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Executive Summary
As we peer into the future of the Indian IT industry landscape we see there are fundamental
and tectonic changes underway that will alter the way Indian IT companies operate
henceforth. The current surge in optimism could be pent-up demand reflecting in a jump in
FY11, 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 fundamental
ways. While the opportunity size continues to be appetising, service providers (TCS, Infosys,
Wipro, and Cognizant) will have to refashion their offerings in some cases. Tremendous
disruption is likely, both in demand and suppl y. Such eventualities impose stringent demands
on the ability of Indian IT to manage on multiple planes or dimensions simultaneously. No
longer will an incremental approach work because what worked in 2004-08 may not work
after 2010 (assuming that 2008-10 is the period of painful adjustment, transition, and
subsequent flush). In such an emerging scenario, service providers who exert a pull around
their 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 next
three-five years, exploring virtually every dimension of the emerging IT services model of the
future. We analyse in depth how each of the Big 3 (Infosys, Wipro, and TCS) are comparatively
placed in the evolving competitive scenario. Our research reveals that many of the strengths of
Infosys (premium pricing, leading margins, leadership in select service lines, organic nature of
growth) that have manifested in industry-leading performance till today may not necessarily play
to the same extent in the changing world. The crisis has given an equal, if not better, opportunity
to 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 give
differentiated 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 operating
models 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 greater
degree than the other two to play catch-up in a few areasend-to-end service provisioning,
presence and manner of executing in new hot spots of opportunity, viz., emerging markets
and building in a culture of acquisition assimilation.
Technology is a leveler. Equally important, several emerging technologies (cloud
computing, collaborative computing, Web 2.0) that promise to transform the way business
process solutions/infrastructure management services are delivered are a great technology
leveler, taking away some of the bite in the intrinsic superiority of Infosys efficiency in
execution. There is still considerable value in the Infosys business model for the investor
even at these rich valuations, but, as our analysis shows, manifestation of that value will
require an aggression from the company which it has traditionally shied away from for fear of
diluting its handsome return metrics and margins. It has the latitude to do so.
To sum up, our long-term position is that Infosys leadership and its must own stock status
in the sector will be increasingly distributed towards the others (TCS and Wipro). We believe
that stock returns from both TCS and Wipro could be double that of Infosys
#
on a
12-18 month horizon, also partly reflecting the narrowing of the valuation gap. The
risk to our thesis is that the crisis/downturn is short and cyclical in nature as opposed to a
structural and secular one. If the former, then client buying habits may revert to pre-crisis, in
which case Infosys traditional and considerable strengths will steer the company towards
continued leadership. Else, its 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
Executive Summary
2 Edelweiss Securities Limited
Information Technology
Table of contents
A. The story in brief ........................................................................................................................................5
B. Structure is hygiene but culture is not .......................................................................................................9
C. Yesterday, today and tomorrow................................................................................................................12
a. Leadership: Is it shifting? ....................................................................................................................... 12
b. There is no dearth of opportunity even in affected verticals ........................................................................ 14
c. Addressing opportunity needs a tailored go-to-market strategy .................................................................. 15
d. Soups-to-nut offering: Advantage Wipro and TCS? .................................................................................... 16
e. Sales and marketing: Infosys still leads.................................................................................................... 17
f. Have players read the market correctly well in advance? ............................................................................ 18
g. Are players building enough defensiveness in their business models? .......................................................... 18
h. Is there a case for pricing premium in favor of any one player?................................................................... 18
i. Non-linearity: Its no ones game as yet ................................................................................................... 19
j. Infosys acquisitions: Is it too little for Infosys?.......................................................................................... 20
k. Margins: Are there new margin-aiding discoveries on the horizon? .............................................................. 21
l. Valuations: Today and tomorrow............................................................................................................. 25
D. Five business truths..................................................................................................................................30
a. The Big 3 may not grow faster than the industry ...................................................................................... 30
b. Technology, process and quality no longer differentiators ........................................................................... 31
c. No new service lines in sight to drive growth............................................................................................. 32
d. No new market is too early to be invested in............................................................................................. 33
e. Fixed price will give way to new engagement models ................................................................................ 33
E. Five financial and valuation truths............................................................................................................35
a. Pricing on knifes-edge ........................................................................................................................... 35
b. Viewing competitive advantage, value-add via margins lens not enough....................................................... 35
c. ROAE only a weak factor impacting valuations ......................................................................................... 37
d. Pent-up opportunity versus secular opportunity ....................................................................................... 38
e. How much valuable can Infosys get in replicating Accenture?...................................................................... 39
F. Pricing: How can one establish premium? ................................................................................................42
G. The IT enterprise of tomorrow..................................................................................................................46
H. Non-linearity: Stern test of commitment ..................................................................................................61
a. Level-1 elementary non-linearity: TCS clearly the leader ............................................................................ 62
b. Level-2 non-linearity: A quick win; will soon be table-stakes....................................................................... 63
c. Level-3 non-linearity: Outcome-based pricing still some time away ............................................................ 64
d. Level-4 non-linearity: Solutions that can showcase expertise ...................................................................... 66
e. Key challenges in driving non-linearity ..................................................................................................... 68
f. Infosys versus Wipro in non-linearity and solutions.................................................................................... 69
I. Making a mark in India and emerging markets.........................................................................................72
a. India a peculiar market for IT services ..................................................................................................... 73
b. Case study - IBM in India: Applying principles of lean management ............................................................ 77
c. The much touted China opportunity likely to be a long range one ................................................................ 78
J. Sales & marketing: Reaching the next league...........................................................................................81
a. The Big 3 in brief................................................................................................................................... 82
b. What ails SG&A in Indian IT? .................................................................................................................. 83
c. The Big 3 in detail ................................................................................................................................. 85
K. SMB segment: Execution critical for good gains........................................................................................93
a. Case study: TCS has a two-year head start over others ............................................................................. 95
L. Healthcare: Near-to-medium term opportunity ........................................................................................97
a. Addressing the provider opportunity ........................................................................................................ 99
b. The other sweet spot lies in big pharma ................................................................................................. 100
c. Acquisition of captive or enterprise business unit..................................................................................... 101
M. Public services: Tougher than it seems...................................................................................................102
a. Can Indian IT tap a significant share of government opportunity? ............................................................. 103
b. Govt. practice significant for global system integrators; profitable for very few .......................................... 104
c. Case study: Accenture in public services: Its a mixed picture .................................................................. 106
d. Risks associated with government projects could weigh on Big 3 ............................................................... 107
Companies
Infosys: Walking the fine line between growth and profitability.............................................................................. 109
TCS: Geared for new rules of the game .............................................................................................................. 115
Wipro: Market share gains to come through ........................................................................................................ 121
Appendix
The rise of Cognizant: Lessons for Indian IT........................................................................................................ 127
To bulge or not to bulge? .................................................................................................................................. 143
Accenture: Acquisition history ........................................................................................................................... 153
Contents
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The Story in Brief
We believe that the next three years, FY10-13, will present a fairly different picture from
what 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 eco-
system amidst the changing landscape. Our exhaustive, no-holds barred study positions
companies not just where they stand in todays context, but also where they are likely to
graduate to in two-three years time. Our conclusions are revealing and powerful. We present
some notable ones below:
(a) Non-linear strategies will take hold hereon, but the ones who have the early advantage
on this have started well ahead of the slowdown. We believe that TCS holds the early
advantage in pockets of non-linearity, but it will take time to impact a company of its
size. Infosys is beginning to leverage its traditional solution selling skills via Finacle to
make a greater dent. Without credible non-linear execution, margins are likely to
decline after FY11 because pricing (realization) increase is not likely to sustain
the 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 the
dominant theme among others. Wipro and TCS are playing these themes via acquisitions
as well while Infosys still favors its traditional BUILD approach. Our checks indicate
that Wipro and TCS are winning their fair share of integrated deals with Infosys
on the offensive.
(c) New verticals of opportunity such as public services and healthcare do not necessarily
lend themselves to offshorisation like BFSI, telecom, and others. Firms that are likely to
penetrate such verticals are those willing to make the investments in crafting specific,
tailored go-to-market strategies. The advantage, we believe, lies with those who
demonstrate greater willingness to partner and ally with what we call complementors
(not just partners). Complementors will cover not only go-to-market, but equally
important technology and R&D aspects as well (case in point - cloud computing is
partnership-intensive). Wipro and Cognizant have shown the needed flexibility to
accommodate such arrangements.
(d) The India market is easy to address from the revenue perspective, but implementation is
not straightforward. Wipros years of investments (infrastructure, subcontracting
partnerships, support, and service centres) cannot be closed in a hurry. While
considerable bench exists today in Infosys to address the India opportunity in
the near-term, we believe moving to a structurally lower-cost delivery model
entails 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 market
and customer segmentation strategies than before, more so when capability and
references in traditional verticals such as BFSI, telecom, and manufacturing are
becoming more equalised. Among our set of companies, Infosys has displayed
finesse in customer segmentation, but the others are not far behind. For example,
Wipro is now targeting its prospective offerings to specifically attack energy costs of
clients (beyond operations and IT).
(f) Squeezing the lemon for incremental gains yields diminishing returns. To continue to
offer productivity gains beyond traditional fixed price, onsite-offshore leverage, firms will
have to enhance and leverage proprietary productivity models or platforms that have
organization-wide impact. Some of these platforms by drawing on collaborative
computing technologies such as Web 2.0 can unleash an order of magnitude productivity
gain. This is an expensive and time-consuming investment. For example, Cognizant
invested 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-time
The Story in Brief
basis. This is an impressive scale of commitment to the process. Also, such a platform
will 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 see
Wipro and TCS closing the gap. In our view, revolutionary technologies such as cloud
computing enables others to narrow the gap even faster as technology plays the role of a
leveler.
(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 a
powerful margin driver. Cognizants propositio n of offering industry-leading growth at
non-GAAP margins of 19-20% is in part helped by its aggressive growth itself. Intrinsic
valuations 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 the
valuation gap with Infosys even further, notwithstanding that they have
outperformed Infosys YTD.
(i) Infosys, in making the transition to where Accenture is today (in business model strength
and size), could yield annualised mid-single digit percentage (5-6%) returns over the
long term. These returns may seem modest to investors, but investments and capability
building to reach there are immoderate. Status quo will not get Infosys there.
Lessons from the past
Before 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 the
previous slowdown. The previous downturn tells us not to extrapolate in a
straightforward fashion. It is tempting to draw a correlation with Infosys stock and
financial performance as it emerged from the slowdown in FY02 and extrapolate that
strength to the emergence from this crisis this time as well. This is a bit misguided and
we explain why
Chart 1: Resurgence of Infosys from 2002 downturn driven by non-tech sectors
Source: Company, Edelweiss research
0.0
28.0
56.0
84.0
112.0
140.0
Telecom Banking & finance Energy &
utilities
Transportation
(
%
)
CAGR (FY02-FY04)
Overall company revenue growth
Chart 2: Infosys resurgence from 2002 downturn driven by enterprise solutions
and testing
The three verticals that showed strength and drove Infosys resurgence from the
previous slowdown were BFSI, energy and utilities, and transportation (chart 1).
Transportation, since then, has underperformed the rest of the business (especially over
FY04-09). The strength in BFSI over 2002-04 does not surprise since it was not the weak
sector in the previous slowdown (technology and telecom was). Thus, resurgence was
driven largely by sectors that were unaffected.
Today, while revival in BFSI will provide part of the thrust, we believe that much of the
case for a protracted revival will have to be driven by traction in manufacturing and
energy & utilities Infosys two verticals of recent strength, and by retail that is roaring
back. If telecom and technology strongly revive, then the possibility of USD revenue
growth 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 lines
as Infosys emerged from the previous downturn. Today, enterprise solutions while stable
is not exhibiting healthy growth. Thus, we believe that the baton for revival will have to
be picked up largely by infra management. Thus, a straight extrapolation of revival from
the previous slowdown to todays circumstance is not wholly appropriate. Stock return
from January 2002 through January 2004 was 150% from the low point during this
period, 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.
What else do we cover?
Our report takes an extensive look at the Indian IT enterprise of tomorrow. The IT
company of tomorrow describes our 10 predictions of the Indian IT model as we
envisage them. Not all of our predictions may materialize, but we believe that the journey to
the next league entails far-reaching ramifications in the way Infosys and others will have
to manage on both the demand (customer and market) and supply (employees, partners,
and sub-contractors) side. As a teaser, one of our important predictions is that
redirecting the skill profile at short order will be an agenda that will exercise the Indian
IT firms. It is possible that the pyramid will cease to be a less relevant parameter
hereon, especially as companies decide what it is core and non-core to them. Another
prediction is that firms that manage the uncomfortable duality of protecting the core
while gearing for expansion extend their leadership position.
0.0
18.0
36.0
54.0
72.0
90.0
Software
maintenance
Consulting service
& PI
Other
services
Testing
(
%
)
CAGR (FY02-FY04)
Overall company revenue growth
The Story in Brief
What else is inside the report
We offer a comparative matrix below that encapsulates our assessment of how firms
stand on sub-themes.
Table 1: How do the Big 3 stack up? Relative summary ratings on fifteen dimensions
Source: Edelweiss research
Note:*Excluding Finacle
Before we explore these sub-themes in detail, we present our feedback on how specific
management challenges and issues such as restructuring have impacted/will likely
impact the companies in our study (refer to the next section, Structure is hygiene but
culture is not).
Sr no Parameter TCS Infosys Wipro
1 Premium pricing No Yes but diminishing No
2 End-to-end full-service offering Strong Improving Strong
3 Traction in emerging markets Moderate Low but picking up Best
4 Customer segmentation finesse Could be better Best Good and improving
5 Differentiated/innovative
contract structuring
Good Could be better Good
6 Defensiveness of
service/vertical portfolio
Moderately defensive Moderately defensive Most defensive
7 Non-linearity/solution/new
engagement model focus
High though recent High though recent* High but no industry-
standard solution yet
8 Readiness to experiment with
different go-to-market models
Good Low Good
9 Strength at
exploiting/leveraging alliances
and partnerships for
technology/R&D/innovation and
market penetration
Medium Low Good
10 Ability to roll up acquisitions
(large/small)
Beginning to pay off
with lag
Untested Chequered but improving
with experience
11 Defensible cost structure in
case of revenue shortfall
Improving with recent
focus
Best Good
12 Willingness to take multiple big
bets and face risk
Ready Conservative Ready
13 Venturing into new verticals of
opportunity such as public
services, healthcare
Willing Guarded Willing
14 Ability to change the revenue
profile over the medium-to-
long term
Improving with
acquisitions
Good Best (with infra
management, BPO,
enterprise IT leading the
way away from historical
bias towards tech and
telecom)
15 Sales & marketing prowess Catching up Best Catching up
Structure is Hygiene but Culture is Not
Infosys, TCS, and Wipro are at an interesting point in their historynot only are they
emerging from a difficult crisis, but they also have to cope with changes in management/loss
of key personnel that could impact their presence in the market.
Infosys, a well democratised and institutionalised engine, will still miss Mr. Nandan
Nilekanione of the chief architects of the companys global transformation practice. Our
view is that Mr. Nilekani personally handled several of Infosys key client relationships at the
very highest levels and enjoyed boardroom access that few in the company (indeed in the
industry) can match. We believe the executive council at Infosys and select members of the
board (who have assumed the responsibility to review the companys strategic accounts) will
have their task cut out. How the company manages this transition seamlessly will be watched.
TCS, on the other hand, faces a different kind of challenge. Mr. S. Ramadurai, CEO and
Managing Director, will step down in October 2009 and hand over the reins to the much
younger Mr. N Chandrasekharan (or Chandra) . As the COO, Mr. Chandra was already
handling the companys 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 of
management. Mr. Chandra may not be a more of the same style leader. He shepherded
the entry of TCS, in the past five years, in infrastructure management, BPO, consulting, and
emerging markets. He also pushed through and presided over a massive shake-
up/reorganisation within the organisation through FY08, wherein geography-based structures
gave way to business unit driven customer-facing structures.
The problem Mr. Chandra faces is one that al l young leaders facemanaging business unit
and country heads who have been in the TCS system for longer than he has been and who
are older than he. It is tricky and we would not rule out departures at the senior level as
energy, youth, and results take precedence over experience and longevity. How TCS
manages this will be closely watched. We believe that Mr. Chandra is the appropriate man to
steer the giant TCS ship in these times.
Wipro has engaged in another recent reshuffle in keeping with its philosophy of rotation of
management once in three-five years. What we find impressive is its willingness to commit
dedicated senior managements time to new key initiatives such as non-linearity, healthcare,
and large deal programme management, among others. In this respect, this contrasts with
Infosys, which has vested its Executive Council with additional strategic responsibilities for
emerging areas.
Among the Big 3, we find that TCS is endeavoring to increase comfort, on a comparable basis
with the other two, with decentralised customer-owning multiple P&L owners, breaking the
rules of engagement away from the delivery units and geographic fiefdoms to individual
business units. Notably, even today, TCS primary reporting segment is geography (and not
vertical) unlike Infosys.
On a broad level, the organisation structure of the three players is similar to verticalised
business units, special carve-outs for new initiatives such as emerging markets, new offerings
such as BPO platform and small and medium business (a focus area for TCS). Structure per
se is unlikely to be a tangible differentiator.
Whats more important is the flexibility built-in within the broader organisation structure that
promotes a sense of entrepreneurship, customer-centricity, and autonomy. Feedback that we
got from the industry is that while Wipro has married an entrepreneurial flavor with good
process discipline, it has tended to be less customer-centric than Infosys. Infosys, on the
Leadership transition to be
healthy for TCS
other hand, has tended to be rather restrictive in the leeway it has given to individuals to
shape the market facing and client engagement agenda. Its insistence on making a project
stand on its own to the extent possible has also interfered in some way in the past in its
ability to penetrate markets and clients and to take strategic decisions with regard to
distributed (global) delivery.
The feedback on TCS is that the new structure is working well (see table 2). Hiccups were
numerous initially as we would expect after any new comprehensive structure takes hold in a
company when it had already over 100,000 employees. Our discussions with business unit
heads at TCS suggest that responsiveness to the customer has vastly improved since the
teething troubles. However, we also note that TCS is losing middle to senior level talent to
competition.
Table 2: Gains accruing from TCS restructuring have been tangible
On the negative side, TCS large size and breadth sometimes make knowledge management
and 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 the
customer (One TCS), it still needs to work internally on how best to codify, integrate, and
leverage internal knowledge.
Cognizants high degree of customer-centricity has restricted organisation-wide
standardization of methodologies and systems. However, its proprietary plat form for distributed
delivery and project management (Cognizant 2.0), developed after sustained, sizable
investments, is rapidly enabling Cognizant harness both dimensions (an ethic of
entrepreneurship and a culture of discipline).
Grooming of a large bench of second-rung leadership
Empowerment
Decentralization of decision-making
Greater sales agility (which shows up in higher win rate especially in large deals)
Speedier exercising of operational levers e.g.: the rapid, drastic offshore
shift in Q4 and Q1 would have been very difficult to pull off in any other structure on
such a scale
Narrower spans of control, allowing better executive oversight for the COO and others
Unambiguous ownership
Better tracking of account-level metrics allowing better operational optimization, cross-
selling, up-selling
Single point of executive contact for customers leading to richer relationships
(proofpoint: consistent upward migration of clients across different buckets)
Superior customer management
Organisational improvements
Resultant outcomes
Agility
Accountability
Well percolated organisational
restructuring yielding tangible
gains
TCS has progressed in
presenting an unified view to
customers
Note: * Marking within the grid is done for the sake of readability
Culture of discipline, standardization and tight oversight
S
p
i
r
i
t
o
f
e
n
t
r
e
p
r
e
n
e
u
r
s
h
i
p
/
A
u
t
o
n
o
m
y
Cognizant
Wipro
TCS
Infosys
X
X
X
X
Chart 3: Companies high on standardisation, discipline score low on autonomy*
Yesterday, Today and Tomorrow
Leadership: Is it shifting?
Chart 4 lays out how revenues of the Big 3 have grown relative to the industry over
FY04-09. Chart 5 highlights the superiority of Infosys EBIT growth over FY04-09 to all
periods (Cognizants stock performance is compared with Infosys ADR).
Chart 4: Revenue CAGR over 5 year for Big 3, Cognizant and industry
Source: Company, Nasscom, Edelweiss research
Chart 5: Infosys has superior EBIT CAGR (04-09) to its Indian peers
0.0
10.0
20.0
30.0
40.0
50.0
Infosys TCS Wipro Cognizant
(
%
)
5-year EBIT CAGR (04-09 )
Cognizant and Infosys the clear
outperformers
except Cognizant. The same is largely true of stock returns over 3-year and 5 year CAGR
0.0
11.0
22.0
33.0
44.0
55.0
Infosys TCS Wipro Cognizant India IT
exports
(
%
)
5-year revenue CAGR (04-09)
Chart 6: Stock returns over 3 yr CAGR and 5 yr CAGR*
Source: Bloomberg, Edelweiss research
Note: *average price over closing week of August taken
Macro drivers operating in the current environment for tech services increasingly have
specific micro-implications for individual players. Viewed against this new backdrop of
shifting equations, we identify five forces that have favored Infosys over FY04-09:
Organic growth (a BUILD approach heavily favored vis--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 and
mining 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.
What 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 service
differentiation.
Ability to execute on a portfolio of business models which co-opt differentiated and
innovative deal structuring, non-linearity.
Innovativeness and speed at fashioning tailored go-to-market approaches to address
specific opportunity areas.
Accelerated or increased probability of success in new ventures spanning new
verticals and/or emerging geographies.
Clever market segmentations thereof to spot opportunities of profitability versus
opportunity of revenue growth (Infosys has done well on this in the telecom service
provider segment in Continental Europe and in exploiting nascent opportunity in
resources).
To a lesser extent, a chequered history of acquisitions that enables firms to come up
the maturity curve on the next acquisition they make.
TCS 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 the
thinking in some of them. Sections below offer our thoughts on the likelihood of a change
in guard.
0.0
5.0
10.0
15.0
20.0
25.0
5-year CAGR 3-year CAGR
(
%
)
Infosys (local) Wipro Infosys (ADR) Cognizant
Five forces that favored Infosys
in the past
but they could change going
forward
Level playing field for Big 3 post
financial crisis
There is no dearth of opportunity even in problem or affected verticals
Traditional verticals such as banking and financial services, telecom, and manufacturing
(which collectively account for nearly 75% of export revenues of Indian IT) are likely to
reset their spending levels in developed markets (we distinguish secular spending from
near-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 burgeoning
opportunity in other segments such as healthcare, public sector, energy and utilities and
more generally emerging markets.
Table 3: Opportunity exists even in predominantly troubled verticals
Infosys, 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 that
use India as a sourcing hub (see chart 7). (Infosys works with 97 F-500 clients, about a
third of its US client base, while about 375 F-500 companies have used off-shoring either
as a captive or with third parties). This tells us that there is still substantial under-
penetration of the Big 3 even within F-500 clients who have used India.
Chart 7: Fortune 500 firms using India to source tech, business services 2008
Source: Nasscom
Clearly, there is no lack of opportunity; though, we caution that only some part of this
opportunity is likely to be profitable at levels that the Big 3 would deem appropriate. For
example, over 40% of the BPO opportunity as identified by Nasscom Mckinsey lies in
customer interaction services (low-level commoditising call centre and elementary data
entry). Likewise, over 75% of the addressable market in banking and financial services
accrues from retail banking, which is characterised by lower barriers-to-entry than
spaces such as unified (integrated) banking, asset management.
BFSI Risk, compliance, audit, integration, analytics Asia, Continental Europe
Manufacturing Extended supply chain integration, consolidation/restructuring using
packages, product development & engineering; integration of the shop
floor into enterprise IT application
Asia (particularly China), US,
Australia
Telecom IP-based solutions such as Telco in a box, customer analytics and revenue
enhancement
Asia, Continental Europe
Geography of burgeoning/
new opportunity
Emerging/tactical opportunity area
Using India as a
source location,
(75%)
Not using India
as a source
location, (25%)
Substantial under penetration of
Big 3 in F-500 exists
High opportunity in low level CIS
and retail (low barrier to entry)
areas
The good way to play the value-added opportunity for existing customers (even
in these troubled verticals) would be around themes. Two revenue themes that
we indentify relate to analytics and integration (refer to case study Playing far-
reaching themes).
Addressing opportunity needs a tailored go-to-market strategy
What is needed from the Big 3 is a customised go-to-market strategy. Increasingly, such
strategies will need to draw on collaboration within the eco-system from various
constituentsalliance partnerships, customers, and acquired entities. Standalone go-to-
market strategies will be less useful going fo rward. Wipro has seized the initiative and its
extensive partnership alliance programme has paid rich dividends in its Middle East/India
strategy. Also, several of Cognizants multi- year contract wins (e.g., Rabobank) have
been 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 and
employee re-badging (taking on board employees of the client) in case of captive
deals/engagements that get divested from the client. The buy-out of Invensys Operations
Managements offshore product development centre (of 400 employees) in Hyderabad by Cognizant
is a good example of how to kickstart capability in a new area of manufacturing where it has been
hitherto absent. These are elements that TCS and Wipro have taken on board to a much
greater extent than Infosys.
Infosys has been relatively guarded in its go-to-market strategy. Its strategy of late has
been 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 made
some progress and is investing resources. (In fact, we see that resources have been
Case study: Playing far-reaching themes
Analytics married with consulting or business process is likely to be a
powerful combination theme across verticals. Analytics, at the Big 3, have been
largely business intelligence and data warehousing implementation of packages such
as SAS, Hyperion (or Oracle) and Cognos (of IMB). However, they have not used it in
a predictive or real-time manner that impacts budgets (e.g., marketing and
advertising budgets of companies), business processes and strategies of companies.
Notably, both IBM and Accenture have emphasised analytics rollouts in their most
recent quarterly earnings call as drivers for the future with IBM, in particular,
making repeated references. IBM has recently set up its business analytics and
optimisation engine. Surprisingly, in no other quarter during the past seven years, for
which we have studied their pronouncements, have they explicitly cited analytics as
a thrust area necessitating a dedicated carve-out.
Accentures analytics framework is primarily built around consulting, while IBMs
analytics practice is built around software solutions that were either developed
(master data management solutions) or acquired (Cognos). Cognizant is rapidly
scaling up its proprietary analytics platform to bolster its business process practice,
helped by its acquisition of marketRx in October 2007. Drug discovery in healthcare
turns on a high degree of analytics capability married with domain. Infosys retail
solution Shopping Trip 360 degree runs on an analytics engine at the back end. The
Big 3 are, however, yet to roll out an enterprise-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 the
future is integration of services (or integration as we refer to it). We see the Big 3
play the integration theme in services much like IBM with the entire IT stack. We visit
this theme repeatedly in this report.
Analytics still has restricted
meaning within Indian IT but
MNCs off-late have put greater
focus on it
Collaborative go to market
strategy has yielded success for
Wipro and Cognizant
among the best performing operating groups for Accenture over FY04-08, over which
period it has not had competition from offshore peers). While this is a good strategy for
the near term, we believe it is important to protect the core (viz., BFSI, telecom, and
retail) which is likely to come under attack from offshore competitors. It has not done
nearly as well on this dimension. Protect the core while breaking new ground is a
theme that we visit later in this report. Infosys is less likely to penetrate verticals that
present a lower opportunity of offshore outsourcing (say the public sector in developed
markets which may mandate greater local presence) or where its value proposition could
conflict with a much stronger player e.g., in healthcare against Cognizant.
Chart 8 shows how the TTM (trailing twelve months revenues) of companies have fared
in various verticals versus the preceding period (June 200809 versus June 2007-08
revenues for various verticals).
Chart 8: Only Wipro & Cognizant defended their positions during crisis
Go-to-market strategies in healthcare and public sector verticals will not work
traditionally as we describe in the respective sections in this report.
Also, it is becoming essential for companies to invest in demonstrating commitment for
bagging transformational/large contracts. For example, Cognizant is known to even hire
expert resources (if not available in-house) well in advance of a deal and commit them to
its pursuit. It presents the perspectives of its own domain advisory councils (composed
of CIOs of client organisations) to prospective customers.
Infosys is known to be cautious on joint ventures. TCS, on the other hand, is reportedly
close 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 the
government for providing citizens online access to government services (venture to be
called MahaOnline). This could be the gateway for other IT projects funded by
Maharashtra.
Infosys, in our view, needs to do more in crafting flexible and customised go-
to-market strategies.
Soups-to-nut offering: Advantage Wipro and TCS?
Wipros strength in BPO and infrastructure management (IM) (collectively about 30% of
IT services revenues) positions itself well when it comes to soups-to-nut (or end-to-end)
(400)
(200)
0
200
400
600
TCS Infosys Wipro CTSH
(
U
S
D
m
n
)
BFSI Mfg. Telecom Retail Healthcare Others
Wipro and Cognizant added
higher revenues during crisis
Infosys showed strength in
manufacturing vertical while TCS
captured share in retail
offerings. Likewise, TCS investments in full-service offerings are bearing fruit in large
deal wins. Such investments were made in the past. Wipro incubated its integrated
offerings for the India market after setting up a dedicated team in mid-2004 to target
the total outsourcing proposition.
Integration (and transformation) is likely to emerge as a strong theme in the industry in
the next two-three years. The days of standalone services such as BPO, IM, and ADM are
numbered. For example, BPO increasingly can be leveraged only by IT companies that
can 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 Wipro
take an early advantage in integrative deals, especially those that involve a serious
component of BPO and IM. It is notable that Wipros three largest deals have all accrued
from 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 up
Infosys has traditionally preferred a farmers approach to its sales and marketingfocus
on existing accounts and mine them as optimally as possible. Wipro and TCS have
tended to scatter their sales and marketing resources to a greater degree across
geographies than Infosys.
However, convergence takes place on mining, (see chart 9) which shows that TCS and
Wipro are fast catching up on account management. Wipro has already matched Infosys
on 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 years
The name of the sales and marketing game shifts to other dimensions: (a)
transformative selling; (b) recalibrating key performance indicators and compensation
benchmarks; (c) a successful hunter strategy (practice specialists /new market
specialists); (d) selling bundled solutions; and (e) partner-level interventions. On these
dimensions, 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 and
marketing structure in Indian IT and explores in detail the models of each of the Big 3 in
comparative context.
The leader in setting standards on sales & marketing and relationship management practices
is undoubtedly Cognizant as we explain later on.
0
5
10
15
20
25
TCS Infosys Wipro TCS Infosys Wipro TCS Infosys Wipro
USD 20 mn + USD 50 mn + USD 100 mn +
(
N
o
s
.
)
NA
Integrated service providers at
advantage
TCS and Wipro focusing on
improving farming while
continuing aggressive hunting
TCS leads large scale account
additions
Changing S&M dimensions
Have players read the market correctly well in advance?
We credit TCS with making visionary moves much ahead of the crisis to build a full-
services model. It was early in:
(a) Branching out to emerging markets along with Wipro and such advantages cannot
be closed in a hurry, especially on the mechanics of delivering on a structurally
lower-cost platform.
(b) Acquiring a BPO platform for insurance (from Pearl BPO) in 2005 at a time when
IT/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 to
show client references in the current environment to advantage.
(d) Accelerating time-to-market in building end-to-end finance and accounting
outsourcing (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 more
risk, especially in larger/crucial projects.
Some of these advantages should favor TCS in the emerging scenario. This is not to
suggest that Infosys has not read market trends, but the BUILD approach that Infosys
favors in contrast to the BUY model of TCS is likely to afford the latter an initial
advantage. TCS has also marked out a business unit separate from the parent company
to 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 broad-
based nature that the post-crisis order will call upon. In this respect, we believe firms
like TCS, that have been less conservative in the past in the way they view client
engagement models, markets, verticals, delivery models do have a head start, even if
non-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) no
single vertical contributing more than 30% to revenues; (b) no client contributing more
than 3% to revenues; and (c) infra management and BPO (stable service lines) accounting
for about 30% of revenues. What is also creditable is the managements ability to
transform the revenue profile away from legacy technology and telecom (over 60% of
revenues 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 Wipros success in transforming BPO from a FTE-based revenue
model to a transaction- or risk-reward-based revenue model (we believe that about 60%
of Wipros BPO revenues come from this model). Wipro has, thus, shown its ability to
overcome challenges and move with times.
Is there a case for pricing premium in favor of any one player going forward?
While pricing pressures abate and are not as bad we expected, we would wait for a
quarter to proclaim that the worst of pricing pressures is behind us, despite the
encouraging commentary of the Big 3. What is more notable is that the case for a
premium for any one player, going forward, is considerably diminished. Premium can be
commanded only by value and on the value-map, the Big 3 are not different from each
other as yet. Historical premiums enjoyed in the past on certain accounts such as BT by
Infosys may still exist, but stand diminished today relative to where they stood even
TCS has made long-term
visionary moves
Infosys pricing premium is
narrowing
four-five quarters ago. In other words, going forward, we do not see a case for pricing
premium in favor of any one player, unless the offering is differentiated. In our view, the
crisis has partly undermined Infosys pricing premium by client focus on attributes such
as pricing for differentiation and value to customer.
The Big 3 are making select strategic interventions to improve pricing power, but we
believe 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 to
our section, Pricing: How can one establish premium? for details on how and who among
the leaders we believe are sowing the seeds of differentiated pricing power for the future.
Chart 10: Wipro has closed billing rate gap with Infosys
Non-linearity: Its no ones game as yet
Our section, Non-linearity: Stern test of commitment, discusses in detail four levels of
non-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 and
platform/utility offerings).
