10 July 2013 Asia Pacific/India Equity Research Computer Services & IT Consulting
India IT Services Sector Research Analysts Anantha Narayan 91 22 67773730
[email protected] Sagar Rastogi 91 22 6777 3851
[email protected]
EXPERT INSIGHTS
The SMAC pack Figure 1: Nasscom expects a US$1 tn opportunity globally from SMAC by 2020 (US$ bn) 250
Social
235
160
Mobility
140
140 200
120
150
100 80
100 50
60
46
40 16
20 0
0 2012 30
2012
2020
Big data
800 25
25
2020
Cloud
700
675
600
20
500
15
400 300
10
6
200
5
100
73
0
0
2011
2015
2012
2020
Source: Nasscom
■ SMAC presents an attractive opportunity for Indian IT services companies. While certain elements of SMAC (social, mobility, analytics and cloud) are possibly over-hyped or are re-classifications of traditional service lines, these service lines present an attractive opportunity for Indian IT services companies over the next few years, in our view. Nasscom estimates a trillion-dollar global market for these service lines by 2020—a 30% CAGR between now and then. ■ We do not think that cloud services will shrink existing IT services budgets. While some parts of existing businesses may get cannibalised, we believe that newer areas of spending will compensate. Indian IT services companies have made several technology transitions successfully over the past 20 years, aided by the fungibility of their employees. Also, despite the onset of significant cost-saving paradigms such as offshoring, global IT services spending has only expanded—enterprises simply use the savings to spend on newer initiatives. ■ It is early days yet to identify specific winners. Given that these service lines still constitute a single-digit proportion of revenue, it is difficult to meaningfully distinguish one company from the other. Importantly, all the large companies appear to be investing in these service lines. TCS appears to be slightly ahead in mobility while Wipro and HCLT’s infrastructure management business aids their cloud initiatives. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683 US
Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS
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10 July 2013
Focus charts and tables Figure 2: Nasscom expects global spending on SMAC to
Figure 3: IDC expects SMAC to generate US$225 bn in
cross US$1 tn by 2020
revenue for Indian IT services companies by 2020 US$bn 250
SMAC revenues (US$bn) 1,112
1,200 1,000
225
200
800
150 108
600 100
400 50
143
200
0
0 2012
FY13 overall industry revenue FY20E SMAC-related revenue
2020
Source: NASSCOM, Credit Suisse
Source: Company data, Credit Suisse
Figure 4: Strong growth in ADM revenues continued, even
Figure 5: ERP implementation and maintenance became
as it reduced as a proportion of revenues
an additional revenue stream for the company
2,000
80%
1,500
60%
1,000
40%
500
20%
0
1500
20% 1000
15% 10%
500
5% 0
0%
0% FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08
FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 Infosys ADM revenue (US$mn, LHS)
25%
Infosys ERP revenues (US$mn, LHS)
% of revenue (RHS)
Source: Company data
% of revenue (RHS)
Source: Company data
Figure 6: In our view, positive (+) impact from SMAC should outweigh the negative (-) impact on revenue for Indian IT services companies Cloud services
Existing offerings
+ Creating customised applications for cloud, multiple mobile devices + Building social media/analytics applications – Need for customised applications to get replaced with standardised cloud-based applications given compelling economics + Migrating back-end of existing applications to the cloud + Tweaking front-end of existing applications for multiple mobile devices – Need to maintain customised applications is eliminated because of use of cloud-based standardised applications + Testing of new applications, systems + Cloud environment could allow more exhaustive testing than currently possible + Developing SMAC strategy + Implementing proprietary SMAC offerings such as Salesforce (cloud-based CRM solution) – Shift from traditional ERP to cloud-based ERP solutions where implementation revenue for IT services companies is lower
App development
+ Creating private clouds + Managing the cloud environment – Adoption of public cloud in areas such as email
Infrastructure Management Services
App maintenance
Testing services Enterprise application services
Note: ‘+’/‘–‘ indicate drivers/inhibitors to revenue growth in the existing service lines. Source: Credit Suisse
Figure 7: Summary of SMAC offerings from different vendors Company
SMAC service offerings
SMAC-related IP
TCS
Infosys
Cloud services, mobility products and services, connected marketing solutions, business intelligence and performance management Cloud, Enterprise analytics, Enterprise information management, Mobility Cloud, Enterprise mobility
Wipro
Cloud services, Analytics and information management
HCL Tech
Cloud computing services, social intelligence, mobility services
CubbuZZ (social, cloud), mKrishi (mobile), TCS mobile PoS, Voice of customer (social, analytics), iON Social Prism (social, analytics), assetSERV (social), mobility testing lab (mobility, cloud), Cloud360 SocialEdge, mConnect, ShoppingTrip360 (analytics), Cloud Ecosystem Hub NextGen Care management (cloud), VirtuaDesk (cloud, mobility), CloudTrust, Mobile Mining Dashboard MTaaS (cloud), Nimbo (cloud)
Cognizant
Source: Company websites
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The SMAC pack SMAC 101 SMAC is the acronym used to aggregate social, mobility, analytics and cloud. While some of the elements of SMAC seem over-hyped (such as social) and could be re-classified older service lines (such as elements of cloud), these largely present new opportunities for Indian IT services companies, in our view. We believe that cloud and analytics, especially advanced analytics, algorithms and big data, are seeing the strongest traction currently while social is still at an early stage. Nasscom estimates worldwide investments in SMAC solutions at over US$1 tn by 2020. According to IDC, Indian IT services vendors should generate over US$225 bn in SMACrelated revenue in that year. To put this in perspective, Indian IT services vendors’ aggregate revenue was US$108 bn in FY13.
SMAC and Indian IT services We believe that SMAC will present new revenue opportunities for Indian IT services companies. While certain current elements of IT services could get cannibalised, new services around SMAC technologies should more than offset that. Indian IT services companies have helped build the previous IT architectures (mainframe, client-server, ERP) and are now well-positioned to roll out the new IT architecture of SMAC. It is important to note that Indian companies have made several technology transitions in the past 20 years, aided by the fungibility of their employees. We also note that IT budgets rarely shrink—enterprises take any cost savings and use them in newer technology areas. With every wave of technology, one could deliver functionality at far greater levels of productivity than with the previous technology, yet IT budgets keep going up. For example, the ADM to ERP shift in the 2000s did not shrink ADM revenues for the Indian companies … and ERP became a new source of revenue.
The positioning of Indian IT services companies We believe these are still early days to meaningfully differentiate one company from the other as far as SMAC offerings are concerned. The scale of such revenue is still small (single-digit proportion of total revenue). While companies seem to have some intellectual property in these service lines, they seem too small to differentiate meaningfully. Importantly, all the large companies understand the importance of these service lines (despite the obvious hype in some of them) and appear to be making investments in them. TCS appears slightly ahead in mobility while Wipro and HCLT have significant initiatives in cloud due to their infrastructure management practices.
