45.1Diluted P/E (x) 24.5 23.0 19.7 17.2 14.5Price/BV(x) 6.1 5.3 4.4 3.6 3.0EV/Revenues (x) 4.0 3.1 3.0 2.5 2.1EV/EBITDA (x) 19.8 15.4 13.4 11.6 9.4EV/EBITDA (x)+1 yr forward 15.4 13.8 11.89.7Dividend yield (%) 0.9 1.1 1.3 1.3 1.3Edelweiss Securities Limited 125

Information TechnologyAPPENDIX126 Edelweiss Securities Limited

India Equity Research | IT Company UpdateCOGNIZANT TECHNOLOGY SOLUTIONSThe rise of Cognizant: Lessons for Indian ITAs part of our ongoing endeavour to bring out the unique aspects of business modelsof global peers (such as Accenture, Cognizant, IBM) of dominant Indian IT servicescompanies, we turn the spotlight on Cognizant Technology Solutions (Cognizant). Wetake a step back and investigate in-depth the Cognizant story unlocking its DNA. Inour view, it is instructive to understand the factors behind the rise of the companyover the past six years.September 10, 2009Late beginnings….Cognizant was a late entrant in the business starting out as an offshoretechnology captive of The Dun & Bradstreet Corporation (then Dun & BradsheetSatyam Software) in 1994. Satyam held a 24% stake in this venture which wasbought back. Cognizant is the youngest player in the SWITCH club (S- Satyam, W– Wipro, I – Infosys, T – TCS, C – Cognizant and H- HCLT), 13 years after Infosyscame into being in 1981.….but with a history of outperformanceCognizant has stolen the thunder out of its larger Indian peers since Indian ITemerged from the previous tech downturn (2002). It has sustained growth wellahead of its older and larger peers (revenue CAGR of 55.2% over CY03-08). Eachyear, for the past five years, the co mpany grew ahead of Infosys on bothrevenues and net profits fronts. In fact, the relative growth differential vis-à-vis itspeers has expanded in CY08 (FY09 for peers)—the most challenging year yet since2003. The company has been consistently adding more USD revenues (in absoluteterms) per quarter than its peers have done in the recent past. This is creditableas the Big 3 in Indian IT (TCS, Infosys, and Wipro) are still significantly largerthan Cognizant. We believe there is something that Cognizant is doing right indriving domain-led sustainable growth, which is embedded in its DNA.MARKET DATACMP : USD 37.5We attribute the superior growth profile of Cognizant to a four-fold refreshingphilosophy that we discuss below:(a) Promise investors modest yet sustainable operating margins and re-invest theexcess in the business for growth, differentiation, and leadership.(b) Adopt a differentiated and structured approach to relationship managementwith proprietary, hard-to-replicate models.(c)Seamlessly integrate the back end with the front end from the beginning(ahead of the curve verticalisation) and align along verticals to the extentpossible. Even Cognizant’s consulting practice is verticalised.(d) Focus on depth rather than breadth. Depth serves Cognizant well in thisenvironmentasitsignificantlygrowsaheadofitspeersandindustryinthisdifficult environment despite having a 46% revenue exposure to the Banking,financial services and insurance (BFSI) segment, and an almost 80%exposure to the US.Never lose sight of delivery, process and productivity even amidst highgrowth. This has resulted in the development of Cognizant 2.0 – a landmarkplatform that presents rich collaboration possibilities in addition to the orderof-magnitudeproductivity improvement that such a proprietary platformenables.Viju George+91-22-4040 7414viju.george@edelcap.comKunal Sangoi+91-22-6623 3370kunal.sangoi@edelcap.comEdelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL , Thomson First Call, Reuters and Factset.Edelweiss Securities Limited

Information TechnologyWe dwell on several notable aspects on which Cognizant has been early in establishing bestpractices and displaying innovation in configuring a customer-centric organization.We explore the four threads of the Cognizant philosophy in greater detail as follows:Define comfortable operating margins of functioning, investing excess inbusinessCognizant, starting out in 1994, felt that it could not take on Indian incumbents’ (i.e.,Infosys and TCS) position of maximising or even optimising margins as that would neverserve to be a point of differentiation for it. The company’s guiding philosophy wassummed up in management’s own words as follows:“When we started, we realised that the India advantage was a substantial one. But sodid every other company! We therefore looked at the Big Five consulting firms andnoticed that they had differentiated themselves by providing excellent customerexperience, leveraging a strong front-end and deep domain expertise. We then set aboutbuilding a company that gave clients the experience equivalent of or better than dealingwith the Big Five consulting firms at an offshore price point.”Further, the management went on to say, “If you think of a pendulum, I would view theglobal majors on one side having deep domain expertise and strong relationshipmanagement. The Indian majors would be at the other end of the pendulum offeringgood delivery excellence, but with limited domain expertise and relationshipmanagement. We brought in the best of both worlds investing in both the front-end andthe backend. We have the strength of delivery, and the positives of domain expertiseand relationship management. And, I think, there is a race to the middle with both typesof companies trying to move towards where we are.”In accordance with this, Cognizant took an approach of working with and committing toa 19-20% operating margin target (before stock compensation expense) intending toreinvest the excess back into the business. Unlike Infosys, it believes that a tradeoffbetween margins and growth is present and will play out in the medium-tolongterm. It took the side of sustainable growth and sustainable targetoperating margin in this debate.Cognizant’s re-investment strategy is three-pronged. One, it invests heavily in clientpartners, generally local people who manage relationships with customers and interfacewith them with a deep understanding of the respective industry. In this context,Cognizant has led the industry in hiring decision-makers. Many of theircountry/geography heads (to name a few Japan, Australia, Argentina and Germany) aretypically locals who have been senior decision-makers in companies such as IBM, Oracle,Accenture and EDS. “In addition to growing people from within, hiring keydecision-makers and integrating them into the Cognizant culture” seemstothemantra as opposed to a typical mindset of “Grow and cultivate decision-makerswithin and then promote them to handle bigger responsibilities”. Thus, it isperhaps not surprising that particularly in the earlier days, geography, sales andmarketing heads in Indian IT companies tended to be Indians promoted from within.Cognizant took a different approach from the beginning.Second, in times of growth Cognizant traditionally keeps a bigger bench and hence alower utilisation rate (60-65%). So this part of the investment goes into maintaining adeeper bench. Third, the company has led the industry in investing in different profilesof people of a value-added nature. It enjoys a decided edge over its peers as a callingcard in premier business school campuses in India (such as IIMs, ISB). As per ourtracking, it makes many more offers than its Indian peers at such institutions and has128 Edelweiss Securities Limited

Cognizant Technology Solutionstraditionally enjoyed stronger brand equity. It is perhaps among the very few Indian ITservicescompanies still visiting these premier campuses in the current environment.All of them are absorbed as business analysts aligned to domains of specialization (e.g.,banking, healthcare or retail), as consultants as part of Cognizant Business Consulting(CBC), or as account managers/relationship managers at client locations. Cognizant’sCBC provides advice to clients in consolidation, IT strategic planning, technologyrationalisation, and offshoreability analysis, among others. While its positioning in CBC isnot necessarily unique (Infosys, TCS, and Wipro have carved out separate solutionsgroups), we believe that in CBC, Cognizant has invested early in creating good traction.Adopt differentiated and structured approach to relationship managementCognizant’s superior approach to relationship management flows not just from itsinvestment industry Practice Leaders (in industries such as banking, healthcare, andretail who operate out of the markets that the company services in the US and Europe,as opposed to having them in India as may the case with Infosys, TCS and Wipro), butalso its Client Partners, and in sales and marketing personnel in greater numbers thanits peers. The structure of its relationship model is interesting and distinct in our view.At the very top of the relationship management model are Practice Partners or PracticeLeaders. They are senior industry professionals responsible for heading specific verticalsor technology offerings and have had substantial experience in their respective domains(typically at least fifteen years). Reporting to Practice Partners are Client Partners whoassume responsibilities for several client accounts. In case a client is large, a ClientPartner handles only that account. The Client Partner serves as the single point ofcontact for a client. Client Partners are supported by Account Managers who assumeindividual account responsibility. Thus, there is a clearly institutionalized threetieredstructure to relationship management (practice partners, client partners,and multiple account managers) which is tightly integrated into delivery.In every vertical, the lead for a new account is usually provided by “hunters”, the salesor marketing team aligned to that vertical. Typically, they comprised people of localorigin or those with significant years of experience doing business in that location.Thereon, the engagement was driven by the Client Partner (“the farmer”) and a DeliveryManager (located offshore). Similarly, the horizontals that sold their services to clients(through the verticals), also had two people with joint responsibility—one onsite andanother offshore. The delivery manager had at his behest functional experts andbusiness analysts.Edelweiss Securities Limited 129

Information TechnologyFig. 1: Two-in-a-box-model as envisaged and implemented by CognizantOnsiteOffshoreSteering committeeClientSr. MgmtCgnizantSr MgmtFSG BusinessUnit HeadClient RepresentativecccPMOCognizant RepresentativeProject OfficeHeadClientPartnerDeliveryDirectorReports toccInteracts withClient ProjectManagersAccountManagerDeliveryManagerccSMEs, TechicalExperts, Quality,System SupportStaffPorject LeadersProject LeaderscBusiness AnalystsccProject Teams,BusinessAnalystsProject TeamscSupportServices-Quality, SystemSupport, RMGccSource: CompanyCognizant calls this the “two-in-a-box-model”, which is trademarked (see fig 1). Inclient engagement, two people (one onsite and another offshore) are jointly responsiblefor all KRAs—customer satisfaction, employee satisfaction, revenue, and profitability. Forexample, for every client, there are two global leads—a Client Partner in the client’slocation and a Delivery Director in an offshore location. Further up, there are twoPractice Leaders—one in the client’s location and another in India. All the pairs havejoint accountability and their performances are assessed based on the same metrics. Noone entity has an upper hand over the other in managing the joint P&L. Because the twopeople at the same level have the same revenue and profit targets, their incentives arestructured similarly, even though their jobs were dissimilar.It was important to align performance management systems and incentive systemsaccordingly. The company was sensitive to this need. The parameters for determiningthe bonus of a Delivery Director are similar to those of a Client Partner, because both ofthem at Cognizant own the top line and bottom line for a particular client. We alsoobserve that the variable component in the total payout structure tends to besignificantly greater in Cognizant than in its Indian peers. The company had to say thisabout its pay-for-performance model:130 Edelweiss Securities Limited

