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December 29, 2020

Sectoral View: Attractive
IT on the cusp of multi-year transformation phase…
Rising adoption of smartphones, high internet speed and social distancing Recommendation matrix (new)
(due to Covid-19) has changed consumer behaviour. Consumers now prefer Company CMP Rating TP Upside (%)
to transact (buy a product) virtually over the smartphone via an app instead

Sector Update
TCS 2,928 Buy 3,410 16%
of physical transaction. This has led to virtualisation of business models. In
INFTEC 1,240 Buy 1,450 17%
addition, to keep business up and running in a work from home scenario,
technology is gaining traction. As a result, new age technologies like HCLTECH 922 Buy 1,105 20%
cybersecurity (to protect business from work from home scenario), app TECHMAH 948 Buy 1,105 17%
development (to help customer transact virtually) and Cloud (to enable WIPRO 383 Hold 435 14%
seamless & efficient online transaction) are witnessing robust growth. We ZENTEC 239 Buy 280 17%
expect technology to become an integral part of a company’s spending and
MASTEK 1,158 Buy 1,350 17%
key to revenue growth. Hence, we expect increased allocation towards
technology making IT companies indispensable to business. Digital
technologies like cloud, cybersecurity, AI, Analytics are expected to play a Recommendation matrix (old)
critical role in driving this growth.
Company old CMP Rating TP Upside (%)
The pace of digital acceleration has increased after Covid-19. We believe we TCS 2,737 BUY 3,300 21%
are in the first phase of a multi-year technology transformation phase. In the
INFTEC 1,121 BUY 1,350 20%
current phase, enterprises are building a cloud-based foundation that will
serve as a resilient, secure, scalable digital core. In subsequent phases, HCLTECH 827 BUY 960 16%
enterprises will see new age technologies like artificial intelligence, TECHMAH 892 BUY 1,040 17%
augmented reality, virtual reality, data analytics and Internet of Things (IOT) WIPRO 346 BUY 435 26%

ICICI Securities – Retail Equity Research

to be developed around cloud leading to a multi-year technology spends. In ZENTEC 178 BUY 210 18%
the next four to five years every major company is expected to migrate to
MASTEK 863 Buy 1,015 18%
cloud and use of Artificial Intelligence (AI) has just started. In the last phase,
there will be emergence of new business models and leverage of technology
to drive growth in ancillary business. As a result, global digital technologies
are expected to grow at a CAGR of 16% to US$900 billion in FY21E-25E led
by 15-20% growth in cloud migration, ADM, digital transformation IOT AI,
etc and 35-45% growth in 5G, robotics, blockchain & others. This, coupled
with vendor consolidation opportunities, acquisition of captives and Research Analysts
offshoring & automation (for cost take out deals) could lead to double digit Devang Bhatt
revenue growth for IT companies in the longer term. devang.bhatt@icicisecurities.com

Offshoring, cost rationalisation to help margin defensibility

One of the structural change witnessed in Covid times is growing
acceptability of offshoring among IT clients due to work from home & work
from anywhere situation. Considering the improved productivity and
seamless execution during this Covid times, we expect the offshoring trend
to witness improved traction. This, coupled with rationalisation of
subcontracting cost, automation, pyramid rationalisation and higher digital
value will help IT companies maintain margin defensibility despite
headwinds (like wage hikes, higher travel & other discretionary spends).
Valuation & Outlook
Considering the robust growth in new age technologies, we expect top five
IT companies to register double digit growth in revenues (on average basis)
in FY22E and FY23E. This, coupled with higher offshoring and cost
rationalisation, will help IT companies maintain stable margins in FY22E &
FY23E (albeit above FY20 levels). Hence, we maintain our positive view on
the sector. We maintain BUY on TCS and Infosys considering their ability to
provide end to end solutions. Further, considering robust opportunity in
cloud, ER&D and 5G we maintain BUY on HCL Tech and Tech Mahindra.
Among midcaps, we prefer Zensar and Mastek based on attractive valuation.
 Sector Update | IT ICICI Direct Research

