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Sector: IT Services BSE Sensex: 16,342

IT Services
Rebound expected after medium term pressures
The global uncertainties in the west and S&P downgrade of US debt rating have weighed down IT stocks. The economic concerns are likely to impact the revenue growth and particularly the discretionary IT spending in the medium term as clients may delay decision making. After a medium term softness we expect a rebound in the outsourcing activities and FY13 is unlikely to see a meltdown as IT outsourcing trends are positive and the value proposition of Indian IT firms continue to be strong. A bear case will be single digit revenue growth in FY13 will be similar to growth achieved in FY10 subsequent to the Lehman crisis. But it is unlikely this time that firms will sink to such growth rates. We think there is a long term potential and the correction has provided an opportunity.
Revenue growth downward revised due to global concerns We believe the revenue growth will be toned down from earlier expectation of 24-25%YoY for FY12 to sub 20%YoY growth. FY13 growth rates revised downward as well.
22 Aug 2011 Rohit Kumar Anand rohit.anand@pinc.co.in +9122 6618 6372

Absolute Performance (%) Geometric HCL Tech Hexaware Infosys MindTree MphasiS

1m (26.9) (23.4) (14.8) (22.4) (14.3) (13.1)

3m (34.5) (23.5) 7.8 (23.0) (3.1) (9.0)

12m (47.9) (5.4) 81.6 (21.7) (34.7) (36.2) (5.9) (51.8) (37.0) (50.7) 5.5 (19.6) 12m (41.4) 6.6 104.5 (11.8) (26.4) (28.1) 6.0 (45.7) (29.0) (44.5) 18.9 (9.4)

Discretionary spending to be hit There might be delay in NIIT Technologies (22.0) (8.9) decision making for discretionary spending but the impact will ISIEmergingMarketsPDF in-bseinstitute1 from 203.199.49.100 on 2011-08-30 08:57:21 EDT. DownloadPDF. Patni (23.1) (20.7) not be severe compared to 2008 crisis as pre Lehman crisis, Persistent Systems (18.0) (20.4) discretionary spending were growing rapidly. USD/INR rate changed We are assuming appreciation in USD against INR compared to earlier expectation of depreciation. USD/INR rate taken as 45 for FY12 and 45.5 for FY13 compared to 44.5 (FY12) and 43.5 (FY13). Attrition to go down in laterals The attrition rate for laterals is expected to go down going ahead. Salary increments will be lower in FY13 The variable salary and increments will be subdued in FY13 supporting the operating margin in addition to support from stronger USD against INR. Valuation and Recommendation We believe the value proposition of Indian IT firms is strong and the long term growth is intact. In the medium term, the revenue growth might get affected but a crash is unlikely and a rebound in outsourcing is expected to come in main verticals along with support from newer verticals which have adopted outsourcing. We believe there is a potential of upside in large Indian IT firms and downside is limited. Maintain BUY recommendation on Infosys, TCS, Wipro and HCL Tech with a target price of Rs2730, Rs1100, Rs382 and Rs464 respectively.
Sasken TCS Wipro Relative Performance (%) Geometric HCL Tech Hexaware Infosys MindTree MphasiS NIIT Technologies Patni Persistent Systems Sasken TCS Wipro (23.5) (19.0) (18.2) 1m (16.3) (12.2) (2.4) (11.1) (1.8) (0.4) (10.6) (11.9) (6.1) (12.3) (7.2) (6.3) (34.8) (21.9) (25.9) 3m (26.5) (14.2) 20.9 (13.6) 8.7 2.1 2.2 (11.1) (10.8) (26.9) (12.4) (16.9)

IT Sector Review

KEY FINANCIALS
Company Infosys TCS Wipro HCL Tech CMP (Rs) 2,194 918 332 387 Mkt Cap (Rs bn) 1,254 1,797 817 271 Net Sales (Rs mn) FY12E FY13E 323,987 448,002 357,145 188,711 383,802 539,048 414,930 222,239 EPS (Rs) FY12E 129.7 49.0 21.6 28.8 FY13E 152.8 57.6 24.8 35.4 16.9 18.7 15.4 13.4 P/E (x) FY12E FY13E 14.4 15.9 13.4 10.9 TP (Rs) 2,730 1,100 382 464 1 Potential Upside (%) 24% 20% 15% 20%

PINC Research reports are also available on Reuters, Thomson Publishers and BLOOMBERG PINV <GO>