Table 4: Different levels or orders of non-linearity
(3.0)
1.0
5.0
9.0
13.0
17.0
Q
1
F
Y
0
7
Q
2
F
Y
0
7
Q
3
F
Y
0
7
Q
4
F
Y
0
7
Q
1
F
Y
0
8
Q
2
F
Y
0
8
Q
3
F
Y
0
8
Q
4
F
Y
0
8
Q
1
F
Y
0
9
Q
2
F
Y
0
9
Q
3
F
Y
0
9
Q
4
F
Y
0
9
Q
1
F
Y
1
0
(
%
)
Onsite Offshore
Peak discount
Non-linearity Description Manifestation Who's ahead
Level 1 Solution accelerators covering technology
business process engineering and
industry processes
Cost savings and annualised
productivity improvement
TCS ahead in technology and
engineering solution
accelerators; some success in
converting mature
accelerators into products
Level 2 Ticket-based, device-based pricing in
support and IM; shared services
As frequency of transaction
increases, gross margins
upwards of 50% possible
Wipro by virtue of presence in
infra management
Level 3 Outcome-based pricing; make pricing a
key driver of the client's business
measure. Very deal specific
Very powerful multiplier
effect if cost profile and risks
are contained
Wipro (Unitech Wireless,
Aircel) and TCS
Level 4 IT/BPO platforms, full scale processing
platforms (horizontal and vertical)
Revenues (licence, % of
transactions, subscription-
based)
Infosys (traditional advantage
of Finacle), TCS (SMB)
Wipro is now at par with Infosys
on offshore rates
Our conclusion is that TCS and Infosys are doing well on Level 4, though revenue offtake
is slow from recently developed platform solutions. Wipro and TCS are ahead on driving
non-linearity through output and outcome-based pricing. TCS leads when it comes to
offering productivity improvements through solution accelerators, though it needs to
systematise and pull this together in a holistic manner to cover more challenging and
strategic 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 3s
frequency of announcements of outcome-based deals (such as Unitech Wireless) and
client wins in platforms/utility offerings. Following a prolonged period of tireless sales
efforts after development of Infosys retail solution (Shopping Trip 360), Infosys has won
some pilot projects. TCS has won several orders from large corporates for its HRO
platform. Its platform for the pension and insurance vertical is likely to be ready for
release by FY10 end. Its recently launched offering for the SMB segment in India
could be over USD 200 mn in revenues by 2013, if well executed (refer to the
section, SMB Segment: Execution critical for good gains).
Our analysis in section, Non-linearity: Stern test of commitment explains that to
keep gross margins steady at 45-46%, Infosys will have to raise level 4 non-
linearity from currently 4% of revenues (Finacle) to ~10% (Finacle + others)
over three years (or 15-16% of incremental revenues over FY10-13E).
Non linearity as a theme could get a leg up if technologies such as cloud computing
become mainstream. In which case, the balance of advantage could shift to those who
are thinking proactively about the cloud and how it can shape delivery and hosting of
business process solutions. Our discussions with the Big 3 suggest that Wipro and TCS
are seeing the cloud as a disruptive medium to offer both infrastructure as a service (and
infrastructure as a utility) and business process-oriented solutions (e.g., cash-to-order or
procurement). In the case of Infosys, the focus is largely on the latter (primary focus
remains 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 the
next acquisition. To be sure, not all acquisitions of Wipro have delivered intended
benefits (there have been some early ones such as Nervewire where there has been
attrition of key management). But with failure/mistakes comes learning and acquisition
failures are no different in imparting a great element of learning.
It is instructive to compare acquisition strategies of TCS, Wipro, and Cognizant. TCS has
gone for the jugular through big-sized acquisitions which pitchforks TCS in the reckoning
for 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) new
capabilities/niches that Cognizant can use to prise open a new segment/geography; (b)
improved ability to offer process innovation/process consulting (Accentures acquisition
of George Group as a case in point); and (c) new engines that can drive non-linearity.
Wipro has preferred a mix of the small and the big, and is getting more comfortable with
size. It believes that its 12 acquisitions since the 2002 acquisition of Spectramind (its
BPO venture) have given it a unique picture of its successes and failures and has
increased its confidence and probability of success in acquisitions over time. Notably, one
of its most recent acquisitions, Infocrossing, was also its biggest. An acquisition history
has enabled Infosys peers to have come up on the maturity curve on acquisitions.
TCS relatively better placed on
driving non-linearity on preliminary
Cloud computing could be a
game changer for Indian IT
Acquisitions are required to get
a leg-up
Experienced now, Wipro has had
mixed success with acquisitions
indications
Table 5: Cognizants acquisition philosophy has helped it enter new spaces/niches
Margins: Are there new margin-aiding discoveries on the horizon?
We see a different set of challenges today: Unlike 2002-04, the current crisis
may 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 absorbed
right through FY11, and some element of flexibility in a firms cost structure. But,
Acquired firm
Month of
acquisition
Consideration of
purchase and
financials of
Area of business
/operation
Strategic rationale Performance since acquisition
Certain assets of
American Express Travel-
related services company
(from Silverline)
Sep-02 USD 10.4 mn BFSI Strengthen CTSH's financial
services practice; this also helped
CTSH them launch their local
development center in Phoenix, AZ,
and Hyderabad, India
Its BFSI practice has since grown to a leadership
position and Amex is one of CTSH's strategic clients.
The Phoenix development center has since grown to
become its largest local development center in the
US, helping it service many other clients across
industry
Aces International Apr-03 CRM Strengthen CTSH's CRM practice Cognizant topped the list of Tier 1 offshore players
in ability to execute CRM in the latest Gartner Magic
Quadrant report for CRM in NA
Infopulse Dec-03 USD 6.4 mn BFSI, IT Services Expand CTSH's Continental
European footprint, strengthen its
BFSI consulting and practice in
Europe
Continental Europe is approximately 40% of
CTSH's European revenues. This acquisition also
helped them win a recently announced 7-year
engagement with RaboBank.
Ygyan Consulting Feb-04 USD 1.7 mn SAP Strengthen and deepen CTSH's SAP
expertise
Cognizant is clearly seen as a strengthning player in the
SAP space, with SAP recently recognizing Cognizant
as a global services partner. Cognizant has
established a SAP Netweaver Testing Center in
Bangalore within Cognizant's premises. It has grown
to many hundreds of professionals. Cognizant
believes that this is one-of-a-kind center for SAP
Labs outside of Waldorf.
Fathom Solutions Apr-05 USD 23.3 mn Consulting for
Telecom
Strengthen CTSH's consulting
capabilities in the
telecommunications sector
Consulting capabilities obtained through this
acquisition have helped Cognizant establish
thought leadership. Recently, AT&T, Alcatel-Lucent,
BEA, Cognizant, IBM, Motorola, and Microsoft jointly
created groundbreaking content commerce
standards under the aegis of TM Forum
[http://www.thefreelibrary.com/AT&T,+Alcatel-
Lucent,+BEA,+Cognizant,+IBM,+Motorola,+Microsof
t+and...-a0170136912]
Aimnet Sep-06 USD 14.8 mn IT Infrastructure
Services
Strengthen its capabilities in ITIS This acquisition gave Cognizant a Network
Operations Center (NOC) in Boston, which is today
seamlessly integrated with its NOC in Bangalore. It
also gave CTSH a "platform" called OnTarget to deliver
RIM services. In their recent research reports,
Gartner and Forrester have recognized Cognizant as
being in the same league as Wipro and HCL for RIM.
marketRx Oct-07 USD 135 mn High-end analytics,
specifically in sales
and marketing in
the life sciences
space
Strengthen Cognizants full-suite of
offerings across all areas of the life
sciences value chain and strengthen
CTSH's capabilities in high-end
analytics
This acquisition gave Cognizant unique end-to-end
capabilities (from discovery, to clinical, to
manufacturing, to commercial operations) in the life
sciences space. It has deepened its high-end
analytics capabilities, strengthened its know-how for
non-linear growth, and so on.
Strategic Vision
Consulting
Jun-08 Media &
Entertainment
Consulting
Expand CTSH's consulting
capabilities in the media &
entertainment industry
This acquisition brought to CTSH the capability to
work with "media studios". SVC was working with 6
of the Top 10 media studios in LA and surrounding
regions.
Active Intelligence Feb-09 Oracle Retail
Solution
Expand CTSH's Oracle Retail
portfolio services
This acquisition helped the company to strengthen
its Retek (Oracle Retail) capability and service its
retail customers effectively. In the last few quarters,
retail has been one of the fastest growing industry
segments for Cognizant.
Notes:
Approximately 39-40% of European revenues come
from Continental Europe, T- Systems has contributed
to it to a certain extent.
This alliance will help Cognizant strengthen its
capabilities in plant floor applications and help stitch
them with enterprise applications.
In March 2008, Cognizant, as part of a global systems
integration alliance with T-Systems, took over T-Systems India
and its approximately 1150 employees. The alliance is
primarily aimed at catering to European corporations with
global delivery requirements for system integration services.
In July 2009, Cognizant, as part of a global product research
and development relationship with Invensys Operations
Management, gave offers to join Cognizant to over 400
Invensys Operations Management professionals from Invensys'
R&D center in Hyderabad.
INR depreciation protected
margins during the crisis phase
stripped of the gains from the INR depreciation vis--vis the USD and resetting it to
average FY08 INR-USD levels, Infosys FY09 EBITDA margins would have declined by as
much as 400-450bps (at same average INR-USD exchange rate as FY08). This compels
three observations:
(a) Unquestionably, there has been a fair loss of economic attractiveness of the Indian
IT industry during the current crisis, primarily because pricing is likely to settle back
to levels where it was about six-eight quarters ago. Client contracts will carry more
risk 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 negative
slope of economic attractiveness, only time can tell. Also, what may add to the
negativity of the slope is our view that Indian IT firms will have to step up their S&M
expenditure to penetrate new markets and domains (verticals). The bang for the
S&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 time
around as well? We believe that broadening of the pyramid is possible only with
growth and critical mass of expertise/capability in established verticals (e.g., BFSI
and telecom service providers) and application management (including
infrastructure management) which will take time to build in new areas/verticals after
the current crisis.
(c) Thus, the slope of the margin after the crisis will show a contained/controlled
trajectory this time around after FY11 (stripped of impact of the exchange rate) like
it did the last time, only if new margin-aiding discoveries manifest themselves (see
chart 11).
Chart 11: Studying margin movement over several phases since 2001
We have identified four margin aiding discoveries:
(a) Growth itself is a margin driver: Growth affords G&A leverage and pyramid
expansion opportunities, but the industry is reset downwards to 18-20% growth
over FY10-12E. Consulting has been talked of as a lever for a while, but success
here for Indian IT has been limited. Companies that grow faster without
compromising unduly on margins have some headroom for maintaining margins
paradoxical, as it may sound.
New service line
penetration
Greater offshoring
Broadening of
employee
pyramid
SG&A leverage
Margins
helped by
weaker
INR
and tight
cost
controls
Controlling trajectory of
margins after current crisis
rests on finding new
margin aiding
discoveries
Earlier crisis
(2001-04)
Post crisis
(2004-08)
FY10-11
Further; after the
current crisis, beyond
FY11
Crisis has reduced economic
attractiveness of Indian IT to
some extent
Need for new margin levers has
arisen
(b) Zero cost of bench: Wipro operates on a zero cost of bench principle for its India
business. It does this through a combination of internal discipline i.e., reducing cycle
times at every stage, right from sourcing (applying Toyotas principles of lean to
software development) to shared services for its India clients. It believes that replicating
the same to its global bench is the next big margin-saving game. We believe that while
executing this for global clients (exports) will be challenging, there is some margin-
upside capture. Also, as firms get smart on just-in-time hiring (e.g., hiring engineering
students 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 that
provide? Offshore wage hikes will dampen for the next two-three years, moving to
8-10% p.a., but managing per capita costs over FY04-08 has depended heavily on
the 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 may
not be positive unless the employee pyramid widens.
(d) Non-linearity: This is the real game, in our view. But unless firms floor the pedal
on non-linearity to obtain 300-400bps of margin benefits in the next three years we
see margins trending down after FY11, though we expect margins to be stable-to-
rising in FY11 on the back of utilisation of the existing bench.
An engine that drives non-linearity on an increasing scale is the only enduring margin-
aiding discovery (See case study How much further can the Big 3 squeeze the same
lemon?).
On this dimension no one player is winning overall, though in pockets TCS and Wipro are
ahead in levels 1-3 and Infosys in level 4 through Finacle (please see section, Non-
linearity: Stern test of commitment). The opportunity is available to the three equally
and 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 fashion
through the recent years peaking at about 52-53% of revenues. On the other hand,
other costs (non-people related excluding depreciation) have shown a consistently
declining trend as % of revenues, partly due to economies of scale and amortization of
other 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 FY04-09
14.0
16.0
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(
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(
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Total people cost as a % of revenues (LHS)
Other costs (ex-depreciation) as a % of revenues
(RHS)
3.9
4.2
4.5
4.8
5.1
5.4
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1
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(
I
N
R
l
a
k
h
s
)
Real time hiring is the new
strategy
We believe that the pressure on Infosys to sustain margins will be greater than it is for
the others and, hence, the lead it has on Wipro (difference of 13 percentage points in
FY09 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-to-
replicate advantages with Infosys (indeed with any of the Big 3). We would not see this
as a worry. Indeed, firms must manage for the over-arching business model than for
margins as our section, Five business truths discusses.
Our 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 attract
talent, 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 enables
pyramid). Our model reckons that under assumptions of (a) current leverage (~80% of
gross hires are freshers), (b) base-case wage inflation of 12.5% (like-on-like for existing
staff) 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 rates
of 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 at
current levels (14.8% of revenues) and real annual realization increase of 3% are strong
ones. Its a tall order if the Big 3 continue to operate status quo.
Table 6: Gross margin movement, in FY13 from current levels under various
scenarios of realization improvement and growth
On taking more realistic estimate of realization improvement (1.5-2.0% excluding
incremental non-linearity) rather than 3%, and other costs moving up 50bps (as % of
revenues), our model shows Infosys gross margins declining more than 200bps by
2013 (not to mention higher SG&A costs % of revenues on an ongoing basis for
Infosys).
To offset all these headwinds and maintain operating margins, the game must shift to
non-linearity. Non-linearity must provide a thrust of 300-400bps at the operating
margin level to sustain current margins three years out.
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 0.9
4.0 0.3 0.7 1.1 1.6 1.9 2.3
Revenue (USD) CAGR (FY11-13)
R
e
a
l
i
z
a
t
i
o
n
i
n
c
r
e
a
s
e
(
%
)
Non linearity could be the only
potent margin aiding force
Table 7: Dynamics of margins play*= Interplay between +ve and -ve factors
Note: * INR-USD equation is omitted though it is perhaps the most important variable, as this is
extraneous over which companies have no control/discretion
Valuations: Today and tomorrow
Question 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 moves
back to players who are able to defend margins with minimal hit to the bottom line. This
was seen in Infosys valuation premium that opened up relative to other players at the
onset of the crisis. We also see that this was the case during the last tech crisis when
Infosys relative P/E premium opened up during late CY01. Wipro has traditionally
enjoyed valuation premium to Infosys, which has reversed with this slowdown.
Chart 13: TCS and Wipros P/E discount to Infosys widened post Lehman
Source: Bloomberg, Company
Relative premiums re-orient when the crisis fades away. Relative premiums can reorient
away 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 likely
to move in favor of players that demonstrate higher sustainable growth. Infosys has
shown that over FY04-08, but Wipro/TCS could match/exceed Infosys here on for various
reasons we have highlighted.
The Big 3 have surprised us with their margin resilience in this environment. They have
not desisted from taking tough measures and ruthlessly exploiting the slightest
Margin aiders(+) Margin detractors (-)
Non-linearity Pricing improvement of the past not sustained
Moderating wage inflation Limited employee pyramid exploitation due to lack
of growth
Zero/lean bench Higher SG&A (more so, higher S&M)
Margins from services in emerging geographies
Globalisation of delivery centers
Unless non-linearity compensates, net impact is likely to take margins downward
post FY11
(45.0)
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Wipro premiumover Infosys TCS premiumover Infosys
premium
discount
TCS and Wipros P/E discount to
Infosys has narrowed post crisis
opportunities to move personnel and business offshore. Also, it has been shown by
others (TCS, Wipro, Cognizant, and HCLT) that in times of crisis such as today, margins
can be readily defended (see case study: Wipro closes the operational margin gap with
Infosys). Thus, we believe that investors are unlikely to pay premiums for more-than-
needed margin management (more so from Infosys) in good times. As an additional data
point, we also note that Cognizant (CTSH on Nasdaq) has traded at a premium to Infosys
during 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-crisis
Source: Bloomberg, Company
Thus the BIG CALL: We believe that over the next two-three years, Wipro and
TCS should be able to establish valuation parity (even occasional premium) to
Infosys in accordance with our thesis of higher growth rates at sustainable
margins.
Chart 15: TCS/Wipro trading at discount to Infosys
Note: * Size of bubble represents current market capitalization
(10.0)
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8 9 10 11 12 13 14 15 16 17 18
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/
E
EPS CAGR % (FY09-12)
Accenture
Infosys
Cognizant
Wipro
TCS
Commendable margin resilience
shown by Big 3
Cognizants historical P/E
premium to Infosys driven by
high growth
TCS, Wipro could establish
valuation parity with Infosys
Case study: Wipro closes the operational margin gap with Infosys
The difference in standalone EBIT margins between Infosys and Wipro (for IT
services) six quarters back (in Q4FY08) stood at ~8.5 percentage points, which
remain the same in Q1FY10. So, on the face of it, it appears that Wipro has not closed
the gap.
Digging into the details we find net average realised exchange rates (a derivative of
the hedging policy) explain part of the gap. In Q4FY08, Infosys average realised
exchange rate was 39.76, while that for Wipro was 40.85. The tailwind for Wipro in
Q4FY08 from a higher realised exchange rate versus Infosys was 60bps (as Infosys
was less hedged during FY08, when the INR appreciated versus the USD; it is still less
hedged than Wipro). So, operationally, Infosys 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 offshore
billing 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 was
almost 15% lower than for Wipro).
Today, Wipro has closed the operational ga p, as we explain below (also see chart
16). 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 has
helped Infosys more than Wipro due to the relative hedging policy). On this
count, the gap should close, as increasingly Wipros realised exchange rate is
moving 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, though
Wipro has closed the gap on this score and has followed a policy of no hiring right
through FY09; also, departures have taken place at higher levels). Wipro is now
almost at par with Infosys on realisations/pricing.
3% of the gap exists because of Wipros acquisitions and higher India/Middle East
presence. To the extent that it is the former, the gap can close as profitability of
acquisitions picks up with scale and synergy.
From this analysis, we believe that Wipro is closing the gap plugging inefficiencies in
its 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 integrates
its acquired entities and extracts synergies; and (b) Wipros average realised
exchange rate inches up towards spot.
Question 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 two-
three years, we believe that their revenue growth patterns will increasingly mirror that of
Accenture in the pre-slowdown years. Over FY05-08, Accenture grew revenues and
operating profits at 14.6% and 12.6% CAGR, respectively. Its median one-year forward
P/E ratio stands at 15.1x over this period (FY05-08). As a secondary check, Accentures
pre-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 us
an indicative benchmark of 16-17x.
Chart 17: Accenture has traded at a median P/E of 15x pre Lehman - collapse
Question 3. How do we compare momentum multiple versus trend multiple?
Valuations react in a yo-yo manner in response to near-term earnings (even quarterly
earnings) and margin outlook. Thus, we have seen valuations violently over- and under-
shoot the median of our suggested valuation band. We believe that such sharp
fluctuations around the median should provide signals to the investor with regard to a
longer-term position. Current momentum of 18-20x is unlikely to sustain unless earnings
growth beyond FY11 is ~20%.
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Infosys ACN
Chart 16: Decomposing Q1FY10 EBIT margin gap between Infosys & Wipro
Steady state P/E multiples for
Indian IT could be 16-17x
3.0
2.5
3.0
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Margin gap
attributable
to forex
Attributable
to pyramid and
billing rates
Attributable to
acquisitions/
India/ME business
Total
margin
gap (EBIT)
(
%
)
Relative valuation premiums/discounts among the Big 3 (e.g., a 10% premium of Wipro
to TCS today) could be momentary depending on relative quarterly performances and
could shift in a +/-10% band purely running on quarterly performance. Sustained
premium 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 that
among 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 (provided
ROCE/margins are above a certain sustainable benchmark).
Also, we note that FY11 is likely to be a bounce-back year of earnings growth (on the
back of pent-up demand coming through and soak-up of current bench at near-zero
additional people costs) but we would caution against extrapolating the FY11 momentum
to 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 (April
2006April 2008). As growth sharply declined in after FY08, the premium turned into
discount. Over the past 12 months, the IT index has traded at an average discount of
7% 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 the
quality of earnings growth (high ROEs and significant cash generation of the Big 3). The
second factor should not be ignored while comparing and investigating under- or over-
valuation of the sector (or the Big 3) relative to the Sensex.
Currently, consensus expectation of the Sensex earnings growth in FY11 (over FY10) of
about 20-22% is ahead that of the Big 3 (at 17-20%) even as the latter are trading at a
10-20% P/E premium to the Sensex (with Infosys premium at the upper end).
Chart 18: Tier 1 IT indexs P/E premium over BSE Sensex has faded
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IT index median Expected reset median
TCS needs to show consistent
performance for upward P/E re-
rating
Five Business Truths
As we look at the IT landscape over FY10-13, we see five aspects that are increasingly
becoming evident in the way the industry should be viewed:
The Big 3 may not grow faster than the industry
The market leaders will grow ahead of the industry is a common conclusion (else, they
would not have emerged market leaders). However, in FY09, Infosys (11.7% revenue
growth) and TCS (5.1% organic revenue growth) grew considerably slower than the
industry (as estimated by Nasscom), while Wipro (ex-Infocrossing) just about kept pace
organically (IT industry exports as per Nasscom grew at about 17% to USD 47 bn in
FY09 from USD 41 bn in FY08). Slower-than-industry growth for the Big 3 is likely to
repeat in FY10 as well.
We see an increasing disconnect between the growth of the leaders in Indian IT and that
of the industry as classified by Nasscom. Going forward, we believe the Big 3 could lag
the industry in growth. This is because Nasscom takes an all-inclusive view of
outsourcing exports, which includes many constituents that are not representative of the
spaces 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 industry
(a) BPO or ITES is forecasted to grow faster than pure IT services
The 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) are
forecast to be larger in absolute dollars than IT services (currently about 60% of total
exports) by 2020 as per Nasscom, Perspective 2020. This implies that the BPO/ITES pie
will grow about one and a half times as fast as IT services over a sustained period (FY09-
20). Also, the lions share (over 40%) of the ITES/BPO opportunity continues to be in
relatively 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/BPO
platforms and end-to-end FAO (finance & accounting outsourcing) positioning.
Given this, it perhaps does not surprise that larger third-party BPO players such as
Genpact and WNS are growing ahead of the industry and much faster than the Big 3 in
percentage terms.
Effect of 1> effect of 2 = Big 3 will grow ahead of industry
Effect of 2> effect of 1 = The Big 3 will lag behind the broader industry
Gaining from vendor
consolidation during
FY10-11
2
Gaining from end-to-end
and comprehensive
solution capability
Growth of Tier-I players
(Big. 3, Cognizant & select
others)
What determines
industry growth?
Emergence of specialists in
fast growing areas: BPO/IMS
(WNS, Genpact)
Ramp-up of third party MNC
captives in India (e.g.
Accenture, IBM)
Ramp-up of MNC in-house
captives in India (GE, Fidelity,
Tesco)
Bold moves by mid-tiers and
others through aggressive
overseas M&A
1
Big 3 could lag growth projected
by Nasscom
Pure play BPO players have
grown faster than IT services
players
(b)Industry today is increasingly composed of MNCs
The MNC (development offices of third-party global ITMNCs suchasIBM, Accenture,
HP/EDS and back-offices of corporates such as Amex, HSBC, and JP Morgan) is a
constituent 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 MNC
group is now focused on driving revenues from India through better utilisation and
productivity. We estimate that IBM could be deriving as much as USD 2 bn from India
(both exports + India market), while Accentures export revenues from its India
presence could be between USD 1.5 bn and 2.0 bn (nearly 7-9% of Accentures FY09
revenues of about USD 23 bn).
Conclusion: The nature of the industry has changed; it has become more
heterogeneous and diverse, with MNC captives (back offices of companies and
development centres of MNC IT biggies) gaining weight in the overall industry system.
Add to this the fast growing BPO segment (and the Big 3 in Indian IT do not participate
in a good portion of this segment), we see that the centre of gravity of the Indian IT
industry 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. This
happened in FY09 and is likely to repeat in FY10. In our view, this possibility should not
necessarily be perceived as negative, it should perhaps be appreciated as a continuing
change in the structure of Indian IT. Thus, on account of these factors, there may be no
such performance benchmark as beating the industry. Wipro does not provide annual
guidance, but in the past it did enunciate an intent to grow at least as fast as the
industry. It may not do that going forward.
Technology, process and quality no longer differentiators
Over two-thirds of the worlds 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 others
have become factory-like in the way they handle repeatable components of commodity
offerings (ADM, packaged implementation support, and BPO). There is a substantial
element of standardisation of technical and process mapping.
Chart 19: Two-thirds of worlds SEI-CMM level-5 firms are in India
Source: Nasscom
The differentiation will occur in the way the Big 3 and others apply intervention at the
business process level using technology and driving an element of integration and
bundling of service linesthemes that we repeatedly turn to later in this report.
India-
based
firms
(65%)
Others
(35%)
Firms assessedfor CMM* Level 5, 2007
Third party MNCs and captive
MNCs have gained weight in
overall industry
Technology process and quality
have become hygiene factors
Fig. 2: Value-addition is much beyond factory-based, technology-led intervention
The integration theme is becoming important across verticals, notably manufacturing,
retail, and telecom (these three verticals will collectively account for about 35-45% of
the Big 3s revenues going forward). Integration is probably the best theme for Indian IT
to establish client lock-in as many more in the C-level executive suite have a stake in
thisCEO (transformation), COO (operations), in addition to the CFO/CIO. Also, this
theme gains particular currency and resonance because consulting per se as a powerful
lead-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 firm
with fledgling strength in BPO can make a unified IT/BPO proposition credible. Firms will
continue to make acquisitions that rapidly stretch capability in such service lines (like
TCS acquisitions of CGSL, the captive Citi BPO). This may not be a bad idea if rapid
maturity in such specific service lines helps them play the integration theme ahead of
others. With this acquisition, not only does TCS become a comprehensive BPO solutions
provider in FAO, but also it is well placed to drive the integration theme in engagements
which involve a fair share of BPO-intensive or BPO-led intervention.
No new service lines in sight to drive growth
Over 2004-08, Indian IT has seen the flowering of various service lines in conjunction
BPO, enterprise solutions, infrastructure management (IM), and testing. All these service
lines have tremendous offshoreability which has enabled the expansion of the employee
pyramid to include youth and aided the margin trend over FY04-08. IM, in particular, has
tremendous headroom for growth, but there is also a much greater chance of
commoditisation in this segment unless the Big 3 execute on different engagement
models 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 an
onsite bias.
Table 8: Only infra management and system integration seem to be able to provide standalone growth
Source: Nasscom
Value addition =
+ +
Technology-led
intervention
Business process-led
intervention
Integration
(USD mn) FY05 FY06 FY07 FY08 FY09E
CAGR
(FY05-09) (%)
Project oriented 5,580 7,708 9,860 11,980 13,514 24.7
IT consulting 250 348 600 650 715 30.0
Systems integration 200 374 580 680 782 40.6
Custom appln development 4,980 5,923 7,170 8,808 9,865 18.6
N/w consulting & integration 150 167 230 280 322 21.0
Software testing - 896 1,280 1,562 1,830 26.9
Outsourcing 3,290 4,364 6,330 9,250 11,313 36.2
Application mgmt 2,690 1,589 2,400 3,550 4,260 12.2
IS outsourcing 600 840 1,700 3,300 4,125 61.9
Others - 1,935 2,230 2,400 2,928 14.8
Support and training 1,100 1,233 1,660 1,870 2,081 17.3
S/w deployment & support 1,100 986 1,330 1,440 1,584 9.5
H/w deployment & support - 80 100 120 139 20.2
Education & training - 167 230 310 358 28.9
Total 9,970 13,305 17,850 23,100 26,908 28.2
Value addition provided to
clients is the only differentiating
factor
Integration is the new theme
but not any new service line
Growth FY10 onwards, therefore, will have to be driven by greater maturity of service
lines, particularly of infrastructure management, but more pertinently, by the integration
of all these service lines.
No new market is too early to be invested in
For many years, Infosys desisted from addressing the domestic market due to margin
issues. As growth from developed markets (US and Europe) is under pressure, the
wisdom 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 we
instead believe is that Infosys is still some time away from replicating the structurally
lower-cost delivery model that peers like Wipro and TCS have institutionalised over the
years. A structurally low cost model to maintain acceptable margins includes an
outcome-based engagement model and strong programme management offices that
access commodity skill-sets from external tier II and III vendors/sub-contractors.
We believe that investments in developing economies other than India will take three-
five years to show for players who are not invested (e.g., Infosys is relatively absent in
the Middle East), as the opportunity basket needs to grow and it takes time to craft local
go-to-market relationships and make them fruitful. Whereas, in developed markets
(Germany, France, Australia), where Indian penetration is comparatively less, the lead
time is 1.5-3 years.
Cognizants experience suggests that the intensity of desired investments is better
maintained consistently rather than taken up suddenly as investments have to be
mapped appropriately to opportunities, which may not be effectively ensured if done in a
hurry or in step changes.
Also, it will be unfortunate if companies allow their view of the length of the crisis to
determine the intensity of their investments before the environment turns decisively. It
may then be a story of costly misses. Also, we believe that further cuts may push the Big
3 to cost structures that are artificially too low and non-conducive for building improved
revenue base scenarios. No new market is too early to be invested in.
Fixed price will give way to new engagement models
The current downturn has seen the come-back of fixed price (FP). FP had also come into
the 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 current
downturn will be different. FP will increasingly give way to new client engagement
models based on delivery of output (which is simple) and business outcome (which is
much harder).
We have identified four distinct leve ls of non-linearity in our section, Non-linearity: Stern
test of commitment. In our view, non-linearity at level 1 (solution accelerators) and level
2 (ticket-based pricing in application maintenance or device-based pricing in IM non-
linearity, shared-services) are elementary margin aiders. This is a two-three year game
before 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 types
of IP-based solutionspure products (Finacle of Infosys), point-solutions, proprietary
transaction 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 on
new technologies such as cloud computing, collaborative communication, social
computing, etc. Accenture has played this high game in insurance and
Middle East and other emerging
markets are under focus with
growth under pressure from
developed markets
Newer engagement models are
evolving from traditional fixed
price and T&M
communication/high-tech; nearly 40% of its revenues in insurance accrue from its own
proprietary solutions.
Smaller companies in particular are placing large bets on such potentially revolutionary
technologies viewing them as levelers in a game in which they are continually falling
behind. We, however, take the view that evol ving technologies should be seen primarily
as a medium for more effective delivery of business process-related solutions. Such
technologies offer improved ability to offer economies of reach, and dispersion to newer
and smaller customer segments such as the SMB.
Five Financial and Valuation Truths
Pricing on knifes-edge; dynamics determined by MNCs as by Indian players
MNCs 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 when
their India delivery models were less mature. In fact, clients prefer to keep Indian
vendors temperate in their expectations by including MNC player(s) all the way to the
final stage in RFP-contested deals. Also, some MNCs are more aggressive than their
Indian peers on pricing, not surprising, given that the benchmark gross margins they
work with in India are lower than those for Indian peers. There is a much larger margin
band available to MNCs to play in, which could be a spoiler.
With no single Indian player commanding such a disproportionate share of the IT-
services exports market (TCS is the largest at 11-12%, Infosys follows at about 9%), no
one 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 pricing
apple cart, while on the other, it takes true differentiation to obtain pricing premium.
Thus, pricing in this industry is on the knifes edgerequires co-operation of all relevant
players in the eco-system to remain on track, while potentially remaining hostage to
predatory tactics of one or two influential players. We model in a 2% annual pricing
increase for the industry in the next five years. This will be possible only when
all relevant players act in sync. We do not model an out-of-turn increase for any
one player among the Big 3, believing it to be a remote possibility.
Viewing competitive advantage, value-add via margins lens not enough
High operating margins of a business could be an indicator of its offshore-centricity.
Infrastructure management and testing are offshore-centric service lines, fetching high
margins. While these are stable from the volumes perspective, they tend to commoditise
rapidly if standalone unless the engagement model is changed from an input-based
model (people) to one that is hosted and on-demand based.
In an industry which the investor community has traditionally analysed in terms of
growth rates and operating margins, we believe operating profit per employee may
better define how well the Big 3 preserve the durability of their business model and offer
returns 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 intact
through FY06-09 (Infosys leads on EBIT/employee at about USD 14,000).
Competitive force is keeping
pricing under check
Margins alone do not indicate
competitive advantage
Chart 20: Per capita EBIT has been broadly constant for Big 3 over FY06-09
Continued traditional and exclusive focus on operating margins as a measure of
commoditisation is insufficient and even perhaps misguided. Closer-to-the customer,
higher-value solutions such as consulting and system integration may not fetch margins
comparable with such offshore-centric service lines but they tend to be higher per capita
profit businesses. We argue that even if a significant move towards such solutions may
entail a shift in the cost structure towards lower operating margins, incremental value
addition results from such a move. This becomes clear as we shift focus to returns on
talent (people), keeping in mind that consulting, integration and other value-added
services reflect in a higher operating profit per employee, better sustainability of this
metric through predictable downstream and consequently incrementally improved
operating 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 may
depend primarily on (1) rather than (2) for value creation.
In our view, if Indian companies merely add employees (i.e., add numbers) without
climbing 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) overcomes
decrease in (1) to increase operating profit. The ideal way to realise sustainable growth
will be to increase both (1) and (2) or at the very least ensure that (1) does not exhibit a
declining trend and is maintained.
(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 and
IM.
The question is, can Infosys and others increase (1)? That there will be employee
addition is certain; hence, (2) is ensured but is that enough? Merely (2) will always mean
that the company is running the treadmill of commoditisation and fighting higher wage
inflation once the demand environment improves. To illustrate, to grow EBIT at 20%, a
company will have to hire 25% more people, which multiplies in the next year and so on.
0
3
6
10
13
16
FY06 FY07 FY08 FY09
(
U
S
D
'
0
0
0
)
Infosys TCS Wipro
Big 3 have maintained their per
capita EBIT
Employee addition not the
answer to increasing operating
profit
success of non-linear
initiatives is the answer
Note: The whole argument is analogous to the stock return principle (Price [P] = P/E x
Earnings [E]). Maximum price appreciation is possible if both P/E and E increase
simultaneously. If firms commoditise, maybe E will increase, but P/E could suffer. The
net impact on P is not always clear. P could increase in the near term, but soon enough
the P/E decline could overpower the role of expanding E and longer-term sustainability of
P would itself be in question.
ROAE only a weak factor impacting valuations
The theory that stocks are reasonable when viewed in the context of historical trading
multiplies assumes less relevance in the event of reset of growth. A reset of the P/E
multiple should logically accompany that of growth. But, is the possibility of improved
ROAE (return on average equity) as an offsetting factor to lower growth tangible? What
impact 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 Accenture
Our analysis suggests that ROAE is a weak factor at best in shoring up valuations (see
table 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% (ex-
cash, Infosys return on average equity for a five-year period of FY04-09 stands
at 65-70%). The impact of an increase of steady-state ROAE by 15 percentage
points to 65% does note beneficially affect valuations if growth dips.
