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Sector: Technology (Software Services)

iGATE Global Solutions Ltd. (IGS.IN) (MASC.BO)

Initiating Coverage Moderate Outperform

(CMP: Rs.380.9, Mkt. Cap: Rs. 11.9 bn, $ 271 mn (April 9, ’07) Relevant Index: Nifty: 3843.5 (April 9, ’07)

IGate looks attractive vis-à-vis its peer Mid-cap Indian IT companies. Its FY08E EPS growth of 54.1% is markedly higher than that of Polaris, Infotech Enterprises, Patni and Mastek, which are expected to post FY08E EPS growth of 29%, 18.9%, 19.2% and 22.2%, respectively. IGate’s FY07E EBIDTA margins of 11.2% are lower compared to its peers but are expected to increase to 13.3% in FY08.

April 9, 2007 Research Contact: Associate Director, Research: Hitesh Kuvelkar, Mob. +91 9833 732633 Email: [email protected]

Sales Offices : India Sales:

Tel. No: +91-22-4001 2440

US Sales: Tel. No: 1-212-227 6611

Email: [email protected] [email protected] Email: [email protected]

Asia & Europe Sales: Tel.: 44-207-959 5300

Email: [email protected]

Research Note issued by First Global Securities Ltd., India FG Markets, Inc. is a member of NASD/SIPC and is regulated by the Securities & Exchange Commission (SEC), US First Global (UK) Ltd. is a member of London Stock Exchange and is regulated by Financial Services Authority (FSA), UK First Global Stockbroking is a member of Bombay Stock Exchange & National Stock Exchange, India

IMPORTANT DISCLOSURES CAN BE FOUND AT THE END OF THIS REPORT.

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Table of Contents Price and Rating History Chart

2

Financial Snapshot

3-4

iGATE Business in Pictures…(FY06)

5

The Short Story…

6-8

iGATE Global Solutions: Out of the woods and ready to be counted…

• Revenue growth set to accelerate in FY07 & FY08

9-14 9-11

• Margins: EBIDTA margin could touch 15% for Q4FY07

12

• Levers for margin improvement

13

• Return Ratios to improve on back of improving margins & better operating asset turnover

14

• Profitability Assumptions

14

Financials

15-23

Earnings Model

15

1

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Price and Rating History Chart Ratings Key Positive Ratings Neutral Ratings Negative Ratings

B = Buy

BD = Buy at Declines

OP = Outperform

S-OP = Sector Outperform H = Hold S = Sell

M-OP = Market Outperform MP = Market Perform SS = Sell into Strength

MO-OP = Moderate Outperform SP = Sector Perform UP = Underperform

A = Avoid

MO-UP = Moderate Underperform

S-UP = Sector Underperform

ST: Short Term

MT: Medium Term

LT: Long Term

iGATE Global Solutions Ltd. (IGS) 500

9-Mar-2004 =100 (LHS)

145

9-Apr-07 450 MO OP 400

130 115

85

300

70

250

55

200

40

150

25 9Mar04

100 26May04

12Aug04

29Oct04

15Jan05

3Apr05

20Jun05

Relative To Nifty (LHS)

6Sep05

23Nov05

FG Reco

9Feb06

28Apr06

15Jul06

1Oct06

18Dec06

6Mar07

iGATE Share Price (RHS)

Represents an Upgrade Represents a Downgrade Represents Reiteration of Existing Rating Details of First Global’s Rating System given at the end of the report

2

INR

350

100

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Financial Snapshot* Key Financials (YE Mar 31st) (Rs. mn)

2002

2003

Total Revenue

4,074

Revenue Growth (Y-o-Y) EBIDTA

494

EBIDTA Growth (Y-o-Y) Profit After Tax (Excl. Extraordnary)

453

Net Profit Growth (Y-o-Y)

2004

2005

2006

2007E

2008E

4,209

5,701

5,800

6,358

8,107

9,863

3.3%

35.5%

1.7%

9.6%

27.5%

21.7%

338

140

325

613

910

1,315

-31.5%

-58.5%

131.6%

88.9%

48.3%

44.5%

215

31

89

140

448

696

-52.6%

-85.4%

183.9%

56.3%

220.5%

55.4%

Shareholders Equity

109

109

109

117

124

131

133

Number of Diluted shares(mn)

27

27

28

29

31

32

32

2008E

Key Operating Ratios (YE Mar 31st) (Rs. mn)

2002

2003

2004

2005

2006

2007E

EPS (Rs) (Basic)

16.7

7.9

1.2

3.1

4.7

14.3

22.0

-52.6%

-85.4%

172.1%

50.3%

202.1%

54.1%

EPS Growth (Y-o-Y) EPS (Rs) (Dill.)

16.5

EPS Growth (Y-o-Y) Fully Diluted C E P S (Rs.)-Excl. Extra-Ordinaries

7.9

1.1

3.0

4.6

14.1

21.7

-52.1%

-85.8%

171.8%

50.0%

208.4%

54.1%

21.2

12.9

8.3

12.1

16.2

27.0

36.7

EBIDTA (%)

12.1%

8.0%

2.5%

5.6%

9.6%

11.2%

13.3%

NPM (%)

11.1%

5.1%

0.6%

1.5%

2.2%

5.5%

7.1%

RoE (%)

37.8%

8.6%

1.2%

3.0%

4.7%

14.6%

15.7%

RoCE (%)

37.8%

8.1%

1.8%

2.5%

2.5%

11.9%

12.9%

Book Value per share (Rs.)

85.6

95.7

92.8

112.3

85.3

108.6

165.8

D/E

0.0

0.0

4.1

3.9

3.9

3.7

3.7

9.6%

20.2%

52.6%

19.7%

26.7%

14.7%

15.2%

2004

2005

2006

2007E

2008E

P/E (x)

27.0

17.5

P/BV (x)

3.5

2.3

P/CEPS (x)

14.1

10.4

EV/EBIDTA (x)

12.3

7.4

Market Cap./ Sales (x)

1.5

1.2

EV/Sales(x)

1.4

1.0

0.6%

0.9%

Dividend Pay out

Valuation Ratios (YE Mar 31st) (Rs. mn)

2002

2003

Dividend Yield DuPont Model (YE Mar 31st) (Rs. mn)

2002

2003

2004

2005

2006

2007E

2008E

EBIDTA/Sales (%)

12.1%

8.0%

2.5%

5.6%

9.6%

11.2%

13.3%

17.3

17.3

6.9

3.0

3.4

5.4

6.8

209.9%

139.1%

17.0%

17.0%

32.6%

60.9%

90.3%

Sales/Operating Assets (x) EBIDTA/Operating Assets (%) Operating Assets/ Net Assets(x) Net Earnings/ EBIDTA (%)

0.2

0.1

0.3

0.5

0.5

0.4

0.3

91.5%

63.7%

22.4%

27.5%

22.8%

49.2%

52.9%

Net Assets/ Equity (x)

1.0

1.0

1.1

1.2

1.2

1.1

1.1

Return on Equity (%)

37.8%

8.6%

1.2%

3.0%

4.7%

14.6%

15.7%

3

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India Research Common Sized Profit & Loss Account (YE Mar 31st) (Rs. mn) Total Revenues