Exhibit 1: Digital technology to drive multi-year growth

Source: Wipro Analyst Meet, ICICI Direct Research;

Exhibit 2: India has high supply of digitally skilled employee (digital FTE as of FY18)
<5% Latin America

13-17% Rest of APAC

(excluding India)
India has higher share of digitally skilled employee
6-10% Nearshore
Europe and lower cost of employee, which, we believe,
can be a key driver of offshoring

70-75% India

Source: Nasscom, ICICI Direct Research

Exhibit 3: IT companies witness higher offshoring post Covid-19

84
82
80
78 Growing acceptability of offshoring due to work
76 from home, Covid situation, higher talent
availability and lower cost has led to increase in
74
offshore effort of IT companies like Infosys, Larsen
72 & Toubro Infotech (LTI) and Mindtree
70
Higher offshoring is expected to help margin
68 defensibility in the long run
66
64
Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21

Infosys LTI Mindtree

Source: Company, ICICI Direct Research, Infosys, Larsen & Toubro Infotech (LTI), Mindtree

ICICI Securities | Retail Research 2

 Sector Update | IT ICICI Direct Research

I-Direct IT coverage universe

Tata Consultancy Services (TCS)
Tata Consultancy Services (TCS) has, over the years, invested in R&D, TCS price performance
platforms and digital reskilling that has helped the company to register a
consistent strong financial performance. The company has also shown its 15,000 4,000
ability to mine clients effectively as it has doubled its US$100 million client 13,000 3,000
over FY14-20 despite its size. In addition, TCS has witnessed strong deal 11,000
wins and has balance sheet strength to carve out complex large deals. The 2,000
9,000
recent Transamerica and Postbank deals are a few examples. Further, 1,000
7,000
considering TCS’ digital prowess and ability to offer end to end solution
5,000 0
makes it a key beneficiary of robust growth in digital technologies leading to

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double-digit revenue growth over a sustainable period. This, coupled with
industry leading growth & solutions, better capital allocation, stable
management and higher revenue growth trajectory than witnessed in the Nifty (L.H.S) Price (R.H.S)

past prompt us to maintain our BUY rating on stock with a revised target
price of | 3410/ share (28.8x FY23E EPS).
Key Risk:
Decline in pace of digital acceleration: We assume that acceleration in digital
technologies will drive revenue growth of IT companies. However, a slower
than expected pace of growth in digital technologies will impact TCS’
revenue growth.
Margin sustainability: We believe that in a post Covid world higher revenue
growth, offshoring and other cost savings like travel facility cost will not
return to normal levels. However, if TCS is unable to realise the cost savings
or realise the benefits of the cost savings it will adversely impact its margins.
Exhibit 4: Financial summary (TCS)
Financials FY19 FY20 FY21E FY22E FY23E CAGR (FY20-23E)
Net Sales 1,46,463 1,56,949 1,62,403 1,78,581 2,01,986 8.8%
EBITDA 39,506 42,110 45,148 51,074 58,374 11.5%
EBITDA Margins (%) 27.0 26.8 27.8 28.6 28.9
Net Profit 31,472 32,340 32,341 38,444 43,751 10.6%
EPS (|) 83.8 86.2 87.5 104.0 118.4
P/E 34.8 33.9 33.4 28.1 24.7
RoNW (%) 34.4 37.5 37.2 42.4 45.7
RoCE (%) 43.8 43.5 44.6 49.0 53.0
Source: Company, ICICI Direct Research

Infosys (INFTEC)
Post the management change, the company has invested in accelerating its Infosys price performance
digital stack and in improving sales & marketing efforts. This has resulted in
revenue outperformance, narrowing of margin gap with the leader and 15,000 1,500
positive momentum in deal wins. The recent multi-million dollar wins of 13,000
Daimler and Vanguard are a case in point. We expect the company to 11,000
1,000
continue to register healthy growth in revenues considering improving large 9,000
deal win trajectory, digital acceleration and the company’s ability to provide 500
7,000
end to end solution. Further, we expect Infosys to register healthy margins
5,000 0
in coming years led by rationalisation of onsite pyramid, automation, lower
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subcontracting cost and improvement in revenues. Hence, we maintain our