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IT Services

Revenue growth to slow down during uncertain times but unlikely to crash Exhibit 1 - Sales (USD) growth
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 FY2006
Source: PINC Research, Company

Infosys

TCS

Wipro

HCL Tech

Infosys

TCS

Wipro

HCL Tech

60% 50% 40% 30% 20% 10% 0%

FY2007

FY2008

FY2009

FY2010

FY2011

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With the increased uncertainty in the global economic scenario and S&P downgrade of US sovereign debt rating, there might be pressures on the IT budget and more on the actual spending. The annual revenue growth of large IT firms is set to decline in FY12 to lower than 20%YoY against earlier expectations of over 25%YoY growth. During the rebound after the previous slowdown due to Lehman crisis, we have noticed that the large firms were able to grow faster than smaller firms in general. The robust business model, diversity in service lines and size made it possible for large Indian IT vendors to steal the market share. Exhibit 2 - Infosys USD revenue performance against guidance
Revenue actual vs guidance (USD) 8.0% 6.0% 4.0% 2.0% 0.0%

08

09

07

08

09

10

10

08

09

10

11

11

11 FY 1Q

FY

FY

FY

FY

FY

FY

FY

FY

FY

FY

FY

FY

FY

FY

FY

FY

3Q

3Q

2Q

3Q

1Q

4Q

1Q

4Q

4Q

4Q

1Q

2Q

2Q

1Q

2Q

-4.0% -6.0%
Source: PINC Research, Company

Outperformance from lower

Outperformance from upper

rohit.anand@pinc.co.in
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3Q

4Q

FY

-2.0%

12

08

09

10

11

IT Services Immediately after the Lehman crisis in Sep 2008, revenue of Infosys for December quarter (Q3FY09) missed its guidance by large margin and further missed guidance in Q4FY09. The impact was severe as the financial sector collapsed in US. Subsequently, Infosys took a cautious stance while guiding for FY10 and started the year with a guidance of 3.1-6.7%YoY USD revenue decline for FY10. The impact was severe but outsourcing from Indian vendors started to gain incremental market share in FY10. The growth in discretionary spending was much higher pre Lehman crisis as evident from the increase in revenue growth from package implementation and application development. The current uncertainties in the west are likely to impact the revenue growth but with a lesser shock as firms are already cautious and discretionary spending is not very high. Particularly, Infosys has been adopting a cautious stance due to uncertainty in the global environment. Nature of IT spending offshoring and discretionary a) Discretionary spending currently not as high as it was in pre Lehman crisis time Exhibit 3 - Package implementation revenue (USD) YoY growth
100% Infosys TCS Wipro

80% ISIEmergingMarketsPDF in-bseinstitute1 from 203.199.49.100 on 2011-08-30 08:57:21 EDT. DownloadPDF. 60% 40% 20% 0% FY 2006 -20% -40%
Source: PINC Research, Company

FY 2007

FY 2008

FY 2009

FY 2010

FY 2011

Before the Lehman crisis, the growth in the discretionary IT spending was rising rapidly. Subsequent to the crisis in 2008, the package implementation revenue nose dived. Unlike this scenario the current state of affairs has relatively lower growth rates in package implementation, comparatively lower than the overall growth rate of the company as clients focused more on cost cutting initiatives during the recovery, post the Lehman crisis. Under the economic uncertainties in the west the discretionary spending is expected to be muted but it is not likely to nose dive as large clients are sitting on huge cash and are more likely to take a longer term call to improve operational efficiencies and increase market share. The new license sales of Oracle and SAP during the last few quarterly earnings have affirmed an increase in the discretionary spending only recently. Due to the uncertainty there might be some delays in decision making on the discretionary spending. The immediate effect to slowdown will be further cost control on the existing projects. TCS has shown good revenue growth during the rebound after the 2008 crisis. TCS has lesser dependency on discretionary IT spending. This time as well it is expected that TCS will be
rohit.anand@pinc.co.in
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IT Services able to show higher growth rates. However, Infosys might learn from the last two years and become more aggressive to win more cost cutting projects against the long term objective of having a balanced growth among business IT services, consulting and SI and products & platforms. b) Offshoring will continue to remain high Clients have increased the offshoring costs post Lehman crisis. The requirement of clients was to focus on cost cutting and deliver more value out of the same dollar. The existing clients might as well look for cost cutting through increased offshoring going ahead. TCS was one of the best placed as pre Lehman crisis the offshoring from TCS was ~42% which shot up to 52% in FY11. This also helped in increasing the profitability for TCS which was taken well by the investors. At the current position HCL Tech has relatively lesser offshore revenues. HCL Tech has won numerous large scale assignments and now it is placed better to leverage on the progress of the deals by increasing the offshoring revenue. This will help in supporting profitability of HCL Tech. Exhibit 4 - Increase in offshore revenues
Offshore revenue (%) Infosys TCS Wipro HCL Tech FY2006 51.3 37.4 46.3 49.2 FY2007 50.1 40.5 45.3 48.2 FY2008 51.6 41.9 45.6 50.2 FY2009 53.3 44.2 46.9 46.5 FY2010 53.9 51.0 50.2 41.3 FY2011 50.8 51.0 48.3 42.2