Table 9: It may be better to judiciously compromise return ratios in favor of growth
0.0
20.0
40.0
60.0
80.0
100.0
Infosys TCS Wipro Accenture
(
%
)
FY07 FY08 FY09
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 3.5
1% (11.8) (6.8) (3.2) (0.4) 1.8 3.5 5.0 6.2 7.2
3% (6.3) (0.7) 3.4 6.5 8.9 10.9 12.5 13.9 15.1
5% (0.5) 5.8 10.4 13.8 16.6 18.8 20.6 22.2 23.5
U
p
s
i
d
e
t
o
o
u
r
b
a
s
e
-
c
a
s
e
F
Y
1
1
E
-
1
6
E
e
a
r
n
i
n
g
s
C
A
G
R
o
f
1
3
%
Higher ROAE does not ensure
higher valuation
Core ROAE is highest for Infosys
The conclusion for Indian IT, in particular for Infosys, is: So long as ROAE remains
above a comfortable benchmark (say 35-40%), operating at current ROAE (ex-cash) at
65-70% as Infosys currently does only adds rather moderately to intrinsic value. It will
be judicious to trade off in favor of growth at the expense of lowering operating margins
and ROCE. If Infosys can drive greater EPS growth per year through FY11-16 by 3-4
percentage 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 spiral
of 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 Indian
IT companies (notably Infosys) have in current ROAEs/operating margins. Above all, it is
a mindset change that Infosys will have to conquer. An acquisition strategy that dilutes
metrics over the long term within an acceptable band, but propels trajectory of annual
growth to a higher level (by even 3-4% per year) is beneficial for shareholders in the
long run. Tweaking the balance sheet and operating margins in favor of better operating
metrics and return ratios yields diminishing returns beyond a point as our analysis
conclusively proves.
Pent-up opportunity versus secular opportunity
FY11 could see significant growth (over FY10) largely as pent-up and tactical
opportunities are unleashed and serviced without fresh hiring (as current utilisation is
well below optimal). These are three-four quarters games, in our view, but it becomes
tempting to extrapolate this to FY12 and beyond. Growth in FY12 will necessarily be
driven by a secular improvement in the demand environment and more important, the
ability of the Big 3 to exploit the spaces/niches of value opportunity. This requires
heightened investment in specialists and knowledge.
At this point, we believe that while such longer-term revenue opportunities
present themselves (such as healthcare, BPO, emerging markets, and public
sector), lower returns in the market from such areas may not translate
commensurately into profitability. The trade-off of revenue growth versus margins
an old debate that particularly surrounds Infosysis likely to come to the fore and be
pronounced. As we prove and believe, companies should go with growth at acceptable
margins in this debate. More important, they may have to redefine their benchmark of
acceptable margins as Infosys may do in India.
Dropping ROAE for growth will
expand valuations for Infosys
Growth versus margin paradox
of Infosys to be more
pronounced now
Fig. 3: When will risk in current valuations manifest itself?
Sustain through
FY12 and beyond
No risk in current
valuations
Secular growth Pent-up growth in FY11
Risk in current valuation
will manifest
down the road
Growth does not
sustain to the same
degree through
FY12 and beyond
EPS growth in FY11 is robust
Case study: How much valuable can Infosys get in replicating Accenture?
We model in sustained 15% revenue CAGR (in USD) through FY10-20 by end of
which, Infosys revenues will be close to USD 20 bn (ex-acquisitions). We note
Accenture was growing at close to 12-13% through FY04-07.
This is an aggressive revenue growth assumption, in our view, as Indian IT does not
address as large a market as Accenture does yet. While there is considerable and
growing intersection between offshore services of both Accenture and Infosys, there
are 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 premise
is that business models of Infosys and its peers will continue to mature going
forward as well.
Fig. 4: Accenture has vertical and consulting islands of exclusivity where the Big 3 are not present
Note: *Infosys has presence in the resources segment
We believe it will be difficult for Infosys to grow ahead of the industry on a
sustainable basis (industry growth forecast by Nasscom-Mckinsey to be 13-14%
through FY20), unless it makes some margin compromises.
Vertical Consulting
Indian IT
- Public services
- Resources*
- Strategy
- Corporate performance management
- Talent performance management
- Process and innovation performance
- Business analytics
Accentures island of exclusivity
Evaluating current valuation risk
Accentures current EBITDA margins stand at 18-19% (before depreciation and stock
amortisation). 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 margins
between the two should remain (even if it narrows from the current level) for the
following reasons:
(a) Infosys is not likely to replicate Accentures partner-heavy sales structure, which
will keep its S&M low relative to Accenture (though higher than it is for itself
today).
(b) Infosys primary centre of gravity is India, even though there will likely be
parallel smaller centers of gravity globally.
(c) Credible non-linearity from Infosys should provide a cushion of 300-400bps (see
table 10).
A steady-state, perpetual-growth multiple would be close to 15x by our value-
driver formula (P/E = (1-g/ROAE)/(CoE-g). As an added check, the median P/E
multiple for Accenture in normal pres-slowdown years was 15-16x. Thus, we
believe that Infosys longer-term multiple should track this band as it reaches
Accentures current size.
Table 10: Theoretical steady-state multiple should be ~15x
Applying this multiple to Infosys estimated profits in the year when Infosys
approaches Accentures current size, we arrive at a fair market cap of USD 50-55 bn
by 2020, almost 2.2-2.4x that of Accentures current (this represents a 5-6%
CAGR of stock return through the next 10 years).
Chart 22: Infosys implied return to shareholders replicating Accenture
g (%) 6.0
CoE (%) 12.0
ROAE (%) 50.0
Implied Steady state multiple 14.7 x
From the formula (1-g/ROAE)/(CoE-g)
32 Infosys (today)
Infosys (in 2020)
24
18 Accenture (today)
4.6 20
Revenues (USD bn)
(
E
B
I
T
D
A
m
a
r
g
i
n
(
%
)
)
Implied CAGR stock return of mid single digit (5-6%) in making this transition
To be sure, uncertainties about assumptions and judgments increase as we look
further, but this back-of-the-en velope exercise tells us that:
(a) Infosys will create value by replicating Accentures business model only if it
manages much higher margins that Accenture operates at today (at least 500-
600bps higher). Such a scenario in the absence of discretionary pricing power of
the 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 long-
term stock returns (%) in slightly above mid-single digits. In our view, this
should not be seen as a negative, but as a consequence of the natural law of
large numbers. Also, as Infosys scales up further, it will be seen more as an
institutional holding across many more investor types and sets. Return
expectations from institutional holdings are typically moderate.
(c) The impact of an additional 1.5% of compounded growth. If Infosys is
able to lock in an additional 1.5 percentage point in annual revenue growth from
15% to 16.5% through FY10-20 even at the cost of a further 200-250bps to
margins (EBITDA margins of 21-22% in FY20E versus base-case of 24%), it
would still be a better outcome for shareholders, increasing implied compounded
annual returns by nearly 1 percentage point through a sustained period.
Pricing: 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.
Contract signed at what stage in the evolution of the IT industry, company (e.g. Infosys
signing the BT contract and BT strongly ramping up through FY06-08).
Comment: Such differences will narrow going forward. Right place at the right time and
at 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 Continental
Europe.
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 previous
downturn 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 in
investing and reaping fruits in enterprise solutions. However, over time, peers have built
comparable 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 clients portfolio, within the pie distributed (e.g. business
process optimisation and integration); such areas of specialisation constitute a small
percentage of revenues.
Sometimes size of the revenue pie with a vendor could be a bargaining tool for the
service provider to command pricing power. Aware of this, clients generally diversify
across service providers to reduce vendor dependency. It will be difficult to have an
unfettered 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 this
parameter.
Much has been said about Infosys ability to manage pricing premium through the
environment. It is a result of several things that we discuss below:
(a) Location based and sub-vertical based premium: Infosys derives pricing premium in
those clients that have not been largely penetrated by the rest of its competition. In
manufacturing and retail & utilities, where there is less of an overlap between its client
set 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 to
some extent.
However, in the absence of proprietary solutions and offerings that are
distinctive, it remains to be seen for how long such geography-based premiums
due to lower penetration might endure. Other players will sooner or later penetrate
such geographies. From our conversations, we gather that a significant flattening of price
curve in the BFS sector has already taken place with this being the most penetrated
Six factors that have determined
pricing premium
Location based low competitive
pressure and service mix have
yielded pricing premium for
Infosys
segment among the Big 3 and Cognizant. Our view is that location-based pricing
premium is likely to be short-lived relative to expertise-based premium. This is a two-
three year game to play and, hence, the onus is on companies to find new sub-verticals
or geographies of lesser penetration to keep the pricing advantage intact. We find that
when catch-up takes place, and two or more top-tier companies are present in a client, it
is difficult for one to get a premium over the other, unless there are special skills
involved.
(b) Consulting and enterprise solutions over 2003-08: Even if Infosys consulting has
fallen short of creating the expected impact, it has played its role in influencing client
perception of Infosys, clearly attempting to make the transition from being tech-
solutions focused to business outcomes based (via transformational and process re-
engineering). Sometimes, perception can also drive client billing.
To Infosys credit, it invested early in higher-value enterprise solutions (mainly Oracle
implementations); but, as peers (TCS, Wipro and others) closed the gap, pricing
premium narrowed.
Does brand fetch pricing power? Infosys has positioned itself consciously as a brand
over 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, Accentures quarterly results in 2009 have shown that clients do not
necessarily revert to a strong brand in a tough economic climate. Brand is perhaps
useful to establish pricing differentiation and extended relationships (which
tend to be fickle) in B2C businesses (and in B2C contexts).
The strength of brand is unlikely to play out in a scenario where technology
differentiation among the Big 3 is subtle, if it exists at all. The tough economic
environment has shown clients that when it comes to processes, quality, on-time
delivery and TCO-based value propositions, the Big 3 are hardly different from one
another. These attributes over time have been rendered table-stakes for the client, thus
making it difficult for any one offshore service provider to obtain sustainable premium
pricing.
Consulting practice has
influenced client perception for
Infosys
Brand may not necessarily fetch
premium pricing in B2B
businesses
Fig 5: Pricing premium obtained only in a small portion of overall portfolio
Chart 23: Wipro has been closing billing rate gap to Infosys through FY09
Conclusion: Historical premiums, enjoyed in the past on certain accounts such as British
Telecom (BT) by Infosys may still exist, but stand diminished today relative to where
they stood even four-five quarters back. In other words, we do not see a case for pricing
premium in favour of any one player in this industry, going forward, unless companies
differentiate on parameters that we lay out below.
How can anyone among the Big 3 differentiate itself on pricing?
(a) Bundling and value chain integration: In offering end-to-end solutions to clients
on a reengineered, consolidated platform, the Big 3 have a control over their clients
critical business processes. However, equall y importantly, by applying a strong-level
of integration, it is possible to remove the transparency in pricing in offering
standalone services such as ADM, enterprise solutions, BPO etc. Integration and
Value-addition pricing
Pricing
Pricing based on specific
geography/sub-vertical focus
Pricing by common
delivery capability
Themes: Integration,
business process
consulting/
transformation,
bundling, outcome-based
Geographic premiums e.g.
(Infosys in Continental Europe)
could be arbitraged as others catch up;
premium because of sub-vertical/
specific industry focus
is relatively more enduring
Discretionary pricing
that endures
(<5% of revenues) (15-20% of revenues)
Vendor 1
Vendor 2
Vendor 3
Vendor 4
Vendor 5
Undifferentiated pricing;
volume is the more
important determinant
(75-80% of revenues)
(3.0)
1.0
5.0
9.0
13.0
17.0
Q
1
F
Y
0
7
Q
2
F
Y
0
7
Q
3
F
Y
0
7
Q
4
F
Y
0
7
Q
1
F
Y
0
8
Q
2
F
Y
0
8
Q
3
F
Y
0
8
Q
4
F
Y
0
8
Q
1
F
Y
0
9
Q
2
F
Y
0
9
Q
3
F
Y
0
9
Q
4
F
Y
0
9
Q
1
F
Y
1
0
(
%
)
Onsite Offshore
Peak discount
Case of pricing premium in
favour of one player will recede
going forward
bundling enables the Big 3 to avoid direct services and price comparisons.
Transformation engagements incorporating a unified, bundled strategy, discretionary
pricing to the service provider as the integrated solution (and not the price) is the
focus.
Not for nothing did IBM regained pricing power and along with it the control of the
customer when despite cries for its break-up, it decided to keep itself intact and
continued to play the role of a value-added integrator of all elements (hardware,
software, services).
(b) Transforming the engagement model to outcome-based: Such a model
becomes worthwhile and fetches pricing premium only after set-up and transition
phases of the engagement (or project). Here, the service provider changes the
terms of the engagement from T&M/fixed price basis to pricing on business
outcomes (going well beyond output that could be defined more narrowly as the
total cost of ownership or TCO). The power of pricing with compounding margins
kicks in only after a certain threshold is crossed and when companies are past their
initial failures and can look to increased probability of success in making this model
work. This requires players to work with a different risk-reward profile from what
they have been used to during 2004-08.
From our conversations/interviews and deals announced, we gather that TCS and
Wipro have made early progress. Infosys has been relatively guarded in adopting
such models (also referred to as level-3 linearity in the section, Non-linearity: Stern
test 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 its
acquisition 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 to
see how they can get away from the T&M/input-based mentality.
This requires skillsets spanning process re-design and re-engineering, demand
analysis through extensive use of analytics, consolidation, systems replacement and
automation and finally a differentiated pricing model. Genpact has found it difficult
to create such a proprietary platform despite its scale in F&A largely because it
relatively lacks technology automation skills. As our section, To bulge or not to
bulge? explains, companies that have built proprietary, go-to positions in key
business processes enjoy stable revenue lines, high profit margins and higher
valuations. 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 this
area. Again, TCS has attempted to buy this capability in insurance through the
acquisition of the insurance BPO platform from the Pearl Group.
Of the three factors that we have laid out above, we believe that companies have
better chance at the first two. Integration is a longer-term theme, while play on
working with outcome-based engagement models is a two-year game for early
advantage.
IBM regained pricing power due
to its value-added integrator
role
TCS and Wipro have made early
progress in transforming the
engagement model to outcome
based
Specialisation in a business
process/vertical will yield
premium pricing
The IT Enterprise of Tomorrow
The model of the IT enterprise of tomorrow cannot be aspirational, it will have to be a reality
if Indian IT has to come out of the current downturn to play a much more enhanced role in
times to come. In our view, a company that delays or bypasses some of the most essential
elements of the model that we discuss here, run the risk of being overtaken and relegated by
peers 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)
The key elements of our model include:
Value chain optimisation at every point of the vertical followed by integration.
Irrelevance of location to competitive advantage.
A much greater degree of co-operation and working flexibility in working with partners in
the ecosystem.
Organisational flexibility to manage a hybrid of business models and multiple growth
agendas.
Sharper customer segmentation practices.
A partnership-driven sales model.
Greater branding of specific offerings as opposed to general, undifferentiated company-
wide branding.
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 the
employee pyramid.
Cost Leadership Sustained broad-based differentiation:
TCS (fixed price, solution accelerators) Nobody yet (aspirational positioning)
Cost Focus Differentiation Focus
Wipro (6 sigma, lean mfg.) Cognizant (Healthcare, S&M focus)
Infosys (Pyramid)
B
r
o
a
d
t
a
r
g
e
t
N
a
r
r
o
w
t
a
r
g
e
t
T
a
r
g
e
t
m
a
r
k
e
t
Competitive advantage
Lower cost Differentiation
Essential elements of our model
of tomorrows IT enterprise
Fig. 7: Highlights of our vision of Indian IT company of tomorrow
Value chain optimisation at every point of vertical followed by integration
The days of new service lines boosting growth are perhaps behind us. The industry has
uncovered a stack of service lines over 2002-08 that hardly existed during the previous
downturn (viz., BPO, infrastructure management, enterprise solutions or package
implementation, 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 service
line 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
Source: IDC, Edelweiss research
Note: # Infosys and Cognizant not present; standalone low margin business
Sub-verticalization
and re-training
in an era of specialists
Value chain
optimization/
integration
Irrelevance of
location to
competitive
advantage
Aggressive pursuit
of tactical
opportunities
for long term gains
Partnership-intensive
in view of emerging
technologies and others
Organisational
flexibility to manage
multiple business
models and growth
agendas
Sharper
customer
segmentation
practices
Partnership-
driven sales
model
Protecting
core while
breaking
new ground
Specific branding
versus undifferentiated,
generic branding
The IT Enterprise
of tomorrow
(USD bn) 2006 2007 2008 2009 2010 2011 2012
The big 3
present (Y/N)
IT Outsourcing (ITO) 170 197 211 223 238 256 275
IS outsourcing 92 100 106 110 116 122 129 Y
Network & desktop outsourcing 33 39 41 44 47 50 55 Y
Application management 23 31 34 36 40 43 47 Y
Hosted application management 3 4 5 6 7 8 9 Y
Hosting infrastructure services 19 23 25 27 29 32 35 Y
Project based services 160 187 196 202 210 220 231
IT consulting 26 30 31 31 32 33 35 Y
Systems integration 81 97 102 105 109 114 120 Y
Network consulting and integration 30 30 32 34 35 37 39 Y
Custom application development 24 30 31 32 33 35 36 Y
Support & training 137 144 149 153 157 161 166
Hardware deploy and support 54 58 60 61 62 63 64 #
Software deploy and support 60 61 64 66 69 71 74 N
IT education and training 22 24 25 26 26 27 27 N
Total 467 528 557 578 605 636 672
No new service line to power
growth going forward
A standalone offering is likely to commoditise and one way to build differentiation and
boost client lock-in with the same set of service lines is to bundle/integrate them (see
more on this in our appendix, To bulge or not to bulge).
The merits of bundling/integration apart from opening up the market for the Big 3 also
include the ability to address all decision-makers in the organisation. Yesterday it was
the 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 be
the CEO (who is concerned with transformation agendas and the role of IT therein) and
the CMO (chief marketing officer) to whom a combined analytics/consulting/BPO offering
is likely to be attractive. As we discuss in our section, Pricing: How can one establish
premium?, bundling helps avoid price traps because it distinguishes the service provider
of tomorrow as a solution and system provider, removing competition from the individual
service line level to the systems level.
Consulting has yielded only limited gains. Also, this is a better opportunity than
consulting 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 to
make a globally recognizable mark in this area, in our view.
Thus, for several reasons, bundling or integration of these service lines represents the
next big opportunity, in our view. Today, revenues from bundling/integration are in low-
to-mid single digits as a percentage of services revenues. Over the next five years, it
could account for as much as 25-30% of revenues. In course of time, we expect the Big
3 to report on a regular basis the contribution of integrated or multi-service
solutions/services to their revenues (as %).
Playing in every element of the value chain of the vertical is key to establishing a
credible 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 a
solution developed by Wipro and TCS for smaller operators in emerging markets claims
to comprehensively meet the needs of telcos going beyond network deployment and
support, unique platforms for collection, billing, aggregation to revenue management,
and fraud analytics.
Irrelevance of location to competitive advantage
Opportunities of value chain optimisation may reside locally away from offshore centres.
Also, higher-value, closer-to-the customer components of the total integration solution
require to be locally addressed for reasons of availability of requisite skill-sets and/or
mindset of the customer. For example, the Big 3 will have to drive interventions in a
geography-agnostic manner (e.g., extended supply chain management
solutions). The current offshore mindset will be rendered obsolete.
Pricing premium will be location neutral as expertise is location neutral. Customer
mindset is also an issue. Nowhere is this more evident than in penetrating the culturally
strong and somewhat closed Continental Europe. Much greater flexibility is needed to
invest in local delivery centres to service this geography (which includes local shared
services as well such as local marketing, finance, HR, etc.). IBM in Germany is culturally
and nationally very different from IBM in the US.
As this extends to new geographies, it is easier to understand why a typically 25-75
model (by onsite:offshore effort that works for US/UK) may not work elsewhere. Over
time, as Indian IT firms develop breeding grounds for talent outside India, they will have
to learn how to manage the entire recruitment and training process on a mass scale
outside India as opposed to selective local recruitment today. Such labour supply chains
Bundled/ integrated offerings
will ensure increasing CXO
involvement
Current offshore mindset will be
rendered obsolete
will have to be globally, tightly integrated. Those that adopt the view that the India
location 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 clear
strategic positioning across the integrated value chain of clients that are fundamental to
long-run profitability.
But a precursor to going global is how well the Big 3 have established proprietary models
for global talent management, knowledge management, distributed delivery and dynamic
work allocation with expertise taking precedence over location. Such a collaborative
platform is typically web-enabled, say by using Web 2.0. Cognizant developed such a
platform Cognizant 2.0 to which incrementally all the new projects are migrating and
on an increasing basis, the existing ones too. The use of the platform as a model for
collaborative product development served as a pull factor for Invensys which Cognizant
believes helped it pull off the Invensys deal. Moreover, Cognizant can also explore the
possibility of opening this up to clients and alliance partners, creating an ecosystem of
shared development and implementation of high-value and high-impact engagements.
We believe within three-five years the traditional 25:75 (onsite:offshore) model of Indian
IT will give way to 25:15:60 (onsite:near-shore:offshore). In the long term (beyond five
years), 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 should
have 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 a
non-enduring advantage that can be closed by the two over 12-18 months.
Greater degree of co-operation, working flexibility with partners
The Big 3, as of today, have leveraged partnerships largely for delivery and
implementations (e.g., clients of SAP/Oracle for packaged implementations). In
particular, Infosys and TCS are under-leveraged in the use of partnerships/alliances. One
smaller technology company mentioned how difficult it found the experience of trying to
stitch an alliance with one of the Big 3. In the end, it went with Accenturea much
larger company and with much less fuss.
Co-partner with the small player is a mindset that the Big 3 have to co-opt in their
working (with the exception of Wipro). Newer technologies such as cloud computing
that all three have a stake in and are increasingly deploying resources and
priority are unlikely to take off unless a well-ingrained, partnership-intensive
approach takes root in the ways of working of the Big 3. The COIN programme at
TCS does well in identifying small-to-mid sized partners for joint innovation and plan-to-
execute models 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 sub-
contracted to other tier 2/3 vendor partners. This is one of Wipros hallmarks of
operating in the Indian market as we discuss in the section, Making a mark in India and
emerging markets. Building a robust programme management office with an elaborate
implementation partner set-up is a non-trivial advantage. One such arrangement is a
many-to-one setting (many partners attached to one company; more like a hub and
spoke partnership model) (see fig 8).
Proprietary platforms could be a
pull factor for clients
Business mix to shift in favour of
nearshore delivery
TCS and Infosys are under
leveraged in the use of
partnerships and alliances
Fig. 8: Different models of partnership depending on intimacy will emerge
Completely networked partnership model, very collaborative
Hub and spoke model, less collaborative

Alliances and partnerships: Infosys has 19 alliances (as listed on its website) but only
four of them are unique to Infosys (who are not with Wipro, TCS, and Accenture) (see
table 12 for more details). Accenture has over 50 alliance partners listed on its website
and 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 non-
linear delivery through co-development of reusable tools/assets, specific co-developed
enterprise offerings such as risk, productivity management, etc. It seems that Accenture
truly sees alliances/partnerships as a way to add value to the business model in many
distinctive ways besides implementation and go-to-market (see table 12).
Partner 3 Partner 2
Partner 1
Partner 3 Partner 2
Partner 1
Accentures alliances are fairly
diversified across categories
unlike restrictive for Infosys and
TCS
Core entity
Core entity
Table 12: Infosys has the fewest number of alliances (both non-exclusive and exclusive)
Note: Accenture, Cognizant and Wipro have more than 25 exclusive alliances, only some of them shown above in table
In contrast, Infosys and TCS have used alliances in a rather self-limiting manner, largely
for go-to-market and implementation. This has certain drawbacks, more so when other
peers craft similar alliances of a non-exclusive/competing nature. For example, Cognizant
has recently initiated a global vendor partnership alliance with SAP, which could render the
Big 3 alliance status with SAP less exclusive. Cognizant can leverage this alliance better as
a result of its superior go-to-market strategy. It is also possible that proprietary
collaborative platforms such as Cognizant 2.0 makes co-operation within the ecosystem
with 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)
One company among the Big 3 has stated that its model of the future will envisage a
trifurcation 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 platform
that allows multi-thread collaboration far beyond the boundaries of the enterprise.
Flexibility to manage hybrid business models and multiple growth agendas
Cognizants agility relative to the Big 3 partly stems from the fact that it had already
organized itself along verticals (by both sales and delivery) way back in 1998-99 when it
was just four years into existence. Its vertical focus is creditable. Even its consulting
practice is aligned along verticals with only a small, niche group outside the 1,800
consultants acting as a common transmission belt to the vertical units, i.e., those with
Accenture TCS Infosys Wipro Cognizant
Acxiom Adobe Mantas Actuate Chordiant
Alcatel Lucent Amdocs Netegrity Inc. Amber Point SwordCiboodle
Aprimo Cordys Siemens Archer ClearStory systems
Aspen Technology Mercury Interactive Wavecom ARM EDIFECS
Asset Control Red Hat Artisan EMC documentum
Avanade Autonomy ENDECA
Callidus Software Axiom iCMG
Calypso Blockade ILOG
Citrix Systems Blue Titan INGRES
Do you use optimally alliances for:
a) Implementation
b) Go-to-market
c) R&D/Technology X
d) Augmentation of domain capability X
e) Non-linearity X
f) Corporate performance improvement (business process transformation)
g) Customization for specific markets X
Do you have
a) Collaborative platform to manage interaction? X
b) An engagement model for extended collaboration/alliances? X
Vertical alignment is critical to
client mining
specialist skill sets such as portfolio management rationalisation and high-end
transformation.
Today, on the face of it, all the Big 3 align th eir strategy by vertical markets in their go-
to-market approaches. They have moved to customer-centric structures (vertical) and
hence, 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 along
customer and vertical lines. There are many more empowered P&L owners today in TCS
than before. Also, it has become easier to view multiple opportunities to sell into a
customer from an integrated standpoint than before. What we find impressive in the
revamped TCS structure is a separate organisational carve-out of the Strategic Initiatives
Group which ensures the complete separation of new initiatives (e.g., the SMB segment
and BPO platform) from the parent group. This is apt because the SMB segment has its
own rhythm and pulse, which is almost completely disconnected with that of the
traditional approach towards larger enterprise clients (Fortune 1000 or Global 1000).
However, the evolution of the structure to accommodate growing priorities can present
other complexities, e.g., the Infosys structure (see fig 9) shows that the earlier vertical
heads 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 play
the role of ensuring adoption of the service line (of which they are in charge) across
other verticals, while at the same time managing their own vertical as they have been
doing 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 is
in Cognizants case.
Fig. 9: Infosys org structure shows dual responsibilities for senior managers
Source: Company
Chief Operating Officer
& Director
Banking &
Capital Markets (BCM)
Independent Validation
Solutions (IVS)
Strategic Global Sourcing Consulting Solutions (CS)
Enterprise Solutions (ES) India Business Unit (IND)
Manufacturing (MFG)
Insurance, Healthcare
& Life Sciences (IHL)
Product Engineering (PE)
Energy, Utilities &
Services (EUS)
Product Lifecycle and
Engineering Solutions (PLES)
Systems Integration (SI)
Communications, Media
& Entertainment (CME)
Retail, Consumer Packaged
Goods & Logistics (RETL)
Global Sales,
Alliances & Marketing
Infrastructure
Management Services (IMS)
New Markets &
Services (NMS)
TCS today has more P&L owners
than before
More than anything, the organization structure of tomorrow should ensure maximum
flexibility and autonomy to accommodate the upheavals of tomorrow (non-linear growth,
multi-vertical solutions, partnerships & joint ventures, and at the extreme a portfolio of
acquisitions). For example, does the company have a crack unit that specializes in
synergy realisation from acquisitions? Sometimes, organizational flexibility kicks
in only from some previous failures as Wipro is trying to learn from its history of
acquisitions. Infosys, with its relative absence of acquisition history, is yet to be tested on
this score. Also, with verticalised set ups today to ensure customer-centricity what are the
structures to ensure the creation and sales of solutions that cut across verticals. It seems
paradoxical but as the Big 3 become larger, the need to find reconciliation between
centralization and de-centralization becomes greater. The IT company of tomorrow is a
hybrid 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. Should
the ownership of those initiatives (e.g., acquisitions/new markets/new solutions) rest
witht he vertical or with any specific horizontal practice or any other over-arching
coordinating group? Based on this analysis, build the structure today to accommodate
such flexibilities with minimal disruption (in a manner of speaking, retropolation from the
future 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 (if
not all) business units in the structure (see fig 10).
Fig. 10: Managing for multiple growth agendas across time horizons
Source: Nasscom, Edelweiss research
1 2 3
6 5 4
7 8 9
Example:
Saas-enabled
SMB
Example:
India
Example:
Current ADM
model
Outcome based
relationships
(beyond projects)
Business
process
consulting
1 year
Meet current earnings
expectations
Extend and defend
core business
2-3 years
Create medium-
term growth
3+ years
Generate portfolio of
high-return options
Create long-term growth
Risks
Low
Outcome
based
projects
High
Timeline
Flexibility and autonomy are
critical parts of tommorows IT
enterprise
It is important to align incentives of key business unit heads in accordance with these
objectives in conjunction. For example, a unit that met its near-term goals but did not
show minimum progress on longer-term initiatives should be judged as only partly
successful and incentives of senior leaders in that unit be accordingly decided. Wipro
has already moved to such a compensation structure.
Sharper customer segmentation practices
Over the years, Infosys has distinguished itself by the ability to choose the right set of
customers. Its sales strategy targets micro-verticals within a major vertical (say mining
within energy) that are less penetrated by offshore peers where it can establish headway
till others catch up. This has been the success story of Infosys retail vertical over the
past decade, wherein it established relationships with the whos who in the retailing
world. More recently, it has also been successful with this strategy in manufacturing
where it leveraged its early leadership in enterprise solutions for manufacturing clients in
Europe and in resources where it has invested ahead of the industry.
Wipro has also followed sound customer segmentation principles in growing the financial
services practice post the previous downturn (in 2002) when its presence in financial
services was negligible. It initially targeted clients in insurance (less in the BFS) outside
the US (primarily in Europe) and in insurance where peers (Infosys/TCS) were less
present. It used BPO as an entry strategy in many of its larger BFSI accounts.
Of late, TCS has broken ground in retail on the back of a credible customised end-to-end
offering specially targeted at mid-sized retailers yet to adopt offshoring, yet willing to
embrace it with a comprehensive integrated offering as opposed to a tentative, small
scale application development starter.
Wipro is now assessing which of its IT clients in the future may be responsive to its pitch
for significant energy savings afforded by its green IT offerings. This is something to be
watched out for, but segmenting customers in old-economy industries according to
energy-intensity is a good first step. Our view is that Wipro and TCS are getting
increasingly smart about customer segmentation and closing the gap with Infosys.
Table 14: Recent select success of several customer segmentation by the Big 4
Note: * Segmentation tomorrow based on attacking costs outside of IT and G&A
Customer segmentation does not stop with client selection and market penetration.
Equally important, it determines how the Big 3 assess and grade costs and efforts-to-
serve for clients. All clients do not need the same level of service levels. A sensible
service 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 client
relationships. It is necessary and can make an initial difference but hardly sufficient.
Company Geography Segment
Infosys Continental Europe Telecom service provider & manufacturing
Wipro Europe Insurance/BPO
TCS US/Europe Retailer (total outsourcing for mid-sized retailers)
Cognizant Middle East/ Europe Manufacturing, retail
Strategy of the past was to
address uncontested sub-
segments
whereas, the current one is to
offer end-to-end services
A partnership-driven sales model
Accentures partner-driven sales model is the ultimate form of client engagement. Its
partner-driven market approach facilitates relationships with C-level decision-makers
creating powerful barriers to entry that others will find hard to replicate.
Today, 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 multiple
account managers handling different facets of the relationship. Whats missing is a
supreme partner who the client can look to as a trusted advisor.
The profile of such a partner is not easy to findtypically he has spent decades in
consulting at the partner level or has hard-to-match industry experience with significant
P&L responsibility in a company. Such a partner engages with the client at the highest
levels and envisages the transformational journey it must take in the future for the client
that fits with the clients competitive positioning.
Recently, Cognizant has identified a few high-potential strategic accounts that it can turbo
charge and take to another level by investing in them. These are expensive investments
that must be made. To illustrate, if Infosys were to cover a mere 5% of its accounts by
partner profiles, we estimate the impact on S&M at 0.5% of revenues (50 bps).
Protecting core while still breaking new ground
One of the great challenges for enterprises is to protect their hard-won leadership
position in segments while still breaking new ground. On analysing the recent financial
performance 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 strength
in manufacturing and in energy and utilities.
(b) TCS position in financial services, telecom, and manufacturing has weakened, but it
is breaking new ground in retail and life sciences.
(c) Wipro has managed relatively well to catch up in financial services (opposed to trend
in this segment of the other two) and increasing traction in retail and healthcare. It
still 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 geographies
(b) Vertically
TCS Infosys
(+) Retail, America (+) Mfg, Retail, & Utilities
(-) Telecom, BFSI, APAC+ROW (-) BFSI, Telecom
Wipro Cognizant
(+) BFSI, Mfg, India and Middle
East
(+) BFSI, Healthcare, Retail and
manufacturing and the US
(-) None (-) None
BFSI Manufacturing
(+) Cognizant, Wipro (+) Infosys, Cognizant, Wipro
(-) Infosys (-) None
Retail Healthcare
(+) TCS, Infosys, Cognizant (+) Cognizant
(-) None (-) None
Partnership driven sales model
could be used to create entry
barriers
Vertical and geographical
analysis of Big 3
Of the Big 3, Wipro is doing better at not losing momentum in its important verticals in
the enterprise division (financial services, utilities, and retail) while increasing traction in
retail and healthcare. It has been dragged down by technology. Overall, Wipro is
managing the balance.
Of the four, Cognizant stands out in penetrating new markets and verticals while
strengthening the core. The company has managed to improve market share and grow in
financial services and healthcare (on absolute dollar basis). The former is particularly
creditable given sector-specific difficulties and declines in run-rate exhibited by TCS and
Infosys. It tells us that if Cognizant can manage to grow in a bedeviled sector, it must be
enjoying pole position with some of its ex tremely troubled clients (HBOS, Wachovia, and
Indy Mac). While it protects its core, its ability to ratchet up the growth engine is not
matched by the Big 3 in Indian IT. With Cognizant, the probability of rewards of new
investments is high. The following explains why:
Cognizant has managed to grow BPO/remote infrastructure management (RIM) to
over 11-12% of revenues from virtually zero base over three to four years.