Cognizant Technology Solutions“We do not grade Client Partners on a normal curve, so there is no limit to what each ofthem can earn. I know of a Client Partner who got a 350% variable compensationpayout The actual bonus amount is based on customer satisfaction and employeesatisfaction scores, and top-line and bottom-line targets. Suppose I, as a Client Partner,have five clients with targets of USD 15 mn revenue at x% profitability. If I achieve USD18 mn at x minus 10% profitability, I don’t get anything. But if I achieve USD 15 mn xplus 20% profitability, there is a huge kicker. In line with the philosophy of the two-inboxmodel, the parameters for determining the bonus of a Delivery Director are similarto those of a Client Partner, because both of them jointly own the top line and bottomline for a particular client with neither holding the upper hand.”2-in-a-box now becomes 3-in-a-box. Cognizant has raised its sales & marketing andrelationship management game by attempting to position itself as a trusted advisor tokey, strategic accounts. Such select, identified accounts will enjoy the expert oversight ofa very senior industry leader (or one who has considerable experience in consultingtypically at a partner level). Such highest-level experts will now manage strategicroadmaps for embedding Cognizant into the entrails of the client’s aligning-IT-tobusinessstrategy while also ensuring that operational, running issues are managed bythe existing 2-in-a-box structure. This is an expensive investment and we reckon that ifInfosys were to make such investments in only 5% of its accounts, additionalinvestments would be ~50 bps (as % of revenues).Presence of an external advisory council. As a novel practice, Cognizant has an“advisory council” for relevant domains or verticals. This council is composed ofexternal industry veterans who bring leading-edge thinking to bear on the industry andplays the role that the board of governors of the company plays on a smaller scale. Thishas helped debate issues at the domain level at a far more granular and expert level andin a manner of speaking helps run each domain run as an independent company with itsown board of directors. Quality advice does not come cheap and Cognizant is preparedto bear this rather unique investment.Again, we emphasise that it is not that Cognizant’s Indian peers operate differently onmost of the discussed aspects, it is just that Cognizant embarked on many of thesestructures well before its Indian peers did.Seamlessly integration of back end with front end; early verticalisation hashelpedCognizant verticalised its back end as early as 1998-1999 and then verticalised its frontend in 2002-03. Unlike some of its Indian peers who waited for critical mass beforeverticalising delivery across domains in geographies, Cognizant strongly verticalised itsdelivery along BFSI and healthcare well before it attained critical mass.It was in 2002-03, when the onsite client relationship structure was morphed from ageography-centric model into a vertical structure. In doing so, Cognizant stole a marchover its competitors, who were still organised along technologies of specialisation oralong geographies. The issue with a geographic-centered approach is that an integratedview of the customer may not be taken. Cognizant established dedicated customer P&Lsfor not just its leading customers but also for what it deemed potentially strategiccustomers and accordingly allocated resources by domain client-wise spanning sales andmarketing, delivery, account management and pre sales. It believes that it was amongthe first to do so in the Indian IT sector, particularly in the context of investing in clientswho were sub scale but of significant potential. Also, in making this transition there areinevitable teething problems associated with incentivising sales force (who were earlieraligned along geographic lines are often accustomed to selling solutions spanningverticals to meet targets). The issue of relocating and accommodating elsewhere seniorEdelweiss Securities Limited 131

Information Technologydelivery personnel who did not have the requisite vertical experience also presenteditself. The verticalisation of other domains viz., retail, manufacturing, telecom, andmedia followed.Most other Indian peers wait for critical mass to be established before they verticaliseacross geographies. For example, Infosys started to complete its verticalisation inEurope only in FY08, waiting tocross over the USD 1 bn plus mark and buildcomfortable margins before completing this exercise. We believe as a result of this delayit may have foregone an opportunity to showcase greater focus and depth in its offeringsin Europe.Cognizant took a vertical-aligned approach even to its BPO. At Cognizant, BPO was acapability which each vertical sold as part of its portfolio of offerings. For example, aspart of its healthcare and life sciences vertical, Cognizant worked with Pfizer GlobalResearch and Development, India, on clinical data management and biometrics. Itemployed pharmacists, bio-statisticians, medical writers, and high-end analytics-drivenprogrammers, thus handling a project normally done by clinical research organisations.The result of such a vertical orientation in BPO is that while revenues in this practicelagged behind that of peers such as Wipro and Infosys who took a horizontal approach,it was a distinctive and defensible position as it was value added. The fact thatCognizant recently announced a large KPO deal—of USD 95 mn over a five-year periodin clinical data management with AstraZeneca is testament to this.Cognizant explains the benefits of ahead-of-the-curve verticalisation as follows“When we started serving customers along industry lines under a common management,we started getting the acceleration of industry knowledge. The same people thoughtconstantly about issues related to a particular industry. As a result of this, dollar fordollar, we have more industry experience and expertise than our competition at thecustomer interface level.”The company is now carrying out verticalisation to the next degree which we call subverticalisation.Cognizant is well organized in sub verticals. A good example is itsmanufacturing and retail practice being sub-organized along discrete manufacturing,process manufacturing, consumer goods, hospitality, logistics, and so on.We believe the benefits of early customer-based verticalisation (the next degree ofverticalisation after domain) are seen in ready scalability. Cognizant has seamlesslygrown in the past four-five years without undergoing drastic/major internalrestructuring, which TCS and Wipro undertook in FY08. If a company does not get thestructure right early on, this sometimes strangulates or delays growth and gives birth toassociated pangs. The jury is still out on the success of restructuring exercise of boththese companies (TCS and Wipro).Focus on depth rather than breadthThe company was helped by its parentage and origins (D&B), and early association withthe IMS Health in penetrating two verticals: (a) banking and financial services; and (b)healthcare including life-sciences. But its investments in relationship management,developing tighter inter-linkages through its two-in-a-box model and early verticalisationhelped develop a business model that lent its natural advantages to farming accounts asopposed to merely opening them. It derives over 70% of its revenues from just twoverticals (BFSI and healthcare) and while that may be perceived as industry-risk, wewould point out the following:(1) On a run rate basis in a difficult environment, Cognizant is adding more revenuesper quarter in BFSI than its larger peers. Over the past three quarters (since Oct 08,132 Edelweiss Securities Limited

Cognizant Technology Solutionsright up to and including June 2009), Cognizant cumulatively added USD 56 mn ofrevenues in BFSI compared to the preceding three quarters (for Infosys and TCS,the corresponding numbers were in negative zone at USD 88 mn and USD 43 mn,respectively). Only Wipro at USD 10 mn kept pace with Cognizant (see chart 1).Chart 1: Cognizant added USD 56 mn in BFSI in the most recent three quarterscompared to the preceding three-quarter period60.056(USD mn)30.00.0(30.0)(4)10(60.0)(43)(90.0)(88)TCS Infosys HCL Tech Wipro (ITOnly)CognizantSource: Company, Edelweiss research(2) We note that despite limited exposure to capital markets in BFSI, Cognizant hasdistinguished itself by depth in commercial/retail banking, treasury and insurance toa much greater extent than peers. Indeed, when Infosys was Cognizant’s presentsize by quarterly revenues (current run rate per quarter is about USD 747mn), itderivedalmost15%lessrevenuesfromtheBFSIsegmentthanCognizantdoesnow.(3) Cognizant has an almost uncontested leadership position in healthcare spanning thedrug development lifecycle—from discovery, clinical, manufacturing/production tocommercial operations (sales and marketing). Its sweet spot is particularly in drugdevelopment covering analytics relating to clinical trials (straddling Phases 1 through4), submission management—an area in which Indian competition is relatively absent.The company also provides post-drug development analytic support by way of anongoing KPO. Where Indian IT competes with Cognizant in healthcare is in handlingpost-research activities related to production, sales, and marketing support andshared services support (finance & accounting, HR etc.). Indian IT vendors havetraditionally used SAP as their point of entry later on in the value chain. A goodexample is the recent AstraZeneca announcement for maintenance of applicationsover a five-year period. While Cognizant got the application maintenance piece fordiscovery, clinical and sales and marketing areas, Infosys got it for manufacturing andcorporate applications (such as HR and Finance).(4) There is also the provider and payer space in addition to life sciences(Pharma/Biotech) that Cognizant has penetrated relatively well. While peers arepresentinthepayersegment,theyarenoticeablylesssointheprovidersegment(hospitals). Unlike the payer side of the healthcare business, wherein Indian IT ismore likely to deal with larger financial institutions/insurance agencies, the providermarket is significantly penetrated and local. For example, the advantage of a strongpresence in New Jersey does not necessarily mean this strength can be exploited topenetrate Washington DC. This requires a localised and a more relationship-orientedEdelweiss Securities Limited 133

