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13 January 2023 India

India IT Services: Mid-caps

EQUITIES
Digital transformation: Scale matters less
Larger mid-caps operating at higher margins,
suggesting benefits to scale
Key points
 Introducing Macquarie’s MOCCA framework for India IT Services mid-caps.
Organic CC
50% growth YoY
45%

 Digital: A regime change in IT spending unappreciated by consensus.

40% Persistent
35%
LTI + Mindtree
30%
25%
20%
Coforge
LTI
Mindtree  Persistent Systems and LTIMindtree are our top picks. Our order of
15%
10%
Zensar Mastek
Mpha…
LTTS preference is PSYS, LTIM, COFORGE, BSOFT, MAST, LTTS, and MPHL.
Birlasoft
5%
0%
-5%
0% 3% 5% 8% 10% 13% 15% 18% 20% 23%
EBIT Margins Introducing 5-factor MOCCA framework to identify mid-cap winners
Source: Macquarie Research, January 2023
We see Digital Transformation as a multi-year growth driver for the industry even
Inside as clients of some India IT services mid-cap firms have been under pressure
Executive Summary 2 already (e.g., Invacare had paused its ERP rollout). We modify our HAMM
Modifying HAMM for midcap IT Services 5 framework for IT Services large-caps (see “IT Services: Introducing HAMM –
Regime change in IT spending post-Covid 14 Digital Transformation -> multi-year demand” published on 8 April 2022) to suit
The rise of midcap IT Services 17 our smaller mid-cap names and introduce our five-factor MOCCA framework
Valuation and recommendation summary 21 (details on page 4) to identify potential risks to growth.
Persistent Systems (PSYS IN) 24
LTIMindtree (LTIM IN) 40 Digital transformation: A long growth runway likely
Coforge (COFORGE IN) 60
While consensus worries about growth rates halving, we think Covid-19 ushered
Birlasoft (BSOFT IN) 78
Mastek (MAST IN) 97 in a new regime in which IT spending will be more resilient. We also think
L&T Technology Services (LTTS IN) 115 demand for Digital Transformation has a long growth runway. Unlike mammoth IT
Mphasis (MPHL IN) 136 programs in the old mode of waterfall development that relied on a final “Go-Live”
after years of development and tens or hundreds of millions of dollars spent,
Digital Transformation programs rely on an approach in which a minimum viable
product is created in weeks and then improved iteratively with new features
Persistent Systems is our top pick, followed by
LTIMindtree added. These programs are deployed almost daily or weekly, reducing the risk of
Bloomberg Rating CMP TP TSR ADTV Mkt catastrophic failure, making clients amenable to experimenting with new vendors.
Ticker cap
(Rs) (Rs) (%) (USD (USD Client mining and offshore shift as key measures of scalability
mn) mn)
PSYS IN OP 4,080 8,330 105 14.3 3,680 The basic ingredient to scale up to become a much larger firm is client mining,
LTIM IN OP 4,318 7,540 76 24.9 15,204
COFORGE IN OP 3,919 6,260 60 12.3 2,944
which is the most important differentiating measure across mid-size firms. We
BSOFT IN OP 306 500 65 7.8 9,64 use increased offshore execution as another key differentiating measure across
MAST IN OP 1,752 2,720 55 0.9 620
LTTS IN OP 3,905 4,630 20 11.4 4,688
mid-size firms as we believe this metric indicates whether a firm is capable of
MPHL IN N 1,989 1,880 (6) 10.9 4,553 pursuing annuity-oriented outsourcing opportunities or is largely a consulting
Source: Bloomberg, Macquarie Research, January 2023. provider. We see onsite-centric consulting models as a lower-margin, potentially
Closing prices as of 10 January 2023
undifferentiated service, where a long tail of local subcontracting outfits operate.

India IT services mid-caps no longer at discount to large-caps

The more level playing field for India IT Services midcaps and their growing
capability to successfully play the same role as the large-caps (i.e., as a cost-
efficient and capable outsourcing partner for both new development and
maintenance) has been rewarded with a PE re-rating in recent years. We think
this is well deserved, but think that the valuations should reflect the differences in
both growth rates and risks to growth. Our preference is for firms with: 1) proven
client mining ability; 2) increasing offshore execution; and 3) declining top-client
concentration. Our top picks are Persistent Systems and LTIMindtree. Our sector
top pick remains HCLT, but now followed by PSYS and LTIM ahead of TCS as
Analysts
we see relatively low risk and greater upside.
Macquarie Capital Securities (India) Pvt. Ltd.
Ravi Menon +9122 6720 4152 ESG: India IT Services firms score well overall in Macquarie Governance & Risk
[email protected]
Score. See individual company ESG tearsheets.

Please refer to page 154 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
Macquarie Research India IT Services: Mid-caps

Executive Summary
We introduce our five-factor MOCCA framework to analyse the growth drivers for India IT Services
mid-caps. Due to the much smaller size of the firms relative to the large-cap firms we analysed
previously, we use a framework that is different from what we introduced for the India IT Services
large-caps (see “IT Services: Introducing HAMM – Digital Transformation -> multi-year demand”
published on 8 April 2022).

What we take for granted with the large-caps cannot be assumed for the mid-caps,. We thus add a
dimension to measure offshore execution and add dimensions to check for client concentration
and vertical concentration. As mega-deals are not the norm for mid-cap firms, we do not include
that as a standard measure and instead discuss that only for firms that have done mega-deals.

Fig 1 Introducing Macquarie’s five-factor MOCCA framework to analyse growth drivers for mid-cap India IT Services firms

Mining
Contribution Contribution Avg account
Ranking by USD1mn+ USD5mn+ USD10mn+ Offshore
from top-10 by Top size (growth Overall Rank
parameter client tier client tier client tier proportion
clients vertical ex-top-10)
additions additions additions
Persistent 1 3 8 6 2 2 1 1
LTI + Mindtree 5 4 6 3 7 1 4 2
LTTS 1 5 4 8 1 3 8 2
Coforge 4 1 1 7 5 8 6 4
Birlasoft 8 2 3 1 10 9 2 5
Zensar 6 5 2 5 3 10 4 5
LTI 6 8 7 2 4 5 7 7
Mindtree 9 7 4 4 8 4 3 7
Mastek 3 NA NA 10 6 6 10 9
Mphasis 10 9 9 9 9 7 9 10
Source: Macquarie Research, January 2023

Persistent Systems, LTIMindtree (which we have ranked using proforma metrics from LTI and
Mindtree), and LTTS rank the highest. Interestingly, as a combined firm, LTIMindtree ranks much
higher than LTI and Mindtree as individual firms – indicating that as a combined firm, the risks to
growth are much lower.

Fig 2 MOCCA framework helps us gauge the risk to growth estimates

MOCCA Revenue CAGR EPS CAGR RoE (%) PE (x) Target FY25
Company Implied target PEG^
Overall Rank FY23-25E (%) FY23-25E (%) FY24E FY24E FY25E PE (x)
Persistent 1 22% 29% 27% 24.3 19.5 40.0 1.8
LTIMindtree# 2 16% 18% 27% 24.9 20.7 36.0 2.0
LTTS 2 13% 15% 25% 30.9 27.8 33.0 2.5
Coforge 4 19% 29% 30% 22.3 16.9 27.0 1.5
Birlasoft 5 15% 15% 19% 13.7 12.2 20.0 1.3
Mastek 9 20% 25% 19% 17.7 12.4 20.0 1.0
Mphasis 10 12% 12% 27% 17.7 16.9 15.0 1.3
Source: Macquarie Research, January 2023

^Note: Using revenue growth/ EPS CAGR for growth rate depending on which we think is a more representative of long-term growth trajectory
#
MOCCA ranking for LTIMindtree using historical metrics for both firms on proforma basis

With the risks highlighted by the MOCCA framework, we are confident in projecting earnings
growth through FY25E across our coverage universe, given our view that the sector is on a secular
growth path that is unlikely to be derailed by a “technical” US recession.

On a PEG basis, we think that some of the midcaps that rate highly in our MOCCA framework now
deserve to trade on par with the large-caps given risks to growth getting derailed are equally low
(for those midcaps that score well in MOCCA).

13 January 2023 2
Macquarie Research India IT Services: Mid-caps

Fig 3 TCS mostly trading above 2x PEG Fig 4 LTIM has had a discontinuity in earnings estimates,
but on consensus estimates, trading above 1.8x on avg

PEG (x)
3.5 3.5

3 3

2.5 2.5

2
PEG (x)

2
1.5
1.5
1
1
0.5
0.5
0

12/04/2018
12/07/2018
12/10/2018
12/01/2019
12/04/2019
12/07/2019
12/10/2019
12/01/2020
12/04/2020
12/07/2020
12/10/2020
12/01/2021
12/04/2021
12/07/2021
12/10/2021
12/01/2022
12/04/2022
12/07/2022
12/10/2022
12/01/2023
0

Source: Bloomberg, Macquarie Research, January 2023 Source: Bloomberg, Macquarie Research, January 2023

We expect LTIM to start trading at a PEG that TCS has been trading at given it is as broad-based
among the mid-caps and as reliable as TCS is seen among the large-caps.

Other large caps beyond the India IT Services flagship TCS are also trading at significantly above
1x PEG reflecting the confidence in extrapolating and paying for growth.

Fig 5 Infosys has been trading at PEG average of 2.16x Fig 6 HCLT has been trading at a PEG average of 1.75x

PEG (x) PEG (x)

3.5 3

3 2.5

2.5
2
2
1.5
1.5
1
1
0.5
0.5

0
0
14/01/2018
14/04/2018
14/07/2018
14/10/2018
14/01/2019
14/04/2019
14/07/2019
14/10/2019
14/01/2020
14/04/2020
14/07/2020
14/10/2020
14/01/2021
14/04/2021
14/07/2021
14/10/2021
14/01/2022
14/04/2022
14/07/2022
14/10/2022
14/01/2018
14/04/2018
14/07/2018
14/10/2018
14/01/2019
14/04/2019
14/07/2019
14/10/2019
14/01/2020
14/04/2020
14/07/2020
14/10/2020
14/01/2021
14/04/2021
14/07/2021
14/10/2021
14/01/2022
14/04/2022
14/07/2022
14/10/2022

Source: Bloomberg, Macquarie Research, January 2023 Source: Bloomberg, Macquarie Research, January 2023

We see a similar discount to the flagship in PEG terms possible in the mid-cap universe as well
and we suggest our MOCCA framework as a good way to think about differentiating between firms
on the basis of risks to earnings growth.

13 January 2023 3
Macquarie Research India IT Services: Mid-caps

Fig 7 On risk-adjusted returns, Persistent Systems and LTIMindtree are our top picks
Bloomberg CMP TP TSR
Company Rating Comments
Ticker (Rs) (Rs) %
Broad-based growth drivers and possible growth upside if top-5 clients
Persistent PSYS IN OP 4,080 8,330 105% resume growth make this our top preference. Significant rerating is possible
pegging vs global peers EPAM and Globant
A low-risk, long-term compounder in our view post-merger with Mindtree and
LTIMindtree LTIM IN OP 4,318 7,540 76%
our #2 preference (after Persistent Systems).
COFORGE Has been relying on BFS to drive growth, but good client mining and offshore
Coforge OP 3,919 6,260 60%
IN execution suggest risk is low to moderate. Our #3 pick after PSYS and LTIM.
Strong client mining, offshore delivery capability and mega deal track record
Birlasoft BSOFT IN OP 306 500 65%
provides comfort despite some client and vertical concentration risk.
Expecting a turnaround in UK gov’t and NHS, and expecting recent
Mastek MAST IN OP 1,752 2,720 57%
transformational M&A to broaden growth drivers and improve client mining.
Pureplay engineering services firm with broad vertical exposure and strong
LTTS LTTS IN OP 3,905 4,630 20% client mining. Near-term growth outlook not better than IT Service peers, but
longer growth runway likely
High reliance on top 10 clients and onsite revenue suggests a portfolio
Mphasis MPHL IN N 1,989 1,880 -6% different from peers and closer to more macro-sensitive consulting, limiting
revenue visibility
Source: Macquarie Research, January 2023

Adjusted for risk, our top pick is Persistent System, for which we see broad-based growth drivers
that have helped deliver superior growth despite a drag from top 5 clients.

Our second preference is LTIMindtree, which we think deserves a re-rating given how the
combined entity has much lower business risk vs the individual firms of LTI and Mindtree. We see
this as a very safe choice and with broader exposure to verticals and the benefit of scale vs
Persistent Systems – which is why we assign LTIM a higher PEG multiple of 2.0x vs the 1.8x
multiple we assign for PSYS.

Our third preference is Coforge. We do not see Coforge’s high reliance on BFS as a risk as this is
a relatively smaller vertical that has been scaled up quickly both organically and inorganically. We
view the BFS contribution positively as it has diversified Coforge’s vertical portfolio and
repositioned it for better growth. Furthermore, we view Coforge’s exposure to mid-size US banks,
which is one of the fastest growing market segments for India IT Services, as a key positive.

Our fourth preference is Birlasoft, which is a sub-US$1bn market-cap firm that we think could
surprise with a growth turnaround. Birlasoft has demonstrated a capability to do turnkey
outsourcing deals with one deal in the public domain: a large deal signed with Invacare (IVC US,
Not Rated) in October 2019 (see link).

Our channel checks suggest strong domain expertise in Insurance as well for Birlasoft and with a
new CEO (Angan Guha) from much bigger peer Wipro, we could see a scale-up in BFSI – which is
a core vertical for almost every India IT Services firm that has managed to scale up beyond
US$1bn in revenue. We think the demonstrated large deal capability could lead it to win similar
deals in the Fortune 1,000 and surprise us positively on growth.

13 January 2023 4
Macquarie Research India IT Services: Mid-caps

We introduced the
Hunting-Acquisition-
Modifying HAMM for midcap IT Services
Mining-MegaDeals Adding dimensions for offshore, client concentration and critical mass in verticals
framework to analyse
large-cap IT Services Removing the emphasis on Client Acquisition given constant tail-account rationalisation
firms. Last year, we introduced Macquarie’s Hunting-Acquisition-Mining-Mega Deals (HAMM) framework
to help analyse the incremental revenue for large IT Services firms (see “IT Services: Introducing
HAMM - Digital transformation-> multi-year demand” from 8 April 2022). While we argue the same
For mid-cap IT Services, framework could be used for mid-cap IT Services, we think not all mid-cap IT Services firms have
we modify this the same capabilities in terms of offshore execution or sufficient vertical domain expertise in every
framework slightly to vertical in which they operate.
emphasise Offshore
Execution capability The high client concentration that some midcaps have is a factor that adds to the risk of revenue
and we also add a few volatility in the event of M&A or other events that could lead to client loss among key clients. So,
factors that help assess we have chosen to modify our framework to add these dimensions and we have also chosen to
the risk of concentration remove the “Hunting” dimension given that the in the past many midcap firms have been plagued
to a client or vertical as by too many tail accounts that suck up sales effort and do not scale up. We substitute Average
the portfolios are not as Account Size for the “Hunting” dimension in our framework. We also discard the “Acquisition”
broad-based as that of factor from our large-cap framework as most mid-cap firms have not done transformational M&A
the large-caps. and we will instead discuss acquisitions in the company-specific sections.

We introduce our five- • We introduce Macquarie’s five-factor framework for mid-cap IT Services (MOCCA) to analyse
factor framework incremental revenue through the following dimensions:
(MOCCA) for mid-cap IT  Mining (measured by client addition to three separate tiers: US$1mn+, US$5mn+ and
Service firms. US$10mn+)

 Offshore Execution

 Client Concentration

 Contribution from top vertical

 Average Account Size

We exclude Mega-deals as a factor as this is not relevant for most mid-cap firms. However, we still
consider this when we analyse individual firms.

As we explain how we analyse each of these factors, a criticism of the framework that might occur
to some could be that these measurements even over longer timeframes of up to the past 60
months are anchored against metrics in the present quarter. We remind such readers that the goal
of the analysis is to identify whether the recent performance in revenue addition is a fair reflection
of the firm’s capabilities and whether the incremental revenue added is sustainable.

We also attempt to identify recent breakouts in performance by this analysis and then can dive
deeper to understand the drivers for a firm’s breakout in particular factor or factors. These are not
intended as scores to measure the annual performance over each of the past five years.

Fig 8 Macquarie’s five-factor MOCCA framework to judge sustainability of growth drivers

Mining
Contribution Contribution Avg account
Ranking by USD1mn+ USD5mn+ USD10mn+ Offshore
from top-10 by Top size (growth Overall Rank
parameter client tier client tier client tier proportion
clients vertical ex-top-10)
additions additions additions
Persistent 1 3 8 6 2 2 1 1
LTI + Mindtree 5 4 6 3 7 1 4 2
LTTS 1 5 4 8 1 3 8 2
Coforge 4 1 1 7 5 8 6 4
Birlasoft 8 2 3 1 10 9 2 5
Zensar 6 5 2 5 3 10 4 5
LTI 6 8 7 2 4 5 7 7
Mindtree 9 7 4 4 8 4 3 7
Mastek 3 NA NA 10 6 6 10 9
Mphasis 10 9 9 9 9 7 9 10

Source: Macquarie Research, January 2023

Even the largest among the India IT Services mid-size players (LTI, Mindtree, and Mphasis) have
their revenue concentrated in a few chosen verticals and have some large white spaces. The
combined LTIMindtree entity will be present across almost all major verticals, but this entity will
have ~US$4bn in annual revenue and be only ~40% smaller than Tech Mahindra.
13 January 2023 5
Macquarie Research India IT Services: Mid-caps

Service portfolio is less of a differentiator among the eight sub-US$5bn annual revenue firms we
have evaluated, with LTTS being the only firm unique in its service portfolio that consists entirely of
engineering services. Mastek, which derives ~32% of revenue from Oracle Cloud and >40% of
revenue from UK government and health agencies, is arguably another firm that obtains a large
proportion of its revenue from niche segments.

Factor-1: Mining: We believe this is the most important factor as it indirectly is also a reflection of
a firm’s project execution capabilities as well as the breadth of its solutions and its sales capability.
We measure this using three different client tiers (US$1mn+, US$5mn+ and US$10mn+).

The weight of this factor is therefore three times as much as any other factor. We think that
weighting is necessary as client mining is by far the most important factor that can determine long-
term growth. We take this as almost a basic requirement in the India Tier-1, but think this cannot
be assumed as easily for the smaller firms where breadth of services may not be sufficient in all
cases.

We do not distinguish between organic and inorganic additions as it is not possible to identify
inorganic contribution to this metric. However, we think that by looking at additions across multiple
periods, we account for this indirectly.

We measure client mining by measuring additions across the US$1mn+, US$5mn+ and
US$10mn+ client tiers. The client tiers above that are disclosed only by LTI, Mindtree, Mphasis
and LTTS (given the larger revenue base for LTI, Mindtree and Mphasis, that is only to be
expected).

LTTS used to have two US$50mn+ clients back in 2QFY19, but that dropped to one by 1QFY20
and dropped to zero by 2QFY23. This would have been concerning except for the factor behind
this change – i.e., at least one of the accounts declined in size owing to a spinoff of a division of its
top customer that LTTS had a large engagement.

The table below tries to identify firms that have “punched significantly above their weight” in client
mining in the US$1mn+ client tier. We do this by ranking firms by their 2QFY23 revenue and then
subtracting the ranking of client additions to the tier during each period.

Fig 9 Scoring US$1mn+ client tier additions adjusted by size: Higher scores mean
punching above weight while negative scores indicate client additions below its needs

Ranking by USD1mn+ client tier additions 5 years 4 years 3 years 2 years 1 year

LTI 0 0 0 (1) (1)

Mindtree (2) (2) (2) 0 0
LTI + Mindtree 0 0 0 0 0
Mphasis (4) (4) (4) (4) (3)
Coforge 1 1 2 0 (1)
Persistent 2 2 2 3 3
LTTS 3 3 2 2 2
Birlasoft NA NA 0 (1) (1)
Mastek NA NA NA 2 2
Zensar 0 0 0 (1) (1)
Source: Company data, Macquarie Research, January 2023

LTTS emerges as a leader in the US$1mn+ client additions, which assuages our concern on the
relatively poor scoring on scaling up the average account size beyond its top 10 accounts. With the
strong addition of small accounts, we think it is reasonable to have some downward drag in
average account size.

After LTTS, Persistent Systems emerges as another clear outlier across periods with very good
client additions in the US$1mn+ client tier across all periods (except for the past year) relative to its
size.

13 January 2023 6
Macquarie Research India IT Services: Mid-caps

Coforge also scores well except for the past year. Coforge acquired Whishworks (a MuleSoft and
Big Data specialist) in April 2019, and SLK Global in April 2021. While it is reasonable to expect a
good deal of help to the US$1mn+ client tier from the acquisition of Whishworks, that should have
helped only in FY20 (thus skewing the 2QFY20 to 2QFY21 additions) and when we look at the
absolute client additions, the additions have continued to be strong over 2QFY21 to 2QFY22 as
well. Only in the last year Coforge seems to have slowed down on the US$1mn+ client additions
and we think this could be due to a shift in focus to client mining.

Mindtree comes across as adding US$1mn+ clients at a rate well below what would be expected of
its size. However, a verdict as simple as that is not the intent of our framework, but to identify any
reasons for such performance. In Mindtree’s case, Debashis Chatterjee (CEO of Mindtree), had
made it clear that he saw the rationalizing of tail accounts as essential. This has worked well as is
evident from Mindtree’s strong revenue addition and its scale up of average account size. So this
does work both ways.

We will look at poor additions to the US$1mn+ client tier as a concerning trend only if it is also
accompanied by poor performance in improving Average Account Size (excluding top 10).

Mphasis scores poorly on both the dimensions – seeing poor additions to the US$1mn+ client tier
and having a decline in the average account size despite that. This is a bit worrying especially as it
also scores the worst in terms of relying on its top 10 accounts for more of its incremental revenue
vs its peers.

When we look at performance in client mining in the higher tier of US$5mn+ client tier, Mphasis
has again not performed very well (see Figs 11 and Fig 12) thus indicating it focuses almost
exclusively on its top-10 accounts or that it at least does not have a very broad-based account
mining program. We will discuss the possible causes and what this implies for a potential investor
in the company-specific discussion.

Birlasoft scores poorly in terms of US$1mn+ client tier additions, but makes up for this by
demonstrating effective client mining outside the to -10 clients and by also punching above its
weight in the US$5mn+ client tier additions.

Fig 10 Changes to US$1mn+ client tier for each firm in the past five years
Change in last Revenue in
5 years 4 years 3 years 2 years 1 year 2QFY23
LTI 115 100 77 45 34 601
Mindtree 46 49 30 35 33 422
LTI + Mindtree 161 149 107 80 67 1,023
Mphasis 42 38 28 24 16 440
Coforge 68 54 47 33 13 247
Persistent 78 72 70 67 40 256
LTTS 71 56 44 34 25 247
Birlasoft NA NA -10 -5 0 149
Mastek NA NA NA 16 11 78
Zensar 3 (4) (1) 6 2 155
Source: Companies, Macquarie Research, January 2023

Coforge leads the US$5mn+ client tier additions adjusted for its size and clearly punches above its
weight across any time period we consider. We can only hypothesize that this means there is a
good cross-selling program that allows Coforge to scale up almost all relationships. We will discuss
this in more detail in the company-specific section.

Birlasoft also scores very well in the US$5mn+ client tier additions for the time periods we have
data – i.e. over the past 3 years since its integration with KPIT’s IT Services business.

LTTS also scores well over the longer-term 4-year and 5-year periods while it has slipped a bit in
the more recent periods.

Mindtree has done exceedingly well in the last year in the US$5mn+ client tier, while performing
poorly over slightly longer-term analysis. We think this could be partly due to pruning of less
profitable accounts that were also classified as tail accounts. Given the strong scoring over the last
year and last 2 years, we see no structural issues.

LTI has performed poorly over the last year and even over the last 2 years in additions to the
USD5mn+ tier. As a combined entity, LTI-Mindtree scores perfectly across all time periods and has
balanced client mining appropriately to its needs.

13 January 2023 7
Macquarie Research India IT Services: Mid-caps

Zensar scores well over the longer-term horizons in additions to the USD5mn+ client tier while
scoring slightly below its required rate over the last year and also over the last 3 years.

Mphasis appears to be focused on client mining within its top-10 accounts and is lagging in
additions to the USD5mn+ client tier.

Fig 11 Scoring US$5mn+ client tier additions adjusted by size: Higher scores mean
punching above weight while negative scores indicate client additions below its needs

Ranking by USD5mn+ client tier additions 5 years 4 years 3 years 2 years 1 year

LTI 0 0 0 (2) (3)

Mindtree 0 (1) (2) 1 2
LTI + Mindtree 0 0 0 0 0
Mphasis (3) (1) (2) (2) (4)
Coforge 3 3 3 4 3
Persistent NA NA 1 0 2
LTTS 2 1 (1) (1) 0
Birlasoft NA NA 2 2 4
Mastek NA NA NA NA NA
Zensar 1 1 (1) 0 (1)
Source: Companies, Macquarie Research, January 2023

When we consider the US$5mn+ client tier additions in absolute terms, Coforge, Persistent
Systems and Birlasoft stand out in their client additions that almost match or exceed that of firms
that are bigger in size.

Fig 12 Changes to US$5mn+ client tier for each firm over different periods
5 years 4 years 3 years 2 years 1 year Revenue
2QFY23

LTI 39 34 30 17 7 601
Mindtree 23 17 14 18 11 422
LTI + Mindtree 62 51 44 35 18 1,023
Mphasis 19 19 16 14 4 440
Coforge 26 20 20 19 8 247
Persistent NA NA 19 14 8 256
LTTS 21 15 7 5 4 247
Birlasoft NA NA 11 7 7 149
Mastek NA NA NA NA NA 78
Zensar 14 9 5 5 2 155
Source: Companies, Macquarie Research, January 2023

Not all India IT Services midcap firms disclose US$10mn+ client count and firms like Mastek are
too small to have a large count of clients in this tier.

Fig 13 Scoring US$10mn+ client tier additions adjusted by size: Higher scores mean
punching above weight while negative scores indicate client additions below its needs

Ranking by USD10mn+ client tier additions 5 years 4 years 3 years 2 years 1 year

LTI 0 0 0 0 (7)
Mindtree 1 1 1 2 2
LTI + Mindtree 0 0 0 0 (3)
Mphasis (3) (3) (1) (2) 2
Coforge 2 2 2 2 4
Persistent NA NA NA NA 1
LTTS 2 2 0 (1) 3
Birlasoft NA NA 3 3 1
Mastek NA NA NA NA NA
Zensar 1 2 0 2 4
Source: Companies, Macquarie Research, January 2023

13 January 2023 8
Macquarie Research India IT Services: Mid-caps

Coforge and Mindtree consistently punch above their weight in additions to the USD10mn+ client
tier across the last 5 years. Birlasoft has been doing well but has fallen slightly below peers in the
past 12 months when most firms added strongly to this tier. Mastek does not disclose client count
in the USD10mn+ client tier.

LTI’s score of negative 7 reflects a loss of one client in the USD10mn+ client tier in the last 12
months while it is the largest firm in the peer group (second biggest considering the LTI + Mindtree
entity as a separate firm) and it scores last (9th as we exclude Mastek which does not disclose
client count in this tier) among the peer group in additions over the past 12 months to the
USD10mn+ client tier. Hence the score of 2-9 = (7).

Fig 14 Coforge has been very consistent as has been Mindtree

Changes to USD 10mn+ 5 years 4 years 3 years 2 years 1 year Revenue
client tier 2QFY23

LTI 19 17 15 10 (1) 601

Mindtree 18 13 13 10 4 422
LTI + Mindtree 37 30 28 20 3 1,023
Mphasis 11 8 10 7 5 440
Coforge 13 12 10 9 4 247
Persistent NA NA NA NA 3 256
LTTS 12 10 7 4 3 247
Birlasoft NA NA 9 5 2 149
Mastek NA NA NA NA NA 78
Zensar 7 8 4 5 3 155
Source: Macquarie Research, January 2023

Factor-2: Offshore execution: We measure offshore contribution to the incremental revenue and
rank firms. We do that not just for the last year, but across the last 2, 3, 4 and 5 years as well.

Some of this is influenced by M&A, but that is also why we emphasize that our framework should
not be thought of as a ranking, but merely a way to analyse the incremental revenue.

A significant change to offshore contribution indicates a possible change to the company’s DNA
from a strategic acquisition (e.g., Mastek and Coforge) or divestiture (e.g., Zensar) and this is just
a cue for us to investigate the reasons for it.

But inorganic contributions aside, a consistent trend of leading the offshore incremental revenue
proportion vs peers should be considered as an index of good offshore delivery capability and as a
potentially higher margin company.

Fig 15 Ranking by offshore incremental revenue proportion; rank 1 has the highest
offshore contribution to incremental revenue during the period under consideration

Offshore incremental revenue

5-years 4-years 3-years 2-years 1-year
proportion (Rank)
LTI 1 4 4 2 3
Mindtree 3 2 2 4 5
LTI + Mindtree 2 3 3 3 4
Mphasis 8 8 9 9 7
Coforge 7 7 7 7 2
Persistent 4 5 6 5 6
LTTS 5 6 8 8 9
Birlasoft NA NA 5 1 1
Mastek 9 9 10 10 10
Zensar 6 1 1 6 8
Source: Companies, Macquarie Research, January 2023

When we look at the long-term trend, Mindtree and LTI score the highest as individual firms,
followed by Persistent, LTTS and Coforge. Mphasis has the lowest contribution from offshore
execution across all the time periods except the last 12 months when Zensar and LTTS have seen

13 January 2023 9
Macquarie Research India IT Services: Mid-caps

a much lower contribution from offshore to incremental revenue vs their historical trend (see Fig
16).

Fig 16 Offshore proportion of incremental revenue

Last 5-years Last 4-years Last 3-years Last 2-years Last 1-year

LTI 68.5% 72.9% 77.5% 78.6% 75.5%

Mindtree 68.3% 73.1% 78.2% 73.2% 70.7%
LTI + Mindtree 68.4% 73.0% 77.8% 76.1% 73.4%
Mphasis 41.0% 45.2% 45.9% 49.6% 51.6%
Coforge 49.5% 54.3% 60.7% 60.1% 79.6%
Persistent 66.8% 64.0% 64.4% 64.2% 54.8%
LTTS 62.3% 60.0% 49.7% 54.9% 23.4%
Birlasoft NA NA 70.9% 78.8% 84.2%
Mastek 36.4% 37.7% 41.6% 49.0% (31.8)%
Zensar 60.5% 118.8% 495.7% 60.3% 47.2%
Source: Companies, Macquarie Research, January 2023

Mastek has had a decline in its offshore revenue over the past 12 months and this has caused its
offshore incremental revenue proportion to be negative. While arguably this could be classified as
“Not Applicable”, we think that a decline in offshore revenue proportion while other firms have had
a positive contribution should require Mastek to be ranked last during this period and we have
retained the negative contribution and considered it towards the ranking.
Factor-3: Client Concentration: We look at the contribution of the top-10 clients to incremental
revenue and rate the contributions. We consider very high contributions as risky and at the other
extreme see very low contribution as possibly indicative of accounts that have limited further
potential and as a source of potential drag on future incremental revenue. Lowest contribution vs
peers is ranked #1 even if that has meant the top-10 clients have declined as the incremental
revenue added over the previous periods can be considered as sustainable (with upside possible if
the drag from the top-10 clients ends or reverses).

Fig 17 Ranking by incremental revenue contribution from top-10 clients: Rank 1 is the
lowest contribution over the period while rank #10 is the highest contribution

Incremental revenue contribution

5-years 4-years 3-years 2-years 1-year
from top-10 clients (Rank)
LTI 4 3 6 6 5
Mindtree 6 7 8 8 7
LTI + Mindtree 5 5 7 7 6
Mphasis 9 8 9 10 10
Coforge 3 4 5 5 8
Persistent 2 2 3 2 2
LTTS 1 1 2 3 3
Birlasoft NA NA 10 9 9
Mastek 8 9 4 4 1
Zensar 7 6 1 1 4
Source: Companies, Macquarie Research, January 2023

^Note: Mphasis changed its top-10 definition to exclude DXC starting 1QFY21

When we look at the incremental revenue contribution it becomes clear that Mphasis and Birlasoft
have got a disproportionate contribution from their top-10 clients vs the peers suggesting these
firms are more at risk vs peers for a change in their growth trajectory due to any client-specific
issues within the top-10. Note that Mphasis’ top-10 definition excludes DXC (which used to be its
largest client and is a much larger IT Services firm itself) starting from 1QFY21.

LTI, Mindtree, Coforge and Persistent score consistently across periods with low reliance on the
top-10, but a fairly steady and always positive contribution by the top-10 clients indicating these
accounts are still growing.

Mastek and Zensar have low top-10 contribution to incremental revenue also because their top-10
revenue has declined in some periods.

13 January 2023 10
Macquarie Research India IT Services: Mid-caps

LTTS has seen low contribution from top-10 clients across all time periods and seen decline in its
top-10 over the last 4 years and last 3 years but is seeing growth again suggesting the client-
specific issues in this segment that were a possible drag on growth are over.

Fig 18 Incremental revenue contribution from top-10 clients (%)

Last 5-years Last 4-years Last 3-years Last 2-years Last 1-year

LTI 32.2% 29.4% 33.1% 35.9% 40.0%

Mindtree 48.0% 45.3% 48.4% 37.9% 44.5%
LTI + Mindtree 38.4% 35.6% 39.0% 36.8% 42.0%
Mphasis 67.3% 63.3% 60.0% 89.0% 81.0%
Coforge 29.6% 31.1% 31.0% 35.5% 52.9%
Persistent 22.3% 23.2% 20.6% 21.0% 15.1%
LTTS 15.3% (6.1)% (8.3)% 23.3% 17.4%
Birlasoft NA NA 75.7% 58.0% 70.2%
Mastek 65.7% 74.6% 26.1% 25.3% (25.2)%
Zensar 51.7% 35.7% (207.2)% 14.7% 25.0%
Source: Companies, Macquarie Research, January 2023

^Note: Mphasis has changed its top-10 definition to exclude DXC starting 1QFY21

Factor-4: Contribution from top vertical: We look at the incremental revenue contribution from
the largest vertical (as of 1QFY23) for each vendor to assess potential risk from concentrated
exposure to a particular vertical or identify any patchy growth that could indicate some key client
issues that we need to take a closer look at.

Fig 19 Incremental revenue contribution from top vertical: Rank 1 is the lowest
contribution over the period while rank #10 is the highest contribution

Incremental revenue contribution

5-years 4-years 3-years 2-years 1-year
from top vertical (Rank)
LTI 4 5 6 5 4
Mindtree 5 6 4 1 3
LTI + Mindtree 1 1 2 2 1
Mphasis 6 8 9 7 5
Coforge 7 7 8 8 7
Persistent NA 2 3 4 2
LTTS 2 3 1 3 6
Birlasoft NA NA 7 10 9
Mastek 3 4 5 6 10
Zensar 8 9 10 9 8
Source: Companies, Macquarie Research, January 2023

The combined LTI-Mindtree entity scores very well in diversifying its top-vertical contribution due to
the synergy that lowers the BFSI exposure for the combined entity to 36% (as of 2QFY23) vs the
47.9% exposure to BFSI for LTI (as of 2QFY23) and the 43.5% exposure to Communications,
Media & Hi-tech for Mindtree (as of 2QFY23).

Mphasis consistently has a high contribution from its leading vertical (BFSI) and derives a
significant majority of its incremental revenue from this vertical across all periods we have
considered. We do not see that as a cause of great concern by itself and we note that its newly
disclosed metrics for Logistics indicates it is adding revenue in this vertical as well.

While Coforge also used to get a large part of its revenue from BFSI, it has broadened its revenue
drivers as its Travel vertical has returned to growth after the precipitous decline (over 1QFY21) in
the wake of Covid-19 and has also started scaling up new verticals such as Healthcare.
As can be expected from firms which are small, Mastek and Birlasoft have had unusually high
contributions in some periods from their top vertical, but over a longer timeframe (like the last 3
years), seem to have a reasonably diversified set of revenue drivers (see table below).

13 January 2023 11
Macquarie Research India IT Services: Mid-caps

Fig 20 Incremental revenue contribution from top vertical (%)

5-years 4-years 3-years 2-years 1-year

LTI 47.9% 48.0% 51.1% 52.0% 54.5%

Mindtree 49.4% 49.5% 50.1% 33.3% 48.4%
LTI + Mindtree 35.1% 35.5% 37.2% 35.8% 43.2%
Mphasis 65.7% 71.3% 75.0% 61.4% 56.8%
Coforge 66.1% 66.0% 65.3% 61.4% 64.7%
Persistent NA 39.2% 42.0% 46.0% 46.0%
LTTS 37.3% 40.8% 32.5% 42.2% 57.2%
Birlasoft NA NA 52.0% 64.3% 90.9%
Mastek 47.4% 45.5% 51.1% 59.5% 99.0%
Zensar 83.0% 125.6% 328.6% 63.1% 68.8%
Source: Companies, Macquarie Research, January 2023

Zensar has had revenue decline in its Hi-Tech vertical over the last 3 years and its BFSI
contribution has been over 100% due to the inorganic contribution to its Banking vertical from the
acquisition of M3bi in May 2021, and organic scale-up as well over 1HFY23.

Factor-5: Average Account Size: We measure the average account size excluding top-10
accounts and look at how it has trended over the last 5 years. While it is difficult to correlate this
with incremental revenue, we look at getting insights into two aspects through this analysis:

1. Whether, on average, we are seeing revenue increases for clients outside the top-10
which would suggest an ability to cross-sell and indicate client mining is working broadly
and we can verify this further with our analysis of client movement across annual revenue
tiers. We would look at a strong ability to mine clients as a crucial metric for assessing
how long the growth runway is for a firm

2. An ability to rationalize tail accounts and thereby improve SG&A leverage over time

As many firms do not provide an active client count, we have chosen to use the USD1mn+ client
count (minus 10 to remove the top-10 clients) and revenue excluding the revenue from top-10
clients as the metric to measure Average Account Size progression.

Fig 21 Ranking by client mining outside top-10

Ranking by client mining outside top-10 Last 5 years Last 4 years Last 3 years Last 2 years Last 1 year

LTI 6 6 7 6 5
Mindtree 1 5 3 1 8
LTI + Mindtree 2 4 4 3 6
Mphasis 8 8 8 10 10
Coforge 5 3 5 7 4
Persistent 3 1 1 4 1
LTTS 7 7 9 8 7
Birlasoft NA NA 2 2 3
Mastek NA NA NA 9 9
Zensar 4 2 6 5 2
Source: Companies, Macquarie Research, January 2023

The ranking is based on the change in average account size over the period indicated in the table
below. Note this is not CAGR, but the absolute change in average account size over time. Over the
last 1-year, many firms have seen average client account sizes decline in USD terms and we think
this could be due to the USD appreciation vs the GBP, EUR and other major currencies.

Persistent Systems has improved its client mining significantly under Sandeep Kalra and that is
clear in its improvement over the last 5 years. Over the last two years and over the last year as
well, Persistent has continued to grow its average account size very well (see Fig 22) indicating it
is not just tail account rationalization or some large new clients who are responsible for this
change, but it is broad-based and sustainable.

13 January 2023 12
Macquarie Research India IT Services: Mid-caps

Mindtree scores far ahead of LTI in this metric across all periods except the last year (when its UK
& Ireland revenue contribution declined from 10.9% of revenue to 6.8% of revenue – which we
attribute at least partly to the ~15% YoY GBP depreciation vs the USD) indicating that under new
CEO Debashis Chatterjee (who took charge in Aug 2019), Mindtree’s tail account rationalization
has meant very good focus on clients that have the potential to scale up. This focused investment
on client mining efforts and conscious weeding out of accounts that do not scale could possibly
help control SG&A better than peers (and we have seen evidence of that

Mastek scores poorly indicating its service portfolio has possibly limited cross-selling and this is
worrying for medium-term growth prospects. But considering Mastek’s significant UK exposure and
the depreciation of the GBP vs USD (our analysis has been in USD terms), this may not be an
entirely fair conclusion. However, that is precisely what we aim to do with this framework – identify
any causes of concern and see what the possible explanations for a particular score are.

We are surprised that Mphasis and LTTS have scored poorly across most time periods and this
could be due to a start and stop process of hunting and mining, with a period focused on client
mining followed by a period focused on opening new logos. We will look at the USD1mn+ tier client
additions to test this hypothesis.

Fig 22 Change in average non-top-10 account size over time (%)

Last 5 years Last 4 years Last 3 years Last 2 years Last 1 year
LTI 17.2% 10.6% 12.1% 20.5% (1.4)%
Mindtree 34.4% 14.9% 20.4% 34.8% (5.8)%
LTI + Mindtree 30.0% 15.8% 18.0% 26.6% (2.7)%
Mphasis (12.6)% (9.4)% 1.5% (19.9)% (11.8)%
Coforge 17.6% 19.7% 12.6% 20.3% 0.5%
Persistent 25.6% 35.3% 34.2% 21.9% 14.7%
LTTS (0.3)% 1.8% (2.6)% 7.2% (4.9)%
Birlasoft NA NA 30.9% 30.8% 4.7%
Mastek NA NA NA 2.7% (9.2)%
Zensar 21.4% 20.7% 12.5% 20.8% 10.3%
Source: Companies, Macquarie Research, January 2023

13 January 2023 13
Macquarie Research India IT Services: Mid-caps

IT is no longer Regime change in IT spending post-Covid

discretionary and plays
a central role in Recession impact on IT spending unlikely to be as in past recessions
business strategy. We
With server spending still strong, worries about large cuts to IT Services are overdone. When we
expect budgets to be
initiated coverage on India IT Services (see “IT Services: Introducing HAMM – Digital
more resilient than
Transformation -> multi-year demand” published on 08-Apr-2022), our core thesis was that Digital
consensus expects
Transformation is the largest technology refresh since the adoption of web technologies and ERP
IDC forecasts IT in enterprises. Secondly, the currently widely anticipated US recession is unlike the GFC or the
Services spending^ 2001-02 recessions that arrived with little warning.
growth of 4.9% in 2023
Third, business strategy now relies more heavily on IT investments in enabling differentiation.
vs 5.9% growth in 2022,
Firms that cut IT spending will do so at their own peril and we expect good managements with
suggesting US
strong balance sheets will continue to spend and use this opportunity to pull further ahead of digital
recession impact is
laggards in their respective industries. India IT Services firms have an exposure mostly to the
minimal
Fortune 500 (with strong balance sheets) and we expect these customers should continue to grow
spending on IT Services. Anecdotally, we have heard of privately held local consulting firms in the
US say they have better visibility going into 2023 than in a normal year.

Fig 23 IT Services spending^ to grow with barely a hiccup Fig 24 …with incremental revenue to drop just 9.2% in 2023

USD mn USD mn
800,000 33,000

700,000 32,000

600,000 31,000

500,000 30,000

400,000 29,000

28,000
300,000

27,000
200,000
26,000
100,000 2022 2023 2024 2025 2026

0 IT Services incremental spending

2021 2022 2023 2024 2025 2026
Source: IDC, Macquarie Research, January 2023 Source: IDC, Macquarie Research, January 2023

^ ^IT
IT Services spending across Canada, US and Western Europe Services spending across Canada, US and Western Europe
Based on the experience as an industry participant who managed a multi-million-dollar IT Services
P&L through the GFC, we think that the resilience of IT budgets at the current juncture is not
surprising and is best exemplified by continued spending on enterprise servers. Hardware
spending is easy to postpone for a CIO and the growth in hardware spending suggests that IT
budgets are not under much pressure.

Fig 25 Enterprise server spending^ expanding in 2023… Fig 26 …but spending increases more volatile for hardware

USD mn USD mn
120,000 35% 50,000

30% 45,000
100,000
25% 40,000
80,000 35,000
20%
30,000
60,000 15%
25,000
10%
40,000 20,000
5% 15,000
20,000
0% 10,000
- -5% 5,000
2018 2019 2020 2021 2022 2023 2024 2025 2026
-
2022 2023 2024 2025 2026
Enterprise server sales (USD constant currency)
Growth YoY (%) IT Services incremental spending IT hardware incremental spending

Source: IDC, Macquarie Research, January 2023 Source: IDC, Macquarie Research, January 2023

^ ^
Enterprise server spending across Canada, US and Western Europe Enterprise server spending across Canada, US and Western Europe
13 January 2023 14
Macquarie Research India IT Services: Mid-caps

The valid comparison for India IT Services firms today is with pureplay services firms that were
strategic vendors back in 2001-02. While FY02 saw Accenture’s consulting decline 6.2%, its
outsourcing portfolio still grew 37%.

Currently, Accenture is guiding for double-digit growth for Outsourcing (on a much bigger base that
is now 47% of the overall revenue vs just 17% in FY01) and high single-digits for Consulting in
FY23 – which would imply that the macro sensitive Consulting is holding up better than in FY02.

Fig 27 Major services firms grew steadily in 1997-2001… Fig 28 …with only consulting declining for Accenture in
FY02

USD mn USD mn
25,000 14,000

12,000
20,000
10,000

15,000
8,000
8,912
9,498
6,000
10,000

4,000
5,000
2,000
1,945 2,662
0 -
1997Y 1998Y 1999Y 2000Y 2001Y FY2001 FY2002

Capgemini Atos Accenture Outsourcing Consulting

Source: Companies, Macquarie Research, January 2023 Source: Companies, Macquarie Research, January 2023

We expect that India IT midcaps have improved their positioning (in aggregate, although firm
specifics will be discussed in individual company sections) during Covid and have emerged as
strategic vendors in many of their accounts. We expect India IT midcaps to also benefit from
vendor consolidation exercises by clients who are likely to start culling of local subcontracting firms
over CY23 as cost pressures mount.

While we expect near-term organic incremental revenue QoQ to be relatively subdued and below
the high watermark hit immediately post-Covid, we expect incremental revenue to remain in
positive territory as we expect no kneejerk cuts unlike during Covid.

Fig 29 In organic constant currency terms, we factor in Fig 30 Incremental revenue QoQ to remain below high
lower incremental revenue to account for near-term softness watermark of 2QFY22 till 2QFY25

USD mn USD mn
1,200 200
1,000
800 150
600
100
400
200 50
0
-200 0
-400
-50
-600
-800 -100
-1,000
-1,200 -150
4QFY20

1QFY24
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20

1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
3QFY23
4QFY23

2QFY24
3QFY24
4QFY24
1QFY25
2QFY25
3QFY25
4QFY25

1QFY22

2QFY23

2QFY25
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21

2QFY22
3QFY22
4QFY22
1QFY23

3QFY23
4QFY23
1QFY24
2QFY24
3QFY24
4QFY24
1QFY25

3QFY25
4QFY25

India IT Svcs Tier-1 India IT Svcs Midcaps India IT Svcs Midcaps

Source: Companies, Macquarie Research, January 2023 Source: Companies, Macquarie Research, January 2023

Note: India IT Svcs Tier-1 includes TCS, Infosys, HCL Tech, Wipro and Note: India IT Svcs Midcaps include LTIMindtree, Mphasis, Coforge,
Tech Mahindra; India IT Svcs Midcaps include LTIMindtree, Mphasis, LTTS, Persistent Systems, Birlasoft and Mastek
Coforge, LTTS, Persistent Systems, Birlasoft and Mastek

13 January 2023 15
Macquarie Research India IT Services: Mid-caps

India IT Services midcap firms have seen a significant shift offshore during the past 2 years (with
Mphasis a rare exception) and some firms have seen margins expand (Mindtree and Coforge in
particular stand out). Note that the incremental revenue in the last 2 years hit these highs despite
the revenue dilution from the offshore shift.

While EBIT margin for India Midcap IT Services is in aggregate higher than pre-Covid, this is due
to the improvement at Mindtree and at Birlasoft (which had a transformational M&A with KPIT’s IT
services division). Once we exclude Birlasoft, EBIT margin at 15% is exactly the same as the pre-
Covid level of 15% in 3QFY19 despite the significant offshore shift suggesting there is upside to
margin once attrition eases off providing headroom for utilisation to improve.

Fig 31 Margins higher vs pre-Covid due to offshore shift Fig 32 …but is same as in 3QFY19 excluding Birlasoft

EBIT Margin EBIT Margin

EBIT Offshore Rev
(%) %
60,000 18% 55% % 17%
17%
50,000 16%
16% 52%
40,000
15% 15%
30,000 14% 49% 14%
13%
20,000
12% 13%
10,000 46%
11%
12%
0 10%
43%
11%

40% 10%
1QFY18

2QFY21

2QFY22
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21

3QFY21
4QFY21
1QFY22

3QFY22
4QFY22
1QFY23
2QFY23
LTIMindtree Mphasis LTTS
Coforge Persistent Birlasoft
Mastek Mid Cap IT Offshore Revenue % EBIT Margin

Source: Companies, Macquarie Research, January 2023 Source: Companies, Macquarie Research, January 2023

Note: Midcap IT includes LTIMindtree, Mphasis, Coforge, LTTS, Note: For India IT Svcs Midcaps including LTIMindtree, Mphasis, Coforge,
Persistent Systems, Birlasoft and Mastek LTTS, Persistent Systems and Mastek, but excluding Birlasoft

13 January 2023 16
Macquarie Research India IT Services: Mid-caps

Digital Transformation’s The rise of midcap IT Services

iterative development
model has reduced deal Faster growth vs large-caps pre-Covid, now growth gap has narrowed
sizes and levelled
playing field for Time to be selective in midcaps and look at mispriced opportunities
midcaps… While midcaps have seen incremental revenue surge post-Covid, we have seen a similar pattern
for the large caps as well. But we think that the playing field is now definitely more level as even for
cost takeout deals, many of the midcap vendors have sufficient scale to be able to bid, provided
…but size still matters they have demonstrated offshore execution capability at scale like the large caps.
as a broader set of
capabilities and an • Iterative nature of Digital Transformation projects has worked in favour of small deal awards that
ability to place bets on have levelled the playing field
multiple new  Incremental revenue marketshare for midcaps has not moved up suggesting the wins are
technologies and is also not coming at the cost of the large caps, but possibly boutique players which could be
a requirement for larger operating locally in client geographies.
cost-takeout +
transformation deals  We expect pre-Covid growth outperformance by midcaps vs India Tier-1 to moderate as we
are seeing larger deals in Digital Transformation and improved participation by Tier-1.
Recommend a selective
approach given  With valuations for most midcaps at a premium to the large-caps, we think one will have to
valuations are mostly at be selective.
a premium to large caps  Macquarie suggests using a framework to analyse the drivers for incremental revenue to
We use Macquarie’s 5- judge how sustainable the growth drivers are for each individual firm.
factor MOCCA o Intuitively this translates to revenue added from:
framework to identify
India IT Services midcap ▪ A pipeline of new deals that is largely dependent on secular factors (or
winners with additional capabilities from acquisitions) and a win rate that should not change
sustainable growth much year to year (except again due to an acquisition).
drivers ▪ Client mining from existing accounts.

▪ Hunting – i.e. the addition of new accounts.

▪ We introduce the Macquarie OCCAMM framework that is a modification of the

HAMM framework we introduced to analyse incremental revenue for the large
caps (see next section for details).