BUY rating on the stock with a revised target price of | 1450/share (25x
FY23E EPS). Nifty (L.H.S) Price (R.H.S)

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 Sector Update | IT ICICI Direct Research

Key Risk:
Change in Management: Any change in strategic direction of the company
due to management change could adversely impact growth trajectory.
Decline in pace of digital acceleration: We assume that acceleration in digital
technologies will drive revenue growth of IT companies. However, a slower
than expected pace of growth in digital technologies will impact Infosys’
revenue growth.
Exhibit 5: Financial summary (Infosys)
| Crore FY19 FY20 FY21E FY22E FY23E CAGR (FY20-23E)
Net Sales 82,676 90,791 99,238 1,11,192 1,25,954 11.5%
EBITDA 20,890 22,279 27,092 29,688 34,008 15.1%
EBITDA Margins (%) 25.3 24.5 27.3 26.7 27.0
Net Profit 15,411 16,595 19,707 21,174 24,316
EPS (|) 35.4 38.9 46.4 49.8 57.2 13.7%
P/E 35.0 31.9 26.8 24.9 21.7
RoNW (%) 23.7 25.2 27.4 27.2 28.7
RoCE (%) 32.9 30.8 33.7 33.6 35.6
Source: Company, ICICI Direct Research

HCL Technologies (HCLTEC)

We believe growing opportunities in cloud, automation and cyber security HCL Tech price performance
are a sweet spot for HCL Tech. The company’s expertise in IMS and app
modernisation (~70% of revenues) can witness phenomenal growth led by 15,000 1,500
integrated deals in cloud. HCL Tech also witnessed healthy traction in deal 13,000
TCV (up 35% QoQ in Q2FY21) and deal pipeline. Further, the company 11,000
1,000
expects ER&D revenues to improve QoQ with product revenues (being 9,000
mission critical & growing traction) expected to be positive YoY. In addition, 500
7,000
we expect the company to register double digit revenue growth in FY22E
5,000 0
and FY23E led by recovery across verticals, acquisition, improving deal
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wins. Further, HCL Tech has various margin levers in terms of higher
utilisation, lower subcontracting cost, lower travel and lower discretionary
spend, which is expected to improve its margins. This, coupled with Nifty (L.H.S) Price (R.H.S)

improved capital allocation policy (the company is planning to increase its

dividend to | 4/share per quarter from | 2/share per quarter) bodes well.
Hence, we maintain BUY rating on the stock with a revised target price of
| 1105/share (18x FY23E EPS).
Key Risk:
Products business: The recently acquired products from IBM require higher
investment. If the company is unable to scale these business adequately it
will adversely impact its revenues.
Decline in pace of digital acceleration: We assume that acceleration in digital
technologies will drive revenue growth of IT companies. However, a slower
than expected pace of growth in digital technologies will impact HCL Tech’s
revenue growth.

Exhibit 6: Financial summary (HCL Tech)

Key Financials FY19 FY20 FY21E FY22E FY23E CAGR FY(20-23E)
Net Sales 60,427 70,678 75,346 85,517 96,207 10.8%
EBITDA 13,968 16,694 19,515 22,235 25,110 14.6%
Margins (%) 23.1 23.6 25.9 26.0 26.1
Net Profit 10,122 11,062 12,376 14,420 16,621 14.5%
EPS (|) 37.3 40.8 45.6 53.2 61.3
P/E 24.7 22.6 20.2 17.3 15.1
RoNW (%) 24.5 21.6 20.7 21.0 20.9
RoCE (%) 26.9 23.0 23.8 24.9 25.3
Source: Company, ICICI Direct Research

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 Sector Update | IT ICICI Direct Research