Information Technologyapproach to sales and marketing which Cognizant has brought to bear. It is anothersub-segment within healthcare that presents entry-barriers.Speed and aggression in crafting go-to-market modelsCognizant has not shied away from adopting customized and differentiated go-to-marketmodels to penetrate new markets. Its partnership with T-Systems has enabled it topenetrate the German market while also affording it an understanding of the telecomdomain where it lags behind peers. Owing to the crisis, the alliance has tracked a bitbelow expectations on the revenue front but has evolved in nature to cover joint go-tomarketpropositions.Manufacturing is a small segment for Cognizant (as % of revenues) but the companyhas recently stitched a win-win alliance with Invensys by taking on board about 400employees of Invensys’ R&D facility in India. We see this as a potential game-changerfor Cognizant as product engineering and lifecycle management, being the inner core ofmanufacturing presents large market potential that Indian peers do not have muchstrength in or expertise at to commensurately exploit (see Case study below).Case study: Cognizant-Invensys alliance represents a good win-win allianceOn the face of it, 400 personnel from Invensys’ R&D captive centre in Hyderabadwould not add more than USD 100 mn of revenues over five years. However, thegame here is rapid expansion and deepening of Cognizant’s competence in varioussub-segments of manufacturing that would enable Cognizant to upsell to existing andprospective manufacturing clients and further penetrate Invensys and its customerswith its system integration and enterprise application skills.To provide a context, Cognizant has used enterprise solutions (packageimplementation) to penetrate manufacturing, but unless it integrates this into shopfloor processes, it will never be able to address manufacturing at its very core. Theacquisition of the Invensys subsidiary helps Cognizant do just that. We gather thatthis was a deal that global and other Indian top tier players went after quiteaggressively, not surprising given that the market for Industrial Automation PackageSolutions is currently around USD 35 bn. In addition, there is a similar size of marketin the area of custom-built solutions. As many industries are espousing packagesolutions, the market potential for Invensys’ products and solutions is significant.Invensys found Cognizant 2.0 a powerful product development platform, which, webelieve, could have been a contributory factor to Cognizant winning out in the end.What will be the markets in which services of Cognizant-InvensysOperations Management combine will be offered?This is a global relationship. For Cognizant, this relationship will create multiple newrevenue streams:1. Core product development: Participate in the core product development forInvensys (this will give Cognizant the ability to understand product functionalitiesin granular detail and be able to customize solutions based on needs).2. Industrial automation services: Cognizant hopes to leverage the productknowledge and be the global systems integrator to provide industrial automationimplementation and support services.3. Being part of the core development team of Invensys Operations Management,this will provide Cognizant a unique opportunity to develop industry-specificsolutions and expand within its client base and/or penetrate newer clients,industries and markets.134 Edelweiss Securities Limited

Cognizant Technology SolutionsMaking both market-facing and internal-focused investments workIn our view, making investments per se is not what makes Cognizant stands out. It liesin making them work. The company has gone on record that it takes less than fourquarters for its experienced business development hires to win deals even in servicelines,verticals (domain) and geographies where it has had no/little presence.While Cognizant protects its core (BFSI and healthcare), its ability to ratchet up thegrowth engine is not matched by the big 3 in Indian IT. With Cogni zant the probability ofrewards of new investments is high. This explains why• Cognizant has managed to grow BPO and Remote Infrastructure management (RIM)to over 11% of revenues from virtually zero base over three to four years.• Cognizant has successfully forayed outside of its traditional strengths (financialservices and healthcare – collectively accounting for 70% of revenues) to findaggressive growth in retail/manufacturing/logistics/transportation, which nowaccount for over 17% of overall revenues.• Cognizant’s European revenues grew by 86 percent in 2007 and 58 percent in 2008,and its proportion of European revenues grew from 12-13 percent to about 18-19percent in just the last couple of years. Likewise, for the June 09 quarter, itsrevenue contribution from outside the US/Europe grew 65% Y-o-Y . This isadmittedly off a low base but it highlights an important point that we have made:the company makes its investments work.One final point on investments. Cognizant 2.0, developed through ~700 man-yearsof investment over several years and currently consuming ~300 man years for ongoingmaintenance is a serious investment program. The company believes that with thisplatform for knowledge management and distributed delivery for project management, ithas unleashed an order-of-magnitude productivity improvement in the way projects aremanaged organisation-wide. It believes that such a platform offers rich win-wincollaboration opportunities with alliances/complementors. In essence, while Cognizanthas traditionally been associated with making front-end investments readily, this hasalso proved that the company keeps its internal focus high as well at the same time.Edelweiss Securities Limited 135

Information TechnologyInfusing flexibility in business modelCognizant’s business model envisages maintaining high levels of bench in years ofgrowth (reflected in high SG&A costs as a percentage of revenues as cost of benchclassified in SG&A). This gives the company the flexibility to soak up the availableutilisation in the system. As a result, it has been rather guarded in hiring right throughCY08, preferring utilisation. Also, unlike Infosys and TCS, Cognizant has considerablymoderated its hiring for CY09 (FY10), thus limiting downsides to margins from uncertainutilisation. In support of this, we note that its organic revenue growth of 28% in CY08and 12-13% in CY09 (CY09 as per consensus) is well ahead of its headcount increase forthe same period. So while Indian peers await greater volume growth to optimizeutilization, Cognizant is already doing that with its utilization tracking near-term highs(for the period data is available with us).The proof of the pudding is in eating itRight from FY03 (or CY02 for Cognizant) through FY10 (or CY09), Cognizant has grownahead of Infosys on both revenues and net profits fronts (see charts 2 and 3). Notably,as the environment gets progressively tougher, the company seems to be expanding itsrelative growth differential. We note its incremental revenues (in USD) added quarterwisein the past three quarters since Oct 2008 outweigh revenues peers have added ona quarterly basis (see charts 4 and 5). This is creditable given the larger revenue basesof the Big 3.Chart 2: Cognizant ahead of Infosys in revenue growth every year since FY04(or CY03)*70.058.0(%)46.034.022.010.0FY2004 FY2005 FY2006 FY2007 FY2008 FY2009InfosysCognizantSource: Company, Edelweiss researchNote:*FY09forInfosysistakenequivalenttoCY08forCognizant136 Edelweiss Securities Limited

Cognizant Technology SolutionsChart 3: Cognizant has grown ahead of Infosys on net profits since FY04*85.068.051.0(%)34.017.00.0FY2004 FY2005 FY2006 FY2007 FY2008 FY2009InfosysCognizantSource: Company, Edelweiss researchNote:*FY09forInfosysistakenequivalenttoCY08forCognizantChart 4: Incremental quarterly revenue build-up most consistent in case ofCognizant*8044(USD mn)8(28)(64)(100)TCS Infosys Wipro (IT Only) HCL Tech CognizantQ1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10Source: Company, Edelweiss researchNote: * unadjusted for inter-currency fluctuations, not expressed in constant currencyEdelweiss Securities Limited 137

Information TechnologyChart 5: Revenue build-up (or increase in quarterly revenue run-rate) over Jun08 – Jun 09 has been maximum for Cognizant*1101039170(USD mn)30(10)(50)(45)(33) (35)(90)TCS Infosys Wipro (IT Only) HCL Tech Cognizan tIncrease in quarterly revenue run-rate over one yearSource: Company, Edelweiss researchNote: * unadjusted for inter-currency fluctuations, not expressed in constant currencyIn CY08, Cognizant’s organic growth at 28% (organic growth excluding acquisitions of T-Systems and marketRX) is markedly ahead of peers, which we believe is commendablegiven its concentrated US and BFSI exposure (nearly 80% and 46% of revenues,respectively). Clearly, the DNA of Cognizant seems to be serving it well in thisenvironment. It seems to set to repeat this revenue growth leadership in an even moredifficult CY09 (FY10 for its peers) at 12-13% USD growth (as per consensus)The market has taken cognizance of Cognizant’s superior growth in good timesCognizant’s P/E (current) has been trading at a consistent premium to the Infosys ADRfor almost the last two years (since Mar 07 through August 09 before which it was at adiscount; see charts 6 and 7). This premium reversed after the Lehman fold-upwhereupon Infosys closed the gap and started trading at a premium. However, theInfosys ADR premium is narrowing as the downturn recedes.Chart 6: Current P/E of Cognizant versus that of Infosys (ADR)45.036.027.0(x)18.09.00.0Jan-04May-04Sep-04Jan-05May-05Sep-05Jan-06May-06Sep-06Jan-07May-07Sep-07Jan-08May-08Sep-08Jan-09May-09Sep-09CognizantInfosys ADRSource: IBES, Company, Edelweiss research138 Edelweiss Securities Limited

Cognizant Technology SolutionsChart 7: Cognizant's P/E premium to the Infosys ADR80.060.0(%)40.020.00.0(20.0)Jan-04May-04Sep-04Jan-05May-05Sep-05Jan-06May-06Sep-06Jan-07May-07Sep-07Jan-08May-08Sep-08Jan-09May-09Sep-09Cognizant PE premium over Infosys ADRSource: IBES, Company, Edelweiss researchConclusions: To sum up, Cognizant has distinguished itself relative to peers via five-foldapproach in its thinking process which underlies its growth thus far. This includes:(a) Reinvestment of excess margins (>19-20% non-GAAP) into the business.(b) Localise and personalise practice leadership and relationship management to theextent possible.(c)Integrate the back end tightly with the front end through joint responsibilities andco-ownership (two-in-a-box approach). This now graduates to three-in-a-box model.(d) Ahead of the curve verticalisation rather than wait for critical mass to build;teething problems presented themselves but the ultimate vision of customerexperience ruled.(e) Managing the tricky duality of protecting the core while investing effectively forgrowth.As a result of these factors, Cognizant has built and refined a business model over timewhich has helped it post superior growth relative to its peers on a sustainable basis.What is relationship management and why is this important?We believe that no one company among the Big 3 holds the aces or advantage in puredelivery per se. Relative differences show up in consultative delivery. With the benefit ofhindsight, we believe that Indian IT firms have historically not spent as much onrelationship management and client mining as they should have. Infosys and TCS faresomewhat better than the others, but the difference shows up in a tougher environmentas the current one. With better relationship management comes better client mining.Cognizant believes that the key to its faster growth rates than peers in the recent pastowes is due to its relationship management and better client mining. We would makethis observation though: When Infosys was Cognizant’s size (i.e. eight quarters ago) ona quarterly revenue run-rate basis, it derived almost 25% lower revenues (in USD mn)from the BFSI segment than Cognizant does.Edelweiss Securities Limited 139