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SMAC 101 What is SMAC? SMAC is the acronym used to aggregate social, mobility, analytics and cloud. It refers to a new IT architecture made possible by revolutionary changes in four underlying technologies. In this grand vision of the enterprise, all company employees are connected (social), will have access to all relevant information that will help them do their job (analytics), everywhere they go (mobility), enabled by an IT ecosystem that costs little and is highly scalable (cloud).
SMAC = social, mobility, analytics, cloud
While some of the elements of SMAC seem over-hyped (such as social) and could be reclassified older service lines (such as elements of cloud), these largely present new opportunities for Indian IT services companies, in our view.
Social The world has always been a social place, with people talking to each other about every aspect of life. As technology has evolved, not only have the distances across which communication was possible shrunk but also the number of people that one could speak to and the media that could be shared (sound, pictures, videos) has expanded rapidly. Now, with the explosion of activity on social sites on the Internet, the ability to chat and instantly share opinions has gone global.
Social includes external data from Twitter, Facebook, etc. and internal social websites
For instance, the reach and scope of consumer opinion is the highest ever. To thrive in this world, consumer-facing companies can use automated social mining tools to transform gigantic amounts of unstructured data on the Internet into usable insights. Companies could also use Facebook-like internal social websites to improve collaboration among employees.
Mobility Advances in mobile phone technology, the better availability of mobile phones as well as improvement in wireless broadband connectivity have given rise to a new set of opportunities and challenges for enterprises. Access to anywhere-anytime information is increasingly being sought by an enterprise’s customers, suppliers, employees and the like. Mobile devices now have a lot of computing power and enterprises can harness that power by treating such devices as “thick clients”. Customers and employees who are consumers of sophisticated, easy-to-use apps on their smartphones have come to demand a similar experience from applications in their workplace. Employees want to be able to use their own devices for office work. This “Bring Your Own Device” (BYOD) phenomenon gives rise to both challenges (providing the same experience on multiple devices while ensuring data security) as well as opportunities (employees can now work even when they step outside the office).
Mobility includes anytimeanywhere access and harnessing the computing power of mobile devices
Figure 8: Smartphones now have a lot of computing power Date of release CPU RAM Storage memory Price
Samsung Galaxy S 4
Desktop computer 10 years ago
2013 1.2-1.6 GHz multi-core 2 GB 64 GB ~Rs40,000
early 1999 to 2003 450 MHz to 1.4 GHz 512 MB 16-32 GB ~Rs50,000
Source: GSMarena, Credit Suisse
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Figure 9: Mobiles are now ubiquitous …
Figure 10: … and are turning ‘smart’ Smartphone sales as %age of total mobile sales
World mobile penetration 96%
100%
60% 53%
90% 50%
80% 70%
44%
40%
61%
60%
31% 30%
50%
25%
40% 30% 20%
20%
23% 12%
17%
10%
10% 0%
0% 2000
2004
Source: ITU
2008
2Q10
2013E
2Q11
4Q11
4Q12
2013E
Source: Company data, Credit Suisse estimates
Analytics According to IBM, we create 2.5 quintillion bytes (2.5 bn GB) of data every day. Further, this data is increasingly ‘unstructured’, in the form of posts to social media sites, information generated by sensors, pictures, videos, cell phone GPS signals, to name a few. Converting this large amount of information into monetisable insights quickly is both a challenge and an opportunity faced by CIOs today.
Analytics includes parsing huge amounts of available data quickly and accurately to provide meaningful business insights
Figure 11: Big data spans four dimensions—volume, velocity, variety, veracity Term
Explanation
Example of business problem
Volume
Enterprises are awash with ever-growing data of all types, easily amassing terabytes—even petabytes—of information. Sometimes 2 minutes is too late. For time-sensitive processes such as catching fraud, big data must be used as it streams into your enterprise in order to maximize its value. Big data is any type of data—structured and unstructured data such as text, sensor data, audio, video, click streams, log files and more. One in three business leaders don’t trust the information they use to make decisions. Establishing trust in big data presents a huge challenge as the variety and number of sources grow.
Turn 12 terabytes of Tweets created each day into improved product sentiment analysis. Scrutinize 5 mn trade events created each day to identify potential fraud.
Velocity
Variety
Veracity
Monitor 100s of live video feeds from surveillance cameras to target points of interest. Get business leaders to trust the insights so that they can act on them.
Source: IBM, Credit Suisse
Cloud computing According to the United States’ National Institute of Science and Technology (NIST), cloud computing is defined as the delivery of computing as a service rather than a product, whereby shared resources, software and information are provided to computers and other devices as a metered service over a network (typically the Internet).
Cloud includes private (within an enterprise) and public
Cloud provides two broad categories of benefits to enterprises. First, it helps organisations reduce absolute costs. Second, it gives organisations a high degree of flexibility with respect to their IT expenditure.
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Figure 12: Cloud offers up to 30% cost savings—excluding costs of overprovisioning …
Source: Persistent Systems
Figure 13: … including costs of overprovisioning, the savings are even higher Assuming a service has a predictable daily demand where the peak requires 500 servers at noon but the trough requires only 100 servers at midnight, as shown in figure below. As long as the average utilization over a whole day is 300 servers, the actual utilization over the whole day (shaded area under the curve) is 300 x 24 = 7,200 server-hours; but since the customer must provision to the peak of 500 servers, she pays for 500 x 24 = 12,000 server-hours, a factor of 1.7 more than what is needed. By utilising cloud computing, i.e. a pay-as-you-go model, this difference can be saved.
Source: Credit Suisse research
Figure 14: The cloud also gives customers the flexibility to handle varied demand patterns at no extra cost
Source: Microsoft
While the technology aspect of the cloud such as virtualisation and outsourced infrastructure management have been around for a while; the ‘exciting’ aspect of the cloud is the innovation in the business aspect, i.e., pay-per-use model and multi-tenancy. Software as a Service (SaaS) and Process as a Service (PaaS) are such examples. An analogy could be drawn with the “.com” boom in the late nineties. While networked computers had been around for several years before then, it was innovation in the business aspect, i.e., e-commerce, that attracted billions of dollars of investment.
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A trillion-dollar opportunity globally by 2020 Nasscom estimates worldwide investments in SMAC solutions at over US$1 tn by 2020. According to IDC, Indian IT services vendors should generate over US$225 bn in SMACrelated revenue in that year. To put this in perspective, Indian IT services vendors’ aggregate revenue was US$108 bn in FY13.