Source: PINC Research, Company ISIEmergingMarketsPDF in-bseinstitute1 from 203.199.49.100 on 2011-08-30 08:57:21 EDT. DownloadPDF.

From clients perspective, we might see more emphasis on offshoring to cut costs. Several first time outsourcers in Continental and mainland Europe might try the outsourcing. However, it will not be done in a publicized manner amidst an environment of high unemployment rate in these economies. Unemployment rate high but tech employment stable Exhibit 5 - US unemployment rate (%)
12 10 8 6 4 2 0 Jan-2001

Mar-2002 May-2003

Jul-2004

Sep-2005 Nov-2006

Jan-2008

Mar-2009 May-2010

Jul-2011

Source: PINC Research, BLS data

rohit.anand@pinc.co.in
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IT Services Exhibit 6 - Hiring in technology continues to be stable even during the last slowdown
total non farm management and technical consulting services 140,000 138,000 136,000 134,000 132,000 130,000 128,000 126,000 124,000 Jan2001 Jan2002 Jan2003 Jan2004 Jan2005 Jan2006 Jan2007 Jan2008 Jan2009 Jan2010 Jan2011
Employment ('000)

computer system design and related services

1600 1400 1200 1000 800 600 400 200 0

Source: PINC Research, BLS data

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The unemployment rate in the US peaked at 10.1% and currently it stands at 9.1% (July 2011) slightly lower than the last month. Although, the overall unemployment rate in the US is a concern but the employment in the technology services was stable even during the last slowdown of 2008 and we dont expect a significant dip during this time as well in a situation when studies from Gartner has suggested 7% growth in tech spending. The tech employment is not expected tofrom fall significantly and on should fare better compared overall unemployment in-bseinstitute1 203.199.49.100 2011-08-30 08:57:21 EDT. to DownloadPDF. rate in the US. However, in a short term, political backlash will be there due to high unemployment rate which is reflected in visa related issues in recent past. The immigration norms are not a company specific problem and it is going to impact a lot of MNCs from the US as well. Increase in visa related issues might force Indian companies to hire locally in the US but save international travel costs and increase video conferencing. Any restrictions on visa norms might also result in increased offshoring from US clients as well. Indian IT-BPO export growth and productivity of US companies The operating profit growth of S&P 500 Information Technology index has shown strong correlation with the Indian IT-BPO exports growth. Exhibit 7 - S&P 500 IT' operating profit growth and Indian IT-BPO exports growth
India IT-BPO exports growth 70% 60% 50% 40% 30% 20% 10% 0% 2001 EBITDA growth - S&P 500 IT index 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% 2002 2003 2004 2005 2006 2007 2008 2009 2010 -60% 2011

Source: PINC Research, Bloomberg, NASSCOM

rohit.anand@pinc.co.in
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IT Services Particularly the S&P 500 Bank index operating profit growth has shown a higher correlation with the growth in Indian IT-BPO export growth. With increased globalisation higher productivity is one of the key requirements to remain competitive in the global world where competition is increasing continuously. IT spending will be required to go for global expansion but at the same time returns on IT spending have to be justified. IT outsourcing has helped banks in the past to become more competitive which is expected to be a continued trend. Exhibit 8 - S&P 500 Banks operating profit growth and Indian IT-BPO exports growth
India IT-BPO exports grow th 70% 60% 50% 40% 30% 20% 10% 0% ISIEmergingMarketsPDF in-bseinstitute1 from 203.199.49.100 on 2011-08-30 08:57:21 EDT. DownloadPDF. 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: PINC Research, Bloomberg, NASSCOM

Op Profit grow th - S&P 500 Banks index 30% 20% 10% 0% -10% -20% -30% -40% -50% 2011

BFSI vertical - Last slowdown hit it badly but lesser vulnerable now Exhibit 9 - BFSI sector revenue (USD) YoY growth - last slowdown hit it badly
60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% FY 2006 -10.0%
Source: PINC Research, Company

