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Equity Research INDIA May 19, 2021 BSE Sensex: 50193 Technology ICICI Securities Limited is the author and A wake up call against unrealistic expectations! distributor of this report Our anti-consensus sector stance that steady state growth/margins are unlikely to

be higher vs pre-covid (Link, Link, Link) echoed in Q4FY21 performance/outlook. As consensus rationalised lofty expectations to an extent, sector witnessed downgrades - notwithstanding the sharp INR depreciation. Despite the continued Sector update euphoria, incremental cloud sales at hyper-scalars remained range bound. The sector continued reporting strong deal wins. However, this metric per se is noticed to be incomplete with no strong causal relationship on future growth. In FY21, BFS Reco Snapshot TP / Healthcare witnessed ‘reactive’ (to covid crisis) spends. (1) Rebalancing of these

Reco (Rs) Upside spends in FY22 and (2) geographic de-risking by clients pose key risks to outlook. TCS HOLD 3,230 5% (1) Resumption of office/marketing events onsite, (2) increase in onsite effort, (3) Infosys BUY 1,600 19% Wipro SELL 365 -28% employee absenteeism in India, (4) catch-up investments and (5) acquisitions HCLT ADD 1,050 13% should translate into largely pre-covid (or lower) margins. Multiples remain TechM HOLD 1,000 3% significantly higher (NIFTY IT: +41%, vs pre-covid averages) on absolute and even Mphasis ADD 1,910 8% Persistent REDUCE 2,050 -12% relative basis (NIFTY: +19%, BANK NIFTY: -8%, NIFTY FMCG: +3% and NIFTY LTI BUY 4,705 29% Pharma: +24%). More overheated in case of mid-cap IT. Valuation premia are still Mindtree HOLD 2,173 4% banking on ‘post covid growth acceleration (g)’ expectations implying further Coforge REDUCE 2,950 -14% LTTS SELL 2,000 -24% scope for disappointments. Rising rates (r) should pose additional risk to multiples Cyient BUY 925 15% as (r-g) spreads widen. We maintain our anti-consensus cautious stance on sector.

 Mar-21 a wake-up call against unrealistic expectations. Robust ‘recovery’ over RV Snapshot H2CY20 from the covid dip has often been extrapolated as long-term ‘growth’ by the EPS (x) P/E (x) street. In absence of proportionate strength in the lead indicators, we have been FY22E FY22E FY22E FY23E TCS 105 109 29 28 cautioning against such extrapolation (Link, Link, Link). Infosys 52 58 26 23 Wipro 20 22 26 23 Mar-21 results are a wake-up call in this regard. Adjusted for a bit of a base shift, HCLT 49 55 19 17 organic growth of most companies reverted to their long-term March averages (See TechM 61 65 16 15 ‘Narrative in Charts’). Aggregate revenue of tier-I IT in most verticals (e.g. retail, Mphasis 75 83 23 21 Persistent 83 94 28 25 manufacturing) is more or less at pre-covid levels (Dec-19). Notable exceptions being LTI 119 145 31 25 BFSI (+11%) and Healthcare (+17%) – which can be largely attributed to ad-hoc covid Mindtree 73 86 29 24 reactive spends (e.g. contact tracing apps, pay check apps etc.). Coforge 101 110 34 31 LTTS 75 88 35 30  Softer-than-expected outlook in most cases. In FY21, majority of companies either Cyient 47 55 17 15

reported revenue decline or low growth. Given the favourable base, good deal booking and captive takeovers many companies reported through FY21, double digit / mid- teen growth for FY22 became a base case expectation. Even with this anticipation, it should be noted, the normalised CAGR over FY20-22E would be in mid / high single digits – lower or at par with pre-covid growth rates. Explicitly or subtly, the sector toned down the growth outlook (vs a quarter ago) with the exception of a few firms (e.g. WPRO, LTI, Mindtree, Coforge). In addition, a disappointing March growth run-rate further reinforces our argument that steady state growth (FY23 and beyond) is unlikely to be higher than pre-covid levels. As consensus Research Analysts: rationalised lofty expectations to some extent, the sector witnessed earnings downgrades despite a strong tailwind from the exchange rate reset (from 73 to 76). Sudheer Guntupalli [email protected] Optimists on the sector seem to be taking comfort from the strong deal wins reported +91 22 6637 7573 during Mar-20. However, going by the previous trends (See ‘Narrative in Charts’), this Hardik Sangani [email protected] headline metric in itself doesn’t appear to be a very credible lead indicator for revenue +91 22 6637 7504 growth. Without further granularity on the (1) mix of new – renewals – restructured deals, (2) duration of execution and (3) extent of roll off in the portfolio of deals under execution, this metric is incomplete, in our view. Knowledge of large deal ramp up can, at best, help in predicting a potential near-term spike in revenue.