2002

2003

2004

2005

2006

2007E

2008E

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

Personnel costs

67.40%

68.60%

69.70%

68.80%

69.50%

70.40%

70.00%

Gross Profit

32.60%

31.40%

30.30%

31.20%

30.50%

29.60%

30.00%

S, G&A Expenses

20.40%

23.40%

27.90%

25.60%

20.80%

18.40%

16.60%

EBITDA

12.10%

8.00%

2.50%

5.60%

9.60%

11.20%

13.30%

Depreciation and Amortization

3.20%

3.20%

3.50%

4.60%

5.60%

5.00%

4.90%

Non-Operating Income

2.40%

0.60%

0.70%

0.00%

-0.50%

-0.40%

-0.40%

Extraordinary Income/Expenses

0.00%

1.70%

-0.40%

2.50%

-1.70%

0.00%

0.00%

PBT

11.40%

7.20%

-0.80%

3.60%

1.80%

5.80%

8.10%

Tax

0.20%

0.50%

0.40%

0.60%

0.90%

0.70%

1.10%

PAT(Excluding Extraordinary)

11.10%

5.10%

0.60%

1.50%

2.20%

5.50%

7.10%

* Net Profit and EPS figures are excluding the one-time charges after giving the tax effect. The effective tax rate used for the FY06 numbers is 24%. FY06 Annual and ‘Quarterly addition to annual figures’ do not match because of the consolidation of the subsidiary effective from April 1st 2005 is not completely reflected in quarterly figures.

Key Statistics

Share Holding Pattern

Industry: 52 Week Hi/Low

Foreign (Promoter & Group) 82%

CMP:

Non Promoter (Institution) 8%

Non Promoter (NonInstitution) 10%

Technology Rs.432/145.70 Rs.380.90

Avg Daily Vol (20 days):

0.01 mn

Avg Daily Val (20 days):

Rs.5.18 mn

Performance over 52 weeks:

4

iGate Global Sol. Ltd :

Up 49.5%

Nifty:

Up 11.3%

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IGS’ Business in Pictures… (FY06) (All figures are in Rs. Mn except where stated otherwise. All percentages are percent of revenues, unless otherwise stated) Operations/Value-add Net Revenues: Rs. 6,358. mn

Cost of Revenue - Rs. 4,419 mn. (69.5%) S, G&A Costs - Rs. 1,325mn. (20.8%)

Personnel Costs - Rs. 3,440 mn. (54.1%)

EBIDTA Rs.613mn (9.6%)

Below Operating Line

Domestic/Export 3%/97%

Non-operating income/expenses: Rs. - 31 mn (-0.49%) Depreciation: Rs. 354mn (5.6%) Extraordinary Expenses: Rs. 111mn (1.7%)

Markets

US – 76.4% Europe –12.8% Asia-Pacific- 10.8%

Competition Domestic: All major IT players like TCS, Infosys, Wipro, Satyam, HCL Technology and other mid-size players like Hexaware, Patni etc. Global Competition: IBM, Accenture, EDS, etc.

Profit Before Tax Rs. 117mn (1.8%)

Taxes Rs. 56mn (0.9%)

Profit After Tax (Excl. Extraordinary) Rs. 140mn (2.2%)

Balance Sheet Assets

Fixed Assets - Rs. 1,413mn (45.6%) Investments - Rs. 299mn (9.6%) Debtors - Rs. 1,562mn (50.4%) Cash – Rs. 462mn (14.9%) L&A – Rs. 309mn (10.0%)

Liabilities

Debt - Rs. 490mn (15.8%) Creditors - Rs. 71mn (2.3%) Provisions - Rs. 876mn (28.3%) Reserves - Rs. 2,483mn (80.2%) Equity - Rs. 124mn (4.0%)

5

Secured(0.03%)

Rs.1mn

UnsecuredRs.489mn (15.8%)

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The Story… iGATE which, incidentally, is the erstwhile Mascot Systems(an IT services and solutions company) with a BPO and Contact Centre business added on, is finally set to record respectable growth and margin numbers in FY07. This, after a painful three-year transition period when its top management – largely an Infy breakaway group -- worked hard at transforming its onsite-centric low-margin business model into a robust offshore service one. Annual revenue growth rates during this period were an abysmal 1.7% to 9.6% and margins were a low (although they were improving slowly) 2% to 9.6%. The transition is now complete and the impact is visible. iGATE’s had a good year so far. Its revenues in the latest quarter Q3 FY07 came in at Rs. 2, 107.3 mn, representing a 27.5% growth Y-o-Y (4% Q-o-Q), after the considering the impact of rupee appreciation. EBIDTA margins in Q3 FY07 came in at 12.7%. The management expects to sustain the growth momentum iGATE’s had a good year so far. Its revenues in the latest quarter Q3 FY07 came in at Rs. 2, 107.3 and is also confident of EBIDTA margin mn, representing a 27.5% growth Y-o-Y (4% Q-otouching 15% by the yearend. Clearly, Q), after the considering the impact of rupee business based on the offshore delivery appreciation. EBIDTA margins in Q3 FY07 came model is pretty much finally on course. in at 12.7%. The management expects to sustain iGATE’s onsite: offshore ratio is now at the the growth momentum and is also confident of industry average of 30:70. The company is EBIDTA margin touching 15% by the yearend... also now rid of low-margin sub-contracting …the company is also now rid of low-margin work it was undertaking for system sub-contracting work it was undertaking for integrators. The focus is completely on system integrators. The focus is completely on direct clients, particularly the Fortune 1000 direct clients, particularly the Fortune 1000 segment. It has been successful in mining segment. It has been successful in mining existing clients and has also been adding existing clients and has also been adding new new customers at better billing rates. customers at better billing rates Like most large Indian offshore vendors, iGATE has built considerable domain expertise in the BFSI vertical, which contributed 42% of revenues in FY06 (up from 32% in FY04). The difference is that the company has been aggressively marketing its transaction-based pricing model, Integrated Technology & Operations (iTops) to clients in the mortgage and insurance verticals. iTops is a shared service model, and pricing is volume based and therefore offers clients the benefit of a variable cost structure. Currently only 10% of iGATE’s revenues are based on iTOPS, since acceptance of the model by clients has been slow. The management expects 25% of revenues to be based on the iTOPS model in the future. On the services front, Application Development & Maintenance is iGATE’s mainstay, bringing in most of the revenues. Going forward, the company expects the contribution of Infrastructure Management Services (IMS) and testing to increase. Outsourcing of testing services has been growing at around 30% globally and most Indian IT service companies are aggressively grabbing a share in this segment. iGATE recently set up a centre for excellence for testing services and is doubling its headcount in this area. It currently has around 10 clients in this service segment and expects the number to go up to about 25 over the next year. Clearly iGATE is now effectively leveraging on the robust demand for offshore services. Volume growth is strong and there’s greater revenue visibility with most of the new engagements being for a three-year period. Concerns on the growth front? There are some… 6