It has successfully ventured outside its traditional strengths (financial services
and healthcare, collectively accounting for 70% of revenues) to find aggressive
growth in retail/manufacturing/logistics/transportation, which now account for
over 17% of overall revenues.
Cognizants European revenues grew by 86% in 2007 and 58% in 2008, and its
proportion of European revenues grew from 12-13% to about 18-19% in just
the last couple of years. Likewise, for the June 2009 quarter, its revenue
contribution from outside the US/Europe grew 65% Y-o-Y. This is admittedly off
a low base, but it highlights an important point that we have made-the
company makes its investments work.
To sum up, protecting the core while investing effectively elsewhere is a difficult duality
to demonstrate. Wipro has managed it better than Infosys/TCS, but Cognizant is the
clear standout performer in its own league.
Greater branding of specific offerings as opposed to general branding
In the past, image promotion has advanced over specific product/service promotion. One
of the reasons could be that the Big 3 have developed few proprietary solutions that they
can distinctively brand and take to market (Finacle of Infosys being one exception).
Some of IBMs most notable marketing messages revolve around landmark offerings and
themes such as e-business (IBM coined the term), on-demand computing, solutions for a
small planet or Green IT, as opposed to generic branding.
Infosys views branding as a much more holistic exercise than the other two. It
does not surprise us that almost all references to brand in TCS FY09 annual report
pertain 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 delivery-
oriented brand. Infosys, on the other hand, takes a much more holistic view of its
branding paradigm. In fact, the word brand or branding appears over 70 times in
Infosys FY09 annual report; about 40 of these references appear in the page on brand
valuation versus 13 in the TCS annual report.
With specific reference to brand, Infosys FY09 annual report mentions brand as a trust-
mark - the promise of quality and authenticity that clients rely on, and not just a logo or
trademark. In addition, the company also believes that better brand enjoys financial
premium that a buyer is ready to pay over other less worthy brands.
Cognizant clearly breaking
ground in new areas
Need to establish brand for specific
offerings or themes
Among 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, The
Economist, The Times, Financial Times, Information Age, The Wall Street Journal,
and The Banker).
(c) Association with the flat world theme and engaging in high-profile forums such as
the 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 and
use of Twitter, SlideShare, and AdWords.
(f) Participation in premier industry events such as Oracle Open World, Sapphire, and
partner sourcing summit.
We, however, believe that in the current economic climate, such generalized event-
associated branding is less of a differentiator in gaining incremental market share. The
environment may be flattening the advantages of brand/branding in the absence of
technological differentiation among the Big 3 in Indian IT.
Fig. 11: Generic branding will have to give way to specific, theme-based branding
Where could umbrella branding be useful in the absence of proprietary or
theme-based solutions? It could be useful in attracting talent but again our
intelligence suggests that Infosys does not necessarily enjoy a better slot in the campus
than TCS (engineering/technical) or Cognizant (MBA). Where we find umbrella branding
perhaps useful would be in the matter of alliances, in emerging markets where trust for
local service providers is somewhat lacking and for the SMB segment for whom trust and
transparency are important.
Branding should do more than communicate cost reduction and/or new
technology roll-out propositions. Certainly, we see branding around strong themes to
Branding
sub-
offerings
Sub-branding
offering 1
Sub-branding
offering 2
Sub-branding
offering 3
Sub-branding
offering 4
Integration
Green IT
Theme
based
branding
Differentiated
branding
Undifferentiated
branding
Infosys definition of brand
Theme-based branding to be
more powerful
be useful, e.g., customised offerings for emerging markets, marketing messages around
service integration could be credible for the Big 3 going forward. It is amazing how
consistent Accenture is in articulating business benefits to clients. In virtually all of its
marketing and messaging, Accenture conveys its belief that its individual technology
expertise matters less than the business value it provides. This message is consistent in
its public filings, its product offerings, and its marketing material.
Aggressive pursuit of tactical opportunities to build long-term relationships
Every downturn will throw up tactical opportunities that must be aggressively pursued
because the lead-in through such pursuits can create a platform for an enduring
relationship. The Big 3 (Wipro to a lesser extent) jumped aboard the financial services
space through the Y2K opportunity, a tactical opportunity that IBM deemed unnecessary
to address directly.
This downturn is no differentit has spawned opportunities in themes relating to
compliance, regulation, integration and risk management for several sectors such as
BFSI, public sector, and healthcare. Some of them (like in healthcare) could be more
long term in nature while a few others may last three-four quarters. We believe that
firms will do well to capitalise on short-term tactical spends. Cognizant has set up a
crack team of consultants charged with surveying and grabbing opportunities in tech
spending emanating from corporations that received TARP funding. Apart from giving a
short-term boost to onsite revenues, such tactical moves may well sow the seeds for a
longer-term fruitful relationship.
Cognizants progress in Germany can be partly attributed to an alliance with T-Systems
which is in the nature of a sub-contracting relationship to some extent. Infosys typically
would stay away from such partnerships deeming them not value-additive. Cognizant
has reported that it has had direct access to many more clients in the notoriously tough
and fragmented German market (T-Systems has the largest market share at 16% in
Germany, Accenture is just 3.8% of the market, three of the top five players in Germany
are locals, see table 16).
Table 16: IT services vendors by revenues, market share in Germany
Source: Gartner (May 2008)
T-Systems and Cognizant are crafting joint go-to-market strategies and have acquired
new clients jointly. Also, the alliance has introduced T-Systems to healthcare clients in
the US (courtesy Cognizants differentiated expertise in this segment) while Cognizant
understands the telecom domain much better (Cognizant is less present in telecom which
is T-Systems mainstay). What began as a sub-contracting relationship and seemed
2007
(USD mn)
T-Systems 5,317 15.9
Siemens IT Solutions and Services 2,900 8.7
IBM 2,550 7.6
Accenture 1,284 3.8
SAP 822 2.5
Fiducia 818 2.5
HP 816 2.4
Atos Origin 761 2.3
EDS 653 2.0
Capgemini 634 1.9
2007 revenue
share (%)
Vendor
Downturn has opened up several
opportunities
Cognizants progress in Germany
is partly attributed to T-Systems
myopic at first is now much more front-ended and collaborative from Cognizants
perspective.
Developing specialists and re-training the workforce will be more important
The theme of sub-vertical specialisation is gaining prominence (e.g., within insurance, it
is necessary to verticalise along life, property, casualty, and healthcare). Likewise, in
retail, it has become essential to develop expertise in sub-segments such as hospitality,
groceries, discounting retailers, luxury goods/fashion retailers, FMCG brands, etc.
Tomorrow is likely to be the age of engaging specialists (e.g., the use of consultants
from outside in innovative deal structuring; TCS is known to employ outsourcing
consultants in large deals). Career paths will become even more specialised not only by
domain expertise, but also by role (e.g., today there is clearly delineated role of solution
architect versus client advisor versus programme manager). We believe companies that
increase the intensity of their training to groom and develop specialists in-house have a
more sustainable model than merely hiring specialists per se as issues of culture fit arise
so often.
It becomes necessary to retrain large segments of the workforce in new
technologies/initiatives to redirect the skill profile. IBM has already established a 4,000
strong division for its Business Analytics and Optimization Unit; this has been
substantially done with retraining rather than hiring. It is instructive to note that
Accenture has trained nearly 20% of its workforce (over 30,000) professionals in SOA
technology, ready to have them absorbed into projects within two years of identifying
SOA as a technology theme.
Also, companies will spend more on getting a much larger proportion of their workforce
trained and certified externally (not internally) from well-regarded industry accreditations
attesting to domain strength (e.g. the Life Office Management Association or
LOMA certification for life insurance). Cognizant believes that it has the highest number
of highest level LOMA certifications; almost all companies that have this certification
globally (fifteen global category winners) are insurance companies, with Cognizant being
the only technology company among them (source:
http://www.loma.org/EdAchieveAwards.asp; Infosys is a regional category winner for the
first time in Asia Pacific).
Accenture 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 of
freshers on joining Infosys). On per capita basis, Accenture spends more than three
times Infosys on training, despite its recruitment number being on the lower side relative
to Infosys. Also, much of the recruitment for Accenture in recent years has been in its
lower costs centres, which puts in context the significance of its much higher per capita
training expenses vis--vis Infosys (>3x).
Accentures annual R&D expenditure of USD 400 mn is largely earmarked towards its
four technology labs (in the US, India, and France), technology centres of excellence and
its high performance group.
Theme of sub-verticalisation is
gaining prominence
Accenture spends >3x that of
Infosys on per capita training
Chart 24: Accentures training expenses have risen twice as fast as revenues
The Indian IT enterprise of tomorrow intensifies spending on training and R&D and does
not 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 a
far 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 re-
training/coaching. Wipro has instituted a consultant training academy in the US. The
senior management at Infosys is engaged hands-on in the extensive re-training of the
sales staff and preparation of augmentation guides for them to help them cope with the
crisis. While this is welcome, this may not be advisable if hiring from outside can kick-
start client discussions/engagements sooner.
Also, it is possible that with: (a) growing maturity of solution accelerators and
automation of business processes; and (b) outsourcing of lower-level work (or parts of
the maintenance factory) to smaller vendors, gross hiring is likely to have a less
predominant share of fresh graduates (as % of employee base), going forward, unlike
today. 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 growth
itself was an enabler for the pyramid in better times). However, we point out this could
be 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 journey
to the next league entails far-reaching ramifications in the way Infosys and others will have
to manage on both the demand (customer and market) and supply (employees, partners,
and sub-contractors) side.
1.0
1.8
2.6
3.4
4.2
5.0
0
6,000
12,000
18,000
24,000
30,000
FY03 FY04 FY05 FY06 FY07 FY08
(
%
)
(
U
S
D
m
n
)
Revenues (USD bn) (LHS) Training as % of revenues (RHS)
R&D spend as % of revenues (RHS)
Increasing spend on training &
R&D critical to building scalable skill
set model
Non-linearity: Stern Test of Commitment
Indian IT companies have long talked about incorporating non-linear delivery models, but
with little success. To some extent, only Wipro has tried to break the one-to-one correlation
between revenue growth and employee addition as it so demonstrated through FY09 - an
effort initiated before the crisis intensified in September 2008 with the collapse of Lehman
Brothers.
We believe that the degree of pressure, which Indian IT companies feel to incorporate non-
linear aspects of growth, significantly depends on the duration of the downturn. If the
downturn turns out to be less severe in intensity and of much shorter duration, we believe
that complacency could set in and the industry could be back on track of driving revenues
wholly through employee growth (non-linearity is likely to be put on the backburner). In such
a scenario, strong advantages rest with companies that plow up their non-linear agenda
regardless of the state of the environment, which, we believe, could yield them differentiated
returns over the medium-to-long term.
To be sure, one of the features of factory models of the Big 3 has been their relentless
focus/success in consistently delivering annual productivity improvements to clients on the
back of productivity enhancers or solution accelerators (what we call level 1 non-linearity).
However, this does not transform the engagement model and is still a TCO-based play.
However, building traction in true solutions by transforming the client engagement model is a
three-year game at the least. Not one company is clearly winning this transformation
challenge, though Wipro has also taken the lead in tying pay-offs to business outcomes in
hallmark transformation deals such as Aircel and Unitech Wireless (interestingly, both these
deals emanated from India).
In this section, we profile non-linear moves of companies and comment on probability of
success in case of those making a reasonable fist of such activities. Our assessment is that
TCS leads in this game in patches, while Wipro has managed to impressively extend non-
linearity to a cover a growing percentage of stable, predictable service lines viz.
infrastructure management and BPO. Infosys needs to do more outside Finacle, its banking
product 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 in
driving non-linearity and penetrating new customer segments. We do not evaluate the cloud
in this section for lack of data points and, hence, our analysis of non-linear growth does not
incorporate the cloud.
Fig 12 lays out the evolution of TCS business model over time. As may be seen, one of the
key elements of the next generation strategy is driving greater degree of non-linear growth.
Not one company is clearly
winning the transformation
challenge as of now
Fig. 12: Charting TCS evolution - Non-linear growth now tops its agenda
Level-1 elementary non-linearity: TCS clearly the leader
Elementary 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 years
as repository of data in projects builds up. On the technology side, Indian IT companies
are closing the gap relative to Accenture/IBM on this dimension.
The game has moved beyond technology service lines to now embrace automation of
business processes such as business intelligence, supply chain management, and HR
(these are core to any transformation program) and domain (vertical solutions). The
Holy Grail has, thus, now moved to componentising business processes (e.g.
procurement, fulfillment, inventory management, production etc). How can we
modify and codify vertical-aligned business processes? Better still, how can we
dynamically program or model business processes? This requires a close marriage
of consulting and IT and helps piece together valuable components for business process
re-engineering. Part of the reason that the likes of IBM and Accenture are much ahead of
the game of Indian IT in transformation-type services is their greater use of pre-
packaged industry sub-solutions (riding on process or domain), impacting the business
process and their ability to stitch such components together with their layer of
integration.
These reusable components/tool-kits are not commonly sold as commercial, licensable
IPs, but are deployed to crash time-to-deliver and reduce manpower intensity. The
measurable impact is cost savings. TCS claims that cost savings from well-proven
components can typically generate cost savings of 30-40% through re-use. Fig 13 shows
snapshots 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 developing
accelerators that are industry-specific (as opposed to those that are technology- or
engineering- specific).
1968 - 1990
1990 - 2000
2000 - 2008
Creation of industry
First assignments in US, UK
Software engineering research in India
Offshore delivery model
Development of case tools and productivity enablers
Expansion - Market presence &service spread
End-to-end solutions delivery
Domain-led organisational model (1998)
GDCs in Hungary, China, Uruguay, Brazil, Japan and Canada
Defining world-class quality systems
Domain-specific product focus
Continuous productivity improvement
Maturity of solution accelerators across service lines
Mighty initiative & knowmax
Investment domain labs and competency centers
2008 onwards
TCS leads in elementary non-
linearity
Aspiring non-linear growth
Integrated customer centric units
Strategic growth business units
Organisational infrastructure groups
Fig. 13: Solution accelerator at TCS extensive; needs to cover industry-specific areas
Who is ahead? Our research indicates that among the Big 3, TCS has the most robust
program to roll out such productivity enhancements. This is a result of a superior
governance program, which has been nurtured and managed by the business excellence
group at TCS. The business excellence program at TCS, with the help of the CTOs office
in conjunction with the industry units (which help identifying technologies and solution
trends that should be covered) and the respective business units (vertical groups), has
developed over 700 solution accelerators/productivity components across the three
areas: (a) technology services; (b) business processes; and (c) vertical domain. This
has enabled TCS to be aggressive in effort estimation for larger projects, thus, helping it
mark out its cost competitiveness. Several of TCS patents have been obtained in
the area of software engineering.
Challenge is also an opportunity. The main challenge for TCS is internally marketing
its development to client account managers and delivery managers for their use in client
projects. TCS two-three year goal is to ensure coverage of 100% of its strategic
accounts to deploy these tool-kits. Also, TCS is solidifying its value measurement
framework to ensure that the impact of its program from deployment of its accelerators
in client engagements across business units is measured, monitored and communicated
to clients. We believe that for TCS, accomplishing monetisation and collaboration
across business units is the relatively harder part.
Level-2 non-linearity: A quick win; will soon be table-stakes
In our view, the best bet for Indian IT companies to work on non-linearity is to transform
the engagement model with their customers for essentially the same services that they
have been offering on a T&M basis. This is a relatively softer challenge as with maturity
in predictable, low-complex service lines (infrastructure management, BPO, application
and process management), it is easier to transform the terms of revenue engagement
from a T&M model to a per transaction/ticket/device basis. Infosys believes that a fair
proportion of its support work (enterprise solutions, applications and BPO) can move to
this engagement model. This is a quick-win, in our view. The game could be over in
two-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 (in
India) under this model from its Global Service Management Centre in India for nearly
Solution
accelerators
Industry
specific
Technology
specific
Productivity
engineering
Over 150
Solution accelerator that automates a
specific business process
Requires incorporation of functional
knowledge and capability in construction
and implementation
Eg.: Digigov, VATIS for government,
Enrgise for utilities, HMS for healthcare
Solution accelerator that automates a
specific service line capability
Applicability for specific stages during the
SDLC for the service line implementation
Eg.: Frameworks for implementing
solutions like BICC, BIBP
Enables implementation of a defined
process, methodology or process step in
delivering the solution to the customer
Spans across industry verticals and service
lines
Eg.: Masketeer for data masking, Jensor
for java profiling
Over 300
Over 250
TCSs challenge remains to
internally market its
development on non-linearity
four-five years now. Clearly, there is gain in extending level-2 non-linearity to global
clients. This partly explains how Wipro has been growing its India revenues well ahead of
its India headcount (profiled later in the section, Making a mark in India and emerging
markets).
Today, Infosys derives less than 4% of its services revenues from such pricing
arrangements.
Level-3 non-linearity: Outcome-based pricing still some time away
Unlike Level-1 and Level-2, we note that Level-3 is not the game of internal software re-
engineering, rather it is a game of defining the revenue outcome for the
project/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 and
agree with the client on how the project or engagement can specifically influence these
drivers (separating out the influence of other client partnerships on key business
driver(s). The process of definition of the business driver (key performance indicator or
KPI) is stressful. To give a simplistic example, it would be unwise to incentivise senior
management of a company on the basis of stock price alone as many other factors could
influence the stock price (such as general equity market conditions). Or it might be
unwise to link pay-offs in implementing a supply chain solution to lead-time of
procurement if lead-time is also a function of how other vendor partners system link up
to the clients systems. Thus, it becomes difficult to determine and isolate cause-and-
effect to 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 drivers
Outcome-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, vendor
margins opaque to the client from the perspective of TCS/Infosys/Wipro. Thus, level-3
transforms the engagement model.
Outcome-based pricing models can be perfected only with requisite data points and the
experience curve, which we hear from Indian IT vendor could vary anywhere from 6-12
months. The Big 3 do not have the data sets going back in time like the way Accenture
and IBM have. Also, identifying the business KPIs is possible only though a strong layer
of consultative analytics. We gather from our interviews that the extent of replication of
this type of non-linearity is less as this addr esses very specific issues of the client (with
or without consulting the clients partners who also impinge on the clients business
drivers). Every installation is potentially unique, taking specific cognizance of how the
clients 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 or
projects which can be transformed from merely T&M/fixed price to outcome-based and
T&M/ Fixed price
Output-based
models
Outcome-based
models
Business driver 1
Business driver 2
Business driver 3
Business driver 4
(Total cost of ownership)
Process of defining a business
driver is stressful in outcome
based pricing
Outcome based models can be
perfected only with experience
curve
how should measurement processes be set up accordingly. It could also require the likes
of Wipro to make some initial investments in re-drawing technology and business
architectures/hierarchies and demonstrate to the client how this is done. We gather that
Infosys 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 of
ownership (TCO), given that cost has been the primary selling proposition in the past. In
such cases, their additional pay-offs are determined by the excess of cost savings above
the agreed-upon base-line (fig 15).
Fig. 15: Engagements can sometimes toggle between TCO and T&M depending on success
The pay-off in level 3 can be dramatic. Margins rise exponentially once revenues cross a
threshold as costs in investing in the new engagement model are substantially incurred
in the early stages of the relationship. (see chart 25). Potentially, the revenue curve can
be upward sloping as volumes reach maturity, but the slope of margin curve can power
ahead of the revenue curve. This is why Level-3 non-linearity can be such a powerful
margin kicker with maturity of the relationship.
Chart 25: Profit/transaction can show exponential curve with volume maturity
Who is ahead in the level-3 game?
The Big 3s global peers (Accenture and IBM) lead when it comes to data sets generation
and codification. Accenture and IBM also use their superior consulting-cum analytics
capability to define key business drivers for clients and solutioning/structuring the
engagement. On the execution plane, Indian IT companies match their ability, though
the consultative gap that crucially changes the nature of engagement model is still
lacking.
N
Y
T&M/Fixed measure
cost savings (TCO)
T&M models/FPP
Gain share in excess
savings by a fixed or
variable distribution
Switch to T&M model or
activate penalty clauses
Exceeds
cost savings
baseline?
(100.0)
(60.0)
(20.0)
20.0
60.0
100.0
(
%
)
Cost/transaction Revenue/transaction Profit/transaction
Current billing engagement
model
Going by announcements of large outcome-based transformation-based engagements in
India of Aircel and Unitech Wireless, Wipro has clearly demonstrated that in the telecom
domain it is prepared to put on line its expertise in telecom and risk its pay-offs to
business 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 such
risk since problems of co-ownership and co-ordination with other vendors of the client in
the ecosystem are less cumbersome. Thus, Wipro has taken the early lead and shown its
skin in the game with landmark deals.
Level-4 non-linearity: Solutions that can showcase expertise
This refers to:
(a) Solutions or licensable IP built to address specific pain points or
opportunity areas of clients in financial services and healthcare that open
up in the wake of regulation: Some of these could be regulatory/compliance
modules that are co-opted into the clients application architecture. The Big 3 are
involved 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 the
backbone: This includes integrated IT/BPO solutions that can be implemented on
an ASP or transaction-based model. Wipro, for example, has an order-to-cash
platform for manufacturing companies that it monetises based on the number of
concurrent users.
In our view, specific point solutions are unlikely to move the needle on financials since
the size of deployment tends to be small. More promising are platform-based proprietary
solutions that automate or streamline business process for clients. Infosys is ready to go
to market with its BPO/IT solution (using the SAP platform) to address the procurement
function. Wipro has a ready-to-market hospital management solution on SAAS model.
Revenues are linked to transactions through the platform in addition to a possible
monthly rent for hosting the solution.
TCS is betting on more comprehensive platforms that affect many more processes for
the client (like life and pension processing and HR outsourcing or HRO). It has several
global customers for its HRO offering, while it targets to get its life and insurance
processing platform ready to hit the market by end of FY10.
Why is level-4 different? Typically, level-1 non-linearity tools focus on increasing the
productivity of a systems integrator itself and, in turn, attempt to lower client costs. For
example, TCS has built a rich tool kit ranging from application rationalisation to testing
automation. These tools often focus on delivery or operations issues such as time
required for a task by a developer or reduction of wastage or bugs. Level-4 solutions, on
the other hand, focus on processes that are outward-looking or client-facing and attempt
to address critical business issues such as supply chain management or RFID adoption.
The challenge in level-4 linearity is to develop a marketing program around it. Also, we
believe that larger enterprises (Fortune 1000 or Global 1000) are unlikely to see platform
solutions from Indian IT companies as a must-buy offering since they are relatively more
reluctant to use vendors proprietary platforms and infrastructure. The more ready
adopter is likely to be the small and medium business segment (SMB) a segment that
the Big 3 have largely stayed away from. It also requires localisation of selling efforts
which the Big 3 are not used to.
Specific point solutions unlikely
to move the needle
SMBs more likely to adopt
Indian ITs platform solutions
Level-4 is sometimes needed to showcase expertise and can contribute to
branding. In our view, licensable solutions by showcasing domain-centric and/or
productisation ability could act as a pull for the client to push through downstream (flow-
through) implementation-oriented work. It can serve as a useful branding exercise even
if actual revenue per se from level-4 non-linearity is modest. This can, thus, be a
differentiated client lead-in.
In the past three years, none of the Big 3 players have made incremental progress in
level 4 non-linearity (besides Infosys Finacle). In our view, Level-4 non-linearity is
unlikely 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 the
same. Table 17 summarises the discussion around the four levels of non-linearity.
Table 17: Non-linearity at a glance for the Big 3
Non-linearity Description Manifestation Who's ahead
Level 1 Solution accelerators covering technology
business process engineering and
industry processes
Cost savings and annualised
productivity improvement
TCS ahead in technology and
engineering solution
accelerators; some success in
converting mature
accelerators into products
Level 2 Ticket-based, device-based pricing in
support and IM; shared services
As frequency of transaction
increases, gross margins
upwards of 50% possible
Wipro by virtue of presence in
infra management
Level 3 Outcome-based pricing; make pricing a
key driver of the client's business
measure. Very deal specific
Very powerful multiplier
effect if cost profile and risks
are contained
Wipro (Unitech Wireless,
Aircel) and TCS
Level 4 IT/BPO platforms, full scale processing
platforms (horizontal and vertical)
Revenues (licence, % of
transactions, subscription-
based)
Infosys (traditional advantage
of Finacle), TCS (SMB)
Case study: Governance structure at Infosys to enforce non-linearity
Though we believe that Infosys is a little behind TCS and Wipro on level 1-3 non-
linearity, Infosys has instituted a sound program for the level-4 non-linear model. We
discuss some elements of this at length below:
1. Have a member of the decision-making council of the company in charge of non-
linear agenda.
Infosys has created the most visibility around its ambitions in this respect. It has
charged a member of its executive council with responsibility of driving non-linear
growth. The council:
(a) Targets to identify and architect the solutions blueprint in those verticals
where 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-year
targets. The challenges of making non-linear growth even 20% of the
companys revenues by 2014 (five years from now) are formidable as this
has to virtually start from ground zero.
Key challenges in driving non-linearity
1) Monetising solutions is equally hard as creating them; build solution-specific KRAs
for the selling and marketing team.
It is far easier for sales to sell services over solutions. Solutions have to be
marketed in a specific manner to clients, for the clients themselves are not sure
what the cost-benefit equation is. Innovative ways have to be found to monetise
solutions even if companies have perfected creating some of them. Why would
clients pay for such services? How should the pricing models work? How can sales
and marketing create a market for such non-linear solutions in the first place? We
have 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 heightened
importance in the wake of credit crisis. Here, the onus is on the development
rather than selling.
(b) Indian IT companies have to sell solutions to clients: Here, the onus of
monetisation 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 is
a brave initiative on the part of Infosys to create a solution in its most
verticalised vertical. The solution required four years to develop to some
degree of finality with the dedication of a dozen specialists to it. Today, Infosys
must learn to develop a marketing program around it. One way of doing is to
articulate an elaborate pay-off profile for each solution.
(c) Weaning away sales force from its comfort zone and incentivise it to
sell a mix of solutions and services: Accentures sales force has learnt over
time to manage its KRAs linked to selling of both consulting and services, when
2. Invest adequately ahead of the curve in running the agenda.
Infosys has identified hiring and training for each of the industry vertical and is
now engaged in setting targets across verticals. The specific solutions groups
(vertical-wise) are supported by a core engineering services team comprising a
few technology and engineering-centric professionals. This team brings in the
best practices of wrapping a horizontal vertical-agnostic accelerated approach
towards various verticals it caters to. In other words, it has a role to play in those
solutions that lend themselves to an engineering platformised approach. In our
view, 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 delivery
in the company. We recognise that there will always be early leaders among
business units driving non-linearity, such as financial services for Infosys and
telecom for Wipro. It is important for the champions to drive re-use of IT
solutions 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 and
utilities (as Wipro has shown sparingly). While re-use and inter-vertical
applicability are steps in the right direction, they have their pain points such as
Intellectual 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 from
the factory model that dominated shape of the delivery engine of Indian
IT in 2003-08.
Solution marketing is more
complex due to its unclear cost
benefit equation in the beginning
consulting alone may have been easier to sell. Likewise, Indian IT players have
to learn how to structure KRAs of their sales force around selling a mix of
services and solutions. In reality, there could be a pushback from the sales
personnel themselves, for at least initially they are likely to find it much easier
to sell services (perhaps even exceed their targets) than solutions as part of the
total mix.
To some extent, Infosys should be able to leverage its experience of selling its
banking product suite (Finacle) in plugging the gap in solution selling.
(d) Dedicated sales specialists for solution selling: None of the Indian IT
companies have approached this level of dedicated selling yet. We believe that
as non-linear initiatives take the centre stage, Indian IT companies may well
need to envisage setting up dedicated sales specialists and partnerships for this
purpose; these specialists and partners understand the domain and are,
therefore, able to provide a customised approach to selling solutions as opposed
to the relatively more generic approach to selling services. Product managers in
product companies like SAP/Oracle are better equipped to sell higher-value
solutions impacting client systems and build their selling pitch around high-level
outcomes and operating business parameters going beyond cost reduction.
The 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 same
comprehensive approach these players have followed with respect to IT-services viz.
dedicated resources for development, specialised selling, along verticalised lines and
perhaps 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 solution
centre carved along lines of verticals with practices feeding into them. The model is that
of a hybrid services and service-led solutions that co-exist.
It is possible with focus. 40% of Accentures insurance revenues come from
solutions (about 2-3% of overall revenues, not to mention Accentures billing
solutions around vertical segments such as communication and high-tech,
covering about 25% of Accentures revenues from this vertical).
Infosys versus Wipro in non-linearity and solutions
Both Infosys and Wipro have placed non-linear growth on their central agenda, with a
team of champions reporting to an authority that drives company-wide and unit-wise
targets (for both practices and verticals). Where they differ in their emphasis is in the
linkages they have to their past. Some of Wipros testing labs that it has built for clients
(like R&D clients including Cisco), are well operationalised to test the compliance and
compatibility of hardware devices and technology standards (such as Wifi). Such labs can
now serve as certification centres that test-proof compliance and compatibility. Pricing
here 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 that
Wipro 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 a
much larger scale of engagement later on.
Ideal IT model will be a hybrid-
services and service-led-solution
model
Non-linear growth agenda is at
the center-stage for Infosys and
Wipro
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 company
average. This is more easily accomplished in stable or maintenance-oriented product
lines 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 of
transactions (which takes a while to peak/reach steady-state; refer back to the pay-
off profile), in the first couple of years, margins on this type of non-linearity is likely
to trail the company-average margins. In steady state, gross margins for projects
under level-3 could be about 5-10% higher than company average. However, over
the life of the project (say, five years), margins would only be moderately higher, in
our view. Large deals, which are transformation-led, always carry liability risks that
must 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 for
Infosys). However, we still see this being modest as a percentage of overall
company revenues (about 4%). We assume that over the next five years, this can
Case study: Infosys Shopping Trip 360: A good product, but slow in revenue
offtake
Shopping Trip 360 is the first indigenous ready-to-market vertical (retail) independent
solution outside of Finacle. It is a solution that leverages Infosys IP in the space of
wireless sensors to transform the physical retail store into a measurable medium of
shopper marketing. It analyses the behavior, time spent, and physical actions of shoppers
to offer actionable insights to retailers and stores, helping them improve customer
experience 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 share
model based on results:
Infosys deploys the in-store technology as a full investment (and charges a one-time
license fee for it). This is likely to be viewed less favourably as it is not based on
outcomes.
Information and insights syndicated in a monthly subscription fee per store (capex for
client is converted into opex).
Revenue share from in-store mobile marketing.
Shopping Trip 360 has received recognition in the trade and analyst media, but client
offtake has been slow. Some of the early adopters of the solution include a few global
retailers 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. Most
of the above deployments are still pilots, where customers are charged a certain sum for
usage over a certain period to enable them to ascertain business benefits.
Converting pilot customers into permanent converts for ongoing IPR deployment
represents the greater challenge. It is hard to estimate what the revenue potential of this
product could be, though we believe that it could be an easier sell in developing markets
(with retailers still developing their infrastructure).
reach 9-10%. This is a non-trivial assumption as on an incremental business, it
builds 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 non-
linearity (Level-4) to keep gross margins constant
Conclusion: Non-linearity is a difficult proposition. TCS has superior ability in level-1 and
leve-2 non-linearity and an aggressive execution of game plan to accomplish level 3 and level
4 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, we
believe, can scale upwards of USD 200 mn by 2013 if the right go-to-market approach is
secured particularly outside India). Wipro has shown much greater willingness to play in
level-2 and level-3 non-linearity. We believe that Infosys needs to incubate more success
stories such as Finacle to catch up. Finacle provides Infosys an advantage though acquisitions
may be the best and quickest way to power non-linear growth on a much larger scale than
now. Infosys has the most to gain from inorganic moves to power this agenda.
Case 1: Without additional non-linearity (or status quo)
Today (2010) Tomorrow (2013)
Revenues 100
160 (assume 17% CAGR in
revenues over FY10-13)
Gross margins 45% 42.5-43% (200 bps down) (a)
Gross profits 45 69 (b)
Case 2: With non-linearity to keep gross margins constant in FY13
Today (2010) Tomorrow (2013)
Revenues 100 160
Gross margins 45%
45% (non-linearity kicking in to
keep 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 non-
linearity and company average
20 (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)
~9-10
Acquisitions may be the best
way to power non-linear growth
Making a Mark in India & Emerging Markets
Infosys has stayed away from addressing the Indian market for a long time for fear that
India business comes at lower margins. It is ironical that MNCs such as IBM are so much
more focused on the Indian market than Indian companies are. Accenture has recently
started a dedicated delivery office in India to service the public sector (government). IT
services in India is separately a USD 12 bn opportunity in India that is there for the
taking (see Chart 26). Nasscom-Mckinsey forecasts the addressable India services
opportunity to rise four-fold to USD 50 bn by 2020 (see Chart 27) with about two-thirds
of this accounted for by BPO and a third by IT.
Chart 26: India USD 12 bn services market; BPO growth ahead of services
Source: Nasscom
Chart 27: Services in India to rise 4x in FY09-20; BPO to account for 2/3
rd
of pie
Source: Nasscom
In our view, the Indian economy is throwing up incrementally greater commercial
opportunity (see Chart 28), too compelling to ignore on the following three counts:
0.0
2.8
5.6
8.4
11.2
14.0
FY05 FY06 FY07 FY08 FY09E
(
U
S
D
b
n
)
IT services ITES-BPO S/wproducts & engg services
CAGR over FY05-09
IT services 24%
BPO 34%
S/w products 33%
2
8
30-35
5
18
60-65
0
20
40
60
80
100
FY00 FY08 FY20
(
U
S
D
b
n
)
Technology services Business services
Decisive Indian IT market growth driver is the economy rather than any
change in buying behavior: IT infrastructure of the incumbent Indian companies
lag foreign entities. Consequently, a major wave of IT investments has begun across
banks, financial services institutions (FSIs), telecom, manufacturing, government,
resource, education and other industries. When the economy grows at ~6%, only a
few verticals in the private sector drive spending (BFSI, telecom); but when the
economy grows ahead of 7%, many more opportunities arise in several verticals
such as retail, manufacturing and even real estate. Also, these verticals are still not
sophisticated in using IT as a productivity driver and present opportunity all the way
from even optimising the data capture process.
IT phase II - Consolidation, virtualisation and SOA: Enterprises in India have
matured to the extent of consolidating their IT infrastructure acquired over the years.