Infosys

TCS

HCL Tech

FY 2007

FY 2008

FY 2009

FY 2010

FY 2011

The current weakness is in general for the economic slowdown in the west compared to the financial system breakdown in 2008. The growth rates in 2010 and 2011 jumped back to good levels due to M&A activities and regulations. The regulatory phase is still in progress but with lower tempo. The focus on global expansion might be on the agenda of the banks in the west
rohit.anand@pinc.co.in
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IT Services coupled with the need of further improving efficiency in the longer run. The growth rate of the BFSI sector is expected to dip from the levels of 30%YoY in FY11 to close to 20%YoY in FY12. According to the management commentary of large Indian IT vendors, we have recently seen increased traction from European banks that are still not so mature in outsourcing. The banks in the US might further increase efforts on operational efficiency improvement and adoption of newer technologies like mobility and cloud. Emerging markets and verticals will provide some support The latest TPI data for Q2FY11 shows that deal signings for APAC and EMEA have increased 55%YoY and 13%YoY respectively. Though, the size is small but it supports the growth. The emerging verticals which have adopted outsourcing after the Lehman crisis include Energy & Utilities, media, healthcare and most of them have shown aggressive growth. Among the lead verticals, manufacturing has started showing signs of increase in contracts and expected to do well. Exhibit 10 - TPI expects a better H2CY11 based on deal pipeline
Industry wide contracts with TCV > USD25mn 1H TCV (USD bn) of contracts awarded Americas EMEA Asia-Pacific Full year TCV (USDbn) EMEA Asia-Pacific Source: TPI 2002 28.1 9.8 3.2 2002 22 9.9 2003 23.2 16.2 1.8 2003 38.9 4.3 2004 25.7 16.5 6.9 2004 42.6 10.2 2005 22.8 23.2 2.1 2005 43.3 6.8 2006 26.6 13.8 5.3 2006 31.6 8.1 2007 14.5 19.6 5.4 2007 39.6 11.1 2008 14.8 29.9 3.1 2008 47 10.9 2009 17.4 17.5 6 2009 44.1 12.2 2010 24.6 19.4 2.5 2010 37 41.9 9.5 2011 12.2 21.3 3.7 2011 -

Americas 50 48 on 2011-08-30 44 45.5 08:57:21 42.7 33.4 30.7 36 ISIEmergingMarketsPDF in-bseinstitute1 from 203.199.49.100 EDT. DownloadPDF.

Overall, for large Indian IT firms, we believe FY12 revenue growth might be close to 20%YoY and it is unlikely that there will be a significant decline in the growth rates for FY13. We are revising downward our FY12 revenue growth rate from 24-27%YoY range to close to 17-20%YoY range and FY13 revenue growth rates from 23-25%YoY to 16-19%YoY. Currency reversal expect USD to appreciate against the INR Earlier, we assumed rupee appreciation against the USD for FY13 and factored in 44.5 for FY12 and 43.5 for FY13. We now expect appreciation of the USD against the INR due to factors like increase in FII outflows etc. We have revised the USD/INR rate for FY12 and FY13 to be 45 and 45.5 respectively.

rohit.anand@pinc.co.in
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IT Services Revision in estimates Exhibit 11 - Change in estimates


FY12E (Rs mn, except EPS) Infosys Revenue EBITDA PAT EPS (Rs) TCS Revenue EBITDA PAT EPS (Rs) Wipro Revenue EBITDA PAT EPS (Rs) HCL Tech Revenue 198,013 188,711 -4.7 242,795 222,239 -8.5 -10.3 -11.0 -11.5 EBITDA 33,540 31,925 -4.8 40,493 36,304 ISIEmergingMarketsPDF in-bseinstitute1 from 203.199.49.100 on 2011-08-30 08:57:21 EDT. DownloadPDF. PAT 21,296 20,273 -4.8 27,001 24,044 EPS (Rs) 30.6 29.0 -5.3 38.8 34.4 Source: PINC Research, Company 360,401 73,038 54,822 22.3 357,145 70,919 53,130 21.7 -0.9 -2.9 -3.1 -2.9 423,626 83,411 64,031 26.0 414,930 79,454 60,822 24.7 -2.1 -4.7 -5.0 -5.1 465,920 135,901 103,709 53.0 448,002 129,588 98,244 50.2 -3.8 -4.6 -5.3 -5.3 569,541 163,614 123,627 63.2 539,048 152,530 113,454 58.0 -5.4 -6.8 -8.2 -8.3 335,615 105,188 79,840 139.7 323,987 100,181 75,669 132.4 -3.5 -4.8 -5.2 -5.2 411,936 126,802 97,275 170.2 383,802 115,742 89,183 156.1 -6.8 -8.7 -8.3 -8.3 Earlier Revised Chg (%) Earlier FY13E Revised Chg (%)