Please refer to important disclosures at the end of this report

Technology, May 19, 2021 ICICI Securities

Rebalancing of the ad-hoc covid reactive budgets in verticals like BFSI (e.g. pay check protection apps) and Healthcare (e.g. contact tracing apps) pose a key risk to FY22 growth outlook. Mar-21 tech spends and commentary of global banks (See ‘Narrative in Charts’) hint at stabilisation pattern (in $ budgets) implying an overhang on % growth. Secondly, the outlook of many IT companies came out before covid 2nd wave became a wide-scale humanitarian crisis in India. The disturbing magnitude of the pandemic can translate into non-negligible employee absenteeism. While the rapidly evolving nature of the pandemic makes it difficult to quantify, any geographic de-risking by clients to other offshore delivery destinations (e.g. Philippines, Poland) may pose risks to the current outlook. Prima facie, companies with higher T&M share may see bigger impact. Barring companies which gave very weak / conservative guidance (HCLT/ Infosys), we see limited scope for guidance upgrades through FY22.  Margins likely to revert to pre covid (or lower) level. Sustainably higher profitability on the back of covid-led tailwinds (e.g. WFH, offshorisation etc.) has been a key expectation of the street for some time. We have always argued (Link) these tailwinds are transient in nature and are unlikely to outlive the pandemic. Even if they do, we expected, their impact will be more or less blunted as clients renegotiate aspects like pricing / quality of deliverables etc. in the new normal. Margin outlook of most companies for FY22 corroborated our arguments on industry profitability. In some cases (e.g. HCLT, LTI), margin outlook was a bigger disappointment as it was lower than even pre-covid levels. Given the covid situation in India, resumption of office and overseas travel may at least be a couple of quarters away. However, in core markets like US/UK which are progressing well on vaccination front, the situation is relatively rosy. For fully vaccinated people, it should be noted that US CDC recently dropped the advisory related to wearing masks/social distancing. Hence, it is not unreasonable to expect resumption of office/marketing events in these geographies in the near term. Secondly, over the previous ~16 months, new project ramp ups have been happening virtually and largely offshore. This is a deviation from the standard practice of higher onsite effort demanded by the clients in the ramp-up phase. This trend can now reverse with developed economies completely opening up. Consequent rise in share of onsite effort, employee absenteeism in India, catch-up investments and acquisitions will likely translate into pre-covid (or lower) margins.  Valuation premia for what?! While valuations have come off the peaks, multiples still remain significantly higher vs long term averages. Across the mainstream sectors, IT witnessed the highest re-rating post Covid. For instance, NIFTY, NIFTY FMCG and NIFTY Pharma are now trading at 19%/3%/24% premium to pre Covid averages, while BANK NIFTY is trading at 8% discount. On the other hand, NIFTY IT is trading at 41% premium without any change in growth / profitability profiles of the sector. At stock level, some large caps / mid-caps are trading up to 65%/130% higher than pre Covid levels. The euphoria is more pronounced in multiples of mid-caps. As per many credible indicators, mid-cap IT valuations look overheated and ripe for a correction. Mid-cap IT universe is now trading at 20% premium to NIFTY IT and on par with TCS which is unsustainable going by historical precedent (See ‘Narrative in Charts’ section). Valuation premia still seems to be banking on ‘post covid long term growth acceleration (g)’ expectations implying further scope for disappointments. Rising rates (r) should pose additional risk to multiples as (r-g) spreads widen. In this context, we maintain our anti-consensus cautious stance on the sector.

Technology, May 19, 2021 ICICI Securities

Narrative in Charts

Chart 1: Mar-21 organic growth of TCS was largely Chart 2: …in line with a typical March quarter TCS TCS CC QoQ CC YoY US$ QoQ US$ YoY 14% 14% 12% 12% 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% -2% -2% -4% Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21

Source: Company data, I-Sec research. Source: Company data, I-Sec research.

Chart 3: Mar-21 growth of Infosys was largely… Chart 4: …in line with a typical March quarter Infosys Infosys CC QoQ CC YoY US$ QoQ US$ YoY 14% 14% 12% 12% 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% -2% -2% -4% Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21

Source: Company data, I-Sec research Source: Company data, I-Sec research

Chart 5: Mar-21 organic growth of HCLT was… Chart 6: …weaker than in previous march quarters HCLT HCLT CC QoQ CC YoY US$ QoQ US$ YoY 9% 10% 8% 9% 7% 8% 6% 7% 6% 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% 0% Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21

Source: Company data, I-Sec research Source: Company data, I-Sec research

Technology, May 19, 2021 ICICI Securities

Chart 7: Mar-21 organic growth (YoY) of Wipro was Chart 8: …weaker than in previous march quarters Wipro Wipro CC QoQ CC YoY US$ QoQ US$ YoY 6% 6% 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% 0% -1% -1% -2% -2% Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21