Fig 33 Incremental revenue QoQ for midcaps shows demand post-Covid has improved^

USD mn
200.0
150.0
100.0
50.0
-
-50.0
-100.0
-150.0
4QFY18
1QFY18
2QFY18

3QFY18

1QFY19

2QFY19
3QFY19
4QFY19

1QFY20

2QFY20
3QFY20
4QFY20
1QFY21

2QFY21
3QFY21

4QFY21
1QFY22

2QFY22
3QFY22
4QFY22
1QFY23
2QFY23

LTI Mindtree Mphasis Coforge Persistent LTTS Birlasoft Mastek Zensar

Source: Companies, Macquarie Research, January 2023

Note: 4QFY19 has high revenue addition for Birlasoft due to the integration with KPIT

13 January 2023 17
Macquarie Research India IT Services: Mid-caps

Fig 34 While incremental revenue for midcaps post-Covid has improved…

USD mn
14,000
12,000
10,000
8,000
6,000
4,000
2,000
-
FY18 FY19 FY20 FY21 FY22

Mid caps Large caps

Source: Companies, Macquarie Research, January 2023

Note: Midcaps include LTI, Mindtree, Mphasis, LTTS, Coforge, PSYS, Birlasoft, Zensar and Mastek; Large
caps include TCS, Infosys, HCL Tech, Wipro and Tech Mahindra

Fig 35 … incremental revenue marketshare for midcaps is similar to pre-Covid levels

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
FY18 FY19 FY20 FY21 FY22

Mid caps Large caps

Source: Companies, Macquarie Research, January 2023

Note: Midcaps include LTI, Mindtree, Mphasis, LTTS, Coforge, PSYS, Birlasoft, Zensar and Mastek; Large
caps include TCS, Infosys, HCL Tech, Wipro and Tech Mahindra

After gaining marketshare in FY21, midcaps have retreated to pre-Covid marketshare levels when
we consider incremental revenue across India IT Services. But despite the mega deals that India
Tier-1 (TCS, Infosys, HCL Tech, Wipro and Tech Mahindra) won and ramped up and inorganic
contributions such as Wipro’s acquisition of Capco, India IT Services midcaps have held their
marketshare at pre-Covid levels. We think that growth outperformance by midcaps vs India Tier-1
will continue, but the growth gap will narrow.

13 January 2023 18
Macquarie Research India IT Services: Mid-caps

Fig 36 Early phase of digital pre-Covid had midcaps outperforming on growth vs Tier-1^

Growth YoY %
30%

25%

20%

15%

10%

5%

0%
FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
India Tier-1 IT revenue growth India IT midcap revenue growth

Source: Macquarie Research, January 2023

Note: Midcaps include LTI, Mindtree, Mphasis, LTTS, Coforge, PSYS, Birlasoft and Mastek (we exclude Zensar
as we do not have Macquarie estimates for future growth); Large caps include TCS, Infosys, HCL Tech, Wipro
and Tech Mahindra

In the early phase of Digital (pre-Covid), we believe smaller digital programs were the norm and
low-code/ no-code development and SaaS implementations were the key drivers for demand.
While the India Tier-1 also participated in this phase, their large revenue base needed a pipeline
with a mix of larger deals which was missing.

Despite the growth gap narrowing to some extent, we see midcap IT poised to deliver a higher
revenue CAGR than the India Tier-1.

Fig 37 USD revenue CAGR over a decade set to be much higher for midcap India IT

USD mn
120,000

100,000

80,000

60,000

40,000

20,000

0
FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Largecap IT (5) Midcap IT (7)

Source: Macquarie Research, January 2023

Note: Midcaps include LTI, Mindtree, Mphasis, LTTS, Coforge, PSYS, Birlasoft and Mastek (we exclude Zensar
as we do not have Macquarie Estimates for future growth); Large caps include TCS, Infosys, HCL Tech, Wipro
and Tech Mahindra

We think that large caps are now benefitting from the post-Covid shift in how Digital
Transformation has become a board level item with emphasis on an overarching enterprise
strategy being needed. We think this has influenced sourcing decisions and therefore we see
vendors going head-to-head with large caps having a tougher time – which we have already seen
to some extent with LTI where the 2QFY23 YoY CC growth is 130bp below 2QFY19 levels vs TCS
where the growth uplift has been 390bps over the same period. But with the merger of LTI and

13 January 2023 19
Macquarie Research India IT Services: Mid-caps

Mindtree, the new entity, LTIMindtree has the heft to compete head-on for larger transformation
deals with a cost-takeout component.

Midcaps that have built scale in a few verticals such as Travel & Hospitality or Insurance or chosen
to focus on large regional banks in the US have continued to see a growth uptick as they have
benefited from the same trends that have helped the Tier-1, i.e. wallet-share gains post-Covid as
they are beneficiaries of vendor consolidation. In the travel & hospitality vertical, we have seen
faster growth as spending surged back in these accounts after the sharp cuts during Covid. Both
Mindtree and Coforge have seen Travel & Hospitality return to pre-Covid levels even as they grew
other parts of their portfolio.

Both India Tier-1 and IT Services midcaps have ramped up their hiring over the past few years. We
see an ability to recruit, train and deploy fresh graduate talent as a necessary ingredient to
sustaining growth rates in the current supply scarce environment.

Midcap IT Services firms have also started ramping up fresh graduate hiring and net hiring had
stepped up for both sets of firms. We think that investors should take a closer look at the success
of large-scale fresh graduate hiring programs for firms that are relatively new to this model as this
will imply an ability to not just keep costs in check, but to also create a more reliable supply pool.

Fig 38 Both large-caps and mid-caps have stepped up hiring capacity, but we think fresh
graduate hiring at scale remains an area large-caps retain an edge

Net hiring
250,000

200,000

150,000

100,000

50,000

0
FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Largecap IT (5) Midcap IT (7)

Source: Macquarie Research, January 2023

Note: Midcaps include LTI, Mindtree, Mphasis, LTTS, Coforge, PSYS, Birlasoft and Mastek (we exclude Zensar
as we do not have Macquarie Estimates for future growth); Large caps include TCS, Infosys, HCL Tech, Wipro
and Tech Mahindra

Overall, we think this is the time to be selective among mid-caps and not assume that the industry
no longer has benefits of scale.

Our preference is for midcap firms that

1. Demonstrate an ability to scale up offshore execution (as that positions them for
outsourcing deals with an element of cost take-out along with digital transformation)

2. Have a track record of client mining beyond their top-10 customers (as this lays the
foundation for a longer runway of growth with reducing key client risks over time)

3. Are broadening their vertical base beyond a single vertical (as this reduces industry-
specific risks)

In the next section, we try to breakdown the incremental revenue drivers and identify the firm-
specific risk factors.

13 January 2023 20
Macquarie Research India IT Services: Mid-caps

Valuation and recommendation summary

We believe investors should consider not just return ratios, but also growth as well as sustainability
of growth when considering the valuations of the midcap IT Services firms.

Fig 39 Mphasis and Coforge appear attractively valued, but…

FY24e PE
35.0

30.0 LTTS

LTIMindtree
25.0 Persistent
Coforge
20.0
Mastek Mphasis
15.0
Birlasoft
10.0

5.0
10% 15% 20% 25% 30% 35%
FY24e RoE
Source: Bloomberg, Macquarie Research, January 2023

Fig 40 …but Mastek, Persistent, Birlasoft, Coforge look more attractive factoring growth

FY24E PE
35.0

30.0 LTTS

25.0 LTIMindtree Persistent

Coforge
20.0
Mphasis
Mastek
15.0
Birlasoft
10.0

5.0

0.0
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
FY24E USD growth (%)
Source: Macquarie Research, January 2023

Similar to our view for the large caps, we are significantly ahead of consensus for India IT Services
midcaps as we expect that IT budgets for services will remain more resilient in this widely
anticipated US recession.

There seems to be some benefit to scale when we look within the IT Services midcap space and
the faster growing firms like Persistent can possibly surprise us on margins as they gain scale and
we could see higher RoE over time.

When we look at the large caps, it does seem that the firms with better scale operate at higher
margins and have higher RoE. This could be just the selective bias as the firms that have a higher
scale currently are firms which have executed well in the past. But it does suggest that scale and
growth ahead of peers could deliver margin benefits. Intuitively, we think this is because a faster
growing firm is better able to manage its compensation structure.

13 January 2023 21
Macquarie Research India IT Services: Mid-caps

Fig 41 TCS in a class of its own; most midcaps within the 20-30% RoE range

FY24e PE
35.0

30.0 LTTS

LTIMindtree
25.0 Persistent TCS
Coforge Infosys
20.0
Mastek Mphasis
15.0 Wipro Tech M HCL Tech
Birlasoft
10.0

5.0

0.0
0% 10% 20% 30% 40% 50% 60%
FY24e RoE
Source: Macquarie Research, January 2023

When we look at just the midcaps, LTTS seems to be the outlier with a PE multiple that is relatively
high considering the RoE. But we think that is justified due to the longer growth runway that is
likely for a pure play ER&D firm vs IT Services peers.

Fig 42 Macquarie is ahead of consensus revenue estimates across our India IT Services midcap coverage
Macquarie vs consensus
Macquarie Visible Alpha
(%)
Company Name FY23E FY24E FY25E FY23E FY24E FY25E FY23E FY24E FY25E

Incremental revenue YoY (USD mn)

Coforge Limited 143 173 236 117 131 152 22.4 31.7 54.9
L&T Technology Services Ltd 118 137 144 107 113 135 10.6 21.2 6.7
Mphasis Limited 202 216 245 152 200 267 32.7 8.1 (8.3)
Persistent Systems Limited 276 226 276 253 150 178 9.0 50.4 54.9
LTIMindtree 607 634 830 661 454 599 (8.1) 39.4 38.6
Total 1,347 1,385 1,731 1,290 1,049 1,331 4.4 32.1 30

India Tier-2 Revenue (USD mn)

Coforge Limited 1,010 1,183 1,419 964 1,096 1,248 4.7 7.9 13.7
L&T Technology Services Ltd 998 1,135 1,279 972 1,085 1,220 2.7 4.6 4.8
Mphasis Limited 1,795 2,011 2,255 1,728 1,928 2,194 3.9 4.3 2.8
Persistent Systems Limited 1,041 1,267 1,543 1,005 1,156 1,334 3.6 9.7 15.7
LTIMindtree 4,121 4,755 5,585 4,112 4,566 5,166 0.2 4.1 8.1

India Midcap IT Revenue (USD mn) 8,965 10,350 12,081 8,782 9,830 11,161 2.1 5.3 8.2
India Midcap IT USD revenue growth YoY (%) 18% 15% 17% 17% 12% 14%
Source: Visible Alpha, Macquarie Research, January 2023

Peer valuations:
We initiate with Outperform calls across our coverage except for Mphasis which we initiate at
Neutral as we worry about volatility in growth due to client-specific issues combined with a higher
reliance on top-10 clients and a higher reliance on onsite revenue for growth than for most peers.

Our pecking order for firms with >USD3bn marketcap is Persistent Systems > LTIMindtree >
Coforge > LTTS > Mphasis.

While among firms with mkt cap <$3bn and while we like both Birlasoft and Mastek, we see lower
risk with Birlasoft and prefer that to Mastek, but rate both Outperforms.

Considering both Persistent Systems and LTIMindtree as more attractively valued vs TCS and with
very broad growth drivers for their size, we now prefer these ahead of TCS.

13 January 2023 22
Macquarie Research India IT Services: Mid-caps

Our sector top pick remains HCLT as we see the firm poised for a significant rerating as investor
concerns about the sustainability of its growth recedes over FY24 as we see it being close to if not
the growth leader among India IT Services large caps.

Fig 43 Persistent Systems and LTIMindtree our top picks in the midcap India IT Services segment
Bloomberg CMP Target TSR Earnings per Share Price / Earnings
Company Ticker Rating (Rs) Price (%) FY22 FY23E FY24E FY25E FY22 FY23E FY24E FY25E

Persistent
PSYS IN OP 4,080 8,330 105% 90.3 125.1 167.2 208.3 52.8 32.6 24.4 19.6
Systems
LTIMindtree LTIM IN OP 4,318 7,540 76% 231.0 150.9 174.3 209.4 18.7 28.6 24.8 20.6
Coforge COFORGE IN OP 3,919 6,260 60% 106.5 132.6 175.7 231.9 41.8 29.6 22.3 16.9
Birlasoft BSOFT IN OP 306 500 65% 16.4 18.9 22.3 25.0 27.7 16.2 13.7 12.2
Mastek MAST IN OP 1,752 2,720 55% 103.7 84.3 96.2 135.8 32.0 20.8 18.2 12.9
LTTS LTTS IN OP 3,905 4,630 20% 90.5 109.6 126.0 140.2 56.4 35.6 31.0 27.9
Mphasis MPHL IN N 1,989 1,880 -6% 75.6 92.7 112.2 117.7 44.7 21.5 17.7 16.9
Source: Macquarie Research, January 2023. Priced as at close on 10 January 2023.

We make no earnings or recommendation changes to our India IT Services large-cap coverage of

TCS, Infosys, HCL Tech, Wipro and Tech Mahindra. Our large-cap pecking order remains HCLT >
TCS > INFO > WPRO > TECHM.

Fig 44 HCLT, TCS remain our top picks among India Tier-1
Bloomberg CMP Target 3Yr Fair 3Yr TSR Earnings per Share (INR) Price / Earnings
Company Ticker Rating (Rs) Price Value CAGR FY22 FY23E FY24E FY25E FY22 FY23E FY24E FY25E
(INR)

TCS TCS IN OP 3,332 4,530 5,590 21% 104.7 116.1 134.9 155.3 31.8 28.7 24.7 21.4
Infosys INFO IN OP 1,572 2,080 2,550 19% 53.0 59.2 69.7 80.0 29.7 26.6 22.6 19.7
HCL Tech. HCLT IN OP 1,045 1,500 2,070 28% 49.8 53.5 62.6 74.0 21.0 19.5 16.7 14.1
Wipro WPRO IN OP 398 530 840 29% 22.4 20.6 26.1 31.2 17.7 19.3 15.2 12.8
Tech Mahindra TECHM IN Neutral 1,046 1,110 1,560 15% 64.4 58.8 66.8 78.2 16.2 17.8 15.6 13.4
Source: Macquarie Research, January 2023. Priced as at close on 10 January 2023.

13 January 2023 23
13 January 2023 India

EQUITIES Persistent Systems (PSYS IN)

A rapid turnaround in fortunes at PSYS Repositioned successfully for growth
USD mn QoQ
30
25
20 Key points
 Renewed focus on BFSI, Healthcare (from Outsourced Product Development).
15
10
5

 PSYS is scaling up accounts by chasing larger, longer-term deals.

0
-5
-10

 Initiate at Outperform with Rs8,330 target price. PSYS is our top pick in our
-15
3QFY20
2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

Top 10 Clients Remaining Clients

MOCCA framework, given our outlook for a long growth runway.

Source: Company data, Macquarie Research, Jan 2023

Repositioned to address a broader and faster growing market

PSYS IN Outperform
Price (at 07:57, 11 Jan 2023 GMT) Rs4,080.00 With improved traction in its enterprise segment in FY20, Persistent Systems has
repositioned itself to address the faster-growing Enterprise Digital Transformation
Valuation Rs 8,330.00 opportunity and has successfully reduced exposure to IBM (IBM US, Not Rated)
- PER
and broadened its client base. Persistent had focused on Outsourced Product
12-month target Rs
8,330.00 Development, and although it had clients in banking, financial services and
Upside/Downside %
+104.2 insurance (BFSI) and Healthcare, there was insufficient sales focus in developing
12-month TSR %
+104.7 these verticals. The acqui-deal for a set of IBM products for Continuous
Volatility Index Medium Engineering and Continuous Life Cycle Management from March 2016 and other
GICS sector Software & Services investments into Persistent’s portfolio of software products was likely an attempt
Market cap Rsm 311,834 at positioning the firm along the lines of Micro Focus (MCRO.LN, Not Rated).
Market cap US$m 3,680
Under its new head of sales (and now CEO) Sandeep Kalra, Persistent Systems
Free float % 67 started a change in its go-to-market approach to focus on longer-term deals and
30-day avg turnover US$m 14.3 larger deals. Persistent Systems also started strengthening its domain
Number shares on issue m 76.43 capabilities (e.g., choosing to focus on payments within BFSI through the
acquisition of SCI in September 2021) and investing in solution accelerators to
Investment fundamentals
differentiate itself and improve its win-rates for larger deals.
Year end 31 Mar 2022A 2023E 2024E 2025E
Revenue bn 57.1 83.3 100.8 121.7 All around #1 in Macquarie’s MOCCA framework for IT midcaps
EBIT bn 7.9 12.5 16.4 20.2
EBIT growth % 56.1 58.3 30.6 23.6 The repositioning has paid off with US$5mn+ client count tripling from 10 clients
Recurring profit bn 9.2 12.8 17.1 21.3 in 3QFY20 (pre-Covid) to 30 as of 2QFY23. Services revenue (i.e. excluding IP-
Reported profit bn 6.9 9.6 12.8 15.9
led revenue) has grown 2.5x in the past 14 quarters since Sandeep Kalra joined
Adjusted profit bn 6.9 9.6 12.8 15.9
EPS rep Rs 90.33 125.09 167.24 208.27
Persistent Systems. Incremental revenue addition has been strong outside the
EPS rep growth % 53.2 38.5 33.7 24.5 top 10 clients even as the top 10 clients have also grown. In the past 14 quarters,
EPS adj Rs 90.33 125.09 167.24 208.27 75% of the incremental revenue has come from non-top-10 clients, while top-
EPS adj growth % 53.2 38.5 33.7 24.5 client concentration has reduced from 23.6% to just 8.7% over the same period.
PER rep x 45.2 32.6 24.4 19.6 Top 10 client concentration has also declined from 52.6% in 1QFY20 to 36.7% in
PER adj x 45.2 32.6 24.4 19.6
2QFY23. We estimate organic incremental services revenue added over FY22
Total DPS Rs 31.00 17.00 22.00 26.00
was US$181mn vs US$10mn in FY19, indicating the success of the improved go-
Total div yield % 0.8 0.4 0.5 0.6
ROA % 17.4 21.3 23.5 24.2
to-market approach by Persistent Systems.
ROE % 22.4 25.3 26.9 26.5
EV/EBITDA x 31.6 19.8 15.7 13.0 Software product engineering heritage deserves premium, top pick
Net debt/equity % -14.3 -22.3 -33.3 -44.1
P/BV x 9.3 7.4 5.9 4.7
Persistent has shifted to offshore execution, improving margins; reduced client
Source: FactSet, Macquarie Research, January 2023
concentration; reduced its reliance on its top vertical and scaled up its BFSI and
(all figures in INR unless noted) Healthcare verticals; improved average account size excluding top 10 client
revenue (it is #1 among peers on this metric across most time periods); and
moved clients rapidly up client tiers, demonstrating a good ability to mine clients.
Our top pick in the sector and #1 in our MOCCA framework, we think
Persistent Systems has potential to be the fastest-growing firm among India IT
mid-caps. Initiate with Outperform and TP of Rs8,330 on 40x March 2025E PE.
ESG: PSYS scores Q1 in Macquarie's MGRS framework with a goal for reaching
Analysts
zero carbon by 2030 and with 7 of 11 of its board members as independent
Macquarie Capital Securities (India) Pvt. Ltd.
directors. See page 13 for details.
Ravi Menon +9122 6720 4152
[email protected]

13 January 2023 24
Macquarie Research India IT Services: Mid-caps

Inside India’s answer to EPAM and Globant

Company profile
Emerging as India’s answer to EPAM and
• Persistent Systems is emerging as India’s answer to EPAM (EPAM US, Not
Globant 26
Rated) and Globant (GLOB US, Not Rated) with its positioning as a Digital
Top overall score in our MOCCA framework 30 Transformation partner to Enterprises using a product engineering approach.
Valuation, recommendation, risks 34 Persistent Systems has a much narrower focus on verticals vs EPAM and
Globant and is focused on only three key verticals: Software & Hi-Tech, BFSI,
Macquarie ESG Assessment 36
and Healthcare. The workforce structure is also closer to a diamond than a
pyramid, similar to Globant and EPAM – and unlike India Tier-1 firms that
largely have a pyramid (in terms of employees by years of experience).

Fig 1 A very successful repositioning seen by rapid increase in

incremental revenue over FY2020-22 after the low point in FY19

USD mn
250

200

150

100

50

-50
FY18 FY19 FY20 FY21 FY22
North America Europe Rest of the World

Source: Company data, Macquarie Research, January 2023

Fig 2 PSYS IN rel BSE Sensex performance, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie
coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2023

(all figures in INR unless noted)

13 January 2023 25
Macquarie Research India IT Services: Mid-caps

Emerging as India’s answer to EPAM and Globant

Repositioned from pure-play outsourced product development to Digital specialist

Change in positioning pits Persistent Systems closer to global peers Globant and EPAM
After current CEO From opportunistic client engagement outside its core focus on Outsourced Product Development
Sandeep Kalra joined (OPD), Persistent Systems (PSYS) now has a systematic go-to-market approach to focus on
Persistent Systems as enterprise clients in BFSI and Healthcare with investments in sales, domain expertise, and solution
Head of Sales, he has accelerators targeting these verticals. The sales team has also been incentivised to go after larger
championed a dramatic deals and accounts with greater potential to scale up.
change in its go-to-
Incremental revenue has seen a smart pickup since this change in go-to-market under current
market emphasising
CEO Sandeep Kalra who joined PSYS in May 2019. An improved demand environment has also
larger deals and
helped as has the scale-up of Digital Transformation projects from smaller Proof-of-Concept
increased focus on BFSI
projects to enterprise-wide programs that have enhanced the addressable wallet-size for PSYS’
and Healthcare verticals
services.

Fig 3 PSYS’ incremental revenue QoQ has increased post-Covid and that has led to a
doubling of quarterly organic revenue run-rate from 3QFY19-2QFY23

USD mn
20 300

15 250

10 200

5 150

0 100

-5 50

-10 0
1QFY20
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19

2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
Quarterly Organic Incremental Revenue in CC terms - LHS Organic Revenue - RHS

Source: Company data, Macquarie Research, January 2023

PSYS’ renewed focus on regular enterprise clients vs its earlier focus purely on software product
firms pits it against EPAM and Globant, which are also positioned as Digital Transformation
specialists with a product development approach. The new go-to-market of PSYS does not mean
indiscriminate client addition to scale up its BFSI and Healthcare verticals, but a focus on both
client mining and deeper domain investments. This seems to be paying off, with the average
account size for Persistent (including top-10 clients) in quarterly revenue terms now greater than
that of EPAM and Globant, despite both being larger firms.

13 January 2023 26
Macquarie Research India IT Services: Mid-caps

Fig 4 Contrasting strategies: Average account size indicates EPAM, Globant are more
broadly spread vs PSYS, which is scaling up accounts faster in the past two years…

USD mn
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
Dec -17 Dec -18 Dec -19 Dec -20 Dec -21
EPAM Globant Persistent

Source: Company data, Macquarie Research, January 2023

This counterintuitive finding is because PSYS has a much lower count of US$1mn+ clients and
while it is still adding to clients in this tier, it seems to believe that scaling up accounts is more
important than adding many more clients. We think that this is a clear differentiation in strategy vs
what we are seeing with EPAM and Globant, where new client additions to the US$1mn+ tier
seems to have accelerated in CY21.

Fig 5 …but has a smaller client base of US$1mn+ clients vs EPAM and Globant

450
400
350
300
250
200
150
100
50
-
Dec -17 Dec -18 Dec -19 Dec -20 Dec -21
EPAM Globant Persistent

Source: Company data, Macquarie Research, January 2023

Although PSYS is smaller than both EPAM and Globant, it is scaling up and is starting to
overcome the drag from its top 10 clients. Persistent has clocked the same compound quarterly
growth rate (CQGR) as the much bigger EPAM in the past three years and more importantly, it is
starting to narrow the incremental revenue addition gap from the non-top-10 clients – suggesting
that once the portfolio issue of the current top 10 clients is addressed, it has the potential to grow
as quickly as EPAM and Globant.

13 January 2023 27
Macquarie Research India IT Services: Mid-caps

Fig 6 Persistent has grown at nearly the same pace as larger EPAM, but slower than
Globant

USD mn
1,400
1,200
1,000
800
600
400
200
0
2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
EPAM Globant PSYS
Source: Company data, Macquarie Research, January 2023

In absolute terms, PSYS is now adding almost the same revenue as its much larger global peers
EPAM and Globant (see chart below). PSYS has managed to catch up over the last 10-12 quarters
and this is clearly a result of its changed go-to-market strategy, where it has started focusing on
addressing a larger market – the Digital Transformation needs of Enterprises.

Fig 7 PSYS narrowing incremental revenue gap with much bigger EPAM and Globant as
seen from this chart of QoQ incremental revenue

USD mn
140
120
100
80
60
40
20
0
-20
-40
3QFY18

4QFY22
2QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

1QFY23

2QFY23

EPAM Globant Persistent

Source: Companies’ data, Macquarie Research, January 2023

While the most recent quarter shows PSYS slipping vs EPAM and Globant in QoQ incremental
revenue, that was mostly due to its top client’s lower contribution, which declined US$6mn QoQ.

Persistent has managed to turn around the stagnation in its top-10 client revenue addition over
CY21 and despite the decline in its top client, even YoY addition from its top-10 clients has started
to match Globant – which at a quarterly revenue run-rate of US$458.9mn as of the quarter ended
30 September 2022, was 1.79x the size of Persistent Systems. This implies that Persistent has the
potential to catch up with Globant in revenue addition from top-10 clients if the stagnation of its top
client is resolved.

13 January 2023 28
Macquarie Research India IT Services: Mid-caps

Fig 8 Incremental revenue YoY from top-10 clients had been a drag for PSYS vs EPAM and
Globant, but adjusted for the drag from its top client, the mining of top 10 is now starting to
match the much larger Globant

USD mn Adjusted for its top client’s decline, Persistent Systems’ YoY
60 revenue addition with top-10 clients almost matching that of
Globant, which is 1.79x its size

50

40

30

20

10

-10
4QCY18 4QCY19 4QCY20 4QCY21 Sep-22

EPAM Globant Persistent

Source: Company data, Macquarie Research, January 2023

We see the rapid scale-up in non-top-10 accounts as coming from the shift in strategy to focus new
sales efforts on the Enterprise segment. Focusing on selling IT services to internal IT departments
is likely to allow PSYS to scale up accounts a lot more than it has with its Outsourced Product
Development (OPD) services to software firms.

Fig 9 The improved client mining reflects better in the YoY revenue added from non-top-10
accounts, where legacy portfolio issues do not have as much of an impact; Persistent has
almost caught up with Globant in its revenue addition outside top-10 clients

USD mn
400
350
300
250
200
150
100
50
-
4QCY18 4QCY19 4QCY20 4QCY21 Sep-22

EPAM Globant Persistent

Source: Companies’ data, Macquarie Research, January 2023

We think the OPD offering has limits on account size because the software product is core to the
customer, and they will not want to outsource a significant part of that and risk losing control. With
the shift in focus to enterprise customers, the addressable spending is much larger in Fortune 500
firms and even with a smaller wallet share, the account size can be much larger.

13 January 2023 29
Macquarie Research India IT Services: Mid-caps

Top overall score in our MOCCA framework

Broadening vertical base; improving client mining; low top-10 client reliance

MOCCA framework indicates sustainable incremental revenue addition

PSYS scores well in our MOCCA framework (Macquarie’s five-factor framework for mid-cap IT
Services firms with the factors listed below), indicating that its incremental revenue addition is
driven by sustainable factors and suggesting a long growth runway is possible.

• Below the chart is a summary of PSYS’s rating in Macquarie’s MOCCA framework. We note
that the ranks are not meant to be taken purely as an indicator of superior/ inferior execution vs
peers, but are only meant to indicate whether the key drivers of incremental revenue are
sustainable and which ones need a closer look.

Fig 10 Persistent emerges as #1 overall in Macquarie’s MOCCA framework, indicating little risk to its growth drivers

Mining
Contribution Contribution Avg account
Ranking by USD1mn+ USD5mn+ USD10mn+ Offshore
from top-10 by Top size (growth Overall Rank
parameter client tier client tier client tier proportion
clients vertical ex-top-10)
additions additions additions
Persistent 1 3 8 6 2 2 1 1
LTI + Mindtree 5 4 6 3 7 1 4 2
LTTS 1 5 4 8 1 3 8 2
Coforge 4 1 1 7 5 8 6 4
Birlasoft 8 2 3 1 10 9 2 5
Zensar 6 5 2 5 3 10 4 5
LTI 6 8 7 2 4 5 7 7
Mindtree 9 7 4 4 8 4 3 7
Mastek 3 NA NA 10 6 6 10 9
Mphasis 10 9 9 9 9 7 9 10
Source: Macquarie Research, January 2023

 Mining: PSYS has been moving clients up the revenue tiers and punches above its weight
The primary risk that in client additions to all three tiers we consider: US$1mn+, US$5mn+ and US$10mn+. This
comes up for PSYS in supports the finding from the Average Account Size factor and indicates that it is not
the MOCCA framework skewed due to just a few client accounts beyond the top-10, but is very broad-based.
is the stagnation we
had seen in the top 10  Offshore Execution: PSYS has strong offshore capability and seems to be offering value-
accounts and the recent added full-fledged solutions, as demonstrated by a fairly steady 64-66% of its incremental
improvement which revenue we consider coming from offshore over most periods.
may yet prove to be  Client Concentration: PSYS scores well in driving a large part of its incremental revenue
temporary. beyond its top-10 clients and has also reduced its client concentration, thus reducing risk,
In the longer term, but its top-10 clients have been a drag on its growth; this is both an opportunity (for faster
however, strong client growth once the client specific drags are over) and a risk (of possible volatility in revenue if
mining capability any of the top-10 decline sharply).
should help PSYS  Contribution from top vertical: PSYS is clearly seeing a greater share of incremental
change the top 10 revenue driven outside of its top vertical, in line with the firm’s strategy.
portfolio and this is an
opportunity.  Average Account Size: PSYS is scaling up accounts outside the top 10 clients and this is
showing up in an increase of the average account size outside the top 10 (using US$1mn+
client count as the denominator). This indicates success in growing accounts beyond the
top 10 and is consistent with a broad set of capabilities and sophisticated account
management practices.

PSYS did a mega deal in March 2016, which was an acquisition deal for IBM products. PSYS has
not seen any major contribution to incremental revenue from a mega-deal since then. If anything,
the IBM products deal has been a drag on IP-led revenue and incremental revenue over the last
five years. There has not been any unsustainable contribution in the recent past from a mega-deal.

Mining

PSYS has done well across client tiers and punches well above its weight – especially over both
the past 12 months as well as the past 24 months.

13 January 2023 30
Macquarie Research India IT Services: Mid-caps

We can see an acceleration in the client count in the US$1mn+ tier following relatively stagnating
levels from FY18-FY20, (as well as from 4QFY20 to 2QFY21 given pressure from Covid-related
downturn. The breakouts in performance over 2QFY21-2QFY22 and from 2QFY22-2QFY23 are
consistent with the change in PSYS’ go-to-market strategy that emphasizes larger, longer-term
deals, as well as identifying and adding accounts with greater addressable spend.

Fig 11 Strong additions to US$1mn+ tier post new CEO Fig 12 Similar scale-up in US$5mn+ tier as well, recently

USD 1mn+ USD 5mn+

clients 35 clients
160

140 30

120 25
100
20
80
15
60

40 10

20 5
0
0
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23

Source: Company data, Macquarie Research, January 2023 Source: Company data, Macquarie Research, January 2023

Lending support to its strong additions in the US$1mn+ client tier, we can see PSYS start to make
an impact in the US$5mn+ client tier as well – adding accounts well above what we would expect
considering its size.

We have only very limited data for the US$10mn+ client tier for PSYS, but in the past 12 months, it
is clearly “punching above its weight” in this tier as well. Overall, we think this indicates a strong
capability to mine client accounts. Client mining is one of the most critical parameters for
sustainable growth and indicates a broad set of service capabilities and sophisticated account
management as well as good client satisfaction (as growing client accounts would not be possible
otherwise).

Offshore execution
We consider the steady ranking in the middle of the tier across years as an indication that the
business model is steady, and that deal wins across years are based on a steady delivery mix of
onsite and offshore. Offshore incremental revenue proportion is fairly steady (barring the past 12
months which had a few acquisitions and possibly some shift back onsite post-Covid) and in-line
with PSYS’ current offshore revenue proportion of ~62% (as of 2QFY23).

Fig 13 Revenue addition has shown good offshore mix Fig 14 Broad set of clients driving incremental revenue

USD mn QoQ USD mn QoQ

30.0 30.0

25.0 25.0
20.0
20.0
15.0
15.0 10.0
10.0 5.0
-
5.0
-5.0
-
-10.0
-5.0 -15.0
3QFY19

2QFY21
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19

4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21

3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23

1QFY20
2QFY20
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19

3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23

Onsite Offshore Top 5 clients Top 6-10 clients Non-top-10 clients

Source: Company data, Macquarie Research, January 2023 Source: Company data, Macquarie Research, January 2023

13 January 2023 31
Macquarie Research India IT Services: Mid-caps

In effort terms, this is an offshore mix of 85.6% for billed effort as of 2QFY23, and since the
unbilled personnel (i.e., “the bench”) is mostly in India, the overall effort-mix is likely to be only
even higher offshore. We do not see much scope for improvement and think the mix might shift a
bit onsite as catering to enterprise customers might involve a slightly higher onsite effort-mix.

Client concentration

As measured by the share of top-10 clients in incremental revenue in the past 12 months to 60
months, the lower the top 10 contribution to incremental revenue in a period, the better the rank in
that period for a firm.

Persistent has consistently derived a very high proportion of its incremental revenue from outside
of its top 10 clients. Now, this could also be because the top-10 clients are stagnating/ declining.
The table below indicates that Persistent has been getting around 20-22% of its incremental
revenue across most periods from its top-10 clients – which is steady.

In absolute terms, PSYS has seen its top-10 accounts flatline as seen by flat incremental revenue
contribution over longer timeframes (for instance 2 years back and 3 years back have almost the
same incremental revenue). So PSYS has a client portfolio that has its top-10 clients as a possible
drag and we could consider this both as a risk and an opportunity for faster growth once this
portfolio transition is complete.

A longer-term analysis of incremental revenue addition by client tier indicates that it is the top client
that has been the sole drag. See chart below.

Fig 15 Apart from FY17 when we saw strong revenue addition following a mega deal, the
top client has declined over FY19, FY20 and FY21 while top-2-5 saw a decline only during
Covid-impacted FY20 and top-6-10 always added revenue

USD mn
80

65

50

35

20

-10

-25
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Top client Top 2-5 clients Top 6-10 clients Non-top-10 clients

Source: Company data, Macquarie Research, January 2023

Vertical concentration

As measured by the share of top vertical in incremental revenue, the lower the share of the
incremental revenue driven by the top vertical, the better the rank in that period for a firm. This is to
identify excessive reliance on the top vertical by a firm.

Consistent with Persistent’s strategy of diversifying beyond its core OPD segment, we see the
contribution of its top vertical to incremental revenue as one of the lowest among its peers across
any period we observe in the past 12 to 48 months (the current vertical classification is not
available prior to that for Persistent).

As can be expected, the stagnation in its top 10 client revenue is also reflected to some extent in
how its top vertical has stagnated. The revenue from the top vertical had been stagnating as
indicated by the flat incremental revenue when we look at the period 2-4 years back.

The chart below shows how the revenue scale-up has been across verticals for Persistent
Systems with the acceleration in the past 24 months being visible across all three major verticals.

13 January 2023 32
Macquarie Research India IT Services: Mid-caps

Fig 16 BFSI and Healthcare & Lifesciences have shown a strong scale-up in the past three
years, while the Tech vertical is seeing a revival after stagnating in FY21

USD mn
140
121
120

100 88
84
80 67 66
56
60 50
43
36 39
40 26
23
20

-
BFSI Healthcare & Lifesciences Tech cos & emerging verticals

2QFY20 2QFY21 2QFY22 2QFY23

Source: Company data, Macquarie Research, January 2023

While Persistent’s ranking indicates a low contribution of incremental revenue from its top vertical,
which we attribute in part to the stagnation we have seen for its top vertical in some periods, the
recent growth performance has been broad-based across verticals, including the top vertical. We
think this suggests incremental revenue can even accelerate once the portfolio issues that are
indicated by its top 10 clients are resolved. In our view, PSYS appears to be in transition to a faster
growth orbit.

Average Account Size:

As measured by the change in average account size (excluding top 10 clients) in the past 12
months to 60 months from offshore, the greater the improvement in average account size, the
better the rank in that period for a firm.

Persistent has seen a 26% improvement in average account size outside the top 10 clients in the
past five years. We think this demonstrates that the company can mine clients beyond a narrow
set of top accounts, and is also not relying on a long tail of accounts that could prove unwieldy over
time.

Mega-deals:

PSYS last completed a mega-deal with the acquisition of some IBM products in March 2016. This
was later restructured and has been a visible drag on its IP-led revenue. In the past five years,
mega-deals have not provided any lift to incremental revenue, and in fact have been a net
negative.

13 January 2023 33
Macquarie Research India IT Services: Mid-caps

Valuation, recommendation, risks

The primary risk for We expect a long growth runway for PSYS given its high score across all five factors of our
PSYS is a marked MOCCA framework.
decline in revenue from
Our estimates factor in steady incremental revenue addition at almost the same pace as seen in
the top client(s).
FY23 (implying a slight decline in incremental revenue addition in constant currency terms) and we
see upside to our estimates being possible if PSYS improves traction within its top 10 clients.

PSYS is offsetting the The primary risk for PSYS is a precipitous decline of its top client or others within the top 10. As of
revenue decline from 2QFY23, the top client accounted for 8.7% of revenue, the following 2-5 clients accounted for an
the top client with additional 18.2% of revenue, and the following 6-10 clients accounted for another 9.8% of revenue.
revenue gains
Revenue from PSYS’ top client declined 27.8% YoY in 2QFY23, while revenue from the second-
elsewhere, which we
through fifth-largest clients increased 35.0% YoY, and revenue from the sixth- through 10th-largest
think indicates a
clients jumped 43.1% YoY. This implies that the top 10 client revenue drag is primarily from the
portfolio in transition.
decline at the top client, and we interpret this as a portfolio that is in transition as this client can
possibly ramp down further.

We model US$ revenue CAGR of 22% over FY23E-25E and EPS growth CAGR of 29% over
FY23E-25E. We think a reasonable multiple can be 1.5x PEG and assign a PE of 40x – a valuation
premium to peers that we feel comfortable with given its top score in our MOCCA framework.

As in our large-cap coverage, we do not give much importance to historical PE trading ranges as
we see Digital Transformation as the beginning of a long technology refresh cycle that can sustain
over the next 5-7 years or even more. We also see this as the first significant refresh of this scale
in Enterprise technology landscape since the adoption of web technologies and ERP in the 2000s.
Hence, we think the historical trading ranges are not relevant, especially the ranges over the past
five years and past 10 years.

Fig 17 PSYS is trading 1-SD above its 10-year average 1-year forward PE

1-year fwd PE
60.0

50.0

40.0

30.0

20.0

10.0

0.0

Source: Bloomberg, Macquarie Research, January 2023

We assign a 40x multiple ~1.5x PEG considering the PAT CAGR of 29.3% over FY23E-25E to
arrive at a TP of Rs8,330 (on 40x Mar-2025 EPS). We note that this is close to 1x PEG
considering the 37% EBIT CAGR over FY22-25E.

Our target PE is nearly two standard deviations above the 10-year average PE, but we think PSYS
has changed its growth trajectory and portfolio significantly emerging as a firm with long-term
broad-based growth drivers in the past two years.

Given Persistent’s broad-based growth and client mining, we are confident in our discounting of
FY25E EPS in our current model. We initiate with an Outperform rating and Persistent Systems
(PSYS) is our top preference among India IT Services mid-caps with market cap over US$3bn.
Our pecking order in this segment is PSYS > LTIMindtree (LTIM IN, CMP Rs4,318, Outperform,
TP Rs7,540) > Coforge (COFORGE IN, CMP Rs3,919, Outperform, TP Rs6,260) > LTTS (LTTS
IN, CMP Rs3,905, Outperform, TP Rs4,630) > Mphasis (MPHL IN, CMP Rs1,989, Neutral, TP
Rs1,880).

13 January 2023 34
Macquarie Research India IT Services: Mid-caps

Fig 18 Low execution risk, possible re-rating beyond our target multiple of 30x possible
MOCCA FY24 RoE (%) FY22-25E US$ FY22-25E EBIT FY24 PE FY25 PE
framework revenue CAGR CAGR (%)
overall rank (%)

Persistent Systems 1 26.9 26.3 36.7 24.3 19.5

Source: Macquarie Research, January 2023

Fig 19 Our top pick; Initiate with Outperform and a TP of Rs8,330 on 40x FY2025E PE
INR
Current price^ 4,080
1-year fwd EPS 148
1-year fwd PE 27.6
Target EPS period Apr-2024 to Mar-2025
Target EPS 208
Target multiple 40
Target price 8,330
Next 1-year dividends 17.0
Total shareholder return (%) 104.6%
Source: Macquarie Research, January 2023

^CMP per Bloomberg as of market close on Jan 10th 2023

We think that a further re-rating beyond our estimate is possible if Persistent can sustain growth at
a level higher than we estimate currently and start getting compared more and more with global
peers EPAM and Globant – which we think depends on the success of PSYS’ new focus on large
deals and on adding new clients to the top 10 that can scale up to offset the stagnation in its top 5
clients. The key risk that we see for Persistent Systems is a sharp revenue decline from its top
client given it is still 8.7% of revenue as of 2QFY23.

Macquarie vs Visible Alpha Consensus:

Fig 20 Macquarie estimates are higher than the consensus across FY23-FY25 for both
revenue and margins for Persistent
Macquarie Visible Alpha (VA) Macquarie vs VA
YE Mar, in Mn FY23E FY24E FY25E FY23E FY24E FY25E FY23E FY24E FY25E
Revenue (US$ mn) 1,041 1,267 1,543 1,005 1,156 1,334 4% 10% 16%
Incremental revenue
276 226 276 240 150 178
(US$ mn)
Revenue 83,347 100,787 121,748 82,859 95,255 109,924 1% 6% 11%
% change 46% 21% 21% 45% 15% 15%
Operating Income 12,499 16,378 20,241 11,916 13,487 15,870 5% 21% 28%
% margin 15% 16% 17% 14% 14% 14%
Net income 9,518 12,781 15,917 9,190 10,715 12,880 4% 19% 24%
% margin 11% 13% 13% 11% 11% 12%
EPS-Diluted 125.1 167.2 208.3 120.2 140.1 168.3 4% 19% 24%
Source: Visible Alpha, Macquarie Research, January 2023

We believe margin expansion is easily possible for Persistent as attrition eases and the
investments in sales and account management start getting spread over a larger revenue base.
We are surprised that the Visible Alpha consensus assumes flat margins over FY23E-25E, and
thus see upside to consensus estimates.

13 January 2023 35
Macquarie ESG Assessment

Persistent Systems Quartile Previous

PSYS IN Macquarie ESG Score Q1
Sustainability (Environment & Social) Q2
SOFTWARE & IT SERVICES Governance & Risk Q1
Ravi Menon Macquarie ESG Research * BM - Below Median
Company Research Homepage

What's New & Interesting

Persistent Systems has outlined a path to zero carbon by 2030: Reaching zero emissions from building operations by 2026, to reduce emissions from global operations
including business travel by 80% by 2028 and finally reaching net zero emissions by 2030. Persistent has a senior executive in Sameer Bendre with the dual responsibility
of operations and sustainability as Chief of Operations and Head of Sustainability.

Key ESG Issues

3 key ESG issues to consider * Supporting Information from Macquarie ESG Model

The company sources only 11.2% of its energy needs from The company reported renewable electricity consumption (Solar Green Power) of

E renewable sources as of FY22. Although this has improved YoY by

170bps, it can improve further, in our view.
10,65,913 KWH in FY22 versus 9,61,081 in FY21. Persistent Systems' use of
renewable power is higher than what it consumes via Diesel Gensets (at
61,122kWH in FY22).

Persistent Systems has improved the diversity on its board although As of 31 March 2022, the company’s Board consisted of 11 Directors, of which 2

S it can improve it further. were women. In FY21, there were 10 board members of which 1 was a woman.

The company has 7 of its 11 directors as independent. The company is ranked in the 81st percentile among 30,482 companies profiled

G for ESG metrics by a third party CSR / ESG ranking portal.

* Key issues are sourced from the full ESG model, including 10+ pages on Environmental/Social issues and 120+ questions on CG/Risk.
Contact your MQ sales rep to see the full model.

ESG Opportunity
What is the greatest opportunity for the company? And what moves is it making to capitalize on that opportunity

We see further improvement in use of renewable energy as the key opportunity for Persistent Systems as it still has only 11.2% of its energy needs from renewable
sources and while this is higher than what it consumes from highly polluting diesel gensets, it can try to improve the mix and source more renewable power.

Looking Ahead
Current Qualitative comments
1. Degree to which ESG risks are factored into financial forecasts, where the risks We foresee no major ESG risks and therefore have not factored any
could have a clearly defined impact on P&L of BS within 3 years. into our model.
(1-10; with 1 = not at all; 10 = completely)
5

2. Degree to which ESG risks are factored into stock valuation (DCF or multiple), Persistent Systems has a carbon neutral goal of 2030 and while it
where the impact is difficult to quantify and/or hits outside the forecast period. trades at a premium to peers, this is mostly due to faster growth
(1-10; with 1 = not at all; 10 = completely)
3 and we do not think that this fully reflects the progress Persistent
has made in outlining a clear path to carbon neutrality by 2030.
3. Two years from now we expect the company's ESG profile to: We expect ESG disclosure to continue to improve further.
(1-10; with 1 = Get Much Worse; 5 = Stay the Same; 10 = Improve Dramatically) 8

Please refer to next page for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures
Macquarie ESG Assessment

Persistent Systems

Score Card Summary *

vs Sector # of
FY20 Score Average Notes Sample KPI *
Environmental Footprint of Hardware
Infrastructure
 7.2 26 Total energy consumed

Environment Score (33%)  7.2 26

Total amount of monetary losses as a result of legal proceedings

Data Privacy & Freedom of Expression  8.3 12
associated with user privacy

Data Security  10.0 7 Number of data breaches

Recruiting & Managing a Global, Diverse &

Skilled Workforce
 8.1 11 Percentage of female representation for management

Social & Human Capital (33%)  8.8 30

Intellectual Property Protection & Total amount of monetary losses as a result of legal proceedings
Competitive Behavior
→ 10.0 2
associated with anticompetitive behavior regulations

Leadership & Governance (33%) → 10.0 2

Environment and Sustainability (E&S)  8.7 58

vs Asia
FY20 Score Average Sample Negatives & Positives *

Board Structure (15%) →

Shareholding (15%) →
Corp Gov (58%)

History (11%) →
Capital Management (9%) →
Remuneration (4%) →
Access (4%) →
Account & Audit (18%) →
Risk (42%)

Earnings Quality (15%) →

True B/S Strength (7%) →
Visibility (2%) →
Macquarie Governance & Risk (G) 
Sector
Score Average

Macquarie ESG Score ^ 5.2 0.0

^Note: Macquarie ESG Score = 60% E&S + 40% G

* This is a summary. For our full ESG model, please contact your Macquarie sales representative.

Important Notice
This document is an ESG tearsheet on the subject company taken out of a published report. For important disclosures and disclaimers regarding this document, please refer to the disclosures and disclaimers in the published report.
Important disclosures and disclaimers regarding Macquarie research that may be relevant to the subject company can also be reviewed at: www.macquarie.com/research/disclosures.
Macquarie Research India IT Services: Mid-caps
Macquarie Quant Alpha Model Views
The quant model currently holds a reasonably positive view on Persistent Attractive
Displays where the
Systems. The strongest style exposure is Profitability, indicating this stock is
company’s ranked based on
efficiently converting investments to earnings; proxied by ratios like ROE or

Fundamentals
the fundamental consensus
ROA. The weakest style exposure is Valuations, indicating this stock is over-
Price Target and
priced in the market relative to its peers.
Macquarie’s Quantitative
139/932 Alpha model.
Two rankings: Local market
Global rank in (India) and Global sector
Software & Services (Software & Services)
% of BUY recommendations 64% (16/25) Quant
Local market rank Global sector rank
Number of Price Target downgrades 1
Number of Price Target upgrades 14

Macquarie Alpha Model ranking Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score For the comparable firms this chart shows the key underlying styles and their
(higher is better). contribution to the current overall Alpha score.

HCL Tech 2.2 HCL Tech

Persistent Systems 0.7 Persistent Systems

Tech Mahindra 0.0 Tech Mahindra

Mphasis -0.1 Mphasis

Wipro -0.2 Wipro

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%
Valuations Growth Profitability Earnings Price Quality
Momentum Momentum

Macquarie Earnings Sentiment Indicator Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions Breakdown of 1 year total return (local currency) into returns from dividends, changes
signal that favours analysts who have more timely and higher conviction in forward earnings estimates and the resulting change in earnings multiple.
revisions. Current score shown below.