SMAC could be a US$225 bn opportunity for Indian companies by 2020
Figure 15: Nasscom expects a US$1tn opportunity from SMAC by 2020 250
Social
235
160
Mobility
140
200
30
800
Big data
140
25
25 20
100
60
46
16 2020
200
5
100
0
0
2012
300
6
20
0
400
10
40
50
500
15
80
100
675
600
120
150
Cloud
700
2012
2020
73
0
2011
2015
2012
2020
Source: Nasscom
Cloud and analytics likely to see traction earlier We understand cloud and analytics, especially advanced analytics, algorithms and big data are seeing the strongest traction currently. Within cloud, corporates are focussed on the infrastructure layer currently and are selectively adopting offerings in the application layer such as Workday (HR) and Salesforce (CRM). Within mobile, there is very high demand for certain sub-segments, for instance, making apps for the iOS (Apple mobile devices). Among the four, social is at the earliest stage—there is significant client interest and a number of pilot programmes are going on, but there have been a few cases where it has been used as a revenue driver. Most of the demand is at the intersection of two or more technologies—for instance, cloud and analytics or social and analytics, etc.
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SMAC and Indian IT services Cloud services unlikely to shrink IT services budgets The bear argument on cloud services is that as enterprises migrate to public cloud-based applications such as Salesforce.com that cost a fraction of traditional ERP systems and custom-built applications and require less customisation, IT services companies will see a steadily reducing revenue pie.
IT budgets rarely shrink— enterprises use cost-savings in newer areas
We disagree with this as we believe that corporate IT spend is constrained only by the IT budget and not by scarcity of business demand for technology. We note that with every wave of technology, one could deliver functionality at far greater levels of productivity than with the previous technology. For instance, writing code for a minicomputer was easier than writing code for the mainframe; similarly, writing code for client-server architecture was a lot easier than writing code for the minicomputer and so on and so forth. We observe that cloud is similarly dramatically reducing unit costs for technology, but the unit consumption of technology is growing at an even faster pace—exactly as it has happened over the past three decades—and we believe that this trend will continue. The intensity of technology has been steadily increasing over the past several years across industry segments. Discretionary IT spend that starts out as a source of competitive differentiation for the company that implements it first, goes on to become a non-discretionary requirement as its competitors rush to match its offerings. Since enterprises are always hungry for competitive differentiation, business unit heads then ask for a similar or slightly higher IT budget as the previous year to build/buy the next item on their technology wishlist. For instance, the first few banks to implement core banking systems could use ‘anywhere banking’ as a source of competitive differentiation in the marketplace. When other banks saw this happening, they rushed to buy/build core banking systems for themselves and today, it is almost impossible to find a large bank without a core banking system. The banks that had already implemented core banking systems would then ask for IT budgets to implement internet banking or mobile banking. We note that offshoring led to far cheaper development costs than earlier. However, even the leading users of offshore services are spending more on IT than ever before.
SMAC will likely present new revenue opportunities Indian IT services companies have helped build the previous IT architectures (mainframe, client-server, ERP) and are now well-positioned to roll out the new IT architecture of SMAC. It is important to note that the Indian companies have made several technology transitions in the past 20 years, aided by the fungibility of their employees. Volumes of Indian IT services companies will be impacted in three ways: (1) Cannibalisation of traditional ERP implementation and some custom application development revenue as the compelling economics and value proposition shifts industry towards cloud-based ERP offerings such as Salesforce and Workday.
There should be some cannibalisation—this will likely be offset by new spend and integration requirements
Employee skills are fungible
(2) Growth from new segments that simply did not exist before—for instance, tapping the corporate marketing budget for analytics-based solutions in addition to corporate IT budget. (3) The SMAC phenomenon should lead to increased complexity in the IT ecosystem of the clients of Indian IT services companies which is directly proportional to spend on IT services companies.
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In our view, professional services around SMAC are likely to cannibalise (in decreasing order of impact) traditional ERP implementation, applications outsourcing, business process outsourcing. However, the decrease in traditional services are likely to be more than offset by increase in services around SMAC. IT services globally owes its existence to a lack of standardisation across various customers. This requires customers to adapt various off-theshelf products for their own processes and/or create customised applications. Then, they also require software to enable the different applications to talk to each other. Hence, SMAC which adds another dimension of complexity to the IT environment of large corporates should lead to increased volumes for IT services companies.
Custom application development, maintenance and testing This contributes 30-50% of revenue for the top four Indian IT services companies. Theoretically, this revenue stream faces some risk of cannibalisation as corporates increasingly opt for software packages such as Salesforce over custom applications. However, we note that a similar threat to ADM revenue was perceived even from traditional ERP packages from the likes of Oracle and SAP in the early 2000s. This proved to be unfounded. For instance, for Infosys, while ADM’s contribution to total revenue dropped, it witnessed a 40%-plus CAGR over FY03-08. At the same time, ERP revenue got added as an additional revenue stream.
The ADM to ERP move in the 2000s did not shrink ADM revenue
Figure 16: Strong growth in ADM revenues continued,
Figure 17: ERP implementation and maintenance became
even as it reduced as a proportion of revenues
an additional revenue stream for the company
2,000
80%
1,800
70%
1,600
1200
25%
1000
20%
60%
1,400 1,200
50%
1,000
40%
800
30%
600
800 15% 600 10% 400
20%
400
10%
200 0
0% FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 Infosys ADM revenue (US$mn, LHS)
% of revenue (RHS)
Source: Company data
5%
200 0
0% FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08
Infosys ERP revenues (US$mn, LHS)
% of revenue (RHS)
Source: Company data
Further, in our view, the SMAC phenomenon will also give impetus to some custom application development. For instance, a number of organisations would hire IT services vendors to develop apps for tablets/phones (mobility); develop applications to analyse big data (analytics) and modify their existing custom application so that they can be deployed on the cloud (cloud).
Enterprise application services The top four Indian IT services companies derive approximately 20-30% of their revenues from consulting, enterprise software package implementation and maintenance. Indian IT services companies have helped build the previous IT architectures (mainframe, client-server, ERP) and are now well-positioned to advise on and roll out this new IT architecture. Vendors of traditional ERP such as IBM, Microsoft, Oracle, SAP have recently started offering cloud-based solutions as well. In our view, they will continue to
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partner with Indian IT services companies, with whom they have long history of working together, to implement cloud-based solutions for their clients. In addition, Indian IT services companies have pro-actively built relationships with top cloud-based ERP vendors such as Salesforce, Netsuite and Workday. We understand that the services revenues from a cloud-based ERP implementation is about a third that from a traditional ERP implementation. While this could reduce the size of such deals, this should also increase the number of deals—as smaller companies, which would have shied away from traditional ERP solutions, start to embrace cloudbased ERP solutions. There is bound to be some cannibalisation and Indian IT services companies may need to increase their sales spend if they wish to target smaller-sized clients or align with companies such as Salesforce.