Information TechnologyWhy do we compare Infosys with Cognizant on relationship management?It is because even though Cognizant, at 45% of revenues from BFSI, is much moreexposed to this beleaguered sector than either TCS (>42% of revenues) or Infosys (33-34% of revenues), it is still growing faster than both through FY10 (or CY09).Yes, relationship management pays. Infosys gets more revenues per sales personnelthan Cognizant, but may not invest adequately ahead of the curve in accountmanagement personnel, especially locals who are familiar with the terrains and trenches.TCS has many more sales and marketing personnel than Infosys, but it does notencourage them to manage accounts of a size that Infosys demands. It seems that bothInfosys and TCS are yet to find the sweet spot on this. Wipro is still lacking on bothdimensions: (a) size of accounts managed by account managers; and (b) number ofsales and marketing personnel they have or feet on the ground (see table 1).It is easy to think that relationship management is somewhat intangible, but it isanything but that. As we have discussed in this report, Cognizant has a three-tierinstitutionalised relationship management structure with practice partners, clientpartners (reporting to practice partners), and account managers (reporting to clientpartners). The buck stops with practice partners but each of these three has welldemarcated responsibilities and profiles. Infosys has theirs aswell,butitisperhapsnotaslocalisedandtieredathigherlevelsasitisforCognizant.Table 1: Cognizant seems to have the perfect balanceInfosys Cognizant TCSStrength of S&M staff (Jun-09) 821 >800 >850Cost of bench in SG&A (in bps) - 300-400 250SG&A as a % of revenues (Q1FY10) 12.6 21.9 19.6SG&A as a % of revenues adjusted for bench 12.6 19-20 17.1Source: Company, Edelweiss research140 Edelweiss Securities Limited

Cognizant Technology SolutionsTable 2: Operating metrics (till Q2CY09)1QCY08 2QCY08 3QCY08 4QCY08 1QCY09 2QCY09Revenue-Horizontal(USD mn)Development 310.1 324.9 345.1 342.1 333.3 346.3Maintenance 333.0 360.5 389.6 411.0 412.6 430.3Total 643.1 685.4 734.7 753.0 745.9 776.6Revenue-Vertical Financial (%) 45.5 45.8 46.1 44.9 44.4 42.8Healthcare (%) 25.0 24.0 23.7 25.2 25.4 26.3Retail/Mft/Logistics (%) 15.0 15.6 15.7 16.4 16.5 17.1Others (%) 14.5 14.6 14.4 13.4 14.0 13.8Revenue - Type Fixed bid (%) 26.8 25.7 26.3 27.8 29.1 30.0Time and material (%) 73.2 74.3 73.7 72.2 70.9 70.0Revenue - Concentration Top 5 clients (%) 20.4 19.9 19.0 18.7 17.6 17.6Top 10 clients (%) 30.8 30.7 29.7 29.8 29.3 29.1Revenue-Geographic(USD mn)North America 513.9 536.3 577.1 601.1 593.8 621.0Europe 121.2 139.0 145.0 136.0 136.0 138.7Asia 8.1 10.2 12.6 16.0 16.0 16.9Revenue - Repeat Client (%) 91.0 88.0 92.0 93.0 90.0 95.0(more than 1 year old)Attrition (annualized) ($) Total turnover 12.4 15.0 17.6 11.5 8.3 11.3Headcount (Ending) Technical staff 54,425 55,525 55,450 57,650 59,470 59,830Support staff 3,565 3,800 4,040 4,047 4,230 4,300Total staff 57,990 59,325 59,490 61,697 63,700 64,130% Onsite 21.5 21.7 22.5 23.0 23.0 23.0% offshore 78.5 78.3 77.5 77.0 77.0 77.0Billing Rates Average - onsite (USD mn) 75.0 75.0 75.5 74.3 72.3 72.3Average - offshore (USD mn) 25.0 25.0 24.5 24.3 23.8 23.5Utilization Utilization - onsite (%) 88.0 88.0 89.0 88.0 88.0 88.0Utilization - offshore (%) 53.0 55.0 61.0 64.0 63.0 66.0DSO (excl. unbilled) In Days 64 70 66 63 64 65DSO (inc. unbilled) In Days 74 77 75 71 73 75Capex (USD mn) 53.4 31.8 61.1 23.1 20.5 9.6Source: CompanyNote: Repeat client revenue represents percentage of revenue from clients who have worked with Cognizant for more than one yearEdelweiss Securities Limited 141

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India Equity Research | ITITTobulgeornottobulge?It is interesting to note that in the current environment Infosys’ proportion of thejunior workforce (i.e., the percentage of employees with less than three years ofexperience) has reached a six-year low. The reverse of the increase in bulge orincreasing proportion of the aging workforce is now taking place. But Infosys’ decisionto have freshers to the extent of 90% in its hiring numbers for FY10 (only about 10%experienced hires in the mix) is not necessarily beneficial for the long term as weexplain in this report.Ironically, lower bulge (or a lower proportion of freshers/less-experienced resources)is not a bad thing, as we believe that long-term progression in the business modelrests on a partly consulting-driven, solution-oriented and vertical-led approach (asopposed to technology-led). And, the success in graduating to such a business modelmay not be determined by operating margins alone, but perhaps more crucially by theper capita profitability. In fact, we argue that some of the lower-margin businessesmay add more value from the per capita profitability perspective. We discuss thisapparent contradiction in this report.September 10, 2009Viju George+91-22-4040 7414viju.george@edelcap.comKunal Sangoi+91-22-6623 3370kunal.sangoi@edelcap.comHigher margin offshore-dominant services use more inexperiencedresourcesThe past four-five years saw the Indian IT services business model progress toenvelop offshore-centric service lines such as BPO, infrastructure services, andtesting. These are volume-based service lines that lend themselves to the use offreshers and non-engineering graduates and, hence, have readily absorbed thebulge in Indian IT companies such as Infosys during 2004-08. Some of theseservices such as testing and infrastructure management can have higher marginsthan the overall company average and are more readily scalable. However, thedownside is that the per capita profitability of such service lines tends to be muchlower than the value-added services. Also, they more readily commoditize beinglower hanging fruit. However, it is possible to take a value-added, distinctiveapproach as Cognizant has in its BPO.…but consulting and value-added services fetch higher per capita profitsBuild-out of consulting and solutions will need to incorporate more experience andsuperior quality skill sets. Such businesses could be lower-margin with a moreonsitebias, but can still top the ladder of value addition. It is instructive to notethis fact: Accenture’s operating (EBIT) margins are 13-14%, yet its percapita EBIT is 15-20% higher than Infosys on a much bigger revenuebase of ~5x.Thus, increasing bulge (inexperience) may not necessarily be an out-andoutgood development for Indian IT. Especially, if the bulge builds out discretelyin service lines such as BPO, infrastructure management (IM), and testing whereIndian IT companies are yet to crack the code in building uniqueness, either in theirdelivery models or in their pricing models. One of the biggest strands of a multithreadvalue addition strategy for Indian IT lies in achieving a smooth integration ofall of these sub-offerings with a common platform or interface to the customer. Thisis only possible with embedded value addition in integration and functionality (thus,higher-skilled resources). Standalone offerings, drawing on inflated bulge, fall shortof doing that. In our view, the real economic advantage of bulge is that it affords astream of steady cash flows in stable service lines that is ideally systematicallyharvested in building traction in value-added, higher-end services.Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL , Thomson First Call, Reuters and Factset.Edelweiss Securities Limited

Information TechnologyCompanies have to make the trade-off between value-addition from higher-cost resourcesagainst the relative stability offered by service lines that lend themselves to bulge. The lattershould be seen as a protective bubble that allows them to play offense. It cannot be theraison d’être. Infosys’ bulge has reversed during FY09.Table 1 lays out how the experience curve fo r Infosys has moved since 2003. Chart 1 showsthe proportion of the workforce with less than three years experience now stands at ~47%,down from the peak of 59% in FY01. Like in the previous slowdown, the bulge today hasreversed in favor of experience.Table 1: Distribution of Infosys’ workforce by experience band(%) FY03 FY04 FY05 FY06 FY07 FY08 FY09 Jun-090-1 year 20.0 31.0 22.6 26.0 25.0 19.9 17.7 16.31-3 years 26.6 21.0 33.5 33.0 31.0 33.4 29.7 28.00-3 years 46.6 52.0 56.0 59.0 56.0 53.3 47.4 44.33-5 years 21.5 20.0 14.8 12.0 18.0 19.1 21.0 22.5Above 5 years 31.9 28.0 29.1 29.0 26.0 27.6 31.6 33.2Source: CompanyChart 1: Charting out Infosys’ bulge over time65.0Steep fall at onset ofprevious downturn60.0(%)55.050.045.0BPO, IM build-out +freshers hiringEnterprise solutions(low bulge) buildout;recalibratingthe pyramid40.0FY 01FY 02FY03FY04FY05FY06FY07FY08FY09Junior workforce as % of total workforce (below 3 yrs' experience)Jun-09Source: Company, Edelweiss researchNote: IM - Infrastructure managementInfrastructure management: Allows bulge, but per capita profitability is lowerthan company averageFigure 1 lays out how offerings in the IT Services portfolio typically stack up on operatingmargins and per capita profitability. Improved per capita profitability is possible ininfrastructure management with effective non-linearity. Wipro indicated to us that onefactor behind its confidence on its margin defence stems from its traction ininfrastructure management (ex-Infocrossing) which allows above company-averagemargins. Also, Wipro indicated that an increasing proportion of its revenue traction ininfrastructure management stems from non-linearity (although still small, inframanagement overall contributes about 19.4% to Wipro’s IT revenues). This comes aboutfrom shared services where resources are shared across devices and workflows, devicebasedpricing and SLA-driven realization. TCS indicated to us that it is executing on asizable, multi-year infrastructure management contract (deal size over USD 100 mn),which substantially rests on outcome-based pricing. Higher per capita profits are,therefore, possible through non-linearity, driven either from a commercial perspective144 Edelweiss Securities Limited