VALUATION SUMMARY We arrive at a target price of Rs2,730 for Infosys factoring 17.5x FY13E EPS of Rs156.1, target price of Rs1,100 for TCS factoring 19x FY13E EPS of Rs58, target price of Rs382 for Wipro factoring 15.5x FY13E EPS of Rs24.7, target price of Rs464 for HCL Tech factoring 13.5x FY13E EPS of Rs34.4. Exhibit 12 - Valuations
Company

CMP Reco TP (Rs) O/S shares (Rs) (mn) Buy Buy Buy Buy 2,730 1,100 382 464 571 1,957 2,454 701 918 332 387

Mkt Cap (Rs bn) 1,253.6 1,796.7 817.2 271.3

EV / Sales FY12E FY13E 3.3 3.9 2.2 1.3 2.6 3.1 1.8 1.1

EV / EBITDA

P/E

RoE FY12E 23.8 31.4 17.7 21.1 FY13E 23.8 28.8 17.1 21.1

Div Yield (%) FY12E 1.2% 1.8% 1.7% 1.0% FY13E 1.2% 1.8% 1.7% 1.0%

FY12E FY13E FY12E FY13E 10.6 13.6 10.9 6.7 8.8 11.1 9.4 5.9 16.6 18.3 15.4 13.1 14.1 15.8 13.5 11.1

Infosys TCS Wipro HCL Tech

2,194

Source: PINC Research, Company

Exhibit 13 - Financials - comparison


Company Sales (Rs mn) FY12E FY13E Infosys TCS Wipro HCL Tech * 323,987 383,802 448,002 539,048 357,145 414,930 188,711 222,239

Sales CAGR FY11-13E 18.1% 20.2% 15.6% 18.4%

EBITDA margin FY12E 32.6% 26.8% 17.0% 17.1% FY13E 30.9% 26.2% 16.3% 16.9%

EBITDA CAGR FY11-13E 11.8% 19.5% 6.6% 7.6%

Net profit FY12E FY13E 80,381 89,640 104,622 118,210 60,927 61,727 20,137 23,875

Net margin FY12E 24.8% 23.4% 17.1% 10.7%

EPS CAGR FY13E FY12E FY13E FY11-13E EPS 23.4% 21.9% 14.9% 10.7% 132.4 50.2 21.7 29.0 156.1 58.0 24.7 34.4 14.3% 14.1% 6.8% 18.9%

Source: PINC Research, Company rohit.anand@pinc.co.in


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IT Services

1-year fwd PER Exhibit 14 - Average 1-year fwd PER multiple


FY06 Infosys TCS Wipro HCL Tech 22.6 20.4 24.0 17.7 FY07 25.3 22.7 26.0 15.6 FY08 19.5 20.4 21.4 16.2 FY09 13.8 11.5 12.9 11.1 FY10 18.7 14.0 15.9 13.5 FY11 22.7 19.4 19.5 16.3 FY12TD 19.6 20.8 18.5 16.1

Source: PINC Research, Company

1-year forward PER Graphs Infosys Exhibit 15 - 1-year forward PER


1 Yr Forw ard PER 40.0 3,000 30.0 ISIEmergingMarketsPDF in-bseinstitute1 from 203.199.49.100 on 2011-08-30 08:57:21 EDT. DownloadPDF. 2,000 20.0 10.0 0.0 Aug-06 1,000 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 0 Aug-06 Average PER (2006-11)

Exhibit 16 - PER band


4,000 26.0x 22.0x 18.0x 14.0x 10.0x

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Source: Bloomberg, PINC Research

Source: Bloomberg, PINC Research

TCS Exhibit 17 - 1-year forward PER


1 Yr Forw ard PER 32.0 24.0 16.0 8.0 0.0 Aug-06 1,050 700 350 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 0 Aug-06 Average PER (2006-11)

Exhibit 18 - PER band


1,400 24.0x 20.0x 16.0x 12.0x 8.0x

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Source: Bloomberg, PINC Research

Source: Bloomberg, PINC Research

rohit.anand@pinc.co.in
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IT Services