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Client concentration risk continues to remain high at iGATE with GE still contributing about 26% of revenues (though it is down from over 40% in the past). Also, client additions have been falling below target – Client concentration risk continues the company added 10 and 5 new clients in Q2 and Q3 to remain high at iGATE with GE FY07 respectively – this is expected to improve in the still contributing about 26% of forthcoming quarters. revenues (though it is down from over 40% in the past). Also, client additions have been falling below Most importantly, it’s the supply side that’s target – the company added 10 and 5 threatening growth the most. Skills shortage in the new clients in Q2 and Q3 FY07 tech sector is a more serious problem for mid-tier respectively – this is expected to companies like iGATE that do not quite enjoy the improve in the forthcoming quarters preferred employer status. In fact, in the past, the company even had to give up deals due to shortage of manpower with requisite skills. Attrition rate across its businesses (including BPO) has been as high as 18%. In the middle management level In the past, the company even had to give up however, the company has been more deals due to shortage of manpower with successful in retaining talent, as attrition rates requisite skills. Attrition rate across its have been in single digits. iGATE is taking businesses (including BPO) has been as high several measures to stem the attrition – it has, as 18%. In the middle management level for example replaced ESOPs with Restricted however, the company has been more Stock Units (RSUs) as an incentive for some successful in retaining talent, as attrition rates have been in single digits. iGATE is taking employee segments. The company is also several measures to stem the attrition – it has, hiring sub- contractors to overcome manpower for example replaced ESOPs with Restricted shortage in specific skill sets. Stock Units (RSUs) as an incentive for some employee segments. The company is also hiring sub- contractors to overcome manpower shortage in specific skill sets

In FY06, iGATE’s EBIDTA margin came in at 9.6%, which was an improvement from the 2% earned in FY04. The primary reasons for iGATE’s low margins in the past have been its high onsite-offshore ratio of about 70:30, a significant amount of low-return subcontract work undertaken for system integrators, and the GE contract at low billing rates. iGATE’s Selling and General Going forward, the management Administration (S, G&A) expenses were also high since expects margin improvements to most of the support services were located overseas. Going sustain on the back of better forward, the management expects margin improvements to employee utilization levels, uptick sustain on the back of better employee utilization levels, in billing rates on new contracts, uptick in billing rates on new contracts, changes in hiring changes in hiring strategy that strategy that envisages taking more campus recruits on envisages taking more campus board and a decline in the S, G&A expenses. The EBIDTA recruits on board and a decline in margins are expected to improve to 11.2% and 13.3% in the S, G&A expenses FY07 and FY08 respectively. iGATE’s free cash flow from operations has been negative in the period FY04-FY05 that has turned positive in FY06. In FY07, the company plans to incur capex of Rs. 450 mn. ($10mn). With improvements in profitability, we expect free cash flow from operations to be positive. While there have been recent concerns about the slow down in the US mortgage markets, the iGate’s exposure to mortgage market remains is comparatively smaller (3-4%). Moreover, the company caters to sub-prime mortgage clients and expects the slow down to increase the outsourcing. 7

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We have assumed addition of 220 people in Q4FY07 and total of 880 billable people for FY08. While majority of the growth will be volume driven, we have also assumed some movement in the billing rates for FY08 estimates (onsite billing rates up by 3.8% and offshore up by 2.8%). Also we have factored in offshore efforts to go up to 75% in FY08 from current levels of 73% and offshore utilization up to 69% from current level of 68%. We expect iGATE Global Solutions to post revenues of Rs. 2.16 bn. in Q4 FY07, and Rs. 8.11 bn. for the whole year. Margin expansion and improvements in operating asset turnover will have a positive impact on the RoE. We expect basic EPS to come in at Rs. 5.44 and Rs. 14.30 for Q4FY07 and FY07 respectively. Considering the top management’s experience and proven track record in the industry and its current focus on growth and margin improvements, we rate iGATE as Moderate Outperform.

Comparative Valuations - Indian Companies Company

Year

Name

End

P/E (x)

P/S (x)

P/BV (x)

EV/SALES (x)

EV/EBIDTA (x)

FY07E FY08E FY07E FY08E FY06 FY07EFY08E FY07E FY08E 7.7

5.8

24.2

18.6

EBIDTA Margin (%)

ROE (%)

RoCE (%)

Annual

Annual

EPS Growth (%)

Sales Growth (%)

FY07E

FY07E

FY07E

(08/07)

(08/07)

31.9%

44.0%

43.8%

26.0%

33.0%

Infosys

Mar 31.0

24.6

8.1

6.1

16.0

Wipro

Mar 28.1

22.6

5.4

4.2

12.1

5.0

3.9

21.5

16.6

23.3%

37.5%

37.5%

24.3%

30.2%

Satyam

Mar 21.7

17.0

4.6

3.5

7.3

4.6

3.5

17.5

13.6

24.0%

29.0%

28.2%

27.6%

32.8%

TCS

Mar 28.6

22.3

6.4

4.9

20.4

6.3

4.8

23.1

17.3

27.4%

52.3%

51.1%

28.1%

32.9%

HCT Tech

June 19.2

15.1

3.3

2.6

2.5

2.9

2.2

13.4

10.6

21.7%

25.3%

25.1%

27.1%

28.0%

Patni

Dec 12.5

10.5

1.9

1.6

2.4

1.6

1.3

8.0

6.2

20.1%

17.7%

14.5%

19.2%

21.7%

IGate

Mar 27.0

17.5

1.5

1.2

4.5

1.4

1.0

12.3

7.4

11.2%

14.6%

11.9%

54.1%

21.7%

Polaris

Mar 14.8

11.5

1.6

1.3

3.2

1.5

1.2

8.8

6.6

17.0%

19.3%

19.5%

29.0%

24.0%

InfoTech

Mar 21.6

21.0

3.3

3.1

7.5

3.2

3.0

15.7

14.3

21.0%

30.6%

29.9%

18.9%

39.0%

Sasken

Mar 30.5

17.3

2.3

1.6

3.2

2.5

1.6

15.1

9.2

16.5%

11.4%

10.2%

76.9%

48.3%

Mastek

Jun

12.4

9.4

1.3

1.0

3.1

1.0

0.8

5.5

5.0

17.0%

27.7%

26.5%

22.2%

20.4%

Source: First Global estimates.

IGate looks attractive vis-à-vis its peer Mid-cap Indian IT companies. Its FY08E EPS growth of 54.1% is particularly higher compared to Polaris, Infotech Enterprises, Patni and Mastek that are expected to post FY08E EPS growth of 29%, 18.9%, 19.2% and 22.2%, respectively. The IGate FY07E EBIDTA margins of 11.2% are lower compared to its peers but are expected to increase to 13.3% in FY08.