There will be some cannibalisation but existing maintenance will continue and cloud solutions will require some implementation, in our view
Figure 18: Traditional ERP vendors have taken a number of initiatives to align themselves with SMAC Company
Date SMAC
Initiative
Microsoft
May-11 Mobility
Acquired Skype, VoIP
Microsoft
Jun-11 Cloud
Launched Office365, SaaS offering around the Microsoft Office Platform
IBM
Aug-11 Analytics
Acquired i2, Intelligence analytics
Oracle
Oct-11 Cloud
Launched Fusion, SaaS-based ERP
Oracle
Oct-11 Cloud
Acquired RightNow, cloud-based customer relationship management solution
IBM
Dec-11 Analytics
Acquired DemandTec, Cloud-based retail analytics
SAP
Dec-11 Cloud
Acquired SuccessFactors, cloud-based human capital management solution
IBM
Jan-12 Cloud
Acquired Green Hat, Cloud based software testing
Oracle
Mar-12 Analytics
Acquired ClearTrial, cloud-based clinical trial operations and analytics products
SAP
May-12 Cloud
Acquired Ariba, SaaS-based procurement management
SAP
May-12 Cloud
IBM
May-12 Analytics
Allowed customers to run its ERP Business Suite software, HANA database and other programs on the Amazon Web Services cloud Acquired Tealeaf Technology, customer experience analytics software
Oracle
May-12 Social
Acquired Virtue, social marketing platform provider
Oracle
Jun-12 Social
Acquired Collective Intellect, cloud-based social intelligence solutions
Microsoft
Jun-12 Social
Acquired Yammer, social networking
Oracle
Jul-12 Social
Acquired Involver, social media development platform
Oracle
Jul-12 Cloud
Acquired Xsigo Systems, provider of network visualisation technology that simplifies cloud operations Acquired Butterfly software, data analysis and migration software
IBM
Sep-12 Analytics
Oracle
Sep-12 Cloud
Microsoft
Oct-12 Cloud
Acquired SelectMinds, cloud-based social talent sourcing and corporate alumni management application Acquired StorSimple, cloud-storage appliance vendor
Oracle
Nov-12 Cloud
Acquired Instantis, cloud project and portfolio management solution
Oracle
Dec-12 Analytics
Acquired Dataraker, cloud-based analytics system
IBM
Dec-12 Analytics
Acquired StoredIQ, Big Data Analysis
IBM
Feb-13 Analytics
Acquired Star Analytics, Business Analytics
Microsoft
Mar-13 Cloud
Acquired MetricsHub, cloud monitoring
Oracle
Mar-13 Cloud
Microsoft
Acquired Nimbula, software to manage and deploy elastic infrastructure-as-a-service clouds offering Windows and Linux Mar-13 Social, Analytics Acquired Netbreeze, social analytics
Source: Company data, Credit Suisse
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Figure 19: Indian IT services companies have pro-actively built relationships with top SMAC vendors (key examples below) SMAC Partner
Comment
Informatica
Offers products relating to analytics
Salesforce
SaaS-based CRM
Hitachi Data Systems
Its Unified Compute Platform (UCP) makes IT infrastructure cloud-ready
NetApp
Global system integrator with specific focus on cloud services and big-data analytics
MicroStrategy
It has a social Intelligence and a cloud offering
Netezza
Analytics
SAS
Analytics
Digi International
It has a device cloud offering called Etherios
Amazon
Cloud
Actuate
Big Data Analytics
Source: Company data
Infrastructure management services Infrastructure management services contribute about 10-30% to revenues for the top Indian IT services companies. In our view, this service line should continue to grow faster than the overall industry as corporates try to derive more value from their existing IT assets by creating a private cloud. There is some potential cannibalisation as customers adopt a public cloud in areas of infrastructure such as email. Figure 20: In our view, positive (+) impact from SMAC should outweigh the negative (-) impact on revenues for Indian IT services companies Cloud services
Existing offerings
+ Creating customised applications for the cloud, multiple mobile devices + Building social media/analytics applications – Need for customised applications to get replaced with standardised cloud-based applications given compelling economics
App development
+ Migrating back-end of existing applications to the cloud + Tweaking front-end of existing applications for multiple mobile devices – Need to maintain customised applications is eliminated because of use of cloud-based standardised applications
App maintenance
+ Testing of new applications, systems + Cloud environment could allow more exhaustive testing than currently possible
Testing services
+ Developing SMAC strategy + Implementing proprietary SMAC offerings such as Salesforce (cloud-based CRM solution) – Industry will shift from traditional ERP to cloud-based ERP solutions where implementation revenue for IT services companies is lower
Enterprise application services
+ Creating private clouds + Managing the cloud environment – Adoption of public cloud in areas such as email
Infrastructure Management Services
Note: ‘+’/‘–‘ indicate drivers/inhibitors to revenue growth in the existing service line. Source: Credit Suisse
There could be impact on margins though Salaries for SMAC skills can be higher than average and could grow faster Skills in these service lines may be difficult to obtain given the relatively nascent nature of these. Also, as this segment experiences rapid growth, salaries for these skills could accelerate faster than average.
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Figure 21: Big Data, Cloud skills appear to be scarce currently
US salaries (US$ 000s, 2012) 105 100
100 95
90
90 86 85 80
75 70 Avg. tech salary in the US
Big Data
Cloud
Source: 2013-12 Dice Salary Survey
Industry may shift more towards outcome-based solutions vs input-based projects In our view, cloud computing could offer disruption in terms of how customers pay for IT. The traditional model of IT was that customers committed large sums upfront for hardware/software/services and bore the entire risk of achieving the promised efficiency. With the advent of the cloud, as corporates become accustomed to paying ‘per use’ for hardware and software, it is likely that they will demand the same pricing models from their IT services vendors. This would require IT services vendors to bear the risk of outcomes. While the Indian companies have a small proportion of outcome-based solutions currently, they are still largely focussed on ‘input variables’ such as the employee pyramid, onsiteoffshore ratio and utilisation. This has been the right strategy so far because revenues for these companies are driven by ‘inputs’. However, this focus might be counter-productive in the cloud environment, where revenues are likely to be delivered by outcome. New competition has emerged During the dot-com boom, a number of consulting firms such as VIANT and Razorfish came up to capitalise on the rapid commercial development of the Internet. These firms were focussed on helping companies, especially start-ups, become Internet-enabled. In this they competed with Indian IT services companies such as Infosys and Wipro. Eventually, they had high costs and could not adapt their business models in time when the Internet bubble collapsed.
A vendor’s execution skills and investments in IP will determine impact on margins
Similarly, there are a number of small firms currently that offer technology and professional services to companies wishing to adopt SMAC. All of them have extensive experience relating to cloud computing and some such as Appirio and Astadia also have developers based out of India. With a combination of strong domain expertise, niche focus and also the advantage of an offshore(-able) cost base, these firms could offer formidable competition to Indian IT services companies. As of now, the market appears to be large enough to accommodate all players. Companies should navigate the margin issues differently Depending on the scale and investments in intellectual property, we think companies will navigate margin issues separately. It will be no different from what is happening currently—as more and more work moves to a fixed price basis, the impact on margins differ across companies, depending on earlier investments in intellectual property and execution skills.