Tech Mahindra (TECMAH)

The company expects digital technologies like customer experience, cloud, Tech Mahindra price performance
data & analytics to grow at a healthy pace in coming years. Tech Mahindra
(TechM) expects customer experience to increase at a CAGR of 11.2% in 15,000 1,500
FY20-24E and expects acquisitions like Born, Mad Pow, Bio to help capture 13,000
this demand. The company generates US$900 million (~17% of topline) 11,000
1,000
from cloud and is growing at 22%. TechM’s booked TCV in cloud is 2x over 9,000
the previous year representing tremendous growth in coming years. In 500
7,000
terms of data & analytics, the company generates US$800 million (15% of
5,000 0
revenues) and employs 10,000 associates with 35 Fortune 500 clients and

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300+ customer base. Apart from capturing acceleration in digital
technologies, the company’s focus on winning large deals & 5G will further
boost revenues in coming years. This, coupled with an improving margin Nifty (L.H.S) Price (R.H.S)

trajectory led by cost rationalisation and reasonable valuation prompt us to

maintain BUY rating on the stock with a revised target price of | 1105/share
(16x FY23E EPS).
Key Risk:
Margin sustainability: The company has various cost levers to improve
margins. However, if TechM is unable to realise the cost savings or realise
the benefits of the cost savings it will adversely impact its margins.
Inability to capture 5G spend: The company generates ~40% of its revenues
from telecom and is expected to be a key beneficiary of 5G spend. Any
inability of TechM to capture the 5G spend will adversely impact the
company’s revenue growth trajectory.

Exhibit 7: Financial summary (Tech Mahindra)

Key Financials FY19 FY20 FY21E FY22E FY23E CAGR (FY20-23E)
Net sales 34,742 36,868 37,536 40,490 44,787 6.7%
EBITDA 6,337 5,726 6,419 7,450 8,599 14.5%
EBITDA Margin (%) 18.2 15.5 17.1 18.4 19.2
Net Profit 4,298 4,033 4,402 5,169 6,097 14.8%
EPS (|) 47.7 45.9 50.0 58.8 69.3
P/E 19.9 20.7 18.9 16.1 13.7
RoNW (%) 21.2 18.5 18.3 18.9 19.5
RoCE (%) 23.6 19.1 18.7 19.8 20.9
Source: Company, ICICI Direct Research

Wipro (WIPRO)
We believe Wipro has all the key ingredients of robust growth in the long Wipro price performance
run. The company has strong full services capabilities across applications,
infra, BPS and engineering, which should help it as integrated deals gain 15,000 500
prominence. Further, the induction of a new CEO with focus on profitable 13,000 400
growth make us positive on Wipro’s future growth. This, coupled with the 11,000 300
new CEO’s focus on simplification of organisation, improving client mining, 9,000 200
focus on fewer verticals and geographies to drive growth is expected to
7,000 100
bode well. In addition, the company has seen improving deal wins and
5,000 0
expects traction in digital tech to further improve growth. Wipro aims to
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accelerate growth without compromising margins. This, coupled with

healthy capital allocation policy, improving tech spends in digital, prompt us
to be positive on the company in the long run. However, the recent run up Nifty (L.H.S) Price (R.H.S)

in stock prompt us to downgrade the stock from BUY to HOLD with a target
price of | 435/share (20x FY23E EPS).
Key Risk:
Higher than expected growth: We expect the company to underperform the
industry in the near term. However, a turnaround led by the new strategy of
the CEO could lead the company to outperform the industry.

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 Sector Update | IT ICICI Direct Research

Decline in pace of digital acceleration: We assume that acceleration in digital

technologies will drive revenue growth of IT companies. However, a slower
than expected pace of growth in digital technologies will impact Wipro’s
revenue growth.