8

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iGATE Global Solutions: Out of the woods and ready to be counted… Here’s a mid-tier IT company that’s finally beginning to live its dreams iGATE Global Solutions, known most for the break-away Infy team at the top, has been struggling hard since 2003 to transform its legacy onsite -centric business model in IT services & solutions (inherited from the erstwhile Mascot Systems). The period of transition has been a painful one, with iGATE having little to show in terms of revenue or margin performance even as demand for outsourcing boomed and the elite in the sector displayed enviable growth and profit numbers quarter after quarter. But it now appears that the transition is almost complete – it now has a pretty healthy offshore delivery model is in place, it is aggressively seeking growth and its client and service portfolios are seeing positive changes. iGATE ’s performance in FY07 so far, truly reflects its newfound strength. Here’s a closer look…

Revenue growth set to accelerate in FY07 & FY08 In Q3 FY07 (the most recent quarter) iGATE’s revenues came in at Rs. 2, 107.3 mn i.e., a growth of 27.5% Y-o-Y (4% Q-o-Q). Revenue Growth Operating Revenue

Q1 06

Q2 06

Q3 06

Q4 06

Q1 07

Q2 07

Q3 07

1474.9

1557.7

1651.4

1673.8

1816.3

2026.2

2107.3

6%

6%

1%

9%

12%

4%

Revenue Growth (Q-o-Q)

iGATE is clearly breaking away from the poor growth performance of the past (2% in FY05 and 10% in FY06). Low growth in the past was not really a reflection of poor business performance, for volumes were increasing at a healthy rate. The growth slowdown was actually a result of two fundamental strategic moves – shifting of a greater proportion of work offshore (which brought down average billing rates) and giving up low-margin subcontracting work being done for system integrators (and other such low-value adding accounts). With the transition process almost complete, growth rates are looking healthy, indicating that the company is indeed successful in leveraging on the strong With the transition process almost demand environment. iGATE’s year-end growth rate may complete, growth rates are looking come in at a very respectable 27.5%, up from the abysmal healthy, indicating that the 9.6% in FY06. company is indeed successful in leveraging on the strong demand environment. iGATE’s year-end growth rate may come in at a very respectable 27.5%, up from the abysmal 9.6% in FY06.

9

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Key growth drivers: Strong volume growth & better billing rates

iGATE’s volume growth has been pretty strong in recent quarters. It has successfully been able to mine existing clients for more business, and this is evident in the increase in the number of million dollar clients from 19 at the end of FY06 to 29 at the end of Q3 FY07. Customer profile Million $ Customers

FY04

FY05

FY06

5

15

19

Fortune 1000 Customers

18

36

51

Active customers*

94

165

NA

* The numbers are as of the quarter ended 31st March of the respective years. ‰

iGATE’s changing revenue mix & its impact… Ö Client concentration: GE’s share down to 26%…healthy growth in new business at higher billing rates Client concentration Top Customer

FY04

FY05

FY06

43.0%

41.0%

40.3%

Next 4

21.0%

18.0%

18.6%

Top 5

64.0%

59.0%

58.9%

Next 5

8.0%

10.0%

11.7%

Top 10

72.0%

69.0%

70.6%

Others

28.0%

31.0%

29.4%

Compared to most other IT majors that derive not more than 4-10% of their revenues from a single client, iGATE has had a far higher degree of client concentration and has been impacted by the associated risks, including billing rate pressures. GE, iGATE’s largest client, brought in as much as 43% of revenues even until FY04. Its share has now come down to 29.5%. The GE contract was renewed a few months ago and it envisages volumes increases with no significant price reduction, according to the management. Going forward, GE’s revenue share is expected to remain stable, as revenues from other customers grow faster. ‰

New business at higher billing rates

As demand for offshore services continues to remain robust, iGATE is aggressively targeting business from Fortune 1000 companies. In Q1 and Q2 of FY07, it added 5-6 new customers from this iGATE is aggressively targeting business from Fortune 1000 segment; and in Q3 two. The revenue share of new companies. In Q1 and Q2 of FY07, it clients is expected to go up steadily. According to the added 5-6 new customers from this management, the new deals are at higher billing rates. segment; and in Q3 two. The revenue share of new clients is expected to go up steadily. According to the management, the new deals are at higher billing rates

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Ö Service segments: Increasing of testing services and Infrastructure Management will push up average billing rates… Currently, iGATE gets most of its revenues from Application Development and Maintenance (ADM) services while majority of the rest is contributed by ERP, consulting, Infrastructure Management Services (IMS). Going forward, the company expects testing services to contribute about 10% of revenues. Outsourcing in testing services has been growing at around 30% globally and most Indian IT service companies are aggressively grabbing a share in this segment. iGATE recently set up a centre for excellence for testing services and is also doubling its headcount in this area. It currently has around 10 clients in this service segment and expects this number to go up to about 25 over the next year. IMS is also witnessing healthy growth. Billing rates for both testing and IMS are higher than the rates for ADM. Ö Verticals: Pricing services on iTops model in the BFSI segment Revenue share across verticals FY04

FY05

FY06

Manufacturing

40.0%

30.0%

25.0%

Financial Services (BFSI)

32.0%

39.0%

42.0%

Service Industry

12.0%

16.0%

21.0%

Retail and Distribution

15.0%

13.0%

11.0%

1.0%

2.0%

1.0%

Others

iGATE has built domain expertise in the BFSI vertical, which contributes 42% of revenues in FY06 (up from 32% in FY04). The company has been marketing its transaction-based pricing model iTops to clients in the mortgage and insurance verticals. iTops is a shared service model, and pricing is volume based and therefore offers clients the benefit of a variable cost structure. Currently only 10% of iGATE’s revenues are based on transaction based pricing, since acceptance of the model by clients has been low, but the share is expected to go up to about 25% in the future. Among other verticals, the revenue contribution of Retail & Distribution has increased from 2% in FY03 to 11% in FY06. The share of manufacturing has declined from 43% in FY03 to 25% in FY06. ‰

Growth Concerns: Slow client additions & manpower crunch Ö Good revenue visibility…but quarterly client additions need to improve…

A major area of concern for iGATE is that quarterly client additions have been falling below target. In Q2 FY07 the company added 10 new clients and in Q3 only 5. Despite this, according to the management, A major area of concern for iGATE is the company now has a strong project pipeline with that quarterly client additions have good revenue visibility, since most of the new accounts been falling below target. In Q2 FY07 are three-year contracts. the company added 10 new clients and in Q3 only 5. Despite this, according to the management, the company now has a strong project pipeline with good revenue visibility, since most of the new accounts are three-year contracts

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Ö The supply-side challenge … Manpower crunch is the greatest challenge to growth in the IT sector, and the problem is more serious for mid-tier companies like iGATE, which do not quite enjoy the preferred employer status. In fact, in the past, the company has had to give up deals due to shortage of requisite skills. Attrition rate across its businesses (including BPO) has been as high as 18%. In the middle management level however, the company has been more successful in retaining talent, as attrition rates have been in single digits. iGATE is taking several measures to stem the attrition – it has, for example replaced ESOPs with RSUs as an incentive for some employee segments. The company is also hiring sub- contractors to overcome manpower shortage in specific skill sets.