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The positioning of Indian IT services companies These are early days yet While we explore the SMAC-related offerings of the larger Indian companies in this section, we believe these are still early days to meaningfully differentiate one company from the other as far as such offerings are concerned. The scale of revenue from SMAC services is still small—Cognizant, which is one of the few companies to break out this revenue stream, expects to deliver US$500 mn of such revenue in CY13—just 6% of total revenue. While companies seem to have some intellectual property in these service lines, they seem too small to differentiate meaningfully. Also, most companies still have such expertise embedded in various industry verticals rather than as a separate service line.
It is too early to meaningfully differentiate one company from another on SMAC but all the larger ones are investing significantly
Importantly, all the large companies understand the importance of these service lines (despite the obvious hype in some of them) and appear to be making investments in them. TCS appears slightly ahead in mobility while Wipro and HCLT have significant initiatives in cloud due to their infrastructure management practice. Figure 22: Summary of SMAC offerings from different vendors Company
SMAC service offerings
SMAC-related IP
TCS
Cloud services, mobility products and services, connected marketing solutions, business intelligence and performance management Cloud, Enterprise analytics, Enterprise information management, Mobility
CubbuZZ (social, cloud), mKrishi (mobile), TCS mobile PoS, Voice of customer (social, analytics), iON
Cognizant
Infosys
Cloud, Enterprise mobility
Wipro
Cloud services, Analytics and information management
HCL Tech
Cloud computing services, social intelligence, mobility services
Social Prism (social, analytics), assetSERV (social), mobility testing lab (mobility, cloud), Cloud360 SocialEdge, mConnect, ShoppingTrip360 (analytics), Cloud Ecosystem Hub NextGen Care management (cloud), VirtuaDesk (cloud, mobility), CloudTrust, Mobile Mining Dashboard MTaaS (cloud), Nimbo (cloud)
Source: Company websites
TCS TCS has developed suites of IT services offerings around SMAC. These include 'cloud services', 'mobility products and services', 'connected marketing solutions' (includes both mobile and social offerings) and 'business intelligence & performance management' (includes analytics offerings). In addition, TCS also has a large set of proprietary platform-based offerings around SMAC. Cloud services TCS was one of the first Indian IT services vendors to target the cloud computing opportunity. It has set up a cloud initiative to address the requirements of its enterprise customers. The cloud initiative is being driven through TCS innovation labs, which anchor clients and develop strategic alliances with various stakeholders, including key clients, start-ups, venture funds and academic institutions.
India IT Services Sector
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10 July 2013
TCS sees two approaches to cloud: ■
An 'innovation' approach, focusing on creating new proprietary applications and migrating its existing proprietary solutions to the cloud. Here, it has naturally started where it has the most expertise and experience, and where it expects the strongest demand. As of the end of 2012, only the BaNCS and F&A (Finance and Accounting) offerings and parts of the HCM (Human Capital Management) offerings were migrated to cloud.
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An 'optimisation' approach that focuses on building private clouds and migrating existing applications to either public or private cloud.
Until recently, TCS’s clients have either retained the datacenter in-house or hosted the cloud with TCS partners. Recently, TCS has invested in building a network of cloud datacenters across the globe. For instance, it is building a 3,000 sq ft, UK-based datacenter for private cloud. Mobility products and services TCS’s mobility team is headquartered within the TCS Customer Collaboration Center in Santa Clara, at the heart of Silicon Valley, and has delivery centers around the world. TCS’s mobility experts serve more than 140 global customers located in all major geographies. TCS’s enterprise mobility products are offered in licensed or cloud-based business models. These include 'foundational platforms'—platforms to develop, test and deploy enterprise and consumer mobile applications across multiple mobile platforms; 'horizontalspecific platforms' and 'vertical-specific platforms' TCS has been designated as a Leader in Enterprise Mobility Services by Forrester Research, Inc., a leading independent research company, in its report The Forrester Wave™: Enterprise Mobility Services, Q1 2013. Connected marketing solutions These are solutions targeted at CMOs of corporates to help customers build a connected brand experience. Business intelligence and performance management TCS SOLAR© Framework helps coalesce business intelligence, business process management, enterprise data management, integration and knowledge management/enterprise content management initiatives, thus driving down the cost of IT and providing the agility to address changing business and regulatory requirements. For instance, TCS has developed a fraud management solution on top of a third-party platform. This introduces new fraud detection rules without lengthy software development life cycle, resulting in faster deployment. It supports both rule-based and score-based fraud detection. It supports fraud detection across channels like web, POS and ATM. Some examples of proprietary SMAC offerings CubbuZZ (social, cloud)
It is a social networking and promotions platform that enables customers to conduct marketing promotions on multiple channels, measure the effectiveness of these activities and steer the campaign in real time on the basis of its response; a pay-as-you-go, cloudbased solution. mKrishi (mobile)
It is a mobile-based rural service delivery platform—a tool for any organisation, including corporate houses and enterprises, that want to focus on the rural sector to perform transactions, capture field information, and process and research that specific critical information. The platform can be customized according to the needs of each customer.
India IT Services Sector
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10 July 2013
TCS Mobile Point of Sale (mobile)
The application improves customer service and speeds up sales transactions during peak demand periods. Voice of customer analytics (social, analytics)
It helps the client generate actionable insights through various channels and touch-points and improves customer experience, service quality and customer loyalty. Platform BPO solutions (cloud)
The end-to-end business process outsourcing services that run on suitable cloud systems: For instance, HR outsourcing, procurement, finance accounting and analytics, bundled with TCS or partner platforms – SAP and/or Oracle. The services are provided on a payper-use model. iON (cloud)
iON is an integrated IT-as-a-Service for small and medium businesses. This is a preintegrated suite of hardware, network and software that is provided on demand to customers in various industry segments including retail, manufacturing, education and legal. TCS BaNCS cloud-based solution (cloud)
TCS BaNCS is a holistic suite of solutions for banks, capital market firms, insurance companies and diversified financial institutions. TCS has converted the Indian version of TCS BaNCS into a multi-tenant capable software and placed it on a leading bank’s data centers (important from a regulatory point of view). It then opened it up for small banks, district banks, cooperative banks and regional rural banks. These banks, now automated, can provide ATM services, support credit cards and more. Around 3,000 banks have moved to this platform.