IT(outcome-driven pricing) or delivery (shared services). Infosys strives to makecomparable strides in this segment like its two Indian peers - Wipro and TCS.Fig. 1: Higher-margin services generally have lower per capita profitability (enterprise solutions is the exception)Per capita profitability (EBIT/employee)Above companyaverageAt or close tocompanyaverageBelow companyaverage• System integration (SI)• Application development (AD)• Consulting (standalone)• Business process outsourcing(BPO) - suffers from the doublewhammy of lower-than-averagemargins and per capita profitability• Consulting (downstream)• Enterprise solutions (packageimplementation) - Combiningthe best of operating marginsand per capita profitability• Infrastructure managementservices (IMS)•TestingBelow company average At or close to company average Above company averageOperating margins (%)Source: Edelweiss researchBPO takes in bulge but suffers from lack of IP and lower per capita profitabilityBPO tends to suffer from the double whammy of both lower margins (%) andlower per capita profits. We estimate that per capita profits for Infosys’ BPO arm isonly about 25% of that of its IT-Services. Thus, it seems that unless Indian IT firms canbuild defensible and value-added propositions in their BPO product line such asverticalization, integration (of processes, platform and data) with IT and commercializedplatforms, they will be hard-pressed to create value in BPO from a standaloneperspective.In general, Indian IT firms have not driven IP or platform-based solutions in BPO toemerge as specialist firms noted for their expertise in a uniquely identified service areasuch as order processing, HR, and sub-areas in finance and accounting (e.g.procurement). It also goes against the culture of Indian IT companies that celebratesservices to create such IP-driven solutions. Hence, their probability of being marketleaders in BPO areas such as transaction processing like global biggies (ADP, Exult, FirstData Processing), through an IPR-driven platform proprietary model, and thus emerge asmulti-billion dollar entities, seems remote.In other words, a standalone commoditized BPO player will find it hard to create marketcap beyond a certain threshold (say, USD 1.0-1.5 bn) because the growth versus margintrade-off is more severe in commodity services. Even Genpact, the world’s largestservice BPO FTE-based player, has a one-year average market cap of about USD 2.6 bn(2.5x revenues), despite being about 4x Infosys’s BPO revenues (or ~ 3x Wipro’s BPOrevenues). Genpact has begun to understand the limitations of being a standalone FTEbasedBPO pure-play and has now developed IT solutions to cater to the integrated IT-BPO opportunity. To understand how the positioning of Indian IT firms’ BPOstrategies need not centre on bulge alone but also on value-add, please refer toEdelweiss Securities Limited 145

Information Technologythe box below that highlights a study in contrast between the BPO models ofInfosys and Cognizant.As per our studies, there are very few entities in BPO that clock over a billion dollar inrevenues with premium market valuations and attractive profitability. Such companieshave a remarkable commonality – they have a proprietary go-to position in their chosenareas (such as HR outsourcing, automated transaction processing) (see table 2). Many ofthem also cater to the operating budgets of the huge SMB segment in the developednations (particularly the US) with their licensable or rent-based offerings. It seems ahard act for Indian IT to follow.146 Edelweiss Securities Limited

ITTable 2: Companies that have achieved serious scale and profitability work on a proprietary non-FTE revenue model with strong horizontal capabilityor vertical solutionsCompanyMktcap(USD bn)Mktcap /Employee(USD)Revenues(USD mn)Revenues /Employee(USD)EBIT marginEBIT /Employee(USD)Employees Description of services Business model positioningAutomatic Data Processing 19.5 432,400 8,867 197,049 20.6% 40,667 45,000 Offers a range of human resource (HR), payroll, t ax and benefitsadministration solutions, proprietary licensed platform.Transaction processing softwarePaychex, Inc. 10.1 808,240 2,083 166,621 38.7% 64,416 12,500 Provides payroll and integr ated human resource and employeebenefits outsourcing solutions to the SME segment in the US.Customisable delivery platformsFiserv, Inc. 7.4 367,800 4,217 210,850 20.9% 44,150 20,000 Provides transaction processing, electronic bill payment, businessprocess outsourcing, document distribution services and proprietarylicensed platform. Company’s o perations are classified into fourbusiness segments: financial institution services (financial segment),payment and industry produc ts (payments); insurance servic es(insurance segment), and corporate and others.Proprietary platforms covering payment, risks and complianceand othersAffiliated Computer Services, Inc. 4.3 58,284 6,523 88,151 10.5% 9,270 74,000 Broad-based services covering information technology, human capitalmanagement, finance and accounting, customer care, transactionprocessing, payment serv ices and commercial education. C aters tomany industries with industry-specific customizations.Integrated IT+BPO offering picking up traction in the market;public services (government ) a major customerTotal System Services, Inc . 3.0 369,914 1,815 223,760 19.2% 42,912 8,110 Provides electronic payment processing and related services tofinancial and non-financial institutions. Services include proc essingconsumer, retail, commercial, government services, stored value anddebit cards.Payment processing solutions including point-of-sale solutionsHewitt Associates 3.3 141,739 3,124 135,828 12.1% 16,478 23,000 Operates in three business segments: benefits outsourcing, humanresource business process outsourcing (HR BPO) and consulting.Total comprehensive, function outsourcing (HR)IMS Health, Inc 2.6 342,533 2,204 293,923 19.5% 57,349 7,500 Offers market intelligence products and services, including portfoliooptimization capabilities, commercial effectiveness innovations,managed care and consumer health offerings, and consulting andservices solutions in healthcare and pharma segments.Vertical positioning in healthcare; proprietary "clinical data"analyticsGenpact Limited 2.6 72,597 1,091 30,147 14.5% 4,369 36,200 Offer services in finance and accounting, collections and customerservices, insurance, supply chain and procurement, analytics,enterprise application and information technology (IT) infrastructure.FTE-based solutions across verticals; no recognized industrysolutionWNS (Holdings) Limited 0.6 30,390 553 25,895 5.8% 1,496 21,356 Provides offshore business process outsourcing services (data, voiceand analytical services).ExlService Holdings, Inc 0.4 37,638 174 18,410 10.2% 1,882 9,432 Provides outsourcing services (claims processing, finance andaccounting and customer service) for its US and UK-based clients.In the process of scaling up in the BPO segment; analytics agrowing portion of the revenue pie which still has a fairportion of legacy voice and customer interactions basedrevenues,acquisition of Aviva BPO captive to establishvertical positioning in insurancePrimarily an outsourcing-based FTE/fixed price model;acquired high-end analytic capabilities with the acquisition ofInductis. Tapping into the growing area of risk and assurancethough still at the very elementary stage of domain-intensityin solutions.Source: Bloomberg, Company, Edelweiss researchEdelweiss Securities Limited 147

Information TechnologyA study in contrast: Infosys BPO versus Cognizant BPO – It’s not about the bulge alone!Infosys staked out its position in its BPO way back in 2002-03 by clearly defining the segments that it will not operate in,namely, voice and customer interaction services. It had a stated focus on transaction processing, particularly in the FAOspace (FAO – finance and accounting software). Over time, this extended to managing parts of the supply chain,procurement and higher knowledge work such as financial research and analytics. Progression to the higher-valuecomponent has been rather measured, and we believe that Infosys needs to do more. Infosys is in the throes ofverticalising some of its mature processes around FAO by adding some domain related value-add. Development of aplatform (in conjunction with SAP), to manage solutions like procurement, is yet to translate into a concrete go-tomarketoffering. Still, the Infosys BPO essentially remains a horizontal-driven service line with a predominant FTE-basedrevenue model. A transaction-based pricing model can generate profits only with scale and minimum volumes whereInfosys is yet to build maturity. Maturity also comes with the requisite learning curve which tends to be longer intransaction-based pricing models. The acquisition of the Philips BPO captive has strengthened Infosys’ positioning inFAO, but may not have invested it with specialist vertical capability (except in mortgage solutions). The Philipsacquisition has also helped Infosys improve its ability at working on a shared services model. It has also helped Infosyswin new clients in FAO especially in the manufacturing vertical. Notably, we believe that Infosys BPO operates at a fairlysignificant bulge (i.e. proportion of low-cost, inexperienced resources) with scale. Solutions, at over a quarter of Infosys’BPO revenues, is a growing value-added pie. Some of the solutions in the Infosys BPO solution suite include SAP-basedHR and procurement platforms, claims processing, accounts payables and mutual fund settlement.Cognizant took a different route to address the BPO/KPO market. Being a late entrant (just over three years back), ittook ‘verticalisation in BPO’ as the logical step in defining its value proposition in keeping with the already prevalentverticalisation in its IT services business. Here, BPO/KPO was a capability that each vertical sold as part of its portfolio ofofferings. For example, as part of its healthcare and life sciences vertical, Cognizant worked with Pfizer Global Researchand Development, India, on clinical data management and biometrics. It employed pharmacists, bio-statisticians,medical writers and high-end analytics-driven programmers, thus handling a project normally done by clinical researchorganisations. The result of such a vertical orientation in BPO/KPO is that while revenues in this practice are lower thanits peers such as Wipro and Infosys who took a horizontal approach, it was a distinctive and defensible position as it wasvalue added. The fact that Cognizant recently announced a large KPO deal -of USD 95 mn over a five-year period inclinical data management with AstraZeneca - is testament to this. The acquisition of marketRx, a high-end sales andmarketing analytics firm focused on sales and marketing analytics in the life-sciences industry (this firm had annual percapita revenues of about USD 100,000 at the time of acquisition with a run rate of USD 40 mn revenues and about 400employees), further boosted Cognizant’s credentials beyond discovery, clinical and manufacturing processes . It alsohelped in driving Cognizant’s BPO/KPO traction in several healthcare/life-sciences leaders (marketRx worked with all the20 of the Top 20 pharma companies) and also extended the capability provided by the core ‘analytics’ platform to othersectors.Can commodity services be innovatively packaged in a strategic and value-added mode? While Cognizant hastraditionally gone down the vertical route to BPO/KPO, it believes that its services lie at the intersection of domain,process, technology and consulting. Even its limited voice-based support is domain intensive and is integrated with thecore processes. One example of its voice based support is the “adverse event calls” (calls made to a toll-free number inthe event of adverse reaction to drugs) that the Company’s specialist professionals (doctors and pharmacists) take tohelp its pharmaceutical clients test newer drugs in accordance with drug safety norms as de fined by bodies such as theFood and Drug Administration (FDA).All of this is reflected in the superior per capita metrics of the Cognizant BPO/KPO relative to the InfosysBPO even as we believe that margins are comparable. As per our estimate, per capita revenues of CognizantBPO is 2.5x that of Infosys (see table 3).This distinction between horizontal and vertical specific BPO and the resultant market opportunity is highlighted in arecent NASSCOM Everest India BPO study titled ‘Road map 2012: Capitalizing on the expanding BPO landscape’, “Overthe next five years, vertical specific BPO services (refers to BPO services that require a high degree of vertical specificknowledge) provide larger market opportunity (60% USD 145-175 bn) compared to horizontal BPO services(refers to BPO services that are reasonably similar across verticals which is estimated at 40%: USD 75-105 bn).”148 Edelweiss Securities Limited