Cost pressures are forcing large enterprises to evaluate and closely assess utilisation
and productivity of these IT assets. Key technology components that would come to
the 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 small
and medium business (SMB; expected to contribute 50% to the enterprise
application market) segment. Vendors like SAP, Oracle and Microsoft have expanded
their software as a service (SaaS) offerings with go-to-market strategies like on-
premise hosted applications and hardware on lease. TCS and Wipro have already
developed their templatised ERP solutions for SAP-SMB. Unfortunately, the collective
buying 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 the
SMB segment in India.
Global majors such as IBM are increasingly seeing India as a beachhead (not just as
a market for talent, but also for their offerings), as seen from their multi-year multi-
million dollar strategic IT relationships with Indian companies such as Bharti and
Reliance. An added benefit of penetrating the Indian market is insulation against the
INR-USD equation. Also, the earlier relative disadvantage of India profits being fully
taxable will disappear with the 10A and 10B benefits coming to an end, effective
FY12.
India a peculiar market for IT services
Unlike several developed markets, which saw implementation of IT through the classic
cycle of application development, integration and then support, enterprises in India are
taking an accelerated view of IT by opting straightway for a package-led implementation
(e.g. SAP and Oracle) and subsequent consolidation.
Chart 28: India business as a % of revenues for Big 3 for past two years
Addressing India opportunity to drive margins; how can Infosys do it?
While 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 that
incumbents like Wipro and TCS have by virtue of their long-standing presence in India
are not easily replicated. Yes, to the extent that Infosys does not need to work to create
recognition in India, it will almost inevitably get invited for bids in the public and private
sector and win its fair share of deals (as has been happening recently). The real
challenge facing Infosys, in our view, is making acceptable margins (>20%) on services
in the Indian market by adopting a structurally low-cost model. We lay out our thoughts
on what Infosys and, more generally, Indian companies can do to mitigate common
concerns on low margins in India and in other emerging countries.
Fig. 16: Addressing the India opportunity entails several aspects
0.0
2.0
4.0
6.0
8.0
10.0
FY08 FY09
(
%
)
TCS Wipro Infosys
Move from own the process to own the customer mindset
Participate in end-to-end integrated deals
Use shared services model
Use India as a breeding ground for outcome-based pricing
efforts and for turnkey end-to-end deals
Run round the clock alliances and partnerships (for
implementation and delivery)
Adopting a structurally low-
cost model is key to making
acceptable margins in India
(a) Institutionalise a robust program management office; move from own the
process 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 minimising
the length of the training program (which tends to be longer for fresh recruits for global
IT services), preparing back-up(s) for an employee in advance of leave (so that back-ups
can progress even as the employee proceeds on leave) and setting a target bench lower
than that for Indian IT services. Also, the lead-time of recruitment in its India/Middle
East business is considerably lower than in its global business.
Wipro operates a robust program management office that de-layers the India work
it sub-contracts downwards the mundane, commodity portions of the overall
assignment to sub-scale tier-2 Indian IT vendors. This obviates the need to manage
bench and shaves off almost 7-8% points in cost of bench in cases where such
outsourcing is possible and well managed. This also helps manage peaks and
troughs 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, but
not necessarily the entire process. This requires an externally oriented robust
program management office that manages workflow, but not necessarily the bits
and pieces of implementation. Infosys, we believe, has some way to go in
developing such an office.
Wipro indicates that between one-third and one-half of its volumes in India (except
in assignments relating to transformation) can be outsourced to smaller IT
companies. However, tasks such as selecting such companies, cultivating
relationships with them and helping shape/perfect their delivery process are not to
be managed in short order. They need time and patience.
(b) Use India as a testing ground to measure the success of outcome-based
pricing efforts, unique commercial structuring and drive non-linearity
through India-specific turnkey frameworks
This is one lever that Indian IT companies can use to beat the price consciousness of
clients. Wipros success in rolling out its aggressive cost management control and
some emerging innovativeness in pricing contracts stems from the success it has
seen in implementing some of those techniques in the Indian markets, particularly in
high-profile deals such as the Aircel go-to-market penetration where it linked
outcomes to revenue-and subscriber-based targets. This was key to solutioning and
led 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 sector
opportunity in India. This was developed by TCS to codify and leverage its
accumulated experience with the Indian government in various spheres that span
education, bureaucracy, defence, infrastructure and healthcare and common
techniques such as data extraction, master-data management, process re-
engineering and process integration with an overlay of system integration. This can
be 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 to
test-market innovation of almost any kind on both demand and supply sides. It is
possible to make decent margins in India by redefining the cost structure (by
questioning what is core and non-core in delivery), applying shared services and
linking pricing to transactions and outcomes.
Sub-contracting takes away the
need to manage bench
India market can be used to
test-market innovation by Big 3
Wipro has understood this game quite well, relatively speaking, in our view. The
India experience has also formed the basis of its relative strength in system
integration and infrastructure management. It could also pave way for addressing a
new customer segment (SMB) in future in the overseas market.
(c) Run round-the-clock alliances and channel partnerships, not only for
implementation of go-to-market but also for delivery
Replicating an intricate alliance network takes time. Wipro has started its alliance
program way back in 1990s. The company finds it easier to enforce its project
management and execution practices on smaller but nimble players who are
adaptable and can absorb varying utilisation. It also manages multiple competitive
alliances 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-to-
market strategy in various areas such as networking, storage, platform development
and enterprise solutions. Wipro has stitched partnerships with several of such global
players to address India and other emerging markets.
In consumer-oriented sectors such as retail banking and telecom, large deals in
India are in the offing. Retail banking accounts for more than three quarters of the
total BFS opportunity in India. However, this requires distribution channels (either
owned or partnered with) that reach out to consumers in rural areas as well. Wipro
has established a strong channel franchise network to reach out to the
smaller towns and rural destinations in India.
In our view, it is important to be able to show flexibility in partnerships in various
areas and demonstrate commitment and track-record before acquiring rights to
setting terms of engagement in such arrangements. We believe that Infosys could
leverage the power of partnerships better than it has done so far in penetrating new
markets.
(d) Demand for end-to-end integrated deals with infra management as the
backbone; India increasingly becoming hot bed for large deals
Opportunities in Indian IT entail working with data in multiple outdated formats on
native platforms. Integration thus is the driving theme to address these diverse
platforms. Infosys needs to be able to fashion an elaborate partner network to
address parts of this total solutioning (especially in hardware-intensive
implementation, 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 Wipros go-to-market strategy in
large, integrated deals in this geography. It was not until three years later that the
company had its first end-to-end integrated deal. The companys first significant
customer win was one of Indias leading private sector banks for which it handled its
infrastructure extending to branch management as well. This was possible by
Wipros data centre investments in Mysore (its Global Service Management Centre,
GSMC), an investment for India.
It is instructive to note that the three largest deals closed by Wipro in its
history have all come from India. We believe that the long India experience has
helped both Wipro and TCS strengthen their credentials in the large deal space for
global clients, especially in those entailing a strong end-to-end integration layer with
infrastructure rollout/management as the backbone.
Big 3 have under-leveraged the
power of partnerships
Largest 3 deals closed by Wipro
are from India
(e) Shared services model used in India
Customers in India are less concerned with exclusivity of resources. Hence, Wipro
employed the shared services model using its data centres and supporting
infrastructure centre. Shared services means using fungible resources across
multiple projects simultaneously. This requires non-intrusive, yet collaborative
infrastructure to be put in place along with client approvals. Over time, Wipro will
roll out shared services for its global clients as well.
(f) Dedicate resources for in-house work
Interestingly enough, Infosys does not have much dedicated delivery/technical staff
for its India business unit. It borrows technical resources for implementation from the
global business units. This is fine for now when there is substantial bench, but what
when the environment turns? We could perceive the absence of dedicated technical
resources as sign of Infosys caution/conservativeness. It could still be testing the
waters, so to speak, ready to invest as the going gets better in India and as the global
business is ready to soak up the bench that exists today. On the other hand, Wipro
has a dedicated team of 15,000 professionals (technical and sales/marketing),
catering to the emerging markets (primarily India and Middle East). Increasingly,
many of Wipros advertisements issued in job sites for MBA graduates call for specialist
functional knowledge for its India/Middle East (emerging markets) practice.
(g) India still a hit or miss market as most large deals are from government
We believe that for the foreseeable future, the government will be key source of big-
ticket deals as the large-scale transformation and infrastructure outsourcing
oriented deals from the private sector such as Unitech Wireless/Bharati are still few
and far between. As the India business head of one of the Big 3 told us, My
dependence on the government is so high that one deal lost is not made up by even
20 smaller deals from the private sector. If the governments decision is commonly
based 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 they
would like to participate in. This is because the provider of consulting/advisory
services is not allowed to address implementation opportunities.
Case study: IBM in India: Applying principles of lean management
IBM has over 72,000 professionals in India, largely catering to the export market
like the Indian Big 3. What is perhaps less known is that IBM derives well over
USD 1 bn annually from the India market in IT services and system integration
(including hardware) on a much leaner workforce. The company does not
deliberately hire for commodity skills and outsources the commodity work to
smaller tier-2 companies.
The company keeps bench in low single digit in India and believes that large
bench reflects inability to forecast business. We gather from our intelligence that
just over 15,000 people are dedicated for the Indian market. If we assume that
pure services in India for IBM amount to at least 50% of its total domestic
revenues, then IBM derives over USD 500 mn from just about 15,000
professionals. Given the pricing in India, this scale of revenues is not possible
without a high degree of sub-contracting of lower-level work to tier-2 and tier-3
local vendors in India. Clearly, IBM sees itself as the value-added integrator at
back-end and the face to customers at front-end.
Large deals in India are
primarily from the government
Table 19: Recent large deal wins from government by Big 3*
Source: Company releases
Note: * Recent deals won by Infosys not cited as size not disclosed
The much touted China opportunity likely to be a long range one
Nasscom estimates the China addressable opportunity to be more than 2x India over the
long haul. While China is seen as a market similar to India in many aspects and
technology spending drivers, we believe that it is likely to be a far more difficult market
to penetrate. Local language is only one of the reasons. Another reason is that the
government is the second biggest spender of IT in China after manufacturing. An
important factor that begs consideration is that nearly three-quarter of Chinas Top 500
companies are state owned enterprises (SOEs). Attracting this market is not easy for the
Big 3, given the work they have to do to build recognition and equity with local decision-
makers.
The Big 3 will have to build considerable local presence and relationships. The China
opportunity, in our view, cannot be addressed from India as a servicing hub. The Big 3
will have to:
(a) Demonstrate the same level of campus relationships and institutionalised hiring as
they have done in India. They will have to create the same eco-system in China over
a period of time as they have done in India. Infosys has established its China
subsidiary in 2003 and yet today, it has just about 1,000 professionals. TCS has
invested in China since 2002, but China accounts for only about 1% of its total
workforce.
(b) In addition to developing technology and localised solutions for local IT, providers
also need to demonstrate commitment to develop capability in China. For example,
Microsoft, IBM and SAP have aggressively invested in Chinas capability by
establishing full-fledged research centers. This would be one way to create a
favourable public image with the government, necessary to survive in China.
Date Service provider Client/Partner Amount Remarks
Oct - 08 Tata Consultancy
Services (TCS)
Ministry of External
Affairs, Government of
India
INR 10 bn (USD
208 mn)
The Passport Seva Project will digitise the
entire passport services lifestyle and allow
online filing of applications. The countrywide
roll-out of the project will take place within
six years, and the government will open 77
passport filing centres across the country in
a phased manner.
March - 09 HCL Technologies National Insurance
Company (NICL) India
INR 3.9 bn (USD
76.5 mn)
The contract entails HCL to deploy a core
insurance solution (CIS) at one-fourth of
NICLs 965 offices by July 2009 in the first
phase while the entire implementation of the
solution will be completed by April 2010. The
contract covers both software application
and hardware across NICLs offices in the
country .
March - 09 Wipro Infotech Employees State
Insurance Corporation
(ESIC)
INR 11.8 bn (USD
245 mn)
Project Panchdeep, aimed at improving
health care services to its beneficiaries, by
providing online facilities to employers and
insured people for registration, payment of
premium and disbursement of cash benefits.
Other modules will provide HR, finance and
general administration programmes for
increasing the organisational efficiency.
Addressing China opportunity
from India as a servicing hub
remains difficult
(c) Stitch partnerships with key local companies in the geography to be able to offer
both bundled solutions and specific solutions (e.g. as SOEs in China upgrade their
hardware systems, partnerships with hardware companies in China is key). We learn
that IBM has partnered with a leading domestic player to launch a next generation
mobile payment system. Again, in India, integration and consolidation is likely to be
an overarching theme.
(d) Be prepared for the long haul. It is difficult to make a dent in China in a reasonable
time frame. Fruits from a specific China strategy will take at least five years to show
up; especially, revenues in this market will follow with a considerable lag.
Case study: Unitech Wireless - The mechanics of a ground-breaking deal
Wipros 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 outcome
that Wipro can provide. Equally important is Unitechs ability to establish subscriber
penetration as per timelines at acceptable ARPUs is critical to Wipros pay offs.
The greenfield, end-to-end contract is uniquely structured and is split into two broad
phases 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 Unitech
Wireless over 18 months, split across multiple milestones. The commercial consideration
has been accordingly captured in the contract.
The operations phase starts after the set up phase. Here, the commercial model is based
on the revenue share model. Wipros pay offs will be a derivative of Unitechs: (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-off
Unitech's revenues
Downside protected by setting thresholds for
subscribers and revenues
#
s
u
b
s
c
r
i
b
e
r
s
By 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 has
done.
It has guaranteed itself a certain minimum if targets on either count (number of
subscribers and/or revenues) are not met by Unitech Wireless.
Wipro expects that the deal margins should track company-average wide margins
by the end of the set up phase with strong upside possibility, depending on the
revenue performance of Unitech Wireless. Its earlier work for Aircel has given it
familiarity of experience of undertaking a similar transformation exercise in the Indian
environment.
On what Wipro will deliver: Wipro will implement most of the functional areas for
application 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 will
deploy component based Service Delivery Platform (SDP) for Unitech Wireless to deliver
the 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 and
timeliness.
Sales & Marketing: Reaching the Next League
To make the most of the opportunity points amidst the crisis, Indian IT companies must
increase the quantum and quality of their SG&A spending (more so their S&M). It is
interesting to note that emerging from the previous tech crisis in FY02, Infosys
significantly 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 believe
that while Indian companies are doing well to cut back on dispensable SG&A (such as
transferring onsite support, pre-sales and G&A offshore, consolidating sales offices), they
are not uniformly well enough to step up the good SG&A (hiring practice/domain
specialists, hunters for new geographies, deal sourcing and structuring teams).
Unfortunately, they have cut back on this aspect till now. To redress this, we believe that
increased 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 what
innovative and investment-oriented companies such as Cognizant are doing in the
current environment to further break away from the pack. We note that only Cognizant
has 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 CTSH
S&M as % of sales NA 4.8 4.6 NA
Hunters versus farmers mix More hunters More farmers More hunters Balanced
Localisation of sales force Low Medium Medium High
Large program management investments Medium Medium Medium High
Preference for heavy hitters Yes No Yes Yes
Good use of partnership/alliances No No Yes No
SMB focus Yes No No No
Ability to identify high-potential accounts Medium Good Medium Good
Account mining strength Good Good Medium Best
Hunting new account-geography expansion strength Good Medium Good Best
Overall Fair (4) Good (2) Fair (4) Best (1)
Chart 29: Strength of sales and marketing force over past three years*
Note: * Infosys numbers in FY09 include some internally reclassified personnel; definition of S&M is
company-specific and hence, the wide discrepancy between Wipros and Infosys S&M people numbers
The Big 3 in brief
To sustain leading growth, Infosys will intensify investments in practice specialists,
earlystage verticalisation and new business development in under-penetrated
accounts/geographies. Selling in tough times implies demand creation as opposed to
playing to or capitalising on customer-created demand. Infosys SG&A has historically
been biased towards the farmer (client mining) in the hunter:farmer mix as opposed to
the relatively greater needs of a hunter (new business development) in sniffing out
opportunities in a dynamic, pro-active manner with greater help of its domain solution or
consulting experts. This need has found recognition within Infosys with the client
engagement model getting more sophisticated with considerable thought given to the
right hunting and pay for performance models. Infosys is involved in a thorough
retraining of its sales force, preparing augmentation guides and overhauling its sales
compensation structure (discussed in detail later on in this section).
TCS, while maintaining its stream of investments, needs to ensure greater effectiveness
of its S&M spending. At over 1,000 S&M personnel (and over 850 quota-carrying sales
people), the company clearly has the most extensive on-the-ground presence of its sales
force (reflected in its higher SG&A spending) but falls short of holding them to manage
accounts 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-traditional
geographies. However, we find account management and mining is perhaps not as
refined 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 the
recent restructuring. Also, we understand that TCS has tended to shift the delivery line
personnel to manage sales. This has limitations in scaling up beyond selling
scale/capacity and lower costs.
Wipro needs to leverage the combined strengths of its sales force with those of its
acquired entities (especially Infocrossing) to increase its competitive positioning for large
deals. The company has built a fair degree of sophistication in selling services such as
infrastructure 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 through
improved integration of R&D and IT programmes into the authority of a single individual.
821
604
537
444
802
499
385
270
498
425
340
213
0
180
360
540
720
900
FY09 FY08 FY07 FY06
(
N
o
s
.
)
Infosys Cognizant Wipro
Sales focus has shifted from
farming to hunting for Infosys
Local and difficult but high potential markets require local buy-outs or partnerships as
Cognizant, for example, has shown with the alliance of T-Systems in Germany or as
Wipro has shown in the Middle East. Infosys has struggled to make an impact on the
German market (though it has done well in Switzerland), but a buy-out or partnership
will 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 into
Australia 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 and
Wipro) is skewed to a single channel (i.e. large key account sales force). This needs to
evolve 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 up
the ante in more ways than one.
What ails SG&A in Indian IT?
SG&A practices in Indian IT are undergoing a sea change. We believe that Infosys among
Indian service providers leads the way in effecting this leadership change. The rules of
the 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-verticalisation
Indian 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 or
sub-scale verticals under the others category and have a general, less-focused
approach towards such verticals. For example, Cognizant has dedicated delivery, prospecting and
supporting teams for sub-verticals in retail such as consumer goods, speciality retailers
2. A proprietary engagement structure replicated throughout organisation
Infosys comes closest to creating a proprietary yet flexible structure replicated
throughout the company. It has three tiers of sales and marketing personnel, viz.,
practice partners, account managers and programme managers. Programme
managers, also partly billable, could identify opportunities within sub-segments of a
large customer and could combine their specialist knowledge with their technological
consultative mindset. However, the structure per se is not nearly as important as
the rules of engagement with the customer and delivery (back end). How much
discretion and accountability does delivery have in the relationship? How is joint-
accountability established and how clearly are the compensation structures jointly
owned? Typically, in such a relationship of peers, both the delivery directors (in
India) and the account directors have joint performance measures that enable
offshore managers to appreciate business realities.
Cognizants trademarked Two-in-a-box model has worked well. It is now upgrading
this 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 of
the sales staff. This team is often instrumental in defining key outcomes as business
variables that matter to clients. Some of Wipros bigger engagements in the recent
past, like the Unitech Wireless deal, transform terms of engagements to risk-reward
models basing payoffs on number of subscribers and subscriber growth while
limiting downsides.
and groceries even while each of these sub-verticals contributed little to the overall revenue
mix (low single digit in percentage terms.)
As Indian IT companies build capability to enhance the quality and speed of their
delivery, using tools and accelerators, they have to learn how best to leverage this
for profitability by pricing accordingly. Newer engagement models on pricing go
beyond T&M and fixed price and embrace outcome-based solution-driven models,
which is a tough sell for sales initially. Sales and marketing specialists will have to
sniff out which clients are inclined towards accepting such models. This is client-
specific and not necessarily only programme or project-dependent. We believe that
that co-opting new engagement models will have to be an embedded, explicit
performance measure linked to monetary benefits. Infosys is already working on
including such measures as part of its sales incentive recalibration strategy.
4. Innovation-related S&M spend
Innovation is not only related to R&D. Innovation, in the sales and marketing
context, refers to investments made in novel avenues: e.g. drawon insights of an
external advisory council. As a novel practice, Cognizant has an advisory council
for relevant domains/verticals/ventures. This council is composed of external
industry veterans who bring leading-edge thinking to bear on the industry and play
the role that the board of governors of the company plays on a smaller scale. This
has helped debate issues at the domain level at a far more granular and expert level
and in a manner of speaking helps run each domain run as an independent company
with its own board of directors. Quality advice does not come cheap, and Cognizant
is prepared to bear this rather unique investment.
5. Partnership and alliance specialists
As we discussed in the section, The IT Enterprise of tomorrow, partnerships and
alliances will be an increasing feature of Indian ITs go-to-market models. Some like
Wipro are leveraging this to a greater degree than others. Senior alliance directors
from the industry who are well-versed in structuring go-to-market models with new
alliance partners and who have a proven track record of strengthening alliances and
making them fruitful could be valued assets to the Big 3. Wipro has a top team that
is concerned solely with managing and monitoring the companys alliance strategy.
6. Customised go-to-market strategies for emerging customer segments
We take SMB as an example. TCS is the only one among Big 3 that has taken a
separate sales strategy for a separately defined SMB segment. The sales model here
has to be aligned with a one-to-many approach, stitching building channel /VAR
partnerships and intensive online support. It is not possible to take a uniform
approach towards SMBs; sales models have to be aligned to fragmented customer
spend to ensure both reach and profitability.
7. Supreme be-all-to-the-client partners capable of stepping up relationship
This is the crux of Cognizants three-in-a-box model. The company has identified
select strategic customers that it will manage for the next level by assigning consulting
partners an additional level of investment that ride on top of client partners. While
client partners work with clients on operational P&L, client partners (managing consulting
relationships on a one-to-one high-level manner) are those who manage the
transition of the relationship to the next level and envisage the sequence of steps
needed in doing so.
Typically, such high-powered professionals are themselves CIOs of corporates or
partners of IT consulting firms (Accenture, IBM). Their remit could go even beyond
the boundaries of their clients by working with clients boards on shaping the IT
strategy in line with the business strategy. This represents the next aspiration for
Infosys, but Cognizant is already putting in place the building blocks to manage such
a programme in a full-fledged manner. Companies see this as key to earning a seat
in their clients senior management as a trusted advisor, so to speak.
The Big 3 in detail
INFOSYS
Infosys SG&A spending has moderated as a percentage of revenues, suggesting that the
company 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 now
What 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), which
suggests a greater intensity of offshore pre-sales personnel (movement offshore), lower-
experienced resources and cutback of incentives of Infosys high-profile consultants (in
Infosys consulting). Marketing (or event-driven expenditure) and branding expenditure
has virtually ground to a halt. Also, travel and communication expenses have come
under the scanner, an uncomfortable duality in our view, because cutback in travel
expenses should ideally be made up for by increased communication expenses, in our
view. Infosys could have greater representation of quality local heavy hitters that can
bring the company into play at the margin in new accounts. More so, when they are
available in greater numbers and at lower costs in this environment.
Chart 31: Per capita personnel S&M expenses have trended down
0.0
2.0
4.0
6.0
8.0
10.0
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 Q1FY10
(
%
)
G&A expenses as a % of revenues S&M expenses as a % of revenues
215.0
227.0
239.0
251.0
263.0
275.0
FY07 FY08 FY09 Q1FY10
(
U
S
D
'
0
0
0
)
S&Mpersonnel cost for Infosys
Infosys S&M expenses had
picked up post the previous
downturn
Strategic accounts reviewed at highest levels by Infosys executive council
Infosys has identified about 50 highest potential accounts for continual review by
executive council members. Each member reviews five accounts on an average. The
review covers: (a) specific resource allocation; (b) general resource allocation; (c) multi-
tier relationship status; (d) transformation services; and (e) increasing success in
offering bundled, integrated offerings on an ongoing basis, migrating beyond the
single/two-service status.
Full-scale verticalisation at Infosys still at bay
One of the unique features of Cognizant, as discussed in our Appendix, The rise of
Cognizant; 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 sales
force in geographies where it lacks scale (such as APAC), preferring to organise sales by
vertical in the more established geographies.
The hunter versus farmer strategy at Infosys needs to be better optimised in
favour of more experienced and resourceful hunters. Quality of strategy is more
important than a mere shift in emphasis. Infosys traditional strengths have been in
farming (client mining) as opposed to client acquisitions and quick ramp-up. But, till
recently, the companys weakness in its core top 10 client portfolio is manifesting
explicitly, spotlighting the need to focus on new client wins and quick ramp-ups (see
chart 32 excluding BT, its top client).
Chart 32: Revenues from top 10 clients (ex-BT) have dipped in past 4 quarters
The sales and marketing strategy needs an additional fusion of heavy-hitter hunters. Its
track record in prising open new markets could be better, in our view. However, to the
companys credit, it is paying utmost strategy to the quality of new client sign ups. It has
laid down clear criteria such as:
(a) The client must belong to the Fortune or global 1000/2000 group; Infosys has laid
down 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 with
the F-1000/2000 or G-1000/2000 accounts as opposed to many smaller accounts.
150.0
175.0
200.0
225.0
250.0
275.0
Q
1
F
Y
0
7
Q
2
F
Y
0
7
Q
3
F
Y
0
7
Q
4
F
Y
0
7
Q
1
F
Y
0
8
Q
2
F
Y
0
8
Q
3
F
Y
0
8
Q
4
F
Y
0
8
Q
1
F
Y
0
9
Q
2
F
Y
0
9
Q
3
F
Y
0
9
Q
4
F
Y
0
9
Q
1
F
Y
1
0
(
U
S
D
m
n
)
Top 10 clients (ex-BT)
Experienced and resourceful
hunters find need in current
times
Also, under-investment in existing accounts needs to pick up. It is all too easy to
ship overseas located relationship managers/account managers to India offices, but
it comes at the expense of client mining. This is better accomplished through use of
programme managers in greater numbers.
The growing S&M imperatives in FY10-11 at Infosys should also cover greater
recruitment in continental Europe (e.g., Germany, France) and developing
markets. Need to hire horizontal sales specialists is high and a good portion of
recruitment in these geographies will comprise such specialists. We believe that
Infosys has fallen behind the curve in assigning dedicated sales and marketing footprint
in Europe to cover verticals such as financial services telecom and retailtwo of its
mainstay domains. The result has been a steady absence of contract wins in Europe in
deals lost to competition during FY09. Also, we note that Infosys consulting subsidiary
has 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 consulting
teams in Europe to address this lacuna. What is, however, more important in our view is
that it needs to build momentum in emerging markets such as APAC and India on a
comparable scale as Wipro and TCS. Thus, there is increased focus in finding suitable
hunters for these geographies. Also, the company may show less reluctance than
before in front-ending larger deals requiring flexible contracting structures.
One of the more important elements in managing to fix the full-services model
is to fill out the growing need for horizontal sales specialists (IMS, BPO, product
engineering, integrative consulting). Horizontal sales specialists are also subject
matter experts. Vertical sales specialists (e.g., sales experts from verticals such as BFS,
telecom, manufacturing) prefer to have horizontal sales specialists pitch their respective
expertise to help them win new service lines in existing accounts. Infosys has identified
sales specialists in areas it needs to build strength (particularly in infrastructure
management, a big and growing area where Infosys is a bit behind the curve. e.g., how
can it win outsourced network management in follow-on business from an existing
telecom client in Germany?) To win this business, the proposition in addition to a
telecom sales specialist, needs to include the consultative pitch of the infrastructure
management sales (IMS) specialist. The end-to-end services provisioning for Infosys
gathers credibility with build-out of horizontal sales specialists who will help the vertical
sales specialists sell more to a client. So far, the company has done reasonably well with
sales 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 emerge
Practice specialist
BFSI
Mfg.
Telecom
Retail
Packages
High-level of sub-specialisation not yet
(Sales professional meant for testing in telecom)
A
c
c
o
u
n
t
m
a
n
a
g
e
r
s
a
l
o
n
g
v
e
r
t
i
c
a
l
s
BPO IMS Testing
Product
engg.
Build-out of horizontal sales
specialists along with vertical
specialist essential for client
mining
To Infosys credit, it is leading the other two (versus Wipro and TCS) in re-
thinking the manner of SG&A functioning. It is undertaking three specific
initiatives to enhance the value of the portfolio managed by an account
manager:
(a) Incentivising the account manager on the quality of accounts opened.
(b) Consistently pogramming the account manager to think in terms of business value
articulation as opposed to cost reduction propositionvarious business value
articulation models are put together covering different programmes across verticals
(e.g. calculating the plug on lost sales as a result of improved uptime of financial
trading platforms).
(c) Improving the sales force productivity models that have been traditionally used thus
farselling multiple service lines within the expected timelines has increasingly
become an important measure of sales force productivity.
Table 21: Infosys current sales and marketing imperatives at a glance
Source: Company
Should Infosys G&A (8% of revenues) leverage (or decrease) with size?
Not necessarily so in linear fashion, as the predominant India delivery model gives way
to the global delivery model. Over time, as Indian IT companies get more global in the
way they deliver, they will expand their GDC presence beyond India with greater
emphasis. Therefore, it becomes unrealistic to expect G&A expenses to leverage as
delivery centres outside India cannot compare with India in expenses, size, scope, and
pyramid. Infosys has already signaled a shift in thinking by preparing to set up a fully-
fledged delivery centre in Germany (delivery and supporting functions) and will follow
this up in France as well.
TCS
Feet on ground; restructuring working its way through the system
TCS has the most extensive on-the-ground sales and marketing presence (well over
1,000 S&M personnel and over 850 quota-carrying personnel). However, like Infosys, it
too has to think through its hunter and farming strategy. Prior to its restructuring, these
functions were not necessarily segregated and it was not uncommon to see people
whose predominant function was hunting do account management and vice versa. What
complicated this further was the reporting authority. Farmers (account managers) used
to report to and be responsible to geographic heads rather than vertical heads. Thus, the
reporting structure was not aligned along vertical lines. That has now changed. Hunters
(new sales/business development personnel) are assigned to specific verticals and report
to the respective geographic heads, while farmers report to their respective vertical
business unit heads.
Segregation of responsibilities has also allowed TCS to recruit professional salespersons
into hunting roles. The company has been hiring only experienced locals in the past four-
five years, which seems to be in abeyance in the current environment.
- adoption of new engagement model by client of outcome-based pricing
- selling bundled solutions
- "Transformation" deals
- Implementing proprietary value articulation models
Set stricter account opening norms e.g. increased focus on F-1000/G-1000
classification, high tech spending clients
Covering new geographies (Continental Europe/Asia)
Hiring new practice specialists in BPO, IMS, Product engineering
Monitor and incentivize account managers on
Infosys leads in rethinking the
manner of SG&A functioning
among the Big 3
Extensive hunting now
accompanied by better structure
to enable improved farming
Sales optimisation must as delivery managers are rarely demand creators
Numerical strength of TCS sales force does not necessarily translate into superior
effectiveness. There is a case for monitoring the effectiveness of personnel, recalibrate
and rotate responsibilities, especially if some are found wanting in building deal pipeline
or obtaining RFPs. The companys sales engine comprises a fair degree of professionals
who have risen through the delivery ranks within the company to take up sales and
marketing responsibilities (thus, they tend to be more technically oriented). We gather
from our sources that a consolidation exercise of the sales force and sales offices is
underway to present a meaner and more focused presence; over 15 overseas sales
offices have been shut down and consolidated to a larger presence. TCS has also been
running a revamped and more effective sales training program for the past two-three
years, introducing concepts like sales coaching and a standard set of sales tools and
techniques that ensure the sales force is better placed to compete.
Good hunters at TCS, but not so good farmers
Extensive office presence to some extent ensures better market intelligence in areas
where peers and geographies are not comparably present. Thus, TCS win rates in recent
quarters are more numerous than peers (see chart 33).
We, however, believe that account management and farming are much less strong at
TCS than hunting. This can be partly attributed to experience and locality and partly to
the fact that the earlier structure did not clearly segregate hunters and farmers. This
resulted in diffused attention to farming. Better farming lowers the associated cost of
sales and SG&A an area where Infosys scores over TCS. But, TCS is confident that with
the new vertical alignment of its sales force and change in reporting structures, such
deficiencies are getting addressed. The jury is out as difficult environment makes the
verdict pending for much longer than expected.
Chart 33: TCS has generally led Infosys in new client wins in the past
Independent customer P&Ls to cover much greater proportion of clients
As 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 those
in shared services such as finance, HR) on a dedicated basis to customer groupings.
Dedicated delivery resources for customers are recognised and their costs accounted for
under the respective customer P&Ls.
0
14
28
42
56
70
Q
1
F
Y
0
7
Q
2
F
Y
0
7
Q
3
F
Y
0
7
Q
4
F
Y
0
7
Q
1
F
Y
0
8
Q
2
F
Y
0
8
Q
3
F
Y
0
8
Q
4
F
Y
0
8
Q
1
F
Y
0
9
Q
2
F
Y
0
9
Q
3
F
Y
0
9
Q
4
F
Y
0
9
Q
1
F
Y
1
0
(
N
o
s
.
)
TCS Infosys
Consolidation of sales force and
sales offices underway
WIPRO
S&M cuts have been even more severe than for Infosys
Wipros reduction of S&M has been harsh (see Chart 34), though the company clarifies
that 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; Wipros cuts ahead of Infosys
Making important changes to incentivise sales force
Wipros improved ability to build order books in the current environment has partly got
to do with the way it recalibrated the compensation structure of its sales force, especially
of its hunters. Earlier, the most important element of the compensation structure was
revenues. The company, however, now gives impetus to order book as a variable in
setting compensation. For hunters, order booking is the key compensation variable.
Even account managers (farmers) at Wipro are incentivised on order booking (new
business in existing clients), in addition to revenues and margins. The companys order
book has handsomely grown YTD, reflecting partly the success of the reset key
performance indicator (KPI).
Preference for local heavy-hitters vis--vis Infosys
Wipro 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 way
into Wipros impressive global management team, which has put the company in an
advantageous position in large deals that required innovative solution-cum-consulting
skills. The costs of consultants, global programme management staff and business
transformation 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 not
mean lack of investments in these high-leverage areas. The company has been relatively
severe in cutting flab in S&M resources at the junior level. Also, there has been
considerable localisation of the work force in the recent past, with about a third of the
onsite sales force being foreign nationalson this dimension, Wipro matches Infosys.