Source: Company data, I-Sec research Source: Company data, I-Sec research

Chart 9: Mar-21 organic growth of TechM was… Chart 10: weaker than in previous March quarters TechM TechM CC QoQ CC YoY US$ QoQ US$ YoY 8% 10%

6% 8% 6% 4% 4% 2% 2% 0% 0% -2% -2% -4% -4%

-6% -6% Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21

Source: Company data, I-Sec research Source: Company data, I-Sec research

Chart 11: Only in BFSI and Healthcare, revenue Chart 12: run-rate was higher v/s pre Covid levels

5,200 Aggregate BFSI revenue - Top 5 IT companies 1,550 Aggregate Healthcare revenue - Top 4 IT companie

5,000 1,500

1,450 4,800 1,400 4,600 1,350 4,400 (US$mn) (US$mn) 1,300 4,200 1,250

4,000 1,200

3,800 1,150 Dec'19 Mar'20 Jun'20 Sep'20 Dec'20 Mar'21 Dec'19 Mar'20 Jun'20 Sep'20 Dec'20 Mar'21

Source: Company data, I-Sec research. Source: Company data, I-Sec research.

Technology, May 19, 2021 ICICI Securities

Chart 13: In other verticals, revenue run-rate is… Chart 14: still close to pre Covid levels

2,900 Aggregate Manufacturing revenue - Top 5 IT 2,300 Aggregate Retail revenue - Top 5 IT companies companies 2,850 2,200 2,800 2,750 2,100 2,700 2,650 2,000

2,600 1,900 (US$mn) (US$mn) 2,550 2,500 1,800 2,450 1,700 2,400 2,350 1,600 Dec'19 Mar'20 Jun'20 Sep'20 Dec'20 Mar'21 Dec'19 Mar'20 Jun'20 Sep'20 Dec'20 Mar'21

Source: Company data, I-Sec research. Source: Company data, I-Sec research.

Chart 15: Post Covid incremental sales don’t hint Chart 16: ..at major acceleration in cloud adoption

AWS (US$mn) Microsoft intelligent cloud (US$mn)

1,200 1,141 2,000 1,742 1,615 959 1,000 1,500 1,024 1,090 751 793 761 800 685 1,000 811 614 589 412 517 600 500 271

400 266 265 - 200 -500 -385 -546 - -1,000 Q4CY18 Q1CY19 Q2CY19 Q3CY19 Q4CY19 Q1CY20 Q2CY20 Q3CY20 Q4CY20 Q1CY21 Q4CY18 Q1CY19 Q2CY19 Q3CY19 Q4CY19 Q1CY20 Q2CY20 Q3CY20 Q4CY20 Q1CY21

Source: Company data, I-Sec Research

Chart 17: On a low base, SAP cloud backlog too is range bound

SAP's current cloud backlog (Eur mn)

Current cloud backlog % change constant currency – yoy

8,000 7,628 30 24 7,500 21 7,155 25 7,000 20 6,634 6,638 6,599 19 6,500 15 5,995 6,000 16 14 10 5,520 5,500 5,328 5 5,000 0 Q1CY19 Q2CY19 Q3CY19 Q1CY20 Q2CY20 Q3CY20 Q4CY20 Q1CY21

Source: Company Data, I-Sec research

Technology, May 19, 2021 ICICI Securities

Chart 18: As-a-service ACV too did not show any major spurt post covid Global Market - As a Service 10.5 9.9

9.5 9.1 8.6 8.5 8 8 7.4 7.5 7.2 7.2 6.5 6.5 6.6 (ACV US$bn) (ACV 6.5

5.5 3QCY18 4QCY18 1QCY19 2QCY19 3QCY19 4QCY19 1QCY20 2QCY20 3QCY20 4QCY20 1QCY21

Source: ISG, I-Sec research

Chart 19: Causality between order booking and Chart 20: …subsequent period growth is limited

TCS Orderbook (US$mn) 12% TCS (YoY,CC) 10,000 10% 9,000 8% 6% 8,000 4%

7,000 2% 0% 6,000 -2% -4% 5,000 -6% 4,000 -8% Jun-19 Sep-19Dec-19Mar-20 Jun-20 Sep-20Dec-20Mar-21 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21

Source: Company data, I-Sec research. Source: Company data, I-Sec research.