Wipro Exhibit 19 - 1-year forward PER


1 Yr Forw ard PER 33.0 26.0 19.0 12.0 5.0 Aug-06 450 300 150 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 0 Aug-06 Average PER (2006-11)

Exhibit 20 - PER band


600 23.0x 19.0x 15.0x 11.0x 7.0x

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Source: Bloomberg, PINC Research

Source: Bloomberg, PINC Research

HCL Tech Exhibit 21 - 1-year forward PER Exhibit 22 - PER band


20.0x 16.0x 420 280 140 0.0 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 0 Aug-06 12.0x 8.0x 4.0x

1 Yr Forw ard PER Average PER (2006-11) 700 ISIEmergingMarketsPDF in-bseinstitute1 from 203.199.49.100 on 2011-08-30 08:57:21 EDT. DownloadPDF. 24.0 560 18.0 12.0 6.0

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Source: Bloomberg, PINC Research

Source: Bloomberg, PINC Research

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10

IT Services Infosys
Income Statement Year ended 31 Mar (Rs mn) Net sales Growth (%) Gross profit Other operating charges EBITDA Growth (%) Depreciation Other income EBIT Interest paid Pre-tax profit (before E/o items) Tax Provision E/o loss / (Income) Net profit Adjusted net profit Growth (%) Diluted EPS (Rs) Diluted EPS Growth (%) FY09 216,930 30.0 99,280 27,330 71,950 37.4 7,610 4,730 69,070 0 69,070 9,360 0 59,880 59,880 28.5 104.5 28.5 FY10 227,420 4.8 106,640 28,120 78,520 9.1 9,310 9,370 78,670 0 78,670 19,970 -3,640 58,700 62,340 4.1 109.2 4.5 FY11 275,010 20.9 124,470 34,830 89,640 14.2 8,620 12,110 93,130 0 93,130 24,900 0 68,230 68,230 9.4 119.4 9.4 FY12E 323,987 17.8 141,317 41,137 100,181 11.8 10,245 13,016 102,952 0 102,952 27,282 0 75,669 75,669 10.9 132.4 10.9 FY13E 383,802 18.5 164,065 48,323 115,742 15.5 12,473 17,248 120,518 0 120,518 31,335 0 89,183 89,183 17.9 156.1 17.9 Cash Flow Statement Year ended 31 Mar (Rs mn) Pre-tax profit Depreciation Total tax paid Chg in working capital Other operating activities Cash flow from oper. (a) Capital expenditure Chg in investments Other investing activities Cash flow from inv. (b) Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Change in Minorities Interest Dividend (incl. tax) Other financing activities Cash flow from fin. (c) Net chg in cash (a+b+c) FY09 69,070 7,610 (9,020) (4,600) (9,810) 53,250 (13,270) 560 10,560 (2,150) 51,100 640 0 0 (24,940) 12,850 (11,450) 39,650 FY10 78,990 9,050 (17,530) (400) (7,960) 62,150 (8,480) (36,960) 8,710 (36,730) 25,420 890 0 0 (15,740) 0 (14,850) 10,570 FY11 93,250 8,540 (28,460) (14,280) (11,530) 47,520 (13,080) 35,580 11,480 33,980 81,500 240 0 0 (36,640) 0 (36,400) 45,100 FY12E 102,952 10,245 (27,282) (12,071) (13,016) 60,827 (16,199) 0 0 (16,199) 44,628 0 0 0 (15,422) 0 (15,422) 29,206 FY13E 120,518 12,473 (31,335) (9,691) (17,248) 74,717 (16,887) 0 0 (16,887) 57,830 0 0 0 (15,422) 0 (15,422) 42,408