Margins: EBIDTA margin could touch 15% for Q4FY07 Margin Analysis 120% 100%

100%

100%

100%

100%

100%

32.6%

31.4%

30.3%

35.0%

30.5%

100%

100%

100%

26.6%

29.3%

31.2%

7.1%

9.9%

12.7%

5.0%

80% 60% 40% 20%

12.1%

8.0%

11.1% FY02

FY03

5.6%

2.0%

5.1%

0%

1.6%

0.6% FY04

FY05

Revenue

GPM

9.6% 1.7% FY06

0.6% Q1FY07

EBIDTA Margin

Q2FY07

7.6%

Q3FY07

NPM

In FY06, iGATE’s EBIDTA margin came in at 9.6%, which was an improvement over the 2% earned in FY04. The primary reasons for iGATE’s low margins in the past have been its high onsiteoffshore ratio of about 70:30, a significant amount of low-return subcontract work undertaken for system integrators, and a large contract with GE at low billing rates. iGATE’s Selling and General Administration (SG&A) expenses have also been high since most of the support services were located overseas. In FY06, wage inflation took a further toll on margins (gross profit margin dropped to 30.4% from 32.6% in FY02). Revenue and EBIDTA Margins

1,558

Rs. mn

2,000 1,500 1,000

11.9% 1,816 1,674 1,652 9.6% 9.6%

2,026

1,435

1,456 7.5%

6.0%

1,475

14% 2,10712.7% 12% 10%

9.9%

8% 6.8%

7.1%

6% 4%

500

2%

0

0% Q3FY05

Q4FY05

Q1FY06

Q2FY06

Revenue(LHS)

Q3FY06

Q4FY06

EBIDTA Margins(RHS)

12

Q1FY07

Q2FY07

Q3FY07

%

2,500

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Margin pressure on account of employee costs continues – in Q1 FY07, salaries of offshore and onsite employees were increased by 12% and 2% respectively leading to decline in the EBIDTA margin from 9.6% in Q4 FY06 to 7.1% in Q1FY07. In Q2 FY07 and Q3 FY07, EBIDTA margins came in at 9.9% and 12.7%. The management expects improvements to sustain on the back of better utilization levels, improvement in the onsite-offshore mix, uptick in billing rates, changes in hiring strategy, decline in the S, G&A expenses.

Levers for margin improvement ‰

Improvements in utilization levels Utilisation ( %) FY04

FY05

FY06

Onsite

91.0%

90.0%

90.0%

Offshore

63.0%

67.0%

67.0%

iGATE’s onsite utilization rate has been around 90% over the last three years while offshore, it has been a low 67% over the last two years. Considering that average utilization rates for most companies in the sector are over 70% offshore and over 95% onsite, iGATE does lag on this parameter and this is one of the main reasons for poor margin performance. The management is confident of further improvement on this front, which will drive margin expansion, going forward. ‰

Upward bias in billing rates Billing Rate Trends

($ Per hour) Offshore Onsite

Q1-05 18.2 55.0

Q2-05 18.0 55.4

Q3-05 18.5 58.6

Q4-05 18.0 63.5

Q1-06 18.7 64.5

Q2-06 19.1 60.2

Q3-06 19.1 60.7

Q4-06 19.1 60.7

Q1-07 19.0 60.6

Q2-07 19.3 61.5

iGATE’s average offshore billing rates have, historically, been lower than that of larger offshore vendors in the sector. In FY06, average offshore rates improved from $ 19.3 per hour (from $ 18.2 in Q1FY05) while onsite billing rates increased to $ 61.5 per hour (from $55 in Q1FY05). Clearly, offshore rates have come under pressure over the years. The management says that billing rates are improving in contracts with new clients, and the steady increase in revenue share of new businesses will have a positive impact on margins going forward. ‰

S, G&A expenses to decline further

Historically iGATE’s S, G& A costs have been high as most support services were located overseas. With most of those services now moved offshore (except for front-end sales and consulting) S, G&A as a percentage of sales has declined from 28.4% in FY04 to 20.8% in FY06. There is scope for further reduction in costs and this too is likely to contribute to margin expansion. ‰

Campus recruitment to counter wage inflation…

iGATE had so far relied considerably on lateral hiring but now, as a strategic move to counter wage inflation, it has started campus recruitment. Expanding the base in this manner would help bring down overall employee costs (even after investments in training) and this too will help in margin improvements in the forthcoming quarters. 13

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Return Ratios to improve on back of improving margins & better operating asset turnover Du-pont Analysis

EBIDTA/Sales (%) Sales/Operating Assets (x)

FY05

FY06

FY07E

FY08E

5.6%

9.6%

11.2%

13.3%

3.0

3.4

5.4

6.8

17.0%

32.6%

60.9%

90.3%

0.5

0.5

0.4

0.3

Net Earnings/ EBIDTA (%)

27.5%

22.8%

49.2%

52.9%

Net Assets/ Equity (x) Return on Equity (%)

1.2 3.0%

1.2 4.7%

1.1 14.6%

1.1 15.7%

EBIDTA/Operating Assets (%) Operating Assets/ Net Assets(x)

iGATE’s RoE (exclusive of extraordinary gains) increased from 3.0% in FY05 to 4.7% in FY06.Going forward we believe RoE will improve further driven by better operating assets turnover and higher iGATE’s RoE (exclusive of EBIDTA margins to the level of 15.7% in FY08. extraordinary gains) increased from 3.0% in FY05 to 4.7% in FY06. Going forward we believe RoE will improve further driven by better operating assets turnover and higher EBIDTA margins to the level of 15.7% in FY08

Profitability Assumptions

Billable Employee (Nos.) Addition Effort Split (%) Onsite Offshore Utilization Rates (%) Onsite Offshore Billing Rates ($ per hour) Onsite Offshore

Q3FY07 5388

Q4FY07E 5608 220

FY08E 6488 880

27% 73%

Constant Constant

25% 75%

92% 68.00%

Constant Constant

Constant 69%

62.1 19.6

Constant Constant

Up by 3.8% Up by 2.8%

14

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Financials IGS’ Earnings Model(Consolidated)* 2006

Profit and Loss Account

2007E

2008E

2157

8107

9863

1449

1492

5706

6907

658

665

2401

2956

394

391

352

1491

1641

201

267

314

910

1315

98

102

110

409

480

103

165

204

501

834

Q1

Q2

Q3

Q4E

6358

1816

2026

2107

1172

4415

1333

1432

502

1943

483

594

324

341

1335

355

197

161

609

129

91

95

354

99

107

67

254

30

Q1

Q2

Q3

Q4

Operating Revenues

1475

1558

1652

1674

Direct Costs

1050

1062

1130

Gross Profit

425

496

521

Operating Costs

324

347

EBIDTA from Operations

101

149

Depreciation

86

83

EBIT

15

67

For the year ended March 31, (Rs. mn)

2007

2006

Other Income/(Expenses), Net

-3

-1

-127

-11

-142

-9

-10

-9

-7

-35

-35

Profit before Tax

12

65

-20

56

112

21

93

156

197

467

800

Total Tax

7

15

22

9

53

11

6

12

26

54

104

Profit after Tax (before minority

4

50

-42

47

59

10

87

144

171

413

696

Prior Period Tax

0

0

0

0

0

0

-3

-2

0

0

0

4

0

0

0

0

-5

0

0

11

19

0

30

0

Tax liab for earlier years

0

4

0

0

Add: Minority interest

10

10

55

0

Profit after tax

14

56

13

47

55

10

101

165

171

448

696

Profit after tax (Excl. Extra-Ordinaries)

14

56

97

47

215

10

101

165

171

448

696

0.49

1.91

3.31

1.52

4.73

0.34

3.23

5.25

5.44

14.30

22.02

GPM (%)

28.8%

31.8%

31.6%

30.0%

30.6%

26.6%

29.3%

31.2%

30.8%

29.6%

30.0%

EBIDTA Margin (%)

6.8%

9.6%

11.9%

9.6%

9.6%

7.1%

9.9%

12.7%

14.5%

11.2%

13.3%

EBIT (%)

1.0%

4.3%

6.5%

4.0%

4.0%

1.7%

5.1%

7.8%

9.4%

6.2%

8.5%

PBT Margin (%)

0.8%

4.2%

-1.2%

3.3%

1.8%

1.2%

4.6%

7.4%

9.1%

5.8%

8.1%

NPM (Excl.ext. ordinary) (%)

1.0%

3.6%

5.9%

2.8%

3.4%

0.6%

5.0%

7.8%

7.9%

5.5%

7.1%

Effective Tax Rate (%)

64.3%

23.0%

24.0%

15.4%

47.1%

50.7%

6.1%

7.6%

13.0%

11.6%

13.0%

Earnings Per Share (In Rs.) Basic

* FY06 Annual and ‘Quarterly addition to annual figures’ do not match because of the consolidation of the subsidiary effective from April 1st 2005 is not completely reflected in quarterly figures.