Chart 21: Causality between order booking and… Chart 22: subsequent period growth is limited

TechM - New deals not including renewals 8% TechM (YoY, CC) 1,600 (US$mn) 1,400 6%

1,200 4%

1,000 2% 800 0% 600 -2% 400 -4% 200

- -6% Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21

Source: Company data, I-Sec research Source: Company data, I-Sec research

Technology, May 19, 2021 ICICI Securities

Chart 23: Tech spends at Top-5 US banks is on a stabilizing trend

Top 7 IT firms - BFSI ( YoY, USD) Tech Spend by Top-5 US banks (YoY, USD)

14 12 12 10 10 8 7 7 8 6 6 5 5 6 4 5 4 4 3 4 2 -4 2 1 0 0 -2 -4 -6 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21

Source: Company data, I-Sec research Note: Top-5 US banks’ sample = JPM, Citi, BofA, Morgan Stanley and US Bancorp. Top-7 IT companies’ sample = Accenture, TCS, Cognizant, Infosys, Wipro, HCL Tech and Tech Mahindra

Chart 24: Tech spends at top BFSI firms is on… Chart 25: … a stabilizing trend

JPM -Quarterly Technology Spend Growth (YoY %) CITI -Quarterly Technology Spend Growth (YoY%)

12% 12% 9% 9% 9% 10% 9% 9% 7% 6% 6% 3% 6% 3% -2% 1% 3% 0% 1% 1% 0% -3% 0% Q4CY19 Q1CY20 Q2CY20 Q3CY20 Q4CY20 Q1CY21 Q4CY19 Q1CY20 Q2CY20 Q3CY20 Q4CY20 Q1CY21

Source: Company data, I-Sec research. Source: Company data, I-Sec research.

Chart 26: Tech spends at top BFSI firms is on… Chart 27: … a stabilizing trend

BofA - Quarterly Technology Spend growth Wells Fargo -Quarterly Technology Spend growth (YoY%) (YoY %)

24% 22% 12% 8% 21% 9% 18% 5% 6% 18% 6% 15% 15% 3% 12% 9% 0% 9% -3% 6% 4% -6% 3% 1% -9% 0% -12% -10% Q4CY19 Q1CY20 Q2CY20 Q3CY20 Q4CY20 Q1CY21 2QCY20 3QCY20 4QCY20 1QCY21

Source: Company data, I-Sec research Source: Company data, I-Sec research.

Technology, May 19, 2021 ICICI Securities

Chart 28: Tech spends at top BFSI firms is on… Chart 29: …a stabilizing trend

Banco Santander - Quarterly Technology Spend UBS Quarterly Technology Spend (YoY %) growth (YoY%) 6% 4% 40% 33% 4% 30% 2% 1% 1% 20% 15% 0% 10% 0% -2% -1% -10% -4% -7% -10% -11% -4% -20% -6% -5% Q4CY19 Q1CY20 Q2CY20 Q3CY20 Q4CY20 Q1CY21 1QCY20 2QCY20 3QCY20 4QCY20 1QCY21

Source: Company data, I-Sec research. Source: Company data, I-Sec research.

Technology, May 19, 2021 ICICI Securities

Commentary of global banks is largely stable and does not hint at any major rise in spends Name Comments Wells Fargo  Technology, telecommunications and equipment expense grew 6% YoY in Q1CY21. On the consumer banking side, the company is accelerating investments in digital with a particular focus on delivering a simple, easy-to-use, best-in-class customer experience for the most-used mobile app features.  On consumer banking and lending, the company’s physical presence will continue to be an important asset but digital capabilities will become an ever more important complement in the business model. Morgan Stanley  Information processing and communications expenses increased 5% YoY in 1QCY21.  The company is looking at data analytics and scoring models. It is making investments in the engine that will help match the FA to the client based on specific needs. U.S. Bancorp  Technology and communications expenses increased 22% YoY in Q1CY21. The strong increase is primarily due to capital expenditures supporting business growth and the impact of increased call center volumes.  Digital transactions now account for nearly 80% of all transactions. More than 60% of loan sales now occur digitally, which compares to less than 40% a year ago.  Continue to adopt new technologies in banking. Invested in the new Akoya Data Access Network and became the first bank to integrate with the company, giving our customers a more secure way to link their data with their favorite third- party apps, as well as more control over their data. In 2020, customers engaged with US Bancorp digitally nine times more than in person. By the end of 2020, more than 77% of transactions and more than half of loan applications were completed digitally. In addition, Paycheck Protection Program digital application was built from an existing all-digital small business lending platform JP Morgan  Technology, telecommunications and equipment expenses declined 2% YoY in Q1CY21. On newer business apps, the company is adding a broad set of capabilities across the full spectrum. Personalisation of apps, global wallets within the payment systems are some of the impending changes on the fintech part.  On lending side, the company is building new data centers. It is building new agile. It is going into the cloud. It doesn't really change that much over time. The company’s investments will probably go up over time, not go down, since it sees plenty of organic growth opportunities to be invested in.  Banks need to invest in cloud to remain competitive.  Competition coming from fintech and big-tech. Banks already compete against a large and powerful shadow banking system. And they are facing extensive competition from Silicon Valley, both in the form of fintechs and Big Tech companies (Amazon, Apple, Facebook, Google and now Walmart), that is here to stay.  As the importance of cloud, AI and digital platforms grows, this competition will become even more formidable. As a result, banks are playing an increasingly smaller role in the financial system.  AI, cloud and digital are transforming the way banks do business. Citi  Tech spend growth healthy at 7% YoY.  Citi continues to make investments to enhance its digital capabilities across the franchise, including digital platforms, mobile and cloud based solutions.  Back in 2012, Citi streamlined consumer business and embraced the shift to digital. The company re-established Citi as a go-to bank for our institutional clients through our global network. BOFA  The company’s investments in digital client interfaces across client groups allowed it to maintain a close relationship with clients, as they moved seamlessly to digital check deposits, payments, banking and investing.  The company’s modern infrastructure and simplified operations underscore the importance of smart investments. BoFA continues to invest approximately USD 3 billion in technology - especially in digital, mobile and online platforms. DB  To be able to respond to market developments and client needs faster and more flexibly, the bank has decided to migrate in scope applications to the public Cloud through a strategic partnership with Google Cloud. This partnership with Google is a major milestone in the Banks’ digital journey and shows a commitment to embrace new technologies such as Cloud.  On the cost side, digitization offers our divisions an opportunity for significant efficiency gains. By investing in digital applications such as digital client self-boarding, front-to-back processes can be automated and the productivity increased.  Development of strong data capabilities should enhance DB’s ability to make accurate predictions about client and market behaviour, reducing fraud and pricing products more efficiently, while complying with regulatory obligations. Barclays  Driving technology and digital innovation - Barclays continues to invest in digital capabilities, upgrading its systems, moving to cloud technology and implementing rapid automation of manual processes. This allows Barclays to deliver a more personalized digital experience, reduce cost and create additional capacity to support more clients. Banco  IT costs declined by 1% YoY in 1QCY21 respectively Santander The bank continues to invest in digital channels and that is strengthening its value proposition with new products and services.  The banking sector has become highly competitive due to new entrants in the digital sphere (including the so-called Big Techs). The company is certain that swift reactions and the implementation of its action plans will place it at the forefront of change.