HCL Tech
HCL Tech 0.4

Persistent Systems
Persistent Systems 0.7

Tech Mahindra
Tech Mahindra -0.2

Mphasis -0.1 Mphasis

Wipro -0.4 Wipro

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -60% -40% -20% 0% 20% 40% 60%
Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

What drove this Company in the last 5 years How it looks on the Alpha model
Which factor score has had the greatest correlation with the company’s A more granular view of the underlying style scores that drive the alpha (higher is
returns over the last 5 years. better) and the percentile rank relative to the sector and market.
⇐ Negatives Positives ⇒
Normalized Percentile relative Percentile relative
Volatility 250 Day 22% Score to sector(/932) to market(/732)

Net Buybacks to Mkt Cap 22%

Alpha Model Score 0.65
Valuation -0.19
Profit Margin Last Actual… 21% Growth 0.00
Working Capital Inc. 20% Profitability 0.43
Earnings Momentum 0.43
Asset Growth -27% Price Momentum 0.29
Net Income Margin FY0 -27% Quality -0.09
Capital & Funding -0.47
Earnings Certainty (NTM) -28%
Liquidity -1.01
Number of Shares Increase… -31% Risk -0.31
Technicals & Trading -0.04
-40% -20% 0% 20% 40%
0 50 100 0 50 100
0 0 1 1

Source (all charts): FactSet, Thomson Reuters, and Macquarie Quant. For more details on the Macquarie Alpha model or for more customised analysis and
screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

13 January 2023 38
Macquarie Research India IT Services: Mid-caps
Persistent Systems (PSYS IN)
Quarterly Results 2Q/23A 3Q/23E 4Q/23E 1Q/24E Profit & Loss 2022A 2023E 2024E 2025E

Revenue m 20,486 21,511 22,569 23,582 Revenue m 57,107 83,347 100,787 121,748
Gross Profit m 20,486 21,511 22,569 23,582 Gross Profit m 57,107 83,347 100,787 121,748
Cost of Goods Sold m 0 0 0 0 Cost of Goods Sold m 0 0 0 0
EBITDA m 3,680 3,980 4,267 4,539 EBITDA m 9,582 15,259 19,266 23,210
Depreciation m 693 690 690 722 Depreciation m 1,660 2,718 2,888 2,969
Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0
Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0
EBIT m 2,987 3,290 3,577 3,817 EBIT m 7,922 12,541 16,378 20,241
Net Interest Income m 0 0 0 0 Net Interest Income m 0 0 0 0
Associates m 0 0 0 0 Associates m 0 0 0 0
Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0
Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0
Other Pre-Tax Income m -31 67 102 180 Other Pre-Tax Income m 1,321 270 721 1,053
Pre-Tax Profit m 2,956 3,357 3,679 3,998 Pre-Tax Profit m 9,243 12,811 17,099 21,294
Tax Expense m -756 -873 -920 -999 Tax Expense m -2,339 -3,251 -4,318 -5,377
Net Profit m 2,200 2,485 2,759 2,998 Net Profit m 6,904 9,560 12,781 15,917
Minority Interests m -0 -0 -0 -0 Minority Interests m -2 -2 -1 -1

Reported Earnings m 2,200 2,485 2,759 2,998 Reported Earnings m 6,904 9,560 12,781 15,917
Adjusted Earnings m 2,200 2,485 2,759 2,998 Adjusted Earnings m 6,904 9,560 12,781 15,917

EPS (rep) 28.79 32.51 36.10 39.23 EPS (rep) 90.33 125.09 167.24 208.27
EPS (adj) 28.79 32.51 36.10 39.23 EPS (adj) 90.33 125.09 167.24 208.27
EPS Growth yoy (adj) % 36.1 40.9 37.3 41.7 EPS Growth (adj) % 53.2 38.5 33.7 24.5
PE (rep) x 45.2 32.6 24.4 19.6
PE (adj) x 45.2 32.6 24.4 19.6

EBITDA Margin % 18.0 18.5 18.9 19.2 Total DPS 31.00 17.00 22.00 26.00
EBIT Margin % 14.6 15.3 15.8 16.2 Total Div Yield % 0.8 0.4 0.5 0.6
Earnings Split % 23.0 26.0 28.9 23.5 Basic Shares Outstanding m 76 76 76 76
Revenue Growth % 51.6 44.2 37.8 25.6 Diluted Shares Outstanding m 76 76 76 76
EBIT Growth % 59.4 58.0 55.5 42.0

Profit and Loss Ratios 2022A 2023E 2024E 2025E Cashflow Analysis 2022A 2023E 2024E 2025E

Revenue Growth % 36.4 45.9 20.9 20.8 EBITDA m 9,582 15,259 19,266 23,210
EBITDA Growth % 40.3 59.3 26.3 20.5 Tax Paid m -2,339 -3,251 -4,318 -5,377
EBIT Growth % 56.1 58.3 30.6 23.6 Chgs in Working Cap m 407 2,942 1,936 2,046
Gross Profit Margin % 100.0 100.0 100.0 100.0 Net Interest Paid m 0 0 0 0
EBITDA Margin % 16.8 18.3 19.1 19.1 Other m 800 -5,614 -3,151 -3,039
EBIT Margin % 13.9 15.0 16.3 16.6 Operating Cashflow m 8,450 9,336 13,733 16,840
Net Profit Margin % 12.1 11.5 12.7 13.1 Acquisitions m 0 0 0 0
Payout Ratio % 34.3 13.6 13.2 12.5 Capex m -3,808 -3,500 -3,750 -3,000
EV/EBITDA x 31.6 19.8 15.7 13.0 Asset Sales m 16,900 18,672 27,466 33,680
EV/EBIT x 38.2 24.1 18.5 14.9 Other m -16,946 -18,672 -27,466 -33,680
Investing Cashflow m -3,854 -3,500 -3,750 -3,000
Balance Sheet Ratios Dividend (Ordinary) m -1,987 -1,299 -1,681 -1,987
ROE % 22.4 25.3 26.9 26.5 Equity Raised m 0 0 0 0
ROA % 17.4 21.3 23.5 24.2 Debt Movements m 3,928 0 0 0
ROIC % 32.5 32.4 37.6 42.8 Other m -118 0 0 0
Net Debt/Equity % -14.3 -22.3 -33.3 -44.1 Financing Cashflow m 1,823 -1,299 -1,681 -1,987
Interest Cover x nmf nmf nmf nmf
Price/Book x 9.3 7.4 5.9 4.7 Net Chg in Cash/Debt m 6,419 4,537 8,302 11,853
Book Value per Share 440.7 548.3 693.5 875.8
Free Cashflow m 4,642 5,836 9,983 13,840

Balance Sheet 2022A 2023E 2024E 2025E

Cash m 9,145 13,681 21,983 33,836

Receivables m 9,484 13,842 16,738 20,220
Inventories m 0 0 0 0
Investments m 0 0 0 0
Fixed Assets m 13,617 14,357 15,219 15,249
Intangibles m 2,790 2,790 2,790 2,790
Other Assets m 19,105 19,105 19,105 19,105
Total Assets m 54,141 63,776 75,836 91,201
Payables m 4,299 5,715 6,675 8,110
Short Term Debt m 1,525 1,525 1,525 1,525
Long Term Debt m 2,801 2,801 2,801 2,801
Provisions m 246 246 246 246
Other Liabilities m 11,589 11,589 11,589 11,589
Total Liabilities m 20,459 21,875 22,835 24,270
Shareholders' Funds m 33,682 41,901 53,001 66,931
Minority Interests m 0 0 0 0
Other m 0 0 0 0
Total S/H Equity m 33,682 41,901 53,001 66,931
Total Liab & S/H Funds m 54,141 63,776 75,836 91,201

All figures in INR unless noted.

Source: Company data, Macquarie Research, January 2023

13 January 2023 39
13 January 2023 India

EQUITIES LTIMindtree (LTIM IN)

Broad-based uptick in revenue contribution Ready to punch above its weight
from clients post-Covid^
USD mn QoQ
90 Key points
 Post merger of LTI and Mindtree, the combined entity LTIMindtree provides
80
70
60
50 perfect synergy and rounds off individual weaknesses.
 Breadth of verticals/horizontals is best among sub-US$5bn revenue firms.
40
30
20

 We initiate with Outperform, as it has a long steady growth runway.

10
0
-10
2QFY18 2QFY19 2QFY20 2QFY21 2QFY22 2QFY23

Top 10 Clients Top 11-20 Clients Non-top-20 clients

Source: Macquarie Research, January 2023

LTI-Mindtree merger provides perfect synergy and lowers risk
^
Note: Proforma using LTI and Mindtree metrics L&T Infotech (LTI) and Mindtree were focused on different verticals, with LTI
strong in BFSI and Manufacturing, and Mindtree strong in Travel, Retail and Hi-
LTIM IN Outperform Tech. As a combined entity, its top-client concentration has reduced and the
Price (at 08:03, 11 Jan 2023 GMT) Rs4,318.00 company has sufficient scale across all major industry verticals to compete with
larger peers. We believe LTIMindtree could benefit from vendor consolidation
Valuation Rs 7,540.00 deals and its pipeline could expand to include much bigger deals, as its size will
- PER now encourage deal advisory firms to include it for larger deals.
12-month target Rs 7,540.00
Upside/Downside % +74.6
LTI has historically scored well in hunting and creating tip-of-the-spear solutions
for entering new accounts (e.g., LTI was one of the first India IT services firms to
12-month TSR % +75.9
achieve the highest partnership level with Snowflake – ahead of even larger
Volatility Index Medium
peers), while under CEO Debashis, Mindtree has excelled at client mining and
GICS sector Software & Services improving the effectiveness of its sales and account management investments.
Market cap Rsbn 1,277 Mindtree has punched above its weight in the last two years in terms of additions
Market cap US$m 15,204 to the US$5mn and US$10mn client tier even as margins expanded through
Free float % 31 increased offshore execution and rationalisation of tail accounts.
30-day avg turnover US$m 24.9
Number shares on issue m 295.8 Merged entity rates high on our MOCCA framework

Investment fundamentals Our MOCCA framework analyses incremental revenue on five factors – Mining,
Offshore proportion, Contribution from top-10 clients, Contribution by top vertical
Year end 31 Mar 2022A 2023E 2024E 2025E
and Average account size. With one of the lowest onsite revenue proportions in
Revenue bn 156.7 265.1 378.1 440.7
EBIT bn 27.0 42.8 64.7 77.2 the peer group, LTIMindtree can compete with Indian tier-1 companies for large
EBIT growth % 13.0 58.3 51.2 19.3 turnkey deals, including cost takeout-led digital transformation deals. Its
Recurring profit bn 31.0 47.5 68.6 82.4 combined size might help improve the pipeline and win-rate. While top-10 client
Reported profit bn 23.0 35.7 51.7 62.1 contribution to incremental revenue was high for Mindtree, this risk reduces as a
Adjusted profit bn 23.0 35.7 51.7 62.1 merged entity and at 36-42% of revenue over the last 5 years, is slightly below
EPS rep Rs 130.82 151.19 174.26 209.44
the top-10 client revenue contribution of 42% for the merged firm, suggesting
EPS rep growth % 18.6 15.6 15.3 20.2
EPS adj Rs 130.82 150.86 174.26 209.44
client concentration can reduce further. With good growth in average account size
EPS adj growth % 18.6 15.3 15.5 20.2 beyond top-10 clients and additions commensurate with size across US$1mn+,
PER rep x 33.0 28.6 24.8 20.6 US$5mn+ and US$10mn+ tiers, the merged entity is very well poised to sustain
PER adj x 33.0 28.6 24.8 20.6 its incremental revenue addition or even improve it.
Total DPS Rs 25.89 62.21 57.40 67.99
Total div yield % 0.6 1.4 1.3 1.6 Initiate with Outperform, TP at Rs7,540
ROA % 23.3 23.3 24.9 25.8
ROE % 28.5 27.1 26.8 26.7 We expect LTIMindtree to excel at both hunting and mining and deliver the most
EV/EBITDA x 24.0 25.5 17.2 14.5 predictable growth among sub-US$5bn revenue India IT services firms. Even
Net debt/equity % 3.8 -12.0 -22.7 -31.8 though smaller competitors such as Coforge or Persistent Systems might grow
P/BV x 8.6 7.3 6.1 5.0
faster, we believe LTIMindtree offers the best prospects for long-term share-price
Source: FactSet, Macquarie Research, January 2023
(all figures in INR unless noted)
outperformance with the least risk in its peer group. Key risk is top client
dependence. LTIMindtree is our 2nd preference (after Persistent Systems) in the
India IT services midcap space with >US$3bn market cap. We initiate with
Outperform and a target price of Rs7,540 (based on 36x FY25E target PE).

Analysts ESG: LTIM scores Q1 in Macquarie's MGRS framework with progress towards its
Macquarie Capital Securities (India) Pvt. Ltd. goal of carbon neutrality and disclosures about Scope-2 and Scope-3 emissions.
Ravi Menon +9122 6720 4152 See page 17.
[email protected]

13 January 2023 40
Macquarie Research India IT Services: Mid-caps

Inside LTIMindtree: A good merger

Company profile
Ready to punch above its weight 42
• In November 2022, the merger of L&T Infotech (LTI) and Mindtree led to the
LTIMindtree scoring well on our MOCCA
formation of LTIMindtree. LTI’s parent, the Indian engineering and construction
framework 47 conglomerate Larsen & Toubro (L&T) had acquired Mindtree in a hostile
Valuation, recommendation, risks 52 takeover in 2019. LTI started providing the L&T group with IT services and
began catering to external customers to retain talent and provide its
Appendices 54
employees opportunities for better growth.
Macquarie ESG Assessment 56

Fig 1 Incremental revenue QoQ: Broad-based uptick post-Covid^

USD mn QoQ
90
80
70
60
50
40
30
20
10
0
-10
2QFY18 2QFY19 2QFY20 2QFY21 2QFY22 2QFY23

Top 10 Clients Top 11-20 Clients Non-top-20 clients

Source: Companies, Macquarie Research January 2023

^Note: Proforma created using LTI and Mindtree metrics, i.e, top-10 being top-5 for each
firm and top-20 being top-10 for each firm

13 January 2023 41
Macquarie Research India IT Services: Mid-caps

Ready to punch above its weight

Merger of LTI and Mindtree provides perfect synergy in verticals and lowers risk

Top client risk was a The merger of LTI and Mindtree has created a combined entity that has a broad mix of vertical
concern for LTI and capabilities (with very little overlap in verticals prior to the merger) and reduced revenue
Mindtree when concentration on top-10 clients.
operating as separate After LTI’s IPO in 2016, its exposure to the Energy sector was a concern due to falling oil prices;
entities. Combined, that the company also had a significant top-client exposure to a large bank. For Mindtree, a global
risk reduces. technology firm had been its top client and was a significant contributor to incremental revenue for
some years. With this merger, we see lower risks from such client concentration and vertical
concentration.
LTIMindtree has scale to
make investments in LTIMindtree has been playing the role of a challenger to India’s tier-1 IT companies in many
more areas and can also accounts. As a combined firm, it now has the heft to compete head-on with these companies. To
hope to be invited to continue growing at the same pace as it has done in the recent past as smaller separate entities,
much larger deals. LTIMindtree will need to continue to be nimble and focused on tip-of-the-spear offerings that
differentiate it vs larger peers. We believe it potentially has access to larger deals due to its
increased scale of operations.

We expect better predictability for the merged firm and think that the stock deserves to trade at a
premium to what the individual stocks traded at.

Fig 2 While LTI had ~50% of revenue from BFSI (as of Fig 3 …Mindtree had just 19% BFSI exposure (as of
2QFY23)… 2QFY23)

Healthcare
Others 3%
Hi-Tech, 7% Travel & BFSI
Media & Hospitality 19%
Entertainment 16%
11% BFS
34%
CPG, Retail &
Pharma
10% Retail, CPG &
Manufacturing
Energy & 19%
Utilities
10% Communicatio
Insurance ns, Media &
Manufacturing 14% Technology*
14% 43%

Source: Company, Macquarie Research, January 2023 Source: Company, Macquarie Research, January 2023; * Erstwhile Hi-
Tech and Media

Even operationally, we believe the geographic presence in terms of delivery centres in India are
complementary without much overlap (e.g., Mumbai). This allows for a deeper presence across
India than even some larger peers, allowing LTIMindtree to allow for better employee mobility
across the country – a factor that can help reduce attrition as has been seen for TCS (TCS IN,
Rs3,286.20, Outperform, TP: Rs4,530.00).

As a combined entity, we believe LTIMindtree’s scale is comparable to its much bigger peer Tech
Mahindra (TECHM IN, Rs1,002.65, Neutral, TP: Rs1,110.00) in many verticals, with LTIMindtree
being bigger than TechM in the critical BFSI vertical (the largest vertical for most India IT services
firms). The only subscale vertical we see for LTIMindtree is Healthcare where it does not have
much of a presence even post-merger.

13 January 2023 42
Macquarie Research India IT Services: Mid-caps

Fig 4 LTIMindtree has revenue comparable to TechMahindra in many verticals over the
last 12 months

USD mn
3,500
3,000
2,500
2,000
1,500
1,000
500
-

BFSI

Retail-CPG-

Communications

Healthcare and
Manufacturing

Hi-Tech, Media
Logistics

Others
and
LTIMindtree TechM

Source: Companies, Macquarie Research, January 2023

Incremental revenue uplift visible post-Covid

For the merged firm, looking at historical metrics on a proforma basis, we see a clear uptick in
incremental revenue post-Covid driven by a surge in revenue from non-top-10 clients, suggesting
that this is led by broad-based client mining and can sustain.

Fig 5 Proforma incremental revenue uptick post-Covid broad-based, which suggests this
would sustain

USD mn
90
80
70
60
50
40
30
20
10
0
-10
2QFY18 2QFY19 2QFY20 2QFY21 2QFY22 2QFY23

Top 5 Clients Top 6-10 Clients Non-top-10 clients

Source: Company, Macquarie Research, January 2023

• Incremental QoQ revenue for LTIMindtree has been very broad-based with:

 Good contribution from non-top-10 clients even as the top-5 are also showing growth; and

 Slightly muted contribution from top-6-10 clients, but this could also be considered an
opportunity to accelerate growth as the portfolio changes over time.

For a more detailed analysis, please see the next section where we go through our 5-factor
MOCCA framework for analysing incremental revenue.
While proforma incremental revenue in USD terms seems sharply lower in 2QFY23 vs 2QFY22,
when we look at the incremental revenue in constant currency (CC) terms over a longer timeframe,
we see that 2QFY23 incremental revenue at US$55mn is ~3x that the US$18mn clocked in
2QFY19 (pre-Covid) and indicates a broad sustained uptick.

13 January 2023 43
Macquarie Research India IT Services: Mid-caps

Fig 6 Proforma incremental revenue QoQ in constant-currency terms^ shows an uptick

post-Covid

USD mn
100

80

60

40

20

-20

-40

-60
4QFY18

2QFY21
2QFY18

3QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Source: Company, Macquarie Research, January 2023
^Note: Mindtree constant-currency growth estimated using EUR-USD and GBP-USD historical rates

The North America business saw a good uptick post Covid, for the overall industry as well as
LTIMindtree (with Europe also impacted by cross-currency movements in addition to heightened
macro worries).

Fig 7 Proforma incremental revenue QoQ (in USD mn without adjusting for cross-
currency) across geographies shows uptick in North America post-Covid…

USD mn
100
80
60
40
20
0
-20
-40
-60
2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

North America Europe APAC and Middle East Rest of the World

Source: Company, Macquarie Research, January 2023

13 January 2023 44
Macquarie Research India IT Services: Mid-caps

Fig 8 …with non-top-10 clients showing a revenue surge post-Covid

USD mn
100
80
60
40
20
0
-20
-40
-60

1QFY19

2QFY19

3QFY19

4QFY19
1QFY18

2QFY18

3QFY18

4QFY18

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Top 5 Clients Top 6-10 Clients Non-top-10 clients

Source: Company, Macquarie Research, January 2023

Client mining across tiers: LTIMindtree has been steadily scaling up clients across tiers,
indicating an ability to enter new accounts and constantly cross-sell new service propositions.

For a more detailed comparison of how LTIMindtree stacks up vs peers in client mining, please
see the next section where we discuss this in detail as part of the Macquarie 5-factor MOCCA
framework to analyse incremental revenue.

Fig 9 Client counts improving steadily, broadening the revenue base for LTIMindtree

Client count
80
70
60
50
40
30
20
10
-
2QFY18 2QFY19 2QFY20 2QFY21 2QFY22 2QFY23

USD 10mn+ clients USD 20mn+ clients USD 50mn+ clients

Source: Company, Macquarie Research, January 2023

Sustainable margin improvement: With a continuous shift offshore, LTIMindtree has seen EBIT
per employee improve even as revenue per employee has dropped (as offshore billing rates are
lower, but gross margins are higher). See our report “IT Services: Growth to solve margin issues –
Underestimated pyramid lever in action soon” from 12-Jul-2022 for illustrative gross margins onsite
and offshore across different experience levels.

13 January 2023 45
Macquarie Research India IT Services: Mid-caps

Fig 10 With offshore shift and tail-account rationalization, EBIT/employee has surged^

USD/ year USD/ year

52,500 11,500

51,000 10,000

49,500 8,500

48,000 7,000

46,500 5,500

45,000 4,000

1QFY20

3QFY20
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19

2QFY20

4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
Annualized revenue per employee (USD) - LHS Annualized EBIT per employee (USD) - RHS

Source: Company, Macquarie Research, January 2023

^
Note: Using proforma figures for LTI and Mindtree for all periods

From a low point of 6.4% EBIT margin in 1QFY20, Mindtree’s EBIT margins improved to 18.6% as
of 2QFY23, with offshore revenue mix changing from 50.5% to 61.0%.

Meanwhile, LTI’s margins were steady at ~16% from 1QFY20 to 2QFY23, but it has also seen a
shift offshore from 50.5% to 61.7%.

The impressive margin expansion at Mindtree has only come partially from an improvement in
utilisation, as utilisation has improved by just 350bp from 1QFY20 to 2QFY23, which is insufficient
to explain the margin expansion; we can only credit better portfolio management (getting out of
low-margin contracts/ accounts) and better sales efficiency (with the tail account rationalisation that
Mindtree undertook after Debashis Chatterjee became CEO in August 2019).

13 January 2023 46
Macquarie Research India IT Services: Mid-caps

LTIMindtree scoring LTIMindtree scoring well on our MOCCA framework

well in: Our MOCCA framework analyses incremental revenue for mid-cap IT services companies on five
• Offshore factors – Mining, Offshore proportion, Contribution from top-10 clients, Contribution by top vertical
Execution and Average account size.

• Broad-based Broadening vertical base, improving client mining, low top-10 client reliance
growth across
verticals MOCCA framework indicates sustainable incremental revenue addition
LTIMindtree scores well on our MOCCA framework (Macquarie’s 5-factor framework for mid-cap IT
• Client mining
Services firms with factors listed below), indicating that its incremental revenue addition is driven
by sustainable factors and suggesting a long growth runway is possible.

• Below is a summary of LTIMindtree’s rating on Macquarie’s MOCCA framework to analyze

incremental revenue. Note that the ranks are not meant to be taken purely as an indicator of
superior/inferior execution vs peers, but is only meant to indicate whether the key drivers of
incremental revenue are sustainable and which ones need a closer look.

Fig 11 LTIMindtree scores better as a merged entity than as individual firms as they balance out each other’s weaknesses

Mining
Contribution Contribution Avg account
Ranking by USD1mn+ USD5mn+ USD10mn+ Offshore
from top-10 by Top size (growth Overall Rank
parameter client tier client tier client tier proportion
clients vertical ex-top-10)
additions additions additions
LTI 6 8 7 2 4 5 7 7
Mindtree 9 7 4 4 8 4 3 7
LTI + Mindtree 5 4 6 3 7 1 4 2
Mphasis 10 9 9 9 9 7 9 10
Coforge 4 1 1 7 5 8 6 4
Persistent 1 3 8 6 2 2 1 1
LTTS 1 5 4 8 1 3 8 2
Birlasoft 8 2 3 1 10 9 2 5
Mastek 3 NA NA 10 6 6 10 9
Zensar 6 5 2 5 3 10 4 5
Source: Macquarie Research, January 2023

 Mining: While Mindtree has been punching above its weight in client additions to the
US$5mn+ and US$10mn+ tiers, LTI as a standalone entity had been performing slightly
below what its size called for. The merged entity is adding accounts across the US$1mn+,
US$5mn+ and US$10mn+ client tiers exactly as required for a firm of its size, suggesting
broad-based client mining extending well beyond the top-10 accounts.

 Offshore Execution: LTIMindtree has strong offshore capability and seems to be doing
value-added full-fledged solutions as demonstrated by >70% of its incremental revenue
over most periods we consider coming from offshore.

 Client Concentration: LTIMindtree scores only around the middle of the peer group in the
proportion of its incremental revenue beyond its top-10 clients, but the incremental revenue
proportion is still slightly below its top-10 client concentration suggesting top-10
concentration will keep declining gradually over time. Mindtree as a standalone entity relied
heavily on its top-10 clients for driving incremental revenue and the merger with LTI has
reduced this risk.

 Contribution from top vertical: LTIMindtree as a combined entity has BFSI as its top vertical
and derives just 35-43% of its incremental revenue from this vertical across the last 5 years
we consider and scores near the top of the peer group in how little it relies on its top
vertical. As separate entities, LTI and Mindtree scored closer to the middle of the peer
group and this is another indication that the merger hits the sweet spot in delivering a more
well-rounded firm.

13 January 2023 47
Macquarie Research India IT Services: Mid-caps

 Average Account Size: LTIMindtree scores well in scaling up accounts outside the top-10
clients and this is showing up in an increase of the average account size outside the top-10
(using US$1mn+ client count adjusted for top-10 clients as the denominator). This indicates
success in growing accounts beyond the top-10 and is consistent with a broad set of
capabilities and sophisticated account management practices and is further supported by
client additions across various revenue tiers.

Mega Deals: Neither LTI nor Mindtree has done any mega deals that we could consider as difficult
to repeat and hence this is not a factor to consider when we look at the incremental revenue
addition trend by LTIMindtree (the merged entity).

Detailed analysis

Mining:
LTIMindtree has done well across tiers and adds exactly what it needs according to its size and
performs better than the standalone entities of Mindtree and LTI which have been more erratic
than the combined entity.

We can see the acceleration in the client count in the US$1mn+ tier after Mindtree’s relative
stagnation over FY18-FY22 as it went through a tail account rationalization (FY20-FY21 can be
understandable given pressure from Covid-related downturn).

This breakout in performance over 2QFY21-2QFY22 and 2QFY22-2QFY23 suggests that

Mindtree’s tail account rationalization is largely done. While we can expect Debashis Chatterjee
(now CEO of LTIMindtree and earlier CEO of Mindtree pre-merger) to undertake a similar exercise
at the combined firm, the recovery in client additions at the US$1mn+ tier at Mindtree over the last
12 months suggests that the process was only about improving sales efficiency and the client base
will be a healthier one at the end of it.

Fig 12 Mindtree’s US$1mn+ tier resumed growth Fig 13 Mindtree also saw a recent surge in US$5mn+ client
additions

USD 1mn+ USD 5mn+

clients clients
250 90
80
200
70
60
150
50
100 40
30
50 20
10
0
0
2QFY20

4QFY20
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20

3QFY20

1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23

3QFY18

1QFY21
1QFY18
2QFY18

4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20

2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23

LTI Mindtree LTI Mindtree

Source: Companies, Macquarie Research, January 2023 Source: Companies, Macquarie Research, January 2023

Lending support to its strong additions in the US$1mn+ client tier, we are able to see Mindtree start
to make an impact in the US$5mn+ client tier as well – adding accounts well above what we would
expect considering its size.

Mindtree has been punching above its weight in the US$5mn+ tier as well, while LTI has been
lagging in this tier a bit. As a combined entity, LTIMindtree adds exactly what it needs and we think
that under the leadership of Debashis Chatterjee, LTIMindtree could start punching above its
weight soon.

Overall, we think LTIMindtree has a strong capability to mine client accounts. Client Mining is one
of the most critical parameters for sustainable growth and indicates a broad set of service
capabilities and sophisticated account management as well as good client satisfaction (as growing
client accounts would not be possible otherwise).

13 January 2023 48
Macquarie Research India IT Services: Mid-caps

Offshore Execution:
LTIMindtree has a steady ranking near the top of the tiers for most years, indicating that the
business model is steady and deal wins across years are based on a steady delivery mix of onsite
and offshore.

We note that as a combined entity, LTIMindtree has a steadier rank over periods than as two
standalone entities – validating that the merger is complementary and reduces execution volatility.

Offshore incremental revenue proportion is fairly steady and over 70% for most periods, indicating
that offshore execution is a part of almost all deals won. We regard this as a good indicator of an
all-weather Outsourcing proposition that will be more immune to periods of economic downturns.

Fig 14 Incremental revenue largely offshore-driven for both Fig 15 LTIMindtree: Offshore effort mix is up post-Covid
LTI and Mindtree

USD mn QoQ Billed

100.0 employees
40,000
80.0
35,000
60.0
30,000
40.0
25,000
20.0
20,000
-
15,000
-20.0
10,000
-40.0
5,000
-60.0
-
1QFY23
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22

2QFY23

1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
LTI - offshore Mindtree - offshore LTI - onsite Mindtree - onsite
Onsite Offshore
Source: Companies, Macquarie Research, January 2023 Source: Companies, Macquarie Research, January 2023

Client concentration:
This is measured by the share of top-10 clients in incremental revenue over the last 12 months to
60 months. Lower the top-10 contribution to incremental revenue in a period, the better the rank for
that period for a firm.

LTIMindtree scores only near the middle or lower vs peers in how much it relies on its top-10
clients to drive incremental revenue, but Mindtree as a standalone firm had been driving a very
high proportion of its incremental revenue from its top-10 clients. As a combined entity,
LTIMindtree does much better and scores closer to the middle of the peer group.

LTIMindtree has been getting around 36-42% of its incremental revenue across most periods from
its top-10 clients – which is lower in most periods than its current top-10 client concentration (at
42% as of 2QFY23) and suggests that top-10 client concentration risk is likely to reduce over time
even as these clients continue to grow as well.

In absolute terms, LTIMindtree has seen its top-10 accounts growing over all periods except for the
Covid-impacted period 3 years back. Incremental revenue contribution over longer timeframes are
consistently higher. We conclude that LTIMindtree has a client portfolio that has its top-10 clients
as a steady contributor to growth, but is not unduly reliant on this segment of clients. We are also
reassured by good client mining that suggests top-10 reliance will reduce further.

13 January 2023 49
Macquarie Research India IT Services: Mid-caps

Fig 16 LTIMindtree: Incremental revenue across client tiers^ Fig 17 LTI and Mindtree have been scaling up US$10mn+
clients faster than similar-sized Mphasis

USD mn QoQ USD 10mn+

100 clients
50
80 45
60 40
40 35

20 30

0 25
20
-20
15
-40
10
-60
5
4QFY18

2QFY19
1QFY18
2QFY18
3QFY18

1QFY19

3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
0
2QFY18 2QFY19 2QFY20 2QFY21 2QFY22 2QFY23

Top 10 Clients Top 11-20 Clients Non-top-20 clients LTI Mindtree Mphasis Coforge

Source: Companies, Macquarie Research, January 2023 Source: Companies, Macquarie Research, January 2023
^
Note: Top-10 by adding top-5 of LTI and top-5 of Mindtree, top-20 arrived
at by adding top-10 of LTI and top-10 of Mindtree

Vertical concentration:
While LTI had BFS as its top vertical accounting for 34% of revenue as of 2QFY23 (48% including
if we were to include Insurance as well), Mindtree had Technology, Communications & Media as
its top vertical accounting for 43.5% of revenue.

As a combined entity, LTIMindtree has BFSI as its top vertical accounting for 36% of revenue) with
Technology-Communications-Media accounting for another 24% of revenue.

The merged firm is more diversified across verticals with Mindtree bringing scale in Hi-tech, Travel
and Retail to complement LTI’s scale in BFS, Insurance and Manufacturing verticals.

Note: As Mindtree does not disclose the Insurance vertical separately, we are using BFSI as a
combined vertical for the merged entity.

Fig 18 Vertical diversification has been the best outcome delivered by the merger as is
clear from the much-improved score for the combined LTIMindtree entity
Incremental revenue
contribution from top vertical 5-years 4-years 3-years 2-years 1-year
(Rank)

LTI 4 5 6 5 4
Mindtree 5 6 4 1 3
LTI + Mindtree 1 1 2 2 1
Mphasis 6 8 9 7 5
Coforge 7 7 8 8 7
Persistent NA 2 3 4 2
LTTS 2 3 1 3 6
Birlasoft NA NA 7 10 9
Mastek 3 4 5 6 10
Zensar 8 9 10 9 8
Source: Companies, Macquarie Research, January 2023

13 January 2023 50
Macquarie Research India IT Services: Mid-caps

Fig 19 LTIMindtree post-merger reduces its reliance on a single vertical

Incremental revenue
contribution from top vertical 5-years 4-years 3-years 2-years 1-year
(%)

LTI 47.9% 48.0% 51.1% 52.0% 54.5%

Mindtree 49.4% 49.5% 50.1% 33.3% 48.4%
LTI + Mindtree 35.1% 35.5% 37.2% 35.8% 43.2%
Mphasis 65.7% 71.3% 75.0% 61.4% 56.8%
Coforge 66.1% 66.0% 65.3% 61.4% 64.7%
Persistent NA 39.2% 42.0% 46.0% 46.0%
LTTS 37.3% 40.8% 32.5% 42.2% 57.2%
Birlasoft NA NA 52.0% 64.3% 90.9%
Mastek 47.4% 45.5% 51.1% 59.5% 99.0%
Zensar 83.0% 125.6% 328.6% 63.1% 68.8%
Source: Companies, Macquarie Research, December 2022

Average Account Size:

LTIMindtree has seen a 30% improvement in average account size outside the top-10 clients over
the last 5 years, but has seen a slight decline in the last 12 months. For LTIMindtree, we have
seen that incremental revenue is not reliant unduly on the top vertical or on top-10 clients.
We believe the slight decline in non-top-10 account size over the last 12 months could be due to
the cross-currency impact as the other periods have shown good improvement with a 30%
increase in average account size outside the top-10 clients to US$1.62mn. This finds further
support in the Client Mining metric analysed next.

Mega Deals:
Neither LTI nor Mindtree has done any mega deals that we would consider difficult to repeat. So
there are no unsustainable revenue contributions from this angle.

13 January 2023 51
Macquarie Research India IT Services: Mid-caps

Valuation, recommendation, risks

We believe LTIMindtree Valuation and Recommendation:
as a combined firm
We believe LTIMindtree offers predictable growth given a broad set of verticals and proven client
offers much lower
mining ability. We see a long runway of growth as we see incremental revenue being largely
earnings risk and this
sustainable per our MOCCA framework with LTIM coming 2 nd overall (below Persistent Systems
should be rewarded
and tied with LTTS).
with a rerating vs
historical trading
average even excluding Fig 20 LTIMindtree trading slightly above 5-year historical average for LTI (pre-merger)
secular factors for the
industry overall (x)
70
60
50
40
30
20
10
0
Jul-19
Dec-17

Aug-18

Nov-18

Mar-20

Jun-20

Sep-20

Aug-21

Jan-22

Jun-22

Sep-22
Mar-18

Apr-19

Oct-19

Dec-19

Nov-20

Oct-21

Dec-22
Apr-22
May-18

Feb-19

Feb-21

May-21
LTIM (5 yr) trailing 12 mth PE Average " +1 std" -1 std

Source: Bloomberg, Macquarie Research, January 2023

The merged entity has lower business risk vs LTI pre-merger (and Mindtree pre-merger) and we
believe the growth rate as a merged firm can be even better than as standalone entities. Thus, we
think LTIM deserves a premium to what LTI has traded at in the past.

Fig 21 LTIMindtree scores 2nd in our MOCCA framework, indicating relatively low risk to growth drivers
FY22-25E USD
MOCCA framework FY22-25E EBIT
FY24 RoE revenue CAGR FY24 PE (x) FY25 PE (x)
overall rank CAGR (%)
(%)
LTIMindtree 2 27% 17% 18% 24.9 20.7
Source: Macquarie Research, January 2023

With a broad set of clients and verticals and the ability to invest in many more areas as a combined
firm, we believe LTIM deserves a premium to the peer group and assign it 36x target multiple (vs
the 18% EBIT CAGR we see for LTIM on proforma basis over FY22-25E).

In our India IT Services midcap coverage, we regard LTIM as the must own stock in terms of
assured long-term compounding at low risk. We initiate with Outperform with LTIM as our
second preference, after Persistent Systems (PSYS IN, CMP Rs4,080, Outperform, TP
Rs8,330) in the India IT Services midcaps space. Our target price of Rs7,540 (based on 36x
FY2025E PE) implies 2x PEG (vs the 18% EBIT CAGR over FY22-25E). We are comfortable
assigning a 2x PEG given low risks to extrapolating growth as growth drivers are broad-based per
our MOCCA framework.

13 January 2023 52
Macquarie Research India IT Services: Mid-caps

Fig 22 Merged entity LTIM at lower business risk vs LTI; Outperform with TP of Rs7,540

Current price^ Rs4,318

1-year fwd EPS Rs158
1-year fwd PE 27.3x
Target EPS period Apr-2024 to Mar-2025
Target EPS Rs209.4
Target multiple 36x
Target price Rs7,540
Next 1-year dividends Rs50
Total shareholder return (%) 76%
Source: Macquarie Research, January 2023
^Note: Closing price as of 10th Jan 2023 from Bloomberg

Risks: The biggest risk we see is the integration risk of two similar sized entities - a first for India
IT Services and the culmination of the first hostile takeover in the sector.

As a standalone entity, Mindtree also had significant risk from an outsized exposure to its top client
and although this has reduced as a combined entity, top-5 clients will still account for 32% and top-
10 for 42% of revenue vs top-10 accounting for 20.2% for Infosys (INFO IN, Rs1,470.40,
Outperform, TP: Rs2,080.00) and the loss of any major clients is a significant risk.

Macquarie vs Visible Alpha Consensus:

We think consensus estimates are not updated for the merged entity’s financials. So we have
added LTI and Mindtree estimates to arrive at the proforma figures for comparison.

We have factored in integration costs over 2HFY23 and think that could be why our operating
income and net income estimates for FY23 and FY24 are sharply lower than Visible Alpha
consensus (which we have added for LTI and Mindtree as the merged entity financials do not
seem to be available yet on Visible Alpha).

We are well ahead of consensus on revenue for FY24E and FY25E, but factor in lower margins as
we expect some investments to scale up relatively nascent verticals (Healthcare) as well as
additional sales investments in Europe over FY24E as LTIM now has the ability to make more
investments due to its scale. We expect margin optimisation to come later.

Fig 23 Our revenue estimates are higher vs the combined consensus of LTI and Mindtree
Macquarie Visible Alpha^ Macquarie vs VA
YE Mar, in Mn FY23E FY24E FY25E FY23E FY24E FY25E FY23E FY24E FY25E

Revenue in USD 4,121 4,755 5,585 4,112 4,566 5,166 0% 4% 8%

Abs change 607 634 830 598 454 599
Revenue 330,297 378,115 440,657 332,362 376,386 425,786 (1)% 0% 3%
% Change 26% 14% 17% 27% 13% 13%
Operating Income 55,089 64,719 77,212 58,000 65,595 74,987 (5)% (1)% 3%
% Margin 17% 17% 18% 17% 17% 18%
Net income 45,516 51,702 62,138 48,114 54,342 62,502 (5)% (5)% (1)%
% Margin 14% 14% 14% 14% 14% 15%
Source: Visible Alpha, Macquarie Research, January 2023
^
Note: Proforma merged numbers for LTI and Mindtree as consensus estimates are not available yet as a
merged entity

13 January 2023 53
Macquarie Research India IT Services: Mid-caps

Appendices
Board (of LTI pre-merger) has 7 independent directors including well-known names like Mr.
Rajnish Kumar (former Chairman of State Bank of India) as Chairman of Audit Committee.

Fig 24 Well-regarded names in corporate India on the Board of Directors

Board of Directors

Mr. Anilkumar Non-Executive - Joining the Company as a Junior Engineer in 1965, Mr. Naik rapidly
Manibhai Naik Non Independent rose to positions of increasing responsibility. His tenure as Group
Director- Executive Chairman was extended by the Board of Directors in April
Chairperson related 2012. He is known for his contribution at L&T like kick starting of the
to Promoter critical equipment for defence sector and transforming L&T into a
world-class conglomerate.
Mr. Sekharipuram Non-Executive - S.N. Subrahmanyan, is the CEO and Managing Director of Larsen &
Narayanan Non Independent Toubro Limited (L&T). In addition, he is also Vice Chairman on the
Subrahmanyan Director boards of L&T Technology Services & Mindtree and Chairman of L&T
Metro Rail (Hyderabad) Limited. Prior to this, he led L&T's
infrastructure business to its position as the country's largest
construction organization and 14th in the world.
Mr. Ramamurthi Non-Executive - Mr. R. Shankar Raman has worked for leading listed corporations in
Shankar Raman Non Independent various capacities in finance for the past 35 years. He has won
Director numerous awards, including Best CFO of Asia in the Industrial Sector.
He also established L&T Finance Limited, a wholly owned subsidiary.
Mr. Sanjeev Aga Non-Executive - He is a Director on the Board of UFO Moviez India Ltd, Pidilite
Independent Industries Ltd, Mahindra Holidays and Resorts India Ltd, and Vedant
DirectorFashions Pvt Ltd. For 2009, Mr. Aga received on behalf of Idea Cellular
the ET Award for The Emerging Company of the Year. In 2009, Indira
Innovation named him CEO of the Year, and in 2010 Tele.Net
felicitated him for Outstanding Contribution to the Telecom Sector. In
2010, Forbes Magazine shortlisted Mr. Aga for the Person of the Year.
Mr. James Non-Executive - He has over 30 years of experience as a management leader in
Varghese Abraham Independent various roles in Canada, South East Asia, and India. Mr. Abraham
Director serves on various Industry advisory bodies and councils including the
India-US Track 2 on Climate Change. He is a member of the Board on
Vistaar Financial Services, Smart Power India, International Justice
Mission, and a Trustee of the Ananta-Aspen Center.
Mr. Rajnish Kumar Non-Executive - Mr. Rajnish Kumar is the former Chairman of the State Bank of India
Independent and also a veteran banker who has worked for SBI for nearly four
Director decades. His knowledge of corporate credit and project finance is well
known. He is also a senior advisor to Barings Private Equity Asia Pte
Ltd and a Kotak Investment Advisors Ltd exclusive advisor.
Mr. Vinayak Non-Executive - In the areas of infrastructure policy, planning, and implementation, he
Chatterjee Independent has frequently been called upon to provide strategic advice to leading
Director domestic and international corporations. In 1998, he was named one of
the 100 Global Leaders of Tomorrow by World Economic Forum in
Davos. In 2011, he received the "Distinguished Alumnus Award" from
IIM Ahmedabad. He is the current Chairman of the Confederation of
Indian Industry (CII).
Ms. Apurva Purohit Indepedent Director Ms. Apurva Purohit is an Indian businesswoman with over three
decades of corporate experience. She also serves as an Independent
Director at L&T Technology Services Ltd and Navin Fluorine
International Ltd. She has received numerous business awards and
has been named one of the Most Powerful Women in Business by the
India Today Group and Fortune India on multiple occasions. In 2022,
she received the IIM Bangalore Distinguished Alumni Award.
Mr. Bijou Kurien Independent Mr. Bijou Kurien has over 35 years of experience working with
Director marquee brands in India's FMCG, consumer durables, and retail
industries. He was a founding member of Titan Industries and Reliance
Retail, and he helped lay the groundwork for both companies. He also
serves as an Independent Director on the boards of several publicly
traded and unlisted companies, is Chairman of the Retailers
Association of India (RAI), and is a member of the World Retail
Congress Advisory Board.
Mr. Independent Mr. Chandrasekaran Ramakrishnan has had an exemplary career
Chandrasekaran Director spanning over 34 years in the field of information technology. He
Ramakrishnan serves as an Independent Director on the Board of PNB Housing
Finance Limited, NSEIT Limited and Aujas Networks (subsidiary of
NSEIT). He is also part of the Chairman’s Council, NASSCOM.
Source: Macquarie Research, January 2023

13 January 2023 54
Macquarie Research India IT Services: Mid-caps

Executive leadership: The merged entity has as its CEO and CFO, the CEO and CFO of
Mindtree, while the COO and the Head of Sales are from LTI.

Fig 25 Merged entity has representation from both Mindtree and LTI
Executive Leadership Team

Mr. Debashis Chief Executive Debashis Chatterjee was the CEO&MD of Mindtree Limited. With a track
Chatterjee Officer & record of successfully incubating and growing new businesses, DC led the
Managing company's profitable growth. He has more than 35 years of industry
Director experience in diverse areas.
Mr. Vinit Chief Financial Vinit Teredesai recently appointed as CFO of LTIM and he have worked as
Teredesai Officer the Chief Financial Officer for Mindtree Ltd. Prior to that he served as the
Chief Financial Officer of Birlasoft, KPIT Technologies, and SunGard. Vinit
has worked in finance, accounting, auditing, taxation, fund raising, risk
management, mergers and acquisitions, and corporate restructuring for over
25 years.
Mr. Nachiket Executive Nachiket Deshpande has over 23 years of experience in profit and loss
Deshpande Director & COO management. He was most recently Senior Vice President and Global
Delivery Head for LTI's Banking and Financial Services unit. He spent nearly
two decades with Cognizant Technology Solutions in various executive
management roles.
Mr. Sudhir Executive Sudhir is an expert in digital transformation, strategic sourcing, and building
Chaturvedi Director & smarter organisations. He is the Whole-Time Director & President-Sales at
President, Larsen & Toubro Infotech (LTI) since September 2016 and prior to that he
Markets was the Chief Operating Officer of NIIT Technologies Limited (now Coforge
Ltd).
Source: Macquarie Research, January 2023

13 January 2023 55
Macquarie ESG Assessment

LTIMindtree Quartile Previous

LTIM IN Macquarie ESG Score Q1

Sustainability (Environment & Social) Q1

SOFTWARE & IT SERVICES Governance & Risk Q1 Q1
Ravi Menon Macquarie ESG Research * BM - Below Median
Company Research Homepage

What's New & Interesting

LTIMindtree has set a goal to be carbon neutral and achieve water neutrality by 2030 (for its India operations) and is increasing the mix of renewable energy it uses. LTIM
has also targeted to achieve 30% increase in diversity by 2030. The company has stared providing an annual update on progress towards these goals with FY2022 seeing
32.5% share of renewable energy in overall energy usage and 83.5% reduction in travel emissions (partly aided by higher work-from-home and due to Covid restrictions).

Key ESG Issues

3 key ESG issues to consider * Supporting Information from Macquarie ESG Model

The company started providing a quantitative assessment of its CDP score: B

E scope-1, scope-2 and scope-3 emissions - the only firm in its size to
provide such data. It has published its first integrated annual report
in FY2022 (LTI).

The company has 30% of women in its workforce, but has only a FY22 Annual Report, page 12

S single woman on its board. It can also do more to disclose local

hiring across different geographies it operates in.

3. Leadership and Governance - IP protection and competitive The company has formulated a Whistle Blower Policy and has established a Vigil

G behaviour is good. Mechanism for Directors and employees to report concerns about unethical
behavior, actual or suspected fraud and any wrong-doing or unethical or improper
practice.

* Key issues are sourced from the full ESG model, including 10+ pages on Environmental/Social issues and 120+ questions on CG/Risk.
Contact your MQ sales rep to see the full model.

ESG Opportunity
What is the greatest opportunity for the company? And what moves is it making to capitalize on that opportunity

Improving gender diversity on the board is what we see as the biggest opportunity for the company.

Looking Ahead
Current Qualitative comments
1. Degree to which ESG risks are factored into financial forecasts, where the risks ESG risks are adequately captured in financial forecasts
could have a clearly defined impact on P&L of BS within 3 years.
(1-10; with 1 = not at all; 10 = completely)
8

2. Degree to which ESG risks are factored into stock valuation (DCF or multiple), ESG risks are adequately captured in the valuation
where the impact is difficult to quantify and/or hits outside the forecast period.
(1-10; with 1 = not at all; 10 = completely)
8

3. Two years from now we expect the company's ESG profile to: We expect ESG disclosure to continue to improve
(1-10; with 1 = Get Much Worse; 5 = Stay the Same; 10 = Improve Dramatically) 8

Please refer to next page for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures
Macquarie ESG Assessment

LTIMindtree

Score Card Summary *

Sector # of
Score Average Notes Sample KPI *
Environmental Footprint of Hardware
7.8 5.8 22 Total energy consumed
Infrastructure

Environment Score (33%) 7.8 5.8 22

Total amount of monetary losses as a result of legal proceedings

Data Privacy & Freedom of Expression 7.3 8.0 10
associated with user privacy

Data Security 7.2 9.1 7 Number of data breaches

Recruiting & Managing a Global, Diverse &

5.2 5.5 17 Percentage of female representation for management
Skilled Workforce

Social & Human Capital (33%) 6.6 7.5 34

Intellectual Property Protection & Total amount of monetary losses as a result of legal proceedings
10.0 10.0 2
Competitive Behavior associated with anticompetitive behavior regulations

Leadership & Governance (33%) 10.0 10.0 2

Environment and Sustainability (E&S) 8.1 7.8 58

Asia
Score Average Sample Negatives & Positives *

Board Structure (15%) 7.9 6.8

Shareholding (15%) 7.9 7.7

Corp Gov (58%)

History (11%) 9.5 8.1

Capital Management (9%) 6.6 7.0

Remuneration (4%) 6.7 7.0

Access (4%) 8.3 6.9

Account & Audit (18%) 8.2 7.9

Risk (42%)

Earnings Quality (15%) 7.3 6.2

True B/S Strength (7%) 8.4 6.5

Visibility (2%) 8.9 7.1

Macquarie Governance & Risk (G) 8.0 7.2

Sector
Score Average

Macquarie ESG Score ^ 8.0 7.8

^Note: Macquarie ESG Score = 60% E&S + 40% G

* This is a summary. For our full ESG model, please contact your Macquarie sales representative.

Important Notice
This document is an ESG tearsheet on the subject company taken out of a published report. For important disclosures and disclaimers regarding this document, please refer to the disclosures and disclaimers in the published report.
Important disclosures and disclaimers regarding Macquarie research that may be relevant to the subject company can also be reviewed at: www.macquarie.com/research/disclosures.
Macquarie Research India IT Services: Mid-caps
Macquarie Quant Alpha Model Views
The quant model currently holds a marginally positive view on LTIMindtree. Attractive
Displays where the
The strongest style exposure is Profitability, indicating this stock is efficiently
company’s ranked based on
converting investments to earnings; proxied by ratios like ROE or ROA. The

Fundamentals
the fundamental consensus
weakest style exposure is Price Momentum, indicating this stock has had
Price Target and
weak medium to long term returns which often persist into the future.
Macquarie’s Quantitative
271/932 Alpha model.
Two rankings: Local market
Global rank in (India) and Global sector
Software & Services (Software & Services)
% of BUY recommendations 43% (13/30) Quant
Local market rank Global sector rank
Number of Price Target downgrades 1
Number of Price Target upgrades 3

Macquarie Alpha Model ranking Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score For the comparable firms this chart shows the key underlying styles and their
(higher is better). contribution to the current overall Alpha score.

HCL Tech 2.4 HCL Tech

Infosys 1.7 Infosys

Persistent Systems 0.6 Persistent Systems

Tech Mahindra 0.3 Tech Mahindra

LTIMindtree 0.2 LTIMindtree

Wipro -0.1 Wipro

One97 Comm -2.1 One97 Comm

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%
Valuations Growth Profitability Earnings Price Quality
Momentum Momentum

Macquarie Earnings Sentiment Indicator Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions Breakdown of 1 year total return (local currency) into returns from dividends, changes
signal that favours analysts who have more timely and higher conviction in forward earnings estimates and the resulting change in earnings multiple.
revisions. Current score shown below.