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Profit & Loss A/c Year ended March 31 Total Revenue Less: Selling, General Administration Expenses Employment Expenses Other (Less: Transfer from revaluation reserve) Total Operating Expenditure EBIDTA

2004 2005 2006 2007E 2008E 5701 5800 6358 8107 9863 1590 3971 0 5561 140

1485 3990 0 5475 325

1325 4419 0 5744 613

1491 5706 0 7197 910

1641 6907 0 8548 1315

EBIDTA from Operations(Incl Inc from Associates Less: Depreciation EBIT Less :Interest Income/(Expenses),Net Non-Operating Income Extraordinary Income Profit before tax Tax Profit after Tax Minority Interest Tax liab for earlier years Profit after Tax Profit After Tax (Excl. Extra-ordinaries)

140 202 -62 3 35 -21 -44 20 -65 68 3 1 31

325 613 266 354 59 259 -18 -14 20 -17 147 -111 208 117 34 56 174 62 42 0 4 6 212 55 89 140

910 409 501 -27 -8 0 467 54 413 30 -5 448 448

1315 480 834 -27 -8 0 800 104 696 0 0 696 696

16

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Common sized Profit & Loss A/c Year ended March 31 Total Revenue Less: Selling, General Administration Expenses Employment Expenses Other (Less: Transfer from revaluation reserve) Total Operating Expenditure

2004 2005 2006 2007E 2008E 100.0% 100.0% 100.0% 100.0% 100.0% 27.9% 69.7% 0.0% 97.5%

25.6% 68.8% 0.0% 94.4%

20.8% 69.5% 0.0% 90.4%

18.4% 70.4% 0.0% 88.8%

16.6% 70.0% 0.0% 86.7%

EBIDTA Income from Associates

2.5% 0.0%

5.6% 0.0%

9.6% 0.0%

11.2% 0.0%

13.3% 0.0%

EBIDTA from Operations (Incl Inc from Associates

2.5%

5.6%

9.6%

11.2%

13.3%

Less: Depreciation EBIT Less :Interest Income/(Expenses),Net Non-Operating Income Extraordinary Income

3.5% -1.1% 0.1% 0.6% -0.4%

4.6% 1.0% -0.3% 0.3% 2.5%

5.6% 4.1% -0.2% -0.3% -1.7%

5.0% 6.2% -0.3% -0.1% 0.0%

4.9% 8.5% -0.3% -0.1% 0.0%

Profit before tax Tax Profit after Tax Minority Interest Tax liab. for earlier years Profit after Tax Profit After Tax (Excl. Extra-ordinaries)

-0.8% 0.4% -1.1% 1.2% 0.1% 0.0% 0.6%

3.6% 0.6% 3.0% 0.7% 0.1% 3.7% 1.5%

1.8% 0.9% 1.0% 0.0% 0.1% 0.9% 2.2%

5.8% 0.7% 5.1% 0.4% -0.1% 5.5% 5.5%

8.1% 1.1% 7.1% 0.0% 0.0% 7.1% 7.1%

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Balance Sheet Year ended March 31 (Rs mn)

2004

2005

2006

2007E

2008E

LIABILITIES Equity Capital Reserves & Surplus Net Worth Loans Minority Interest Capital Employed

109 2497 2606 450 256 3313

117 3178 3295 462 171 3927

124 2483 2607 490 0 3097

131 3319 3450 490 0 3940

133 5180 5313 490 0 5803

2539 742 1797 37 418 0

3137 974 2163 141 457 3

2548 1171 1377 32 299 3

2992 1579 1413 32 299 3

3552 2060 1492 32 299 3

1382 421 264

1452 398 345

1562 462 309

1932 1199 309

2351 2805 309

243 165 597 1006 3313

227 190 616 1033 3927

71 285 591 947 3097

186 300 761 1246 3940

220 365 903 1488 5803

ASSETS Gross Block Less: Depreciation Net Block Capital WIP Investments Deferred tax Assets Current Assets Sundry Debtors Cash and Bank Balance Loans and Advances Less:Current Liabilities and Provisions Sundry Creditors Provisions Others Total current liabilities & provisions Capital Employed

18

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Common sized Balance Sheet Year ended March 31 LIABILITIES Equity Capital Reserves & Surplus Net Worth Loans Minority Interest Capital Employed ASSETS Gross Block Less: Depreciation Net Block Capital WIP Investments Deferred tax Assets Current Assets Sundry Debtors Cash and Bank Balance Loans and Advances Less:Current Liabilities and Provisions Sundry Creditors Provisions Others Total current liabilities & provisions Capital Employed

2004

2005

2006

2007E

2008E

3.3% 75.4% 78.7% 13.6% 7.7% 100.0%

3.0% 80.9% 83.9% 11.8% 4.3% 100.0%

4.0% 80.2% 84.2% 15.8% 0.0% 100.0%

3.3% 84.2% 87.6% 12.4% 0.0% 100.0%

2.3% 89.3% 91.6% 8.4% 0.0% 100.0%

76.7% 22.4% 54.3% 1.1% 12.6% 0.0%

79.9% 24.8% 55.1% 3.6% 11.6% 0.1%

82.3% 37.8% 44.5% 1.0% 9.6% 0.1%

75.9% 40.1% 35.9% 0.8% 7.6% 0.1%

61.2% 35.5% 25.7% 0.5% 5.1% 0.1%

41.7% 12.7% 8.0%

37.0% 10.1% 8.8%

50.4% 14.9% 10.0%

49.0% 30.4% 7.8%

40.5% 48.3% 5.3%

7.3% 5.0% 18.0% 30.4% 100.0%

5.8% 4.8% 15.7% 26.3% 100.0%

2.3% 9.2% 19.1% 30.6% 100.0%

4.7% 7.6% 19.3% 31.6% 100.0%

3.8% 6.3% 15.6% 25.6% 100.0%

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Key Ratios Year ended March 31 Personal Cost /Sales (%) Other Income/PBT (%) Tax/PBT (%) RoE (%)- Excl. Extra-Ordinaries RoCE (%)-Excl. Extra-Ordinaries Return on Net Assets (%) Return on Operating Assets Total Loan / Equity (x) Interest Coverage (x) Interest / Debt. (x) Growth in Gross Block (%) Sales growth (%) Operating Profit Growth (%) Net Profit Growth Excl. Extra-Ordinaries(%) Debtors Days Creditors Days Cash Days Invst.+Loan & Adv./Cap. Empl. (%) Current Ratio (x) Dividend Payout Ratio (%) Fully Diluted EPS (Rs.)-Excl. Extra-Ordinaries EPS Growth Excl. Extra-Ordinaries(%) Fully Diluted C E P S (Rs.)-Excl. Extra-Ordinaries Book Value Per Share