ITTable 3: Comparing Infosys BPO with Cognizant BPO on select parametersParameter(s) Infosys BPO Cognizant BPOYears of existence 6.5 years 3.5 yearsNo. of employees 17,000 3,500*Annualized revenues (FY09) USD 280 mn USD 150 mnAs % of total (company-wide) 6% 5%Annualized per capita revenues USD 16,000 USD 40,000*Focus areasFAO (in financial services), billingand collections management (intelecom), financial researchHealthcare and Life Sciences; FinancialServices; Manufacturing, Retail andLogisticsVertical solutionsMortgageFinancial Services (Fundadministration, fund accounting,investment analysis and researchsupport, trust services, fraudanalytics, loan processing,finance and accounting)Healthcare and Pharmaceutical (clinicaldata management, pharmacovigilance,provider credentialing, drug safety andrisk management, regulatory filingsupport, subrogation, anti-fraud)Financial Services (Fund administration,fund accounting, investment analysis andresearch support, trust services, fraudanalytics, loan processing, finance andaccounting)Manufacturing, Retail and Logistics(supply chain mapping, pricing analytics,procurement management, warrantyclaims processing, logistics management)Media and Entertainment (Mediameasurement, online ad management,campaign analytics, royalty processing,subscription and customer valuemanagement)Bulge High ModerateOutcome-based revenues or non-linearity as% of revenues (BPO)Acquisition strategy (based on acquisitionsso far)LowPhilips BPO – deepen expertise inF&A, operate on a shared servicemodelModeratemarketRx deepened its domain expertisein the life-sciences industry and added“high-end analytics” capabilities.Source: Company, Edelweiss researchNote: *Edelweiss estimates onlyCan the bulge be sustained?We liken any of the top-3 Indian IT companies to a giant ship. This was going steadily ina particular direction and since the rules of the direction and controls were set, the shipcould run with a greater proportion of inexperience. But with the ship needing to reset itspriorities in the current environment, and hence, alter direction, effecting changerequires some greater level of experience and old hands. Only after the new rules of thegame become clear, and blue printing and proof-of-concept have accordingly developedcan the reversion of the bulge to the mean take place. In other words, broadening of thepyramid is possible only with critical mass of domain knowledge/capability in verticals(e.g. BFSI and telecom service providers) and service lines such as applicationmanagement, BPO and infrastructure management, which will take time to build in newareas and verticals after the current crisis.Edelweiss Securities Limited 149

Information TechnologyThe Y2K crisis provided an opportunity to build out in BFSI and expand bulgesubsequently, while the outsourcing of R&D and product development in telecomequipment vendor space (heralded by captives such as Texas Instruments and Motorolain India) provided expertise in networks management and systems management, whichwas leveraged on a larger scale in the telecom service provider segment. These ‘trigger’events presented opportunity to penetrate and consolidate, and consequently laid thefoundation for bulge in this vertical as well. Today, Indian IT needs to seek such eventsfor a mean reversion of the bulge. We lay out the process of reversion of the bulge to themean in figure 2.Fig 2: Low bulge but high value-add solutions create downstream, high bulgeorientedimplementation opportunitiesBulge is highHigher margin but commoditizing service lines providing annuity-like stream of investablecash flows (testing, infrastructure management services etc.)Bulge is reversedInvest in building lower/equivalent margin but higher per capita profitability solutions(domain-led, delivery based etc.)Bulge builds up againSolutions after having won acceptability and recognition begin to drive downstreamDownstream maturity, in turn, creates more bulgeSource: Edelweiss researchHowever, value-addition in business model resting exclusively on increasedbulge exhausts itself fairly quickly unless firms floor the pedal on innovationWhen we have business models built only on people, then soon with limited pricingpower and skill sets, diminishing returns (as measured by EBITDA/person orEBIT/person) will set in. The INR depreciation is helping today, but what when the trendof INR depreciation is reversed.This is because pricing is declining while investments will have to be made that will endup keeping expenses growth ahead of revenues. Already, all others, barring Infosys,have been showing declining trends of EBITDA/employee till FY08. Thus, one isconstantly running a treadmill. To grow at 20% EBITDA, a company will have to hire25% more people, which multiplies in the next year and so on.Unless the decline in operating profits/employee (EBITDA/employee) is arrested, webelieve benchmark cost of capital (equity) returns (of 12-13%) will be hard to obtainbeyond a horizon of two-three years in the large-cap Indian IT services space. To beatthis benchmark, firms must work towards making discernible progress in their non-linearinitiatives.Viewing the competitive advantage and value-add of the business through the lens ofoperating margins is insufficient. Operating profit per employee is perhaps a moreappropriate gauge of value-addition/commoditisation. As we have pointed out before,150 Edelweiss Securities Limited

ITwhat may be less relevant hereon in the Indian IT sector is operating margins (%) inisolation. The focus must move to operatingprofit/employee in a people-intensivebusiness. This is because higher-value solutions such as consulting may be lower EBITDAmargin businesses,but fetch much higher percapita profits (than bettermarginoffshore-oriented business such as BPO and infrastructure management). Wechartthevalue-creation pattern in figure 3.Fig. 3: Howwill value migration take place along the operating marginand percapita profitability axes?Per capita profitability(EBIT/employee)Above companyaverageBelow companyaverageAcceptable coursetogeneratehigher value-add subject toconditionsLowvalue additioncourseHigher course of value additionbut movement is rare (idealscenario)Below company averageAbove company averageOperating margins (%)Source: Edelweiss researchInfosys hasmanaged per capita EBITDA/EBIT much better than others so far. But, itcan choose to protect margins and yet commoditise its business, which couldresult inshrinkage or sub-optimal growth and declining per capitaEBITDAover time. Or, th ecompanycan take steps to add value on a per capita basis evenifmarginsdecline. The best exampleis Accenturee (its operating(EBIT) margins are 13-14%, yet its per capita EBITis ~20%higher than Infosys on a much bigger revenue base of 5x, see table4).Thus, one of theobjectives of an acquisition is to seehowIndianfirmschange their profile of percapita EBIT/EBITDA forthe better over time. In our view, should not be too much of aworry if margins decline acceptably in theprocess.Table 4: Accenture’s per capita metrics are superior than Infosys despite muchlower margins on a revenue base ~5xofInfosys((based on latest annual financials)Infosys(a)Accenture (b) Ratio ofFiscal periodFY08 (Mar09) CY08(Aug 08) (b) to (a)Average no.ofemployees(fiscal)98,000186,0001.9xRevenues (USD bn)4.722.34.8xEBIT (USD bn)1.43.02.2xEBIT margins (%)29.513.50.5xCash flows (USD bn)1.42.82.0xPer employee metricsRevenues (USD '000)47.6119.92.5xEBIT (USD '000)14.016.21.2xCash flows (USD '000)14.415.11.0xSource: Company, Edelweiss researchEdelweiss Securities Limited 151

Information TechnologyConclusionIncreasing bulge may not necessarily be an out-and-out good development forIndian IT. Especially, if the bulge builds out discretely in service lines such as BPO,infrastructure management and testing where Indian IT companies are yet to crack thecode in building uniqueness, either in their delivery models or in their pricing models.One of the biggest strands of a multi-thread value addition strategy for Indian IT lies inachieving a smooth integration of all of these sub-offerings with a common platform orinterface to the customer. However, the layer of seamless integration can only comefrom embedded value addition in integration and functionality (thus, higher-skilledresources). Standalone offerings (e.g. standalone BPO), drawing on expanded bulge, fallshort of doing that.In conclusion, the real economic advantage of bulge is that it affords a stream of steadycash flows in stable service lines that is ideally systematically harvested in buildingtraction in value-added, higher-end services. Firms have to make the trade-offbetween value addition from higher-cost resources against the relative stabilityoffered by service lines that lend themselves to bulge. The latter should be seenas a protective bubble that allows them to play offense. It cannot be the raisond’être.152 Edelweiss Securities Limited

Accenture: Acquisition historyAccenture: Acquisition HistoryAccenture, in accordance with its small, tactical tuck-in acquisitions strategy, makesmultiple small-scale acquisitions in a year (FY08, it made 12 acquisitions). Generally, totalconsiderations for all acquisitions in a year have amounted to about USD 200-300 mn. Itslargest acquisition, for which we have data, is of Capgemini’s North American health practicefor USD 175 mn (net). Accenture recently established its process and innovation performancegroup after acquisition of the George Group, which specialises in process, operational, andbusiness transformation (including Lean Six Sigma) and innovation strategy.Total consideration of acquisitions for FY06, FY07, and FY08 amounted to USD 209 mn, USD187 mn, and USD 304 mn, respectively.Some of them are discussed in the following pages.Edelweiss Securities Limited 153