HCL Tech
HCL Tech 0.8
Infosys
Infosys 0.1
Persistent Systems
Persistent Systems 0.9
Tech Mahindra
Tech Mahindra -0.1

LTIMindtree 0.8
LTIMindtree

Wipro -0.5 Wipro

One97 Comm 0.2 One97 Comm

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -70% -50% -30% -10% 10% 30% 50% 70%
Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

What drove this Company in the last 5 years How it looks on the Alpha model
Which factor score has had the greatest correlation with the company’s A more granular view of the underlying style scores that drive the alpha (higher is
returns over the last 5 years. better) and the percentile rank relative to the sector and market.
⇐ Negatives Positives ⇒
Normalized Percentile relative Percentile relative
Asset Growth 32% Score to sector(/932) to market(/736)

PE Growth FY1 29%

Alpha Model Score 0.24
Valuation -0.19
FCF Yield FY0 29% Growth -0.07
Profit Margin Last Actual… 29% Profitability 0.67
Earnings Momentum 0.16
EPS Growth FY1 -31% Price Momentum -0.37
DPS Growth FY1 -34% Quality 0.12
Capital & Funding -0.11
BPS Growth FY1 -38%
Liquidity -0.38
Sales Growth FY1 -41% Risk -0.19
Technicals & Trading -0.67
-60% -40% -20% 0% 20% 40% 60%
0 50 100 0 50 100
0 0 1 1

Source (all charts): FactSet, Thomson Reuters, and Macquarie Quant. For more details on the Macquarie Alpha model or for more customised analysis and
screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

13 January 2023 58
Macquarie Research India IT Services: Mid-caps
LTIMindtree (LTIM IN, Outperform, Target Price: Rs7,540.00)
Quarterly Results 2Q/23A 3Q/23E 4Q/23E 1Q/24E Profit & Loss 2022A 2023E 2024E 2025E

Revenue m 48,367 85,144 86,343 89,559 Revenue m 156,687 265,082 378,115 440,657
Gross Profit m 14,099 25,576 26,027 26,226 Gross Profit m 48,120 78,855 112,893 133,013
Cost of Goods Sold m 34,268 59,568 60,316 63,333 Cost of Goods Sold m 108,567 186,227 265,222 307,645
EBITDA m 9,117 15,614 16,270 16,553 EBITDA m 30,585 49,310 73,021 86,637
Depreciation m 1,308 2,086 2,060 2,158 Depreciation m 3,549 6,519 8,301 9,425
Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0
Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0
EBIT m 7,809 13,528 14,210 14,395 EBIT m 27,036 42,791 64,719 77,212
Net Interest Income m -189 -175 -175 -175 Net Interest Income m -728 -713 -700 -700
Associates m 0 0 0 0 Associates m 0 0 0 0
Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0
Forex Gains / Losses m 411 150 120 100 Forex Gains / Losses m 3,025 1,501 450 450
Other Pre-Tax Income m 982 1,010 1,272 1,026 Other Pre-Tax Income m 1,642 3,885 4,105 5,449
Pre-Tax Profit m 9,013 14,513 15,427 15,346 Pre-Tax Profit m 30,975 47,463 68,574 82,411
Tax Expense m -2,215 -3,567 -3,791 -3,771 Tax Expense m -7,989 -11,739 -16,853 -20,253
Net Profit m 6,798 10,947 11,636 11,575 Net Profit m 22,986 35,724 51,722 62,158
Minority Interests m -5 -5 -5 -5 Minority Interests m -17 -24 -20 -20

Reported Earnings m 6,793 10,942 11,631 11,570 Reported Earnings m 22,969 35,700 51,702 62,138
Adjusted Earnings m 6,793 10,942 11,631 11,570 Adjusted Earnings m 22,969 35,700 51,702 62,138

EPS (rep) 38.70 36.88 39.20 39.00 EPS (rep) 130.82 151.19 174.26 209.44
EPS (adj) 38.70 36.88 39.20 39.00 EPS (adj) 130.82 150.86 174.26 209.44
EPS Growth yoy (adj) % 23.2 5.8 8.1 8.1 EPS Growth (adj) % 18.6 15.3 15.5 20.2
PE (rep) x 33.0 28.6 24.8 20.6
PE (adj) x 33.0 28.6 24.8 20.6

EBITDA Margin % 18.8 18.3 18.8 18.5 Total DPS 25.89 62.21 57.40 67.99
EBIT Margin % 16.1 15.9 16.5 16.1 Total Div Yield % 0.6 1.4 1.3 1.6
Earnings Split % 19.0 30.6 32.6 22.4 Basic Shares Outstanding m 175 296 296 296
Revenue Growth % 28.4 105.8 100.7 98.0 Diluted Shares Outstanding m 176 236 297 297
EBIT Growth % 20.5 82.2 90.9 98.7

Profit and Loss Ratios 2022A 2023E 2024E 2025E Cashflow Analysis 2022A 2023E 2024E 2025E

Revenue Growth % 26.7 69.2 42.6 16.5 EBITDA m 30,585 49,310 73,021 86,637
EBITDA Growth % 12.2 61.2 48.1 18.6 Tax Paid m -7,989 -11,739 -16,853 -20,253
EBIT Growth % 13.0 58.3 51.2 19.3 Chgs in Working Cap m -9,542 -18,204 -10,015 -11,895
Gross Profit Margin % 30.7 29.7 29.9 30.2 Net Interest Paid m -728 -713 -700 -700
EBITDA Margin % 19.5 18.6 19.3 19.7 Other m 4,194 6,099 5,255 6,599
EBIT Margin % 17.3 16.1 17.1 17.5 Operating Cashflow m 16,520 24,752 50,708 60,388
Net Profit Margin % 14.7 13.5 13.7 14.1 Acquisitions m -779 18,561 0 0
Payout Ratio % 19.8 41.2 32.9 32.5 Capex m -8,590 -11,124 -7,151 -7,401
EV/EBITDA x 24.0 25.5 17.2 14.5 Asset Sales m 34 0 0 0
EV/EBIT x 27.2 29.4 19.4 16.3 Other m -259 0 0 0
Investing Cashflow m -9,594 7,437 -7,151 -7,401
Balance Sheet Ratios Dividend (Ordinary) m -8,749 -7,099 -15,973 -19,523
ROE % 28.5 27.1 26.8 26.7 Equity Raised m 0 0 0 0
ROA % 23.3 23.3 24.9 25.8 Debt Movements m 1,572 0 0 0
ROIC % 27.6 35.2 31.6 35.7 Other m -3,281 -700 -700 -700
Net Debt/Equity % 3.8 -12.0 -22.7 -31.8 Financing Cashflow m -10,458 -7,799 -16,673 -20,223
Interest Cover x 37.1 60.0 92.5 110.3
Price/Book x 8.6 7.3 6.1 5.0 Net Chg in Cash/Debt m -3,645 24,390 26,884 32,765
Book Value per Share 503.7 592.7 713.5 857.6
Free Cashflow m 7,930 13,628 43,557 52,987

Balance Sheet 2022A 2023E 2024E 2025E

Cash m 3,949 28,339 55,223 87,988

Receivables m 37,368 76,866 84,946 98,997
Inventories m 0 0 0 0
Investments m 31,366 53,757 53,757 53,757
Fixed Assets m 17,601 22,421 21,271 19,247
Intangibles m 6,900 11,632 11,632 11,632
Other Assets m 27,509 49,695 49,695 49,695
Total Assets m 124,693 242,710 276,525 321,315
Payables m 5,812 15,150 13,216 15,371
Short Term Debt m 519 519 519 519
Long Term Debt m 6,809 6,809 6,809 6,809
Provisions m 4,303 13,173 13,173 13,173
Other Liabilities m 19,047 31,654 31,654 31,654
Total Liabilities m 36,490 67,305 65,371 67,526
Shareholders' Funds m 88,146 175,324 211,053 253,668
Minority Interests m 57 81 101 121
Other m 0 0 0 0
Total S/H Equity m 88,203 175,405 211,154 253,789
Total Liab & S/H Funds m 124,693 242,710 276,525 321,315

All figures in INR unless noted.

Source: Company data, Macquarie Research, January 2023

13 January 2023 59
13 January 2023 India

EQUITIES Coforge (COFORGE IN)

Incremental revenue mostly from non-top-10 Timely acquisitions in Digital paying-off
USD mn
300.0

250.0
Key points
200.0  We expect a sustainable growth trend for the IT solutions and services
150.0 company, Coforge, thanks to its timely investments.
100.0
 It is poised to set credentials and gain scale in its Banking vertical, after
50.0
tapping into the US retail bank sector through its recent acquisition
 Coforge ranks third in our pecking order after Persistent Systems and
-

-50.0
FY18 FY19 FY20 FY21 FY22 LTIMindtree. We initiate at Outperform, and with a TP of Rs6,260.
Top 5 Clients Top 6-10 Non-top-10

Source: Macquarie Research, January 2023

Early mover advantage through organic and inorganic investments
COFORGE IN Outperform Coforge (earlier known as NIIT technologies Ltd.), a mid-cap global IT solutions
Price (at 10:00, 11 Jan 2023 GMT) Rs3,918.60 and services organization, has established its Digital Transformation credentials
Valuation Rs 6,260.00 through a mix of timely inorganic and organic investments over the last seven
- PER years. We believe Coforge’s early entry into digital transformation is paying off
12-month target Rs 6,260.00 now, with credentials and capabilities that extend beyond offering services in low-
Upside/Downside % +59.8 code platforms such as Pega and MuleSoft. – it now includes end-to-end
12-month TSR % +59.8 integration and advisory services for clients. Driven organically and across a
Volatility Index Medium broad set of clients, we see a step up in Coforge’s QoQ incremental revenue
GICS sector Software & Services post-Covid and believe this trend will be sustainable. Further, Coforge’s
Market cap Rsm 239,270 transformation effort is not only limited to its services portfolio (mainly digital
Market cap US$m 2,944 transformation) but also its banking and financial services (BFS) vertical. Its BFS
Free float % 60 vertical has scaled up significantly through its recent acquisition of SLK Global,
30-day avg turnover US$m 12.3 providing Coforge a solid entry into US Retail Banking.
Number shares on issue m 61.06
Coforge scores well in Macquarie’s MOCCA framework
Investment fundamentals
Year end 31 Mar 2022A 2023E 2024E 2025E We use Macquarie’s five-factor framework for mid-cap IT Services, MOCCA,
Revenue bn 64.3 80.3 94.1 111.9 (Mining, Offshore Execution, Client Concentrations, Contribution from top vertical,
EBIT bn 8.9 11.9 14.6 19.0 Average account size – see page 4 of our sector note) to analyse incremental
EBIT growth % 47.3 33.6 23.0 30.5
revenue. Coforge ranks 4 in our MOCCA framework with a healthy contribution
Recurring profit bn 8.6 11.5 14.7 19.2
Reported profit bn 6.6 8.2 10.9 14.4
from Offshore Execution to incremental revenue, good scale up of Accounts
Adjusted profit bn 6.6 8.2 10.9 14.4 beyond top-10 and strong client mining across USD1mn+, USD5mn+ and
EPS rep Rs 108.31 134.40 178.71 235.86 USD10mn+ client tiers. Although its top-10 clients were a drag on the company’s
EPS rep growth % 45.2 24.1 33.0 32.0
growth, we believe this would improve with the introduction of new clients in the
EPS adj Rs 108.16 134.39 178.71 235.86
EPS adj growth % 39.3 24.3 33.0 32.0 top-10 tier or a change in client circumstances (Coforge historically relied on the
PER rep x 36.2 29.2 21.9 16.6 Travel vertical, which was affected by covid). While incremental revenue has
PER adj x 36.2 29.2 21.9 16.6 seen an outsized contribution from its BFS vertical, which is now Coforge’s top
Total DPS Rs 0.00 0.00 0.00 0.00
vertical, we don’t view this negatively or believe the company is too reliant on this
Total div yield % 0.0 0.0 0.0 0.0
ROA % 21.0 22.3 23.9 26.7 vertical. In fact, we believe this indicates how Coforge has scaled up when the
ROE % 25.5 27.4 30.2 32.2 growth from its Travel & Insurance was lacklustre, thanks to Covid.
EV/EBITDA x 21.2 16.4 13.7 10.9
Net debt/equity % -0.7 -15.4 -29.8 -40.9 Coforge ranks third in our pecking order; initiate at Outperform
P/BV x 8.8 7.4 6.0 4.8
Source: FactSet, Macquarie Research, January 2023 Coforge trades higher than 1SD above its 10-yr historical avg PER, but we
(all figures in INR unless noted)
suggest investors to look beyond this reference as fundamentals have changed
significantly within this time frame. This is reflected in its growth acceleration as
well as in the pick-up of its BFS vertical. Our TP of Rs6,260 is derived using 27x
2025 PE multiple, based on 1.5x PEG (assigned in line with its rank within our
Analysts MOCCA framework, see page 3 of our sector note) on FY22-25E USD revenue
Macquarie Capital Securities (India) Pvt. Ltd.
CAGR of 18%. ESG: Although Coforge ranks Q1 in our Asia Macquarie ESG
Ravi Menon +9122 6720 4152
[email protected] score, we see a scope for improvement in its ESG disclosures (see page 15).

13 January 2023 60
Macquarie Research India IT Services: Mid-caps

Inside Coforge: Rebranded and repositioned

Company profile
Timely acquisitions have transformed
• Coforge, earlier called NIIT Technologies Ltd, started as a subsidiary of the IT
Coforge 62
training firm NIIT Ltd and was spun off into a separate firm in 2004. The
MOCCA framework: Risk of vertical founders of NIIT sold their 30.5% stake in NIIT Technologies to Barings
concentration 65 Private Equity Asia (BPEA) in 2019. In 2020, NIIT Technologies was
rebranded as Coforge. Coforge operates across 21 countries with delivery
Valuation, recommendation, and risks 71
centres across 9 countries.
Appendices 73
Macquarie ESG Assessment 74 Fig 1 Coforge has seen a step-up in incremental revenue in FY22, which is
sustainable in our view

USD mn
350
300
250
200
150
100
50
0
-50
FY18 FY19 FY20 FY21 FY22

Incremental Organic Revenue YoY Incremental revenue YoY from acquisitions

Source: Company, Macquarie Research, January 2023

Fig 2 COFORGE IN rel BSE Sensex performance, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie
coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2023

(all figures in INR unless noted)

13 January 2023 61
Macquarie Research India IT Services: Mid-caps

Timely acquisitions have transformed Coforge

Acquiring Incessant and Whishworks added Pega and Mulesoft capability

Coforge added Pega and Mulesoft capabilities before these became table-stakes
• Strategy of inorganic acquisitions to establish credentials early in specific niches

• Coforge has complemented its acquisitions with organic investments in adjoining capabilities to
derive the most synergy out of its inorganic acquisitions

 E.g., by scaling up Appian practice after acquiring Pega capability

 E.g., by scaling Salesforce practice after acquiring Mulesoft capability

Coforge has moved Coforge had a track record in Airlines and Insurance but lacked a tip-of-the-spear offering to
early in the Digital differentiate itself and get large new accounts. We think the acquisition of Incessant in 2015 helped
space with a mix of Coforge set credentials fairly early in Digital Transformation as a Pega specialist. Coforge has,
inorganic and organic since the acquisition of Incessant, invested in adjacencies such as Appian (the leader in low-code
investments development and business process automation) and broadened its service portfolio with a mix of
further inorganic (Whishworks for Mulesoft capabilities) and organic investments (with a Salesforce
practice as an adjacency to what was acquired from Whishworks).
Coforge’s Digital
We see only ServiceNow as a relatively small practice for Coforge in the business process
credentials seem to
management/ low-code/ no-code development space that is a key component of Digital
have only ServiceNow
Transformation
as a white space
Coforge’s early entry into Digital Transformation seems to be paying off now with credentials and
Sustained organic
capabilities that extend beyond the low-code platforms of Pega and Appian and include integration
incremental revenue
and advisory services. Post-Covid, this has translated into improved incremental revenue addition
QoQ in constant
(see chart below).
currency terms post-
Covid suggests
Coforge’s early Fig 3 Incremental revenue in constant currency shows consistently higher additions post-
investments in Digital Covid
are paying off now
USD mn
20.0

15.0

10.0

5.0

-5.0

-10.0

-15.0
4QFY21
2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

Source: Company, Macquarie Research, January 2023

When we consider the incremental revenue QoQ in nominal USD terms (see figure-4), the
incremental revenue seems to be dropping off, but that is mostly due to cross-currency as is clear
from fig-3.

It can also be seen from fig-4 that the absolute impact of the acquisitions has been not very
substantial and the improvement in incremental revenue addition post-Covid can only be explained
by an improved pipeline and win-rate. While the improved pipeline should be partly due to an
improved demand environment, we attribute the improved win-rate to synergy from past
acquisitions.

13 January 2023 62
Macquarie Research India IT Services: Mid-caps

Fig 4 Although there has been minimal inorganic contribution in revenue terms the
synergy has been significant in our view

USD mn
30
25
20
15
10
5
0
-5
-10
-15
-20

4QFY21
1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Incremental revenue QoQ - Organic Acquisitions Impact

Source: Company, Macquarie Research, January 2023

We think Coforge has taken the same approach of how it has transformed its service portfolio and
is applying that to its industry verticals now. We see its recent acquisition of SLK Global providing
a solid entry into US Retail Banking with an anchor customer such as the Fifth Third Bank.

We expect to see the improved pipeline and win rates in the Banking vertical for Coforge helping it
improve incremental revenue addition and sustain growth rates even as the revenue base keeps
growing. To some extent, this is already visible in much improved contribution of the Banking
vertical to incremental revenue QoQ beyond the impact of the SLK Global acquisition over
1QFY22 and 2QFY22.

Fig 5 Inorganic addition in Banking in 1QFY22 and 2QFY22 seems to be followed with
organic incremental revenue in Banking making this a new growth vector for Coforge

USD mn
30
25
20
15
10
5
0
-5
-10
-15
-20
1QFY19

4QFY20
1QFY18

2QFY18

3QFY18

4QFY18

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

Banking and Financial Services Insurance Transport Others

Source: Company, Macquarie Research, January 2023

Coforge also has a broader footprint geographically compared to many peers who are US-centric.
Even with the cross-currency headwinds over 2QFY23, EMEA has still been a substantial
contributor to incremental revenue QoQ (in nominal USD terms).

13 January 2023 63
Macquarie Research India IT Services: Mid-caps

Fig 6 EMEA has been a contributor to incremental revenue for most periods for Coforge

USD mn
30
25
20
15
10
5
0
-5
-10
-15
-20

3QFY21
1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Americas EMEA ROW

Source: Company, Macquarie Research, January 2023

Coforge has been adding revenue across a broad set of clients with a good part of its incremental
revenue coming from a client base beyond its top-10 clients. The top-5 and top-10 clients are also
positive contributors across most periods suggesting that these accounts are still growing and
there are no client-specific issues within the top-10.

The high contribution of non-top-10 clients in 1QFY22 and 2QFY22 are driven by the inorganic
contribution from SLK Global, but we see that the non-top-10 contribution was healthy even prior to
that as well as after that. So, it is not just the impact of acquisitions that is driving revenue beyond
the top-10 clients.

This broad base for revenue addition suggests that Coforge has a compelling value proposition
that is driving deal wins across a broad set of clients and we find further confirmation of this in our
detailed analysis using our MOCCA framework (see next section).

Fig 7 Broad contribution across client tiers to incremental revenue QoQ

USD mn
30
25
20
15
10
5
0
-5
-10
-15
-20
2QFY19

3QFY21
1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

Top 5 Clients Top 6-10 Non-top-10

Source: Company, Macquarie Research, January 2023

13 January 2023 64
Macquarie Research India IT Services: Mid-caps

MOCCA framework: Risk of vertical concentration

Broadening vertical base; improving client mining; low top-10 client reliance

Incremental revenue sustainable per our analysis

Coforge scores well in our MOCCA framework, (Macquarie’s 5-factor framework for mid-cap IT
Services firms with the factors listed below) indicating, sustainable factors are driving its
incremental revenue addition and a long growth runway is possible. The only risk is along the lines
of vertical concentration, but we do not see this as a significant risk.

• Below is a summary of Coforge’s rating in Macquarie’s MOCCA framework that we use to

analyse the company’s incremental revenue. Note that the ranks are not meant to be taken
purely as an indicator of superior/ inferior execution vs peers, but is only meant to indicate
whether the key drivers of incremental revenue are sustainable and which ones need a closer
look

Fig 8 Despite BFSI driving a large part of its incremental revenue, we like Coforge for its strong client mining

Mining
Contribution Contribution Avg account
Ranking by USD1mn+ USD5mn+ USD10mn+ Offshore
from top-10 by Top size (growth Overall Rank
parameter client tier client tier client tier proportion
clients vertical ex-top-10)
additions additions additions
LTI 6 8 7 2 4 5 7 7
Mindtree 9 7 4 4 8 4 3 7
LTI + Mindtree 5 4 6 3 7 1 4 2
Mphasis 10 9 9 9 9 7 9 10
Coforge 4 1 1 7 5 8 6 4
Persistent 1 3 8 6 2 2 1 1
LTTS 1 5 4 8 1 3 8 2
Birlasoft 8 2 3 1 10 9 2 5
Mastek 3 NA NA 10 6 6 10 9
Zensar 6 5 2 5 3 10 4 5
Source: Macquarie Research, January 2023

 Mining: Coforge has been moving clients up the revenue tiers and punches above its
weight in client additions to all three tiers we consider: USD1mn+, USD5mn+ and
USD10mn+.

 Offshore Execution: Coforge has strong offshore capability and appears to be providing
solutions with end-to-end responsibility for execution, as evidenced by a good share (from
49% to 79%) of incremental revenue coming from offshore over the last 5 years.

 Client Concentration: Even though Coforge generates a large portion of its incremental
revenue from clients other than its top ten, we do not see much revenue growth from these
clients. Coforge had reduced its client concentration, reducing risk, but its top-10 clients
have been a drag on growth, which is both an opportunity (for faster growth once the client-
specific drags are removed) and a risk (of possible volatility in revenue if any of the top-10
decline sharply).

 Contribution from top vertical: Coforge's top vertical is clearly driving a larger share of
incremental revenue, which is consistent with the company's strategy. However, the risk
has increased as a result of this concentration.

 Average Account Size: Coforge is scaling up accounts outside its top-10 clients, but the
average account size outside the top-10 has not been as impressive (using USD1mn+
client count as the denominator). This indicates that accounts are having lower revenue
growth compared to the top ten.

Mega Deals and acquisitions: Coforge had acquired SLK in April 2021, which was their most
recent Mega Deal. This acquisition contributed significantly to the revenue in Q2FY22, and we can
also notice that there was some impact from the Whishworks acquisition on the revenue in
2QFY20. Furthermore, during the past five years, acquisitions have contributed around 10% to the
total incremental revenue.
13 January 2023 65
Macquarie Research India IT Services: Mid-caps

Mining:
Coforge has been adding USD1mn+ accounts at a rate better than its size would need suggesting
a good ability to penetrate new accounts and mine these accounts to over USD1mn.

We can see the acceleration in the client count in the USD1mn+ tier after relatively stagnating over
FY19-FY20 (FY20-FY21 can be understandable given pressure from Covid-related downturn).
This breakout in performance over 2QFY21-2QFY22 and from 2QFY22-2QFY23 is consistent with
the change in Coforge’s strategy that emphasizes on larger deals.

Fig 9 Good scale-up in USD1mn+ client count Fig 10 USD5mn+ tier has also seen recent rapid scale-up

USD 1mn+ USD 5mn+

clients clients
160 50
45
140
40
120
35
100 30
80 25
20
60
15
40
10
20 5
- -
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
4QFY21

3QFY22
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21

1QFY22
2QFY22

4QFY22
1QFY23

Source: Company, Macquarie Research, January 2023 Source: Company, Macquarie Research, January 2023

Lending support to its strong additions in the USD1mn+ client tier, we see Coforge has consistently
punched above its weight in adding clients to the USD5mn+ client tier as well

Coforge has also done well in client additions to the USD10mn+ client tier as well. Overall, we
think this indicates that Coforge has a strong capability to mine client accounts.

Client Mining is one of the most critical parameters for sustainable growth and indicates a broad
set of service capabilities and sophisticated account management as well as good client
satisfaction (as growing client accounts would not be possible otherwise).

Fig 11 USD10mn+ additions very strong for Coforge Fig 12 Non-top-10 clients driving good growth

USD 10mn+ USD mn QoQ

clients 30
20
25
18
20
16
15
14 10
12 5
10 0
8 -5
-10
6
-15
4
-20
2
2QFY20
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20

3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23

-
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23

Top 5 Clients Top 6-10 Non-top-10

Source: Company, Macquarie Research, January 2023 Source: Company, Macquarie Research, January 2023

13 January 2023 66
Macquarie Research India IT Services: Mid-caps

Offshore Execution:
Offshore incremental revenue proportion has increased, and we see a sustainable level at ~60%
(barring the last 12 months which had a higher proportion of revenue offshore due to the SLK
Global integration) and note this is higher than Coforge’s current offshore revenue proportion of
~50% (as of 2QFY23 for IT Services excluding the offshore-centric BPO revenue from SLK
Global).

Fig 13 Offshore mix has improved significantly^ Fig 14 Offshore headcount has doubled

USD mn QoQ
20.0 14,000 60.0%
15.0 12,000 50.0%
10.0 10,000
40.0%
5.0 8,000
30.0%
- 6,000
-5.0 20.0%
4,000
-10.0 2,000 10.0%
-15.0 - 0.0%

1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
-20.0
1QFY20
2QFY20
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19

3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23

Headcount offshore - IT Services

Onsite Offshore
Offshore revenue proportion-RHS

Source: Macquarie Research, January 2023 Source: Company, Macquarie Research, January 2023

^Note: Incremental revenue excluding BPO

Given incremental revenue share higher than the current offshore revenue proportion, we see
scope for improvement in the offshore revenue proportion and think that this would be a structural
shift in the firm's delivery model and be an important and sustainable long term margin
improvement lever medium-term.

Client concentration:
Coforge scores in the middle across most periods we consider except the last 12 months indicating
that the revenue addition is not relying overly on top-10 clients.

Coforge has been getting around 29-35% of its incremental revenue across most periods from its
top-10 clients except the last 12 months when it is higher at 53%.

With the revival in growth within the top-10 over the last 12 months, we think that the portfolio drag
is over and think that new accounts have entered the top-10. We expect these accounts can
eventually keep falling further down the tiers as new accounts come up and displace them. We do
note that this revival in top-10 could be due to the SLK Global acquisition, and we therefore draw
on the improvement in average account size beyond the top-10 clients to support this conclusion
(see fig-18).

A longer-term analysis of incremental revenue addition by client tier indicates that it is the top-6-10
clients that has been the drag but is now starting to turn around when we look at incremental
revenue YoY in Q2 of every fiscal over the last 6 years.

Revenue addition has been broad-based across geographies as well and this is not usual among
the IT Services midcaps which are usually US-centric (with the exception of Mastek which has
been UK and Europe centric). Coforge has a geographic mix closer to the large caps and EMEA
has been a good contributor to incremental revenue.

13 January 2023 67
Macquarie Research India IT Services: Mid-caps

Fig 15 Non-top-10 the main driver, top-5 returns to growth Fig 16 Broad-based geographic additions as well

USD mn YoY USD mn YoY

16.0 16.0
14.0 14.0
12.0 12.0

10.0 10.0
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
-
- -2.0
-2.0 -4.0
-4.0 -6.0
2QFY18 2QFY19 2QFY20 2QFY21 2QFY22 2QFY23 2QFY18 2QFY19 2QFY20 2QFY21 2QFY22 2QFY23

Top 5 Clients Top 6-10 Non-top-10 Americas EMEA ROW

Source: Company, Macquarie Research, January 2023 Source: Company, Macquarie Research, January 2023

Vertical concentration:
Coforge has been relying more on its major vertical BFSI for driving incremental revenue than
most of its peers. Coforge classifies BFS and Insurance separately, but we regard this as a single
vertical for comparison across peers.

BFS has been driving Coforge’s growth contributing 60-66% of its incremental revenue steadily
over the last 5 years and this indicates that BFS has not suddenly gained prominence due to the
SLK acquisition but indicates a strategic shift in Coforge’s portfolio.

Coforge’s high reliance on its top vertical (BFS) would have been worrying if it had not been for this
being a relatively rapid scale up of a formerly smaller vertical.

For Coforge, BFS is a focus vertical that has grown much faster than the company overall and has
emerged as the top vertical as recently as 3QFY22 (when it displaced Insurance that accounted for
27.8% of revenue in 3QFY22 vs 28.4% by BFS).

Fig 17 Not a BFSI alone play as seen by 2QFY23 revenue Fig 18 FY22 had a large inorganic contribution in BFS

USD mn YoY
USD mn
90.0 300.0
250.0
80.0
200.0
70.0
150.0
60.0 100.0
50.0 50.0
-
40.0
-50.0
30.0
-100.0
20.0 FY18 FY19 FY20 FY21 FY22

10.0 Banking and Financial Services Insurance Transport Others

-
Banking and Insurance Transport Others
Financial Services

Source: Company, Macquarie Research, January 2023 Source: Company, Macquarie Research, January 2023

13 January 2023 68
Macquarie Research India IT Services: Mid-caps

The chart below shows how the revenue scale-up has been across verticals for Coforge with the
acceleration in the last 24 months being visible in only one vertical i.e., Banking and Financial
Services.

BFS-focused SLK Global was integrated fully in 2QFY22 and the YoY incremental revenue in
2QFY23 in BFS is entirely organic and shows Coforge has successfully improved its pipeline and
winrate in BFS following the acquisition.

Fig 19 Except for SLK integration in 1HFY22, broad-based addition across verticals

USD mn QoQ
30
25
20
15
10
5
0
-5
-10
-15
-20

2QFY21
1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Banking and Financial Services Insurance Transport Others

Source: Company, Macquarie Research, January 2023

While the low ranking (8 out of 10) indicates a high contribution of incremental revenue from its top
vertical (BFSI) and the recent growth performance is driven primarily by BFS, we do not see this as
a significant cause for concern. We see US midsize banks as an attractive growth market which is
scaling up IT investments and is under-indexed to offshore-centric IT Services.

So we are not concerned by the high risk indicated by the relatively high share of incremental
revenue from BFSI for Coforge as this is a deliberate portfolio shift driven through the SLK Global
acquisition.

Average Account Size:

Coforge has seen an 18% improvement in average account size outside the top-10 clients over the
last 5 years.

For Coforge, we think that the middle of the pack ranking for improvement in the average account
size beyond the top-10 accounts reflects how its growth has been driven mostly by the BFS
vertical and we would consider this worrying if it were not for the top-of-the-pack ranking for client
mining in the USD5mn+ and USD10mn+ revenue tiers.

Mega Deals:
Coforge had acquired SLK Global in April 2021 by buying a controlling interest of 60%. Coforge
gained an anchor customer in BFS through this acquisition as Fifth Third Bank had a minority
equity stake in SLK Global. As part of the acquisition terms, Fifth Third Bank has committed a base
volume to SLK Global over the next 5 years from the date of acquisition. In addition, Coforge will
acquire an additional 20% equity stake in SLK Global from Fifth Third Bank in April 2023

13 January 2023 69
Macquarie Research India IT Services: Mid-caps

Fig 20 Coforge has seen organic incremental revenue improve significantly over FY22
even as the SLK Global acquisition has been the largest M&A deal in its history

USD mn
350
300
250
200
150
100
50
0
-50
FY18 FY19 FY20 FY21 FY22

Incremental Organic Revenue YoY Incremental revenue YoY from acquisitions

Source: Company, Macquarie Research, January 2023

Acquisitions have been a significant part of Coforge’s strategy, and the deals have all been
structured with a majority stake purchased initially followed by exercising options over time to
acquire the remaining stake – thus motivating the sellers to maximise the value of the business
beyond the initial sale and acting as a good retention bonus for the management (usually the
founders of such firms).

Fig 21 Coforge has created a good M&A template for gradually absorbing acquisitions and
retaining the sellers’ interest in running the business successfully for a few more years

100%
10%
90% 20% 19%
80% 20%
13%
70% 23%
60% 19% 13%
50%
40%
30% 55% 58% 60%
51%
20%
10%
0%
Incessant Ruletek WHISHWORKS SLK Global
FY16 FY17 FY18 FY19 FY20 FY21 FY22

Source: Company, Macquarie Research, January 2023

13 January 2023 70
Macquarie Research India IT Services: Mid-caps

Valuation, recommendation, and risks

Although Coforge is Valuation and Recommendation:
trading at 1 std
We think that Coforge would continue to add incremental revenue higher than the organic addition
deviation above its 10-
of USD156mn in FY22. We believe the resurgence in travel drove some of the revenue addition
year average PER, we
but that may not be sustainable. However, we are optimistic about Coforge’s broadening vertical
believe its positioning
exposure with BFS now almost a third of its business from just 17% in 2QFY20 (pre-pandemic).
has changed a lot in the
Additionally, we see its client mining track record and its low reliance on its top-10 clients as a
last 10 years, and this is
good predictor of its long-term sustainable growth.
reflected in its growth
as well as a scale-up of
its BFSI vertical. So, we Fig 22 Coforge is trading higher than 1std deviation above its 10-year average
do not think that
historical trading 1-year fwd PE
multiples should be a 45.0
good reference 40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0

Source: Bloomberg, Macquarie Research, January 2023

Fig 23 Relatively low risk per Macquarie’s MOCCA framework factoring in revenue growth, margin expansion with scale
benefits
MOCCA framework FY22-25E USD FY22-25E EBIT
FY24 RoE (%) FY24 PE (x) FY25 PE (x)
overall rank revenue CAGR (%) CAGR (%)

Coforge 4 30.2 18% 29% 22.3 16.9

Source: Macquarie Research, January 2023

Despite trading higher than 1SD above its 10-year historical average, we think growth
diversification in all its verticals and broad-based growth across clients, offer Coforge sufficient
revenue visibility till 2025. We assign a 27x PE multiple to 2025E EPS to derive our target price.
Our target multiple is based on 1.5x PEG that we assign Coforge in line with our MOCCA
framework (see page 3 of our sector note for details) considering FY22-25E USD revenue CAGR
of 18% and organic growth rate of 19% over FY23-25E. We initiate with an Outperform rating and
TP of INR6,260 on 27x FY25 PE. Note we use 2025 EPS as we believe current prices already
factor in 2024 growth expectations.

We believe there is an overhang on the stock as the company has filed for an ADR, and its current
majority shareholder, Barings Private Equity Asia (BPEA) Ltd plans to reduce its holding through
the ADR. In our view, this overhang suppresses current multiples, and we factor a rerating into our
target price. Coforge is our third preference after Persistent Systems (PSYS IN, CMP Rs4,080,
Outperform, TP Rs8,330) and LTIMindtree (LTIM IN, CMP Rs4,318, Outperform, TP Rs7,540)
among India IT Services midcaps.

13 January 2023 71
Macquarie Research India IT Services: Mid-caps

Fig 24 Initiate with Outperform and TP of Rs6,260 on 27x FY25 PE

INR

Current price^ 3,919

1-year fwd EPS 152
1-year fwd PE (x) 25.8
Target EPS period Apr-2024 to Mar-2025
Target EPS 232
Target PE multiple (x) 27
Target price 6,260
Next 1-year dividends 45
Total shareholder return (%) 60%
Source: Macquarie Research, As of 10th January 2023

Risks: 1) Coforge has ~36% revenue contribution from its top-10 clients and 23% from its top-5
clients as of 2QFY23. While this client concentration is lower than many of its peers, there is still
client concentration risk, and any key client loss is a risk to our estimates.

2) Since Coforge has a large revenue contribution from EMEA i.e. ~39% as of 2QFY23, the
appreciation of the INR vs GBP and EUR is a risk that is higher for Coforge than most of its peers.
3) Coforge has filed for an ADR, and we expect Barings Private Equity to reduce their stake
through the ADR issue. This could be a potential overhang on the stock and continue to suppress
the stock’s valuation.

Our USD revenue Macquarie vs Visible Alpha

estimates are 8% ahead Our revenue estimates for Coforge are higher than VA consensus for FY23-25E by 5%/8%/14% on
of consensus for FY24 USD revenue.
and 14% ahead for FY25

Fig 25 Our estimates are higher than the consensus

Macquarie Visible Alpha Macquarie vs VA

YE Mar, in Mn FY23E FY24E FY25E FY23E FY24E FY25E FY23E FY24E FY25E
Revenue in USD 1,010 1,183 1,419 964 1,096 1,248 5% 8% 14%
Incremental revenue
143 173 236 98 131 152
(USD mn)
Revenue 80,253 94,055 111,932 79,492 90,325 102,877 1% 4% 9%
% change 25% 17% 19% 24% 14% 14%
Operating Income 11,862 14,588 19,041 11,536 12,989 14,886 3% 12% 28%
% margin 15% 16% 17% 15% 14% 14%
Net income 8,621 10,902 14,388 8,040 9,423 11,011 7% 16% 31%
% margin 11% 12% 13% 10% 10% 11%
EPS-Diluted 132.6 175.7 231.9 130.5 152.4 177.5 2% 15% 31%
Source: Visible Alpha, Macquarie Research, January 2023

13 January 2023 72
Macquarie Research India IT Services: Mid-caps

Appendices
Fig 26 Coforge has an independent director as Chairman, but has only 3 of its 7 board members as independent directors
Board of Directors

Mr. Basab Pradhan Non-Executive - Mr. Basab Pradhan's career has spanned IT Services, Technology, and Consumer Marketing. In India,
Independent Director-he began his career in consumer marketing with Hindustan Unilever. Following that, he spent the majority
Chairperson of his career at Infosys Ltd., where he was Head of Global Sales & Marketing for the final five years of his
tenure. From 2002 to 2005, he reorganised and led the company's sales and go-to-market transformation
while maintaining industry-leading growth and margins. Penguin Random House published his book on
the Indian IT Services industry in 2012.
Mr. Hari Gopalakrishnan Non-Executive - Non Mr. Gopalakrishnan is a Managing Director in the Mumbai office of Baring Private Equity Asia ("BPEA"),
Independent Director where he invests in the technology and healthcare sectors. Mr. Gopalakrishnan joined BPEA in 2007 and
is a founder of the BPEA India business. Mr. Gopalakrishnan previously worked in the private equity
practise at New Vernon, an India-focused multi-strategy investment management firm. He was previously
employed by PricewaterhouseCoopers India.
Mr. Kenneth Tuck Kuen Non-Executive - Non Mr. Cheong is a Managing Director and member of the Investment Committee at BPEA. He joined BPEA
Cheong Independent Director in 1998 and worked on the firm's investments in China, Korea, the United States, and India. Previously
worked as a Manager for BZW Asia for three years, where he was involved in corporate finance and
M&A in the region, as well as for DBS Bank for three years, where he was involved in credit, marketing,
and loan syndications.
Mr. Patrick John Cordes Non-Executive - Non Mr. Cordes is BPEA's Managing Director and Chief Financial Officer. He joined BPEA in 2006 and is in
Independent Director charge of the finance, tax, portfolio monitoring, legal, compliance, IT, and office operations functions, as
well as the human capital function. Prior to joining BPEA, he worked at Deloitte in New York and Hong
Kong, where he served a diverse client base that included private equity firms, Japanese trading
companies, global financial institutions, and non-financial US registrants based in Asia.
Ms. Mary Beth Boucher Independent Director Beth is an internationally Certified Board Director, Global CIO and Transformation Officer Partner in
Fortium Partners. She has more than 25 years of experience leading strategic initiatives such as Global
M&A, Cybersecurity, ITO/BPO transformation, Process Automation to solve the information technology
challenges of complex global enterprises. Beth is a member of the World Affairs Forum, NY Society for
Information Management, Evanta NYC leadership Council.
Mr. Ashwani Kumar Puri Non-Executive - He has extensive experience in investment/acquisition advisory services, valuations and decision
Independent Directoranalysis, business and financial restructuring, dispute analysis, and forensics as a Financial Management
veteran. He has served on the Banking Division/Ministry of Finance, Ministry of Corporate Affairs, INSOL
International, and PWC's Global Advisory Leadership Team's various committees. He serves as a Non-
Executive Director and Chairman of the Audit Committee at Aditya Birla Finance Limited.
Mr. Kirti Ram Hariharan Non-Executive - Non Mr. Hariharan is the General Counsel of BPEA and responsible for all legal matters associated with
Independent Director company. Prior to joining BPEA, Mr. Hariharan was at leading law firm Paul, Hastings, Janofsky and
Walker, worked with Och-Ziff Capital Management at their Hong Kong and Bangalore offices and was a
Partner of Amarchand&Mangaldas& Suresh A. Shroff & Co., India’s leading law firm.
Source: Macquarie Research, January 2023

Fig 27 Senior management team who is ex-Genpact

Management

Mr. Sudhir Singh Chief Executive Officer Sudhir joined forces at Coforge in May 2017. He has over 24 years of industry experience and
& Managing Director worked with Unilever (Hindustan Lever), Infosys, and Genpact. He started his career with Unilever in
1995, where he received the prestigious Hindustan Lever Chairman's Award during his six-year
tenure in Sales and Brand Management. Following that, he worked for Infosys in various capacities
for nearly a decade. prior to joining the company, he was the Chief Operating Officer of Genpact's
Capital Markets and IT Services business.
Mr. Ajay Kalra Chief Financial Officer Ajay has over 20 years of finance and accounting experience. He began his career as an FP&A
manager at Xerox in 1995, then moved to Genpact in 1999, where he held various positions including
senior vice president and global controller. Ajay Kalra received his ACA from The Institute of
Chartered Accountants of India and his B.Com (H) from Delhi University.
Source: Macquarie Research, January 2023

13 January 2023 73
Macquarie ESG Assessment

COFORGE Quartile Previous

COFORGE IN Macquarie ESG Score Q1
Sustainability (Environment & Social) Q2
SOFTWARE & IT SERVICES Governance & Risk Q1 Q1
Ravi Menon Macquarie ESG Research * BM - Below Median
Company Research Homepage

What's New & Interesting

Coforge has engaged third parties to help get a solar-based energy connection of 4 MW to power campus facilities, which should help improve the company's
energy rating. Coforge planted 36 different varieties of flowering plants over the entire Greater Noida campus and created a flower valley on premises.

Key ESG Issues

3 key ESG issues to consider * Supporting Information from Macquarie ESG Model

Can increase use of renewable power in its Noida campus and To improve its energy consumption pattern, Coforge has migrated from LPG
provide details of this to improve its rating. Can also accelerate its (liquid petroleum gas) connection to PNG (piped natural gas) connection, helping
E carbon neutral commitment to an earlier date than the current it to save 10-15 % on its energy consumption requirement. In addition, the
2050 target. company is certified with ISO 14001 & ISO 45001 standards and is engaged in
several initiatives towards reduction of unnecessary usage or wastage of plastic,
paper, energy and water.

We believe Coforge could improve the diversity on its board as it The company reported 28.71% female-employee strength among total
currently has only one woman board member (which is statutorily permanent employees in FY22.
S required in India). The company could also start providing more
details of the nationalities of its workforce in quantitative terms
to provide details on diversity.

No governance issues, but the firm is PE owned and some No supporting material, but this is based on investor feedback.
investors have complained that they have been misled regarding
G potential share sales (Barings PE sold after reportedly telling
investors that they will not sell any more shares).

* Key issues are sourced from the full ESG model, including 10+ pages on Environmental/Social issues and 120+ questions on CG/Risk.
Contact your MQ sales rep to see the full model.

ESG Opportunity
What is the greatest opportunity for the company? And what moves is it making to capitalize on that opportunity

Coforge does not disclose much and does not have a separate ESG report. With a new investor relations team with separate responsibilities for M&A and Investor
Relations, we expect improved disclosures.

Looking Ahead
Current Qualitative comments
1. Degree to which ESG risks are factored into financial forecasts, where the We see no significant risks. Coforge has a long history of
risks could have a clearly defined impact on P&L of BS within 3 years. operations and has not had any major lawsuits regarding
(1-10; with 1 = not at all; 10 = completely)
5 discrimination or other such issues.

2. Degree to which ESG risks are factored into stock valuation (DCF or multiple), We see no ESG risks for Coforge and hence have not factored in
where the impact is difficult to quantify and/or hits outside the forecast period. any into our estimates.
(1-10; with 1 = not at all; 10 = completely)
5

3. Two years from now we expect the company's ESG profile to: Currently there are limited disclosures and we expect this to
(1-10; with 1 = Get Much Worse; 5 = Stay the Same; 10 = Improve Dramatically) change with engagement with the new investor relations team
9
which includes an executive who was earlier with TechMahindra.

Please refer to next page for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures
Macquarie ESG Assessment

COFORGE

Score Card Summary *

Sector # of
Score Average Notes Sample KPI *
Environmental Footprint of Hardware
2.4 2.4 17 Total energy consumed
Infrastructure

Environment Score (33%) 2.4 2.4 17

Total amount of monetary losses as a result of legal proceedings

Data Privacy & Freedom of Expression 8.0 8.0 9
associated with user privacy

Data Security 8.0 8.0 6 Number of data breaches

Recruiting & Managing a Global, Diverse

7.4 7.4 7 Percentage of female representation for management
& Skilled Workforce

Social & Human Capital (33%) 7.8 7.8 22

Intellectual Property Protection & Total amount of monetary losses as a result of legal proceedings
10.0 10.0 1
Competitive Behavior associated with anticompetitive behavior regulations

Leadership & Governance (33%) 10.0 10.0 1

Environment and Sustainability (E&S) 6.7 6.7 40

Asia
Score Average Sample Negatives & Positives *

Board Structure (15%) 7.5 7.0 Chairman on Board Committees

Shareholding (15%) 8.0 8.2 High liklihood of selldown of old shares

Corp Gov (58%)

History (11%) 10.0 8.1 Directors and/or senior management from MNC background

Capital Management (9%) 7.3 6.8 Company does not have clear target ROE or ROA

Remuneration (4%) 7.8 7.2 Directors compensation grwoth lower than NP grwoth past 3 years

Access (4%) 8.3 7.0 Analyst access up to CEO

Account & Audit (18%) 8.4 8.2 Cash income tax paid >110% of reported tax (avg past 3 years)
Risk (42%)

Earnings Quality (15%) 7.7 6.3 Recurring revenues >50% of total

True B/S Strength (7%) 6.8 6.2 Analyst views significant assets on balance sheet that are overvalued

Visibility (2%) 10.0 7.8 4 or more customers channel checked in last 6 months

Macquarie Governance & Risk (G) 8.1 7.3

Sector
Score Average

Macquarie ESG Score ^ 7.3 7.3

^Note: Macquarie ESG Score = 60% E&S + 40% G

* This is a summary. For our full ESG model, please contact your Macquarie sales representative.

Important Notice
This document is an ESG tearsheet on the subject company taken out of a published report. For important disclosures and disclaimers regarding this document, please refer to the disclosures and disclaimers in the published
report. Important disclosures and disclaimers regarding Macquarie research that may be relevant to the subject company can also be reviewed at: www.macquarie.com/research/disclosures.
Macquarie Research India IT Services: Mid-caps
Macquarie Quant Alpha Model Views
The quant model currently holds a marginally positive view on Coforge. The Attractive
Displays where the
strongest style exposure is Profitability, indicating this stock is efficiently
company’s ranked based on
converting investments to earnings; proxied by ratios like ROE or ROA. The

Fundamentals
the fundamental consensus
weakest style exposure is Quality, indicating this stock is likely to have a
Price Target and
weaker and less stable underlying earnings stream.
Macquarie’s Quantitative
263/933 Alpha model.
Two rankings: Local market
Global rank in (India) and Global sector
Software & Services (Software & Services)
% of BUY recommendations 67% (14/21) Quant
Local market rank Global sector rank
Number of Price Target downgrades 1
Number of Price Target upgrades 1

Macquarie Alpha Model ranking Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score For the comparable firms this chart shows the key underlying styles and their
(higher is better). contribution to the current overall Alpha score.

Mindtree 0.8 Mindtree

Persistent Systems 0.7 Persistent Systems

Coforge 0.3 Coforge

Larsen & Toubro Infotech 0.2 Larsen & Toubro Infotech

Birlasoft -0.3 Birlasoft

Mastek -0.4 Mastek

One97 Comm -2.4 One97 Comm

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%
Valuations Growth Profitability Earnings Price Quality
Momentum Momentum

Macquarie Earnings Sentiment Indicator Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions Breakdown of 1 year total return (local currency) into returns from dividends, changes
signal that favours analysts who have more timely and higher conviction in forward earnings estimates and the resulting change in earnings multiple.
revisions. Current score shown below.

Mindtree
Mindtree 0.8
Persistent Systems
Persistent Systems 0.7
Coforge
Coforge 0.4
Larsen & Toubro Infotech
Larsen & Toubro Infotech 0.3

Birlasoft -0.6
Birlasoft

Mastek -0.9 Mastek

One97 Comm 0.7 One97 Comm

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -70% -50% -30% -10% 10% 30% 50% 70%
Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

What drove this Company in the last 5 years How it looks on the Alpha model
Which factor score has had the greatest correlation with the company’s A more granular view of the underlying style scores that drive the alpha (higher is
returns over the last 5 years. better) and the percentile rank relative to the sector and market.
⇐ Negatives Positives ⇒
Normalized Percentile relative Percentile relative
Number of Shares Increase… 29% Score to sector(/933) to market(/731)

Price to Cash NTM 28%

Alpha Model Score 0.25
Valuation -0.01
Price to Book FY0 27% Growth 0.01
Price to Sales FY0 26% Profitability 0.43
Earnings Momentum 0.22
Dividend Cover -21% Price Momentum 0.04
Sales Growth FY1 -21% Quality -0.01
Capital & Funding -0.36
ROIC FY1 -22%
Liquidity -1.32
Return on Equity FY1 -22% Risk -0.53
Technicals & Trading -0.40
-30% -20% -10% 0% 10% 20% 30%
0 50 100 0 50 100
0 0 1 1

Source (all charts): FactSet, Thomson Reuters, and Macquarie Quant. For more details on the Macquarie Alpha model or for more customised analysis and
screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

13 January 2023 76
Macquarie Research India IT Services: Mid-caps
Coforge (COFORGE IN, Outperform, Target Price: Rs6,260.00)
Quarterly Results 2Q/23A 3Q/23E 4Q/23E 1Q/24E Profit & Loss 2022A 2023E 2024E 2025E

Revenue m 19,594 20,825 21,539 22,144 Revenue m 64,320 80,253 94,055 111,932
Gross Profit m 6,278 6,704 7,044 6,980 Gross Profit m 20,584 25,581 30,140 36,273
Cost of Goods Sold m 13,316 14,122 14,495 15,164 Cost of Goods Sold m 43,736 54,672 63,915 75,659
EBITDA m 3,444 3,771 4,082 3,768 EBITDA m 11,154 14,215 17,091 21,530
Depreciation m 614 566 543 670 Depreciation m 2,272 2,353 2,503 2,490
Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0
Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0
EBIT m 2,830 3,205 3,539 3,098 EBIT m 8,882 11,862 14,588 19,041
Net Interest Income m 0 0 0 0 Net Interest Income m 0 0 0 0
Associates m 0 0 0 0 Associates m 0 0 0 0
Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0
Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0
Other Pre-Tax Income m -150 -67 -67 29 Other Pre-Tax Income m -266 -359 114 201
Pre-Tax Profit m 2,680 3,138 3,473 3,127 Pre-Tax Profit m 8,616 11,503 14,703 19,242
Tax Expense m -474 -728 -806 -725 Tax Expense m -1,468 -2,501 -3,411 -4,464
Net Profit m 2,206 2,410 2,667 2,401 Net Profit m 7,148 9,002 11,292 14,778
Minority Interests m -195 -195 -195 -98 Minority Interests m -530 -807 -390 -390

Reported Earnings m 2,011 2,215 2,472 2,304 Reported Earnings m 6,618 8,195 10,902 14,388
Adjusted Earnings m 2,011 2,215 2,472 2,304 Adjusted Earnings m 6,618 8,195 10,902 14,388

EPS (rep) 32.97 36.31 40.53 37.77 EPS (rep) 108.31 134.40 178.71 235.86
EPS (adj) 32.97 36.31 40.53 37.77 EPS (adj) 108.16 134.39 178.71 235.86
EPS Growth yoy (adj) % 36.1 21.8 20.2 53.7 EPS Growth (adj) % 39.3 24.3 33.0 32.0
PE (rep) x 36.2 29.2 21.9 16.6
PE (adj) x 36.2 29.2 21.9 16.6

EBITDA Margin % 17.6 18.1 19.0 17.0 Total DPS 0.00 0.00 0.00 0.00
EBIT Margin % 14.4 15.4 16.4 14.0 Total Div Yield % 0.0 0.0 0.0 0.0
Earnings Split % 24.5 27.0 30.2 21.1 Basic Shares Outstanding m 62 61 61 61
Revenue Growth % 24.9 25.6 23.6 21.0 Diluted Shares Outstanding m 61 61 61 61
EBIT Growth % 32.3 30.6 30.7 35.4

Profit and Loss Ratios 2022A 2023E 2024E 2025E Cashflow Analysis 2022A 2023E 2024E 2025E

Revenue Growth % 37.9 24.8 17.2 19.0 EBITDA m 11,154 14,215 17,091 21,530
EBITDA Growth % 41.8 27.4 20.2 26.0 Tax Paid m -1,468 -2,501 -3,411 -4,464
EBIT Growth % 47.3 33.6 23.0 30.5 Chgs in Working Cap m 1,433 2,177 1,882 2,756
Gross Profit Margin % 32.0 31.9 32.0 32.4 Net Interest Paid m 0 0 0 0
EBITDA Margin % 17.3 17.7 18.2 19.2 Other m -3,462 -4,287 -3,650 -5,310
EBIT Margin % 13.8 14.8 15.5 17.0 Operating Cashflow m 7,657 9,604 11,912 14,512
Net Profit Margin % 10.3 10.2 11.6 12.9 Acquisitions m 0 0 0 0
Payout Ratio % 0.0 0.0 0.0 0.0 Capex m -1,475 -1,000 -1,100 -1,200
EV/EBITDA x 21.2 16.4 13.7 10.9 Asset Sales m 0 0 0 0
EV/EBIT x 26.6 19.7 16.0 12.3 Other m -8,089 0 0 0
Investing Cashflow m -9,564 -1,000 -1,100 -1,200
Balance Sheet Ratios Dividend (Ordinary) m 0 0 0 0
ROE % 25.5 27.4 30.2 32.2 Equity Raised m -3,697 1 0 0
ROA % 21.0 22.3 23.9 26.7 Debt Movements m 2,139 0 0 0
ROIC % 42.9 33.0 38.7 49.7 Other m 0 -3,538 -3,599 -4,392
Net Debt/Equity % -0.7 -15.4 -29.8 -40.9 Financing Cashflow m -1,558 -3,537 -3,599 -4,392
Interest Cover x nmf nmf nmf nmf
Price/Book x 8.8 7.4 6.0 4.8 Net Chg in Cash/Debt m -3,465 5,067 7,213 8,920
Book Value per Share 443.7 531.4 651.1 815.0
Free Cashflow m 6,182 8,604 10,812 13,312

Balance Sheet 2022A 2023E 2024E 2025E

Cash m 4,468 9,535 16,748 25,668

Receivables m 13,894 17,336 20,317 24,179
Inventories m 0 0 0 0
Investments m 0 0 0 0
Fixed Assets m 8,651 7,298 5,896 4,606
Intangibles m 10,708 10,708 10,708 10,708
Other Assets m 11,823 11,823 11,823 11,823
Total Assets m 49,544 56,700 65,492 76,984
Payables m 0 0 0 0
Short Term Debt m 0 0 0 0
Long Term Debt m 3,365 3,365 3,365 3,365
Provisions m 6,926 8,191 9,290 10,396
Other Liabilities m 10,939 10,939 10,939 10,939
Total Liabilities m 21,230 22,495 23,594 24,700
Shareholders' Funds m 27,331 32,415 39,718 49,713
Minority Interests m 983 1,790 2,180 2,570
Other m 0 0 0 0
Total S/H Equity m 28,314 34,205 41,898 52,283
Total Liab & S/H Funds m 49,544 56,700 65,492 76,984

All figures in INR unless noted.