 The bank is investing in growth opportunities that advance its digitalization, collaborating with or acquiring smaller, highly specialized fintechs. Its investments in Ebury and Mercury, coupled with the acquisition of technology-based assets from Wirecard, will fast track the growth of its world-class payment platform.  Medium-term goal of Banco Santander on technology front is to enable > 50% of its sales in digital channel. Royal Bank of  The pandemic has accelerated digital adoption, changing consumer behaviour and how organizations create value Canada  Leveraging data and our trusted brand, RBC will use data analytics and digital platforms to understand and meet clients’ needs, and deliver new and differentiated solutions.  RBC’s Capital Markets AI-based electronic trading platform, Aiden™, executes trades based on live market data, and dynamically adjusts to new information and learnings from each of its previous actions. Source: Company Data, I-Sec Research

Technology, May 19, 2021 ICICI Securities

Chart 30: Employee absenteeism should have higher impact in T&M projects

T&M as % of revenue

25 Mphasis LTTS Wipro HCLT Mindtree

Source: Company data, I-Sec research.

Chart 31: Utilisations are closer to the peak and should mean revert Infosys Wipro TechM 90%

88%

86%

84%

82%

80%

78% Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21

Source: Company data, I-Sec research.

Chart 32: Offshore effort share is closer to the peak and should rebalance

76% Infosys -share of offshore effort

75%

74%

73%

72%

71%

70% Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Source: Company data, I-Sec research.

Technology, May 19, 2021 ICICI Securities

Chart 33: Retention costs / attrition interventions will likely come back

Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 21%

19%

17%

15%

13%

11%

5% TCS Wipro HCLT TechM

Source: Company data, I-Sec research.

Chart 34: Overseas travel may be at least a couple of quarters away TCS Infosys Wipro 4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0% Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21

Source: Company data, I-Sec research.

Chart 35: Facility expense savings should continue for a couple of quarters TCS Infosys Wipro 2.0% 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21

Source: Company data, I-Sec research.

Technology, May 19, 2021 ICICI Securities

Chart 36: In FY22, profitability is expected to revert to pre Covid (or lower) level

TCS Infosys Wipro HCLT TechM 28.0 27.0 26.0 25.7

24.0 24.7 23.0 22.0

20.0 20.3 20.0

18.0 17.3 16.6 16.0 14.9 14.0

12.0 11.0 10.0 FY17 FY18 FY19 FY20 FY21 FY22E Source: Company data, I-Sec research.

Chart 37: IT Sector witnessed the highest rerating (v/s pre Covid)

50 Re-rating (v/s 5-yr avg pre-covid) 41 40

30 24 19 20 (%) 10 3 -

-10 -8 -20 NiftyIT Nifty Pharma Nifty Nifty FMCG Nifty Bank (P/B)

Source: Bloomberg, I-Sec research

Chart 38: Multiples of our coverage universe rerated by up to 130% (v/s Pre Covid)

Re-rating (v/s 5-yr avg pre-covid)

150 130 110 90 70 50 30 10 LTI TCS LTTS Wipro HCLT Cyient TechM Infosys Coforge Mphasis Mindtree Persistent

Source: Bloomberg, I-Sec research.