Global programme team has been the focus of Wipros recent investments
This team consists mainly of consultants who have an enhanced ability of consultative
solutioning. By virtue of the way the consultants structure deals (e.g., adjusting the cost
of operations in a particular programme for a customer in the energy vertical on a real-
time basis to the price of gas/oil, they variabalise the clients cost structure for the
(40)
(28)
(16)
(4)
8
20
Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10
(
U
S
D
m
n
)
Infosys Wipro
Recalibration of compensation
structure resulting in better
order book build-up
programme to the extent possible). Thus, to some extent, the client should be able to
lower the cost of operations in response to falling gas prices (though the reverse need
not take place).
S&M: Positive for identifying growth areas; negative for inability to effect
integration of acquired entities
We would credit Wipro with hiring practice managers in two areas, viz., infrastructure
management and BPO, ahead of Infosys. This has helped bolster Wipros positioning in
large deals involving infra management and BPO. On the negative side, the company has
been somewhat late/ less successful in integrating the S&M and consulting specialists of
its multiple acquired companies into the global delivery framework. Several left, and of
those who stayed back many continued to operate in silos for a while till the
organisation-wise restructuring came into effect, which ensured some integration of
practice specialists across verticals.
Local geography sales heads vs. vertical heads presents uncomfortable duality
The 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 sales
efforts/time across verticals is key and we learn that Wipro is still fine tuning its efforts
on this resource prioritisation exercise. The local geography head should also essentially
drive standardisation of sales productivity models in his geographic domain. We still see
some issues in Wipro with dual reporting of the vertical sales staff in various geographies
to both vertical heads (who tend to be located offshore) and local geography heads.
Sales integration underway to plug account management gap with Infosys
Over the past three years, Wipro has strenuously attempted to close the gap relative to
Infosys in large account management with its focus on dedicated resources for its
mega/gamma accounts. Many of these accounts have dedicated G&A resources (besides
delivery and sales) and enjoyed very periodic reviews under the oversight of the
chairman himself. Wipro has comparable number of USD 20 mn and USD 50 mn
accounts as Infosys, but the deviation is seen in accounts of size exceeding USD 50 mn
where Wipro still lags both Infosys and TCS. This is surprising because Wipro holds its
own 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 as
follows:
As recently as a year ago, revenue targets for R&D and IT divisions for the same R&D
client (e.g. Nokia, Siemens, and Ericson) were managed separately by multiple account
managers. This has since been integrated under an overall sponsor who is charged with
penetrating the account using both R&D and IT services. This holistic view has helped
overcome 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 IT
services. 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 many
more programme managers in its large accounts to ensure continued growth (as
opposed to delivery managers managing the larger accounts in status quo fashion).
Cognizant is adept in swarming its high-potential accounts with programme managers to
exceed satisfaction and ensure greater mining, thereof.
Credit Wipro for hiring practice
managers to play the large deal
game
Wipro lags Infosys and TCS in
USD 50 mn plus accounts
Other factors
Working with the requisite hunter-farmer strategy; is there a desired mix?
Ideally, the composition of hunters and farmers should be increasingly weighted in
favour 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 be
maintained at 10-15% of the total mix, else companies may not be doing enough on new
markets/initiatives (see Cognizants proportion of hunters to farmers over the years in
the chart below).
Chart 35: Cognizants hunters account for a decreasing proportion of total
quota-carrying personnel still at 10%
Experiments in hiring local consultants should be seen as temporary as best
Over the years, sometimes all the three have experimented with consultants and
rainmakers who can help with quick wins. However, we see issues with this approach of
scalability and broader integration into the organisation. We learn that firms that have
used 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 newer
geographies may be a good first level experiment at best.
1
8
.
5
1
4
.
8
1
1
.
4
9
.
7
8
1
.
5
8
5
.
2
8
8
.
6
9
0
.
3
0.0
20.0
40.0
60.0
80.0
100.0
C
Y
9
9
C
Y
0
0
C
Y
0
1
C
Y
0
2
C
Y
0
3
C
Y
0
4
C
Y
0
5
C
Y
0
6
C
Y
0
7
C
Y
0
8
(
%
)
Sales persons Account managers
2
3
.
1
2
5
.
6
3
9
.
0
2
3
.
6
2
0
.
7
7
6
.
9
7
4
.
4
6
1
.
0
7
6
.
4
7
9
.
3
1
6
.
7
8
3
.
3
SMB Segment: Execution Critical for Good Gains
Gartner reports that more than half of the worldwide technology spending is outside the
Global 2000 corporations (G-2000) and this spending is growing more than two and a half
times that of the G-2000.
SMB segment in India
IBM estimates the total IT spending of Indian SMBs will touch USD 11 bn in 2009, of
which, USD 1.3-1.5 bn is expected to be spent on IT services alone. IBM has an SMB
customer-base of nearly 2,000 in India and it expects IT spending from this segment to
grow over 20% Y-o-Y.
Mentality to cater to SMB is different and not easy to overcome
The Big 3 have traditionally stayed away from the fast growing SMB segment because
traditional ways of serving and selling large enterprise clients fetch much larger bang for
the 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 also
mandates a methodical and reticulate network of channel partners such as value-added
resellers and distributors. In many ways, it must be run as a separate focus group with
its own development and marketing resources, separated from the parent company as
TCS is doing.
Table 22: Go-to-market approach for SMB requires distinct focus and discipline
Source: Nasscom
Economics of SMB service provider
Investments in SMB are made upfront, like in products. As revenues build up through
various 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. Gross
margins in such a model tend to be high (>70%) as incremental investments in every
additional sale are absorbed more in expenses in selling, distribution and revenue share
with partners. The economic model of Salesforce.com, a SaaS-based hosted CRM
solutions provider, is instructive: Salesf orce.com has demonstrated robust revenue
Key drivers for success Description
SMB needs assesment Understand core needs and behaviours of SMB customers
Micro-segment: The market and focus on most viable segments
Creation of SMB-specific offerings Develop distinct offerings for SMB-specific needs, not scale down enterprise
products
Ensure flexibility, ease of service and reliability in offerings
Creation of profitable sales model Understand channel economics to build visible ecosystem of partners
Operate multiple routes to market (e.g., web-based direct sales, sales through
partners or sales through distributors)
Lean infrastructure deployment Use technology-enabled infrastructure to drive down costs (e.g., internet-based
self service)
Apply CRM techniques to customers and partners
Scalable lead generation Leverage affiliated relationships to gain access to customers
Aggregate customers to sell face to face
Invest sufficiently in brand building
Distinct organisation structure Build a distinct organisation aligned against actionable segments
Ensure complete segment ownership of SMB organisation and tied up support
infrastructure with field exeuction
growth at gross margins of nearly 80% (a five-year revenue CAGR greater than 60% to
hit USD 1 bn in revenues). Much of the gro ss margins of Salesforce.com are eaten away
by sales and marketing expenses (~50% of revenues). Salesforce.com has an installed
base of 60,000 companies that can be managed only with a partnership-intensive
approach.
Chart 36: Revenue growth, margin and SG&A profile of Salesforce.com
This corroborates our belief that SMB is a SG&A intensive model. Companies have to be
able to manage and streamline their SG&A set up to realise superior economics in this
segment. It involves, among many other things, developing an appreciation of what
must be invested in-house in SG&A and what must be managed with partners (through a
variable-cost model to the extent possible). To sum up, while revenue growth is not an
issue (revenues spiral with increase in the installed base of SMBs), the appropriate Own
versus Partner strategy to manage SG&A assumes paramount importance in this
segment.
Technology evolution is breaking down barriers to address this market
SAAS and cloud computing are proving cost effective to meet the processing and
computing needs of enterprises in a hosted manner (thus converting the capex model to
opex for the customer). Thus, we believe that it will become progressively easier to
address smaller customer segments (such as SMB), going forward. In fact, TCS (as
discussed in the case study) leverages its own cloud to address SMB.
60.0
65.0
70.0
75.0
80.0
85.0
40.0
50.0
60.0
70.0
80.0
90.0
2,005 2,006 2,007 2,008 2,009
(
%
)
(
%
)
Revenue growth (LHS)
Gross margin (RHS)
SG&A expense as a % of revenues (RHS)
SMB is a SG&A intensive model
Case study: TCS has a two-year head start over others
TCS 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 sizes
and industries and ascertained their IT readiness. It assessed that the general
maturity of IT adoption and buying behavior in SMB fell short of minimum. Several
enterprises (revenues of USD 100 mn) did not have even a network to link up their
systems/hardware. Implementation of even elementary accounting software such as
Tally was absent. Enterprise packages were faraway bets.
Given the huge gap in IT maturity, TCS concluded that total IT (IT-as-a-service) will
be the appropriate offering for the Indian market. (IT-as-a-service) is an elementary
soups-to-nut offering, covering hardware, software, applications (office) and
business process (HR, F&A, payroll, CRM and industry specific ERP solution) bundled
as a utility to the SMB segment. It is configurable to a fine degreeaddressing the
needs of a concern having zero IT maturity.
IT-as-a-service is a catalogue-based model where the enterprise and service provider
can choose compatible options within the mix (hardware, software, office and business
process after assessing current and future needs. We believe this is a good model as it
captures maximum share of SMB wallet (unlike pure services) while also providing the
flexibility 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 to
be marketed, customised to various vertical groupsmanufacturing, retail,
professional services, education, and healthcare (primarily wellness). For example,
customised modules for the retail segment included point-of-sale, warehouse
management, store management, procurement, and supply chain. Manufacturing is
likely to be TCS largest segment for SMB.
Revenue model
The revenue model is utility-based (per user monthly price based on capacity and
number of users). Any future modules bought by the SMB customer is charged
along the line. The SMB group within TCS has about 450 professionals drawn from
within the company and hired from outside.
Challenges pertain to managing revenue traction and customer attrition
In our view, extrapolating the SG&A intensity of Salesforce.com to TCS SMB is not
wholly appropriate. TCS has a much better chance of managing SG&A costs in a
much lower trajectory than Salesforce.com as such costs are India-based (while the
Indian market is the focus). Also, TCS is likely to be able to have strong bargaining
power with channel partners given its size and strength in services and ability to
push volumes. All told, the key is robust revenue growth to ensure above-average
company margins.
Customer sign ups are proceeding at a fair clip (about 10-15 SMBs sign up per
month). TCS has already signed up well over 50 SMB customers. However, this has
been established only through direct sales. As TCS implements the foundation for its
partnership strategy, we believe that the rate of customer sign-ups will multiply
several-fold (5-6x). The challenge will not be so much on delivery as the cloud within
TCS (private cloud) can host the capacity and infrastructure for servicing the SMB on
a multi-tenancy model (many users at once). Challenge will be more around partner
and channel management.
However, 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 through
channel partners), it becomes essential to develop economies of scale in delivering
and training (through hosted training sessions that involve many SMB participants
simultaneously). Towards this end, TCS has begun identifying value-resellers such as
telcos/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 2013
Table 23 highlights the revenue potential three years out. If focus is restricted to
India, 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 markets
outside India that have better pricing power and greater scale. TCS is implementing
its go-to-market model for outside-India geographies.
If TCS can exploit the market opportunity outside India, SMB can scale upwards of USD
300 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 partnership
strategy
Note: * Upside can accrue from a meaningful expansion outside India
As per our revenue estimate of USD 200 mn by FY13, we see the SMB
segment breaking even during year two and registering well above-
company average margins towards the end of year three. Thus, it will take
close to three years for SMB in TCS to emerge as a material non-linear
theme.
Revenue Model (Direct sales in India)
Number of customers sign-up in year 1 (2010) 100
Customer attrition (%) 10%
Avg customer base by 2013 825
Avg revenues per customer in 2013 (USD/year) 50,000
(A) Annual revenues by 2013 (in USD mn) ~40
(b) Revenue model (through channel partnerships)
Customer attrition (%) 20%
Avg customer base by 2013 4180
Avg revenues per customer in 2013 (USD/year) 40,000
(B) Annual revenues by 2013 (in USD mn) ~165
Total 2013 revenues (USD mn) - (A) + (B)* ~ 205-210
Healthcare: Near-to-Medium Term Opportunity
Summary: Healthcare as a vertical has perhaps never generated as much opportunity as
before. In fact, IDC estimates that the explosion of opportunity in healthcare will significantly
compensate for the likely long-term decline in spending rates in the BFS segment. While
opportunity in the big-pharma space (Pfizer, Astrazeneca) is not new to Indian IT,
considerable excitement results from the burgeoning expenditure in healthcare reform
undertaken by the government in developed markets. While the Big 3 can work their way
through the payer side of the equation (payers are insurance companies that manage health
plans), working with providers is likely to be more difficult (as this is a considerably localised
and fragmented market, though huge). We profile the nature of opportunity addressable for
Indian IT and conclude that only a very small portion of government-triggered healthcare
spending can move offshore. The provider space is more dominated by EDS and Affiliated
Computer Services (ACS). With some additional investments, Wipro could leverage
Infocrossing (an acquired company) to play more meaningfully in this space. This
could be a three-four year window of opportunity for select players to capture
disproportionate share.
Fig. 19: US Healthcare IT spending has historically grown at twice that of GDP growth, fuelled by multiple drivers
Source: Nasscom
Opportunity, yes, but how much can realistically be captured? Healthcare, as
commonly understood, consists of four segments. Of this, the sub-segment, creating the
most 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 to
be the prime beneficiary of government-enabled spending that mandates hospitals and
US national health expenditure 2004-08 (USD bn)
US healthcare provider IT spending 2004-08 (USD bn)
0
500
1,000
1,500
2,000
2,500
2004 2005 2006 2007 2008
(
U
S
D
b
n
)
14
15 15
16
17
0
4
8
12
16
20
2004 2005 2006 2007 2008
(
U
S
D
b
n
)
Trends driving growth
- Growing and changing healthcare
needs with aging of population
- Greater awareness and expectations
of citizens
- Increasing responsibilities of Government
and healthcare providers
- Advanced technology and more information
- Better access to health information
- More treatment options
- Advancing medical and technology
health administrations to store and manage medical records as per defined standards.
Towards this, healthcare codes are being st andardised and integration of hospital
management 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 pharma
Source: Nasscom
Note: *Homecare, long-term care; ** Consumer driven health plans; # Electronic health record
Tapping the provider opportunity requires large-scale automation of processes within a
hospital that Indian IT players could embark on as a promising opportunity. However, as
shown in fig 20, there is only a narrow sliver of opportunity that can be offshore
outsourced (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 required
and this does not play to the natural advantages of Indian IT. So, Indian companies will
have to compete with a much wider array of local healthcare solution providers in
US/Europe who provide solutions as a platform which are particularly suited to the needs
of smaller hospitals. We learn that even Accenture has a relatively limited presence in
the provider space.
Description
Key trends that impact IT
1. Provider Hospitals Hospital system transitioning from best-of-breed to integrated
enterprise solutions
Ambulatory Electronic health records are at an inflection point for adoption due to
growth at doctor offices
Other healthcare* Greater need to secure, store and utilise patient data to improve
patient outcomes
Greater push to share data across providers and create patient health
record (e.g. patients, technology venders, govt)
2. Payer Integrated payer and
providers for-profit
More sophisticated data management required to improve medical
and performance management (e.g., disease management and care
analysis)
Not-for-profit Greater focus on cost-reduction particularly in reducing cost of non-
core IT
Specialist Integration of legacy in-house systems with consolidation
Payer IT systems need to accommodate new products (e.g.,
CDHPs**)
3. Pharma Infrastructure Proliferation of clinical data from multiple sources requires improved
analytical tools (e.g., claims data, EHR #)
Applications Pharmaceutical players exploring new models for R&D (e.g., greater
use of electronic data collections during clinical trials)
Greater use of IT to enable sales and marketing
4. Connectivity Financial (e.g., claims) Portion of claims that are electronic continues to increase
Administrative (e.g.,
practice management,
elgibility verification,
referrals, pre-certification)
Desire to for greater technical sophistication to reduce cost and
rework (e.g., auto redemption)
Large-scale process automation
required for addressing provider
opportunity
Fig. 20: Only a narrow sliver of provider segment opportunity can move offshore (<10%)
Source: Nasscom
Note: *Theoretical maximum not considering supply chain constraints or low pace of adoption
Addressing the provider opportunity
There are three ways to address this opportunity, in our view:
(a) Acquire ready-to-market platforms from smaller players: These could be players
who have managed health plans in accordance with Medicare, Medicaid and other
government sponsored programs. In other words, go to market with a commercial
hospital management solution. But be prepared for a good deal of customisation
which Indian IT companies have generally not preferred (as against standardisation).
(b) Approach this as a predominantly BPO opportunity and cater to the G&A spend of
hospitals on a consolidated basis. Item lines such as procurement, billing,
administration and information management, and scheduling could lend themselves
to process automation. Once, companies have such a platform in place, they can
use outcome-based pricing to optimise pay-offs (e.g. profit sharing from collection
of outstanding receivables). Also, Indian IT can play on the integration theme as
hospital systems transition from best-of-breed to integrated enterprise solutions,
though larger global peers like Accenture and ACS could profit more from such a
trend.
(c) Integrate the payer into the equation as well. Indian IT may find it more convenient
to manage the funding side of healthcare (healthcare insurance) relative to the
deployment side. This plays more to their comfort zone, as payers are larger
enterprises and traditional methods of account management and delivery work
better with the payers than providers.
Fragmentation is another hurdle to overcome, but the changing landscape
could present greater opportunity to standardise. The Big 3 are present in varying
degrees in the payer segment, but are noticeably less so in the provider segment
(hospitals). Unlike the payer side of the healthcare business, wherein Indian IT is more
likely to deal with larger financial institutions/insurance agencies, the provider market is
significantly penetrated and local. For example, the advantage of a strong presence in
New Jersey does not necessarily mean this strength can be exploited to penetrate
Washington DC. This requires a localised and a more relationship-oriented approach to
sales and marketing which Cognizant has brought to bear, relatively speaking. To some
extent, standardisation of healthcare codes and common integration norms enables
players to operate on a more holistic (or less fragmented) basis as before. In our view,
50
25
0
0 25 50
(
M
a
x
i
m
u
m
g
l
o
b
a
l
s
o
u
r
c
i
n
g
p
o
t
e
n
t
i
a
l
%
)
- Technology
services
- G&A
Patient care provision
Hospitality functions
Other professional
healthcare services
Nursing services
Share of employment (%)
- The overall maximum degree of global resourcing
possible in the healthcare provider industry is ~8%*
- This is because over 70% of the work requires
patient contact, and a further 13% requires
presence in medical facilities
- Nevertheless, given the size of the industry,
there is significant scope for global sourcing
of back-office work
- Primary opportunities are G&A (e.g., claims
processing, payroll, and medical records management)
and technology services (e.g., application development)
High priority opportunities
Provider market is significantly
penetrated and is local
Wipro could leverage Infocrossing as the latter has an in-house managed care
platform. However, real success will be determined by how Wipro makes the
Infocrossing healthcare platform transplantable to other markets or local health systems
and craft tailor-made go-to-market strategies.
Few healthcare specialists above USD 1 bn in revenues. www.healthcare-
informatics.com profiles the largest healthcare systems providers globally (see table 25).
There are seven healthcare specialists over USD 1 bn in size (revenues). Wipro has leapt
into the Top 20, courtesy its acquisition of Infocrossing, while Cognizant, with nearly
USD 700 mn from this segment (in CY08), is tenth in this list. It is notable that only two
of these seven are healthcare specialists others are vertical practices of larger system
integrators such as EDS, CSC and Perot or are captive healthcare practices of
conglomerate MNCs such as GE, Siemens and Philips. Also, we find that all specialists
have an aggressive M&A agenda to overcome challenges of localisation and limited
scalability thereof.
Table 25: Very few healthcare specialists among Top 10; they are aggressively M&A-driven
Source: www.healthcare-informatics.com, Edelweiss research
Note: SI system integrator, BU business unit
The other sweet spot lies in big pharma
Among offshore players, Cognizant has an almost uncontested leadership position in
spot is particularly in drug development, covering analytics relating to clinical trials
(straddling Phases 1 through 4) and submission management - an area in which Indian
competition is relatively absent. The company also provides post-drug development
analytic support by way of an ongoing KPO. Where Indian IT competes with Cognizant in
healthcare is in handling post-research activities related to production, sales and
marketing support, and shared services support (finance & accounting, HR etc). Indian
IT 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 of
applications over a five-year period. While Cognizant got the application maintenance
piece for discovery, clinical and sales and marketing areas, Infosys got it for
manufacturing and corporate applications (such as HR and finance). We observe that
Cognizants growing capability in enterprise solutions could make it equally competitive
post-production opportunity, going forward. However, Infosys is making rapid strides in
the manufacturing side of pharma (such revenues are classified as part of its
manufacturing).
Revenues
2008 (USD mn)
1 McKesson Technology Solutions 2,984 27.2 Yes
Healthcare specialist
2 Cerner Corporation 1,676 10.3 Yes
3 CSC 1,640 17.4 No BU within global SI
4 Agfa HealthCare 1,583 (8.2) No
5 Siemens Medical Solutions 1,400 NA No
Captive medical unit of conglomerate
6 Perot Systems 1,304 8.5 Yes BU within global SI
7 GE Healthcare 1,000 NA No
8 Philips Healthcare 732 NA Yes
9 Allscripts-Misys Healthcare Solutions, Inc. 694 74.5 Yes
10 Cognizant 688 44.2 No
BU within global SI
2 yr revenue
CAGR (%)
Aggressive
M&A history
Nature Sr No. Company
Cognizant is uncontested leader
in services spanning the entire
drug development lifecycle
healthcare spanning payers, providers and pharmaceutical companies. The pharmaceutical
portfolio spans the entire drug development lifecycle-from discovery, clinical, manu-
facturing/production to commercial operations (sales and marketing). Its sweet
Acquisition of captive or enterprise business unit
It is possible for Infosys and others to plug this gap through the acquisition of a big-
pharma captive, wherever such acquisition opportunities exist. It is notable that
Accenture boosted its presence in life sciences (pharma) through the acquisition of
Capgeminis life sciences practice (a carve-out). Acquisition of captives could be the best
way to kickstart activity as Accenture has demonstrated. The USD 175mn buyout by
Accenture is perhaps its largest acquisition by consideration in the last four-five years.
To sumup, healthcare is an opportunity, but the burgeoning provider space does not
yield to the traditional offshoring model to the same extent that BFSI and manufacturing
do. This can be a USD 1 bn revenue segment annually for select Indian IT
players in five years time through penetration in the provider space, though
margins will be lower as this could be onsite-centric. Current margins are
sustained only with platform-based turnkey solutions.
Public Services: Tougher Than it Seems
Summary: There is immense excitement over the government vertical opening up in a
comprehensive fashion in developed and emerging economies. Tempting as it is to believe
that the government is likely to be a robust growth segment for Indian IT, we are cautious
about prospects of the IT industry making a mark in this segment in developed markets. We
see 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, Western
Europe) is likely to be difficult for Indian IT unless companies are willing to localise on a much
more 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 is
likely to accomplish this much easier, but Accentures challenged operating margins in this
segment (high-single digit) should highlight margin difficulties for the Big 3 in embracing the
government in the US/UK in a pronounced manner. The UK is relatively easier than the US to
penetrate.
The Big 3 can tap opportunities in the IT system and architecture design thrown up by new
norms around compliance, regulation, and risk management. However, offshoreability in
government work to support margins may be restricted for a host of considerations including
data privacy. A much better way to address the public services vertical would be through
healthcare, where opportunity not only exists as a result of regulation, but is also likely to be
more profitable than government services per se. Notably, Accenture has unified its
government group with the healthcare group, as it sees government spending in healthcare
as key to accelerate penetration through shared synergies. It is early advantage to Wipro
among the Big 3 due to the companys acquisition of Infocrossing that works with a few state
governments in the US in healthcare-related contracts. Infosys is likely to stay away.
Government among top 3 verticals in terms of total IT spending
It 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 IDC
estimates, 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 & homeland
security, education, health & human service, agriculture, among others, are large
spending sub-verticals within the government space. Chart 37 presents the growth in
worldwide IT spending by government vertical and Chart 38 shows the vertical-wise
worldwide IT spent for 2008.
Better way to address public
services opportunities is through
healthcare
Chart 37: Worldwide IT spending for government vertical
Source: IDC
Chart 38: Vertical-wise IT spending for CY08 globally; govt. 3
rd
largest spender
Source: Nasscom
Can Indian IT tap significant share of government opportunity?
To capture the public sector opportunity, pr oviders need to tailor their go-to-market
strategy (see table 26).
We would note that government contracts are typically fixed price, outcome based and
have high entry barriers (difficult to secure). Further, the vendor selection process for
most government projects are request for proposal (RFP)-driven and have pre-conditions
such as requisite certifications for even participation. High priority is placed on prior work
with government at state, federal or local level in the past (primarily the US
government), thus restricting/barring companies from the bidding stage itself*. Thus, to
qualify for bidding in government projects (outside India), an inorganic move (like HCL
Tech through Axon) enables to enter and kick-start operations in this vertical. Further, to
penetrate this vertical, companies need to have well trained sales force intimately
familiar with the working methodologies and procedures of governments.
0.0
45.0
90.0
135.0
180.0
225.0
2007 2008 2009E 2010E 2011E 2012E
(
U
S
D
b
n
)
Government
Heathcare
2%
Transportation
3%
Utilities &
Const.
4%
Services
7%
Retail
9%
Government
12%
Communication
13%
Others
15%
Mfg.
17%
BFSI
18%
Government vertical difficult to
penetrate
* Navigating the complexity of the federal Multiple Awards Schedules (MAS) such as IT Schedule 70 as laid down by the Federal (used for such
areas as public key infra (PKI), software maintenance and equipment leasing) or Government-wide Acquisition Contracts (GWACs) such as
STARS, Alliant, ANSWER or Millennia can be daunting.
now HCL (through acquisition of Axon work with the UK government), have made some
progress in tapping the public sector in the UK. We expect other Indian vendors to start
working with governments through the healthcare vertical, which could serve as a
platform to get into core government work.
Table 26: Success factors for targeting public sector and defence customers
Source: Nasscom
Govt. practice significant for global system integrators; profitable for very few
Only EDS operates at near-20% operating margins for the government segment. We
note that margins for CSC and Accenture in this segment are in single-digits in
percentage terms. Of the three, we believe that EDS works with a much greater share
from the Federal government and defense, suggesting that longer-term contracts with
the Federal government in areas of defense could be more profitable in the government
pie. One reason could be ability to price in outcomes over a longer-time period and
higher room for the likes of EDS to plug inefficiencies at the Federal set up through
outsourcing. Notably, Accenture is absent from some parts of defense, except border
security/patrolling.
We note that for some global IT companies such as CSC and EDS, government/public
service business is more profitable than rest of the business, despite higher quarterly
fluctuations.
Success factors for targeting public sector and defence customers
1 Focus on top 10 countries representing 80% of defence market
Create different value proposition for civillian government
2 Sales approach Allign sales approach to longer sales cycles of government and defence customer
Build a local sales team familiar with government processes
Acquire certification required for participating in government and defence RFP process
3 Pricing and delivery
model
Shift to a transparent cost plus pricing model given pressure on governments to get
lowest pricing
Decide an onsite mix based on security and proximity needs of government
Budget for sufficient delivery lead time (e.g., obtaining necessary access permits and
clearance
Investment in developing relationships with local players focussed on defence and
government deals (e.g. Lockheed Martin)
Customer segment
focus
Also, government practice will primarily require local staff and presence, in which, Indian
vendors are still far behind. Only TCS (due to its acquisition of Pearl BPO in 2005) and
Chart 39: Operating margins in govt. segment higher than company average for EDS and CSC
Accenture EDS
CSC
Source: Companies, Edelweiss research
0.0
4.0
8.0
12.0
16.0
20.0
(
%
)
Govt. Overall company
(2.0)
3.0
8.0
13.0
18.0
23.0
CY03 CY04 CY05 CY06 CY07
(
%
)
3.5
4.5
5.5
6.5
7.5
8.5
(
%
)
Case study: Accenture in public services: A mixed picture
Accentures public services group accounts for about 12% of its total revenues at
operating margins of 9.1%, below the company average. The company typically had a
much higher proportion of outcome-based (gain-share) revenues from this vertical. It
has leveraged this ability elsewhere within it and this has contributed to its confidence
in managing complex projects of such nature across other vertical groups.
Interestingly, the current COO of Accenture was previously the head of the public
services vertical within the company and was instrumental in driving Accentures
broad-basing of contract structuring incorporating gain-share and outcomes across
the company.
Since considerations of transparency in government contracts are paramount,
Accentures sole-sourced business in this segment is dramatically lower than its
overall average (50%). Also, much of the companys implementation is based on
partnership 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 for
the Federal such as health, postal, customs, immigration/emigration, public transit
(railways/tolls), border management, education, etc. The company has a large
deliverycentreinTexas, cateringtothe Federal government work. Restrictions on
taking work out of the country get even more acute in Continental Europe, notably
Germany and France.
Indian IT conceivably can match Accenture in re-architecting of IT systems and
defining boundaries of information and work flow exchange on account of emerging
norms from risk, compliance and regulation in this environment. However, it needs to
develop consulting and system architecting strength. Moreover, offshoreability of such
work is limited.
NHS: Accenture case portrays difficulties associated with govt. contracts
About the programme: The NHS National Programme for IT (NPfIT) is an initiative
by the Department of Health in England to move the National Health Service (NHS)
towards a single, centrally-mandated electronic care record for patients. This
programme also aims to connect general practitioners to hospitals, providing access to
these records by authorised health professionals. NPfIT is the world's biggest civil
information technology programme and known as Connecting for Health. This large
systems integration project programme was established in October 2002, with
estimated total cost of GBP 12.4 bn. It was awarded to four vendors that included
Accenture, BT, CSC, and Fujitsu.
Accenture withdrew from the GBP 1.9 bn NHfIT contract after three years of the
programme award, as it was plagued with delays caused by software partner
(Accentures version).
Facts: In 2003, Accenture was awarded a 10-year contract of GBP 1.9 bn to be the
local service provider (LSP) for this programme in the East and North East regions. In
September 2006, Accenture withdrew from the contract by agreeing to a pull-out fee
of GBP 63 mn and handing over the contract to CSC.
Risks associated with government projects could weigh on Big 3
a. Fixed price nature: Almost all government projects are fixed price, which increases
the inherent risk for the vendor. Delays, uncertainty of completion, modification in
scope of work etc., could affect the projects profitability to a great extent.
b. Delay in project completion: One of the key challenges a vendor faces with
governments is that these entities typically fund projects through appropriated
monies. While these projects are often planned and executed as multi-year projects,
government entities usually reserve the right to change the scope of or terminate
these projects for lack of approved funding and at their convenience. Changes in
government or political developments could result in projects being reduced in scope
or terminated altogether. Also, in case of change in scope, it becomes difficult for
the service provider to charge for scope change or scope creep or even scope
overhaul.
c. Stricter contract terms: Government contracts tend to be more onerous and are
often difficult to negotiate than commercial contracts. They entail a greater degree
of scrutiny and publicity. At times, regardless of the precision, any negative publicity
may impact the reputation of the vendor in the marketplace.
d. Extensive scrutiny on project update: Government contracts and proceedings
surrounding them are often subject to more extensive scrutiny and publicity than
contracts with commercial clients. This requires more than additional dedicated
resources 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 or
legislative decision makers, revisions in government tax policies and reduced tax
revenues can affect the number and terms of new government contracts signed.
f. Heightened risk of reputation: An objection/issue raised by any of the state
governments could not only affect the business with that particular government
agency, but also business with other agencies of the same or other governmental
entities.
THIS PAGE IS INTENTIONALLY LEFT BLANK

?
Greater risk taking approach required to increase market share
Infosys Technologies (Infosys) has consistently increased its market share over
FY02-08, ahead of the other two large peers. Going forward, with changing buying
behavior, we see the need for Infosys to assume greater risk. Infosys aggressive
foray into the domestic Indian market, to some extent, highlights the companys
approach to settle for lower margin/high opportunity business as well.
Superior account management skills with improving focus on hunters
Infosys SG&A has historically been biased towards the farmer (client mining) in
the 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 model
getting more sophisticated with right hunting and pay for performance model.
Balance sheet strength provides opportunity to leverage inorganically
Infosys has been very conservative in its approach for inorganic moves. It has
conserved and accumulated huge cash reserves (INR 107 bn i.e. USD 2.2 bn) that
can 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 position
Infosys management has consistently demonstrated its ability to align itself with
the changing realities; be it in areas of organizational restructuring (first among
the Big 3), displaying greater finesse in choosing customer segments and
managing foreign exchange exposure among others. However, with the demand
dynamics changing, we believe that managements quick response to changing
customer behavior , (even i f subtle) and early adaptation wil l be on test in retaining
its leadership position.
Outlook and valuations: Need to change gears; recommend HOLD
Infosys is the most preferred stock in the Indian IT sector. Margin management
through cost leadership and industry leading growth have contributed to Infosys
commanding sustained valuation premium. Going forward as peers demonstrate
equal-to-higher growth rates and margin resilience we see Infosyss P/E premium
narrowing. At current levels the stock is trading at a P/E of 21.6x and 18.7x for
FY10E and FY11E earnings, respectively. We recommend HOLD on the stock. On
a relative return basis the stock is rated Sector Underperformer.
September 10, 2009
Reuters : INFY.BO Bloomberg : INFO IN
Absolute Rating HOLD
Rating Relative to Sector Underperformer
Risk Rating Relative to Sector Low
Sector Relative to Market Equalweight
Note:
Please refer last page of the report for rating explanation

MARKET DATA
CMP : INR 2,240
52-week range (INR) : 2,235 / 1,040
Share in issue (mn) : 573.1
M cap (INR bn/USD mn) : 1,284 / 26,402
Avg. Daily Vol. BSE (000) : 2,049.4
SHARE HOLDING PATTERN (%)
Promoters* : 16.5
MFs, FIs & Banks : 8.3
FIIs : 35.7
Others : 39.6
* Promoters pledged shares : Nil
(% of share in issue)
RELATIVE PERFORMANCE (%)
Sensex Stock Stock over
Sensex
1 month 7.8 5.1 (2.7)
3 months 4.6 21.6 17.0
12 months 10.4 24.7 14.3

Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Viju George
+91-22-4040 7414
viju.george@edelcap.com

Kunal Sangoi
+91-22-6623 3370
kunal.sangoi@edelcap.com
India Equity Research | IT Company Update

Walking the fine line between growth and profitability
EDELWEISS 4D RATINGS
Financials
Year to March FY09 FY10E FY11E FY12E
Revenues (INR mn) 216,930 222,847 258,121 303,235
Rev. Growth (%) 30.0 2.7 15.8 17.5
EBITDA (INR mn) 71,950 74,216 86,471 97,945
Net profit (INR mn) 59,880 59,588 69,176 82,099
Adj. shares outstdg (mn) 572 573 575 579
Diluted EPS (INR) 104.4 103.9 119.8 141.3
EPS growth (%) 28.5 (0.5) 15.4 17.9
Diluted P/E (x) 21.5 21.6 18.7 15.9
EV/EBITDA (x) 16.5 15.5 12.8 10.9
ROAE (%) 37.4 29.3 27.7 26.8
INFOSYS TECHNOLOGIES
Company Description
Infosys is the second-largest IT services company in India providing consulting and IT
services to clients globally. It is also among the fastest growing IT services organization
in the world and a leader in the offshore services space with a pioneer in Global delivery
model. Infosys provides business consulting, application development and maintenance
and engineering services to 569 active clients spread across Banking, Financial Services,
Insurance, Retail, Manufacturing, and Utilities verticals and 29 countries. The company
has also its own proprietary core banking software - Finacle used by some of the leading
banks in India, Middle East, Africa and Europe. Infosys IT services employee force
stands at 103,905 and the companys revenues for FY09 stood at INR 216.9 bn (USD
4.7 bn).