Source: Company data, Macquarie Research, January 2023

13 January 2023 77
13 January 2023 India

EQUITIES Birlasoft (BSOFT IN)

Scoring well in client mining across tiers Good strategy, poor timing; a pivot likely now
Client count
30

25 Key points
20
 Has pursued large deals with Russell 2000 firms as a “blue ocean” strategy.
 Top 10 clients have driven much of the incremental revenue. Under new
15

10

5 CEO Angan Guha, we think a strategic pivot is likely.

-
2QFY20 2QFY21 2QFY22 2QFY23  Initiate at Outperform with a Rs500 target price.
Clients >USD5mn Clients >USD10mn

Source: Macquarie Research, January 2023

Has demonstrated its ability to execute large deals

BSOFT IN Outperform
Birlasoft was created in its current form in January 2019 by the merger of KPIT’s
Price (at 11:17, 11 Jan 2023 GMT) Rs305.95
IT Services business (KPIT IN, Not Rated) with the erstwhile privately-held
Valuation Rs 500.00 Birlasoft. The new scale of operations helped Birlasoft obtain access to larger
- PER
deals. In October 2019, Birlasoft won a multi-year US$240mn deal with Invacare,
12-month target Rs 500.00 a Russell 2000 healthcare firm. In our view, this mega-deal not only showed
Upside/Downside % +63.4 Birlasoft’s ability to act as a total outsourcing partner – rare and possibly unique
12-month TSR % +65.1 among its peers – but also suggests the firm can pursue large deals quickly.
GICS sector Software & Services
Market cap Rsm 83,616 New CEO Angan Guha has, during his time at Wipro, managed verticals
Market cap US$m 964 including financial services, manufacturing, hi-tech, and energy & utilities. With
Free float % 58 Birlasoft’s historical strength in Manufacturing and SAP implementation, we think
30-day avg turnover US$m 7.8 the upgrade cycle for SAP HANA is a good market opportunity that should
Number shares on issue m 273.3 present a new addition to the pipeline. We think adding sales capability should be
relatively easier than building credentials and see a reasonable possibility for a
Investment fundamentals
quick turnaround in growth under Mr. Guha, with BFSI a possible focus vertical
Year end 31 Mar 2022A 2023E 2024E 2025E
given his experience as well as that of Chief Business Officer, Roop Singh
Revenue m 41,303 48,464 55,395 63,368
EBIT m 5,653 6,693 7,875 8,906
(formerly SVP and Global Head of Securities & Capital Markets at Wipro).
EBIT growth % 25.9 18.4 17.7 13.1
Recurring profit m 6,185 7,072 8,499 9,564 Middle of the pack rating in MOCCA framework shows some risks
Reported profit m 4,656 5,320 6,332 7,125
Adjusted profit m 4,656 5,320 6,332 7,125
Birlasoft scores well in client mining and poorly in relatively high reliance on top
EPS rep Rs 16.46 18.73 22.21 24.92 10 clients, but that is an outcome of a large deal focused strategy. The Russell
EPS rep growth % 44.5 13.8 18.6 12.2 2000 is undoubtedly a better hunting ground than the Fortune 500 for smaller IT
EPS adj Rs 16.46 18.73 22.21 24.92
services firms that have a good outsourcing value proposition. This is a segment
EPS adj growth % 44.6 13.8 18.6 12.2
PER rep x 18.6 16.3 13.8 12.3
of the market that we believe is under-indexed to offshore IT Services. Corporate
PER adj x 18.6 16.3 13.8 12.3 mortality (due to M&A) in this segment is likely to be higher than in the Fortune
Total DPS Rs 4.50 4.50 5.50 6.00 1000 and with weaker balance sheets vs the larger firms the correlation with
Total div yield % 1.5 1.5 1.8 2.0
macro could be stronger. We see this as a temporary flanking strategy to build
ROA % 17.7 18.7 19.6 19.4
ROE % 19.5 19.3 20.3 20.0 credibility and scale before moving slowly up to the Fortune 1000 and possibly
EV/EBITDA x 11.5 9.9 8.6 7.7 even the Fortune 500 over time. Having set credentials with total outsourcing
Net debt/equity % -40.5 -42.0 -46.1 -50.7 deals, we think client concentration risks will get lowered with new deal wins.
P/BV x 3.3 3.0 2.6 2.3
Source: FactSet, Macquarie Research, January 2023 Quality compounder at inexpensive valuation; initiate at Outperform
(all figures in INR unless noted)

Part of the well-respected CK Birla group that owns Orient Cement, Orient
Electric, and other firms in a range of industries in India, Birlasoft has
demonstrated effective capital allocation by returning excess cash to
shareholders through a recent buyback and a series of dividends since it became
a listed entity. We see Birlasoft as a firm with an ability to scale up given its
strong outsourcing value proposition and delivery credentials with a large deal.
Analysts Initiate with Outperform rating and a TP of Rs500 on 20x FY2025 PE. Birlasoft is
Macquarie Capital Securities (India) Pvt. Ltd. our #4 pick after PSYS, LTIM, and Coforge.
Ravi Menon +9122 6720 4152
[email protected] ESG: Scores in the first quartile in our MGRS framework. Has one of the most
diverse boards with three of six directors being women. See page 16.
13 January 2023 78
Macquarie Research India IT Services: Mid-caps

Inside Birlasoft: Underappreciated capabilities

Company profile
Good strategy, poor timing; a pivot likely now 80
• Birlasoft was established in 1990 as a privately held company by the CK Birla
MOCCA framework indicates some risks 85
group. As can be expected for IT services firms established by conglomerates,
Valuation, recommendation, risks 90 Birlasoft has domain expertise in manufacturing and skills in ERP that stem
Appendices 92 back to its founding. With the merger of KPIT’s IT Services business with itself
in January 2019, Birlasoft gained scale and the value unlocking has worked
Macquarie ESG Assessment 93
well for both parties with KPIT choosing to focus exclusively on engineering
services while Birlasoft gained from KPIT’s complimentary skills and
credentials in SAP and Oracle.

Fig 1 Scale up across verticals since merger with KPIT’s IT Services

USD mn
80
70
70
59
60
50 49
50
40 33
28 28 29
30 25
22 22 20 20 21
17 19
20
10
-
BFSI E&U Life sciences Manufacturing
2QFY20 2QFY21 2QFY22 2QFY23

Source: Company, Macquarie Research, January 2023

Fig 2 BSOFT IN rel BSE Sensex performance, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie
coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2023

(all figures in INR unless noted)

13 January 2023 79
Macquarie Research India IT Services: Mid-caps

Good strategy, poor timing; a pivot likely now

Blue ocean strategy targeting Russell 2000 tough in the current macro
Russell 2000 focus We think that Birlasoft chose wisely to try to win a total outsourcing deal with a Russell 2000 firm
might have hurt as a way to differentiate vs peers and grow in a relatively uncontested market segment (at least by
Birlasoft in the current India IT Services peers). However, given the uncertain macro environment and the possibility of a
macro environment. recession, we think further traction has been difficult to achieve. In a recession, we think that one
should factor more corporate mortality within the Russell 2000 than in the Fortune 500 and with
smaller balance sheets, the Russell 2000 clients may see more volatility in their IT budgets.
However, valuable We have seen the impact of its largest customer’s troubles on Birlasoft’s revenue with the
credentials have been Healthcare vertical’s revenue and margins coming under pressure, and this is the risk that this
established and we strategy carries while the portfolio of such large contracts is still small. We note margins in the
think going upmarket is Healthcare vertical have rebounded even as revenue has not entirely recovered, and we can
now possible for attribute this to a shift offshore that has been revenue-dilutive, but margin-accretive.
Birlasoft.
Birlasoft has scored the highest among peers in driving a large proportion of incremental revenue
offshore and this validates its offshore delivery capability – an essential ingredient in securing large
outsourcing deal wins.

We expect that the large deal credential set should help create a pipeline of more such deals for
Birlasoft and positions it well to win deals with a total contract value (TCV) of at least US$100
million. We see this as difficult to model into estimates as the timing of such deal awards is difficult
to predict, but see this as providing upside to our estimates.

While Healthcare has had challenges, it has also grown in the past three years and the largest
vertical for Birlasoft, Manufacturing, has grown consistently. Even smaller verticals such as
Banking, Financial Services & Insurance (BFSI) and Energy & Utilities have seen additions, even if
these have not been consistent every quarter.

• While incremental revenue post-Covid has struggled to cross high watermark of 4QFY20, we
must remember that 3QFY20 and 4QFY20 saw the contribution of the Invacare mega-deal in
the Healthcare vertical.

 Healthcare has since been a drag for many quarters even beyond the Covid-affected
quarters of 1QFY21 and 2QFY21.

 However, incremental revenue from other verticals has been less volatile.

 Incremental revenue by client tier also shows broad-based contribution in most quarters.

 Client mining shows additions across client tiers indicating broad-based growth.

Overall, we see incremental revenue as largely sustainable except for the mega-deal and think
Birlasoft can be a reliable compounder, despite its recent growth challenges due to the headwinds
in its Healthcare vertical.

Fig 3 Incremental revenue QoQ has struggled to get back to 4QFY20 levels post-Covid…

USD mn
10.0
8.0
6.0
4.0
2.0
-
-2.0
-4.0
-6.0
-8.0
1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

Source: Company data, Macquarie Research, January 2023

13 January 2023 80
Macquarie Research India IT Services: Mid-caps

The incremental pre-Covid revenue had a one-off contribution from the Invacare (IVC US, Not
Rated) mega-deal signed in October 2019 (see link). This becomes clear when we look at the
incremental revenue QoQ from the Healthcare vertical (Fig 4).

Fig 4 …as the Invacare mega-deal signed in October 2019 helped boost incremental
revenue, but the boost has faded

USD mn
12.0
9.0
6.0
3.0
0.0
-3.0
-6.0
-9.0
1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Lifesciences incremental revenue QoQ

Source: Company data, Macquarie Research, January 2023

Revenue and margin by vertical are available for Birlasoft only from 4QFY21 and show that the
margins for Healthcare were reduced in the first three quarters of FY22, but have since recovered.
We think the worst does seem to be over for Birlasoft’s Healthcare vertical.

Fig 5 The revenue woes in Healthcare have been visible in margins too

USD mn % margin
34 18%
17%
32
16%

30 15%
14%
28 13%
12%
26
11%
24 10%
4QFY21 1QFY22 2QFY22 3QFY22 4QFY22 1QFY23 2QFY23

Lifesciences revenue Lifesciences segmental margin Overall EBIT margin

Source: Company data, Macquarie Research, January 2023

While Healthcare has had its share of woes, Manufacturing, which is Birlasoft’s largest vertical, has
been a more reliable contributor to incremental revenue, and even BFSI has seen traction in recent
quarters. With Angan Guha joining Birlasoft as CEO, we think that BFSI traction can gain
additional traction.

13 January 2023 81
Macquarie Research India IT Services: Mid-caps

Fig 6 While Healthcare has faded, Manufacturing has been a steadier contributor

USD mn
12.0
9.0
6.0
3.0
0.0
-3.0
-6.0
-9.0
-12.0
1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
BFSI E&U Life sciences Manufacturing

Source: Company data, Macquarie Research, January 2023. Note: E&U is Energy & Utilities

All verticals have grown if we consider the past three years (as 1QFY20 was the first full quarter of
operations after the merger with KPIT, we consider only the past three years to be a relevant time
period).

Fig 7 Manufacturing has seen the strongest revenue addition among verticals in absolute
terms

USD mn
80
70
70
59
60
50 49
50
40 33
28 28 29
30 25
22 22 20 20 21
17 19
20
10
-
BFSI E&U Life sciences Manufacturing
2QFY20 2QFY21 2QFY22 2QFY23

Source: Company data, Macquarie Research, January 2023

Note: E&U is Energy & Utilities

Even through 2HFY20, which was influenced by the mega-deal quarters of 3QFY20 and 4QFY20,
a broad set of clients drove incremental revenue. If we look at incremental revenue contribution
across client tiers, there seems to be broad-based participation in most quarters. We think this
suggests that Birlasoft is mining client accounts and not just relying on large deals alone as an
engine for growth.

13 January 2023 82
Macquarie Research India IT Services: Mid-caps

Fig 8 Clients across all tiers have contributed to incremental revenue in most quarters

USD mn
10.0
8.0
6.0
4.0
2.0
-
-2.0
-4.0
-6.0
-8.0
1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Top 5 Top 6-10 Top 11-20 Non-top-20

Source: Company data, Macquarie Research, January 2023

We find further support to the thesis that there is broader client mining when we look at additions to
the US$5mn+ and US$10mn+ client tiers. From just five clients above US$10mn+ in revenue
following integration with KPIT in 4QFY19, Birlasoft increased this to 14 clients as of 2QFY23.
Similarly, the US$5mn+ client tier expanded from 16 clients to 27.

Fig 9 Which finds validation in client mining demonstrated by additions across client tiers

30

25

20

15

10

-
Q1FY21

Q4FY22
Q4FY19

Q1FY20

Q2FY20

Q3FY20

Q4FY20

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q1FY23

Q2FY23
USD 5mn+ clients USD 10mn+ clients

Source: Company data, Macquarie Research, January 2023

Tail accounts have been rationalised and the US$1mn+ client tier declined slightly from 84 to 76
over this period, but we do not see that as particularly worrying given our view that client mining in
the higher tiers demonstrates Birlasoft’s capabilities. Another factor that provides comfort is that
the US$1mn+ client tier has fluctuated up as well as down, indicating new clients are coming in
even as some others are being let go of as part of the tail account rationalisation.

13 January 2023 83
Macquarie Research India IT Services: Mid-caps

Fig 10 US$1mn+ tier shows fluctuations due to tail account rationalisation offsetting adds

88
86
84
82
80
78
76
74
72
70

3QFY20

4QFY22
4QFY19

1QFY20

2QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

1QFY23

2QFY23
Source: Company data, Macquarie Research, January 2023

Birlasoft has been able to scale up average client accounts beyond the top-10 accounts with
average annual revenue run-rate for non-top-10 client accounts up 22% from 4QFY19 to 2QFY23
even as top-10 client run-rate was up 72%.

Fig 11 Annual run-rate across both top-10 clients and non-top-10 has been trending up

USD mn
30.0

25.0

20.0

15.0

10.0

5.0

0.0
2QFY21
4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Average Account Size USD Mn Avg top-10 client revenue (USD mn)
Average Account Size USD Mn excl. top-10 clients
Source: Company data, Macquarie Research, January 2023

In the next section, we use Macquarie’s 5-factor MOCCA framework to analyse the incremental
revenue added by Birlasoft and compare that against peers, as well as analyse how sustainable
the company’s growth is relative to peers.

13 January 2023 84
Macquarie Research India IT Services: Mid-caps

MOCCA framework indicates some risks

Excellent offshore capabilities, reliant on top-10 clients, but mining beyond that

MOCCA framework indicates sustainable incremental revenue addition except mega deal
Our MOCCA framework (Macquarie’s five-factor framework for mid-cap IT services firms with the
factors listed below) indicates that Birlasoft’s incremental revenue addition has some risks, but we
still judge it to be largely sustainable except for the mega-deal contribution as offshore execution
capability and evidence of client mining beyond top-10 clients assuages our concerns.

• Below is a summary of Birlasoft’s rating in Macquarie’s OCCAMM framework to analyse

incremental revenue. Note that the ranks are not meant to be taken purely as an indicator of
superior/ inferior execution vs peers, but are meant only to indicate whether the key drivers of
incremental revenue are sustainable and which ones need a closer look.

Fig 12 Birlasoft scores surprisingly well in offshore contribution and client mining in higher tiers

Mining
Contribution Contribution Avg account
Ranking by USD1mn+ USD5mn+ USD10mn+ Offshore
from top-10 by Top size (growth Overall Rank
parameter client tier client tier client tier proportion
clients vertical ex-top-10)
additions additions additions
Persistent 1 3 8 6 2 2 1 1
LTI + Mindtree 5 4 6 3 7 1 4 2
LTTS 1 5 4 8 1 3 8 2
Coforge 4 1 1 7 5 8 6 4
Birlasoft 8 2 3 1 10 9 2 5
Zensar 6 5 2 5 3 10 4 5
LTI 6 8 7 2 4 5 7 7
Mindtree 9 7 4 4 8 4 3 7
Mastek 3 NA NA 10 6 6 10 9
Mphasis 10 9 9 9 9 7 9 10
Source: Macquarie Research, January 2023

 Mining: Birlasoft has been moving clients up the revenue tiers and is outperforming peers in
Birlasoft scores high in client additions to the US$5mn+ and US$10mn+ client tiers. This supports the finding from
Client mining and the Average Account Size factor, which indicates that the high ranking reflects a broad
Offshore Execution – client base, and it is not skewed due to just a few client accounts beyond the top 10.
two crucial ingredients  Offshore Execution: Birlasoft has strong offshore capability and seems to be doing value-
that demonstrate a added full-fledged solutions, as demonstrated by a fairly steady 71-85% of its incremental
capability to scale up as revenue over most periods we consider coming from offshore.
an India IT Services firm.
 Client Concentration: Birlasoft has been relying the most in the peer group on its top 10
clients for incremental revenue. While this is a risk, we see evidence of broader client
The key risk shown by mining beyond the top 10, and since the firm has had a limited operating history after the
MOCCA framework is the merger with KPIT, we think this is excusable as management attention would be directed at
top 10 client the top accounts, at least initially.
contribution, which  Contribution from top vertical: Birlasoft also relies more heavily on its top vertical than
would have been almost all its peers in driving incremental revenue. This would have been concerning for us
concerning for us if it if it were not for the margin expansion demonstrated in its Healthcare vertical that suggests
were not for client a shift offshore. All verticals also have shown growth in the past three years, indicating that
mining that extends deal wins and client mining is broad-based beyond the top vertical.
deep beyond top-10
indicated by the increase  Average Account Size: Birlasoft ranks highly in scaling accounts outside the top 10 clients,
in Average Account Size and this is showing up in an increase of the average account size outside the top 10 (using
excluding top-10 clients. US$1mn+ client count as the denominator). This indicates success in growing accounts
beyond the top 10, and is consistent with a broad set of capabilities and sophisticated
account management practices. This also assuages our concerns around client
concentration and suggests that Birlasoft has capability to scale up a broad range of client
accounts over time.

13 January 2023 85
Macquarie Research India IT Services: Mid-caps

o While Birlasoft lags in adding accounts to the US$1mn+ client tier, this is in line with the
firm’s strategy to rationalize tail accounts. We think this is understandable given the
transformational merger with KPIT’s IT Services business could have given some
legacy accounts that needed to be gradually removed.

Mega-deals: The only mega-deal Birlasoft has completed was signed in October 2019, and the
mega-deal boosted incremental revenue over 3QFY20 and 4QFY20. This is why, unlike most
peers, Birlasoft has not seen a post-Covid surge in its incremental revenue past pre-Covid levels.

Mining:
Birlasoft has done well in additions to the US$5mn+ client tier and is outperforming relative to
peers its size. We think this supports the improvement driven in the average account size beyond
the top 10 clients and indicates good client mining ability.

Birlasoft also is outperforming relative to peers its size in additions to the US$10mn+ client tier as
well. While the last 12-month performance is less impressive than longer-term performance, we
think the 280bps shift offshore in the past 12 months could also be affecting this metric slightly.

In the US$1mn+ client tier, the performance seems slightly below what one would expect, but the
firm has had a strategy of rationalizing tail accounts to improve the efficiency of its sales efforts.
This is entirely to be expected following the transformational merger with KPIT’s IT Services
business in January 2019.
We can see that Birlasoft has reduced the number of US$1mn+ clients. However, for a firm with
proven ability to scale accounts broadly, as evidenced by the company’s additions to the US$5mn+
and US$10mn+ client tiers, this is surprising to us, and we can only explain this as a deliberate
strategic choice.

Fig 13 US$10mn+ clients have nearly tripled in past three Fig 14 Tail account rationalization visible in US$1mn+ tier
years

Client count USD 1mn+

30 clients
88

25 86
84
20 82
80
15
78
10 76
74
5
72

- 70
4QFY19

3QFY21

3QFY22
1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

4QFY21

1QFY22

2QFY22

4QFY22

1QFY23

2QFY23

2QFY20 2QFY21 2QFY22 2QFY23

Clients >USD5mn Clients >USD10mn

Source: Company data, Macquarie Research, January 2023 Source: Company data, Macquarie Research, January 2023

Offshore Execution:
Birlasoft scores well in shifting offshore and this is in line with its positioning as a total outsourcing
partner for Russell 2000 firms. Birlasoft scores the best among peers in the past two years, and
this validates its strategic positioning as a full-fledged outsourcing provider with excellent offshore
delivery capability. We think this strength in offshore delivery is also why it has been unique among
peers in signing a mega-deal for total IT outsourcing with a client.

In revenue mix terms, this is an onsite revenue proportion of 48% as of 2QFY23 – an improvement
of nearly 900bp from the 56.9% as of 4QFY19 (the quarter when Birlasoft became a listed entity
with the merger of KPIT’s IT Services business). We expect offshore revenue proportion can
increase further, although gradually, and see this as a possible margin lever.

13 January 2023 86
Macquarie Research India IT Services: Mid-caps

Fig 15 Post-Covid incremental revenue largely offshore Fig 16 Scaling up revenue across client tiers

USD mn
100% 60.0
80%
60% 50.0
40%
20% 40.0
0%
-20% 30.0

-40%
20.0
-60%
-80%
10.0
-100%

-
2QFY20 2QFY21 2QFY22 2QFY23
Onsite Ofshore Top 5 Top 6-10 Top 11-20 Non-top-20

Source: Company data, Macquarie Research, January 2023 Source: Company data, Macquarie Research, January 2023

Client concentration:
The weakest score for Birlasoft in our OCCAMM framework comes from its high top-10 client
contribution to incremental revenue.

While Birlasoft scores the worst among peers in how much it relies on its top 10 clients for
incremental revenue, when we look at the constituents of incremental revenue across top 5, top 6-
10, and top 11-20 client cohorts, it seems to be scaling up across all these tiers. While non-top-20
is relatively stagnant, that could be due to the tail account rationalization strategy, and this thesis
finds support in client mining in the US$5mn+ and US$10mn+ tiers, while U$D1mn+ client
accounts have stagnated.

With 58-76% of incremental revenue coming from top 10 clients, Birlasoft does seem far more
reliant on the top 10 clients for growth vs peers (except Mphasis) in the past two years.

In absolute terms, Birlasoft has seen incremental revenue improvement for its top 10 clients in the
past three years (no data is available prior to that as the merger with KPIT happened only in
January 2019). This suggests that the top 10 clients overall are not a drag on growth and could
even be expected to continue to grow. We would have been more concerned about the heavy
reliance on top 10 clients for growth if the rest of the portfolio was stagnant or declining. However,
Birlasoft has shown that it is mining clients beyond the top 10, as well with compelling additions to
the US$5mn+ and US$10mn+ client tiers.

Incremental revenue QoQ has been broad-based, and apart from the recent drag from non-top-20
clients over 1HFY23 and slowing contribution within the top 5 and top-6-10 in 2QFY23, the
contributions have been broad-based across top 5, top-6-10, top 11-20, and non-top-20 client
cohorts.

13 January 2023 87
Macquarie Research India IT Services: Mid-caps

Fig 17 Incremental revenue QoQ more broad-based than the poor ranking would suggest

USD mn
10.0
8.0
6.0
4.0
2.0
-
-2.0
-4.0
-6.0
-8.0
1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Top 5 Top 6-10 Top 11-20 Non-top-20

Source: Company data, Macquarie Research, January 2023

Vertical concentration:
Birlasoft has relied on the Manufacturing vertical to drive most incremental revenue, but this seems
exaggerated due to a decline in the Healthcare vertical (at least in part owing to the offshore shift
in its large Healthcare account).

While we acknowledge the high contribution from Manufacturing in the past 12 months is
concerning, when we consider how all verticals have performed since Birlasoft merged with KPIT,
we see that all verticals have grown. We also show that Lifesciences hit a high-water mark in
2QFY22 and has declined slightly since then.

When we look at the margin improvement in the Lifesciences vertical (up 480bp from 2QFY22 to
2QFY23), we can correlate that with the 280bp shift offshore for the firm overall. We think this
suggests the incremental revenue drag from Lifesciences vertical is likely due to an offshore shift
and not due to a loss of clientele.

Fig 18 Recent headwinds in Lifesciences seem to be from the shift offshore

USD mn
80
70
70
59
60
50 49
50
40 33
28 28 29
30 25
22 22 20 20 21
17 19
20
10
-
BFSI E&U Life sciences Manufacturing
2QFY20 2QFY21 2QFY22 2QFY23

Source: Company data, Macquarie Research, January 2023

Average account size:

Birlasoft has seen a 31% improvement in average account size outside the top 10 clients in the
past three years supporting our finding of strong client mining in the US$5mn+ and US$10mn+
client tiers. This assuages our concern about high reliance on the top 10 for incremental revenue
and indicates that this is a temporary issue due to the large deal wins.

13 January 2023 88
Macquarie Research India IT Services: Mid-caps

Birlasoft signed a mega-deal for total IT outsourcing with Invacare, a Russell 2000 Lifesciences
firm, in October 2019 (see link). While the US$240mn total contract value (TCV) over multiple
years may not seem to be large enough to be considered as a mega-deal, we classify it as a
mega-deal, given that the deal TCV is more than twice the quarterly revenue for Birlasoft at the
time the deal was signed. The uplift from this has taken incremental revenue QoQ over 3Q and 4Q
of FY22 (pre-Covid) to a level that has been tough to match even with the post-Covid secular
uptick that the industry overall has seen.

We are also surprised that Birlasoft has not been able to follow up this mega-deal with any other
mega-deal wins since then. This is perhaps due to the uncertain macro environment since then
and the impact being perhaps more acute for the Russell 2000 firms with smaller balance sheets
compared to the Fortune 500. This could also be due to client confidentiality reasons and deal wins
may not be in the public domain. We think this is probable as some quarters show a spike in net
new deal wins. While we do not factor in a repeat of such mega deals, this factor could provide
upside to our revenue estimates.

Fig 19 Excluding mega deal in 3QFY20, deal TCV improving Fig 20 Average non-top-10 size up 22% despite offshore
shift (*)

USD mn USD mn
300.0 5.0
4.5
250.0 4.0
3.5
200.0 3.0
2.5
150.0 2.0
1.5
100.0 1.0
0.5
50.0 0.0
4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
-

Average Account Size USD Mn excl. top-10 clients

Source: Company data, Macquarie Research, January 2023 Source: Company data, Macquarie Research, January 2023.
*Note: From 4QFY19 through 2QFY23.

13 January 2023 89
Macquarie Research India IT Services: Mid-caps

Valuation, recommendation, risks

Birlasoft is a reliable Valuation and recommendation:
compounder given its
We see Birlasoft as a reliable compounder given its strength in offshore delivery and demonstrated
strength in offshore
client mining ability.
delivery and
demonstrated client We expect to see added growth vectors from improved traction in BFSI, a pickup in the SAP HANA
mining ability. upgrade cycle and possible resumption of large deal traction with the Russell 2000 firms or even
slightly larger clients as Birlasoft now has a client reference. These provide upside to our revenue
estimates (currently at USD revenue growth CAGR of 15.1% over FY23E-25E).
We see upside to both
Considering growth has been pulled down due to the offshore shift and the possibly related drag in
revenue and margin
the Life Sciences vertical, we think that a minor re-rating is possible.
estimates as we have
not seen the margin We also see upside to our margin estimate as attrition starts easing up providing headroom to
benefits from the improve utilisation, and see a structural improvement being possible with more offshore shift and
offshore shift as an improved pyramid (i.e., a higher mix of fresh graduates to the employee base).
elevated attrition and
backfill costs weighed
on margins.
Fig 21 1-year forward PE has limited availability for Birlasoft (*)

1-year fwd PE
25.0

20.0

15.0

10.0

5.0

0.0

Source: Company data, Macquarie Research, January 2023

Note: Birlasoft listed in 2019 through a merger with the IT Services business of KPIT that was spun-off

Fig 22 Despite Birlasoft’s mid-level rank in MOCCA framework, we think risks are largely behind us and in the price
FY22-25E USD
MOCCA framework FY22-25E EBIT
FY24 RoE (%) revenue CAGR FY24 PE (x) FY25 PE (x)
overall rank CAGR (%)
(%)

Birlasoft 5 19% 13% 16% 13.7 12.2

Source: Macquarie Research, January 2023

Valuation:
We think client mining, offshore execution capability, and an ability to win turnkey large deal wins
are the essential ingredients for a long growth runway and Birlasoft scores well across all three
parameters. We see Birlasoft as a reliable long-term compounder despite the recent hiccups in its
Healthcare vertical.
We think the growth drag from its Healthcare vertical is largely over and expect an improvement in
overall growth aided by an increased contribution from the BFSI vertical.

We assume a minor re-rating as growth accelerates and margin improves. We see upside to both
our growth and margin estimates.

13 January 2023 90
Macquarie Research India IT Services: Mid-caps

We are comfortable with revenue visibility up to FY25E and assign a PE multiple of 20x (vs US$
revenue growth CAGR of 15% over FY23E-25E), a PEG of 1.3x, like what we assign Mphasis
given recent management changes at Birlasoft that adds risk and relatively higher risks vs most
peers per Macquarie’s MOCCA framework. We initiate with an Outperform rating and a target price
of Rs500 (on 20x FY25 PE).

We prefer Birlasoft to Mastek in the sub-US$3bn market-cap range of our India IT Services mid-
cap coverage as we see fewer execution risks to Birlasoft and see upside to our estimates if more
mega deals are signed. Within IT Services mid-caps, Birlasoft is our #4 overall pick after Persistent
Systems (PSYS IN, CMP Rs4,080, Outperform, TP Rs8,330), LTIMindtree (LTIM IN, CMP
Rs4,318, Outperform, TP Rs7,540), and Coforge (COFORGE IN, CMP Rs3,919, Outperform, TP
Rs6,260) (in that order).

Fig 23 Initiate with Outperform rating and a target price of Rs500 on 20x FY25E PE
INR

Current price 306.5

1-year fwd EPS 21.0
1-year fwd PE 14.6
Target EPS period Apr-2024 to Mar-2025
Target EPS 24.9
Target multiple 20
Target price 500
Next 1-year dividends 5.0
Total shareholder return (%) 65%
Source: Macquarie Research, January 2023

Risks:

Birlasoft is below the scale of most peers in BFSI, which is a highly competitive vertical. This could
make it difficult to grow this segment.

Another risk is that the top five clients account for 31.1% of revenue as of 2QFY23 and the loss of
any of these key clients could be a significant risk to our estimates.

13 January 2023 91
Macquarie Research India IT Services: Mid-caps

Appendices
Fig 24 Diversity on the board is high with 3 women out of 5 directors^
Board of Directors

Mrs. Amita Birla Non-Executive - Amita Birla is the Chairman of Birlasoft Ltd. and the Co-Chairman of the CK Birla Group. Under her direction,
Non Independent the company has evolved into a trusted partner to its customers in terms of unlocking value in their digital
Director- journey. She was also in charge of the merger of KPIT's IT division with Birlasoft. Amita has extensive
Chairperson related experience successfully leading companies, thanks to her unique visionary yet empathetic leadership style.
to Promoter She has championed several transformative initiatives within the Group, including a shift towards a more
effective workforce, a strong brand positioning, and globally aligned people processes.
Mr. Chandrakant Birla Non-Executive - CK Birla is the Chairman of the CK Birla Group, one of India's largest business conglomerates. Under his
Non Independent leadership, the company has developed enviable capabilities in engineering, technology, and manufacturing,
Director and it is on an ambitious growth path, armed with new ideas, world-class technology, and exceptional talent.
He is also the chairman of AVTEC, HIL, National Engineering Industries, Neosym, Orient Cement, and Orient
Paper & Industries.
Mr. Ashok Kumar Non-Executive - Mr. Ashok Kumar Barat was the Managing Director and Chief Executive Officer of Forbes & Company
Barat Independent Limited. He has held leadership positions in a number of Indian and multinational organisations, both in India
Director and abroad, including Hindustan Lever Limited, RPG Group, Pepsi, Electrolux, Telstra, and Kraft-Heinz. He
serves on the boards of Wacker Metroark Chemicals Private Limited, Cholamandalam Investment & Finance
Company Limited, DCB Bank Limited, Mahindra Intertrade Limited, and the Council of the European Union
Chamber of Commerce in India.
Ms. Alka Bharucha Non-Executive - Alka Bharucha is a founding partner of Bharucha & Partners. She has over 30 years of industry experience.
Independent Alka has extensive telecom industry experience, having advised Indian and multinational telecom companies
Director on mergers and acquisitions, financings, initial public offerings, and regulatory matters. She actively
represents multinational corporations in their investments in retail, real estate, defence, power, and banking.
She serves on the boards of several publicly traded companies.
Ms. Nandita Gurjar Non-Executive - Nandita's mainstream IT experience includes software development, general management, and consulting.
Independent She began her career in 1992 at Wipro InfoTech and later joined Infosys Limited in December 1999. Nandita
Directorrelocated Progeon in 2003 and later joined Infosys as Global Head of Human Resources in 2007. She served
on the World Economic Forum's (WEF) Global Advisory Council on New Leadership Models. She has
spoken at the World Bank, the Conference Board, and Great Places to Work in the United States.
Source: Company, Macquarie Research, January 2023

^Former CEO Dharmender Kapoor was on the board, but we do not know if new CEO Angan Guha has joined the Board

Fig 25 New CEO who took charge in December, new CFO awaited after Chandrasekar Thyagarajan’s resignation in Jan 2023
Management

Mr. Angan Guha Chief Executive Officer Angan Guha is a global technology leader who previously worked at Wipro as the Chief Executive Officer
& Executive Director of the Americas 2 Strategic Market Unit. He was a member of Wipro's Executive Council and the
company's Executive Board. Angan is well-known for his expertise in managing large-scale engagements
and building complex and diverse global teams. He previously oversaw operations in financial services,
manufacturing, energy & utilities, hi-tech, and Canada.
Chandrasekar Chief Financial Officer Chandrasekar Thyagarajan is a Chartered Accountant with 32 years of experience in global and Indian
Thyagarajan companies, including 18 years as a CXO. He has 20 years of finance experience in the IT services
industry, having worked for a leading US multinational IT SI firm and in previous roles supporting the
Infrastructure Services, BPO and KPO services, software development, Application Management Services,
and IT Consulting Services businesses.
Shreeranganath Chief Delivery Officer SK previously worked for Accenture as the Managing Director and Technology Delivery Lead for Financial
Kulkarni Services. Prior to joining Accenture, SK was a key member of the leadership teams at Cognizant and
Infosys. He has more than 30 years of experience in all aspects of technology services, including delivery,
sales, and client engagement. He has also managed relationships with Fortune 500/Marquee Wall Street
clients in North America, the United Kingdom, Europe, Asia, and the Emerging Markets
Roop Singh Chief Business Officer Roop was the Vice President and Business Head of IBM's Banking and Financial Services practise in the
United States prior to joining Birlasoft. Roop was the Senior Vice President and Global Head of the
Securities and Capital Markets business at Wipro prior to joining IBM. Roop has over 25 years of industry
experience and has held senior leadership roles in Europe, North America, the Middle East, and Asia
Pacific.
Source: Company, Macquarie Research, January 2023

13 January 2023 92
Macquarie ESG Assessment

Birlasoft Quartile Previous

BSOFT IN Macquarie ESG Score Q1
Sustainability (Environment & Social) Q1
SOFTWARE & IT SERVICES Governance & Risk Q1 Q1
Ravi Menon Macquarie ESG Research * BM - Below Median
Company Research Homepage

What's New & Interesting

CEO and CFO have both changed recently following underperformance of the firm vs peers in growth and stock-price performance. Birlasoft includes the CEO on the
board and has explicitly declared a self-admittedly ambitious USD1bn revenue target by FY25. Company has introduced electric vehicles in Bengaluru, Pune and
Hyderabad offices for transport (which we expect will reduce scope-2 and scope-3 emissions).

Key ESG Issues

3 key ESG issues to consider * Supporting Information from Macquarie ESG Model

Company has undertaken steps to reduce energy usage and reduce Has replaced conventional AC with an energy efficient PAC system that the firm

E scope-2 (and potentially scope-3 emissions). estimates will reduce energy consumption by 35,000 KWH units per annum. Has
also replaced the HVAC system at its Pune office which is expected to reduce
electricity consumption by 100,000 kWh per annum and reduce carbon
emissions by 80 tons per annum. Birlasoft has also introduced electric vehicles
into its transportation fleet to reduce emissions.

One of the more diverse boards among India IT Services firms, 22.7% of the workforce are women per the FY22 annual report

S Birlasoft has 3 women directors among its 6 board members. The

firm also has a Prevention of Sexual Harassment (POSH) policy and
has mandated POSH e-training for all employees.

Critical Board committees have independent directors as The audit committee consists of 4 independent directors and all four are

G chairpersons and the audit committee has only independent

directors as its members (apart from having an independent
financially literate. The chairman of this committee has accounting expertise.

director as Chairperson).

* Key issues are sourced from the full ESG model, including 10+ pages on Environmental/Social issues and 120+ questions on CG/Risk.
Contact your MQ sales rep to see the full model.

ESG Opportunity
What is the greatest opportunity for the company? And what moves is it making to capitalize on that opportunity

No explicit carbon neutral target has been stated. The firm appears to be making progress in improving energy efficiency and is also reducing Scope-2 emissions.
Measuring scope-3 emissions and starting to disclose these will be helpful.

Looking Ahead
Current Qualitative comments
1. Degree to which ESG risks are factored into financial forecasts, where the risks We see no significant ESG risks and have not factored in any into
could have a clearly defined impact on P&L of BS within 3 years. our estimates.
(1-10; with 1 = not at all; 10 = completely)
5

2. Degree to which ESG risks are factored into stock valuation (DCF or multiple), We do not think that the independence of the board or its
where the impact is difficult to quantify and/or hits outside the forecast period. diversity have provided Birlasoft with any valuation premium.
(1-10; with 1 = not at all; 10 = completely)
2

3. Two years from now we expect the company's ESG profile to: While the company has not stated an explicit carbon neutral
(1-10; with 1 = Get Much Worse; 5 = Stay the Same; 10 = Improve Dramatically) 7 target, it has been improving energy efficiency and taking
measures to reduce scope-2 emissions.

Please refer to next page for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures
Macquarie ESG Assessment

Birlasoft

Score Card Summary *

Sector # of
Score Average Notes Sample KPI *
Environmental Footprint of Hardware
6.0 4.2 21 Total energy consumed
Infrastructure

Environment Score (33%) 6.0 4.2 21

Total amount of monetary losses as a result of legal proceedings

Data Privacy & Freedom of Expression 8.0 8.0 7
associated with user privacy

Data Security 8.0 8.0 9 Number of data breaches

Recruiting & Managing a Global, Diverse

7.3 7.4 11 Percentage of female representation for management
& Skilled Workforce

Social & Human Capital (33%) 7.8 7.8 27

Intellectual Property Protection & Total amount of monetary losses as a result of legal proceedings
10.0 10.0 1
Competitive Behavior associated with anticompetitive behavior regulations

Leadership & Governance (33%) 10.0 10.0 1

Environment and Sustainability (E&S) 7.9 7.3 49

Asia
Score Average Sample Negatives & Positives *

Board Structure (15%) 6.8 7.0 Chairman on Board Committees

Shareholding (15%) 7.6 8.2 Cross-shareholdings with other group companies

Corp Gov (58%)

History (11%) 5.5 8.1 At least 1 C-level resignation past 2 years

Capital Management (9%) 7.9 6.8 Company does not have clear target ROE or ROA

Remuneration (4%) 5.6 7.2 Company does not buy back shares to offset options

Access (4%) 8.3 7.0 Analyst access up to CEO

Account & Audit (18%) 8.9 8.2 Cash income tax paid <90% of reported tax (avg past 3 years)
Risk (42%)

Earnings Quality (15%) 7.2 6.3 Top 3 customers represent 25%-50% sales past three years

True B/S Strength (7%) 7.5 6.2 Analyst views significant assets on balance sheet that are overvalued

Visibility (2%) 7.4 7.8 4 or more competitors channel checked in last 6 months

Macquarie Governance & Risk (G) 7.4 7.3

Sector
Score Average

Macquarie ESG Score ^ 7.7 7.5

^Note: Macquarie ESG Score = 60% E&S + 40% G

* This is a summary. For our full ESG model, please contact your Macquarie sales representative.

Important Notice
This document is an ESG tearsheet on the subject company taken out of a published report. For important disclosures and disclaimers regarding this document, please refer to the disclosures and disclaimers in the published
report. Important disclosures and disclaimers regarding Macquarie research that may be relevant to the subject company can also be reviewed at: www.macquarie.com/research/disclosures.
Macquarie Research India IT Services: Mid-caps
Macquarie Quant Alpha Model Views
The quant model currently holds a marginally negative view on Birlasoft. The Attractive
Displays where the
strongest style exposure is Valuations, indicating this stock is under-priced in
company’s ranked based on
the market relative to its peers. The weakest style exposure is Price

Fundamentals
the fundamental consensus
Momentum, indicating this stock has had weak medium to long term returns
Price Target and
which often persist into the future.
Macquarie’s Quantitative
492/932 Alpha model.
Two rankings: Local market
Global rank in (India) and Global sector
Software & Services (Software & Services)
% of BUY recommendations 80% (8/10) Quant
Local market rank Global sector rank
Number of Price Target downgrades 0
Number of Price Target upgrades 0

Macquarie Alpha Model ranking Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score For the comparable firms this chart shows the key underlying styles and their
(higher is better). contribution to the current overall Alpha score.

Persistent Systems 0.9 Persistent Systems

Coforge 0.4 Coforge

Larsen & Toubro Infotech 0.3 Larsen & Toubro Infotech

Tech Mahindra 0.3 Tech Mahindra

Mastek -0.3 Mastek

Birlasoft -0.4 Birlasoft

One97 Comm -2.4 One97 Comm

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%
Valuations Growth Profitability Earnings Price Quality
Momentum Momentum

Macquarie Earnings Sentiment Indicator Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions Breakdown of 1 year total return (local currency) into returns from dividends, changes
signal that favours analysts who have more timely and higher conviction in forward earnings estimates and the resulting change in earnings multiple.
revisions. Current score shown below.

Persistent Systems
Persistent Systems 0.7
Coforge
Coforge 0.5
Larsen & Toubro Infotech
Larsen & Toubro Infotech 0.5
Tech Mahindra
Tech Mahindra -0.1

Mastek -0.9
Mastek

Birlasoft -0.6 Birlasoft

One97 Comm 0.7 One97 Comm

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -80% -30% 20% 70%
Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

What drove this Company in the last 5 years How it looks on the Alpha model
Which factor score has had the greatest correlation with the company’s A more granular view of the underlying style scores that drive the alpha (higher is
returns over the last 5 years. better) and the percentile rank relative to the sector and market.
⇐ Negatives Positives ⇒
Normalized Percentile relative Percentile relative
Momentum 6 Month 33% Score to sector(/932) to market(/730)

Net Buybacks to Mkt Cap 30%

Alpha Model Score -0.36
Valuation 0.30
PE Growth FY1 27% Growth -0.24
Momentum 3 Month 27% Profitability 0.19
Earnings Momentum -0.01
Return on Equity NTM -42% Price Momentum -0.91
Return on Equity FY1 -43% Quality 0.12
Capital & Funding 0.23
Turnover (USD) 250 Day -49%
Liquidity -1.54
Sales Growth FY1 -52% Risk -0.53
Technicals & Trading -1.19
-60% -40% -20% 0% 20% 40% 60%
0 50 100 0 50 100
0 0 1 1

Source (all charts): FactSet, Thomson Reuters, and Macquarie Quant. For more details on the Macquarie Alpha model or for more customised analysis and
screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

13 January 2023 95
Macquarie Research India IT Services: Mid-caps
Birlasoft (BSOFT IN, Outperform, Target Price: Rs500.00)
Quarterly Results 2Q/23A 3Q/23E 4Q/23E 1Q/24E Profit & Loss 2022A 2023E 2024E 2025E

Revenue m 11,921 12,339 12,661 13,111 Revenue m 41,303 48,464 55,395 63,368
Gross Profit m 11,921 12,339 12,661 13,111 Gross Profit m 41,303 48,464 55,395 63,368
Cost of Goods Sold m 0 0 0 0 Cost of Goods Sold m 0 0 0 0
EBITDA m 1,764 1,994 2,045 2,114 EBITDA m 6,419 7,500 8,706 9,777
Depreciation m 207 204 200 207 Depreciation m 765 807 831 871
Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0
Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0
EBIT m 1,557 1,790 1,845 1,907 EBIT m 5,653 6,693 7,875 8,906
Net Interest Income m -58 -31 -36 -33 Net Interest Income m -130 -158 -167 -187
Associates m 0 0 0 0 Associates m 0 0 0 0
Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0
Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0
Other Pre-Tax Income m -27 175 234 177 Other Pre-Tax Income m 662 537 791 845
Pre-Tax Profit m 1,472 1,934 2,043 2,052 Pre-Tax Profit m 6,185 7,072 8,499 9,564
Tax Expense m -321 -493 -521 -523 Tax Expense m -1,530 -1,752 -2,167 -2,439
Net Profit m 1,151 1,441 1,522 1,528 Net Profit m 4,656 5,320 6,332 7,125
Minority Interests m 0 0 0 0 Minority Interests m 0 0 0 0

Reported Earnings m 1,151 1,441 1,522 1,528 Reported Earnings m 4,656 5,320 6,332 7,125
Adjusted Earnings m 1,151 1,441 1,522 1,528 Adjusted Earnings m 4,656 5,320 6,332 7,125

EPS (rep) 4.05 5.07 5.35 5.37 EPS (rep) 16.46 18.73 22.21 24.92
EPS (adj) 4.05 5.07 5.35 5.37 EPS (adj) 16.46 18.73 22.21 24.92
EPS Growth yoy (adj) % 10.8 25.7 12.3 25.8 EPS Growth (adj) % 44.6 13.8 18.6 12.2
PE (rep) x 18.6 16.3 13.8 12.3
PE (adj) x 18.6 16.3 13.8 12.3

EBITDA Margin % 14.8 16.2 16.2 16.1 Total DPS 4.50 4.50 5.50 6.00
EBIT Margin % 13.1 14.5 14.6 14.5 Total Div Yield % 1.5 1.5 1.8 2.0
Earnings Split % 21.6 27.1 28.6 24.1 Basic Shares Outstanding m 282 282 285 285
Revenue Growth % 17.8 15.1 15.0 13.6 Diluted Shares Outstanding m 283 284 285 286
EBIT Growth % 17.6 24.3 18.0 27.0

Profit and Loss Ratios 2022A 2023E 2024E 2025E Cashflow Analysis 2022A 2023E 2024E 2025E

Revenue Growth % 16.2 17.3 14.3 14.4 EBITDA m 6,419 7,500 8,706 9,777
EBITDA Growth % 21.2 16.8 16.1 12.3 Tax Paid m -1,530 -1,752 -2,167 -2,439
EBIT Growth % 25.9 18.4 17.7 13.1 Chgs in Working Cap m 2,563 1,174 621 433
Gross Profit Margin % 100.0 100.0 100.0 100.0 Net Interest Paid m -130 -158 -167 -187
EBITDA Margin % 15.5 15.5 15.7 15.4 Other m -4,515 -1,811 -451 -20
EBIT Margin % 13.7 13.8 14.2 14.1 Operating Cashflow m 2,807 4,953 6,542 7,564
Net Profit Margin % 11.3 11.0 11.4 11.2 Acquisitions m 0 0 0 0
Payout Ratio % 27.3 24.0 24.8 24.1 Capex m -617 -1,200 -1,199 -1,198
EV/EBITDA x 11.5 9.9 8.6 7.7 Asset Sales m 0 0 0 0
EV/EBIT x 13.1 11.1 9.5 8.4 Other m -2,449 0 0 0
Investing Cashflow m -3,066 -1,200 -1,199 -1,198
Balance Sheet Ratios Dividend (Ordinary) m 0 0 0 0
ROE % 19.5 19.3 20.3 20.0 Equity Raised m 0 0 0 0
ROA % 17.7 18.7 19.6 19.4 Debt Movements m -405 158 167 187
ROIC % 35.2 32.8 34.6 37.0 Other m -1,061 -1,956 -2,247 -2,537
Net Debt/Equity % -40.5 -42.0 -46.1 -50.7 Financing Cashflow m -1,466 -1,799 -2,080 -2,351
Interest Cover x 43.4 42.4 47.3 47.7
Price/Book x 3.3 3.0 2.6 2.3 Net Chg in Cash/Debt m -1,754 1,955 3,263 4,015
Book Value per Share 91.5 103.5 116.8 132.9
Free Cashflow m 2,190 3,753 5,343 6,366

Balance Sheet 2022A 2023E 2024E 2025E

Cash m 11,689 13,644 16,907 20,922

Receivables m 12,441 13,912 15,488 17,322
Inventories m 0 0 0 0
Investments m 1,011 1,011 1,011 1,011
Fixed Assets m 2,601 2,994 3,362 3,689
Intangibles m 4,673 4,673 4,673 4,673
Other Assets m 1,418 1,418 1,418 1,418
Total Assets m 33,833 37,652 42,859 49,034
Payables m 2,095 2,788 3,743 5,144
Short Term Debt m 317 475 641 828
Long Term Debt m 912 912 912 912
Provisions m 835 835 835 835
Other Liabilities m 3,845 3,448 3,448 3,448
Total Liabilities m 8,003 8,458 9,579 11,167
Shareholders' Funds m 25,831 29,194 33,280 37,868
Minority Interests m 0 0 0 0
Other m 0 0 0 0
Total S/H Equity m 25,831 29,194 33,280 37,868
Total Liab & S/H Funds m 33,833 37,652 42,859 49,034

All figures in INR unless noted.