Technology, May 19, 2021 ICICI Securities

Table 1: Relative valuation table P/E (x) Revenue growth (US$,%) EBIT (%) FY21E FY22E FY23E FY24E FY21E FY22E FY23E FY24E FY21E FY22E FY23E FY24E TCS 35.7 29.3 28.2 26.1 0.6 14.3 8.0 8.0 25.9 26.1 25.0 25.0 Infosys 29.4 25.8 23.1 21.4 6.1 16.5 10.0 8.0 24.5 23.5 23.5 23.5 Wipro 26.3 25.9 23.0 21.5 -1.4 20.0 8.7 5.5 20.1 17.3 17.8 18.0 HCLT 19.4 19.1 16.9 15.3 2.4 11.0 8.5 8.0 21.4 20.0 20.5 21.0 TechM 19.3 15.8 14.9 14.1 -1.4 11.0 7.5 8.5 14.2 14.9 14.5 14.0 Mphasis 27.4 23.5 21.2 19.0 5.6 9.9 9.5 12.0 16.1 17.0 17.0 17.0 Persistent 39.5 28.0 24.9 20.6 12.9 20.1 11.3 13.0 12.1 14.0 14.0 15.0 LTI 33.0 30.6 25.1 22.2 9.5 19.2 13.5 12.0 19.3 18.0 18.8 19.0 Mindtree 31.0 28.5 24.3 21.9 -1.1 13.5 12.0 11.0 17.5 16.6 16.7 16.7 Coforge 44.3 34.0 31.3 27.5 6.5 29.9 14.8 13.1 13.0 14.0 12.9 12.6 LTTS 42.0 35.2 30.1 26.8 -6.3 11.0 12.0 12.0 14.5 16.5 17.0 17.0 Cyient 23.8 17.3 14.6 13.3 -10.9 13.4 11.0 10.0 10.1 13.5 14.2 14.2

EPS (Rs) RoE (%) FY21E FY22E FY23E FY24E FY21E FY22E FY23E FY24E TCS 86.5 105.4 109.3 118.4 37.1 41.9 40.7 42.3 Infosys 45.5 51.9 58.0 62.7 25.2 28.2 26.9 25.2 Wipro 19.3 19.6 22.0 23.6 19.7 18.3 18.1 17.4 HCLT 48.0 48.7 55.0 60.8 23.5 20.2 20.6 20.8 TechM 50.3 61.4 64.9 68.8 17.8 19.2 18.2 17.4 Mphasis 64.5 75.2 83.2 93.1 19.7 20.8 20.8 20.9 Persistent 59.0 83.4 93.6 113.2 16.1 19.7 19.4 20.2 LTI 110.3 118.8 144.7 164.0 32.6 29.3 29.9 28.2 Mindtree 67.4 73.3 85.9 95.2 25.7 23.5 22.9 21.3 Coforge 77.4 100.9 109.6 124.7 19.4 22.0 20.8 20.4 LTTS 62.9 75.1 87.6 98.3 21.3 21.6 22.4 22.0 Cyient 33.8 46.6 55.1 60.4 13.5 16.4 17.4 16.9 Source: Company data, Bloomberg, I-Sec Research

Technology, May 19, 2021 ICICI Securities

Chart 39: Nasdaq100 is off the peak and trading close to 1SD above mean

P/E 1SD -1SD Avg 2SD -2SD 34

19 P/E (x) P/E 14

4 Jul-08 Jul-19 Oct-05 Apr-11 Oct-16 Jan-03 Jun-09 Jan-14 Jun-20 Mar-01 Feb-02 Mar-12 Feb-13 Dec-03 Nov-04 Dec-14 Nov-15 Sep-06 Aug-07 Sep-17 Aug-18 May-10 May-21 Source: Bloomberg, I-Sec research, Note: 1- year blended forward P/E ratio used.

Chart 40: Accenture is still trading 3SD above long term average

P/E 1SD -1SD Avg 2SD -2SD 38 33 28 23 18

P/E (x) P/E 13 8 3 Jul-10 Apr-07 Oct-13 Apr-20 Jan-04 Jun-09 Jan-17 Feb-05 Mar-06 Feb-18 Mar-19 Nov-01 Dec-02 Nov-14 Dec-15 Aug-11 Sep-12 May-08 May-21 Source: Bloomberg, I-Sec research.

Chart 41: Despite correction from peak, NIFTY IT valuations are still bloated

P/E 1SD -1SD Avg 2SD -2SD 32

16 P/E (x) P/E 12

4 Jul-10 Jul-15 Jul-20 Jan-08 Jan-13 Jan-18 Mar-12 Mar-17 Nov-08 Sep-09 Nov-13 Sep-14 Nov-18 Sep-19 May-11 May-16 May-21

Source: Bloomberg, I-Sec research.