Cognizant Cognizant has been the most vocal about its SMAC strategy. The CEO, Frank D'souza focuses full-time on Cognizant’s strategy around ‘Horizon 3’ offerings that include SMAC. Cognizant 'Horizon 3' offerings are offerings that are a small proportion of revenues currently but will likely drive growth in the long-term. These include new markets (e.g., Latin America, public sector and new industries); non-linear offerings called 'business cloud' and SMAC offerings. Cognizant expects to deliver about US$500 mn of revenue in SMAC-related services in CY13. This is ~6% of its overall revenue guidance for CY13. While a significant majority of the work is from existing clients, Cognizant has also used SMAC offerings to win new clients. Cognizant’s offering suites relevant to SMAC include cloud, enterprise analytics, enterprise information management and mobility. Cloud
Cognizant believes that its vendor-neutral approach, multi-platform expertise and its efficient delivery model are key USPs for its cloud-based services. Like TCS, it offers both professional services relating to the cloud—developing new custom applications for the cloud and migrating existing client applications to private and public clouds—but also on creating proprietary cloud-based solutions, called business cloud offerings. The company has about ten business cloud offerings that are live currently and there are more in the pipeline that it is actively developing. Enterprise analytics Cognizant’s offerings here have been built around MarketRx, an acquisition made in 2007. MarketRx was a leading provider of analytics and related software services to life sciences companies and Cognizant is believed to have pipped Infosys and Wipro in bagging this deal. It now has a team of 600-plus associates that develop analytics offerings across industry segments.
India IT Services Sector
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Some examples of its successes include: ■
For a leading insurance company, Cognizant improved sales effectiveness by helping identify high-potential agents among its 3,900-person force. This enabled the company to redirect agent efforts for immediate savings.
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A life sciences organization had developed a profitable promotion mix across both direct and indirect channels. Cognizant ran multiple scenarios for budgets and forecast sales under various spending levels. It also helped determine sales force needs and coverage allocation for maximum ROI during a new product introduction.
Enterprise information management
Cognizant’s Data Warehousing, Business Intelligence & Performance Management (DWBI & PM) practice has completed over 4,900 projects for more than 700 blue-chip corporations Cognizant's solutions leverage Cognizant’s proprietary PLATINUM information management solution—an integrated platform that blends collaboration, value creation, workflow automation, process orchestration and knowledge management. Some examples of its successes include: ■
A global pharmaceutical giant used Cognizant to segment its audience based on buying behaviour, create promotion response models that predicted incremental sales for every additional dollar spent on promotions, allocate marketing budgets across 12 channels to maximise ROI and increase sales of its top-selling brand by 15%, with no additional spend on promotions.
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An oil & gas provider used Cognizant dashboards to control drilling and production in real time.
Mobility
Cognizant mobility practice takes a holistic view of enterprise mobility. Its approach of 'freedom within a framework' allows business the freedom to innovate while providing IT the control to do it securely. Proprietary SMAC offerings Social Prism (social, analytics)
A social mining tool: Helps understand in near real time not just what customers are saying about the organisation but also its competitors. assetSERV (social)
An enterprise platform to manage a marketing organisation's huge libraries of digital assets: It serves as a central repository for all types of rich media—everything from printed materials such as signage, stock photography, packaging and billboards, to radio spots and TV commercials—and it automates the business processes that support the marketing functions. Teams work collaboratively and are more productive. Cognizant Mobility Testing Lab (mobility, cloud)
A cloud-based mobile app testing solution that enables enterprises to quickly and affordably test apps virtually in a real-world environment using multiple devices, different operating systems, screen configurations and carriers. Cloud360 (cloud)
It helps clients manage heterogeneous cloud environments.
India IT Services Sector
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Infosys Infosys has service offerings around cloud and enterprise mobility. Internally, they are designed as two separate emerging technology business units within its platforms, products and solutions service line. The corresponding specialist sales teams are embedded in each vertical. They work in tandem with the vertical client relationship managers. The scope of the unit is to not only work on client assignments, but also to incubate early-stage ideas, either on their own or in partnership with clients. Infosys has also set up 2 academies to develop talent relating to cloud and mobility. On the social and analytics side, it has set up a Social Customer Relationship Management (SCRM) centre of excellence. This invests into research, industry adoption explorations, innovations and development. It has developed industry-specific integrated solutions that enable enterprises to adopt SCRM swiftly and easily. It has also initiated a series of entrepreneurial culture building programs including Fridea (Ideas on Fridays), the Infosys Co-creation Platform (Ideas from employees), employee learning missions (e.g., work with clients to learn cutting-edge technologies) Cloud Some examples of its successes include: ■
For a class 1 railroad company in North America, Infosys helped move their legacy infrastructure (servers, routers, networks, cooling units) and legacy applications (including SAP) into a private cloud. This helped their client reduce their costs by 50%.
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The city of Orlando, USA worked with Infosys, to move to Google Apps for applications such as Gmail, Google Docs, and instant messaging solutions. Use of Google Apps improved Orlando’s efficiency, helped realise US$200,000 in annual cost savings, streamlined communications within departments and enhanced mobility of applications.
Enterprise mobility Some examples of its successes include: ■
For a leading North American retailer, Infosys developed a system based on Apple iOS system which extended the features of a traditional point-of-sale (POS) terminal to a mobile handheld device. The client not only avoided the expenditure on traditional POS terminal hardware and space, it improved average sale per employee per store and was able to subtly brand itself as one of the most innovative and tech-savvy companies amongst its peers.
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One of the largest banks in the US, with a global presence, wanted greater visibility of its services in the mobile banking sphere. Infosys conceptualised and implemented the next-generation Infosys mBanking solution based on mobile-Web technology that was designed to work on multiple devices.
Proprietary SMAC offerings SocialEdge (social, analytics)
A social and analytics tool: It tracks consumer conversations on social platforms such as Facebook and Twitter and helps win customers by executing targeted campaigns on social media. mConnect (mobile)
A versatile enterprise middleware that helps quickly enable website functionality on mobile devices.
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10 July 2013
ShoppingTrip360 (analytics)
A retail analytics tool: It provides the same level of analysis on physical shopper concentration and cart paths in a brick and mortar store as click-stream analysis on websites. Also helps better shelf fill rates, targeted promotion which improve customer satisfaction and improve average sales per square foot. Infosys Cloud Ecosystem Hub (cloud)
It enables organisations to build, manage and govern a unified hybrid (private and public) cloud environment.