Information TechnologyTable 1: Select acquisitions made by Accenture over the yearsTarget Company Target Desc ription Target Subsector Deal DescriptionNokia (SymbianProfessional Services)Finland based engineeringservices and turnkey softwaredevelopment unit of NokiaConsulting services (excl. ITconsulting),Engineeringservices,SoftwaredevelopmentThe acquisition of Symbian professional services unit enhances Accenture’ s accessible entrenched software,product development and testing sk ills to help companies in mobile solution s ecosystem address. The acquiredunit benefits from Accenture’s strong brand, global sales group and broad tech nology skills. As a result of thistransaction, about 165 professional se rvice engineers and consultants based i n the United Kingdom, Finland,Japan, Korea and Australia will transfer to Accenture.ATAN Brazil based provider ofindustrial informationtechnology and automationsolutionsIT consulting,IT training The transaction is line with Accenture’s st rategy to focus on the growing automation and industrial IT servicesindustry. Accenture hopes to increas e efficiency by integrating ATAN’s use of t echnology in industrialsituations into its consulting practice s. ATAN employs approximately 500 staff across its AutomationTechnology, Industrial IT and Specia l Solutions segments.Origin Digital Inc US based g lobal videoapplications service provider.Portals The acquisition expands Accenture’s ability to help its clients grow their digital media revenue through Origin’sspecialized expertise. Post acquisition, Origin Digital will be a part of Accenture Digital Media Services (ADMS)groupAddVal TechnologyIncUS based provider ofsoftware products, businessand technology services forthe cargo industry.Application softwareproducts,Other servicesThe acquisition enables Accenture t o strengthen its freight and logistics pract ice and help its clients tomodernize their freight management services. For AddVal, the acquisition would allow it to deliver tools andcapabilities to a broader market and provide its clients full range of consulting and technology servicesAccenture would be retaining AddVal’s employee which is in line with Accenture recruiting initiatives to meetgrowing client needs.Sopia Corporation Japan based consulting andIT solutions company.IT consulting,SystemsintegrationSopia generated revenues of about JPY 5.4 bn (USD 52.5 mn) for the ye ar ended March 2007. The acquisitionis in line with Accenture's strategy of broadening its system integration business in Japan. In turn, Japanesecustomers will benefit from Accenture’s consulting capabilities, modern delivery methodologies, and globalreach.Memetrics HoldingPty. LimitedUS based provider of testingand optimization solutions fordigital marketers withoperations in Australia andUKApplication softwareproducts,IT consultingWith this transaction, Accenture enhances its market reach in online marketing, supplying digital optimizationservices for clients. Consequently, Accenture has also agreed to acquire Maxamine, the US based provider ofsolutions which scans websites and identifies implementation problems. Post acquisition, Maxamine andMemetrics employees will be offered positions with Accenture’s marketing sci ences practiceMaxamine Inc US based provider of testingand optimization services tohelp companies to improvethe marketing effectivenessand financial returns.Business support services The acq uisition provides Accenture the opportu nity to enhance its services and to expa nd its business line. Theacquisition is in line with Accenture’s acquisition of MemetricsMAXIM Systems Inc US based p rovider ofinformation technologyservices.Corliant Inc US based IT consultingcompany.Application softwareproducts,Softwaredevelopment,SystemsintegrationThis acquisition helps Accenture expand its operations in defense practice in the US military market forcommand and control systems. Post acqu isition, all the 135 employees will joi n AccentureIT consulting After the acquisition all of the 150 employees of Corliant will join Accenture. Post acquisition Corliant willbecome part of Accenture Technology Consulting. The acquisition will complement Accenture’s existingnetwork technology services thereby strengthening its position in network technology market. MoreoverAccenture will be able to combine Corliant’s networking and Cisco-specific expertise to their broad client basewhich will enable them to deliver more enhanced solutions to public-sector clients.154 Edelweiss Securities Limited

Accenture: Acquisition historyTable 1: Select acquisitions made by Accenture over the years (Contd.)Target Company Target Descri ption Target Subsector Deal DescriptionH. B. Maynard andCompany IncGeorge GroupConsulting, L.PUS based company engagedin consulting, software, andtraining business dedicated toproviding innovative solutionsto improve workforceperformance and eliminatewasteApplication softwareproducts,Business supportservices,Consulting services(excl. ITconsulting),Educational &Training Services,ITconsulting,ITtraining,SoftwaredevelopmentUS based Consulting firm Consulting services (excl. ITconsulting)Maynard reported annual revenue of USD 20 mn for 2006. The acquisition will build up Accenture’s humanperformance practice. Apart from this, Accenture will also get benefit from Mayna rd’s workforce performancetechniques and software toolsThe acquisition is in line with Accenture’s strategy of expanding its US consulting business and will bring inGeorge Group’s expertise in process improvement techniques including Lean Six Sigma. George Groupemploys approximately 250 people.Espin SpA Italy based provider oftechnology services to ICTbusiness.Data processing,Hardwaremaintenance,IT trainingAccenture Limited, the listed US based management consulting, technology and outsourcing company, hasacquired Espin SpA, the Italian provider o f technology services to ICT business, from Fiat SpA, the Italianindustrial group, for an undisclosed consideration. The acquisition is in line with Accenture’s strategy toexpand its geographical centers. Espin has revenues of around EUR 12m.NaviSys, Inc. US based provider oftechnology solutions for thehealth and insuranceindustry.Diversiti Pty Ltd Australian company providingcontract and permanent staffto government bodies andprivate corporations engagedin IT implementationprojects.Application softwareproducts,SoftwaredevelopmentThe acquisition will enhance Accen ture’s processing capabilities from front-office sales to back-office policyadministration and enable the company to exploit NaviSys’s software for the further development of its lifeinsurance business as well as provide NaviSys with a growth path globally. TA Associates acquired Navisys in2000.Business support services Chandler Macleod Ltd, the listed Australian recruitment and contracting company, has agreed t o acquireDiversiti Pty Ltd, the Australian recruitment company, from Accenture Australia Ltd, also an Australianrecruitment and contracting company, for an undisclosed consideration. Diversiti generated revenues of AUD65m (USD 49.6m). The acquisition will be funded partly in cash and the rema ining as a percentage ofearnings over the first two years of operations post completion.The acquisition complements both the Ch andler Macleod’s organic growth across Australia and recruitmentservices offerings thereby enabling it to expand into the IT contracting and recruitm ent sector. Thetransaction will also enhance Diversiti’s fo cus on their growth strategy.Random WalkComputing IncUS based technologyconsulting firm specializing intrading system applications,risk management systemsand other technologies forbanks, asset managers,exchanges and other financialservices institutionsApplication softwareproducts,ITconsulting,Softwaredevelopment,SystemsintegrationThe acquisition expands Accenture’s custom software integration and developmen t capabilities in stocks,bonds and derivative markets and will also enable Random Walk to expand and grow geogra phically.Pecaso Limited UK based HR and IT servicesfirm involved in SAP HumanCapital Managementconsulting and integrationservices for multinationalcorporations andgovernments.Business support services,ITconsultingAccenture Limited has agreed to acquire Pecaso Limited, the UK based provider of specialist HR consultancyservices for IT based HR solutions.The addition of Pecaso’s people and technology will enable Accenture to combine resources, tools andcapabilities of both the companies. The acquisition is expected to build on Accenture’s leadership in providinghuman resources management solutions to customers. Post acquisition, Pecaso ’s 300 HR and IT experts inseven countries and its proprietary technology, will become part of Accenture.Edelweiss Securities Limited 155

Information TechnologyTable 1: Select acquisitions made by Accenture over the years (Contd.)Target Company Target Descript ion Target Subsector Deal DescriptionH. B. Maynard andCompany IncGeorge GroupConsulting, L.PUS based company engagedin consulting, software, andtraining business dedicated toproviding innovative solutionsto improve workforceperformance and eliminatewasteApplication softwareproducts,Business supportservices,Consulting services(excl. ITconsulting),Educational &Training Services,ITconsulting,ITtraining,SoftwaredevelopmentUS based Consulting firm Consulting services (excl. ITconsulting)Maynard reported annual revenue of USD 20 mn for 2006. The acquisition will build up Accenture’s humanperformance practice. Apart from this, Accenture will also get benefit from Maynard’s workforce performancetechniques and software toolsThe acquisition is in line with Accenture’s strategy of expanding its US consulting business and will bring inGeorge Group’s expertise in process improvement techniques including Lean Six Sigm a. George Groupemploys approximately 250 people.Espin SpA Italy based provider oftechnology services to ICTbusiness.Data processing,Hardwaremaintenance,IT trainingAccenture Limited, the listed US based management consulting, technology and outsourcing company, hasacquired Espin SpA, the Italian provider of technology services to ICT business, from Fiat SpA, the Italianindustrial group, for an undisclosed consideration. The acquisition is in line with Accenture’s strategy toexpand its geographical centers. Espin has revenues of around EUR 12m.NaviSys, Inc. US based provider oftechnology solutions for thehealth and insuranceindustry.Diversiti Pty Ltd Australian company providingcontract and permanent staffto government bodies andprivate corporations engagedin IT implementationprojects.Application softwareproducts,SoftwaredevelopmentThe acquisition will enhance Accenture’s processing capabilities from front-office sales to back-office policyadministration and enable the company to exploit NaviSys’s software for the further development of its lifeinsurance business as well as provide NaviSys with a growth path globally. TA Associates acquired Navisys in2000.Business support services Chandler Macleod Ltd, the listed Australian recruitment an d contracting company, has agreed to acquireDiversiti Pty Ltd, the Australian recruitment company, from Accenture Australia Ltd, also an Australianrecruitment and contracting company, for an undisclosed consideration. Diversiti generated revenues of AUD65m (USD 49.6m). The acquisition will be funded partly in cash and the remaining as a percentage ofearnings over the first two years of operations post completion.The acquisition complements both the Chandler Macleod’s organic growth across Australia and recruitmentservices offerings thereby enabling it to expand into the IT contracting and recruitment sector. Thetransaction will also enhance Diversiti’s focus on their growth strategy.Random WalkComputing IncUS based technologyconsulting firm specializing intrading system applications,risk management systemsand other technologies forbanks, asset managers,exchanges and other financialservices institutionsApplication softwareproducts,ITconsulting,Softwaredevelopment,SystemsintegrationThe acquisition expands Accenture’s cu stom software integration and development capabilities in stocks,bonds and derivative markets and will also enable Random Walk to expand and gro w geographically.Pecaso Limited UK based HR and IT servicesfirm involved in SAP HumanCapital Managementconsulting and integrationservices for multinationalcorporations andgovernments.Business support services,ITconsultingAccenture Limited has agreed to acquire Pecaso Limited, the UK based provider of specialist HR consultancyservices for IT based HR solutions.The addition of Pecaso’s people and technology will enable Accenture to combine resources, tools andcapabilities of both the companies. The acquisition is expected to build on Accenture’s leadership in providinghuman resources management solutions to customers. Post acquisition, Pecaso’s 300 HR and IT experts inseven countries and its proprietary technology, will become part of Accenture.156 Edelweiss Securities Limited