Exhibit 8: Financial summary (Wipro)

Key Financials FY19 FY20 FY21E FY22E FY23E CAGR (FY20-23E)
Net Sales 58,052 61,340 61,664 67,004 74,550 6.7%
EBITDA 11,938 12,659 13,385 14,759 16,740 9.8%
Net Profit 9,003 9,722 9,888 10,789 12,106 7.6%
EPS (|) 14.9 16.6 18.1 19.7 22.1
P/E 25.6 23.0 21.2 19.4 17.3
RoNW (%) 15.8 17.4 18.6 19.9 21.8
RoCE (%) 17.8 19.3 21.0 22.3 24.4
Source: Company, ICICI Direct Research

Zensar Technologies (ZENTE)

We expect Zensar to register healthy growth in core revenues (i.e. excluding Zensar Technologies price performance
third party maintenance revenues) mainly led by improving order book
(increased 16.7% QoQ in Q2FY21), deal pipeline (US$1.5 billion), net new 15,000 500
wins and conversion ratio. This, coupled with bottoming out of retail vertical, 13,000 400
improvement in cloud revenues and ramp up of projects will lead to healthy 11,000 300
improvement in revenues. In addition, the company has also hired Nachiketa
9,000 200
Mitra (from Cognizant) to boost its financial service (~26.6% of revenues)
7,000 100
segment in the long term. Coupled with healthy cash on the balance sheet,
5,000 0
we expect the company to pursue inorganic acquisition (in cloud or software

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engineering side). Hence, we expect the company to register improving
revenue growth in the long term. Further, improving margins are expected
to boost the bottomline. This coupled with attractive valuation prompt us to Nifty (L.H.S) Price (R.H.S)

maintain BUY rating on the stock with a revised target price of | 280/share
(12x FY23E EPS).
Key Risk:
Weakness in top client: The company expects weakness in the top client to
continue in the next two quarters. However, higher than anticipated
weakness in top client could negatively impact company’s growth trajectory.
Conversion of pipeline: The company has seen healthy order book and deal
pipeline. However, delay in decision making or delay in conversion of
pipeline could adversely impact company’s topline.

Exhibit 9: Financial summary (Zensar)

(| Crore) FY19 FY20 FY21E FY22E FY23E CAGR (FY20-23E)
Net Sales 3,983 4,177 3,839 4,012 4,391 1.7%
EBITDA 493 513 680 742 826 17.2%
EBITDA Margin (%) 12.4 12.3 17.7 18.5 18.8
Adjusted PAT 314 268 386 455 525 25.2%
Adjusted EPS (|) 13.9 11.5 16.8 19.9 22.9
P/E 17.2 20.7 14.2 12.0 10.4
ROE (%) 16.1 12.8 16.2 16.8 17.1
ROCE (%) 17.6 12.7 17.7 17.6 17.7
Source: Company, ICICI Direct Research

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 Sector Update | IT ICICI Direct Research

Mastek (MASTEK)
Mastek believes the UK private sector has bottomed out. Hence, with Mastek price performance
traction in UK government revenues, US retail and UK private sector, we
expect Mastek to register improving revenues in coming quarters. In 15,000 1,500
addition, Evosys expertise in Oracle cloud migration coupled with Mastek’s 13,000
capability to cross-sell data analytics, application support and digital 11,000
1,000
commerce will help the company win integrated and larger deals. This will 9,000
result in multi-million dollar deals and annuity type of deals in long run. This, 500
7,000
coupled with a large deal from the UK government (above US$25 million
5,000 0
annually via participation through consortium), large customer wins across

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geographies, inorganic growth (led by healthy cash balance), improving deal
pipeline in cloud and market share gains are some long term drivers for
Mastek’s revenues. Further, stable margins and healthy balance sheet Nifty (L.H.S) Price (R.H.S)

prompt us to remain positive on the stock. This, coupled with attractive

valuations prompt us to maintain BUY recommendation on the stock with a
revised target price of | 1350/share (15x FY23E EPS).
Key Risk:
Acquisition of Evosys: The company’s acquisition of Evosys has enabled the
company to improve its deal wins and margins. However, inability of the
company to cross sell will adversely impact its revenue and margin
trajectory.
Margin sustainability: The company has various cost levers to sustain robust
margins. However, if Mastek is unable to realise the cost savings or realise
the benefits of the cost savings it will adversely impact its margins.