Wipro Wipro is focusing on seven technology themes as emerging service opportunities. Of these, five—social computing, collaboration, mobility, information management and cloud—correspond to SMAC. Green and open source are the remaining two. All opportunities are incubated by units led by a senior manager. For instance, Wipro has formed a cloud solutions unit, called the Productized Solutions Group (PSG), which is responsible for defining and expanding the organization wide strategy and road map. Another leg of Wipro’s strategy has been acquiring minority stakes in technology companies. This initiative is led by Mr Rishad Premji, chief strategy officer and also son of the chairman, in close collaboration with the office of the chief technology officer. Wipro has made two acquisitions so far. In May, it spent US$30 mn to acquire a minority stake of nearly 10% in Opera Solutions, a New Jersey-based big data company that provides mostly cloud-based analytical services to various industries. In June, it acquired a minority stake of around 10% in Axeda, a US based cloud-computing firm, for US$5 mn. Axeda’s core strength is in its cloud and machine to machine, or M2M, solutions. The two had been working together for 12-14 months. As a result of this agreement, Wipro now has platinum partner status with Axeda and will get preferential treatment with respect to access to its trained technical resources and premium support. We believe that Wipro is also advantageously positioned due to its acquisition of Infocrossing for US$600 mn in 2007. This enables it to provide hosting services on its own datacentres. While Wipro has no intention of becoming a public cloud service provider such as Amazon or Google, it believes that having the ability to offer hosting services gives it added flexibility and could be a differentiating factor in some situations. It is already offering its proprietary loan origination platform, NetOxygen and Temenos’ core banking solution on a pay-per-use model by hosting it on its own data centres. Wipro has operational service line suites around analytics and information management, cloud services and mobility. Its social offerings appear to be built around its expertise with Salesforce.com's offerings. In 2011, Forrester had rated Wipro a leader in “The Forrester Wave” Salesforce.com implementation. Analytics and information management Some examples of its successes include: ■
For a South-east Asian state, Wipro helped obtain insights into commuter behaviour for planning more efficient public transport systems and policies.
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For a leading global consumer products company ranked among the Fortune global 500, Wipro helped analyse the efficacy of marketing efforts and guide country-wise brand positioning.
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Cloud services Some examples of its successes include: ■
For a leading escalator and elevator giant, Wipro integrated a host of complex onpremise apps with Salesforce.com. This has facilitated 360° view of customer lifecycle for over 100,000 customers
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For a large US based education company, Wipro migrated a critical revenue generating application (US$160mn p.a.) onto the cloud. The pay-per-use model saved costs by 30% and eliminated the need to buy hardware in the near future.
Proprietary SMAC offerings NextGen Care Management (cloud)
A cloud-based healthcare solution on the Force.com platform for the US healthcare market, aimed at primary care physicians and healthcare providers. VirtuaDesk (cloud, mobility)
It enables rapid virtual desktop implementation while ensuring high security. CloudTrust (cloud)
Comprehensive lifecycle framework that addresses security challenges for the enterprises adopting cloud computing. Mobile Mining Dashboard (mobility)
Provides greater visibility for plant inventory and enables convenient mobile-based access to various employee & business related approval work flows. This improves productivity of engineers, ensures better decision making and near-real-time data.
HCL Tech HCL Tech's SMAC initiative is being incubated by a division called Ecosystem Business Incubation headed by a senior vice president. This unit’s function is to identify disruptive technologies, invest ahead and create an ecosystem of partners and solution providers for the company. HCL Tech’s 'three big bets' are mobility, big data and multi-channel integration. HCL Tech has formed a group of customer-centric service offerings called 'services +' which includes cloud computing services, social intelligence and mobility services. Cloud computing services Some examples of its successes include: ■
For a global leader in enterprise IT hardware that sold large capital equipment and frequent consumables replenishment, HCL Tech built a cloud-based monitoring and re-ordering solution. This enabled the customer to expand the market for OEM supplies and created a strong services business.
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For a technology and telecommunications equipment company, HCL Tech migrated it from legacy customer support management tool to a cloud based solution.
Mobility services Some examples of its successes include: ■
For its hospital customers, HCL Tech made a solution for relaying of up to date key patient information to medical practitioners.
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For its banking customers, HCL Tech enabled secure mobile banking transactions.
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Proprietary SMAC offerings MTaaS (cloud)
Management Tools as a Service is a private cloud based enterprise management platform for the delivery of IT management tools. Currently, it serves over 35 Global 1,000 customers of HCL Tech. Nimbo (cloud)
Nimbo is HCL’s cloud enablement and orchestration platform that incorporates core modules such as capacity planning, load balancing, network and resource management, and disaster recovery.
India IT Services Sector
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Companies Mentioned (Price as of 10-Jul-2013) Accenture Plc (ACN.N, $74.1) Amazon com Inc. (AMZN.OQ, $291.51) Cognizant Technology Solutions Corp. (CTSH.OQ, $66.55, OUTPERFORM, TP $85.0) Facebook Inc. (FB.OQ, $25.46) HCL Technologies (HCLT.BO, Rs839.0, OUTPERFORM, TP Rs950.0) Infosys Limited (INFY.BO, Rs2501.0, NEUTRAL, TP Rs2700.0) International Business Machines Corp. (IBM.N, $191.3) Microsoft Corporation (MSFT.OQ, $34.35) Oracle Corporation (ORCL.OQ, $31.51) SAP (SAPG.F, €56.4) Salesforce.com Inc. (CRM.N, $38.72) Tata Consultancy Services (TCS.BO, Rs1513.4, OUTPERFORM, TP Rs1760.0) Wipro Ltd. (WIPR.BO, Rs365.0, OUTPERFORM, TP Rs440.0)
Disclosure Appendix Important Global Disclosures Anantha Narayan and Sagar Rastogi, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 3-Year Price and Rating History for Cognizant Technology Solutions Corp. (CTSH.OQ) CTSH.OQ Date 03-Aug-10 01-Nov-10 25-Apr-11 30-Jun-11 14-Sep-12 14-Nov-12
Closing Price (US$) 60.62 65.04 81.83 73.34 71.00 64.29
Target Price (US$) 67.00 81.00 98.00 75.00 85.00
Rating O
NR N* O*
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM N O T RA T ED N EU T RA L
3-Year Price and Rating History for HCL Technologies (HCLT.BO) HCLT.BO Date 11-Jan-11 21-Apr-11 05-Jul-11 21-Sep-11 18-Oct-11 20-Feb-12 18-Apr-12 06-Jul-12 25-Jul-12 01-Oct-12 17-Oct-12 03-Jan-13 17-Jan-13 04-Mar-13 17-Apr-13
Closing Price (Rs) 474.55 518.65 506.55 405.55 401.15 491.45 495.55 489.95 513.75 581.90 580.30 625.40 703.30 714.90 751.15
Target Price (Rs) 600.00 640.00 600.00 485.00 560.00 580.00 575.00 650.00 700.00 740.00 765.00 860.00 930.00 950.00
Rating O * * O
O U T PERFO RM
* Asterisk signifies initiation or assumption of coverage.