Key Risks
a) prolonged slowdown in US and Europe beyond FY10; b) faster than expected returns
from non-linear initiatives; and c) sharp appreciation of INR against US dollar, Euro and
GBP.
Financial Statements
Income statement (INR mn)
Year to March FY08 FY09 FY10E FY11E FY12E
Revenues 166,920 216,930 222,847 258,121 303,235
Cost of revenues 92,070 117,650 119,772 137,837 163,444
Gross profit 74,850 99,280 103,074 120,284 139,791
S&M expenses 9,160 11,040 11,969 14,197 20,620
G&A expenses 13,310 16,290 16,890 19,617 21,226
Total SG&A expenses 22,470 27,330 28,859 33,814 41,846
EBITDA 52,380 71,950 74,216 86,471 97,945
Depreciation & amortization 5,980 7,610 9,292 9,360 9,582
EBIT 46,400 64,340 64,924 77,111 88,362
Other income 6,920 9,140 8,969 11,576 14,261
Foreign exchange gain/(loss) 120 (4,390) 310 0 0
Others 0 20 0 0 0
Profit before tax 53,440 69,070 74,203 88,687 102,623
Tax 6,850 9,190 14,615 19,511 20,525
Core profit 46,590 59,880 59,588 69,176 82,099
Profit after tax 46,590 59,880 59,588 69,176 82,099
Net profit after minority interest 46,590 59,880 59,588 69,176 82,099
Shares outstanding (mn) 571 572 573 575 579
EPS (INR) basic 81.5 104.6 103.9 120.2 141.7
Diluted shares (mn) 573 573 574 577 581
EPS (INR) diluted 81.3 104.4 103.9 119.8 141.3
CEPS (INR) 92.3 118.0 120.1 136.5 158.2
Dividend per share 33 25 28 30 35
Dividend (%) 665.7 500.0 560.0 600.0 700.0
Dividend pay out (%) 47.8 27.9 31.5 29.2 28.9
Common size metrics - as % of revenues
Cost of revenues 55.2 54.2 53.7 53.4 53.9
Gross margin 44.8 45.8 46.3 46.6 46.1
G&A expenses 8.0 7.5 7.6 7.6 7.0
S&M expenses 5.5 5.1 5.4 5.5 6.8
SG&A expenses 13.5 12.6 13.0 13.1 13.8
EBITDA margin 31.4 33.2 33.3 33.5 32.3
EBIT margin 27.8 29.7 29.1 29.9 29.1
Net profit margins 27.9 27.6 26.7 26.8 27.1
Growth metrics (%)
Revenues 20.1 30.0 2.7 15.8 17.5
EBITDA 19.3 37.4 3.1 16.5 13.3
EBIT 19.7 38.7 0.9 18.8 14.6
PBT 25.8 29.2 7.4 19.5 15.7
Net profit 20.7 28.5 (0.5) 16.1 18.7
EPS 20.2 28.5 (0.5) 15.4 17.9
Infosys Technologies
Balance sheet (INR mn)
As on 31st March FY08 FY09 FY10E FY11E FY12E
Equity share capital 2,860 2,860 2,867 2,877 2,897
Share premium account 28,510 29,250 30,235 32,235 36,235
Reserves 106,580 150,430 191,232 240,209 298,579
Total shareholders funds 137,950 182,540 224,334 275,321 337,711
Sources of funds 137,950 182,540 224,334 275,321 337,711
Goodwill and other intangible asset 6,890 6,890 6,890 6,890 6,890
Gross fixed assets 47,500 64,040 76,540 91,540 108,340
Less: Accumulated depreciation 19,860 24,160 33,452 42,811 52,394
Net fixed assets 27,640 39,880 43,088 48,729 55,946
Capital WIP 13,240 6,770 7,070 7,720 7,220
Investments 720 - - - -
Deferred tax asset 1,190 1,260 1,260 1,260 1,260
Cash & bank balances 69,500 96,950 136,654 178,479 227,851
Debtors 32,970 36,720 35,221 39,602 45,693
Loans and advances 27,710 32,790 40,988 48,365 58,038
Total current assets 130,180 166,460 212,863 266,447 331,582
Sundry creditors 19,120 20,040 24,048 28,377 32,917
Provisions 22,790 18,680 22,790 27,348 32,270
Total current liabilities 41,910 38,720 46,838 55,724 65,187
Working capital 88,270 127,740 166,025 210,722 266,395
Application of funds 137,950 182,540 224,334 275,321 337,711
Book value per share (BV) (INR) 241 318 391 477 581
Free cash flow
Net profit 46,590 59,880 59,588 69,176 82,099
Depreciation 5,980 7,610 9,292 9,360 9,582
Deferred tax 150 50 0 0 0
Others (8,490) (2,270) (8,859) (11,576) (14,261)
Gross cash flow 44,230 65,270 60,020 66,959 77,420
Less:Changes in working capital 3,400 12,020 (1,419) 2,872 6,301
Operating cash flow 40,830 53,250 61,439 64,087 71,119
Less: Capex 10,560 10,070 12,800 15,650 16,300
Free cash flow 30,270 43,180 48,639 48,437 54,819
Cash flow statement (INR mn)
Cash flow from operations 46,930 57,850 60,020 66,959 77,420
Cash for working capital (6,100) (4,600) 1,419 (2,872) (6,301)
Operating cashflow (A) 40,830 53,250 61,439 64,087 71,119
Net purchase of fixed assets (15,950) (13,270) (12,800) (15,650) (16,300)
Net purchase of investments (710) 680 0 0 0
Others 5,460 10,560 8,859 11,576 14,261
Investments 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 4,020
Financing cash flow (C) (7,770) (24,300) (17,794) (18,188) (19,708)
Free cash flow 24,880 39,980 48,639 48,437 54,819
Exchange rate differences (D) 410 760 0 0 0
Change in cash (A+B+C) + (D) 22,270 27,580 39,704 41,825 49,371
Ratios
ROAE (%) 37.2 37.4 29.3 27.7 26.8
ROACE (%) 37.2 40.2 31.9 30.9 28.8
Debtors (days) 63 59 59 53 51
Payable (days) 37 33 36 37 37
Cash conversion cycle 26 26 23 17 15
Current ratio 3.1 4.3 4.5 4.8 5.1
Fixed assets turnover (x) 6.7 6.4 5.4 5.6 5.8
Total asset turnover(x) 1.3 1.4 1.1 1.0 1.0
Equity turnover(x) 1.3 1.4 1.1 1.0 1.0
Valuation parameters
Diluted EPS (INR) 81.3 104.4 103.9 119.8 141.3
Y-o-Y growth (%) 20.2 28.5 (0.5) 15.4 17.9
CEPS (INR) 92.3 118.0 120.1 136.5 158.2
Diluted P/E (x) 27.6 21.5 21.6 18.7 15.9
Price/BV(x) 9.3 7.0 5.7 4.7 3.9
EV/Revenues (x) 7.2 5.5 5.2 4.3 3.5
EV/EBITDA (x) 23.1 16.5 15.5 12.8 10.9
Dividend yield (%) 1.5 1.1 1.2 1.3 1.6
Infosys Technologies
Leadership transition to be healthy in the long term
Mr. N. Chandrasekharan (Chandra) will ta ke over as CEO from Mr. S. Ramodarai
in October 2009. Mr. Chandra has shepherded some of TCS key initiatives like
entry in IMS, BPO, consulting, emerging markets and also driven organisational
restructuring (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 relationships
TCS has shown greater flexibility on adjusting pricing (TCO) in the current
environment (provided enough revenue commitment from client) and
accommodated free transitions. These become critical elements for clients in
evaluating vendor relationships for long-term. Further, these adjustments may
not necessarily pressurise margins, as pricing adjustments are generally
accommodated by change in offshore and employee mix as well.
Serious contender for large deals; proven success in past
Ability to demonstrate value proposition (through client references), end-to-end
full service capability (domain skills) and global networked delivery model
(GNDM) has enabled TCS to win maximum number of large deals compared
with peers over the past two years. Further, frequent review and time devoted
(creating list of must win deals) by senior management will ensure TCS larger
share of big deals. Also, in our view, TCS has the best record when it comes to
be able to provide annual productivity increases and guaranteed cost savings.
Focus on account farming taking precedence over hunting
Known for better hunting ability, TCS vertical alignment of its sales force and
change in reporting structures indicate its emphasis on account farming. With
farming (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-four
years and institutionalise a defensible margin structure, which is starting to
yield positive outcomes. Consistent quarterly performance should help close the
valuation gap with Infosys. We expect TCS to grow its earnings by 20% CAGR
over the FY09-12E. At current levels the stock is trading at a P/E of 18.9x and
15.9x for FY10E and FY11E earnings, respectively. We upgrade the stock to a
BUY. On a relative return basis the stock is rated Sector Outperformer.
September 10, 2009
Reuters : TCS.BO Bloomberg : TCS IN
Absolute Rating BUY
Rating Relative to Sector Outperformer
Note:
MARKET DATA
CMP : INR 557
52-week range (INR) : 570 / 209
Share in issue (mn) : 1,957.2
M cap (INR bn/USD mn) : 1,090 / 22,422
Promoters* : 75.1
FIIs : 11.2
Others : 6.2
* Promoters pledged shares : 12.0
Sensex
1 month 7.8 4.0 (3.8)
3 months 4.6 43.4 38.8
12 months 10.4 31.7 21.3
Viju George
+91-22-4040 7414
Kunal Sangoi
+91-22-6623 3370
Geared for new rules of the game
Financials
Revenues (INR mn) 278,129 299,785 351,998 424,217
Growth (%) 23.0 7.8 17.4 20.5
EBITDA (INR mn) 71,781 78,630 93,101 114,217
Net profit (INR mn) 51,720 57,905 69,088 83,725
Adj. shares outstdg (mn) 1,958 1,968 1,976 1,990
Adj. EPS (INR) 26.4 29.4 35.0 42.2
EPS growth (%) 3.1 11.3 18.9 20.7
P/E (x) 21.1 18.9 15.9 13.2
EV/EBITDA (x) 14.9 13.3 11.0 8.8
ROE (%) 36.9 32.7 31.1 30.2
TATA CONSULTANCY SERVICES
Company Description
TCS is India's largest and one of its oldest IT companies. It commenced operations in
1968 and provides a comprehensive range of IT services to industries such as banking
and financial services, insurance, manufacturing, telecommunications, retail, and
transportation. With a presence in 38 countries, TCS is positioned to deliver its services
seamlessly. TCS has a large diversified client base (933 active clients), which include
seven Fortune Top-10 companies. TCS employee force stands at ~141,650 (including
subsidiaries) and its revenues for the last twelve months (TTM) stood at INR 286 bn
(USD 6.0 bn).
Key Risks
a) maintaining the margins, while pursuing large deals; b) execution risk because of
fixed price intensity; and c) sharp appreciation of INR against US dollar, Euro and GBP.
Revenues 226,175 278,129 299,785 351,998 424,217
Cost of revenues 122,344 150,774 160,590 189,729 224,520
Gross profit 103,831 127,355 139,195 162,269 199,697
S&M expenses 46,309 55,143 59,676 68,640 84,843
G&A expenses 565 431 889 528 636
EBITDA 56,958 71,781 78,630 93,101 114,217
Depreciation & Amortization 5,745 5,766 7,192 8,096 9,757
EBIT 51,213 66,015 71,438 85,005 104,460
Other income 6,888 (4,673) (750) 1,150 1,254
Tax 7,494 9,012 12,123 16,370 21,143
Core profit 50,607 52,330 58,565 69,786 84,571
Profit after tax 50,607 52,330 58,565 69,786 84,571
Minority int. and others - paid/(recd.) 416 611 659 698 846
Shares outstanding (mn) 1,958 1,957 1,968 1,976 1,984
EPS (INR) basic 25.6 26.4 29.4 35.0 42.2
Diluted shares (mn) 1,958 1,958 1,968 1,976 1,990
EPS (INR) diluted 25.6 26.4 29.4 35.0 42.1
CEPS (INR) 28.6 29.4 33.1 39.1 47.1
Dividend per share 7.0 7.0 7.5 8.5 10.0
Dividend (%) 7.0 7.0 7.5 8.5 10.0
Dividend pay out (%) 32.0 31.2 29.8 28.4 27.7
Cost of revenues 54.1 54.2 53.6 53.9 52.9
Gross margin 45.9 45.8 46.4 46.1 47.1
SG&A expenses 20.7 20.0 20.2 19.7 20.2
EBITDA margin 25.2 25.8 26.2 26.4 26.9
EBIT margin 22.6 23.7 23.8 24.1 24.6
Growth metrics (%)
Revenues 21.4 23.0 7.8 17.4 20.5
EBITDA 12.5 26.0 9.5 18.4 22.7
EBIT 10.3 28.9 8.2 19.0 22.9
PBT 20.1 5.6 15.2 21.9 22.7
Net profit 21.4 3.4 11.9 19.2 21.2
EPS 21.5 3.0 11.4 18.9 20.3
Tata Consultancy Services
Equity share capital 979 979 1,968 1,976 1,984
Reserves 98,468 131,193 170,846 220,279 280,788
Borrowings 7,483 5,505 6,331 4,748 2,374
Minority interest 2,300 3,098 3,755 4,453 5,299
Sources of funds 133,602 165,147 207,272 255,828 314,817
Goodwill and other intangible asset 14,738 34,146 34,152 34,152 34,152
Net fixed assets 30,214 37,495 42,303 47,707 52,950
Investments 26,503 17,271 22,448 26,934 32,319
Other assets 10,399 28,194 35,242 42,291 52,864
Cash & Bank balances 10,352 13,438 33,513 53,103 69,559
Debtors 53,903 60,463 64,064 77,150 97,628
Unbilled revenue 13,525 14,814 16,295 18,902 21,548
Inventories 424 366 494 667 900
Prepaid & other current assets 14,965 20,671 25,838 32,298 40,372
Provisions 7,101 8,835 11,044 13,805 17,256
Other liabilities 371 5,151 5,923 4,443 2,221
Working capital 51,748 48,042 73,127 104,744 142,532
Free cash flow
Net profit 50,190 51,720 57,905 69,088 83,725
Depreciation 5,745 5,766 7,192 8,096 9,757
Others (10,878) (549) (4,814) (9,084) (13,355)
Gross cash flow 45,058 56,937 60,284 68,101 80,127
Less:Changes in working capital 11,699 1,012 5,783 10,546 19,111
Less: Capex 12,340 10,661 12,000 13,500 15,000
Free cash flow 21,019 45,264 42,501 44,055 46,016
Cash for working capital (11,699) (1,012) (5,783) (10,546) (19,111)
Net purchase of investments (13,330) 10,435 (5,177) (4,487) (5,384)
Others 5,320 (29,128) (750) 1,150 1,254
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 46,016
Exchange rate differences (D) (650) 5,121 0 0 0
Change in cash (A+B+C) + (D) (1,193) 10,068 20,078 19,591 16,457
Ratios
ROAE (%) 47.0 36.9 32.7 31.1 30.2
ROACE (%) 53.0 51.8 42.9 41.1 40.9
Debtors (days) 78 75 76 73 75
Payable (days) 47 54 60 57 55
Current ratio 2.2 1.8 2.1 2.4 2.6
Diluted EPS (INR) 25.6 26.4 29.4 35.0 42.1
Y-o-Y growth (%) 21.5 3.0 11.4 18.9 20.3
CEPS (INR) 28.6 29.4 33.1 39.1 47.1
Diluted PE (x) 21.7 21.1 18.9 15.9 13.2
Price/BV(x) 8.8 7.0 5.6 4.5 3.6
EV/Revenues (x) 4.7 3.8 3.5 2.9 2.4
EV/EBITDA (x) 18.7 14.9 13.3 11.0 8.8
EV/EBITDA (x)+1 yr forward 14.8 13.6 11.3 9.0
Dividend yield (%) 1.3 1.3 1.3 1.5 1.8
Tata Consultancy Services
Poised to address changing business dynamics
Wipro is well poised to address the demand dynamics post the crisis. Ability to
offer full gamut of services (i.e. IMS, testing, BPO and PI), higher presence in
India & Middle East, smart customer segmentation and diversified vertical
presence, position Wipro ahead of Infosys. Wipro has the most defensive portfolio
among the Big 3 (no client >3% and no vertical >30% of revenues).
Ability to change revenue profile impressive
From early 2002, when technology and telecom accounted for over two-thirds of
revenues, Wipro has come a long way. Today, this segment contributes less than
a third of Wipros revenues, marking Wipros ability to effect a sustained
transformation of its revenue profile. Wipro is drawing even with Infosys and TCS
on financial services, manufacturing, retail while still maintaining leadership in
energy and utilities a defensive vertical that it has penetrated quite distinctively.
Recalibrated sales force aids order book accretion
Wipros improved ability to build order book in the current environment has partly
got 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, even
account managers (farmers) at Wipro are incentivised on order booking (new
business in existing clients), in addition to revenues and margins.
Operating margin difference vis--vis Infosys getting plugged
Over the past two-three quarters, Wipros initiatives in the managing bench, bulge
and offshore mix, along with rationalisation of administrative expenses at
acquired entities have yielded encouraging results. Operating margin difference
(vis--vis Infosys) on account of operational parameters (bulge, utilisation, admin
exp) have reduced to only ~5.5% vis--vis ~9% in past six quarters. Also, as
profitability 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 program
management, recalibration of sales, management restructuring and several
technology initiatives such as cloud computing. Impact of these initiatives will
drive improved performance going forward. We expect Wipros earnings to grow
17% over FY09-12E. At current levels, the stock is trading at a P/E of 19.7x and
17.2x for FY10E and FY11E earnings, respectively. We upgrade the stock to a
BUY. On a relative return basis the stock is rated Sector Performer.
September 10, 2009
Reuters : WIPR.BO Bloomberg : WPRO IN
Absolute Rating BUY
Rating Relative to Sector Performer
Note:
MARKET DATA
CMP : INR 544
52-week range (INR) : 573 / 181
Share in issue (mn) : 1,465.7
M cap (INR bn/USD mn) : 797 / 16,293
Promoters* : 79.2
FIIs : 6.3
Others : 12.3
* Promoters pledged shares : Nil
Sensex
1 month 7.8 5.7 (2.1)
3 months 4.6 25.3 20.7
12 months 10.4 25.3 14.9
Viju George
+91-22-4040 7414
Kunal Sangoi
+91-22-6623 3370
Market share gains to come through
Financials
Revenues (INR mn) 254,564 254,317 291,988 341,178
Rev. growth (%) 28.9 (0.1) 14.8 16.8
EBITDA (INR mn) 50,799 56,722 64,358 76,481
Net profit (INR mn) 34,415 40,496 46,475 55,454
Shares outstanding (mn) 1,455.3 1,462.2 1,470.2 1,472.2
Diluted EPS (INR) 23.6 27.6 31.5 37.6
EPS growth (%) 6.6 16.8 14.1 19.2
Diluted PE (x) 23.0 19.7 17.2 14.5
EV/EBITDA (x) 15.4 13.4 11.6 9.4
ROAE (%) 24.6 24.4 23.2 22.9
WIPRO
Company Description
Wipro 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 of
services, including systems integration, IT-enabled services, package implementation,
software application development & maintenance, and R&D services. Wipro is the first P
CMM Level 5 and SEI CMM Level 5-certified IT services company in the world. It has
more than 830 clients spanning the BFSI, manufacturing, retail, utilities, and telecom
verticals. Wipro has over 98,500 employees. The companys revenues for the past twelve
months stood at INR 258 bn (USD 5.66 bn).
Key Risks
a) sustained economic slowdown in the US and Europe beyond FY10; (b) maintaining
margins while pursuing large deals and (c) sharp appreciation of INR against the USD,
Euro and GBP.
Revenues 197,428 254,564 254,317 291,988 341,178
Cost of revenues 138,831 178,176 172,914 197,360 229,848
Gross profit 58,597 76,388 81,403 94,628 111,330
S&M expenses 8,506 10,893 10,264 13,335 14,379
G&A expenses 10,585 14,696 14,417 16,935 20,471
EBITDA 39,506 50,799 56,722 64,358 76,481
Depreciation & Amortization 5,917 8,357 9,341 10,192 10,942
EBIT 33,589 42,442 47,381 54,166 65,539
Other income 2,167 (1,272) 3,296 2,647 2,599
Foreign exchange gain/(loss) 125 (1,596) (3,503) (1,300) (1,000)
Tax 3,873 5,422 7,042 9,437 12,085
Core profit 32,008 34,152 40,131 46,075 55,053
Profit after tax 32,008 34,152 40,131 46,075 55,053
Minority int. and others - paid/(recd.) (233) (263) (365) (400) (401)
Shares outstanding (mn) 1,451 1,455 1,462 1,470 1,472
EPS (INR) basic 22.23 23.6 27.7 31.6 37.7
Diluted shares (mn) 1,455 1,456 1,467 1,475 1,477
EPS (INR) diluted 22.2 23.6 27.6 31.5 37.6
CEPS (INR) 26.3 29.4 34.1 38.5 45.1
Dividend per share 5.0 6.0 7.0 7.0 7.0
Dividend (%) 250.0 300.0 350.0 350.0 350.0
Dividend pay out (%) 26.5 29.9 29.7 25.9 21.8
Cost of revenues 70.3 70.0 68.0 67.6 67.4
Gross margin 29.7 30.0 32.0 32.4 32.6
G&A expenses 5.4 5.8 5.7 5.8 6.0
S&M expenses 4.3 4.3 4.0 4.6 4.2
SG&A expenses 9.7 10.1 9.7 10.4 10.2
EBITDA margin 20.0 20.0 22.3 22.0 22.4
EBIT margin 17.0 16.7 18.6 18.6 19.2
Growth metrics (%)
Revenues 32.1 28.9 (0.1) 14.8 16.8
EBITDA 15.9 28.6 11.7 13.5 18.8
EBIT 12.4 26.4 11.6 14.3 21.0
PBT 10.3 10.3 19.2 17.7 20.9
Net profit 10.5 6.7 17.7 14.8 19.3
Diluted EPS 10.3 6.6 16.8 14.1 19.2
Wipro
Equity share capital 2,923 2,930 2,937 2,944 2,951
Reserves 99,990 118,769 148,153 182,973 226,823
Borrowings 47,767 60,751 48,619 26,976 13,488
Minority interest 114 235 284 284 284
Sources of funds 177,235 211,168 230,912 246,532 279,337
Goodwill and Other Intangible Asset 51,423 67,106 65,214 63,002 60,540
Gross fixed assets 47,837 57,389 67,480 77,639 86,739
Less: Accumulated depreciation 21,559 28,428 35,877 43,857 52,337
Net fixed assets 26,278 28,961 31,603 33,782 34,402
Capital WIP 13,544 20,901 23,409 26,218 28,839
Investments 16,506 18,188 20,506 24,206 28,565
Deferred tax asset (1,308) (215) (215) (215) (215)
Cash & bank balances 39,270 49,117 61,310 58,167 69,833
Debtors 38,908 46,217 45,289 50,398 58,888
Unbilled revenue 8,305 13,843 17,442 21,977 27,691
Inventories 7,172 8,686 9,864 12,558 14,068
Loans and advances 22,306 33,721 37,093 40,802 44,883
Other liabilities 18,817 35,853 38,608 37,416 32,289
Working capital 70,792 76,227 90,395 99,540 127,206
Free cash flow
Net profit 32,241 34,415 40,496 46,475 55,454
Depreciation 5,917 8,357 9,341 10,192 10,942
Others (803) (5,602) 49 (0) (1)
Gross cash flow 37,355 37,170 49,886 56,667 66,395
Less:Changes in working capital 12,760 341 2,015 13,069 17,562
Less: Capex 47,463 23,271 12,599 12,968 11,722
Free cash flow (22,868) 13,558 35,273 30,631 37,111
Cash for working capital (12,760) (341) (2,015) (13,069) (17,562)
Net purchase of investments 18,329 (1,030) (2,318) (3,299) (3,878)
Dividends (5,325) (6,811) (12,027) (12,055) (12,084)
Proceeds from issue of equity 747 440 2,443 2,443 2,443
Proceeds 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) 11,666
Ratios
ROAE (%) 27.9 24.6 24.4 23.2 22.9
ROACE (%) 28.9 24.0 23.5 25.0 27.7
Debtors (days) 62 61 66 60 58
Payable (days) 43 47 58 56 55
Current ratio 2.6 2.0 2.1 2.2 2.4
Debt/EBITDA 1.2 1.2 0.9 0.4 0.2
Debt/Equity (x) 0.4 0.4 0.3 0.1 0.1
Adjusted debt/Equity 0.4 0.4 0.3 0.1 0.1
Diluted EPS (INR) 22.2 23.6 27.6 31.5 37.6
Y-o-Y growth (%) 10.3 6.6 16.8 14.1 19.2
CEPS (INR) 26.3 29.4 34.1 38.5 45.1
Diluted P/E (x) 24.5 23.0 19.7 17.2 14.5
Price/BV(x) 6.1 5.3 4.4 3.6 3.0
EV/Revenues (x) 4.0 3.1 3.0 2.5 2.1
EV/EBITDA (x) 19.8 15.4 13.4 11.6 9.4
EV/EBITDA (x)+1 yr forward 15.4 13.8 11.8
Dividend yield (%) 0.9 1.1 1.3 1.3 1.3
Wipro
9.7
APPENDIX
As part of our ongoing endeavour to bring out the unique aspects of business models
of global peers (such as Accenture, Cognizant, IBM) of dominant Indian IT services
companies, we turn the spotlight on Cognizant Technology Solutions (Cognizant). We
take a step back and investigate in-depth the Cognizant story unlocking its DNA. In
our view, it is instructive to understand the factors behind the rise of the company
over the past six years.
Late beginnings.
Cognizant was a late entrant in the business starting out as an offshore
technology captive of The Dun & Bradstreet Corporation (then Dun & Bradsheet
Satyam Software) in 1994. Satyam held a 24% stake in this venture which was
bought 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 Infosys
came into being in 1981.
.but with a history of outperformance
Cognizant has stolen the thunder out of its larger Indian peers since Indian IT
emerged from the previous tech downturn (2002). It has sustained growth well
ahead of its older and larger peers (revenue CAGR of 55.2% over CY03-08). Each
year, for the past five years, the company grew ahead of Infosys on both
revenues and net profits fronts. In fact, the relative growth differential vis--vis its
peers has expanded in CY08 (FY09 for peers)the most challenging year yet since
2003. The company has been consistently adding more USD revenues (in absolute
terms) per quarter than its peers have done in the recent past. This is creditable
as the Big 3 in Indian IT (TCS, Infosys, and Wipro) are still significantly larger
than Cognizant. We believe there is something that Cognizant is doing right in
driving domain-led sustainable growth, which is embedded in its DNA.
We attribute the superior growth profile of Cognizant to a four-fold refreshing
philosophy that we discuss below:
(a) Promise investors modest yet sustainable operating margins and re-invest the
excess in the business for growth, differentiation, and leadership.
(b) Adopt a differentiated and structured approach to relationship management
with 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 extent
possible. Even Cognizants consulting practice is verticalised.
(d) Focus on depth rather than breadth. Depth serves Cognizant well in this
environment as it significantly grows ahead of its peers and industry in this
difficult 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 high
growth. This has resulted in the development of Cognizant 2.0 a landmark
platform that presents rich collaboration possibilities in addition to the order-
of-magnitude productivity improvement that such a proprietary platform
enables.
September 10, 2009
MARKET DATA
CMP : USD 37.5
Viju George
+91-22-4040 7414
Kunal Sangoi
+91-22-6623 3370
The rise of Cognizant: Lessons for Indian IT
COGNIZANT TECHNOLOGY SOLUTIONS
We dwell on several notable aspects on which Cognizant has been early in establishing best
practices 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 in
business
Cognizant, 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 never
serve to be a point of differentiation for it. The companys guiding philosophy was
summed up in managements own words as follows:
When we started, we realised that the India advantage was a substantial one. But so
did every other company! We therefore looked at the Big Five consulting firms and
noticed that they had differentiated themselves by providing excellent customer
experience, leveraging a strong front-end and deep domain expertise. We then set about
building a company that gave clients the experience equivalent of or better than dealing
with 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 the
global majors on one side having deep domain expertise and strong relationship
management. The Indian majors would be at the other end of the pendulum offering
good delivery excellence, but with limited domain expertise and relationship
management. We brought in the best of both worlds investing in both the front-end and
the backend. We have the strength of delivery, and the positives of domain expertise
and relationship management. And, I think, there is a race to the middle with both types
of companies trying to move towards where we are.
In accordance with this, Cognizant took an approach of working with and committing to
a 19-20% operating margin target (before stock compensation expense) intending to
reinvest the excess back into the business. Unlike Infosys, it believes that a trade-
off between margins and growth is present and will play out in the medium-to-
long term. It took the side of sustainable growth and sustainable target
operating margin in this debate.
Cognizants re-investment strategy is three-pronged. One, it invests heavily in client
partners, generally local people who manage relationships with customers and interface
with them with a deep understanding of the respective industry. In this context,
Cognizant has led the industry in hiring decision-makers. Many of their
country/geography heads (to name a few Japan, Australia, Argentina and Germany) are
typically locals who have been senior decision-makers in companies such as IBM, Oracle,
Accenture and EDS. In addition to growing people from within, hiring key
decision-makers and integrating them into the Cognizant culture seems to the
mantra as opposed to a typical mindset of Grow and cultivate decision-makers
within and then promote them to handle bigger responsibilities. Thus, it is
perhaps not surprising that particularly in the earlier days, geography, sales and
marketing 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 a
lower utilisation rate (60-65%). So this part of the investment goes into maintaining a
deeper bench. Third, the company has led the industry in investing in different profiles
of people of a value-added nature. It enjoys a decided edge over its peers as a calling
card in premier business school campuses in India (such as IIMs, ISB). As per our
tracking, it makes many more offers than its Indian peers at such institutions and has
traditionally enjoyed stronger brand equity. It is perhaps among the very few Indian IT-
services companies 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. Cognizants
CBC provides advice to clients in consolidation, IT strategic planning, technology
rationalisation, and offshoreability analysis, among others. While its positioning in CBC is
not necessarily unique (Infosys, TCS, and Wipro have carved out separate solutions
groups), we believe that in CBC, Cognizant has invested early in creating good traction.
Adopt differentiated and structured approach to relationship management
Cognizants superior approach to relationship management flows not just from its
investment industry Practice Leaders (in industries such as banking, healthcare, and
retail 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), but
also its Client Partners, and in sales and marketing personnel in greater numbers than
its 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 Practice
Leaders. They are senior industry professionals responsible for heading specific verticals
or technology offerings and have had substantial experience in their respective domains
(typically at least fifteen years). Reporting to Practice Partners are Client Partners who
assume responsibilities for several client accounts. In case a client is large, a Client
Partner handles only that account. The Client Partner serves as the single point of
contact for a client. Client Partners are supported by Account Managers who assume
individual account responsibility. Thus, there is a clearly institutionalized three-
tiered structure 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 sales
or marketing team aligned to that vertical. Typically, they comprised people of local
origin 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 Delivery
Manager (located offshore). Similarly, the hori zontals that sold their services to clients
(through the verticals), also had two people with joint responsibilityone onsite and
another offshore. The delivery manager had at his behest functional experts and
business analysts.
Cognizant Technology Solutions
Fig. 1: Two-in-a-box-model as envisaged and implemented by Cognizant
Cognizant calls this the two-in-a-box-model, which is trademarked (see fig 1). In
client engagement, two people (one onsite and another offshore) are jointly responsible
for all KRAscustomer satisfaction, employee satisfaction, revenue, and profitability. For
example, for every client, there are two global leadsa Client Partner in the clients
location and a Delivery Director in an offshore location. Further up, there are two
Practice Leadersone in the clients location and another in India. All the pairs have
joint accountability and their performances are assessed based on the same metrics. No
one entity has an upper hand over the other in managing the joint P&L. Because the two
people at the same level have the same revenue and profit targets, their incentives are
structured similarly, even though their jobs were dissimilar.
It was important to align performance management systems and incentive systems
accordingly. The company was sensitive to this need. The parameters for determining
the bonus of a Delivery Director are similar to those of a Client Partner, because both of
them at Cognizant own the top line and bottom line for a particular client. We also
observe that the variable component in the total payout structure tends to be
significantly greater in Cognizant than in its Indian peers. The company had to say this
about its pay-for-performance model:
Onsite Offshore
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We do not grade Client Partners on a normal curve, so there is no limit to what each of
them can earn. I know of a Client Partner who got a 350% variable compensation
payout The actual bonus amount is based on customer satisfaction and employee
satisfaction 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 USD
18 mn at x minus 10% profitability, I dont get anything. But if I achieve USD 15 mn x
plus 20% profitability, there is a huge kicker. In line with the philosophy of the two-in-
box model, the parameters for determining the bonus of a Delivery Director are similar
to those of a Client Partner, because both of them jointly own the top line and bottom
line for a particular client with neither holding the upper hand.
Presence of an external advisory council. As a novel practice, Cognizant has an
advisory council for relevant domains or verticals. This council is composed of
external industry veterans who bring leading-edge thinking to bear on the industry and
plays the role that the board of governors of the company plays on a smaller scale. This
has helped debate issues at the domain level at a far more granular and expert level and
in a manner of speaking helps run each domain run as an independent company with its
own board of directors. Quality advice does not come cheap and Cognizant is prepared
to bear this rather unique investment.
Again, we emphasise that it is not that Cognizants Indian peers operate differently on
most of the discussed aspects, it is just that Cognizant embarked on many of these
structures well before its Indian peers did.