2004

2005

2006

2007E

2008E

69.7% -78.2% -45.7% 1.2% 1.8% 2.4% -3.3%

68.8% 9.4% 16.3% 3.0% 2.5% 4.5% 2.0%

69.5% -14.4% 47.4% 4.7% 2.5% 8.7% 9.0%

70.4% -1.6% 11.6% 14.6% 11.9% 12.9% 19.4%

70.0% -1.0% 13.0% 15.7% 12.9% 13.5% 29.6%

0.2 44.5 5.5% -18.8% 9.6% 338.6% 56.3% 86.5 8.9 24.7 17.3% 2.5 26.7% 4.6 50.0% 16.2 85.3

0.1 38.1 5.5% 17.4% 27.5% 93.4% 220.5% 87.0 8.9 54.0 17.3% 2.8 14.7% 14.1 208.4% 27.0 108.6

0.1 56.0 5.5% 18.7% 21.7% 66.4% 55.4% 87.0 8.9 103.8 12.5% 3.7 15.2% 21.7 54.1% 36.7 165.8

0.2 0.1 16.2 19.6 2.7% 4.3% 125.2% 23.5% 35.5% 1.7% -130.4% -195.9% -85.4% 183.9% 85.3 89.2 11.0 15.0 24.4 25.8 23.0% 22.2% 2.1 2.1 52.6% 19.7% 1.1 3.0 -85.8% 171.8% 8.3 12.1 92.8 112.3

20

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Cash Flow Statement Year ended March 31 (Rs mn) From Operations Profit Before Tax Depreciation Less: Dividend Payout Tax

2004

2005

2006

2007E

2008E

-44 202

208 266

117 354

467 409

800 480

19 20

20 34

43 56

75 54

121 104

Operating cashflow

118

420

373

746

1055

Changes in Capital Structure Increase in Equity Share capital Increase in Share premium Increase in other reserves Inc/(Dec) in Loans Inc/(Dec) in Minority Interest Inc/(Dec) in Equity/Loans/MI

1 19 63 450 256 789

8 482 45 12 -86 461

7 13 -728 28 -171 -850

7 7 491 0 0 506

1 1 1285 0 0 1287

Adjustments Diff.in Dep.

49

-34

-158

0

0

Total Inflows

957

847

-634

1252

2343

9 -122

25 3

95 -181

15 285

65 177

0 99 53 0 265

0 71 82 0 125

0 109 -37 0 158

0 371 0 0 71

0 419 0 0 177

-814 1412 37 -13 -9 613

39 597 105 3 0 744

-159 -589 -110 1 0 -856

0 444 0 0 0 444

0 560 0 0 0 560

Inc/(Dec) in Cash/Bank Balance

79

-23

64

737

1606

Total Outflows

957

847

-634

1252

2343

CASH OUTFLOWS Working Capital Changes Inc/(Dec) in Provisions Inc/(Dec) in Current Liabilities Less: Inc/(Dec) in Inventory Inc in Debtors Inc/(Dec) in Loans & Adv. Inc/(Dec) in other Current Assets Inc/(Dec) in Working Capital Capex/Investments Inc/(Dec) in Investments Addition to Gross Block Inc/(Dec) in Capital WIP Inc/(Dec) in other assets Inc. in Misc. Assets Inc/(Dec) in Fixed assets/ Investments

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Common sized Cash Flow Statement Year ended March 31 From Operations Profit Before Tax Depreciation Less: Dividend Payout Tax

2004

2005

2006

2007E

2008E

-4.6% 21.1%

24.6% 31.4%

-18.5% -55.9%

37.3% 32.6%

34.1% 20.5%

2.0% 2.1%

2.4% 4.0%

-6.7% -8.8%

6.0% 4.3%

5.2% 4.4%

Operating cashflow

12.4%

49.6%

-58.9%

59.6%

45.0%

Changes in Capital Structure Increase in Equity Share capital Increase in Share premium Increase in other reserves Inc/(Dec) in Loans Inc/(Dec) in Minority Interest Inc/(Dec) in Equity/Loans/MI

0.1% 2.0% 6.6% 47.0% 26.8% 82.5%

0.9% 56.9% 5.3% 1.4% -10.1% 54.4%

-1.1% -2.1% 114.8% -4.5% 26.9% 134.0%

0.6% 0.6% 39.2% 0.0% 0.0% 40.4%

0.0% 0.0% 54.9% 0.0% 0.0% 55.0%

5.2%

-4.0%

24.9%

0.0%

0.0%

Adjustments Diff.in Dep. Total Inflows

100.0% 100.0% 100.0% 100.0% 100.0%

CASH OUTFLOWS Working Capital Changes Inc/(Dec) in Provisions Inc/(Dec) in Current Liabilities Less: Inc in Debtors Inc/(Dec) in Loans & Adv. Inc/(Dec) in other Current Assets Inc/(Dec) in Working Capital Capex/Investments Inc/(Dec) in Investments Addition to Gross Block Inc/(Dec) in Capital WIP Inc/(Dec) in other assets Inc. in Misc. Assets Inc/(Dec) in Fixed assets/ Investments

0.9% -12.7%

2.9% 0.3%

-15.0% 28.6%

1.2% 22.7%

2.8% 7.6%

10.3% 5.6% 0.0% 27.6%

8.3% 9.7% 0.0% 14.8%

-17.2% 5.8% 0.0% -25.0%

29.6% 0.0% 0.0% 5.7%

17.9% 0.0% 0.0% 7.5%

0.0% -85.0% 147.5% 3.8% -1.3% -0.9% 64.1%

0.0% 4.6% 70.6% 12.4% 0.4% 0.0% 87.9%

0.0% 25.0% 92.9% 17.3% -0.1% 0.0% 135.1%

0.0% 0.0% 35.5% 0.0% 0.0% 0.0% 35.5%

0.0% 0.0% 23.9% 0.0% 0.0% 0.0% 23.9%

8.3%

-2.7%

-10.1%

58.8%

68.6%

Inc/(Dec) in Cash/Bank Balance Total Outflows

100.0% 100.0% 100.0% 100.0% 100.0%

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FIRST GLOBAL

www.firstglobal.in

India Research

Free Cash Flow Analysis Year ended March 31 (Rs mn) EBITA Less: Adjusted Taxes NOPLAT Depreciation Gross Cashflow Increase in Working Capital Operating Cashflow Net Capex Increase in Net Other Assets FCF From Operation Less: Inc./(Dec.) in Investment FCF after Investment Less: Investment in Goodwill & Intangible FCF after Goodwill Plus: Gain/(loss) on Extraordinary Items Plus: Foreign currency Translation Effect Total FCF