Technology, May 19, 2021 ICICI Securities

Chart 42: TCS is trading 2SDs above long term average

P/E 1SD -1SD Avg 2SD -2SD 36 32 28 24 20

P/E (x) P/E 16 12 8 4 Feb-07 Feb-10 Feb-13 Feb-16 Feb-19 Nov-07 Nov-10 Nov-13 Nov-16 Nov-19 Aug-05 Aug-08 Aug-11 Aug-14 Aug-17 Aug-20 May-06 May-09 May-12 May-15 May-18 May-21

Source: Bloomberg, I-Sec research.

Chart 43: Infosys is trading 1.5 SDs above long term average

P/E 1SD -1SD Avg 2SD -2SD 32 28 24 20 16 P/E (x) P/E 12 8 4 Feb-07 Feb-10 Feb-13 Feb-16 Feb-19 Aug-05 Nov-07 Aug-08 Nov-10 Aug-11 Nov-13 Aug-14 Nov-16 Aug-17 Nov-19 Aug-20 May-06 May-09 May-12 May-15 May-18 May-21

Source: Bloomberg, I-Sec research.

Chart 44: HCLT is trading 1SD above long term average

P/E 1SD -1SD Avg 2SD -2SD 23 21 19 17 15 13

P/E (x) P/E 11 9 7 5 3 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15 May-16 May-17 May-18 May-19 May-20 May-21

Source: Bloomberg, I-Sec research.

Technology, May 19, 2021 ICICI Securities

Chart 45: Wipro is trading 2SD above long term average

P/E 1SD -1SD Avg 2SD -2SD 30 27 24 21 18 15 P/E (x) P/E 12 9 6 3 Jul-08 Jul-19 Oct-05 Apr-11 Oct-16 Jun-09 Jan-14 Jun-20 Mar-12 Feb-13 Sep-06 Aug-07 Dec-14 Nov-15 Sep-17 Aug-18 May-10 May-21

Source: Bloomberg, I-Sec research.

Chart 46: TechM is trading 0.5SD above long term average

P/E 1SD -1SD Avg 2SD -2SD 40 35 30 25 20

P/E (x) P/E 15 10 5 0 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20 Sep-06 Sep-08 Sep-10 Sep-12 Sep-14 Sep-16 Sep-18 Sep-20 May-07 May-09 May-11 May-13 May-15 May-17 May-19 May-21

Source: Bloomberg, I-Sec research.

Chart 47: Mid-cap IT is trading 3SD above long term average

P/E 1SD -1SD Avg 31 2SD -2SD 3SD

16 P/E (x) P/E 11

1 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15 May-16 May-17 May-18 May-19 May-20 May-21

Mid-cap IT = Market cap weighted average of MPHL, Coforge, HEXW, MTCL, PSYS, CYL, LTI, LTTS Source: Bloomberg, I-Sec research.

Technology, May 19, 2021 ICICI Securities

Chart 48: Mid-cap IT trading at ~20% premium to NIFTY IT is rare (and unsustainable?)

Discount/ -2SD 2SD Avg 1SD -1SD Premium 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% Jul-10 Jul-15 Jul-20 Jan-08 Jan-13 Jan-18 Mar-07 Mar-12 Mar-17 Nov-08 Nov-13 Nov-18 Sep-09 Sep-14 Sep-19 May-11 May-16 May-21

Source: Bloomberg, I-Sec research.

Chart 49: Mid-cap IT trading at par with sector leader (TCS) is rare (and unsustainable?)

Discount/ 3SD 2SD Avg 1SD -1SD Premium 60%

40%

20%

-20%

-40%

-60%

-80% Jul-08 Jul-15 Oct-06 Apr-10 Oct-13 Apr-17 Oct-20 Jun-11 Jan-12 Jun-18 Jan-19 Mar-06 Feb-09 Mar-13 Feb-16 Mar-20 Dec-07 Nov-10 Dec-14 Nov-17 Aug-05 Sep-09 Aug-12 Sep-16 Aug-19 May-07 May-14 May-21

Source: Bloomberg, I-Sec research.

Chart 50: LTI is trading 1.5SD above long term average

P/E 1SD -1SD Avg 2SD -2SD 40 36 32 28 24 20 P/E (x) P/E 16 12 8 4 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 May-17 May-18 May-19 May-20 May-21

Source: Bloomberg, I-Sec research.

Technology, May 19, 2021 ICICI Securities

Chart 51: Mphasis is trading 1.5SD above long term average

P/E 1SD -1SD Avg 2SD -2SD 30 28 26 24 22 20 18 16

P/E (x) P/E 14 12 10 8 6 4 Jul-08 Jul-19 Oct-05 Apr-11 Oct-16 Jun-09 Jan-14 Jun-20 Mar-12 Feb-13 Sep-06 Aug-07 Dec-14 Nov-15 Sep-17 Aug-18 May-10 May-21

Source: Bloomberg, I-Sec research.