Seamlessly integration of back end with front end; early verticalisation has
helped
Cognizant verticalised its back end as early as 1998-1999 and then verticalised its front
end in 2002-03. Unlike some of its Indian peers who waited for critical mass before
verticalising delivery across domains in geographies, Cognizant strongly verticalised its
delivery along BFSI and healthcare well before it attained critical mass.
It was in 2002-03, when the onsite client relationship structure was morphed from a
geography-centric model into a vertical structure. In doing so, Cognizant stole a march
over its competitors, who were still organised along technologies of specialisation or
along geographies. The issue with a geographic-centered approach is that an integrated
view of the customer may not be taken. Cognizant established dedicated customer P&Ls
for not just its leading customers but also for what it deemed potentially strategic
customers and accordingly allocated resources by domain client-wise spanning sales and
marketing, delivery, account management and pre sales. It believes that it was among
the first to do so in the Indian IT sector, particularly in the context of investing in clients
who were sub scale but of significant potential. Also, in making this transition there are
inevitable teething problems associated with incentivising sales force (who were earlier
aligned along geographic lines are often accustomed to selling solutions spanning
verticals to meet targets). The issue of relocating and accommodating elsewhere senior
2-in-a-box now becomes 3-in-a-box. Cognizant has raised its sales & marketing and
relationship management game by attempting to position itself as a trusted advisor to
key, strategic accounts. Such select, identified accounts will enjoy the expert oversight of
a very senior industry leader (or one who has considerable experience in consulting
typically at a partner level). Such highest-level experts will now manage strategic
roadmaps for embedding Cognizant into the entrails of the clients aligning-IT-to-
business strategy while also ensuring that operational, running issues are managed by
the existing 2-in-a-box structure. This is an expensive investment and we reckon that if
Infosys were to make such investments in only 5% of its accounts, additional
investments would be ~50 bps (as % of revenues).
delivery personnel who did not have the requisite vertical experience also presented
itself. The verticalisation of other domains viz., retail, manufacturing, telecom, and
media followed.
Most other Indian peers wait for critical mass to be established before they verticalise
across geographies. For example, Infosys started to complete its verticalisation in
Europe only in FY08, waiting tocross over the USD 1 bn plus mark and build
comfortable margins before completing this exercise. We believe as a result of this delay
it may have foregone an opportunity to showcase greater focus and depth in its offerings
in Europe.
Cognizant took a vertical-aligned approach even to its BPO. At Cognizant, BPO was a
capability which each vertical sold as part of its portfolio of offerings. For example, as
part of its healthcare and life sciences vertical, Cognizant worked with Pfizer Global
Research and 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 research organisations.
The result of such a vertical orientation in BPO is that while revenues in this practice
lagged 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 that
Cognizant recently announced a large KPO dealof USD 95 mn over a five-year period
in 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 thought
constantly about issues related to a particular industry. As a result of this, dollar for
dollar, we have more industry experience and expertise than our competition at the
customer interface level.
The company is now carrying out verticalisation to the next degree which we call sub-
verticalisation. Cognizant is well organized in sub verticals. A good example is its
manufacturing 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 of
verticalisation after domain) are seen in ready scalability. Cognizant has seamlessly
grown in the past four-five years without undergoing drastic/major internal
restructuring, which TCS and Wipro undertook in FY08. If a company does not get the
structure right early on, this sometimes strangulates or delays growth and gives birth to
associated pangs. The jury is still out on the success of restructuring exercise of both
these companies (TCS and Wipro).
Focus on depth rather than breadth
The company was helped by its parentage and origins (D&B), and early association with
the 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 verticalisation
helped develop a business model that lent its natural advantages to farming accounts as
opposed to merely opening them. It derives over 70% of its revenues from just two
verticals (BFSI and healthcare) and while that may be perceived as industry-risk, we
would point out the following:
(1) On a run rate basis in a difficult environment, Cognizant is adding more revenues
per quarter in BFSI than its larger peers. Over the past three quarters (since Oct 08,
right up to and including June 2009), Cognizant cumulatively added USD 56 mn of
revenues 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 quarters
compared to the preceding three-quarter period
(2) We note that despite limited exposure to capital markets in BFSI, Cognizant has
distinguished itself by depth in commercial/retail banking, treasury and insurance to
a much greater extent than peers. Indeed, when Infosys was Cognizants present
size by quarterly revenues (current run rate per quarter is about USD 747mn), it
derived almost 15% less revenues from the BFSI segment than Cognizant does now.
(3) Cognizant has an almost uncontested leadership position in healthcare spanning the
drug development lifecyclefrom discovery, clinical, manufacturing/production to
commercial operations (sales and marketing). Its sweet spot is particularly in drug
development covering analytics relating to clinical trials (straddling Phases 1 through
4), submission managementan area in which Indian competition is relatively absent.
The company also provides post-drug development analytic support by way of an
ongoing KPO. Where Indian IT competes with Cognizant in healthcare is in handling
post-research activities related to production, sales, and marketing support and
shared services support (finance & accounting, HR etc.). Indian IT 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 of applications
over a five-year period. While Cognizant got the application maintenance piece for
discovery, clinical and sales and marketing areas, Infosys got it for manufacturing and
corporate 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 are
present in the payer segment, they are noticeably less so in the provider segment
(hospitals). Unlike the payer side of the healthcare business, wherein Indian IT is
more likely to deal with larger financial institutions/insurance agencies, the provider
market is significantly penetrated and local. For example, the advantage of a strong
presence in New Jersey does not necessarily mean this strength can be exploited to
penetrate Washington DC. This requires a localised and a more relationship-oriented
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approach to sales and marketing which Cognizant has brought to bear. It is another
sub-segment within healthcare that presents entry-barriers.
Speed and aggression in crafting go-to-market models
Cognizant has not shied away from adopting customized and differentiated go-to-market
models to penetrate new markets. Its partnership with T-Systems has enabled it to
penetrate the German market while also affording it an understanding of the telecom
domain where it lags behind peers. Owing to the crisis, the alliance has tracked a bit
below expectations on the revenue front but has evolved in nature to cover joint go-to-
market propositions.
Manufacturing is a small segment for Cognizant (as % of revenues) but the company
has recently stitched a win-win alliance with Invensys by taking on board about 400
employees of Invensys R&D facility in India. We see this as a potential game-changer
for Cognizant as product engineering and lifecycle management, being the inner core of
manufacturing presents large market potential that Indian peers do not have much
strength in or expertise at to commensurately exploit (see Case study below).
Case study: Cognizant-Invensys alliance represents a good win-win alliance
On the face of it, 400 personnel from Invensys R&D captive centre in Hyderabad
would not add more than USD 100 mn of revenues over five years. However, the
game here is rapid expansion and deepening of Cognizants competence in various
sub-segments of manufacturing that would enable Cognizant to upsell to existing and
prospective manufacturing clients and further penetrate Invensys and its customers
with its system integration and enterprise application skills.
To provide a context, Cognizant has used enterprise solutions (package
implementation) to penetrate manufacturing, but unless it integrates this into shop
floor processes, it will never be able to address manufacturing at its very core. The
acquisition of the Invensys subsidiary helps Cognizant do just that. We gather that
this was a deal that global and other Indian top tier players went after quite
aggressively, not surprising given that the market for Industrial Automation Package
Solutions is currently around USD 35 bn. In addition, there is a similar size of market
in the area of custom-built solutions. As many industries are espousing package
solutions, the market potential for Invensys products and solutions is significant.
Invensys found Cognizant 2.0 a powerful product development platform, which, we
believe, could have been a contributory factor to Cognizant winning out in the end.
What will be the markets in which services of Cognizant-Invensys
Operations Management combine will be offered?
This is a global relationship. For Cognizant, this relationship will create multiple new
revenue streams:
1. Core product development: Participate in the core product development for
Invensys (this will give Cognizant the ability to understand product functionalities
in granular detail and be able to customize solutions based on needs).
2. Industrial automation services: Cognizant hopes to leverage the product
knowledge and be the global systems integrator to provide industrial automation
implementation 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-specific
solutions and expand within its client base and/or penetrate newer clients,
industries and markets.
Making both market-facing and internal-focused investments work
In our view, making investments per se is not what makes Cognizant stands out. It lies
in making them work. The company has gone on record that it takes less than four
quarters for its experienced business development hires to win deals even in service-
lines, verticals (domain) and geographies where it has had no/little presence.
While Cognizant protects its core (BFSI and healthcare), its ability to ratchet up the
growth engine is not matched by the big 3 in Indian IT. With Cogni zant the probability of
rewards 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 (financial
services and healthcare collectively accounting for 70% of revenues) to find
aggressive growth in retail/manufacturing/logistics/transportation, which now
account for over 17% of overall revenues.
Cognizants 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 18-19
percent in just the last couple of years. Likewise, for the June 09 quarter, its
revenue contribution from outside the US/Europe grew 65% Y-o-Y . This is
admittedly 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-years
of investment over several years and currently consuming ~300 man years for ongoing
maintenance is a serious investment program. The company believes that with this
platform for knowledge management and distributed delivery for project management, it
has unleashed an order-of-magnitude productivity improvement in the way projects are
managed organisation-wide. It believes that such a platform offers rich win-win
collaboration opportunities with alliances/complementors. In essence, while Cognizant
has traditionally been associated with making front-end investments readily, this has
also proved that the company keeps its internal focus high as well at the same time.
Infusing flexibility in business model
Cognizants business model envisages maintaining high levels of bench in years of
growth (reflected in high SG&A costs as a percentage of revenues as cost of bench
classified in SG&A). This gives the company the flexibility to soak up the available
utilisation in the system. As a result, it has been rather guarded in hiring right through
CY08, preferring utilisation. Also, unlike Infosys and TCS, Cognizant has considerably
moderated its hiring for CY09 (FY10), thus limiting downsides to margins from uncertain
utilisation. In support of this, we note that its organic revenue growth of 28%in CY08
and 12-13% in CY09 (CY09 as per consensus) is well ahead of its headcount increase for
the same period. So while Indian peers await greater volume growth to optimize
utilization, 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 it
Right from FY03 (or CY02 for Cognizant) through FY10 (or CY09), Cognizant has grown
ahead 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 its
relative growth differential. We note its incremental revenues (in USD) added quarter-
wise in the past three quarters since Oct 2008 outweigh revenues peers have added on
a quarterly basis (see charts 4 and 5). This is creditable given the larger revenue bases
of the Big 3.
Chart 2: Cognizant ahead of Infosys in revenue growth every year since FY04
(or CY03)*
Note: * FY09 for Infosys is taken equivalent to CY08 for Cognizant
10.0
22.0
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Infosys Cognizant
Chart 3: Cognizant has grown ahead of Infosys on net profits since FY04*
Note: * FY09 for Infosys is taken equivalent to CY08 for Cognizant
Chart 4: Incremental quarterly revenue build-up most consistent in case of
Cognizant*
Note: * unadjusted for inter-currency fluctuations, not expressed in constant currency
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Chart 5: Revenue build-up (or increase in quarterly revenue run-rate) over Jun
08 Jun 09 has been maximum for Cognizant*
Note: * unadjusted for inter-currency fluctuations, not expressed in constant currency
In CY08, Cognizants organic growth at 28% (organic growth excluding acquisitions of T-
Systems and marketRX) is markedly ahead of peers, which we believe is commendable
given 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 this
environment. It seems to set to repeat this revenue growth leadership in an even more
difficult CY09 (FY10 for its peers) at 12-13% USD growth (as per consensus)
The market has taken cognizance of Cognizants superior growth in good times
Cognizants P/E (current) has been trading at a consistent premium to the Infosys ADR
for almost the last two years (since Mar 07 through August 09 before which it was at a
discount; see charts 6 and 7). This premium reversed after the Lehman fold-up
whereupon Infosys closed the gap and started trading at a premium. However, the
Infosys ADR premium is narrowing as the downturn recedes.
Chart 6: Current P/E of Cognizant versus that of Infosys (ADR)
Source: IBES, Company, Edelweiss research
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Chart 7: Cognizant's P/E premium to the Infosys ADR
Source: IBES, Company, Edelweiss research
Conclusions: To sum up, Cognizant has distinguished itself relative to peers via five-fold
approach 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 the
extent possible.
(c) Integrate the back end tightly with the front end through joint responsibilities and
co-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 customer
experience ruled.
(e) Managing the tricky duality of protecting the core while investing effectively for
growth.
As a result of these factors, Cognizant has built and refined a business model over time
which 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 pure
delivery per se. Relative differences show up in consultative delivery. With the benefit of
hindsight, we believe that Indian IT firms have historically not spent as much on
relationship management and client mining as they should have. Infosys and TCS fare
somewhat better than the others, but the difference shows up in a tougher environment
as 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 past
owes is due to its relationship management and better client mining. We would make
this observation though: When Infosys was Cognizants size (i.e. eight quarters ago) on
a quarterly revenue run-rate basis, it derived almost 25% lower revenues (in USD mn)
from the BFSI segment than Cognizant does.
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Why do we compare Infosys with Cognizant on relationship management?
It is because even though Cognizant, at 45% of revenues from BFSI, is much more
exposed 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 personnel
than Cognizant, but may not invest adequately ahead of the curve in account
management personnel, especially locals who are familiar with the terrains and trenches.
TCS has many more sales and marketing personnel than Infosys, but it does not
encourage them to manage accounts of a size that Infosys demands. It seems that both
Infosys and TCS are yet to find the sweet spot on this. Wipro is still lacking on both
dimensions: (a) size of accounts managed by account managers; and (b) number of
sales 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 is
anything but that. As we have discussed in this report, Cognizant has a three-tier
institutionalised relationship management structure with practice partners, client
partners (reporting to practice partners), and account managers (reporting to client
partners). The buck stops with practice partners but each of these three has well
demarcated responsibilities and profiles. Infosys has theirs as well, but it is perhaps not
as localised and tiered at higher levels as it is for Cognizant.
Table 1: Cognizant seems to have the perfect balance
Infosys Cognizant TCS
Strength of S&M staff (Jun-09) 821 >800 >850
Cost of bench in SG&A (in bps) - 300-400 250
SG&A as a % of revenues (Q1FY10) 12.6 21.9 19.6
SG&A as a % of revenues adjusted for bench 12.6 19-20 17.1
Table 2: Operating metrics (till Q2CY09)
Source: Company
Note: Repeat client revenue represents percentage of revenue from clients who have worked with Cognizant for more than one year
1QCY08 2QCY08 3QCY08 4QCY08 1QCY09 2QCY09
Revenue-Horizontal (USD mn)
Development 310.1 324.9 345.1 342.1 333.3 346.3
Maintenance 333.0 360.5 389.6 411.0 412.6 430.3
Total 643.1 685.4 734.7 753.0 745.9 776.6
Revenue-Vertical Financial (%) 45.5 45.8 46.1 44.9 44.4 42.8
Healthcare (%) 25.0 24.0 23.7 25.2 25.4 26.3
Retail/Mft/Logistics (%) 15.0 15.6 15.7 16.4 16.5 17.1
Others (%) 14.5 14.6 14.4 13.4 14.0 13.8
Revenue - Type Fixed bid (%) 26.8 25.7 26.3 27.8 29.1 30.0
Time and material (%) 73.2 74.3 73.7 72.2 70.9 70.0
Revenue - Concentration Top 5 clients (%) 20.4 19.9 19.0 18.7 17.6 17.6
Top 10 clients (%) 30.8 30.7 29.7 29.8 29.3 29.1
Revenue-Geographic (USD mn)
North America 513.9 536.3 577.1 601.1 593.8 621.0
Europe 121.2 139.0 145.0 136.0 136.0 138.7
Asia 8.1 10.2 12.6 16.0 16.0 16.9
Revenue - 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 11.3
Headcount (Ending) Technical staff 54,425 55,525 55,450 57,650 59,470 59,830
Support staff 3,565 3,800 4,040 4,047 4,230 4,300
Total 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 77.0
Billing Rates Average - onsite (USD mn) 75.0 75.0 75.5 74.3 72.3 72.3
Average - offshore (USD mn) 25.0 25.0 24.5 24.3 23.8 23.5
Utilization Utilization - onsite (%) 88.0 88.0 89.0 88.0 88.0 88.0
Utilization - offshore (%) 53.0 55.0 61.0 64.0 63.0 66.0
DSO (excl. unbilled) In Days 64 70 66 63 64 65
DSO (inc. unbilled) In Days 74 77 75 71 73 75
Capex (USD mn) 53.4 31.8 61.1 23.1 20.5 9.6
It is interesting to note that in the current environment Infosys proportion of the
junior workforce (i.e., the percentage of employees with less than three years of
experience) has reached a six-year low. The reverse of the increase in bulge or
increasing proportion of the aging workforce is now taking place. But Infosys decision
to 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 we
explain 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 model
rests on a partly consulting-driven, solution-oriented and vertical-led approach (as
opposed to technology-led). And, the success in graduating to such a business model
may not be determined by operating margins alone, but perhaps more crucially by the
per capita profitability. In fact, we argue that some of the lower-margin businesses
may add more value from the per capita profitability perspective. We discuss this
apparent contradiction in this report.
Higher margin offshore-dominant services use more inexperienced
resources
The past four-five years saw the Indian IT services business model progress to
envelop offshore-centric service lines such as BPO, infrastructure services, and
testing. These are volume-based service lines that lend themselves to the use of
freshers and non-engineering graduates and, hence, have readily absorbed the
bulge in Indian IT companies such as Infosys during 2004-08. Some of these
services such as testing and infrastructure management can have higher margins
than the overall company average and are more readily scalable. However, the
downside is that the per capita profitability of such service lines tends to be much
lower than the value-added services. Also, they more readily commoditize being
lower hanging fruit. However, it is possible to take a value-added, distinctive
approach as Cognizant has in its BPO.
but consulting and value-added services fetch higher per capita profits
Build-out of consulting and solutions will need to incorporate more experience and
superior quality skill sets. Such businesses could be lower-margin with a more-
onsite bias, but can still top the ladder of value addition. It is instructive to note
this fact: Accentures operating (EBIT) margins are 13-14%, yet its per
capita EBIT is 15-20% higher than Infosys on a much bigger revenue
base of ~5x.
Thus, increasing bulge (inexperience) may not necessarily be an out-and-
out good development for Indian IT. Especially, if the bulge builds out discretely
in service lines such as BPO, infrastructure management (IM), and testing where
Indian IT companies are yet to crack the code 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 in achieving a smooth integration of
all of these sub-offerings with a common platform or interface to the customer. This
is only possible with embedded value addition in integration and functionality (thus,
higher-skilled resources). Standalone offerings, drawing on inflated bulge, fall short
of doing that. In our view, the real economic advantage of bulge is that it affords a
stream of steady cash flows in stable service lines that is ideally systematically
harvested in building traction in value-added, higher-end services.
September 10, 2009
Viju George
+91-22-4040 7414
Kunal Sangoi
+91-22-6623 3370
India Equity Research | IT
To bulge or not to bulge?
IT
Companies have to make the trade-off between value-addition from higher-cost resources
against the relative stability offered by service lines that lend themselves to bulge. The latter
should be seen as a protective bubble that allows them to play offense. It cannot be the
raison dtre. Infosys bulge has reversed during FY09.
Table 1 lays out how the experience curve for Infosys has moved since 2003. Chart 1 shows
the proportion of the workforce with less than three years experience now stands at ~47%,
downfromthepeakof 59%inFY01. Likein the previous slowdown, the bulge today has
reversed in favor of experience.
Table 1: Distribution of Infosys workforce by experience band
Source: Company
Chart 1: Charting out Infosys bulge over time
Note: IM - Infrastructure management
Infrastructure management: Allows bulge, but per capita profitability is lower
than company average
Figure 1 lays out how offerings in the IT Services portfolio typically stack up on operating
margins and per capita profitability. Improved per capita profitability is possible in
infrastructure management with effective non-linearity. Wipro indicated to us that one
factor behind its confidence on its margin defence stems from its traction in
infrastructure management (ex-Infocrossing) which allows above company-average
margins. Also, Wipro indicated that an increasing proportion of its revenue traction in
infrastructure management stems from non-linearity (although still small, infra
management overall contributes about 19.4% to Wipros IT revenues). This comes about
from shared services where resources are shared across devices and workflows, device-
based pricing and SLA-driven realization. TCS indicated to us that it is executing on a
sizable, 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 perspective
(%) FY03 FY04 FY05 FY06 FY07 FY08 FY09 Jun-09
0-1 year 20.0 31.0 22.6 26.0 25.0 19.9 17.7 16.3
1-3 years 26.6 21.0 33.5 33.0 31.0 33.4 29.7 28.0
0-3 years 46.6 52.0 56.0 59.0 56.0 53.3 47.4 44.3
3-5 years 21.5 20.0 14.8 12.0 18.0 19.1 21.0 22.5
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Fig. 1: Higher-margin services generally have lower per capita profitability (enterprise solutions is the exception)
BPO takes in bulge but suffers from lack of IP and lower per capita profitability
BPO tends to suffer from the double whammy of both lower margins (%) and
lower per capita profits. We estimate that per capita profits for Infosys BPO arm is
only about 25% of that of its IT-Services. Thus, it seems that unless Indian IT firms can
build defensible and value-added propositions in their BPO product line such as
verticalization, integration (of processes, platform and data) with IT and commercialized
platforms, they will be hard-pressed to create value in BPO from a standalone
perspective.
In general, Indian IT firms have not driven IP or platform-based solutions in BPO to
emerge as specialist firms noted for their expertise in a uniquely identified service area
such 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 celebrates
services to create such IP-driven solutions. Hence, their probability of being market
leaders in BPO areas such as transaction processing like global biggies (ADP, Exult, First
Data Processing), through an IPR-driven platform proprietary model, and thus emerge as
multi-billion dollar entities, seems remote.
In other words, a standalone commoditized BPO player will find it hard to create market
cap beyond a certain threshold (say, USD 1.0-1.5 bn) because the growth versus margin
trade-off is more severe in commodity services. Even Genpact, the worlds largest
service BPO FTE-based player, has a one-year average market cap of about USD 2.6 bn
(2.5x revenues), despite being about 4x Infosyss BPO revenues (or ~ 3x Wipros BPO
revenues). Genpact has begun to understand the limitations of being a standalone FTE-
based BPO 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 BPO
strategies need not centre on bulge alone but also on value-add, please refer to
System integration (SI)
Application development (AD)
Consulting (standalone)
Consulting (downstream)
Testing
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IT
A study in contrast: Infosys BPO versus Cognizant BPO Its 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 FAO
space (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-value
component has been rather measured, and we believe that Infosys needs to do more. Infosys is in the throes of
verticalising some of its mature processes around FAO by adding some domain related value-add. Development of a
platform (in conjunction with SAP), to manage solutions like procurement, is yet to translate into a concrete go-to-
market offering. Still, the Infosys BPO essentially remains a horizontal-driven service line with a predominant FTE-based
revenue model. A transaction-based pricing model can generate profits only with scale and minimum volumes where
Infosys is yet to build maturity. Maturity also comes with the requisite learning curve which tends to be longer in
transaction-based pricing models. The acquisition of the Philips BPO captive has strengthened Infosys positioning in
FAO, but may not have invested it with specialist vertical capability (except in mortgage solutions). The Philips
acquisition has also helped Infosys improve its ability at working on a shared services model. It has also helped Infosys
win new clients in FAO especially in the manufacturing vertical. Notably, we believe that Infosys BPO operates at a fairly
significant 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-based
HR 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), it
took verticalisation in BPO as the logical step in defining its value proposition in keeping with the already prevalent
verticalisation in its IT services business. Here, BPO/KPO was a capability that each vertical sold as part of its portfolio of
offerings. For example, as part of its healthcare and life sciences vertical, Cognizant worked with Pfizer Global Research
and 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 research
organisations. The result of such a vertical orientation in BPO/KPO is that while revenues in this practice are lower than
its 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 that Cognizant recently announced a large KPO deal -of USD 95 mn over a five-year period in
clinical data management with AstraZeneca - is testament to this. The acquisition of marketRx, a high-end sales and
marketing analytics firm focused on sales and marketing analytics in the life-sciences industry (this firm had annual per
capita revenues of about USD 100,000 at the time of acquisition with a run rate of USD 40 mn revenues and about 400
employees), further boosted Cognizants credentials beyond discovery, clinical and manufacturing processes . It also
helped in driving Cognizants BPO/KPO traction in several healthcare/life-sciences leaders (marketRx worked with all the
20 of the Top 20 pharma companies) and also extended the capability provided by the core analytics platform to other
sectors.
Can commodity services be innovatively packaged in a strategic and value-added mode? While Cognizant has
traditionally 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 the
core processes. One example of its voice based support is the adverse event calls (calls made to a toll-free number in
the event of adverse reaction to drugs) that the Companys specialist professionals (doctors and pharmacists) take to
help its pharmaceutical clients test newer drugs in accordance with drug safety norms as de fined by bodies such as the
Food and Drug Administration (FDA).
All of this is reflected in the superior per capita metrics of the Cognizant BPO/KPO relative to the Infosys
BPO even as we believe that margins are comparable. As per our estimate, per capita revenues of Cognizant
BPO 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 a
recent NASSCOM Everest India BPO study titled Road map 2012: Capitalizing on the expanding BPOlandscape, Over
the next five years, vertical specific BPO services (refers to BPO services that require a high degree of vertical specific
knowledge) 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).
Table 3: Comparing Infosys BPO with Cognizant BPO on select parameters
Note: *Edelweiss estimates only
Can the bulge be sustained?
We liken any of the top-3 Indian IT companies to a giant ship. This was going steadily in
a particular direction and since the rules of the direction and controls were set, the ship
could run with a greater proportion of inexperience. But with the ship needing to reset its
priorities in the current environment, and hence, alter direction, effecting change
requires some greater level of experience and old hands. Only after the new rules of the
game become clear, and blueprinting and proof-of-concept have accordingly developed
can the reversion of the bulge to the mean take place. In other words, broadening of the
pyramid is possible only with critical mass of domain knowledge/capability in verticals
(e.g. BFSI and telecom service providers) and service lines such as application
management, BPO and infrastructure management, which will take time to build in new
areas and verticals after the current crisis.
Parameter(s) Infosys BPO Cognizant BPO
Years of existence 6.5 years 3.5 years
No. of employees 17,000 3,500*
Annualized revenues (FY09) USD 280 mn USD 150 mn
As % of total (company-wide) 6% 5%
Annualized per capita revenues USD 16,000 USD 40,000*
Mortgage
Financial Services (Fund
administration, fund accounting,
investment analysis and research
support, trust services, fraud
analytics, loan processing,
finance and accounting)
Healthcare and Pharmaceutical (clinical
data management, pharmacovigilance,
provider credentialing, drug safety and
risk management, regulatory filing
support, subrogation, anti-fraud)
Financial Services (Fund administration,
fund accounting, investment analysis and
research support, trust services, fraud
analytics, loan processing, finance and
accounting)
Manufacturing, Retail and Logistics
(supply chain mapping, pricing analytics,
procurement management, warranty
claims processing, logistics management)
Media and Entertainment (Media
measurement, online ad management,
campaign analytics, royalty processing,
subscription and customer value
management)
Bulge High Moderate
Focus areas FAO (in financial services), billing
and collections management (in
telecom), financial research
Healthcare and Life Sciences; Financial
Services; Manufacturing, Retail and
Logistics
Low Moderate
Acquisition strategy (based on acquisitions
so far)
Philips BPO deepen expertise in
F&A, operate on a shared service
model
marketRx deepened its domain expertise
in the life-sciences industry and added
high-end analytics capabilities.
Outcome-based revenues or non-linearity as
% of revenues (BPO)
Vertical solutions
IT
The Y2K crisis provided an opportunity to build out in BFSI and expand bulge
subsequently, while the outsourcing of R&D and product development in telecom
equipment vendor space (heralded by captives such as Texas Instruments and Motorola
in India) provided expertise in networks management and systems management, which
was leveraged on a larger scale in the telecom service provider segment. These trigger
events presented opportunity to penetrate and consolidate, and consequently laid the
foundation for bulge in this vertical as well. Today, Indian IT needs to seek such events
for a mean reversion of the bulge. We lay out the process of reversion of the bulge to the
mean in figure 2.
Fig 2: Low bulge but high value-add solutions create downstream, high bulge-
oriented implementation opportunities
However, value-addition in business model resting exclusively on increased
bulge exhausts itself fairly quickly unless firms floor the pedal on innovation
When we have business models built only on people, then soon with limited pricing
power and skill sets, diminishing returns (as measured by EBITDA/person or
EBIT/person) will set in. The INR depreciation is helping today, but what when the trend
of INR depreciation is reversed.
This is because pricing is declining while investments will have to be made that will end
up keeping expenses growth ahead of revenues. Already, all others, barring Infosys,
have been showing declining trends of EBITDA/employee till FY08. Thus, one is
constantly running a treadmill. To grow at 20% EBITDA, a company will have to hire
25% more people, which multiplies in the next year and so on.
Unless the decline in operating profits/employee (EBITDA/employee) is arrested, we
believe benchmark cost of capital (equity) returns (of 12-13%) will be hard to obtain
beyond a horizon of two-three years in the large-cap Indian IT services space. To beat
this benchmark, firms must work towards making discernible progress in their non-linear
initiatives.
Viewing the competitive advantage and value-add of the business through the lens of
operating margins is insufficient. Operating profit per employee is perhaps a more
appropriate gauge of value-addition/commoditisation. As we have pointed out before,
Bulge is high
Higher margin but commoditizing service lines providing annuity-like stream of investable
cash flows (testing, infrastructure management services etc.)
Bulge is reversed
Invest in building lower/equivalent margin but higher per capita profitability solutions
(domain-led, delivery based etc.)
Bulge builds up again
Solutions after having won acceptability and recognition begin to drive downstream
Downstream maturity, in turn, creates more bulge
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IT
Conclusion
Increasing bulge may not necessarily be an out-and-out good development for
Indian 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 the
code 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 in
achieving a smooth integration of all of these sub-offerings with a common platform or
interface to the customer. However, the layer of seamless integration can only come
from embedded value addition in integration and functionality (thus, higher-skilled
resources). Standalone offerings (e.g. standalone BPO), drawing on expanded bulge, fall
short of doing that.
In conclusion, the real economic advantage of bulge is that it affords a stream of steady
cash flows in stable service lines that is ideally systematically harvested in building
traction in value-added, higher-end services. Firms have to make the trade-off
between value addition from higher-cost resources against the relative stability
offered by service lines that lend themselves to bulge. The latter should be seen
as a protective bubble that allows themto play offense. It cannot be the raison
dtre.
Accenture: Acquisition History
Accenture, in accordance with its small, tactical tuck-in acquisitions strategy, makes
multiple small-scale acquisitions in a year (FY08, it made 12 acquisitions). Generally, total
considerations for all acquisitions in a year have amounted to about USD 200-300 mn. Its
largest acquisition, for which we have data, is of Capgeminis North American health practice
for USD 175 mn (net). Accenture recently established its process and innovation performance
group after acquisition of the George Group, which specialises in process, operational, and
business transformation (including Lean Six Sigma) and innovation strategy.
Total consideration of acquisitions for FY06, FY07, and FY08 amounted to USD 209 mn, USD
187 mn, and USD 304 mn, respectively.
Some of them are discussed in the following pages.
Accenture: Acquisition history
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IT
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
SECTOR RATINGS
Company Absolute Relative Relative
reco reco risk
Infotech Enterprises Buy SO H
Rolta India Buy SO H
Tata Consultancy Services Buy SO L
Mphasis Hold SU M
Wipro Buy SP L
Infosys Technologies Hold SU L
Patni Computer Systems Hold SU M
HCL Technologies Hold SU H
Edelweiss Securities Limited, 14
th
Floor, Express Towers, Nariman Point, Mumbai 400 021,
Board: (91-22) 2286 4400, Email: research@edelcap.com
Naresh Kothari Co-Head Institutional Equities naresh.kothari@edelcap.com +91 22 2286 4246
Vikas Khemani Co-Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206
Nischal Maheshwari Head Research nischal.maheshwari@edelcap.com +91 22 6623 3411
Coverage group(s) of stocks by primary analyst(s): Information Technology
HCL Tech, Infosys, Infotech, Mphasis, Patni, Rolta, TCS, and Wipro
25-Aug-09 HCL IMS continues to 307 Hold
Tech. power growth;
Result Update
20-Aug-09 Mphasis Sustained margin 516 Hold
performance; Result Update
03-Aug-09 Rolta Order flow looks up; 155 Buy
India guidance positive; Result Update
30-Jul-09 Patni Demand stability, margin; 328 Hold
Computers management merit an upgrade;
Result Update
Date Company Title Price (INR) Recos
Recent Research
Hold
Hold
Hold
Hold
Hold
Hold
Hold
1,000
1,250
1,500
1,750
2,000
2,250
S
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0
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9
(
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)
Hold
Hold Hold
Hold Hold
180
260
340
420
500
580
S
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(
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Hold
Hold
Buy Buy
Buy
200
280
360
440
520
600
S
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(
I
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R
)
Infosys technologies Tata Consultancy Services
Wipro
Edelweiss Research is also available on www.edelresearch.com ,Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe
Rating Distribution* 53 43 29 128
* 3 stocks under review
Market Cap (INR) 72 41 15
> 50bn Between 10bn and 50 bn < 10bn
Buy Hold Reduce Total
This document has been prepared by Edelweiss Securities Limited (Edelweiss). Edelweiss, its holding company and associate companies are a full service, integrated
investment banking, portfolio management and brokerage group. Our research analysts and sales persons provide important input into our investment banking
activities. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any
transaction. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or
complete and it should not be relied on as such. Edelweiss or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that
may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to
be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this
document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in
this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment
discussed or views expressed may not be suitable for all investors. We and our affiliates, group companies, officers, directors, and employees may: (a) from time to
time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving
such securities and earn brokerage or other compensation or act as advisor or lender/borrower to such company (ies) or have other potential conflict of interest with
respect to any recommendation and related information and opinions. This information is strictly confidential and is being furnished to you solely for your
information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in
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The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this
information. This information is subject to change without any prior notice. Edelweiss reserves the right to make modifications and alterations to this statement as
may be required from time to time. However, Edelweiss is under no obligation to update or keep the information current. Nevertheless, Edelweiss is committed to
providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither
Edelweiss nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special
or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a
guide to future performance. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be
treated as endorsement of the views expressed in the report. Edelweiss Securities Limited generally prohibits its analysts, persons reporting to analysts and their
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that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no
part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved
Access the entire repository of Edelweiss Research on www.edelresearch.com
Rating Interpretation
Buy appreciate more than 15% over a 12-month period
Hold appreciate up to 15% over a 12-month period
Reduce depreciate more than 5% over a 12-month period
Rating Expected to
IT
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