Source: Company data, Macquarie Research, January 2023

13 January 2023 96
13 January 2023 India

EQUITIES Mastek (MAST IN)

Post Evosys deal, non-top 10 clients key driver Transformational acquisitions start to bear fruit
USD mn
12.0
10.0
8.0
Key points
6.0
4.0
2.0
 Mastek has been doing transformational M&A starting with Evosys. It is
- nearing critical mass in the US with its MST Solutions acquisition.
 A mid-market specialist, especially because of Evosys’ Oracle SaaS skills.
-2.0
-4.0
1QFY22
2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

 Initiate at Outperform with a Rs2,720 target price.

Top 5 Clients Top 6-10 Clients Non Top-10 Clients

Source: Company, Macquarie Research, January 2023

Repositioning underway into a mid-market specialist

MAST IN Outperform
Sub-US$500mn revenue firms are generally under-indexed to India IT services.
Price (at 08:57, 11 Jan 2023 GMT) Rs1,752.00
Mastek, prior to the demerger of its insurance products business (spun off and
Valuation Rs 2,720.00 rebranded as Majesco), had been a firm that suffered from a lack of management
- PER
attention to differentiating and scaling its IT Services business. With the
12-month target Rs
2,720.00 acquisition of Oracle SaaS SMB market specialist Evosys in February 2020, this
Upside/Downside %
+55.3 began to change. We think that the acquisition of MST Solutions in July 2022
12-month TSR %
+55.3 further cements Mastek’s positioning as a SaaS implementation and Digital
Volatility Index High Transformation mid-market specialist among offshore-centric IT Services firms.
GICS sector Software & Services
Market cap Rsm 52,700 We believe Mastek now has sufficient scale – at over 5,000 employees and a
Market cap US$m 620 US$300mn+ annual revenue run rate spread across the world – to start catering
Free float % 43 to larger clients (Fortune 1000 or at least Russell 2000 companies). For instance,
30-day avg turnover US$m 0.9 Evosys’ credentials still show an SMB (US$100-200mn in revenue) focus, but we
Number shares on issue m 30.08 are starting to see larger clients (>US$1bn in revenue) as well. We think this
suggests Mastek has been able to move Evosys’ services up market – the
Investment fundamentals
outcome that was the rationale for Evosys’ founder Umang Nahata to sell and
Year end 31 Mar 2022A 2023E 2024E 2025E
take an equity stake, as well as an executive position, post-merger.
Revenue m 21,838 25,067 29,742 35,433
EBIT m 4,196 3,797 4,608 5,780
MOCCA framework shows risks; does not account for recent M&A
EBIT growth % 31.2 -9.5 21.4 25.4
Recurring profit m 4,480 4,132 4,788 6,099 Where Mastek scores low is in offshore execution and scaling up accounts
Reported profit m 2,951 2,852 3,096 4,482
Adjusted profit m 2,951 2,599 3,096 4,482
beyond its top 10. Evosys had established itself as one of the leaders in Oracle
EPS rep Rs 103.46 92.55 96.22 135.89 SaaS implementation using an outcome-based pricing model with execution
EPS rep growth % 27.3 -10.5 4.0 41.2 heavily offshore in India. We think this is a niche offering that is perfect for
EPS adj Rs 103.65 84.32 96.17 135.79
account entry for Mastek. With the acquisition of MST Solutions, Mastek now has
EPS adj growth % 27.6 -18.6 14.1 41.2
PER rep x 16.9 18.9 18.2 12.9
Salesforce and Mulesoft capability and credentials that it can cross-sell. With a
PER adj x 16.9 20.8 18.2 12.9 broadening portfolio of solutions that can be cross sold, we think client mining is
Total DPS Rs 0.19 0.21 0.36 0.53 likely to improve and there is potential for growth to accelerate. Catering to the
Total div yield % 0.0 0.0 0.0 0.0
US private sector could also improve its offshore revenue proportion.
ROA % 17.5 14.4 15.9 18.2
ROE % 30.6 22.0 22.3 27.7
EV/EBITDA x 10.5 11.8 10.5 8.5
Long-term transition upmarket is challenging but possible
Net debt/equity % -43.9 -24.8 -34.2 -42.0
With early signs of success visible in taking Evosys’ services to larger clients,
P/BV x 4.9 4.3 3.9 3.3
such as a large healthcare provider in the US, we think that Mastek is showing
Source: FactSet, Macquarie Research, January 2023
(all figures in INR unless noted) signs of being able to enter larger accounts and expect it to be able to cross-sell
other services. We initiate coverage with an Outperform rating and a TP of
Rs2,720 assigning 1x PEG for 20x FY25 PE. We prefer Birlasoft to Mastek in
sub-US$1bn market-cap India IT services considering the higher risks to Mastek
per our MOCCA framework (see page 8).
ESG: Mastek scores in the first quartile in Macquarie’s MGRS framework with its
Analysts
Macquarie Capital Securities (India) Pvt. Ltd.
stated carbon-neutral target for 2025 and a board with four independent directors,
Ravi Menon +9122 6720 4152 including an independent director as Chairman. See page 15.
[email protected]

13 January 2023 97
Macquarie Research India IT Services: Mid-caps

Inside Mastek: Repositioning through M&A

Company profile
Transformational acquisitions start to bear fruit 99
• Mastek has a long history, having been established in 1982 as Management
MOCCA framework indicates some risks 104
and Software Technology Private Limited by Indian Institute of Management
Valuation, recommendation, risks 108 students Ashank Desai, Ketan Mehta and R. Sundar, who were later joined by
Appendices 110 Sudhakar Ram. In September 2014, Mastek demerged its insurance products
and services business to form Majesco Ltd, and in February 2020, the
Macquarie ESG Assessment 111
company acquired Evosys, an Oracle Platinum partner and a leading Oracle
Cloud implementation and consultancy firm. With the acquisition of Evosys,
Mastek nearly doubled its employee base and added ~50% to its revenue. In
July 2022, Mastek acquired Salesforce specialist MST Solutions adding ~50%
to its US revenue base and nearly 10% to its overall revenue.

Fig 1 Incremental revenue moved up after Evosys acquisition in 4QFY20

USD mn
16.0

12.0

8.0

4.0

0.0

-4.0

-8.0
2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
UK & Europe US ME ROW

Source: Company data, Macquarie Research, January 2023

Fig 2 MAST IN rel BSE Sensex performance, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie
coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2023

(all figures in INR unless noted)

13 January 2023 98
Macquarie Research India IT Services: Mid-caps

Transformational acquisitions start to bear fruit

Evosys acquisition boosted incremental revenue; MST Solutions can amplify this

From a firm primarily With Evosys, an Oracle platinum partner from 2010, Mastek now has credentials as well as a
focused on insurance differentiated value proposition that can act as a tip-of-the-spear offering to get new account entry.
products, a spin-off and The revenue from non-top-10 customers has almost doubled and the number of US$1mn+ client
sale of the product accounts has increased by over 50% since the Evosys acquisition, validating the synergies from
business gave the the deal.
capital to reposition With the acquisition of MST Solutions, a Salesforce specialist with a US-based clientele, Mastek
Mastek’s services has the potential to achieve a similar transformation in the US. While Evosys added nearly 50% to
business. overall revenue and provided a tip-of-the-spear solution, the acquisition of MST Solutions
increases Mastek’s US revenue by >50% and adds Salesforce capability that should make for both
another tip-of-the-spear solution as well as a good cross-sell into existing accounts.
The Evosys merger was
transformational and We think the transformational M&A required to jumpstart growth and reposition Mastek is now
while MST Solutions done. With early proof points of success, we think this could become a good compounder with
does not have the same optionality built in and available at inexpensive valuations. With former Wipro executive Hiral
impact on scale, the Chandrana (who joined Mastek in July 2021) as CEO, we think sales efforts for better cross-selling
potential synergies are and a focus on scaling up verticals outside of the government segment are likely.
significant and give • Mastek has more than doubled in revenue and tripled in headcount over 3QFY20-2QFY23 with
Mastek the critical mass the help of transformational acquisitions (of Evosys and MST Solutions).
it needs to kick start
growth in the US.  After nearly doubling margins from 2QFY20 to 3QFY21, headwinds from the GBP
depreciation vs the INR have taken margins down 430bps over 1HFY23.

 While margins medium-term are likely to not touch the highs reached immediately after
merger with the offshore-centric high-margin Evosys, we think margins should recover from
current lows.

 See Mastek evolving to a more diversified geography and vertical mix and also moving up
towards slightly larger clients.

 Expect broader service portfolio to expand cross-sell opportunities and provide client
mining as a more important lever for growth.

Fig 3 Incremental revenue QoQ up materially after Evosys acquisition in 4QFY20

USD mn
16.0

12.0

8.0

4.0

-4.0

-8.0
3QFY21
2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

Source: Company data, Macquarie Research, January 2023

We think account entry has become much easier for Mastek after the acquisition of the highly
differentiated and focused Evosys (a pure play Oracle SaaS implementation firm that achieved
platinum level partnership with Oracle back in 2010 – a surprising feat for such a small firm).

13 January 2023 99
Macquarie Research India IT Services: Mid-caps

After initially adding a lot more clients, we think the focus has shifted to client mining and the active
client count has started reducing slightly. This is apparent from the scale-up of US$1mn+ clients
and the incremental revenue from non-top-10 clients.

Fig 4 Post-Evosys integration, active client count surged to a high of 472 in 3QFY21…

Active clients (no:)

500

400

300

200

100

4QFY21
1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Source: Company data, Macquarie Research, January 2023

However, the focus seems to have shifted to client mining after that and we have seen an
improvement in the US$1mn+ client tier count that had stagnated in the 37-40 range even after the
Evosys acquisition. After the active accounts peaked in 3QFY21, the focus of the sales efforts
seems to have shifted towards cross-selling. The US$1mn+ client tier improved significantly from
41 in 3QFY21 to 51 by 1QFY23 and further to 56 in 2QFY23 (but the additions in 2QFY23 could be
partly inorganic from the integration of MST Solutions).

Fig 5 …but US$1mn+ client count improved from 41 in 3QFY21 to 51 by 1QFY23

USD 1mn+ clients

60 56
51
50 47
45 44
41 42 42
40
40 37
34

30
25

20
3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

Source: Company data, Macquarie Research, January 2023

Mastek has historically had a high exposure to the UK government and has been a provider to
multiple entities such as the NHS and HM revenue & customs. Mastek’s involvement with UK
government projects goes back many years and includes projects such as the congestion charging
system for the City of London.

In its FY22 annual report, management stated that it sought to prioritise the Healthcare & Life
Sciences sector and continue to focus on Retail and Manufacturing. It has also spoken of using a
cross-sell strategy to sell into customers acquired through Evosys which has a high customer
acquisition velocity. Mastek has showcased some wins in Healthcare & Life Sciences in the US
such as a deal for Oracle cloud implementation for the largest Protestant non-profit provider chain
in the US (see link).

13 January 2023 100

Macquarie Research India IT Services: Mid-caps

The government business, at 42% of revenue as of 2QFY23, remains the biggest vertical for
Mastek. While we have seen Healthcare & Life Sciences play an important role in some quarters, it
has been down over the last two quarters due to cross-currency impact and delays in new program
starts at NHS (per Mastek management’s comments in recent earnings calls).

Fig 6 Incremental revenue by verticals shows Government segment remains critical

USD mn
16.0

12.0

8.0

4.0

0.0

-4.0

-8.0
1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Government Financial Services Retail Vertical IT and Other verticals Health

Source: Company data, Macquarie Research, January 2023

The acquisition of MST Solutions has added local and state government revenue in the US to
Mastek’s government vertical that was largely UK-centric. Financial services is a relatively small
contributor and management has not called this segment out as an area of focus – possibly
because the competitive intensity is high in Banking, Financial Services, & Insurance (BFSI).

Fig 7 Incremental revenue contribution by vertical shows government as the main driver
in most quarters

100%

50%

0%

-50%

-100%
1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

Government Financial Services Retail Vertical IT and Other verticals Health

Source: Company data, Macquarie Research, January 2023

We think the most transformational aspect following the Evosys acquisition is how the incremental
revenue QoQ is now being driven largely by non-top-10 clients in many quarters. This indicates
that Mastek’s strategy of attempting to acquire customers through the Evosys sales engine and
then cross-sell into these new customers is having some degree of success.

13 January 2023 101

Macquarie Research India IT Services: Mid-caps

Fig 8 Post Evosys acquisition, non-top-10 clients driving large part of incremental
revenue QoQ

USD mn
16.0

12.0

8.0

4.0

-4.0

-8.0
2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Top 5 Clients Top 6-10 Clients Non Top-10 Clients

Source: Company data, Macquarie Research, January 2023

The cross-sell success becomes even more evident when we look at the US$1mn+ client tier
which has moved up much more in the past 12 months than over the prior 12 months.

Fig 9 US$1mn+ client count increasing suggesting some cross-selling

60 56

50 45
40
40

30

20

10

-
2QFY21 2QFY22 2QFY23
Source: Company data, Macquarie Research, January 2023

With MST Solutions, Mastek adds to both the service portfolio it can offer and it also gains critical
mass in the US – the biggest market for most India IT Services firms and just 24.2% of revenue for
Mastek even after the MST Solutions acquisition.

We expect that the US market can play a more important role in future as Mastek replicates the
same strategy that it has used to derive synergy with Evosys – use the client acquisition engine of
the high velocity SaaS implementation projects and cross-sell into that client base.

13 January 2023 102

Macquarie Research India IT Services: Mid-caps

Fig 10 UK & Europe has dominated incremental revenue most quarters

USD mn
16.0

12.0

8.0

4.0

0.0

-4.0

-8.0

1QFY22

2QFY22
2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

3QFY22

4QFY22

1QFY23

2QFY23
UK & Europe US ME ROW

Source: Company data, Macquarie Research, January 2023

We analyse the incremental revenue and compare vs peer group performance in the next section
using Macquarie’s five-factor MOCCA framework.

13 January 2023 103

Macquarie Research India IT Services: Mid-caps

MOCCA framework indicates some risks

Low top 10 client reliance, but relying highly on the top vertical in past 12 months

Low offshore contribution recently, poor mining of the long tail of clients added by Evosys
Mastek scores well in some aspects of our MOCCA framework (Macquarie’s 5-factor framework
for mid-cap IT Services firms with the factors listed below; please see our sector report, titled India
IT Services Midcaps – Digital Transformation: Scale matters less for more details) indicating that
its incremental revenue addition is driven by mostly sustainable factors, but there are some risks
that could make growth less predictable vs some peers.

• Below is a summary of Mastek’s rating in Macquarie’s MOCCA framework to analyse

incremental revenue. Note that the ranks are not meant to be taken purely as an indicator of
superior/inferior execution vs peers, but are only meant to indicate whether the key drivers of
incremental revenue are sustainable and which ones need a closer look.

Fig 11 Scores well in US$1mn+ client tier, low reliance on top 10, but scores poorly in offshore execution

Mining
Contribution Contribution Avg account
Ranking by USD1mn+ USD5mn+ USD10mn+ Offshore
from top-10 by Top size (growth Overall Rank
parameter client tier client tier client tier proportion
clients vertical ex-top-10)
additions additions additions
LTI 6 8 7 2 4 5 7 7
Mindtree 9 7 4 4 8 4 3 7
LTI + Mindtree 5 4 6 3 7 1 4 2
Mphasis 10 9 9 9 9 7 9 10
Coforge 4 1 1 7 5 8 6 4
Persistent 1 3 8 6 2 2 1 1
LTTS 1 5 4 8 1 3 8 2
Birlasoft 8 2 3 1 10 9 2 5
Mastek 3 NA NA 10 6 6 10 9
Zensar 6 5 2 5 3 10 4 5
Source: Macquarie Research, January 2023

 Mining: Mastek has been punching above its weight in client additions to the US$1mn+ tier.
Mastek does not disclose client numbers for US$5mn+ and US$10mn+ tiers. The additions
to the US$1mn+ client tier are contrary to our finding from the Average Account Size factor
and suggests that the cross-selling and client mining is possibly selective across the large
set of clients that Evosys works with on Oracle Cloud implementation depending on client
wallet size. We think that most of the customers Evosys works with are smaller firms that
may not have a large addressable spend.

 Offshore Execution: Mastek does not disclose the onsite-offshore revenue split, but it does
provide the headcount split. In terms of headcount, Mastek has 26% of its headcount onsite
vs 24% for Coforge and in the past 12 months, Mastek’s onsite headcount proportion has
increased by 190bps while Coforge’s has decreased by 271 bps, and therefore Mastek
rates lower vs peers on this factor. We have used the headcount split to estimate the
offshore revenue proportion.

 Client Concentration: While Mastek scores well in driving a large part of its incremental
revenue beyond its top 10 clients, this is also because both its top-5 clients as well as its
top-6-10 clients have been declining in the last year. While this could be partly due to
cross-currency, this does reduce the positive reading from this factor and we should
consider the risk that its top 10 clients could continue to be a drag on growth.

 Contribution from top vertical: Except for the past 12 months, Mastek has been seeing a
greater share of incremental revenue driven outside its top vertical and this is exactly in line
with the firm's strategy. While this includes the impact of inorganic contributions, that is part
of the firm’s strategy to reposition itself.

13 January 2023 104

Macquarie Research India IT Services: Mid-caps

 Average Account Size: While US$1mn+ client accounts have been seeing an addition to
their ranks indicating success with client mining, we are surprised that average account
size (excluding the top 10) has declined over the last 12 months. We can only hypothesise
that this is due to a large set of tail accounts and the impact of cross-currency (as the GBP
has depreciated vs the USD and Mastek has a higher exposure to the UK vs peers).

Mining:
Mastek punches well above its weight in the US$1mn+ tier over both the last 12 months as well as
the last 24 months. Data is not available prior to these periods.

We have added the absolute client count below for easy reference and we can see the
acceleration in the client count in the US$1mn+ tier. This performance over the periods is
consistent with the change in Mastek’s go-to-market strategy that emphasizes cross-selling deals
with Evosys.

Fig 12 Scale-up in Fortune 1000 clients after new CEO Fig 13 Despite cross-currency hit from GBP, US$3mn+
joined in 2QFY22 client count increasing steadily

Fortune 1000 USD 3mn+

clients clients
30 25

20 20
25 19
20 18
16 16
20 15
15

15
10
10

5
5

- -
4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Source: Company data, Macquarie Research, January 2023 Source: Company data, Macquarie Research, January 2023

Mastek is the smallest firm among the India IT Services midcaps that we have analyzed and it
does not disclose its client count in the USD5mn+ and USD10mn+ tiers. However, it does share
US$3mn+ tier data and that indicates Mastek added 4 clients to this tier over the last year taking
the total to 20 as of 2QFY23.

Offshore Execution:
Onsite mix had reduced In effort terms (employee time spent and billable on client projects), Mastek currently has an onsite
after the Evosys mix of 26.3% vs 22% for Mphasis and 23.5% for Coforge (using only the IT Services headcount for
acquisition and offshore both Mphasis and Coforge, i.e. excluding BPO to make these figures strictly comparable). This is
employee proportion not particularly high and while we expect a higher incremental revenue proportion from offshore as
increased 1,420bps the revenue mix from Evosys’ offshore-centric Oracle Cloud deals becomes a smaller part of the
from 3QFY20 to 2QFY22 overall firm, we do not see this as a negative, but as part of the strategy.
with effort mix now
Post the merger with Evosys, the offshore headcount proportion had jumped over 400bps and
closer to larger peers
continued to improve steadily until 2QFY22 – a shift offshore by 1,420bps from 3QFY20. After
like Coforge.
2QFY22, the onsite headcount proportion started increasing again and we think this was due to the
cross-selling into Evosys accounts that resulted in a more normal onsite-offshore mix vs the
offshore-centric execution by Evosys.

13 January 2023 105

Macquarie Research India IT Services: Mid-caps

Fig 14 Healthy offshore headcount mix despite recent shift Fig 15 Mastek has improved its offshore headcount mix
in mix to higher onsite execution closer to bigger peers

Offshore
80% 25% headcount (%)
85%
20%
80%
70%
15%
75%

10%
60% 70%

5%
65%

50% 0% 60%
2QFY22

4QFY22

2QFY23
4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

3QFY22

1QFY23

Offshore headcount proportion (%) EBIT Margin-RHS Mastek Mphasis Coforge

Source: Company data, Macquarie Research, January 2023 Source: Company data, Macquarie Research, January 2023

Client concentration:
We measure client concentration as the share of top-10 clients in incremental revenue over last 12
months to 60 months. The lower the top-10 contribution to incremental revenue in a period, the
better the rank for that period for a firm.

Mastek has been consistently driving a very high proportion of its incremental revenue from
outside of its top-10 clients. Over the last 12 months, this is because top-10 client revenue has
declined. Even excluding the last 12 months, however, it is a turnaround from the earlier periods
prior to the acquisition of Evosys. Evosys’ clientele base is very broad and is spread across
industries. So we think that incremental revenue is very sustainable.

A longer-term analysis of incremental revenue addition by client tier indicates that it is the top client
that has been the sole drag (Fig 15).

Fig 16 Even if we exclude 4QFY20 when Evosys was integrated, non-top-10 contribution to
incremental revenue is healthy and sustained in most quarters

USD mn
16.0

12.0

8.0

4.0

-4.0

-8.0
2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

Top 5 Clients Top 6-10 Clients Non Top-10 Clients

Source: Company data, Macquarie Research, January 2023

13 January 2023 106

Macquarie Research India IT Services: Mid-caps

Vertical concentration:
Consistent with Mastek’s strategy of diversifying beyond its core Government vertical, we see the
contribution of its top vertical to incremental revenue is low vs most of its peers across most
periods except the last 12 months (partly due to the integration of MST Solutions in 2QFY23 which
has exposure to US local and state government entities).

Fig 17 shows how the revenue scale-up has been across verticals for Mastek with major verticals
growing consistently except for the declines in health & life sciences in recent quarters (which
management comments attributed to temporary delays in new program starts at NHS). We find it
surprising that the retail vertical has been stagnating and this is despite management declaring it to
be a focus vertical.

While the ranking indicates a low contribution of incremental revenue from its top vertical and this
is also due to the stagnation we have seen for its top vertical in some periods, the recent growth
performance is broad-based across verticals including the top vertical.

Fig 17 Broad-based across verticals in most quarters, but

government is a large contributor Fig 18 Top 5 clients a drag in recent past, but bottomed out

USD mn USD mn
16.0 16.0
14.0
12.0 12.0
10.0
8.0
6.0 8.0
4.0
2.0 4.0
-
-2.0 -
-4.0
-6.0
-4.0
4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

-8.0

4QFY22
2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

1QFY23

2QFY23
Govt & Education Financial Services
Retail/ Consumer Manufacturing & Technology
Health & Lifesciences Top 5 Clients Top 6-10 Clients Non Top-10 Clients

Source: Company data, Macquarie Research, December 2022 Source: Company data, Macquarie Research, December 2022

We think the incremental revenue addition can accelerate once the portfolio issues that are
indicated by its top-10 clients and the Healthcare vertical are resolved.

Average Account Size:

Mastek has seen its average account size (excluding the top 10) decline 9.2% in the past 12
months, but this is possibly largely due to GBP and EUR depreciation vs the USD (given Mastek
has 62% of its revenue from the UK and Europe as of 2QFY23 and had 70% of its revenue from
the UK and Europe as of 1QFY22).

While the decline in average account size over the last 12 months can be probably due to the
GBP, we have not seen account size move up too much even over the last two years. That could
be due to limited cross-sell prospects within the large tail of SMB accounts that Evosys serves.

We are not overly concerned by the poor showing on this metric as Mastek has been showing
traction in client mining with additions to US$1mn+ and US$3mn+ accounts as well as a scale-up
in Fortune 1000 clients which indicates that management is pursuing a strategy of going after more
scalable clients and is actively looking at cross-selling solutions.

We expect to see average account size improve as the recently acquired MST Solutions provides
Mastek with Salesforce capability that can be cross-sold into many of the new accounts Mastek
adds through its Evosys subsidiary (which does Oracle SaaS implementation).

13 January 2023 107

Macquarie Research India IT Services: Mid-caps

Valuation, recommendation, risks

We think a growth Valuation and Recommendation:
turnaround is likely for
As the uncertainty reduces in the UK, we think that the drag from business with UK government
Mastek as the UK
entities will ebb and growth can accelerate.
government sector drag
seems to be over and We also expect improved growth in the US as we expect the MST Solutions acquisition provides
the US has reasonable Mastek with critical mass to be considered as a vendor for larger projects. With revenue growth in
scale to kickstart the US likely to come from the typical India Services mix of onsite-offshore project execution (vs
organic growth after the Evosys’ offshore-centric shared services delivery for its Oracle SaaS implementation), EBIT
MST Solutions margin may reduce slightly. But that said, we still think profit growth in the mid-teens is possible
acquisition. and that could make Mastek a good long-term compounder with headroom to grow and with
potential for upside to our revenue growth estimates.

Our estimates are conservative as the success of the US revenue scale up is far from assured. But
Assigning a 20x
we think there is a reasonable chance for success given MST Solutions has an onsite-offshore
multiple vs ~20% USD
delivery model that should make a cultural fit relatively easy and similar to Coforge’s acquisitions
revenue growth we
Incessant and Whishworks. CEO Hiral Chandrana’s experience of working with Wipro in the US
expect over FY24E and
should help attract senior talent in sales and account management to help scale up US operations.
FY25E.

Fig 19 Mastek is trading close to its 10-year average despite transformational M&A

1-year fwd PE
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0

Source: Bloomberg, Macquarie Research, January 2023

Fig 20 Mastek does not score well in Macquarie’s MOCCA framework, but recent transformational M&A should help
MOCCA framework FY22-25E USD FY22-25E EBIT
FY24 RoE FY24 PE FY25 PE
overall rank revenue CAGR (%) CAGR (%)

Mastek 9 19% 16% 11% 17.7 12.4

Source: Macquarie Research, January 2023

We see revenue growth returning to >20% in USD terms over FY24 (with the worst of the
headwinds from the UK public sector and NHS already in the base) and assign a 20x PE multiple
to Mastek – implying a 1x PEG vs the USD revenue growth of 20% we expect over both FY24 and
FY25. If Mastek management can credibly demonstrate a scale-up in the US and improve visibility
of growth, that could trigger a further rerating to a 1.5x PEG and that provides upside to our price
target.
We also believe there is upside to our estimates given the growth drags from Healthcare and UK
government are behind us and INR depreciation vs the GBP and EUR could provide some tailwind
to margins. The EPS dilution from the issuance of 4.23mn shares to Evosys shareholders is now
complete and the remaining Compulsory Convertible Preference Shares should result in a further
dilution of only 0.5-0.6mn shares (i.e., ~2%).

13 January 2023 108

Macquarie Research India IT Services: Mid-caps

We initiate with an Outperform rating and a TP of Rs2,720 on 20x March 2025 PE (vs a USD
revenue CAGR of 20% over FY24E-25E).

We prefer Birlasoft to Mastek in the India IT Services firms with a market cap <US$1bn. Mastek is
#5 in our overall pecking order in our India IT Services midcap coverage - below Persistent
Systems (PSYS IN, CMP Rs4,080, Outperform, TP Rs8,330), LTIMindtree (LTIM IN, CMP
Rs4,318, Outperform, TP Rs7,540), Coforge (COFORGE IN, CMP Rs3,919, Outperform, TP
Rs6,260) and Birlasoft (BSOFT IN, CMP Rs306, Outperform, TP Rs500).

While we see significant upside possible for Mastek, the execution is riskier and our confidence in
our estimates is lower than for stocks that score higher in our MOCCA framework. For investors
who have a specific small cap (<US$1bn) market cap focus, we think this could be an interesting
turnaround situation in terms of growth.

Fig 21 Initiate with Outperform on 20x FY25E PE with a TP of Rs2,720

INR

Current price (*) 1,752

1-year fwd EPS 88
1-year fwd PE 20.0
Target EPS period Apr-2024 to Mar-2025
Target EPS 136
Target multiple 20
Target price 2,720
Next 1-year dividends 32
Total shareholder return (%) 55
Source: Macquarie Research, January 2023.
*Current market price as of close on 10 January 2023 (Bloomberg).

Fig 22 We expect incremental revenue to bounce back in FY24E

Y/E Mar (INR mn) FY22 FY23E FY24E FY25E

Revenue in USD Mn 292 315 379 454

Incremental revenue YoY (USD mn) 60.5 22.8 63.6 75.6
YoY growth (%) 26.1 7.8 20.2 20.0
Revenue 21,838 25,067 29,742 35,433
YoY growth (%) 26.8 14.8 18.6 19.1
EBIT 4,196 3,797 4,608 5,780
EBIT Margin (%) 19.2 15.1 15.5 16.3
Net Profit 2,951 2,852 3,096 4,482
Net Profit Margin (%) 13.5 11.4 10.4 12.6
Source: Company data, Macquarie Research, January 2023

We expect incremental revenue to bounce back to slightly above the FY22 level following the MST
Solutions acquisition that adds new dimensions to growth in terms of:
• A stronger US presence that should help Mastek get invited for more deals

• Cross-selling MST Solutions’ Salesforce capability into existing Mastek accounts

We do not bake in significant margin improvement as we expect the offshore-heavy, high-margin

Evosys business to stabilise as a proportion of overall revenue with growth closer to company
average and scale-up in the US will require sales investments.

Risks:

Mastek scores relatively low in our MOCCA framework and there are evident risks to growth:
namely continued reliance on the UK gov’t sector and the NHS in the UK – which we expect to
have bottomed and will return to growth but could still prove otherwise.

A second key risk is the integration of MST solutions in the US, which we expect to be relatively
easy culturally, given MST Solutions also has an India-centric offshore delivery capability, but this
integration could underwhelm in expected synergy benefits from new client acquisition and cross-
sell opportunities as Mastek needs to revamp its US sales team.

13 January 2023 109

Macquarie Research India IT Services: Mid-caps

Appendices
Fig 23 Board: Independent Director as Chairperson and 4 of 6 board members independent directors
Board of Directors

Mr. S. Sandilya Non-Executive - Independent Mr. S. Sandilya has nearly 5 decades of diverse professional experience. He is currently the
Director-Chairperson Non-Executive Chairman of Eicher Group. He joined the company in 1975 and has held various
positions in Group Finance, including Information Technology, Strategy and Planning,
Manufacturing, and General Management. He has served on the Confederation of Indian
Industries' (CII) National Council for many years. He served on the Society of Indian Automobile
Manufacturers' Executive Committee.
Mr. Ashank Desai Executive Director-MD - Vice Mr. Ashank Desai is an Information Technology (IT) Industrialist, the Principal Founder and
Chairperson Former Chairman of Mastek, and he has over four decades of rich and diverse experience in the
IT industry. Mr. Desai is a well-known IT industry veteran who was a founding member and Past
Chairman of NASSCOM. Prime Minister Shri Narendra Modi honoured him for his contributions
to NASSCOM and the IT industry. He has also received the ASOCIO Honourable Contributors
Award twice, making him the only Indian to do so.
Mr. Ketan Mehta Non-Executive - Non Mr. Ketan Mehta has nearly four decades of experience in the information technology industry.
Independent Director He co-founded Mastek in 1982 and has been solely focused on the Majesco business since
2015. Over the last thirteen years, he has been the driving force behind the conceptualisation
and execution of Majesco's insurance strategy, including the acquisition and integration of seven
insurance technology companies. Prior to that, he was the driving force behind Mastek's
collaboration with Deloitte Consulting.
Mr. Rajeev Grover Non-Executive - Independent Mr. Grover has over three decades of varied experience in Finance, Operations, General
DirectorManagement, and Business Transformation. He worked for Mercer Consulting, Hewitt Associates
(now Aon Hewitt), eFunds Corp, GE Capital International Services, and American Express,
among others. He was a pioneer in the Business Process Outsourcing industry in India, leading
the establishment of three organisations in the country.
Ms. Priti Rao Non-Executive - Independent Ms. Priti has 24 years of diverse experience in developing and delivering a wide range of IT
Director services for customers on all five continents. She played an important role in supporting IT teams
while working for companies such as Infosys, L&T, and Dell. Ms. Priti serves on the Board of
Directors of Union Bank of India and is also a director of a few other private companies that
provide technology services and products.
Mr. Atul Kanagat Non-Executive - Independent Mr. Atul Kanagat has nearly 3.7 decades of consulting and multinational company experience.
Director Mr. Kanagat has held various management and leadership positions with Hindustan Lever, Mc
Kinsey & Company of Seattle Symphony, Fred Hutch Cancer Research Centre and Greater
Seattle Chamber of Commerce, Liberty Science Centre in Jersey City. Mr. Kanagat has also held
the position of Vice President - Strategy & Mergers & Acquisitions at Harman International.
Source: Company, Macquarie Research, January 2023

Fig 24 Relatively new CEO who was in a senior role at much bigger peer Wipro earlier
Management

Mr. Hiral Chandrana Global Chief Executive Officer Mr Hiral Chandrana is the Global CEO of Mastek Group. He has over 25 years of global
experience in IT Services and Digital Solutions across a wide range of industries. He has held
progressive business leadership positions with Wipro Limited and Electronic Data Systems.
During his 14-year tenure at Wipro, he served as Senior Vice President & Global Head. He
also has extensive experience in the Consumer, Retail, Manufacturing, and Healthcare
industries, as well as working with Fortune 1000 global clients in the United States, United
Kingdom, Europe, the Middle East, and Asia Pacific.
Mr. Arun Agarwal Global Chief Financial Officer Arun Agarwal joined the Company in the year 2016 and has been the Chief Financial Officer of
the company since 2021. He has over 19 years of extensive experience and expertise in the
field of Finance. Previously, he held senior leadership roles at Firstsource Solution, GE, Wipro
and Synovate. He is a Chartered Accountant by qualification.
Source: Macquarie Research, January 2023

13 January 2023 110

Macquarie ESG Assessment

Mastek Quartile Previous

MAST IN Macquarie ESG Score Q1
Sustainability (Environment & Social) Q1
SOFTWARE & IT SERVICES Governance & Risk Q1 Q1
Ravi Menon Macquarie ESG Research * BM - Below Median
Company Research Homepage

What's New & Interesting

Mastek has a FY25 carbon neutral target and a FY40 net zero target. This is a more aggressive goal than bigger peers which have mostly targeted to be carbon
neutral by 2030. But the company's current use of renewable power is nil.

Key ESG Issues

3 key ESG issues to consider * Supporting Information from Macquarie ESG Model

The significant areas of improvement are to disclose the power Scores only 3.7 on Environment. Mastek is not a part of RE100, an alliance of

E usage effectiveness ratio (PUE) and to improve sourcing of power

from renewable sources (currently nil although the company has
companies committed to transition towards 100% renewable energy.

installed solar roof panels in its cafeteria).

The company should ideally share the % of workforce who are Score of 8.3. The company had 6 directors including 1 female director as at the

S from different nationalities and also improve diversity among the

senior executive team and the board.
end of FY21 and FY22. The company also reported that 35% of its middle
management comprises of women, 31% of its senior leadership roles are held by
women, and 12% of its Executive Leadership Team are women.

Very good board composition with 4 independent directors and an Scores a full 10 on Governance.

G independent director as Chairman of the board. CEO is not on the

board.

* Key issues are sourced from the full ESG model, including 10+ pages on Environmental/Social issues and 120+ questions on CG/Risk.
Contact your MQ sales rep to see the full model.

ESG Opportunity
What is the greatest opportunity for the company? And what moves is it making to capitalize on that opportunity

Improving power consumption from renewable sources is the biggest ESG opportunity for Mastek. As it operates mostly from leased facilities, it may not be easy to
do, but with a carbon neutral target for FY25, we should see some improvement in energy consumption.

Looking Ahead
Current Qualitative comments
1. Degree to which ESG risks are factored into financial forecasts, where the risks There has not been a history of any lawsuits for Mastek about
could have a clearly defined impact on P&L of BS within 3 years. discrimination of any kind. Environmental risk is addressed to some
(1-10; with 1 = not at all; 10 = completely)
1 extent with a net zero target by 2040 and carbon neutral target by
FY25.
2. Degree to which ESG risks are factored into stock valuation (DCF or multiple), Local backlash against outsourcing of IT jobs is a risk that is
where the impact is difficult to quantify and/or hits outside the forecast period. difficult to quantify, but Mastek has been operating in the US and
(1-10; with 1 = not at all; 10 = completely)
3 the UK for more than 30 years with no lawsuits. We believe
management is careful to ensure diversity in the workforce.
3. Two years from now we expect the company's ESG profile to: With a carbon neutral target by FY25, we think Mastek should
(1-10; with 1 = Get Much Worse; 5 = Stay the Same; 10 = Improve Dramatically) 8 make progress in improving its energy usage and improve its ESG
rating.

Please refer to next page for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures
Macquarie ESG Assessment

Mastek

Score Card Summary *

Sector # of
Score Average Notes Sample KPI *
Environmental Footprint of Hardware
3.7 4.0 18 Total energy consumed
Infrastructure

Environment Score (33%) 3.7 4.0 18

Total amount of monetary losses as a result of legal proceedings

Data Privacy & Freedom of Expression 8.0 8.0 7
associated with user privacy

Data Security 10.0 8.7 8 Number of data breaches

Recruiting & Managing a Global, Diverse

7.0 7.2 14 Percentage of female representation for management
& Skilled Workforce

Social & Human Capital (33%) 8.3 8.0 29

Intellectual Property Protection & Total amount of monetary losses as a result of legal proceedings
10.0 10.0 1
Competitive Behavior associated with anticompetitive behavior regulations

Leadership & Governance (33%) 10.0 10.0 1

Environment and Sustainability (E&S) 7.3 7.3 48

Asia
Score Average Sample Negatives & Positives *

Board Structure (15%) 6.8 6.9 Chairman on Board Committees

Shareholding (15%) 8.7 8.2 Founder has prior listings

Corp Gov (58%)

History (11%) 8.0 8.2 No senior management turnover last 2 years

Capital Management (9%) 6.6 6.8 Company does not have clear target ROE or ROA

Remuneration (4%) 7.8 7.1 Directors compensation grwoth lower than NP grwoth past 3 years

Access (4%) 8.3 7.0 Analyst access up to CEO

Account & Audit (18%) 7.3 8.2 Company does not employ big 4 auditor
Risk (42%)

Earnings Quality (15%) 7.3 6.4 Top 3 customers represent 25%-50% sales past three years

True B/S Strength (7%) 7.4 6.3 Analyst views significant assets on balance sheet that are overvalued

Visibility (2%) 10.0 7.3 4 or more customers channel checked in last 6 months

Macquarie Governance & Risk (G) 7.5 7.3

Sector
Score Average

Macquarie ESG Score ^ 7.4 7.5

^Note: Macquarie ESG Score = 60% E&S + 40% G

* This is a summary. For our full ESG model, please contact your Macquarie sales representative.

Important Notice
This document is an ESG tearsheet on the subject company taken out of a published report. For important disclosures and disclaimers regarding this document, please refer to the disclosures and disclaimers in the published
report. Important disclosures and disclaimers regarding Macquarie research that may be relevant to the subject company can also be reviewed at: www.macquarie.com/research/disclosures.
Macquarie Research India IT Services: Mid-caps
Macquarie Quant Alpha Model Views
The quant model currently holds a marginally negative view on Mastek. The Attractive
Displays where the
strongest style exposure is Profitability, indicating this stock is efficiently
company’s ranked based on
converting investments to earnings; proxied by ratios like ROE or ROA. The

Fundamentals
the fundamental consensus
weakest style exposure is Price Momentum, indicating this stock has had
Price Target and
weak medium to long term returns which often persist into the future.
Macquarie’s Quantitative
505/932 Alpha model.
Two rankings: Local market
Global rank in (India) and Global sector
Software & Services (Software & Services)
% of BUY recommendations 25% (1/4) Quant
Local market rank Global sector rank
Number of Price Target downgrades 0
Number of Price Target upgrades 0

Macquarie Alpha Model ranking Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score For the comparable firms this chart shows the key underlying styles and their
(higher is better). contribution to the current overall Alpha score.

Persistent Systems 0.6 Persistent Systems

Coforge 0.3 Coforge

Larsen & Toubro Infotech 0.2 Larsen & Toubro Infotech

Tech Mahindra 0.2 Tech Mahindra

Mastek -0.4 Mastek

Birlasoft -0.5 Birlasoft

One97 Comm -2.5 One97 Comm

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%
Valuations Growth Profitability Earnings Price Quality
Momentum Momentum

Macquarie Earnings Sentiment Indicator Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions Breakdown of 1 year total return (local currency) into returns from dividends, changes
signal that favours analysts who have more timely and higher conviction in forward earnings estimates and the resulting change in earnings multiple.
revisions. Current score shown below.

Persistent Systems
Persistent Systems 0.7
Coforge
Coforge 0.4
Larsen & Toubro Infotech
Larsen & Toubro Infotech 0.4
Tech Mahindra
Tech Mahindra -0.1

Mastek -0.9
Mastek

Birlasoft -0.6 Birlasoft

One97 Comm 0.6 One97 Comm

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -70% -50% -30% -10% 10% 30% 50% 70%
Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

What drove this Company in the last 5 years How it looks on the Alpha model
Which factor score has had the greatest correlation with the company’s A more granular view of the underlying style scores that drive the alpha (higher is
returns over the last 5 years. better) and the percentile rank relative to the sector and market.
⇐ Negatives Positives ⇒
Normalized Percentile relative Percentile relative
Volatility 250 Day 46% Score to sector(/932) to market(/729)

EBITDA Revisions 3 Month 37%

Alpha Model Score -0.40
Valuation 0.17
Asset Growth 30% Growth 0.11
Momentum 3 Month 30% Profitability 0.75
Earnings Momentum -0.44
Number of Shares Increase… -35% Price Momentum -0.66
Cash to Total Assets FY0 -38% Quality 0.19
Capital & Funding 0.06
RNOA -44%
Liquidity -1.78
Merton Score -59% Risk -0.33
Technicals & Trading -0.09
-60% -40% -20% 0% 20% 40% 60%
0 50 100 0 50 100
0 0 1 1

Source (all charts): FactSet, Thomson Reuters, and Macquarie Quant. For more details on the Macquarie Alpha model or for more customised analysis and
screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

13 January 2023 113

Macquarie Research India IT Services: Mid-caps
Mastek (MAST IN, Outperform, Target Price: Rs2,720.00)
Quarterly Results 2Q/23A 3Q/23E 4Q/23E 1Q/24E Profit & Loss 2022A 2023E 2024E 2025E

Revenue m 6,253 6,443 6,668 7,036 Revenue m 21,838 25,067 29,742 35,433
Gross Profit m 6,253 6,443 6,668 7,036 Gross Profit m 21,838 25,067 29,742 35,433
Cost of Goods Sold m 0 0 0 0 Cost of Goods Sold m 0 0 0 0
EBITDA m 1,074 1,058 1,122 1,248 EBITDA m 4,625 4,347 5,171 6,440
Depreciation m 171 138 131 141 Depreciation m 429 550 562 660
Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0
Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0
EBIT m 903 921 991 1,108 EBIT m 4,196 3,797 4,608 5,780
Net Interest Income m -53 -27 -34 -24 Net Interest Income m -77 -133 -95 -95
Associates m 0 0 0 0 Associates m 0 0 0 0
Exceptionals m 253 0 0 0 Exceptionals m 0 253 0 0
Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0
Other Pre-Tax Income m 69 70 72 69 Other Pre-Tax Income m 361 469 275 414
Pre-Tax Profit m 1,173 965 1,029 1,152 Pre-Tax Profit m 4,480 4,386 4,788 6,099
Tax Expense m -311 -256 -273 -305 Tax Expense m -1,146 -1,215 -1,269 -1,617
Net Profit m 862 709 756 847 Net Profit m 3,334 3,171 3,519 4,482
Minority Interests m -71 -85 -91 -102 Minority Interests m -383 -319 -422 0

Reported Earnings m 791 624 665 745 Reported Earnings m 2,951 2,852 3,096 4,482
Adjusted Earnings m 538 624 665 745 Adjusted Earnings m 2,951 2,599 3,096 4,482

EPS (rep) 25.85 20.39 21.21 23.64 EPS (rep) 103.46 92.55 96.22 135.89
EPS (adj) 17.58 20.39 21.21 23.64 EPS (adj) 103.65 84.32 96.17 135.79
EPS Growth yoy (adj) % -34.7 -15.8 -18.9 -6.0 EPS Growth (adj) % 27.6 -18.6 14.1 41.2
PE (rep) x 16.9 18.9 18.2 12.9
PE (adj) x 16.9 20.8 18.2 12.9

EBITDA Margin % 17.2 16.4 16.8 17.7 Total DPS 0.19 0.21 0.36 0.53
EBIT Margin % 14.4 14.3 14.9 15.7 Total Div Yield % 0.0 0.0 0.0 0.0
Earnings Split % 20.7 24.0 25.6 24.1 Basic Shares Outstanding m 30 31 33 33
Revenue Growth % 17.1 16.7 14.7 23.4 Diluted Shares Outstanding m 29 31 32 33
EBIT Growth % -11.8 -12.8 -8.6 12.9

Profit and Loss Ratios 2022A 2023E 2024E 2025E Cashflow Analysis 2022A 2023E 2024E 2025E

Revenue Growth % 26.8 14.8 18.6 19.1 EBITDA m 4,625 4,347 5,171 6,440
EBITDA Growth % 26.8 -6.0 18.9 24.6 Tax Paid m -1,146 -1,215 -1,269 -1,617
EBIT Growth % 31.2 -9.5 21.4 25.4 Chgs in Working Cap m 1,091 -1,353 495 615
Gross Profit Margin % 100.0 100.0 100.0 100.0 Net Interest Paid m -77 -133 -95 -95
EBITDA Margin % 21.2 17.3 17.4 18.2 Other m -1,763 3,562 -620 -720
EBIT Margin % 19.2 15.1 15.5 16.3 Operating Cashflow m 2,730 5,208 3,681 4,623
Net Profit Margin % 13.5 10.4 10.4 12.6 Acquisitions m 2,814 0 0 0
Payout Ratio % 0.2 0.2 0.4 0.4 Capex m -365 -6,128 -230 -280
EV/EBITDA x 10.5 11.8 10.5 8.5 Asset Sales m 4,563 0 0 0
EV/EBIT x 11.6 13.5 11.7 9.5 Other m -7,211 0 0 0
Investing Cashflow m -199 -6,128 -230 -280
Balance Sheet Ratios Dividend (Ordinary) m -475 -659 -1,177 -1,767
ROE % 30.6 22.0 22.3 27.7 Equity Raised m 19 0 0 0
ROA % 17.5 14.4 15.9 18.2 Debt Movements m -779 0 0 0
ROIC % 45.2 40.1 30.6 37.8 Other m -49 -133 -95 -95
Net Debt/Equity % -43.9 -24.8 -34.2 -42.0 Financing Cashflow m -1,284 -792 -1,272 -1,862
Interest Cover x 54.7 28.5 48.4 60.8
Price/Book x 4.9 4.3 3.9 3.3 Net Chg in Cash/Debt m 1,248 -1,712 2,179 2,481
Book Value per Share 358.6 411.4 450.1 524.6
Free Cashflow m 2,365 -920 3,451 4,343

Balance Sheet 2022A 2023E 2024E 2025E

Cash m 7,266 5,553 7,733 10,214

Receivables m 4,356 3,434 4,074 4,854
Inventories m 0 0 0 0
Investments m 548 548 548 548
Fixed Assets m 1,474 1,536 1,204 824
Intangibles m 6,980 12,495 12,495 12,495
Other Assets m 4,258 4,258 4,258 4,258
Total Assets m 24,882 27,825 30,312 33,193
Payables m 333 764 910 1,075
Short Term Debt m 695 695 695 695
Long Term Debt m 1,208 1,208 1,208 1,208
Provisions m 901 901 901 901
Other Liabilities m 9,529 9,529 9,529 9,529
Total Liabilities m 12,665 13,096 13,242 13,407
Shareholders' Funds m 10,714 12,907 14,826 17,542
Minority Interests m 1,503 1,822 2,244 2,244
Other m 0 0 0 0
Total S/H Equity m 12,217 14,729 17,071 19,786
Total Liab & S/H Funds m 24,882 27,825 30,312 33,193

All figures in INR unless noted.

Source: Company data, Macquarie Research, January 2023

13 January 2023 114

13 January 2023 India

EQUITIES L&T Technology Services (LTTS IN)

Broad-based growth across client tiers Wider client portfolio than peers
USD mn
14.0
12.0 Key points
 High breadth of capabilities across verticals for sustained growth.
10.0
8.0

 Low share of top-10 in incremental revenue implies long growth runway.

6.0
4.0

 A safe play within India engineering services.