Exhibit 10: Financial summary (Mastek)

| Crore FY19 FY20 FY21E FY22E FY23E CAGR FY20-23E
Net Sales 1,033 1,072 1,654 1,779 1,930 21.7%
EBITDA 132 155 313 334 363 32.7%
EBITDA Margins (%) 12.7 14.5 18.9 18.8 18.8
Adjusted Net Profit 101 133 201 230 263 25.6%
Adjusted EPS (|)* 40 52 68 78 89
P/E 28.9 22.1 17.0 14.9 13.0
RoNW (%) 14.1 16.8 15.4 15.7 15.9
RoCE (%) 17.0 11.3 15.1 15.4 15.7
Source: Company, ICICI Direct Research

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 Sector Update | IT ICICI Direct Research

Exhibit 11: ICICI Direct Research universe (IT)

EPS (|) P/E (x) RoCE (%) RoE (%)

Company Cmp (|) TP (|) Rating Mcap (| Cr)

FY20 FY21E FY22E FY23 FY21 FY22 FY23 FY20 FY21E FY22E FY23E FY20
FY20 FY21E FY22E FY23E
E E E E
HCL Tech (HCLTEC) 922 1,105 Buy 2,50,145 40.8 45.6 53.2 61 23 20 17 15 23.0 23.8 24.9 25.3 21.6 20.7 21.0 20.9
Infosys (INFTEC) 1,240 1,450 Buy 5,28,231 38.9 46.3 49.8 57 32 27 25 22 30.8 33.7 33.6 35.6 25.2 27.4 27.2 28.7
TCS (TCS) 2,928 3,410 Buy 10,98,792 86.2 87.5 104.0 118 34 33 28 25 43.5 44.6 49.0 53.0 37.5 37.2 42.4 45.7
Tech M (TECMAH) 948 1,105 Buy 91,716 45.9 50.0 58.8 69 21 19 16 14 19.1 18.7 19.8 20.9 18.5 18.3 18.9 19.5
Wipro (WIPRO) 383 435 Hold 2,18,811 16.6 18.1 19.7 22 23 21 19 17 19.3 21.0 22.3 24.4 17.4 18.6 19.9 21.8
Mindtree (MINCON) 1,610 1,680 Buy 26,519 38.3 58.8 68.0 76 42 27 24 21 23.0 29.7 30.0 29.6 20.0 25.5 25.4 24.6
LTI (LTINFC) 3,638 3,850 Buy 63,544 86.6 105.9 126.5 149 42 34 29 24 30.7 31.8 31.6 31.3 28.1 28.3 28.3 28.0
Coforge (NIITEC) 2,689 2,690 Hold 16,289 71.4 75.7 94.4 110 38 36 28 24 23.0 25.5 27.0 27.6 18.5 20.1 22.0 22.6
Infoedge (INFEDG) 4,641 4,090 Buy 59,682 26.8 23.8 33.1 39 173 195 140 118 18.0 9.1 11.9 13.3 13.5 6.8 9.0 10.0
Teamlease (TEASER) 2,586 2,840 Buy 4,421 20.5 47.2 64.9 83 126 55 40 31 15.0 13.8 15.9 17.2 6.5 12.7 14.7 15.9
Source: Company, ICICI Direct Research

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 Sector Update | IT ICICI Direct Research

RATING RATIONALE
ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
stocks according to their notional target price vs. current market price and then categorises them as Buy, Hold,
Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as
the analysts' valuation for a stock

Buy: >15%;
Hold: -5% to 15%;
Reduce: -5% to -15%;
Sell: <-15%

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICI Direct Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

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 Sector Update | IT ICICI Direct Research

ANALYST CERTIFICATION
I/We, Devang Bhatt, PGDBM, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also
certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation
from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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