ISIEmergingMarketsPDF in-bseinstitute1 from 203.199.49.100 on 2011-08-30 08:57:21 EDT. DownloadPDF. == Balance Sheet Key Ratios
Year ended 31 Mar (Rs mn) Equity Share capital Reserves & surplus Shareholders' funds Minorities interests Total Debt Capital Employed Net fixed assets Net Other Current Assets Cash & Cash Eq. Investments Net Deferred Tax Assets Total assets FY09 2,860 179,680 182,540 0 0 182,540 53,540 30,790 96,950 0 1,260 182,540 FY10 2,860 227,630 230,490 0 0 230,490 53,550 32,260 105,560 37,120 2,000 230,490 FY11 2,860 256,900 259,760 0 0 259,760 57,600 46,560 150,950 1,440 3,210 259,760 FY12E 2,860 315,672 318,532 0 0 318,532 60,320 57,696 195,866 1,440 3,210 318,532 FY13E 2,860 372,185 375,045 0 0 375,045 65,876 66,245 238,274 1,440 3,210 375,045 Year ended 31 Mar OPM (%) Net margin (%) Yield (%) Net debt/Equity (x) Net Working Capital (days) Asset turnover (x) ROCE (%) RoE (%) EV/Net sales (x) EV/EBITDA (x) PER (x) Price/Book (x) FY09 33.2 27.6 2.0 0.0 63 1.0 35.2 32.8 5.3 16.1 21.0 6.9 FY10 34.5 27.4 1.3 0.0 58 0.8 30.0 27.0 5.0 14.6 20.1 5.4 FY11 32.6 24.8 2.9 0.0 69 0.9 31.2 26.3 4.0 12.3 18.4 4.8 FY12E 30.9 23.4 1.2 1.0 72 0.9 28.2 23.8 3.3 10.6 16.6 3.9 FY13E 30.2 23.2 1.2 1.0 70 0.9 27.5 23.8 2.6 8.8 14.1 3.3

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11

IT Services TCS
Income Statement Year ended 31 Mar (Rs mn) Net sales growth (%) Gross profit Other operating charges EBITDA growth (%) Depreciation Other income EBIT Interest paid PBT (before E/o items) Tax provision E/o Income / (loss) Net profit Adjusted net profit growth (%) Diluted EPS (Rs) Diluted EPS Growth (%) FY09 278,128 21.7 123,708 50,324 73,384 25.5 7,370 (4,149) 66,014 535 61,330 9,011 611 52,319 51,708 3.0 26.4 3.0 FY10 300,289 8.0 138,661 51,862 86,799 18.3 7,208 2,781 79,591 536 81,835 12,088 1,019 69,747 68,728 32.9 35.1 32.9 FY11 373,245 24.3 168,949 56,964 111,985 29.0 7,216 5,324 104,769 0 110,093 21,739 1,190 88,354 87,164 26.8 44.5 26.8 FY12E 448,002 20.0 197,156 67,567 129,588 15.7 9,662 9,274 119,926 0 129,200 29,716 1,240 99,484 98,244 12.7 50.2 12.7 FY13E 539,048 20.3 233,569 81,040 152,530 17.7 11,272 11,715 141,258 0 152,973 38,243 1,275 114,730 113,454 15.5 58.0 15.5 Cash Flow Statement Year ended 31 Mar (Rs mn) Pre-tax profit Depreciation Total tax paid Chg in working capital Other operating activities Cash flow from oper. (a) Capital expenditure Chg in investments Other investing activities Cash flow from inv. (b) Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Chg in Minorities int. Dividend (incl. tax) Other financing activities Cash flow from fin. (c) Net chg in cash (a+b+c) 51,415 (11,156) (26,446) 617 (36,985) 14,430 39 (379) 0 (16,124) 0 (16,464) (2,034) 74,869 (10,104) (19,126) (25,930) (55,161) 19,708 54 (3,960) 0 (19,594) 0 (23,500) (3,792) 69,148 (17,407) 20,843 (22,100) (18,663) 50,485 0 (310) 0 (45,832) 1 (46,141) 4,343 89,287 (17,920) 0 0 (17,920) 71,367 0 0 0 (32,294) 2 (32,292) 39,075 113,442 (20,214) 0 0 (20,214) 93,227 0 0 0 (32,294) 2 (32,292) 60,935 FY09 FY10 FY11 FY12E FY13E