2.0
-
-2.0
2QFY21 3QFY21 4QFY21 1QFY22 2QFY22 3QFY22 4QFY22 1QFY23 2QFY23
Top 5 Clients Top 6-10 Top 11-20 Non-top-20 clients

Source: Company, Macquarie Research, December 2022

Broader base than many India engineering services peers
LTTS’ scale is superior to most of its global peers in engineering services, and we
LTTS IN Outperform
Price (at 11:17, 11 Jan 2023 GMT ) Rs3,905.00 think this allows it to invest in many new areas. LTTS is also able to cross-
pollinate its capabilities across industry verticals (e.g., using its power electronics
Valuation Rs 4,630.00 capabilities from its industrial products group to cater to EV charging needs in its
- PER
Automotive vertical), and this creates more cross-selling opportunities and higher
12-month target Rs 4,630.00
differentiation vs peers. Compared to Indian engineering services peers like
Upside/Downside % +18.6
Cyient (CYL IN, Not Rated), KPIT (KPIT IN, Not Rated) and Tata Elxsi (TELX IN,
12-month TSR % +19.5
Not Rated), we think LTTS has a much broader set of verticals with deep sub-
Volatility Index Medium
verticals, such as Aerospace, Rail, Automotive, Trucks & Off-Highway vehicles
GICS sector
and Travel & Hospitality within Transportation.
Commercial & Professional Services
Market cap Rsm 412,368 With demonstrated client mining beyond the top-10 clients and much lower client
Market cap US$m 4,688 concentration vs India engineering services peers, we think LTTS offers more
Free float % 26 predictable growth over the long term. We see no obvious gaps in the portfolio and
30-day avg turnover US$m 11.4 think it is well positioned even in areas like Automotive, where its peers have long
Number shares on issue m 105.6 been leaders, e.g., LTTS recently won a five-year deal for engineering services for
a German automotive leader’s infotainment systems (see link).
Investment fundamentals
Year end 31 Mar 2022A 2023E 2024E 2025E Long growth runway and low risk, per our MOCCA framework
Revenue bn 65.7 80.2 90.3 100.9
EBIT bn 12.0 14.8 16.9 19.0 With a broad set of verticals and a broad base of clients driving incremental
EBIT growth % 52.1 23.2 14.3 12.2 revenue, we see a long growth runway for LTTS. While its top-5 clients have
Recurring profit bn 13.1 15.8 18.3 20.4 been a drag on revenue growth, this was due to industry-specific cyclicality and
Reported profit bn 9.6 11.5 13.3 14.8
Adjusted profit bn 9.6 11.5 13.3 14.8
we see an opportunity for growth to pick up once the top-5 clients resume growth.
EPS rep Rs 90.52 108.72 126.04 140.41 LTTS has been moving clients up revenue tiers and punches above its weight in
EPS rep growth % 44.0 20.1 15.9 11.4 client additions in US$1mn+ and US$10mn+ tiers, but has seen some challenges
EPS adj Rs 90.52 108.72 126.04 140.42 in some periods for US$5mn+ client tier additions. The only factor in Macquarie
EPS adj growth % 44.0 20.1 15.9 11.4
PER rep x 43.1 35.9 31.0 27.8
MOCCA framework that LTTS scores poorly on vs peers is offshore execution.
PER adj x 43.1 35.9 31.0 27.8
Total DPS Rs 35.00 35.00 40.00 47.00 Long-term compounder with exposure to EV, Digital Twins
Total div yield % 0.9 0.9 1.0 1.2
ROA % 21.5 22.8 22.9 22.7
While we think valuation limits upside from rerating and there is some risk of a
ROE % 25.1 25.2 24.7 23.4 derating if growth falters even temporarily, any share-price volatility provides an
EV/EBITDA x 28.6 23.6 20.8 18.7 entry opportunity for long-term investors and we see limited derating risk. We see
Net debt/equity % 1.4 -15.1 -26.2 -35.1
LTTS as a long-term compounder and see engineering services growth as less
P/BV x 9.9 8.3 7.0 6.0
volatile now (vs earlier) with the Digital Transformation mega trend supporting
Source: FactSet, Macquarie Research, January 2023
(all figures in INR unless noted) growth across industries. Near-term growth will likely be below midsize IT
Services peers like Persistent Systems and Coforge, and while LTTS does trade
at higher valuations, the difference in portfolios and bigger moat that engg
services has vs IT Services justifies the premium, in our view. We initiate with an
Outperform and a TP of Rs4,630. We are 4% ahead of VisibleAlpha consensus in
USD revenue for FY24. We see limited upside and prefer PYS, LTIM and
Analysts
Coforge to LTTS among the >US$1bn mkt cap India IT Services midcap firms.
Macquarie Capital Securities (India) Pvt. Ltd.
Ravi Menon +9122 6720 4152 ESG: LTTS scores Q2 on Macquarie’s MGRS, but we think with a carbon and
[email protected]
water neutral target by 2030, this could improve. See page 19.

13 January 2023 115

Macquarie Research India IT Services: Mid-caps

Inside LTTS: A pure-play engineering services firm

L&T Technology Services (LTTS)
Broader portfolio vs Indian engineering
LTTS was formed in 2012 as a subsidiary of Larsen & Toubro (L&T) with the
services peers 117
objective of offering engineering services to third parties outside L&T. LTTS got a
Scoring well in our MOCCA framework 125 broader portfolio and a clearer execution mandate as L&T reorganized its
Valuation, recommendation, risks 129 subsidiaries prior to its IPO through a slump sale of the Product Engineering
Services (PES) division of LTI (erstwhile L&T Infotech, formed as a subsidiary of
Appendices 131
L&T to provide IT Services globally) to LTTS for Rs5.0bn. LTTS also acquired the
Macquarie ESG Assessment 133 Industrial Engineering Services business of L&T in 2015 for Rs5.5bn and
acquired 74% of shares in a subsidiary of Thales (with Thales continuing to hold
the remaining 26%). In December 2014, LTTS acquired the Engineering Services
division of Dell for US$12.2mn and Dell International Services India Pvt Ltd with
offices in Hyderabad and Bangalore for a further Rs13.6mn. There have been a
few minor acquisitions post the IPO of LTTS in September 2016.

Fig 1 Broad-based growth across client tiers

USD mn
14.0
12.0
10.0
8.0
6.0
4.0
2.0
-
-2.0
2QFY21 3QFY21 4QFY21 1QFY22 2QFY22 3QFY22 4QFY22 1QFY23 2QFY23
Top 5 Clients Top 6-10 Top 11-20 Non-top-20 clients

Source: Company data, Macquarie Research, January 2023

Fig 2 LTTS IN rel BSE Sensex performance, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie
coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2023

(all figures in INR unless noted)

13 January 2023 116

Macquarie Research India IT Services: Mid-caps

Broader portfolio vs Indian engineering services peers

Broader set of verticals and clients drive incremental revenue for LTTS

Incremental revenue contribution from non-top-10 clients suggests growth can continue
While LTTS is a pure-play engineering services firm, its strategy seems different from many of its
Indian pure-play peers like Cyient, KPIT or Tata Elxsi, that focus on one to two key verticals and
have a greater reliance on a small set of key clients.

LTTS has a broad range of capabilities across engineering services, and this is exemplified by its
90 R&D innovation labs, ranging from its Electric Vehicle lab to Smart Manufacturing to IoT to a
Wet Lab (that is focused on the Life Sciences industry).

Fig 3 LTTS is more diversified vs its engineering services peers in India

USD mn
300
250
200
150
100
50
0
LTTS Tata Elxsi Cyient KPIT

Transportation Telecom & Hi-tech Industrial Products

Process Industry Healthcare & Medical Devices Media and Communications
Others

Source: Company data, Macquarie Research, January 2023

LTTS has a scale We see LTTS as a more diversified player compared to its Indian engineering services peers and
comparable to global see its growth as more sustainable. Our MOCCA framework (see the next section for details)
engineering pureplay suggests a long runway of growth for LTTS, given:
peers and an employee
1) Low reliance on incremental revenue from its top-10 clients even as these clients continue to
base bigger than most
grow;
of them
2) Breadth of verticals across which it is competitive that makes it less exposed to an industry-
LTTS scores well in our
specific downturn in engineering services (e.g., Aerospace or Automotive or Healthcare);
MOCCA framework due
to low reliance on top- 3) Evidence of continued client mining with steady additions across client tiers including at the
10 clients, broad bottom US$1mn+ client tier.
revenue contribution to
We see LTTS as having scale benefits vs most engineering services pure-play firms, with only
growth across multiple
Altran (now part of Capgemini) and Alten being significantly higher in terms of employee numbers.
verticals and good
client mining across
tiers

13 January 2023 117

Macquarie Research India IT Services: Mid-caps

Fig 4 LTTS has scale comparable to global peers and an employee base bigger than most
Company Revenue^ No of Revenue profile Revenue/
(USD mn) employees employee
(USD/year)

Alten 3,459 42,300 Derives 35% of its revenues from France 81,761
AKKA 1,837 18,420 Derives 54% of revenues from France and Germany 99,707
Altran# 1,181 50,455 Derives 73% of its revenues from Europe 23,399
IAV 1,020 8,200 Automotive focused engineering services firm with most 124,431
of its employees in Germany
Bertrandt 1,003 12,030 German-centric auto & aerospace engineering services 83,400
firm
LTTS 880 20,861 India-centric delivery with Transportation at 32% of 42,194
revenue and Telecom & Hi-Tech at 21%. Top-5
clients account for just 28% of revenue
EDAG 813 7,849 61% of revenues from Germany. Largest independent 103,635
engineering partner to automotive industry
Quest Global 620 13,000 India-centric firm with ~50% of employees in India. 47,692
Warburg Pincus holds a significant stake.
Cyient 608 13,428 India-centric firm with most employees in India. Top-5 45,293
clients account for ~27% of revenue
Assystems 571 6,500 Derives 32% of its revenues from Energy and 87,873
Infrastructure and 68% from Nuclear
Tata Elxsi 326 9,375 India-centric firm with most employees in India. 34,820
Embedded product design account for ~87% of
revenue
Semcon 199 2,045 Swedish firm with 73% of revenues from Sweden 97,467
ESI Group 161 1,144 82% of revenues from licensing of IP 141,170
Source: Company data, Macquarie Research, January 2023

^Note: Revenue as of CY21/ FY22 depending on financial year end

Note: Altran’s revenue calculated based on disclosure of Capgemini’s inorganic revenue contribution
#

LTTS’ breadth of expertise is visible in its deal wins across verticals, including ones such as
Automotive, where its peers KPIT and Tata Elxsi are focused. For instance, LTTS announced a
five-year, multi-million dollar deal with BMW in August 2022 (see link here) to provide engineering
services for the company’s suite of infotainment consoles targeted for its family of hybrid vehicles.
LTTS has grown 25% YoY in Transportation over 2QFY23 in USD terms vs 17.2% growth YoY for
KPIT and 30.4% for Tata Elxsi, despite a revenue base that is similar in Transportation (see Fig 8).

While quarterly incremental revenue post-COVID does not seem to be higher vs pre-COVID levels
(in contrast to many IT Services peers), LTTS’ incremental revenue seems steadier. This is due to
both a change in the incremental revenue being driven by a broader set of clients as well as a
broader set of verticals post-COVID vs FY18 (when top-10 and Telecom & Hi-Tech had an
outsized contribution to incremental revenue).
Fig 5 While post-COVID organic incremental revenue QoQ hasn’t been much above pre-
COVID levels, it seems steadier for LTTS as it is not relying heavily on top-5 customers like
it was in FY18

20

10

-10

-20

-30
1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

Quarterly Organic Incremental Revenue in CC terms

Source: Company data, Macquarie Research, January 2023

13 January 2023 118

Macquarie Research India IT Services: Mid-caps

We think that verticals such as Plant Engineering got a shot in the arm with projects such as
production optimisation and changing the plant layouts to prioritise certain items over others
during COVID.

We also see momentum in Plant Engineering continuing with brownfield expansions with an
emphasis on industry 4.0 in FMCG and the shifting of work offshore in Oil & Gas for ongoing
management of change in plants. These are longer-term deals and should provide additional
incremental revenue compared to the pre-COVID pipeline and has offset pressure seen in Medical
Devices and Telecom & Hi-Tech.

Industrial products is another vertical that seems to be picking up momentum as products ranging
from wind energy turbines to ship engines want to develop digital twins and improve reliability and
performance as new sensors and real-time data analysis make that possible.

Fig 6 Incremental revenue not relying mostly on Telecom & Hi-Tech as in FY18, but a
broader set of verticals post-COVID…

USD mn
15

-5

-15

-25
1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Transportation Industrial Products Telecom & Hi-tech Process Industry Medical Devices

Source: Company data, Macquarie Research, January 2023

While Transportation declined sharply over 4QFY20 and 1QFY21 as Aerospace programs were
put on hold, the incremental revenue in Transportation has been driven by not just a partial
recovery in Aerospace, but also new traction in Automotive. FY18 had seen a large deal in
Telecom & Hi-Tech which saw a decline as the client spun off the division to a private equity player
who decided to move the work in-house and absorb LTTS’ employees. We see no such one-off
elements to the revenue addition in recent quarters.

Fig 7 …as is clear when we look at the breakup of incremental revenue QoQ

100%

50%

0%

-50%

-100%
4QFY20

1QFY22

2QFY23
1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

1QFY21

2QFY21

3QFY21

4QFY21

2QFY22

3QFY22

4QFY22

1QFY23

Transportation Industrial Products Telecom & Hi-tech Process Industry Medical Devices

Source: Company data, Macquarie Research, January 2023

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Macquarie Research India IT Services: Mid-caps

LTTS has a geographic mix that is more North America-heavy than firms that are more
Automotive-centric such as Tata Elxsi and KPIT. North America continues to contribute most of the
incremental revenue for LTTS, but Europe and Asia have also been contributing despite cross-
currency headwinds (see chart below).

Even in verticals like Transportation where it competes head-to-head with more focused peers like
KPIT and Tata Elxsi, LTTS has been consistently adding more revenue (see chart below). KPIT
focuses exclusively on Transportation while Tata Elxsi had 41.5% of its revenue coming from
Transportation as of 2QFY23 (with another 42.3% from Communication & Media and the balance
coming from Healthcare and Medical devices).

LTTS has 35% of its revenue coming from Transportation, but defines this vertical more broadly
and includes Aerospace, Rail Transport and Heavy equipment within this segment in addition to
Automotive (unlike Tata Elxsi that focuses largely on Automotive within Transportation and has no
exposure to Aerospace).
Fig 8 LTTS consistently adding more revenue in Transportation vs KPIT and Tata Elxsi
despite no acquisitions to help improve pipeline and win-rate

USD mn
7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0
2QFY22 3QFY22 4QFY22 1QFY23 2QFY23

LTTS KPIT Tata Elxsi

Source: Company data, Macquarie Research, January 2023

LTTS’ nearest peer in size among India pure-play engineering services firms is Cyient with overall
quarterly revenue of US$175mn (and services revenue of US$151mn) as of 2QFY23 vs
US$247mn for LTTS. But LTTS has much lower client concentration vs Cyient with top-10 clients
accounting for only 27% of revenue vs 40% for Cyient (as of 2QFY23).

LTTS’ top-20 client exposure is only 42.4% on a trailing-twelve-month basis and is ~39% for
2QFY23 per our calculations.
Fig 9 LTTS has client concentration that is lower than its peers with its top-20-account
exposure still less than the top-10 accounts of most peers

90% 85%
80%
70%
60%
48%
50%
39% 40%
40%
30%
20%
10%
0%
LTTS Cyient Tata Elxsi KPIT

Top-5 Client Top 6-10 Clients Top 11-20 Top-21 Clients

Source: Company data, Macquarie Research, January 2023

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Macquarie Research India IT Services: Mid-caps

While its client concentration is lower than its peer group already, LTTS’ incremental revenue is
driven largely by clients outside its top-20 even as the top-20 also seems to be growing. This also
suggests a longer growth runway and more sustainable incremental revenue.

Fig 10 LTTS has been deriving a large part of incremental revenue beyond its top-20
accounts

USD mn
14.0
12.0
10.0
8.0
6.0
4.0
2.0
-
-2.0
2QFY21 3QFY21 4QFY21 1QFY22 2QFY22 3QFY22 4QFY22 1QFY23 2QFY23

Top 5 Clients Top 6-10 Top 11-20 Non-top-20 clients

Source: Company data, Macquarie Research, January 2023

Surprisingly, despite the higher client concentration for Cyient vs LTTS, both firms have similar
average account size outside the top-10 (see Fig 11). Client mining capability seems comparable,
but LTTS has been able to add many new customers (see Fig 12) and we think this could also be
due to the continued investment into new practices and ongoing investments in adjacencies to
existing verticals.

Fig 11 Both LTTS and Cyient seem to have similar average account size excluding top-10
clients

USD mn
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
-
2QFY18 2QFY19 2QFY20 2QFY21 2QFY22 2QFY23

Cyient LTTS

Source: Company data, Macquarie Research, January 2023

From a similar count of US$1mn+ customers at 79 for LTTS vs 65 for Cyient back in 2QFY18,
LTTS has grown to having 150 US$1mn+ customers by 2QFY23 (without any major acquisitions
other than a small one, Orchestra, in Oct-2020 for US$25mn) while Cyient has grown to just 85
customers in the US$1mn+ client tier. LTTS scores well in hunting and we attribute this to better
tip-of-the-spear solutions across multiple industries incubated through the investments in 90+ R&D
labs.

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Macquarie Research India IT Services: Mid-caps

Fig 12 Client base of US$1mn+ vs Cyient

160 150

140 125
116
120 106
100 94
85 85
79 77 76
80 65 68
60
40
20
-
2QFY18 2QFY19 2QFY20 2QFY21 2QFY22 2QFY23
Cyient LTTS

Source: Company data, Macquarie Research, January 2023

LTTS’ hunting capabilities have meant that even as average account size outside the top-10
clients for Cyient and LTTS are similar (indicating client mining ability is similar), it has grown much
faster (see Fig 13).

Fig 13 LTTS has grown nearly 3x faster than Cyient over the last 13 quarters

USD mn
300

250

200
CQGR:0.6%
150

100

50

0
1QFY22
2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Cyient LTTS

Source: Company data, Macquarie Research, January 2023

LTTS’ broader industry exposure has meant an ability to consistently add more incremental
revenue than Cyient with Cyient’s recent outperformance coming inorganically (see Fig 14).

13 January 2023 122

Macquarie Research India IT Services: Mid-caps

Fig 14 LTTS has outperformed Cyient consistently on an organic incremental revenue

basis QoQ

USD mn
20

10

-10

-20

-30
2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Cyient LTTS

Source: Company data, Macquarie Research, January 2023

Even within the top-10 clients, LTTS scores better than Cyient across most periods (excluding the
last 12 months from 2QFY23 – here we do not know the impact of the acquisition Cyient has made
on its top-10 client revenue nor do we know the cross-currency drag for both of them).

Fig 15 LTTS does better than Cyient in incremental revenue YoY from top-10 clients for
most periods…

USD mn
20
15
10
5
0
-5
-10
-15
-20
2QFY19 2QFY20 2QFY21 2QFY22 2QFY23

Cyient LTTS

Source: Company data, Macquarie Research, January 2023

While in 2QFY23 LTTS seems to have underperformed Cyient in incremental revenue additions to
the top-10 client tier, Cyient could have an inorganic contribution to its top-10 client tier (with four
acquisitions being integrated by Cyient over 2QFY23, we think this is possible).

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Macquarie Research India IT Services: Mid-caps

Fig 16 …but where it scores much higher is in the non-top-10 (note Cyient has a recent
acquisition aiding 2QFY23 figures)

USD mn
40

30

20

10

-10

-20
2QFY19 2QFY20 2QFY21 2QFY22 2QFY23

Cyient LTTS

Source: Company data, Macquarie Research, January 2023

As we discussed earlier, the incremental revenue outperformance in non-top-10 by LTTS seems to

be coming from an addition of more accounts in the US$1mn+ client tier vs Cyient.

As Engineering Services is seen by investors as a sub-segment of India IT Services and most

large India IT Services firms have large engineering service practices (e.g. HCL Tech; HCLT IN,
Outperform, TP Rs1,500, CMP Rs1,045; had over USD1.8bn in revenue from Engineering and
R&D services in FY22), we compare LTTS to the sub-US$5bn revenue India IT Services firms.

13 January 2023 124

Macquarie Research India IT Services: Mid-caps

Scoring well in our MOCCA framework

Broadening vertical base; improving client mining; low top-10 client reliance

MOCCA framework indicates sustainable incremental revenue addition

LTTS scores well in our MOCCA framework (Macquarie’s 5-factor framework for mid-cap IT
Services firms with the factors listed below, please see details in our sector report, titled Digital
transformation: Scale matters less) indicating that its incremental revenue addition is driven by
sustainable factors and suggesting a long growth runway is possible. We use this framework to
benchmark LTTS’ incremental revenue drivers against a broader peer group, i.e. midsize India IT
Services players.

• Below is a summary of LTTS rating in Macquarie’s MOCCA framework to analyse

incremental revenue. Note that the ranks are not meant to be taken purely as an indicator
of superior/inferior execution vs peers but are only meant to indicate whether the key
drivers of incremental revenue are sustainable and which ones need a closer look.

Fig 17 LTTS scores very well, indicating that its growth drivers are sustainable

Mining
Contribution Contribution Avg account
Ranking by USD1mn+ USD5mn+ USD10mn+ Offshore
from top-10 by Top size (growth Overall Rank
parameter client tier client tier client tier proportion
clients vertical ex-top-10)
additions additions additions
LTI 6 8 7 2 4 5 7 7
Mindtree 9 7 4 4 8 4 3 7
LTI + Mindtree 5 4 6 3 7 1 4 2
Mphasis 10 9 9 9 9 7 9 10
Coforge 4 1 1 7 5 8 6 4
Persistent 1 3 8 6 2 2 1 1
LTTS 1 5 4 8 1 3 8 2
Birlasoft 8 2 3 1 10 9 2 5
Mastek 3 NA NA 10 6 6 10 9
Zensar 6 5 2 5 3 10 4 5
Source: Macquarie Research, January 2023

• Mining: LTTS has been moving clients up the revenue tiers and punches above its
Scores well in client
weight in client additions in US$1mn+ and US$10mn+ tier but has seen some
mining in US$1mn+ and
challenges in some periods for US$5mn+ client tier additions. This suggests that the
US$10mn+ tier and in
client mining is broad-based and the flatlining of Average Account Size beyond top-
driving growth across a
10 clients could be due to client-specific issues with some US$5mn+ accounts.
broad set of clients and
Overall, LTTS still demonstrates a capability for client mining and that reassures us
verticals
that a long growth runway is possible, and the incremental revenue does not have
unsustainable dependence on a few clients within the top-10 accounts.

Although scoring • Offshore Execution: LTTS's offshore capability has seen some volatility with the last
relatively low on the 12 months seeing a higher onsite contribution, but with ~62% of incremental revenue
Offshore contribution to over the last 5 years coming from offshore, we think there is a strong offshore
incremental revenue, delivery capability and LTTS is delivering not just skills, but solutions.
with ~62% of
• Client Concentration: LTTS has a large portion of its incremental revenue coming
incremental revenue
from its non-top-10 clients and this has kept reducing client concentration and risk.
over the last 5 years
But its top-5 clients have been a drag on its growth, and this is both an opportunity
coming from offshore,
(for faster growth once the client-specific drags are removed) and a risk (of possible
we think there is a
volatility in revenue if any of the top-5 decline sharply). We think the Aerospace
strong offshore delivery
decline during Covid could be one of the drags within the top-10 clients and expect
capability. We also think
this can reverse over the next few years providing a fillip to growth.
engineering services as
a service is likely to • Contribution from top vertical: LTTS has a high share of incremental revenue driven
have higher onsite outside its top vertical and this breadth of vertical exposure is what differentiates it
proportion than IT with most India Engineering Services peers that have a concentration in one or two
Services verticals.

13 January 2023 125

Macquarie Research India IT Services: Mid-caps

• Average Account Size: The stagnant average account size outside the top-10 (using
US$1mn+ client count as the denominator) should not be taken negatively as LTTS
has been growing clients outside its top-10 accounts and even seen growth within its
top-10 as well. We see the continued addition of US$1mn+ client accounts as the
reason for the stagnation in average account size beyond the top-10 clients and this
a good foundation for continued growth.

LTTS has not engaged in any mega deals after a large deal with a Hi-Tech firm back in FY18.
Hence, we see the recent incremental revenue as sustainable from this perspective.

Mining:
LTTS has consistently done well across tiers and punches well above its weight – especially over
both the last 24 months as well as the last 60 months. By punching above its weight in additions to
the US$1mn+ tier, LTTS redeems its lower scoring in scaling up accounts outside its top-10 clients

We have added the absolute client count below for easy reference and we can see the growth in
the client count in the US$1mn+ tier every year with client additions even during Covid-impacted
FY21.

Fig 18 US$1mn+ client count up 88% over last 22 quarters Fig 19 US$10mn+ client count above pre-Covid level

USD 1mn+ USD 10mn+

clients clients
160 30

140
25
120
20
100

80 15

60
10
40

20 5

- -
1QFY18

1QFY20

1QFY22
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19

2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21

2QFY22
3QFY22
4QFY22
1QFY23
2QFY23

1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
Source: Company data, Macquarie Research, January 2023 Source: Company data, Macquarie Research, January 2023

But LTTS has been falling slightly behind in scaling clients in the US$5mn+ client tier. We think
that this could be because it is expanding rapidly into new industry segments and adding new
clients, and we note LTTS has done well in the US$1mn+ client tier indicating it isn’t a lack of
ability that is hampering its additions to the US$5mn+ tier.

Lending support to its strong additions in the US$1mn+ client tier, we are able to see LTTS is
clearly punching above its weight in US$10mn+ client tier. Overall, we think this indicates a strong
capability to mine client accounts.

Client Mining is one of the most critical parameters for sustainable growth and indicates a broad
set of service capabilities and sophisticated account management as well as good client
satisfaction (as growing client accounts would not be possible otherwise).

With strong additions in the US$10mn+ client tier, LTTS punches above its weight across most
periods and assuages any concern we could have had in its slightly below-par performance in
client mining in the US$5mn+ client tier.

13 January 2023 126

Macquarie Research India IT Services: Mid-caps

Offshore Execution:
While LTTS has been near the bottom of the tiers over the past two years (indicating a larger
contribution from onsite to incremental revenue), we think that engineering services deals with new
clients or in new areas with existing clients usually start with a higher onsite contribution. Over the
past few quarters, the offshore incremental revenue proportion had volatility in its contribution and
has been at an average of 55% (range of 50%-62%) which we would still consider healthy and
indicative of an ability to move work offshore and take on responsibility for execution vs just
providing skills. While LTTS’ closest peer Cyient did not provide the onsite-offshore split earlier, it
has started sharing its offshore proportion recently and Cyient’s offshore mix is 48% as of 2QFY23.

With a long-term contribution of 50-60% or better coming from offshore, we think LTTS’
incremental revenue does not have unsustainable factors such as onsite skills-based staffing that
could be influenced by temporary skill shortages.

We also think this is still relatively early days for many client accounts and projects in engineering
services and offshore leverage can pick up over time unlike in IT Services where a higher offshore
adoption has been accepted as the industry norm.

Client concentration:
LTTS has consistently generated a large proportion of its incremental revenue from clients beyond
its top 10. LTTS has seen its incremental revenue from its top ten clients be 23% at most, but has
still seen positive contribution from its top-10 clients across the last 5 years barring two periods.
This suggests that the top-10 clients are still growing and while there could be some client-specific
issues that have led to lower contribution from the top-10 in some periods, the top-10 are still likely
to be broadly distributed across multiple industries and hence not a source of great risk.

In absolute terms, we see that incremental revenue from the top-10 clients has, apart from the
Covid recovery over the past 2 years, been muted. This is an opportunity for faster growth for the
firm overall as the drag from these clients in the base reduces further over time.

A longer-term analysis of incremental revenue addition by client tier indicates that it is the top 5
clients that have been the sole drag. See chart below.

Fig 20 Incremental revenue: Top-5 a drag in FY20 and FY21 Fig 21 Non-top-20 clients the main driver for growth

USD mn YoY USD mn QoQ

80 14.0

60 12.0
10.0
40
8.0
20
6.0
0
4.0
-20
2.0
-40 -

-60 -2.0

-80
FY17 FY18 FY19 FY20 FY21 FY22

Top 5 Clients Top 6-10 Top 11-20 Top 5 Clients Top 6-10 Top 11-20 Non-top-20 clients

Source: Company data, Macquarie Research, January 2023 Source: Company data, Macquarie Research, January 2023

Over FY22, the top-5 have seen a recovery and a return to growth. This is possibly either because
of a change in the clients classified as top-5 or a change in client circumstances. Either way, this
suggests that LTTS’ drag from its top-5 clients are likely to be over. When we look at the
incremental revenue trend in recent quarters from its top-5 and top-6-10 accounts, the trend is
encouraging despite recent cross-currency headwinds.

13 January 2023 127

Macquarie Research India IT Services: Mid-caps

Vertical concentration:
Consistent with LTTS’s strategy of broad diversification across verticals, we see the contribution of
its top vertical to incremental revenue is one of the lowest among its peers across any period we
take over the last 24 to 60 months and while it is high relative to previous periods, the 57.2%
contribution over the last 12 months is not worrying. As of 2QFY23, only 34.5% of the revenue is
from the top vertical (Transportation – which itself is broad-based across Aerospace, Heavy
Equipment & Trucks and Passenger Cars).

Except for the last 12 months when a bounce-back in Aerospace and improved traction in
Automotive helped drive much faster growth in Transportation vs the other verticals (except for
Plant Engineering which also grew 20.8% YoY in 2QFY23), LTTS has not been overly reliant on
Transportation vertical to drive growth. The broad-based nature of its portfolio ensures that growth
is steady across the portfolio even as some verticals are firing on all cylinders while others may be
growing slower. So, we don’t see any unsustainable elements to LTTS’ incremental revenue from
this angle either.

The chart below shows how the revenue scale-up has been across verticals for LTTS with the
acceleration in the last 24 months being visible especially in Transportation and Process Industry
verticals.

Fig 22 Revenue by vertical shows that LTTS has scale across multiple verticals and has
seen a pick-up in transportation and Process Industry over 2QFY21-2QFY23

USD mn
90 85
80
69 68
70
60 56

50 43
47 46 48
38 41 38 40
40 35 32 33
27
30 26 23 27
17
20
10
0
Transportation Industrial Products Telecom & Hi-tech Process Industry Medical Devices

2QFY20 2QFY21 2QFY22 2QFY23

Source: Company data, Macquarie Research, January 2023

So, while the ranking indicates a low contribution of incremental revenue from its top vertical over
the last 12 months, the recent growth performance is still broad-based across verticals including
the top vertical and that suggests that the incremental revenue addition is sustainable.

Average Account Size:

Given strong revenue contribution outside the top-10 clients, we would have expected to see
Average Account Size outside top-10 improve for LTTS. Surprisingly, average account size
excluding top-10 clients has declined ~5% over the last 5 years. But we are not worried about this
as the Client Mining shows LTTS performing fairly well across US$1mn+ and US$10mn+ client
tiers (see Fig-18 and Fig-19).

Mega Deals:
LTTS had not done any Mega Deals since FY18 when it signed a large deal with a high-tech
customer. So there is no major unsustainable contribution to incremental revenue in the recent
past from this standpoint.

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Macquarie Research India IT Services: Mid-caps

Valuation, recommendation, risks

LTTS is trading at a significant premium to that at which Accenture acquired Umlaut (which was a
EV/Sales multiple of ~2.4x (see links here and here) in June 2021 for a reported US$1.0bn.
However, compared to Hitachi’s US$9.6bn acquisition of privately held GlobalLogic in March 2021,
even if we factor the current run rate of GlobalLogic at US$1.5bn (see link here), the EV/Sales
multiple of 6.4x for the deal seems to be at a premium to what LTTS trades at today. Given Umlaut
was only ~4K people vs GlobalLogic at ~20K people in March 2021, one can argue that LTTS
should be considered closer to GlobalLogic than Umlaut.

Compared to KPIT that has guided for an organic revenue growth of >23% in constant currency
(CC) over FY23, LTTS is expected to grow organically at a rate of 15.5-16.5% in constant
currency. We see the Transportation verticals as similarly sized between LTTS and KPIT and see
both firms as having access to similar clients (noting that LTTS has signed a large deal with BMW
in August 2022, which is seen as one of the strategic customers for KPIT). We think that LTTS’
broader base allows for a longer growth runway as it potentially can cross-sell and grow beyond its
initial entry point into a customer.

LTTS can draw on its expertise in one vertical and cross-pollinate that across its portfolio (e.g. its
Power Electronics expertise has helped it in showcasing credentials suitable for engineering
services to design Electric Vehicle chargers). We think this ability to cross-pollinate skills across
the firm makes LTTS a more valuable partner to its clients and differentiates it vs its more focused
engineering services peers. This also potentially increases the addressable wallet-share with
individual customers for LTTS.

While we see little rerating prospects for LTTS given even strategic acquisitions like that of
GlobalLogic by Hitachi was only at 6.4x EV/Sales implying only a 28% premium to LTTS (currently
trading at ~5.0x), we still see sufficient upside and a long runway of growth to justify current
multiples and initiate with an Outperform rating.

Fig 23 LTTS is trading close to 1 std deviation above its last 5 year trading history

1-year fwd PE
70.0

60.0

50.0

40.0

30.0

20.0

10.0

0.0
14/02/2017 14/02/2018 14/02/2019 14/02/2020 14/02/2021 14/02/2022

Avg +1std -1std

Source: Bloomberg, Macquarie Research, January 2023

Fig 24 Broad-based revenue drivers and client mining beyond top-10 lead us to expect a long growth runway
MOCCA framework FY24 RoE (%) FY22-25E USD revenue FY22-25E EBIT FY24 PE FY25 PE
overall rank CAGR (%) CAGR (%)

LTTS 2 24.7 13.3 16.5 30.9 27.8

Source: Macquarie Research, January 2023

13 January 2023 129

Macquarie Research India IT Services: Mid-caps

We value LTTS at 2.5x PEG and assign a target PE multiple of 33x (considering USD revenue
CAGR of 13% over FY22-25E) to arrive at a target price of Rs4,630 on 33x Mar-2025 PE. We are
comfortable discounting FY25E EPS now, as we see LTTS as being very predictable and having a
long runway of growth.

Given limited upside, we prefer Persistent Systems (PSYS IN, Outperform, TP Rs8,330, CMP
Rs4,080), LTIMindtree (LTIM IN, Outperform, TP Rs7,540, CMP Rs4,318) and Coforge
(COFORGE IN, Outperform, TP Rs6,260, CMP Rs3,919) ahead of LTTS among India IT Services
midcaps with >US$1bn market cap.

Fig 25 Initiate with Outperform and TP of Rs4,630 on 33x FY2025E PE

(INR)

Current price^ 3905

1-year fwd EPS 117
1-year fwd PE 33.4
Target multiple 33
Target EPS period Apr-2024 to Mar-2025
Target EPS 140
Target Price 4,630
Next 1-year dividends 35
Next 1-year total returns (%) 20%
Source: FactSet, Macquarie Research, January 2023

^
Closing price as on 10th January 2023 from Bloomberg

Macquarie vs Visible Alpha Consensus:

Fig 26 Our estimates are above consensus for FY24E and FY25E on USD revenue and
EBIT and Net Income in INR terms
Macquarie Visible Alpha Macquarie vs VA
YE Mar, in Mn FY23E FY24E FY25E FY23E FY24E FY25E FY23E FY24E FY25E

Revenue in USD 998 1,135 1,279 977 1,096 1,237 2% 4% 3%

Abs change 118 137 144 97 118 142
Revenue 80,166 90,268 100,899 80,323 90,042 101,700 0% 0% -1%
% change 22% 13% 12% 22% 12% 13%
Operating Income 14,791 16,904 18,963 14,600 16,368 18,187 1% 3% 4%
% margin 18% 19% 19% 18% 18% 18%
Net income 11,493 13,323 14,843 11,478 13,102 14,683 0% 2% 1%
% margin 14% 15% 15% 14% 15% 14%
EPS-Diluted 108.7 126.0 140.4 108.6 123.7 138.8 0% 2% 1%
Source: Visible Alpha, Macquarie Research, January 2023

Risks: The key risk we see to LTTS is a possible derating for the overall engineering services
segment. Compared to IT Services peers, even though the growth runway is possibly longer, near-
term growth prospects for IT Services peers seem better. Another key risk is the possible loss of
any major customers – especially among the top-10 customers.

13 January 2023 130

Macquarie Research India IT Services: Mid-caps

Appendices
Fig 27 LTTS has a board with eminent board members including senior former executives from IT Services peers like
Cognizant and Wipro
Board of Directors

Joining the Company as a Junior Engineer in 1965, Mr. Naik rapidly rose to positions of increasing
responsibility. His tenure as Group Executive Chairman was extended by the Board of Directors in April
Non-Executive - Non
Mr. Anilkumar 2012. He is known for his contribution at L&T like kick starting of the critical equipment for defence sector and
Independent Director-
Manibhai Naik transforming L&T into a world-class conglomerate. Mr. Naik has received the nation's highest civilian
Chairperson
honours, the Padma Vibhushan and the Padma Bhushan, as well as the highest award from the state of
Gujarat, the Gujarat Garima
S.N. Subrahmanyan, is the CEO and Managing Director of Larsen & Toubro Limited (L&T).In addition, he is
Non-Executive - Non
Mr. S.N also Vice Chairman on the boards of L&T Technology Services & Mindtree and Chairman of L&T Metro Rail
Independent Director-
Subrahmanyan (Hyderabad) Limited. Prior to this, he led L&T's infrastructure business to its position as the country's largest
Vice Chairperson
construction organization and 14th in the world.
Dr. Panda has over 31 years of global industry experience in complex technology and engineering services
research, conceptualisation, creation, operationalization, and turnaround. He joined the L&T Group in 2009
Mr. Keshab Non-Executive - Non
as the Chief Executive Officer of L&T IES and has received numerous awards during his tenure as CEO of
Panda Independent Director
LTTS, including being named CEO of the Year by leading news channel CNBC Awaaz for his distinguished
contributions to the engineering and technology sectors over the past three decades.
Narayanan is a member of the Institution of Electronics and Telecommunications Engineers and the Indian
National Academy of Engineering. He serves as the vice-chairman of the Sanmar Group and the National
Mr. Narayanan Non-Executive -
Accreditation Board of Certification Bodies. In addition, he serves as president of the Indo-Japan Chamber of
Kumar Independent Director
Commerce and Industry. He serves on the boards of several public companies, including Bharti Infratel
Limited, Times Innovative Media Limited, MRF Limited, and L&T.
Ms. Apurva Purohit is an Indian businesswoman with over three decades of corporate experience. She also
serves as an Independent Director at L&T Technology Services Ltd and Navin Fluorine International Ltd.
Ms. Apurva Non-Executive -
She has received numerous business awards and has been named one of the Most Powerful Women in
Purohit Independent Director
Business by the India Today Group and Fortune India on multiple occasions. In 2022, she received the IIM
Bangalore Distinguished Alumni Award.
Chandra has had a distinguished career in information technology spanning 34 years. He sits on the boards
Mr.
Non-Executive - of PNB Housing Finance Limited, NSEIT Limited, and Aujas Networks Limited as an independent director
Chandrasekaran
Independent Director (subsidiary of NSEIT). He is also a member of NASSCOM's Chairman's Council. He is popularly known for
Ramakrishnan
his works at Cognizant, India.
From 2000 to 2002, Sudeep was a member of Nasscom's Executive Council, and again from 2009 to 2011.
Between 2002 and 2008, he was the President of Wipro's Enterprise Solutions Division and a member of the
Mr. Sudip Non-Executive -
Wipro Corporate Executive Council. He was the chief executive officer of LTIL from 2008 to 2011. He is also
Banerjee Independent Director
a director of Kesoram Industries Limited and IFB Industries Limited, and he was an Operating Partner at
Capital Square Partners Advisors Pte Ltd in Singapore.
Luis Miranda was also involved in the establishment of two highly successful companies, HDFC Bank and
IDFC Private Equity. Luis left his position as CEO of IDFC Private Equity in 2010. Luis Miranda is the
Mr. Luis Non-Executive - Chairman of the Indian School of Public Policy, the Centre for Civil Society, and the CORO, ManipalCigna
Miranda Independent DirectorHealth Insurance, as well as a Senior Advisor at Morgan Stanley. He is a Trustee of the University of Chicago
Trust in India, as well as a member of the Global Leaders Group and the Advisory Council of Chicago
Booth's Rustandy Center for Social Sector Innovation.
Source: Macquarie Research, January 2023

13 January 2023 131

Macquarie Research India IT Services: Mid-caps

Fig 28 Acquisitions by LTTS

Purchase
Company Date consideration Description
(INR Mn)

Orchestra will help

Orchestra bolster Group’s offerings in the areas of Network engineering & Enterprise Mobility and next generation
2/10/2020 489
Technology digital systems for
5G and IoT networks.
Graphene provides end-to-end solutions — from chip
design and embedded software, through to providing support to mass manufacturing, thereby being a
one-stop service and
Graphene
solution provider. Graphene’s strong offshore presence, coupled with expertise in complete VLSI Chip
Semiconductor 15/10/2018 782
Design & Embedded
Services
Software will be a force multiplier for the Group and will enhance the capabilities in the Semiconductor
& Product OEM
space.
Provider of design services from specification to final product in Digital Signal Processing for
communications, video, security and networking. The acquisition deepens the Group’s offerings to
Esencia
1/06/2017 1,146 global customers, particularly in the realm of perceptual computing, internet of things, advanced silicon
Technologies
products and wireless networking technologies with fast, powerful and smart design tools and signal
processing libraries.
Dell Engineering Services has more than 15 years of extensive experience in Mechanical Design &
Analysis, Embedded Engineering, Applied Engineering, and Manufacturing Consulting across multiple
industries and has long-term relationships with marquee clients in North America, especially in the
Dell Engineering transportation industry. This acquisition enables L&T Technology Services to consolidate its position as
21/11/2014 3,081
Services preferred vendor in the USD $4 billion Transportation ER&D market. The acquired assets will enable
L&T Technology Services to leverage the customer base and complementary capabilities of Dell
Engineering Services along with L&T Technology Services’ broader portfolio of Embedded and PLM
offerings, supported by a global sales force.
Source: Company, Macquarie Research, January 2023

13 January 2023 132

Macquarie ESG Assessment

Larsen & Toubro Infotech Quartile Previous

LTI IN Macquarie ESG Score Q1

Sustainability (Environment & Social) Q1

SOFTWARE & IT SERVICES Governance & Risk Q1 Q1
Ravi Menon Macquarie ESG Research * BM - Below Median
Company Research Homepage

What's New & Interesting

LTI has set a goal to be carbon neutral and achieve water neutrality by 2030 (for its India operations) and is increasing the mix of renewable energy it uses. LTI has also
targeted the achievement of a 30% increase in diversity by 2030. The company has stared providing an annual update on progress toward these goals, with FY22 seeing
a 32.5% share of renewable energy in overall energy usage and an 83.5% reduction in travel emissions (partly aided by higher work-from-home and due to Covid
restrictions).

Key ESG Issues

3 key ESG issues to consider * Supporting Information from Macquarie ESG Model

LTI has started providing a quantitative assessment of its scope-1, CDP score: B

E scope-2, and scope-3 emissions - the only firm of its size to provide
such data. It published its first integrated annual report in FY22.

Of its workforce, 30% is women, but LTI has only a single woman on FY22 Annual Report, page 12

S its board. The company can also do more to disclose local hiring
across the different geographies in which it operates.

IP protection and competitive behaviour are good. The company has formulated a whistleblower policy and has established a vigil

G mechanism for directors and employees to report concerns about unethical

behavior, actual or suspected fraud, or any wrongdoing or unethical or improper
practice.

* Key issues are sourced from the full ESG model, including 10+ pages on Environmental/Social issues and 120+ questions on CG/Risk.
Contact your MQ sales rep to see the full model.

ESG Opportunity
What is the greatest opportunity for the company? And what moves is it making to capitalize on that opportunity

We see improving gender diversity on the board as the biggest opportunity for LTI.

Looking Ahead
Current Qualitative comments
1. Degree to which ESG risks are factored into financial forecasts, where the risks ESG risks are adequately captured in financial forecasts.
could have a clearly defined impact on P&L of BS within 3 years.
(1-10; with 1 = not at all; 10 = completely)
8

2. Degree to which ESG risks are factored into stock valuation (DCF or multiple), ESG risks are adequately captured in the valuation.
where the impact is difficult to quantify and/or hits outside the forecast period.
(1-10; with 1 = not at all; 10 = completely)
8

3. Two years from now we expect the company's ESG profile to: We expect ESG disclosure to continue to improve.
(1-10; with 1 = Get Much Worse; 5 = Stay the Same; 10 = Improve Dramatically) 8

Please refer to next page for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures
Macquarie ESG Assessment

Larsen & Toubro Infotech

Score Card Summary *

Sector # of
Score Average Notes Sample KPI *
Environmental Footprint of Hardware
7.8 5.8 22 Total energy consumed.
Infrastructure

Environment Score (33%) 7.8 5.8 22

Total amount of monetary losses as a result of legal proceedings

Data Privacy & Freedom of Expression 7.3 8.0 10
associated with user privacy.

Data Security 7.2 9.1 7 Number of data breaches.

Recruiting & Managing a Global, Diverse &

5.2 5.5 17 Percentage of female representation for management.
Skilled Workforce

Social & Human Capital (33%) 6.6 7.5 34

Intellectual Property Protection & Total amount of monetary losses as a result of legal proceedings
10.0 10.0 2
Competitive Behavior associated with anticompetitive behavior regulations.

Leadership & Governance (33%) 10.0 10.0 2

Environment and Sustainability (E&S) 8.1 7.8 58

Asia
Score Average Sample Negatives & Positives *

Board Structure (15%) 7.9 6.8

Shareholding (15%) 7.9 7.7

Corp Gov (58%)

History (11%) 9.5 8.1

Capital Management (9%) 6.6 7.0

Remuneration (4%) 6.7 7.0

Access (4%) 8.3 6.9

Account & Audit (18%) 8.2 7.9

Risk (42%)

Earnings Quality (15%) 7.3 6.2

True B/S Strength (7%) 8.4 6.5

Visibility (2%) 8.9 7.1

Macquarie Governance & Risk (G) 8.0 7.2

Sector
Score Average

Macquarie ESG Score ^ 8.0 7.8

^Note: Macquarie ESG Score = 60% E&S + 40% G

* This is a summary. For our full ESG model, please contact your Macquarie sales representative.

Important Notice
This document is an ESG tearsheet on the subject company taken out of a published report. For important disclosures and disclaimers regarding this document, please refer to the disclosures and disclaimers in the published report.
Important disclosures and disclaimers regarding Macquarie research that may be relevant to the subject company can also be reviewed at: www.macquarie.com/research/disclosures.
Macquarie Research India IT Services: Mid-caps

L&T Technology Services (LTTS IN, Outperform, Target Price: Rs4,630.00)

Quarterly Results 2Q/23A 3Q/23E 4Q/23E 1Q/24E Profit & Loss 2022A 2023E 2024E 2025E

Revenue m 19,951 20,377 21,101 21,570 Revenue m 65,697 80,166 90,268 100,899
Gross Profit m 6,405 6,579 6,958 7,227 Gross Profit m 21,906 26,119 29,425 32,733
Cost of Goods Sold m 13,546 13,798 14,143 14,343 Cost of Goods Sold m 43,791 54,046 60,843 68,166
EBITDA m 4,218 4,332 4,603 4,775 EBITDA m 14,149 17,163 19,447 21,658
Depreciation m 590 617 590 610 Depreciation m 2,144 2,373 2,543 2,695
Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0
Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0
EBIT m 3,628 3,715 4,013 4,165 EBIT m 12,005 14,791 16,904 18,963
Net Interest Income m 0 0 0 0 Net Interest Income m 0 0 0 0
Associates m 0 0 0 0 Associates m 0 0 0 0
Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0
Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0
Other Pre-Tax Income m 261 269 163 330 Other Pre-Tax Income m 1,087 1,033 1,436 1,464
Pre-Tax Profit m 3,889 3,984 4,177 4,495 Pre-Tax Profit m 13,092 15,824 18,340 20,427
Tax Expense m -1,057 -1,083 -1,135 -1,222 Tax Expense m -3,486 -4,299 -4,985 -5,552
Net Profit m 2,832 2,901 3,041 3,273 Net Profit m 9,606 11,525 13,355 14,875
Minority Interests m -8 -8 -8 -8 Minority Interests m -36 -32 -32 -32

Reported Earnings m 2,824 2,893 3,033 3,265 Reported Earnings m 9,570 11,493 13,323 14,843
Adjusted Earnings m 2,824 2,893 3,033 3,265 Adjusted Earnings m 9,570 11,493 13,323 14,843

EPS (rep) 26.68 27.40 28.69 30.90 EPS (rep) 90.52 108.72 126.04 140.41
EPS (adj) 26.68 27.40 28.69 30.90 EPS (adj) 90.52 108.72 126.04 140.42
EPS Growth yoy (adj) % 22.7 16.3 15.8 19.1 EPS Growth (adj) % 44.0 20.1 15.9 11.4
PE (rep) x 43.1 35.9 31.0 27.8
PE (adj) x 43.1 35.9 31.0 27.8

EBITDA Margin % 21.1 21.3 21.8 22.1 Total DPS 35.00 35.00 40.00 47.00
EBIT Margin % 18.2 18.2 19.0 19.3 Total Div Yield % 0.9 0.9 1.0 1.2
Earnings Split % 24.6 25.2 26.4 24.5 Basic Shares Outstanding m 106 106 106 106
Revenue Growth % 24.1 20.8 20.2 15.1 Diluted Shares Outstanding m 106 106 106 106
EBIT Growth % 22.4 18.2 22.6 21.3

Profit and Loss Ratios 2022A 2023E 2024E 2025E Cashflow Analysis 2022A 2023E 2024E 2025E

Revenue Growth % 20.6 22.0 12.6 11.8 EBITDA m 14,149 17,163 19,447 21,658
EBITDA Growth % 40.5 21.3 13.3 11.4 Tax Paid m -3,486 -4,299 -4,985 -5,552
EBIT Growth % 52.1 23.2 14.3 12.2 Chgs in Working Cap m 1,452 346 1,988 2,087
Gross Profit Margin % 33.3 32.6 32.6 32.4 Net Interest Paid m 0 0 0 0
EBITDA Margin % 21.5 21.4 21.5 21.5 Other m -2,053 342 -2,539 -2,709
EBIT Margin % 18.3 18.5 18.7 18.8 Operating Cashflow m 10,062 13,552 13,911 15,484
Net Profit Margin % 14.6 14.3 14.8 14.7 Acquisitions m 350 0 0 0
Payout Ratio % 38.7 32.2 31.7 33.5 Capex m -1,624 -1,800 -1,800 -1,800
EV/EBITDA x 28.6 23.6 20.8 18.7 Asset Sales m 0 0 0 0
EV/EBIT x 33.7 27.4 23.9 21.3 Other m -3,209 0 0 0
Investing Cashflow m -4,483 -1,800 -1,800 -1,800
Balance Sheet Ratios Dividend (Ordinary) m -3,633 -3,695 -4,223 -4,962
ROE % 25.1 25.2 24.7 23.4 Equity Raised m 1 0 0 0
ROA % 21.5 22.8 22.9 22.7 Debt Movements m 0 0 0 0
ROIC % 22.6 25.4 29.2 31.9 Other m -1,350 0 0 0
Net Debt/Equity % 1.4 -15.1 -26.2 -35.1 Financing Cashflow m -4,982 -3,695 -4,223 -4,962
Interest Cover x nmf nmf nmf nmf
Price/Book x 9.9 8.3 7.0 6.0 Net Chg in Cash/Debt m 597 8,057 7,888 8,722
Book Value per Share 394.5 468.2 554.4 648.0
Free Cashflow m 8,438 11,752 12,111 13,684

Balance Sheet 2022A 2023E 2024E 2025E

Cash m 6,742 14,799 22,687 31,409

Receivables m 16,959 17,571 19,785 22,115
Inventories m 0 0 0 0
Investments m 13,918 13,918 13,918 13,918
Fixed Assets m 7,045 6,472 5,729 4,834
Intangibles m 5,881 5,881 5,881 5,881
Other Assets m 10,365 10,365 10,365 10,365
Total Assets m 60,910 69,006 78,365 88,522
Payables m 1,720 1,986 2,212 2,456
Short Term Debt m 1,952 1,952 1,952 1,952
Long Term Debt m 5,359 5,359 5,359 5,359
Provisions m 0 0 0 0
Other Liabilities m 10,117 10,117 10,117 10,117
Total Liabilities m 19,148 19,414 19,640 19,884
Shareholders' Funds m 41,625 49,423 58,523 68,405
Minority Interests m 137 169 201 233
Other m 0 0 0 0
Total S/H Equity m 41,762 49,592 58,724 68,638
Total Liab & S/H Funds m 60,910 69,006 78,365 88,522

All figures in INR unless noted.