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3-Year Price and Rating History for Infosys Limited (INFY.BO) INFY.BO Date 18-Oct-10 11-Jan-11 18-Apr-11 05-Jul-11 21-Sep-11 12-Oct-11 13-Jan-12 20-Feb-12 15-Apr-12 06-Jul-12 13-Jul-12 12-Oct-12 03-Jan-13 11-Jan-13 04-Mar-13 12-Apr-13 03-Jun-13
Closing Price (Rs) 3107.00 3329.25 2905.20 2954.50 2433.40 2680.50 2585.55 2950.60 2403.30 2443.85 2227.80 2395.65 2336.30 2712.60 2903.00 2295.45 2513.95
Target Price (Rs) 3575.00 4050.00 3400.00 3100.00 3050.00 2950.00 3200.00 2800.00 2700.00 2500.00 2450.00 2500.00 2700.00 3110.00 2450.00 2700.00
Rating O N * * O N O U T PERFO RM N EU T RA L
* Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for Tata Consultancy Services (TCS.BO) TCS.BO Date 22-Oct-10 11-Jan-11 26-Apr-11 08-Jun-11 05-Jul-11 21-Sep-11 18-Oct-11 18-Jan-12 21-Feb-12 24-Apr-12 13-Jul-12 14-Jan-13 04-Mar-13
Closing Price (Rs) 1040.10 1099.40 1188.40 1177.35 1179.70 1043.05 1033.50 1075.35 1233.90 1195.25 1249.65 1334.30 1510.20
Target Price (Rs) 1175.00 1325.00 1275.00 1150.00 1350.00 1375.00 1325.00 1420.00 1400.00 1450.00 1500.00 1760.00
Rating O N * N O*
O U T PERFO RM N EU T RA L
* Asterisk signifies initiation or assumption of coverage.
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3-Year Price and Rating History for Wipro Ltd. (WIPR.BO) WIPR.BO Date 25-Oct-10 24-Jan-11 21-Feb-11 28-Apr-11 05-Jul-11 21-Jul-11 21-Sep-11 01-Nov-11 20-Feb-12 12-Mar-12 15-Mar-12 25-Apr-12 06-Jul-12 24-Jul-12 29-Oct-12 02-Nov-12 03-Jan-13 04-Mar-13 19-Apr-13 08-Jul-13
Closing Price (Rs) 378.14 390.49 395.67 392.55 376.12 352.31 312.36 327.92 394.75 384.16 375.29 360.43 344.57 304.06 302.96 320.71 349.23 368.39 368.65 356.05
Target Price (Rs) 417.42 452.58 505.30 483.33 456.97 430.61 342.73 377.88 377.88 369.09 355.91 338.33 364.70 373.48 386.67 430.61 400.00 440.00
Rating N O * * N R N
N EU T RA L O U T PERFO RM REST RICT ED
O
* Asterisk signifies initiation or assumption of coverage.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative t o the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
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Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution
Rating
Versus universe (%)
Of which banking clients (%)
Outperform/Buy* 43% (53% banking clients) Neutral/Hold* 40% (50% banking clients) Underperform/Sell* 15% (38% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperfor m, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Price Target: (12 months) for HCL Technologies (HCLT.BO) Method: Our target price of Rs950 for HCL is based on 14x (25% discount to multiple implied by TCS TP) 24-month forward EPS. Risk:
Risks to our 12-month target price of Rs950 for HCL include the following: (1) a weaker economic environment in the US leading to slower IT services spending; (2) stronger competition by global vendors in the offshore arena; (3) large clients of the company shifting a greater proportion of their work to their in-house centres; (4) greater-than-expected wage inflation; and (5) adverse currency movements.
Price Target: (12 months) for Cognizant Technology Solutions Corp. (CTSH.OQ) Method: Our $85 target price for CTSH is ~18x our 2014E EPS estimate. Our TP is derived from a weighted scenario analysis. Risk:
Risks to Cognizant's achievement of our $85 target price include: any significant reduction in worldwide IT (information technology) spending, any backlash towards offshore outsourcing especially should the U.S. head into a recessionary environment, higher levels of employee attrition, a further rise in the rupee versus the dollar, any unplanned increases in wage inflation, changes in the pricing environment, and a slowdown in the financial services vertical.
Price Target: (12 months) for Infosys Limited (INFY.BO) Method: Our target price of Rs2,700 for Infosys is 14x (25% discount to implied multiple for TCS) our estimated EPS (earnings per share) for the next 24 months. Risk:
Downside risks to our Rs2,700 target price for Infosys include: (1) a weaker economic environment in the US leading to slower IT services spending; (2) stronger competition by global vendors in the offshore arena; (3) large clients of the company shifting a greater proportion of their work to their in-house centres; (4) greater-than-expected wage inflation; and (5) adverse currency movements. Key upside risk is faster than expected turn around by management.
Price Target: (12 months) for Tata Consultancy Services (TCS.BO) Method: Our target price of Rs1,760 for TCS is based on 18.5x 24-month forward EPS (earnings per share) (30% premium to the current 12-month forward P/E [price-to-earnings] for MSCI India). Risk:
Potential risks to our target price of Rs1,760 for TCS include: (1) a slowdown in the US economy, which could lead to a slowdown in revenues, and (2) a sharp appreciation in the INR vs. the USD.
Price Target: (12 months) for Wipro Ltd. (WIPR.BO) Method: Our target price of Rs440 for Wipro is based on 13x (30% discount to the multiple implied by TCS's TP) 24-month forward EPS. Risk:
Risks to our Rs440 target price for Wipro include: (1) a weaker economic environment in the US leading to slower IT services; (2) greaterthan expected wage inflation; and (3) adverse currency movements.
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Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names
The subject company (HCLT.BO, CTSH.OQ, INFY.BO, TCS.BO, WIPR.BO, IBM.N, ORCL.OQ, SAPG.F, AMZN.OQ, MSFT.OQ, FB.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (IBM.N, ORCL.OQ, AMZN.OQ, MSFT.OQ, FB.OQ) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (CTSH.OQ, TCS.BO, IBM.N, MSFT.OQ) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (IBM.N, ORCL.OQ, MSFT.OQ) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (IBM.N, ORCL.OQ, AMZN.OQ, MSFT.OQ, FB.OQ) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (HCLT.BO, CTSH.OQ, INFY.BO, TCS.BO, WIPR.BO, IBM.N, ORCL.OQ, SAPG.F, CRM.N, AMZN.OQ, MSFT.OQ, FB.OQ) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (CTSH.OQ, TCS.BO, IBM.N, MSFT.OQ) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (CTSH.OQ, ACN.N, IBM.N, ORCL.OQ, CRM.N, AMZN.OQ, MSFT.OQ, FB.OQ). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (SAPG.F).
Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (HCLT.BO, CTSH.OQ, INFY.BO, TCS.BO, WIPR.BO, ACN.N, IBM.N, ORCL.OQ, SAPG.F, CRM.N, AMZN.OQ, MSFT.OQ, FB.OQ) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. The following disclosed European company/ies have estimates that comply with IFRS: (SAPG.F). As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (India) Private Limited................................................................................................. Anantha Narayan ; Sagar Rastogi For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.creditsuisse.com/researchdisclosures or call +1 (877) 291-2683.
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