2004 -62 28 -90 202 112 319 -207 1399 -288 -1318 -814 -505 0 -505 -31 0 -535

2005 59 10 49 266 315 120 196 736 97 -638 39 -677 0 -677 123 0 -554

Financing Cash Flow Interest Exp/(inc) After Tax, Net Inc/(dec) in Excess Cash and Marketable Securities Dec/(Inc) in Debt Dividends Share Repurchase/(Issues) Minority Interest Total financing flow

-56 35 -450 19 -17 -68 -535

-2 16 -26 47 -12 -28 20 43 -496 701 -42 0 -554 785

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2006 2007E 2008E 259 501 834 123 58 108 136 443 726 354 409 480 491 852 1206 173 124 229 317 728 977 -541 444 560 173 0 0 685 284 417 -159 0 0 843 284 417 0 0 0 843 284 417 -58 0 0 0 0 0 785 284 417

31 684 0 75 -471 -30 284

30 1554 0 121 -1287 0 417

FIRST GLOBAL

www.firstglobal.in

India Research

IMPORTANT DISCLOSURES Price Target Price targets (if any) are derived from a subjective and/or quantitative analysis of financial and nonfinancial data of the concerned company using a combination of P/E, P/Sales, earnings growth, discounted cash flow (DCF) and its stock price history.

The risks that may impede achievement of the price target/investment thesis are ¾

Change in the economic climate / legislation against Indian offshore development in the countries where the company provides its services

¾

Billing Rate pressure from clients

¾

Fluctuation on US$-Rupee exchange rate

¾

Salary and wage inflation & high employee attrition

¾

Availability of tax holidays and incentives from Government of India

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FIRST GLOBAL

www.firstglobal.in

India Research

Rating system of First Global Our rating system consists of three categories of ratings: Positive, Neutral and Negative. Within each of these categories, the rating may be absolute or relative. When assigning an absolute rating, the price target, if any, and the time period for the achievement of this price target, are given in the report. Similarly when assigning a relative rating, it will be with respect to certain market/sector index and for a certain period of time, both of which are specified in the report.

Rating in this report is relative to: S&P CNX Nifty

Positive Ratings (i) Buy (B) – This rating means that we expect the stock price to move up and achieve our specified price target, if any, over the specified time period. (ii) Buy at Declines (BD) – This rating means that we expect the stock to provide a better (lower) entry price and then move up and achieve our specified price target, if any, over the specified time period. (ii) Outperform (OP) – This is a relative rating, which means that we expect the stock price to outperform the specified market/sector index over the specified time period.

Neutral Ratings (i) Hold (H) – This rating means that we expect no substantial move in the stock price over the specified time period. (ii) Marketperform (MP) – This is a relative rating, which means that we expect the stock price to perform in line with the performance of the specified market/sector index over the specified time period.

Negative Ratings (i) Sell (S) – This rating means that we expect the stock price to go down and achieve our specified price target, if any, over the specified time period. (ii) Sell into Strength (SS) – This rating means that we expect the stock to provide a better (higher) exit price in the short term, by going up. Thereafter, we expect it to move down and achieve our specified price target, if any, over the specified time period. (iii) Underperform (UP) – This is a relative rating, which means that we expect the stock price to underperform the specified market/sector index over the specified time period. (iv) Avoid (A) – This rating means that the valuation concerns and/or the risks and uncertainties related to the stock are such that we do not recommend considering the stock for investment purposes.

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FIRST GLOBAL

www.firstglobal.in

India Research

FIRST GLOBAL Nirmal, 6th Floor, Backbay Reclamation, Nariman Point, Mumbai - 400 021, India.

Dealing Desk (India):

FG Markets, Inc. 90 John Street, Suite 703, New York, NY 10038

Tel.: +91-22-400 12 400 email: [email protected]

FIRST GLOBAL (UK) Ltd. The Cobalt Building, 19-20, Noel Street, London W1F 8GW, United Kingdom

Dealing Desk (US):

Dealing Desk (UK & Europe):

Tel. No: +1-212-227 6611 email: [email protected]

Tel. No: +44-207-959 5300 email: [email protected]

The information and opinions in this report were prepared by First Global. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. However, such information has not been verified by us, and we do not make any representations as to its accuracy or completeness. Any statements nonfactual in nature constitute only current opinions, which are subject to change. First Global does not undertake to advise you of changes in its opinion or information. First Global and others associated with it may make markets or specialize in, have positions in and effect transactions in securities of companies mentioned and may also perform or seek to perform investment banking services for those companies. Whilst all reasonable care has been taken to ensure the facts stated and the opinions given are fair, neither First Global (UK) Limited nor FG Markets, Inc. nor any of their affiliates shall be in any way responsible for its contents, nor do they accept any liability for any loss or damage (including without limitation loss of profit) which may arise directly or indirectly from use of or reliance on such information. First Global (or one of its affiliates or subsidiaries) or their officers, directors, analysts, employees, agents, independent contractors, or consultants may have positions in securities or commodities referred to herein and may, as principal or agent, buy and sell such securities or commodities. An employee, analyst, officer, agent, independent contractor, a director, or a consultant of First Global, its affiliates, or its subsidiaries may serve as a director for companies mentioned in this report. First Global and its affiliates may, to the extent permitted under applicable law, have acted upon or used the information prior to or immediately following its publication, provided that we could not reasonably expect any such action to have a material effect on the price. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors as they believe necessary. Where an investment is denominated in a currency other than the investor's currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. There may be instances when fundamental, technical, and quantitative opinions may not be in concert. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange rate fluctuations, and limited availability of information on international securities. The value of investments and the income from them may vary and you may realize less than the sum invested. Part of the capital invested may be used to pay that income. In the case of higher volatility investments, these may be subject to sudden and large falls in value and you may realize a large loss equal to the amount invested. Some investments are not readily realizable and investors may have difficulty in selling or realizing the investment or obtaining reliable information on the value or risks associated with the investment. Where a security is denominated in a currency other than sterling (for UK investors) or dollar (for US investors), changes in exchange rates may have an adverse effect on the value of the security and the income thereon. The tax treatment of some of the investments mentioned above may change with future legislation. The investment or investment service may not be suitable for all recipients of this publication and any doubts regarding this should be addressed to your broker. While First Global has prepared this report, First Global (UK) Ltd. and FG Markets, Inc. is distributing the report in the UK & US and accept responsibility for its contents. Any person receiving this report and wishing to effect transactions in any security discussed herein should do so only with a representative of First Global (UK) Ltd. or FG Markets, Inc. First Global (UK) Limited is regulated by FSA and is a Member firm of the London Stock Exchange. FG Markets, Inc. is regulated by SEC and is a member of National Association of Security Dealers (NASD) and Securities Investor Protection Corporation (SIPC). FG Markets, Inc., its affiliates, and its subsidiaries make no representation that the companies which issue securities which are the subject of their research reports are in compliance with certain informational reporting requirements imposed by the Securities Exchange Act of 1934. Sales of securities covered by this report may be made only in those jurisdictions where the security is qualified for sale. Additional information on recommended securities is available on request. This report may not be resold or redistributed without the prior written consent of First Global.

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