Accenture: Acquisition historyTable 1: Select acquisitions made by Accenture over the years (Contd.)Target Company Target Desc ription Target Subsector Deal DescriptionSavista Corp. (BPOAssets)Purchased assets of US basedprivately held businessprocess outsourcing servicesand technology solutionscompanyBusiness support services Accenture Limited has agreed to acquire the Business Process Outsourcing assets of Savista Corporation, theUS based Technology and BPO services provider and a portfolio company of Accel-KKR Company LLC, the USbased private equity firm, controlled by Accel Partners and Kohlberg Kravis Roberts & Co, the US basedprivate equity firms, for USD 20m.As a result of the acquisition, 400 Savista professionals will join Accenture. The acquisition enables Accentureto expand in the segments of human resources, finance and accounting, learning, customer care andprocurement of the Business Resou rce outsourcing and allow Accenture to offe r industry-defining outsourcingservices to more clients.Media Audits GroupLimitedUK based media consultancyfirm. Its services includemeasurement of return onadvertising investment.Advertising,Business supportservices,Consulting services(excl. IT consulting)The acquisition helps Accenture in expanding its marketing sciences and data services capabilities. Oncompletion of the acquisition Accenture's global marketing sciences practice, which will comprise more than200 professionals, will be able to offe r marketing and media optimisation ser vices allowing marketers to tracktheir investments.Media Audits Group Limited was formed a s a result of the management buy out of Sidetran Ltd in 2001backed by Barclays Ventures.Capgemini (NorthAmerican HealthPractice business )US and Canadian health careproject and consultingpractices of Capgemini.Consulting services (excl. ITconsulting),ITconsulting,Other servicesAccenture ltd has agreed to acquire the US and Canadian health care project and consulting practice ofCapGemini US and CapGemini Canada, both divisions of Capgemini SA, the French consultancy group, for atotal cash consideration of USD 175m .The transaction will combine Accenture’s capabilities and experience in health plans, life sciences companiesand government organizations with Capgemini's strength in serving hospitals and health systems, thusexpanding Accenture's capabilities across public and private sector health and life sciences organisations.The sale is part of Capgemini’s EUR 400m strategic asset disposal plan that was a nnounced in September2004. Upon completion Capgemini wi ll retain its outsourcing contracts with he alth care clients in the US andits federal public sector health consulting capabilities in the US.Post acquisition, approximately 600 Capgemini professionals, including 70 clinicians, will join Accenture'sHealth & Life Sciences practice in N orth America.Nomos Sistema Italian provider of lifeinsurance managementsoftware.Application softwareproducts,Operating systemsand systems-relatedsoftware,Softwaredevelopment,SystemsintegrationAccenture ltd has agreed to acquire the assets of Nomos Sistema, the Italian provider of life insuranceadministration and product management software systems, from Getronics Italian, the Italian provider of ITservices, and a group of investors. Getronics Italia owns a 75% stake in Nomos Sistema. Nomos Sistemacurrently employs approximately 130 p eople and for the year 2003, the comp any generated EUR 14.7m inrevenues. The acquisition is in line with Accenture's strategy to increase its presence in key markets, includingthe Italian market.Caleb TechnologiesCorpUS-based provider of supportsoftwareApplication softwareproducts,SoftwaredevelopmentNavitaire Inc, the US airline support services provider and subsidiary of Accenture, the US consulting firm, hasacquired the key assets of Caleb Technologies, the US technology and software solutions provider to theairline industry.The key assets include operations recovery, decision-support and resource planning systems. Navitaire hasalso hired approximately 25 Caleb employees and assumed all of Caleb's customer contracts.Edelweiss Securities Limited 157

Information TechnologyTable 1: Select acquisitions made by Accenture over the years (Contd.)Target Company Target Descrip tion Target Subsector Deal DescriptionEDB Business Partner(Telecom business)Norway based telecombusiness of EDB BusinessPartner.Application softwareproducts,ITconsulting,SoftwaredevelopmentAccenture Ltd has agreed to acquire bulk of Telecom business of EDB Business Partner ASA, the listed Norwaybased IT services company offering software solutions, consultancy and computer operating services, for aconsideration of NOK 400m (EUR 47.47m). Accenture will make an initial payment of NOK 100m (EUR11.87m), and the remaining NOK 300m (EUR 35.60m) will be paid in the second h alf of 2004.The transaction will transfer 360 employees from EDB to Accenture on 1 May 2004.EDB expects to gain approximately NOK 300m (USD 35.60m) form the sale. The Telecom business area isexpected to generate total revenues of approximately NOK 330m (EUR 39.16m) to 350m (EUR 41.53m) in2004.Systor AG IT service provider. Systoroffers one-stop consulting,system integration andoutsourcing. It helps largeand medium-sized companiesto develop sustainable ITstrategies.IT consulting Accenture AG, the Swiss consultancy unit of Accenture Ltd, has reached agreement to acquire Systor AG, thebankrupt Swiss IT services company, from UBS Capital AG, the private equity company.Under the terms of the agreement, Accenture will take over all Systor's operations and will retain 520 of the620 employees of Systor.Vectiv Corp US based provider of productlifecycle managementsoftware.Application software products The acquisition enables Accruent's solutions to manage store lifecycle related communications, tas ks, plansand activities, including market planning, site acquisition, build-out, opening, operation, renovation anddisposition.E-peopleserve Human Resourcesoutsourcing servicesprovider.Business supportservices,Consulting services(excl. IT consulting)The consideration consists of USD 70m (EUR 80.57m) in cash and additional paym ents based on E-peopleserve revenues over the next five years. The above revenues, to be originated from customer otherthan BT and Accenture, will total betw een USD 35m (EUR 40.29m) and USD 222. 5m (EUR 256.1m).Accenture will consider E-peopleserve as a core business. BT, which intends to focus on its core activities, willuse the proceeds from the sale to reduce its debt obligations.Source: www.mergermarket.com158 Edelweiss Securities Limited

RATING & INTERPRETATIONITSECTOR RATINGSCompany Absolute Relative Relativereco reco riskInfotech Enterprises Buy SO HRolta India Buy SO HTata Consultancy Services Buy SO LMphasis Hold SU MWipro Buy SP LInfosys Technologies Hold SU LPatni Computer Systems Hold SU MHCL Technologies Hold SU HABSOLUTE RATINGRatingsExpected absolute returns over 12 monthsBuy More than 15%Hold Between 15% and - 5%Reduce Less than -5%RELATIVE RETURNS RATINGRatingsSector Outperformer (SO)Sector Performer (SP)CriteriaStock return > 1.25 x Sector returnStock return > 0.75 x Sector returnStock return < 1.25 x Sector returnSector Underperformer (SU)Stock return < 0.75 x Sector returnSector return is market cap weighted average return for the coverage universewithin the sectorRELATIVE RISK RATINGRatingsLow (L)Medium (M)High (H)CriteriaBottom 1/3rd percentile in the sectorMiddle 1/3rd percentile in the sectorTop 1/3rd percentile in the sectorRisk ratings are based on Edelweiss risk modelSECTOR RATINGRatingsOverweight (OW)Equalweight (EW)CriteriaSector return > 1.25 x Nifty returnSector return > 0.75 x Nifty returnSector return < 1.25 x Nifty returnUnderweight (UW)Sector return < 0.75 x Nifty returnEdelweiss Securities Limited 159

Information TechnologyEdelweiss Securities Limited, 14 th Floor, Express Towers, Nariman Point, Mumbai – 400 021,Board: (91-22) 2286 4400, Email: research@edelcap.comNaresh Kothari Co-Head Institutional Equities naresh.kothari@edelcap.com +91 22 2286 4246Vikas Khemani Co-Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206Nischal Maheshwari Head Research nischal.maheshwari@edelcap.com +91 22 6623 3411Coverage group(s) of stocks by primary analyst(s): Information TechnologyHCL Tech, Infosys, Infotech, Mphasis, Patni, Rolta, TCS, and Wipro(INR)Infosys technologies2,2502,0001,7501,500Hold Hold1,250HoldHold1,000Hold HoldHoldTata Consultancy Services(INR)600520440Hold360280Buy BuyHoldBuy200Sep-08Oct-08Nov-08Dec-08Jan-09Feb-09Mar-09Apr-09May-09Jun-09Jul-09Aug-09Sep-09Sep-08Oct-08Nov-08Dec-08Jan-09Feb-09Mar-09Apr-09May-09Jun-09Jul-09Aug-09Sep-09WiproRecent Research(INR)580500420340260180HoldHoldHoldHoldHoldDate Company Title Price (INR) Recos25-Aug-09 HCL IMS continues to 307 HoldTech. power growth;Result Update20-Aug-09 Mphasis Sustained margin 516 Holdperformance; Result Update03-Aug-09 Rolta Order flow looks up; 155 BuyIndia guidance positive; Result UpdateSep-08Oct-08Nov-08Dec-08Jan-09Feb-09Mar-09Apr-09May-09Jun-09Jul-09Aug-09Sep-0930-Jul-09 Patni Demand stability, margin; 328 HoldComputers management merit an upgrade;Result Update160 Edelweiss Securities Limited

ITDistribution of Ratings / Market CapEdelweiss Research Coverage UniverseBuy Hold Reduce TotalRating InterpretationRatingExpected toRating Distribution* 53 43 29 128* 3 stocks under review> 50bn Between 10bn and 50 bn < 10bnMarket Cap (INR) 72 41 15BuyHoldReduceappreciate more than 15% over a 12-month periodappreciate up to 15% over a 12-month perioddepreciate more than 5% over a 12-month periodAccess the entire repository of Edelweiss Research on www.edelresearch.comThis document has been prepared by Edelweiss Securities Limited (Edelweiss). Edelweiss, its holding company and associate companies are a full service, integratedinvestment banking, portfolio management and brokerage group. Our research analysts and sales persons provide important input into our investment bankingactivities. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of anytransaction. 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