Source: Company data, Macquarie Research, January 2023

13 January 2023 135

13 January 2023 India

EQUITIES Mphasis (MPHL IN)

Mphasis relies on a thin rung of large clients Sustaining growth might prove tricky
Client count
30

25 Key points
20
 High onsite and top-10 client contributions drive incremental revenue.
 Drag from mortgage processing reduces near-term growth potential.
15

10

-
 Limited client mining beyond top-10 suggests growth could sputter; Neutral.
Mphasis LTI Mindtree
USD100mn+ USD50-100mn USD20-50mn USD10-20mn

Source: Companies, Macquarie Research, January 2023

Top-10 clients at scale more than peers but client base a bit too thin

MPHL IN Neutral With four US$100mn+ clients and another two clients over US$75mn, Mphasis is
Price (at 07:57, 11 Jan 2023 GMT) Rs1,988.85 unique among its peers in having so many accounts of this size. But we worry
that this is a riskier model vs the approach that emphasizes growth over a
Valuation Rs 1,880.00 broader portfolio. As of 2QFY23, top-10 clients excluding DXC accounted for 60%
- PER
of Mphasis’ revenue vs 36% for Coforge, 37% for Persistent Systems and 42%
12-month target Rs 1,880.00
for LTIMindtree (using post-merger combined metrics for LTI and Mindtree).
Upside/Downside % -5.5
Weighted for size, Mphasis has been lagging peers in adding clients to the
12-month TSR % -5.5
US$10mn+ and US$5mn+ client tiers (except for the last 12 months when it has
Volatility Index Medium
done well in the US$10mn+ tier). We worry that this could mean that the growth
GICS sector Software & Services
could sputter unless client mining improves.
Market cap Rsm 374,500
Market cap US$m 4,553 With a very high reliance on its top-10 clients and its Banking & Capital Markets
Free float % 44 vertical for growth, we think that Mphasis needs to step up investments to add
30-day avg turnover US$m 10.9 more clients across a broader set of verticals to ensure a long runway of growth
Number shares on issue m 188.3 for a firm of its size. Despite experienced senior management and strong domain
credentials in BFS, we worry that unless Mphasis uses the current window of
Investment fundamentals
technology refresh to catch up in other verticals, client credentials and domain
Year end 31 Mar 2022A 2023E 2024E 2025E
expertise beyond BFSI will be a constantly rising entry barrier that will need
Revenue bn 119.6 145.0 168.8 193.9
EBIT bn 18.3 22.8 27.8 28.9 transformational M&A investments to catch up with peers.
EBIT growth % 17.0 24.9 21.9 4.1
Recurring profit bn 19.1 23.3 28.1 29.5 MOCCA framework indicates multiple risks to growth drivers
Reported profit bn 14.3 17.6 21.2 22.3
Adjusted profit bn 14.3 17.6 21.2 22.3 Apart from the top-10 concentration and the relatively weak additions to the
EPS rep Rs 75.59 92.66 112.16 117.65 US$1mn+ and US$5mn+ client tiers, we see other risks as well. While
EPS rep growth % 17.5 22.6 21.0 4.9 incremental revenue has surged in the supply constrained post-Covid
EPS adj Rs 75.61 92.67 112.16 117.65
EPS adj growth % 17.4 22.6 21.0 4.9
environment, Mphasis is alone among its peers in having most of this incremental
PER rep x 26.3 21.5 17.7 16.9 revenue coming from onsite delivery (i.e., in the client’s home geography, mostly
PER adj x 26.3 21.5 17.7 16.9 the US). We worry that the onsite-centric delivery that suggests a portfolio closer
Total DPS Rs 0.00 0.00 0.00 0.00
to macro-sensitive Consulting than all-weather Outsourcing.
Total div yield % 0.0 0.0 0.0 0.0
ROA % 18.1 20.5 24.2 25.2
ROE % 21.2 24.4 28.4 29.8
Given a decade under HP’s ownership, a tough turnaround; Neutral
EV/EBITDA x 17.3 14.1 11.7 11.2
We think Mphasis was not allowed to flourish under HP’s ownership as it
Net debt/equity % -6.1 -10.1 -10.1 -10.1
P/BV x 5.4 5.0 5.0 5.0
effectively had to compete with its parent. It is our view that this lost decade
Source: FactSet, Macquarie Research, January 2023
(2006-16) has been costly for Mphasis in terms of building an organisational
(all figures in INR unless noted) ability to create tip-of-the-spear solutions and add a broad customer base across
verticals. Despite attempts with tuck-in M&As such as Stelligent and Blink, we
think that the private equity ownership constrains Mphasis’ ability to invest in
transformational M&As to beef up its verticals. We expect Mphasis to lag peer
group revenue growth and margins and initiate with Neutral anticipating a
widening PE discount vs Persistent Systems, LTIMindtree and Coforge (our top
Analysts picks among India IT Services midcaps).
Macquarie Capital Securities (India) Pvt. Ltd.
Ravi Menon +9122 6720 4152 ESG: Mphasis scores well on ESG, but it can improve on renewable energy
[email protected] usage which is currently only 0.04% of its total energy usage. See page 15.

13 January 2023 136

Macquarie Research India IT Services: Mid-caps

Inside Mphasis: Sustaining growth might prove tricky

Company profile
Growth likely to hit air pockets as top-10
• Mphasis is a mid-size IT Services and business process outsourcing (BPO)
sputters 138
firm with its clientele primarily in the US and Europe. EDS acquired Mphasis in
MOCCA framework indicates multiple risks April 2006 and after HP acquired EDS in May 2008, Mphasis was effectively
144 competing with HP’s fully owned subsidiary in India. When HP sold Mphasis to
Blackstone in April 2016, Mphasis secured a contractual commitment of
Valuation, recommendation, risks 148
continued revenue from DXC (formed by the merger of HP and CSC). The
Macquarie ESG Assessment 150 revenue commitment of US$990mn over 5 years has run its course and DXC
revenue has declined from 29% at the time of the sale to Blackstone to 4.6%
of revenue as of 2QFY23 (ended 30 June 2022).

Fig 1 Post-Covid incremental revenue bump-up largely onsite-led

USD mn QoQ
40

30

20

10

-10

-20
Q1FY20

Q2FY20

Q3FY20

Q4FY20

Q1FY21

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23
Onsite Offshore

Source: Company data, Macquarie Research, January 2023

Fig 2 MPHL IN rel BSE Sensex performance, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie
coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2023

(all figures in INR unless noted)

13 January 2023 137

Macquarie Research India IT Services: Mid-caps

Growth likely to hit air pockets as top-10 sputters

Higher onsite proportion vs peers could make Mphasis more vulnerable

DXC drag done, but mortgage BPO entering a cyclical downturn and M&A gains are fading
Mphasis’ high reliance Mphasis has a scale in banking, financial services and insurance (BFSI) that is ahead of the peer
on onsite revenue group and at 63% of revenue, a higher exposure to this vertical vs smaller peers that top out at
addition and top-10 55% (Coforge) or larger peers that have a bigger practice, but a smaller revenue share from BFSI
could cause it to hit at 36% (LTIMindtree post-merger).
some growth air
• DXC’s revenue commitment to Blackstone for US$990mn over 5 years from the sale of Mphasis
pockets
to Blackstone has now run its course and even adjusted for DXC’s decline, we see that IT
Services incremental organic revenue had peaked in 2QFY22 and has dropped since then.

For broadening vertical • BPO revenue peak is also likely behind us as Mphasis has a large exposure to mortgage
exposure, we think processes and the peak volumes in that business are unlikely to come back near-term.
transformational M&A is
 Difficult to sustain the incremental revenue momentum seen in 1HFY22
required
 Mphasis’ top-10 customers account for 60% of revenue and we see that incremental
revenue over the last 9 quarters has been relying largely on this segment.

 Banking and Capital Markets accounts for 54% of revenue as of 2QFY23 and has made
strong incremental contributions that coincide with incremental revenue ramps in BPO (see
Fig 10 that compares incremental revenue in Banking & Capital Markets with BPO)

 With top-2-5 customers declining, Mphasis will find it tough to continue adding revenue at
the same pace as before unless it broadens its client mining efforts beyond the top-10.

 Mphasis has relied significantly on onsite revenue addition and its onsite revenue
proportion has remained steady through the last 3 years even as peers like Coforge have
shifted offshore by 15.8% making the growth comparison uneven

Fig 3 Incremental revenue for Mphasis has relied heavily on Banking and Capital Markets

USD mn
35

25

15

-5

-15
2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

Banking and Capital Market Insurance

Info & Tech, Communication & Entertainment Logistics
Others
Source: Company data, Macquarie Research, January 2023

13 January 2023 138

Macquarie Research India IT Services: Mid-caps

Fig 4 Non-top-10 client contribution has been significant to incremental revenue QoQ
except when an acquisition has been integrated like Blink in 3QFY22

USD mn
35.0

25.0

15.0

5.0

-5.0

-15.0
2QFY21 3QFY21 4QFY21 1QFY22 2QFY22 3QFY22 4QFY22 1QFY23 2QFY23
Top Client Top 2-5 Clients Top 6-10 Clients Non Top-10 Clients

Source: Company data, Macquarie Research, January 2023

The unusually high reliance on top-10 clients for driving incremental revenue becomes clearer
when we look at the breakup of incremental revenue in percentage terms.

Fig 5 Around 80% of incremental revenue QoQ has been coming from top-10 clients in
most periods

100%

80%

60%

40%

20%

0%

-20%

-40%
2QFY21 3QFY21 4QFY21 1QFY22 2QFY22 3QFY22 4QFY22 1QFY23 2QFY23
Top Client Top 2-5 Clients Top 6-10 Clients Non Top-10 Clients

Source: Company data, Macquarie Research, January 2023

We think the thin layer of large clients makes for a riskier portfolio vs peers like LTI and Mindtree
who have just 1 client in the US$100mn+ tier, but have a much broader set of clients further down
the tiers. Even much smaller Coforge has 19 US$10mn+ clients vs 24 for Mphasis.

13 January 2023 139

Macquarie Research India IT Services: Mid-caps

Fig 6 Mphasis has the most US$100mn+ clients, but lags peers in breadth below that (as
of 2QFY23)

Client count
30

25

20

15

10

-
Mphasis LTI Mindtree
USD100mn+ USD50-100mn USD20-50mn USD10-20mn

Source: Company data, Macquarie Research, January 2023

Onsite-heavy revenue addition has been a surprising characteristic of Mphasis’ growth post-Covid
as most peers had experienced a significant shift offshore during the post-Covid period. 54% of
Mphasis’ incremental revenue from 2QFY20-2QFY23 has come from onsite service delivery.
Mphasis derives 56.8% of its revenue from onsite as of 2QFY23 – down just 120bp from the 58%
in 2QFY20 (pre-Covid) vs the shift of over 10.3% offshore for LTI (excluding Mindtree).

Fig 7 Onsite revenue addition has been driving incremental revenue in most periods

USD mn QoQ
40

30

20

10

-10

-20
Q2FY22
Q2FY19

Q3FY19

Q4FY19

Q1FY20

Q2FY20

Q3FY20

Q4FY20

Q1FY21

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q3FY22

Q4FY22

Q1FY23

Q2FY23

Onsite Offshore

Source: Company data, Macquarie Research, January 2023

Except for 3QFY21 and 4QFY21 which were muted quarters for growth, we’ve seen a very high
contribution from onsite to incremental revenue.

After the revenue decline at the beginning of Covid in 4QFY20, the rebound for most peers was led
by offshore revenue ramp-up. Mphasis is unique among peers in maintaining a steady and
relatively higher onsite revenue proportion.

Coforge had a higher onsite revenue proportion than Mphasis pre-Covid, but has brought that
down by 15.8% from 2QFY20-2QFY23 (entirely organically as revenue from SLK, acquired in April
2021 is offshore BPO, but not included in the metrics that disclose onsite-offshore revenue mix)
while Mphasis has reduced onsite revenue proportion by just 120bp over the same period.

13 January 2023 140

Macquarie Research India IT Services: Mid-caps

Fig 8 Mphasis unique among peers in not seeing an offshore shift post-Covid

Onsite revenue (%)

70% 66%
64%
65%
60% 58% 59% 58% 57%
56%
55%
50%
49% 49%
50% 47% 47%
45% 41%
41%
38% 39%
40%
35%
30%
LTI Mindtree Mphasis Coforge

2QFY20 2QFY21 2QFY22 2QFY23

Source: Company data, Macquarie Research, January 2023

IT Services revenue adjusted for DXC seems to have peaked in 2QFY22 and has been dropping
since then (unadjusted for cross-currency headwinds that we do not have by segment).

With BPO revenue also having peaked in 2QFY21 and declining most quarters since then, we
think Mphasis will find it tough to breach the high watermark of incremental organic revenue in the
near-term without any mega deals.

Fig 9 Incremental revenue QoQ peak behind us for both IT Services revenue (ex-DXC) and
for BPO (given mortgage cycle peak is likely behind)

USD mn
40

30

20

10

-10

-20
2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

BPO IT Services organic (excluding DXC) Acquisitions

Source: Company data, Macquarie Research, January 2023

Similarly, even if we were to adjust for the decline in BPO, the peak incremental revenue for
Banking & Capital Markets segment seems to be behind us. We also note that prior to 2QFY22,
the heavy contributions from the Banking & Capital Markets vertical coincides with BPO ramp-ups
suggesting that with the peak of the mortgage cycle behind us, it might be difficult to expect
Banking & Capital Markets to contribute significantly to growth.

Following a record order intake of US$505mn in 1QFY22 including a US$250mn large deal,
Mphasis had strong incremental revenue addition in Banking & Capital Markets over 2QFY22 and
3QFY22 even without much help from BPO. But this has not been repeated since and does not
seem sustainable.

13 January 2023 141

Macquarie Research India IT Services: Mid-caps

Fig 10 BPO driving incremental revenue for Banking & Financial Services except over
2QFY22 and 3QFY22

USD mn QoQ
30
25
20
15
10
5
0
-5
-10
-15

2QFY19

4QFY19

2QFY20

4QFY20

2QFY21

4QFY21
2QFY18

3QFY18

4QFY18

1QFY19

3QFY19

1QFY20

3QFY20

1QFY21

3QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
BPO Banking & Capital Markets

Source: Company data, Macquarie Research, January 2023

With the impact of a furlough with one of its top customers and the drag in the mortgage BPO
business, incremental revenue is back to pre-Covid trends for Mphasis, but DXC drag now largely
over. We expect incremental revenue to have bottomed in 2QFY23 but expect BPO to return to
growth only gradually.

Fig 11 Incremental revenue now back to pre-Covid trend despite DXC decline being over…

USD mn
40
30
20
10
0
-10
-20
-30
3QFY18
2QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

Direct International HP/ DXC Business

Source: Company data, Macquarie Research, January 2023

While Mphasis has tried to diversify its mortgage business, the cyclical elements of the business
still seem to be playing out as the earlier uptick from BPO has now turned to a drag.

13 January 2023 142

Macquarie Research India IT Services: Mid-caps

Fig 12 …as BPO incremental revenue that had surged post-Covid now turns to a drag…

USD mn
40

30

20

10

-10

-20
2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
BPO IT Services organic (excluding DXC) Acquisitions

Source: Company data, Macquarie Research, January 2023

The DXC revenue commitment was for US$990mn over a period of 5 years and it is unreasonable
to expect the revenue to continue much beyond that as DXC is effectively a competitor to Mphasis
as it has both application services and infrastructure services and target the same clientele. The
cumulative revenue from DXC since the sale of Mphasis to Blackstone by HP (which merged with
CSC to form DXC) has comfortably crossed US$990mn and is approaching US$1.5bn now.

Even if we assume contractual terms that have changed to accommodate for any delays in
meeting the US$990mn commitment over 5 years, we think it would be prudent to assume that this
revenue will eventually run down.

Fig 13 …DXC revenue commitment over and we expect a decline

USD mn
70 1,600

60 1,400
1,200
50
1,000
40
800
30
600
20
400
10 200
0 0
Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22 Q3FY22 Q4FY22 Q1FY23 Q2FY23
HP channel revenue QoQ (USD mn) Cumulative HP channel revenue (USD mn)

Source: Company data, Macquarie Research, January 2023

13 January 2023 143

Macquarie Research India IT Services: Mid-caps

MOCCA framework indicates multiple risks

Narrow vertical base; high top-10 client reliance; lagging in client additions

MOCCA framework indicates incremental revenue addition has some downside risk
Incremental revenue analysis for Mphasis using our MOCCA framework (Macquarie’s 5-factor
framework for mid-cap IT Services firms with the factors listed below) indicates that its incremental
revenue addition has some risk factors and suggests we could see volatile growth or lower growth
vs peers.

• Below is a summary of Mphasis’ rating in Macquarie's MOCCA framework to analyze

incremental revenue. Note that the ranks are not meant to be taken purely as an indicator of
superior/ inferior execution vs peers but is only meant to indicate whether the key drivers of
incremental revenue are sustainable and which ones need a closer look.

Fig 14 MOCCA framework indicates risks across multiple dimensions indicating growth can sputter

Mining
Contribution Contribution Avg account
Ranking by USD1mn+ USD5mn+ USD10mn+ Offshore
from top-10 by Top size (growth Overall Rank Avg Score
parameter client tier client tier client tier proportion
clients vertical ex-top-10)
additions additions additions
LTI 6 8 7 2 4 5 7 7 6
Mindtree 9 7 4 4 8 4 3 7 6
LTI + Mindtree 5 4 6 3 7 1 4 2 4
Mphasis 10 9 9 9 9 7 9 10 9
Coforge 4 1 1 7 5 8 6 4 5
Persistent 1 3 8 6 2 2 1 1 3
LTTS 1 5 4 8 1 3 8 2 4
Birlasoft 8 2 3 1 10 9 2 5 5
Mastek 3 NA NA 10 6 6 10 9 7
Zensar 6 5 2 5 3 10 4 5 5
Source: Macquarie Research, January 2023

 Mining: Unlike the growth we’ve seen with top-10, Mphasis has lagged peers in moving
High onsite contribution clients up the revenue tiers and lags peers in client additions to all three tiers we consider:
even through Covid- US$1mn+, US$5mn+ and US$10mn+. This supports the finding from the Average Account
impacted period when Size factor and indicates that this is an area that Mphasis needs to invest in.
most peers shifted more  Offshore Execution: Mphasis seems to emphasize its onsite delivery capability and seems
work to India suggests a to be positioned more as a Consulting provider than an Outsourcing provider.
consulting-oriented
portfolio unlike peers  Client Concentration: Mphasis relies heavily on its top-10 clients to drive incremental
and this could mean revenue, and this is a risk (of possible volatility in revenue if any of the top-10 decline
higher volatility in an sharply as we have seen in recent quarters).
uncertain macro  Contribution from top vertical: Mphasis relies heavily on Banking & Capital Markets to drive
Broadening vertical incremental revenue and we would like to see other verticals scale up to reduce risk.
exposure and client  Average Account Size: Mphasis has not been scaling up accounts outside the top-10 and
base is required and we are seeing a decrease in the average account size outside the top-10 (using US$1mn+
Mphasis is trying with a client count adjusted for the top-10 as the denominator). While growth with the top-10
strategy it has titled indicates strong client relationships with possibly Fortune-500 clients, we think for broader
“New Client client mining Mphasis needs to invest in similar sophisticated account management
Acquisition” with a practices with a broader set of clients.
dedicated sales,
delivery, domain, and Mphasis has not done any mega deals involving asset takeovers or people rebadging that could be
technical leadership for considered tough to repeat. This is a factor that we don’t need to consider for most midcaps.
each of the 5 verticals it Mining:
focuses on, but we have
yet to see that in client Mphasis has not added as many US$1mn+ accounts as it should for its size over any of the
additions to US$1mn+ periods we consider. Client count in US$1mn+ tier has improved for Mphasis, but its US$1mn+
and US$5mn+ tiers client count is lower than smaller peers. This could be due to a focused account strategy, but it
lags peers when weighted for size even in the additions to US$5mn+ client tier.

Mphasis also lags peers in the US$10mn+ client tier as well except over the last 12 months. This
could indicate that its new account management investments are starting to pay off, but this could
13 January 2023 144
Macquarie Research India IT Services: Mid-caps

also be due to the Blink acquisition providing some cross-sell opportunities and we think we would
need to see broader and more sustained traction across even the lower tiers to feel reassured that
there is a long growth runway.

While Mphasis has demonstrated a strong capability to mine its key client accounts as
demonstrated by its top-10 clients, we believe additional Sales & Marketing investments are
required to broaden its client base and lower the risk of relying too heavily on its top-10 clients.

We would like to see Mphasis demonstrate continued progress in the US$10mn+ client tier
additions and ideally even in the US$5mn+ and US$1mn+ client tiers as that would convincingly
demonstrate that Mphasis has a differentiated tip-of-the-spear solution that enables new account
entry.

Fig 15 Needs to scale up lower client tiers Fig 16 Similar sized Mindtree and LTI have many more
US$10mn+ clients and even smaller Coforge scaling up

USD 10mn+
70 clients
50
60 45
40
50
35

40 30
25
30
20

20 15
10
10
5

- 0
2QFY18 2QFY19 2QFY20 2QFY21 2QFY22 2QFY23 2QFY18 2QFY19 2QFY20 2QFY21 2QFY22 2QFY23

USD1-5mn clients USD5-10mn clients USD10mn+ clients LTI Mindtree Mphasis Coforge

Source: Company data, Macquarie Research, January 2023 Source: Company data, Macquarie Research, January 2023

Offshore execution:
Measured by the incremental revenue contribution over last 12 months to 60 months from offshore.
Higher the offshore contribution in a period, the better the rank for that period for a firm. We
consider the steady ranking at or near the bottom of the tier across years as an indication that the
business model is more onsite-centric vs its peers and we should recognize it as such. Offshore
incremental revenue proportion has been improving for Mphasis but it has improved a lot more for
the peer group which has seen its delivery shift to offshore during Covid and continues to be more
offshore-driven than Mphasis.

Fig 17 Most quarters have seen onsite-heavy growth Fig 18 Mphasis leans heavily on its top-10 clients

USD mn QoQ USD mn QoQ

40 40.0
30.0
30
20.0
20 10.0
-
10
-10.0
0 -20.0
-30.0
-10
-40.0
-20 -50.0
2QFY20
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20

3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
Q2FY20
Q3FY20
Q4FY20
Q1FY21
Q2FY21
Q3FY21
Q4FY21
Q1FY22
Q2FY22
Q3FY22
Q4FY22
Q1FY23

Onsite Offshore From top-10 clients Others

Source: Company data, Macquarie Research, January 2023 Source: Company data, Macquarie Research, January 2023

13 January 2023 145

Macquarie Research India IT Services: Mid-caps

In terms of effort, this is an onsite mix of 22% for Mphasis’ IT Services headcount as of 2QFY23.
Since the unbilled personnel, i.e., the bench, is mostly in India, the overall effort-mix is likely to be
higher onsite and if we adjust for utilisation, the onsite effort mix increases to 26% - which is still
not very high. When we compare with Coforge’s headcount mix, it is not very different with 24% of
billable headcount onsite. This suggests that the difference in revenue mix is because Mphasis has
a higher difference between its onsite and offshore rates vs Coforge. This difference in portfolio is
likely structural and we think Mphasis’ model is closer to Consulting than Outsourcing and see it as
possibly more exposed to macro headwinds.

Client concentration:
Measured by the share of top-10 clients in incremental revenue over last 12 months to 60 months.
Lower the top-10 contribution to incremental revenue in a period, the better the rank for that period
for a firm.

Mphasis has been consistently driving a very high proportion of its incremental revenue from its
top-10 clients. Now, this could also be because the top-10 clients are growing fast. Mphasis has
been getting around 60-90% of its incremental revenue across most periods from its top-10 clients
– which is much higher than the peer group implying that management is focusing sales
investments primarily on the top-10 accounts.

Note that Mphasis redefined its top-10 clients to exclude DXC starting 1QFY21 and the DXC
decline can explain this apparent stagnation in top-10 clients. Top-10 client revenue excluding
DXC has grown from a quarterly run rate of US$147mn in 1QFY21 to US$264mn in 2QFY23.

A longer-term analysis of incremental revenue addition by client tier indicates that it is the top client
that has been the sole drag. See chart below.

If we consider the revenue from top-10 clients excluding DXC, we see that non-top-10 contribution
is still small. We see this as a possible risk to sustaining incremental revenue and the growth
challenges in 1HFY23 have come with slowing revenue additions in the top-10 clients.

Fig 19 Even after excluding DXC, reliance on top-5 and top-10 high in most quarters

USD mn
35.0

25.0

15.0

5.0

-5.0

-15.0
2QFY21 3QFY21 4QFY21 1QFY22 2QFY22 3QFY22 4QFY22 1QFY23 2QFY23
Top Client Top 2-5 Clients Top 6-10 Clients Non Top-10 Clients

Source: Company data, Macquarie Research, January 2023

Vertical concentration:
Measured by the share of top vertical in incremental revenue. The lower the share of the
incremental revenue driven by the top vertical, the better the rank. This is to identify excessive
reliance on the top vertical by a firm.
Although Mphasis has started investing in growing verticals beyond Banking & Capital Markets, the
results are not visible yet except that the contribution from Banking & Capital Markets has come
down as overall incremental revenue has dropped (with headwinds in BPO).

Mphasis has been scaling up its Banking & Capital Markets vertical as seen by steady increases in
incremental revenue over the last 5 years.

13 January 2023 146

Macquarie Research India IT Services: Mid-caps

So, while the ranking indicates a high contribution of incremental revenue from its top vertical the
relative contribution has reduced recently, that is only because of a slowdown in the revenue
addition by Banking & Capital Markets and this is precisely the sort of risk the OCCAMM
framework is intended to guide investors about.

The chart below shows how the revenue scale-up has been across verticals for Mphasis with the
verticals outside Banking & Capital Markets looking irrelevant in comparison to the Banking &
Capital Markets segment. Transformational acquisitions may be necessary to scale up some of the
other verticals.
Fig 20 Banking & capital markets dwarves other verticals of Mphasis

USD mn
300
239
250
210
200 175
140
150 118127
100 71 82
47 49 39 48 57 56 59
31 31 34 31 34 37 34 40 50 42 42 52
50
- - -
-
Banking and Insurance Info & Tech, Logistics Others
Capital Mkt. Communication &
Entertainment
2QFY18 2QFY19 2QFY20 2QFY21 2QFY22 2QFY23

Source: Company data, Macquarie Research, January 2023

Average Account Size:

We use this metric as another measure of the breadth of growth drivers. The intuitive explanation
is that growth that is relying a lot more on the top-10 accounts is less sustainable than growth that
is supported by growth beyond the top-10 accounts. This metric should ideally find support in both
improvement in the incremental revenue outside the top vertical and in client mining.

We see that the average account size excluding top-10 accounts has been declining over time for
Mphasis except from 2QFY20-2QFY21 when the top-10 definition was changed to exclude DXC
(which boosted the non-top-10 contribution).

If Mphasis had been adding many new accounts in the US$1mn+ client tier or even below that, this
metric would not be worrying on its own. But Mphasis’ client mining beyond the top-10 seems poor
as we see in our analysis of the additions to US$1mn+, US$5mn+ and US$10mn+ tiers.
Fig 21 Excluding top-10 accounts, Mphasis’ average account size has stagnated while LTI
and Mindtree have caught up

USD mn
2.5

2.0

1.5

1.0

0.5

-
2QFY18 2QFY19 2QFY20 2QFY21 2QFY22 2QFY23

LTI Mindtree Mphasis

Source: Company data, Macquarie Research, January 2023

13 January 2023 147

Macquarie Research India IT Services: Mid-caps

Valuation, recommendation, risks

To give confidence that We think Mphasis could lag the peer group in growth near-term given headwinds in its top-10
Mphasis has a long clients and to its BPO business. We also expect margins to continue to be below the peer group
growth runway, we unless we see a shift in revenue mix to higher-margin offshore delivery.
would like to see
We see US$ revenue CAGR of 12% over FY22-25E which is closer to what we expect for India
broader client mining
Tier-1 with much broader client base and lower execution risks. Within India IT Services midcaps,
and a more evenly
we see Mphasis as having higher risk and prefer Persistent Systems (PSYS IN, CMP Rs4,080,
spread revenue
Outperform, TP Rs8,330), LTIMindtree (LTIM IN, CMP Rs4,318, Outperform, TP Rs7,540) and
contribution across
Coforge (COFORGE IN, CMP Rs3,919, Outperform, TP Rs6,260) among near peers.
verticals
Given higher risks to hiccups in incremental revenue addition due to the reliance on top-10 client
accounts, the Banking & Capital Markets vertical and the high reliance on onsite revenue, we think
With a higher revenue that the PE discount with peers can widen.
mix onsite, we think
To broaden the client base and reduce reliance on its Banking & Capital Markets vertical,
Mphasis’ margins will
transformational M&A will likely be required and this means less cashflow available to
remain below that of
shareholders if Mphasis goes down this route. But this is what we think will be required to set the
peers and also
firm on a better footing for long-term sustainable growth.
increases growth risks
in an uncertain macro.
Fig 22 Mphasis is close to its 10-year average, but if growth falters, derating is possible

1-year fwd PE
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0

Average +1std -1std

Source: Bloomberg, Macquarie Research, January 2023

Fig 23 Highly reliant on top-10 clients and top vertical for growth indicating riskier growth drivers vs peers
MOCCA framework FY24 RoE (%) FY22-25E US$ FY22-25E EBIT FY24 PE FY25 PE
overall rank revenue CAGR (%) CAGR (%)

Mphasis 10 27.1 12.3 16.6 16.9 17.4

Source: Macquarie Research, January 2023

We assign a target PE of 16x for Mphasis vs expected US$ revenue CAGR of 12% over FY22-25E
(close to an implied PEG of 1.3x based on US$ revenue growth and slightly lower than what we
assign to similar sized peers which score higher on our MOCCA framework). We arrive at a target
price of Rs1,880 on 16x FY2025 PE. We initiate with a Neutral rating – the only Neutral rating
within our IT midcap coverage, with the others rated Outperform.

13 January 2023 148

Macquarie Research India IT Services: Mid-caps

Fig 24 Initiate with Neutral and a TP of Rs1,880 on 16x FY2025E PE

INR

Current price^ 1,989

1-year fwd EPS 103
1-year fwd PE 19.3
Target EPS period Apr-2024 to Mar-2025
Target EPS 118
Target multiple 16
Target Price 1,880
Next 1-year dividends 65
Next 1-year total returns (%) (6)%
Source: Macquarie Research, January 2023

^
Note: CMP per Bloomberg as of close of 10 Jan 2023

Key upside risk is mega Risks:

deal wins with any of
We think Mphasis can continue to grow its top clients, but the growth air pocket it has hit over
the existing clients
1QFY23 and 2QFY23 illustrates the downside risk – that even a single client within the top-10 can
cause overall growth to slow down given high reliance on the top-10 customers. We also see the
risk that DXC can continue to decline as the revenue commitment given by HP to Blackstone
Key downside risk is the
should be over now and for DXC, engaging a competitor as a subcontractor beyond a contractual
loss of any key clients
commitment makes little sense beyond some transition period where existing client commitments
or a cut in their IT
are maintained without disruption.
spending that could
lead to growth Key upside risk is that Mphasis can win mega deals with any of its existing clients. It has a proven
challenges for Mphasis. ability to scale up large relationships (especially within Banking & Capital Markets) if it focuses
management attention and sales bandwidth.

Macquarie vs Visible Alpha consensus:

We are ahead of consensus for Mphasis as well, but not as ahead as we are for peers such as
Persistent Systems (where we are 10% ahead of consensus for FY24 US$ revenue) or Coforge
(where we are 9% ahead of consensus for FY24 US$ revenue).

Fig 25 Our estimates are above consensus just like for peers aligned with our view of a
strong demand environment for IT Services
Macquarie Visible Alpha Macquarie vs VA
YE Mar, in Mn FY23E FY24E FY25E FY23E FY24E FY25E FY23E FY24E FY25E

Revenue in US$ 1,795 2,011 2,255 1,728 1,928 2,194 4% 5% 4%

Abs change 202 216 245 135 200 267
Revenue 145,023 168,750 193,899 142,433 158,894 180,878 2% 7% 9%
% change 21% 16% 15% 19% 12% 14%
Operating Income 22,824 27,812 28,947 21,781 24,699 28,892 5% 12% 3%
% margin 16% 16% 15% 15% 16% 16%
Net income 17,558 21,239 22,279 17,102 19,553 22,600 3% 9% 1%
% margin 12% 13% 11% 12% 12% 12%
EPS-Diluted 92.7 112.2 117.7 90.1 103.1 119.0 3% 9% 2%
Source: Visible Alpha, Macquarie Research, January 2023

13 January 2023 149

Macquarie ESG Assessment

Mphasis Quartile Previous

MPHL IN Macquarie ESG Score Q1 Q1
Sustainability (Environment & Social) Q2
SOFTWARE & IT SERVICES Governance & Risk Q1 Q1
Ravi Menon Macquarie ESG Research * BM - Below Median
Company Research Homepage

What's New & Interesting

Mphasis' ESG FY22 report mistakenly represented that "54% of renewable energy is used across the operations" while the correct interpretation is that Mphasis
increased use of renewable energy by 54% in FY22. Only 0.04% of Mphasis' overall energy usage is from renewable sources. Compared to 1 woman on the board in FY21,
it had 3 women on the board in FY22 (of 12 directors total).

Key ESG Issues

3 key ESG issues to consider * Supporting Information from Macquarie ESG Model

Mphasis' energy disclosures pertain only to the Indian entities of the CDP score: F. See Mphasis ESG databook page 13.

E Mphasis group and its use of captive diesel gensets is 13.99 times its
use of renewable power and only 0.04% of its total energy
consumption is met by renewable power.

The company does not disclose the onsite ratio of the highest-paid Annual report FY22 (page 136) along with ESG report FY22 (page 26).

S individual to the median remuneration of the employees. Mphasis

has only 14,098 permanent employees on the rolls of the company
vs total global workforce of 36,910 in FY22, indicating a very high
proportion of off-roll employees or subcontractors.

Chairman, while independent, has been on the board since April See Mphasis' website for Board of Directors. Chairman Mr. Davinder Singh Brar

G 2004. joined the board of Mphasis on 8 April 2004 and was elected Chairman of the
Board effective 11 December 2015.

* Key issues are sourced from the full ESG model, including 10+ pages on Environmental/Social issues and 120+ questions on CG/Risk.
Contact your MQ sales rep to see the full model.

ESG Opportunity
What is the greatest opportunity for the company? And what moves is it making to capitalize on that opportunity

Using more renewable power is the greatest opportunity for Mphasis to improve ESG.

Looking Ahead
Current Qualitative comments
1. Degree to which ESG risks are factored into financial forecasts, where the risks No significant ESG risks seen and therefore none factored into our
could have a clearly defined impact on P&L of BS within 3 years. estimates.
(1-10; with 1 = not at all; 10 = completely)
5

2. Degree to which ESG risks are factored into stock valuation (DCF or multiple), Valuation is in line with peers which seem to have explicit carbon
where the impact is difficult to quantify and/or hits outside the forecast period. neutral goals and have made larger investments in renewable
(1-10; with 1 = not at all; 10 = completely)
1 energy.

3. Two years from now we expect the company's ESG profile to: Mphasis has a business sustainability report that it publishes
(1-10; with 1 = Get Much Worse; 5 = Stay the Same; 10 = Improve Dramatically) annually and it also provides an ESG data book. We expect
7
disclosures to improve as it is one of the few firms that provides
power-usage effectiveness.

Please refer to next page for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures
Macquarie ESG Assessment

Mphasis

Score Card Summary *

Sector # of
Score Average Notes Sample KPI *
Environmental Footprint of Hardware
5.8 6.8 17 Total energy consumed
Infrastructure

Environment Score (33%) 5.8 6.8 17

Total amount of monetary losses as a result of legal proceedings

Data Privacy & Freedom of Expression 8.3 7.8 9
associated with user privacy

Data Security 10.0 8.6 4 Number of data breaches

Recruiting & Managing a Global, Diverse &

7.3 6.3 9 Percentage of female representation for management
Skilled Workforce

Social & Human Capital (33%) 8.5 7.6 22

Intellectual Property Protection & Total amount of monetary losses as a result of legal proceedings
10.0 10.0 1
Competitive Behavior associated with anticompetitive behavior regulations

Leadership & Governance (33%) 10.0 10.0 1

Environment and Sustainability (E&S) 8.1 8.1 40

Asia
Score Average Sample Negatives & Positives *

Board Structure (15%) 7.4 6.8 Chairman on Board Committees

Shareholding (15%) 8.9 7.7 One Vote/Share

Corp Gov (58%)

History (11%) 8.8 8.1 At least 1 C-level resignation past 2 years

Capital Management (9%) 9.2 6.9 Company does not have clear target ROE or ROA

Remuneration (4%) 8.9 7.0 Company buys back shares to offset options

Access (4%) 8.3 6.9 Analyst access up to CEO

Account & Audit (18%) 8.3 7.9 Interest income/expense does not appear to match cash/debt levels (last 3 years)
Risk (42%)

Earnings Quality (15%) 6.9 6.2 Top 3 customers represent 25%-50% sales past three years

True B/S Strength (7%) 7.3 6.5 Analyst views significant assets on balance sheet that are overvalued

Visibility (2%) 6.3 7.0 4 or more competitors channel checked in last 6 months

Macquarie Governance & Risk (G) 8.1 7.2

Sector
Score Average

Macquarie ESG Score ^ 8.1 8.1

^Note: Macquarie ESG Score = 60% E&S + 40% G

* This is a summary. For our full ESG model, please contact your Macquarie sales representative.

Important Notice
This document is an ESG tearsheet on the subject company taken out of a published report. For important disclosures and disclaimers regarding this document, please refer to the disclosures and disclaimers in the published report.
Important disclosures and disclaimers regarding Macquarie research that may be relevant to the subject company can also be reviewed at: www.macquarie.com/research/disclosures.
Macquarie Research India IT Services: Mid-caps
Macquarie Quant Alpha Model Views
The quant model currently holds a neutral view on Mphasis. The strongest Attractive
Displays where the
style exposure is Quality, indicating this stock is likely to have a superior and
company’s ranked based on
more stable underlying earnings stream. The weakest style exposure is

Fundamentals
the fundamental consensus
Price Momentum, indicating this stock has had weak medium to long term
Price Target and
returns which often persist into the future.
Macquarie’s Quantitative
371/931 Alpha model.
Two rankings: Local market
Global rank in (India) and Global sector
Software & Services (Software & Services)
% of BUY recommendations 72% (21/29) Quant
Local market rank Global sector rank
Number of Price Target downgrades 1
Number of Price Target upgrades 2

Macquarie Alpha Model ranking Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score For the comparable firms this chart shows the key underlying styles and their
(higher is better). contribution to the current overall Alpha score.

HCL Tech 2.3 HCL Tech

Persistent Systems 0.5 Persistent Systems

Tech Mahindra 0.2 Tech Mahindra

Mphasis 0.0 Mphasis

Wipro -0.1 Wipro

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%
Valuations Growth Profitability Earnings Price Quality
Momentum Momentum

Macquarie Earnings Sentiment Indicator Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions Breakdown of 1 year total return (local currency) into returns from dividends, changes
signal that favours analysts who have more timely and higher conviction in forward earnings estimates and the resulting change in earnings multiple.
revisions. Current score shown below.

HCL Tech
HCL Tech 0.7

Persistent Systems
Persistent Systems 0.7

Tech Mahindra
Tech Mahindra -0.1

Mphasis -0.2 Mphasis

Wipro -0.4 Wipro

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%
Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

What drove this Company in the last 5 years How it looks on the Alpha model
Which factor score has had the greatest correlation with the company’s A more granular view of the underlying style scores that drive the alpha (higher is
returns over the last 5 years. better) and the percentile rank relative to the sector and market.
⇐ Negatives Positives ⇒
Normalized Percentile relative Percentile relative
DPS Revisions 3 Month 26% Score to sector(/931) to market(/729)

Capex to Sales FY0 26%

Alpha Model Score -0.03
Valuation 0.30
Net Income Margin FY0 22% Growth -0.16
Momentum 3 Month 22% Profitability 0.31
Earnings Momentum -0.23
Merton Score -24% Price Momentum -0.73
Operating Leverage Inc. -25% Quality 0.33
Capital & Funding 0.05
Sales Growth FY1 -30%
Liquidity -0.83
Earnings Certainty (NTM) -31% Risk -0.27
Technicals & Trading -1.60
-40% -20% 0% 20% 40%
0 50 100 0 50 100
0 0 1 1

Source (all charts): FactSet, Thomson Reuters, and Macquarie Quant. For more details on the Macquarie Alpha model or for more customised analysis and
screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

13 January 2023 152

Macquarie Research India IT Services: Mid-caps
Mphasis (MPHL IN)
Quarterly Results 2Q/23A 3Q/23E 4Q/23E 1Q/24E Profit & Loss 2022A 2023E 2024E 2025E

Revenue m 35,198 37,232 38,481 39,816 Revenue m 119,614 145,023 168,750 193,899
Gross Profit m 9,883 10,813 11,427 11,671 Gross Profit m 34,950 42,294 49,839 53,982
Cost of Goods Sold m 25,315 26,419 27,054 28,145 Cost of Goods Sold m 84,664 102,729 118,912 139,918
EBITDA m 6,177 6,762 7,078 7,291 EBITDA m 21,175 26,017 31,365 32,710
Depreciation m 801 908 689 886 Depreciation m 2,906 3,193 3,554 3,763
Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0
Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0
EBIT m 5,376 5,854 6,390 6,405 EBIT m 18,269 22,824 27,812 28,947
Net Interest Income m -260 -260 -260 -260 Net Interest Income m -744 -1,012 -1,040 -1,040
Associates m 0 0 0 0 Associates m 0 0 0 0
Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0
Forex Gains / Losses m 150 0 0 0 Forex Gains / Losses m 486 266 0 0
Other Pre-Tax Income m 285 298 368 275 Other Pre-Tax Income m 1,119 1,192 1,359 1,602
Pre-Tax Profit m 5,551 5,892 6,498 6,420 Pre-Tax Profit m 19,130 23,270 28,131 29,509
Tax Expense m -1,366 -1,444 -1,592 -1,573 Tax Expense m -4,820 -5,712 -6,892 -7,230
Net Profit m 4,185 4,448 4,906 4,847 Net Profit m 14,310 17,558 21,239 22,279
Minority Interests m 0 0 0 0 Minority Interests m 0 0 0 0

Reported Earnings m 4,185 4,448 4,906 4,847 Reported Earnings m 14,310 17,558 21,239 22,279
Adjusted Earnings m 4,185 4,448 4,906 4,847 Adjusted Earnings m 14,310 17,558 21,239 22,279

EPS (rep) 22.10 23.49 25.91 25.60 EPS (rep) 75.59 92.66 112.16 117.65
EPS (adj) 22.10 23.49 25.91 25.60 EPS (adj) 75.61 92.67 112.16 117.65
EPS Growth yoy (adj) % 23.1 24.6 24.0 20.9 EPS Growth (adj) % 17.4 22.6 21.0 4.9
PE (rep) x 26.3 21.5 17.7 16.9
PE (adj) x 26.3 21.5 17.7 16.9

EBITDA Margin % 17.5 18.2 18.4 18.3 Total DPS 0.00 0.00 0.00 0.00
EBIT Margin % 15.3 15.7 16.6 16.1 Total Div Yield % 0.0 0.0 0.0 0.0
Earnings Split % 23.8 25.3 27.9 22.8 Basic Shares Outstanding m 188 188 188 188
Revenue Growth % 22.7 19.2 17.4 16.7 Diluted Shares Outstanding m 189 189 189 189
EBIT Growth % 24.4 24.4 28.5 23.1

Profit and Loss Ratios 2022A 2023E 2024E 2025E Cashflow Analysis 2022A 2023E 2024E 2025E

Revenue Growth % 23.0 21.2 16.4 14.9 EBITDA m 21,175 26,017 31,365 32,710
EBITDA Growth % 17.5 22.9 20.6 4.3 Tax Paid m 3,686 5,712 5,712 5,712
EBIT Growth % 17.0 24.9 21.9 4.1 Chgs in Working Cap m 1,501 2,670 2,670 2,670
Gross Profit Margin % 29.2 29.2 29.5 27.8 Net Interest Paid m -744 -1,012 -1,012 -1,012
EBITDA Margin % 17.7 17.9 18.6 16.9 Other m -8,461 -14,293 -19,642 -20,986
EBIT Margin % 15.3 15.7 16.5 14.9 Operating Cashflow m 17,157 19,094 19,094 19,094
Net Profit Margin % 12.0 12.1 12.6 11.5 Acquisitions m 0 0 0 0
Payout Ratio % 0.0 0.0 0.0 0.0 Capex m -1,200 -2,517 -2,517 -2,517
EV/EBITDA x 17.3 14.1 11.7 11.2 Asset Sales m 8 0 0 0
EV/EBIT x 20.0 16.1 13.2 12.7 Other m -1,629 0 0 0
Investing Cashflow m -2,820 -2,517 -2,517 -2,517
Balance Sheet Ratios Dividend (Ordinary) m -12,177 -12,226 -12,226 -12,226
ROE % 21.2 24.4 28.4 29.8 Equity Raised m 442 2 2 2
ROA % 18.1 20.5 24.2 25.2 Debt Movements m -1,411 0 0 0
ROIC % 22.9 26.4 31.2 32.5 Other m -2,515 -1,012 -1,012 -1,012
Net Debt/Equity % -6.1 -10.1 -10.1 -10.1 Financing Cashflow m -15,661 -13,236 -13,236 -13,236
Interest Cover x 24.6 22.6 26.7 27.8
Price/Book x 5.4 5.0 5.0 5.0 Net Chg in Cash/Debt m -1,217 3,340 3,340 3,340
Book Value per Share 370.1 397.5 397.5 397.5
Free Cashflow m 15,957 16,576 16,576 16,576

Balance Sheet 2022A 2023E 2024E 2025E

Cash m 9,494 12,834 12,834 12,834

Receivables m 22,269 27,110 27,110 27,110
Inventories m 0 0 0 0
Investments m 14,352 14,352 14,352 14,352
Fixed Assets m 4,152 3,476 3,476 3,476
Intangibles m 27,348 27,348 27,348 27,348
Other Assets m 29,946 29,946 29,946 29,946
Total Assets m 107,561 115,066 115,066 115,066
Payables m 8,496 10,666 10,666 10,666
Short Term Debt m 5,272 5,272 5,272 5,272
Long Term Debt m 0 0 0 0
Provisions m 1,084 1,084 1,084 1,084
Other Liabilities m 23,278 23,278 23,278 23,278
Total Liabilities m 38,130 40,301 40,301 40,301
Shareholders' Funds m 69,431 74,765 74,765 74,765
Minority Interests m 0 0 0 0
Other m 0 0 0 0
Total S/H Equity m 69,431 74,765 74,765 74,765
Total Liab & S/H Funds m 107,561 115,066 115,066 115,066

All figures in INR unless noted.

Source: Company data, Macquarie Research, January 2023

13 January 2023 153

Macquarie Research India IT Services: Mid-caps
Important disclosures:
Recommendation definitions Volatility index definition* Financial definitions
Macquarie – Asia and USA This is calculated from the volatility of historical All "Adjusted" data items have had the following
Outperform – expected return >10% price movements. adjustments made:
Neutral – expected return from -10% to +10% Added back: goodwill amortisation, provision for
Underperform – expected return <-10% Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging,
expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense
Macquarie – Australia/New Zealand – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property
Outperform – expected return >10% speculative. revals, appraisal value uplift, preference dividends &
Neutral – expected return from 0% to 10% minority interests
Underperform – expected return <0% High – stock should be expected to move up or
down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa*
Note: expected return is reflective of a Medium Volatility be aware this stock could be speculative. ROA = adjusted ebit / average total assets
stock and should be assumed to adjust proportionately ROA Banks/Insurance = adjusted net profit /average
with volatility risk Medium – stock should be expected to move up total assets
or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds
Gross cashflow = adjusted net profit + depreciation
Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average
move up or down at least 25–30% in a year. number of shares

Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks
down at least 15–25% in a year. are modelled under IFRS (International Financial
* Applicable to select stocks in Asia/Australia/NZ Reporting Standards).

Recommendations – 12 months
Note: Quant recommendations may differ from
Fundamental Analyst recommendations

Recommendation proportions – For quarter ending 31 Dec 2022

AU/NZ Asia USA
Outperform 55.17% 62.10% 68.04% (for global coverage by Macquarie, 2.41% of stocks followed are investment banking clients)
Neutral 37.59% 25.07% 28.87% (for global coverage by Macquarie, 2.52% of stocks followed are investment banking clients)
Underperform 7.24% 12.82% 3.09% (for global coverage by Macquarie, 0.00% of stocks followed are investment banking clients)

PSYS IN vs BSE Sensex, & rec history MPHL IN vs BSE Sensex, & rec history

(all figures in INR currency unless noted)

(all figures in INR currency unless noted)

Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2023

12-month target price methodology

PSYS IN: Rs8,330.00 based on a PER methodology
MPHL IN: Rs1,880.00 based on a PER methodology

Company-specific disclosures:
PSYS IN: Macquarie Group Limited together with its affiliates may have a beneficial interest in the debt securities of the companies mentioned in this
report. MAST IN: Macquarie Group Limited together with its affiliates may have a beneficial interest in the debt securities of the companies mentioned in
this report. MPHL IN: Macquarie Group Limited together with its affiliates may have a beneficial interest in the debt securities of the companies
mentioned in this report.
A reference to “Macquarie” is a reference to the entity within the Macquarie Group of companies (comprising Macquarie Group Limited and its worldwide
affiliates and subsidiaries) that is relevant to this disclosure.
Important disclosure information regarding the subject companies covered in this report is available publicly at
www.macquarie.com/research/disclosures. Clients receiving this report can additionally access previous recommendations (from the year prior to
publication of this report) issued by this report’s author at https://www.macquarieinsights.com.
Target price risk disclosures:
MAST IN: Mastek has a significant exposure to the IT spending of UK Govt entities including the NHS. Any negative impact of austerity measures on IT
spending by the UK Govt could impact Mastek. Mastek has made a relatively large acquisition in MST Solutions (~10% of revenue impact to Mastek
from this acquisition) in July 2022 and any integration challenges could be another risk.
BSOFT IN: Birlasoft has a new CEO in Angan Guha who has just taken charge in December 2022 and senior management turnover is a risk. Another
risk is its exposure to smaller firms outside the Fortune-1000 that could be more impacted in a US recession than the larger clients of bigger peers like
TCS.
COFORGE IN: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include
geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global
economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates,
foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to
manage certain of these exposures.
PSYS IN: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include
geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global
economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates,
foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to
manage certain of these exposures.
13 January 2023 154
Macquarie Research India IT Services: Mid-caps
LTIM IN: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include
geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global
economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates,
foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to
manage certain of these exposures.
MPHL IN: Mphasis has a higher reliance on top-10 customers than many of its peers and the loss of any of these key customers is a risk. Mphasis has
been deriving revenue from a System Integrator competitor, DXC, as part of the agreement by which HP (which merged with CSC to form DXC) sold
Mphasis to Blackstone. The committed revenue of over USD990mn is now over and this account that is no longer disclosed as part of the top-10 clients,
but accounted for 4.6% of revenue as of 2QFY23. The loss of DXC revenue is another risk. Upside risk comes from better than expected revenue
traction from Mphasis' new account additions and any mega deals that it could win that could help it post revenue growth higher than we expect.
LTTS IN: LTTS is a pure play engineering services firm and engineering services is considered to have a higher impact on clients revenue as these
services are used to create products used by end customers. Contractual liabilities are usually limited, but reputational risk is high in case of any
failures.
Sensitivity analysis:
Clients receiving this report can request access to a model which allows for further in-depth analysis of the assumptions used, and recommendations
made, by the author relating to the subject companies covered. To request access please contact [email protected].
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13 January 2023 155

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13 January 2023 156

Equities

Asia Research
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Strategy, Country Max Koh (Malaysia) (603) 2059 8814 Ashish Jain (India) (9122) 6720 4063
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Lifestyle Ari Jahja (ASEAN) (6221) 2598 8366
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This publication was disseminated on 12 January 2023 at 17:51 UTC.