Chart 52: Mindtree is trading 2SD above long term average

P/E 1SD -1SD Avg 2SD -2SD 33

18 P/E (x) P/E 13

3 Jul-20 Apr-12 Oct-14 Jan-09 Jun-11 Jan-18 Mar-08 Feb-13 Mar-17 Nov-09 Aug-10 Dec-13 Aug-15 Nov-18 Sep-19 May-07 May-16 May-21

Source: Bloomberg, I-Sec research.

Chart 53: LTTS is trading 2SD above long term average

P/E 1SD -1SD Avg 2SD -2SD 37

21 P/E (x) P/E 17

9 Jul-17 Jul-18 Jul-19 Jul-20 Jan-18 Jan-19 Jan-20 Jan-21 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Sep-17 Nov-17 Sep-18 Nov-18 Sep-19 Nov-19 Sep-20 Nov-20 May-17 May-18 May-19 May-20 May-21

Source: Bloomberg, I-Sec research.

Technology, May 19, 2021 ICICI Securities

Chart 54: Coforge is trading 3.5SD above long term average

P/E 1SD -1SD Avg 36 2SD -2SD 3SD 31

16 P/E (x) P/E 11

1 Jul-05 Jul-10 Jul-15 Jul-20 Jan-08 Jan-13 Jan-18 Mar-07 Mar-12 Mar-17 Nov-08 Sep-09 Nov-13 Sep-14 Nov-18 Sep-19 May-06 May-11 May-16 May-21

Source: Bloomberg, I-Sec research

Chart 55: Persistent is trading 4SD above long term average

P/E 1SD -1SD Avg 33 2SD -2SD 4SD 28

18 P/E (x) P/E 13

3 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Nov-18 Nov-19 Nov-20 May-10 May-11 May-12 May-13 May-14 May-15 May-16 May-17 May-18 May-19 May-20 May-21

Source: Bloomberg, I-Sec research.

Chart 56: Cyient is trading 2SD above long term average

P/E 1SD -1SD Avg 2SD -2SD

21 19 17 15 13 11 P/E (x) P/E 9 7 5 3 Jul-06 Jul-09 Oct-05 Apr-07 Oct-08 Apr-10 Jan-08 Jun-12 Jun-15 Mar-13 Mar-16 Feb-19 Dec-10 Sep-11 Dec-13 Sep-14 Nov-16 Aug-17 Nov-19 Aug-20 May-18 May-21

Source: Bloomberg, I-Sec research.

Technology, May 19, 2021 ICICI Securities

Price charts Infosys TCS HCL Tech Tech Mahindra

1,500 3,500 1200 1200 1100 1100 1,300 3,000 1000 1000 1,100 2,500 900 900 800 900 800 (Rs) (Rs) (Rs) 2,000 700 (Rs.) 700 700 600 600 1,500 500 500 500 400 400 300 1,000 300 300 Nov-18 Nov-19 Nov-20 May-18 May-19 May-20 May-21 Nov-18 Nov-19 Nov-20 May-18 May-19 May-20 May-21 Nov-18 Nov-19 Nov-20 May-18 May-19 May-20 May-21 Nov-18 Nov-19 Nov-20 May-18 May-19 May-20 May-21 Wipro Mphasis Mindtree L&T Infotech

550 2050 2550 5000 500 1850 2150 4500 450 1650 4000 1750 400 1450 3500 350 1250 1350 3000 (Rs) (Rs) 300 1050 (Rs) 950 2500

250 850 (Rs) 2000 550 200 650 1500 150 450 150 1000 100 250 500 Nov-18 Nov-19 Nov-20 May-18 May-19 May-20 May-21 Nov-18 Nov-19 Nov-20 May-18 May-19 May-20 May-21 Nov-18 Nov-19 Nov-20 Nov-18 Nov-19 Nov-20 May-18 May-19 May-20 May-21 May-18 May-19 May-20 May-21 L&T Technology Services Cyient Persistent Systems Coforge

3100 950 2700 3750 850 3250 2600 750 2200 2750 650 2100 1700 550 2250 (Rs) (Rs) 1600 450 1200 (Rs) 1750 (Rs) 350 1250 1100 700 250 750 150 600 200 250 Nov-18 Nov-19 Nov-20 May-18 May-19 May-20 May-21 Nov-18 Nov-19 Nov-20 Nov-18 Nov-19 Nov-20 Nov-18 Nov-19 Nov-20 May-18 May-19 May-20 May-21 May-18 May-19 May-20 May-21 May-18 May-19 May-20 May-21 Source: Bloomberg

Technology, May 19, 2021 ICICI Securities

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