ISIEmergingMarketsPDF in-bseinstitute1 from 203.199.49.100 2011-08-30 08:57:21 EDT. DownloadPDF. ==on Balance Sheet Key Ratios
Year ended 31 Mar (Rs mn) Equity capital Reserves & surplus Shareholders' funds Minorities interests Total Debt Capital Employed Net fixed assets Cash & Cash Eq. Net other Current Assets Investments Net Deferred Tax Assets Total assets FY09 26,351 131,182 157,533 3,098 4,505 165,136 99,834 13,440 34,592 17,271 0 165,137 FY10 21,156 189,686 210,842 2,204 6,297 219,344 87,020 10,250 37,479 74,347 10,248 219,344 FY11 21,149 232,895 254,044 3,147 5,425 262,616 132,425 15,539 58,378 50,193 6,081 262,616 FY12E 21,149 292,719 313,867 3,147 5,680 322,694 136,155 52,964 76,998 50,193 6,385 322,695 FY13E 21,149 374,751 395,900 3,147 5,948 404,994 145,917 113,897 88,282 50,193 6,704 404,994 Year ended 31 Mar OPM (%) Net margin (%) Dividend yield (%) Net debt/Equity (x) Net Working Capital (days) Asset turnover (x) ROCE (%) RoE (%) EV/Net sales (x) EV/EBITDA (x) PER (x) Price/Book (x) FY09 23.7 18.6 1.8 (0.0) 45 1.2 40.0 32.3 6.5 24.8 34.7 11.3 FY10 26.5 22.9 1.1 (0.0) 46 1.1 35.8 32.6 6.0 20.8 26.1 8.4 FY11 28.1 23.4 2.6 (0.1) 57 1.1 39.1 34.5 4.8 16.1 20.6 7.0 FY12E 26.8 21.9 1.8 (0.2) 63 1.1 36.5 31.4 3.9 13.6 18.3 5.7 FY13E 26.2 21.0 1.8 (0.3) 60 1.1 34.4 28.8 3.1 11.1 15.8 4.5

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12

IT Services Wipro
Income Statement Year ended 31 Mar (Rs mn) Net sales Growth (%) Gross profit Other operating charges EBITDA Growth (%) Depreciation Other income EBIT Interest paid PBT (before E/o items) Tax provision E/o Income / (loss) Net profit Adjusted net profit Growth (%) Diluted EPS (Rs) Diluted EPS Growth (%) FY09 254,564 28.9 76,388 24,101 52,287 31.9 8,357 (1,816) 43,930 0 39,574 4,620 263 34,954 35,217 9.2 14.1 (4.9) FY10 271,957 6.8 85,658 25,600 60,058 14.9 7,831 3,369 52,227 0 54,880 9,294 345 45,586 45,931 30.4 18.7 33.4 FY11 310,542 14.2 97,734 32,300 65,434 9.0 8,211 6,652 57,223 0 62,387 9,714 304 52,673 52,977 15.3 21.6 15.3 FY12E 357,145 15.0 107,448 36,529 70,919 8.4 10,088 7,060 60,831 0 65,346 12,416 200 52,930 53,130 0.3 21.7 0.2 FY13E 414,930 16.2 120,867 41,413 79,454 12.0 11,748 10,584 67,706 0 75,590 15,118 350 60,472 60,822 14.5 24.7 13.9 Cash Flow Statement Year ended 31 Mar (Rs mn) Profit After Tax Depreciation Total tax paid Chg in working capital Other operating activities Cash flow from oper. (a) Capital expenditure Chg in investments Other investing activities Cash flow from inv. (b) Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Chg in Minorities int. Dividend (incl. tax) Other financing activities Cash flow from fin. (c) Net chg in cash (a+b+c) FY09 34,415 8,357 0 (341) (5,574) 36,857 (16,592) (353,146) 342,045 (27,693) 9,164 440 6,419 0 (6,829) 18 48 9,212 FY10 45,931 7,831 0 (6,485) 6,584 53,861 (12,979) (340,891) 320,055 (33,815) 20,046 0 7,329 0 (6,823) 0 506 20,552 FY11 53,321 8,211 0 (21,378) 6,098 46,252 (12,211) (474,476) 469,448 (17,239) 29,013 0 (10,122) 0 (15,585) 0 (25,707) 3,306 FY12E 53,130 10,088 0 (2,299) 6,208 67,127 (17,857) 0 0 (17,857) 49,270 0 0 0 (13,420) 0 (13,420) 35,850 FY13E 60,822 11,748 1 (11,569) 7,559 68,561 (20,747) 0 0 (20,747) 47,815 1 0 1 (13,420) 1 (13,417) 34,398

ISIEmergingMarketsPDF in-bseinstitute1 from 203.199.49.100 on 2011-08-30 08:57:21 EDT. DownloadPDF. == Key Balance Sheet Ratios
Year ended 31 Mar (Rs mn) Equity capital Reserves & surplus Shareholders' funds Minorities interests Total Debt Capital Employed Net fixed assets Cash & Cash Eq. Net other Current Assets Investments Net Deferred Tax Assets Total assets FY09 31,413 118,769 150,182 235 27,563 177,980 123,649 49,117 3,037 2,008 169 177,980 FY10 34,722 161,390 196,112 437 26,009 222,558 120,383 64,878 33,266 2,345 1,686 222,558 FY11 35,850 203,830 239,680 691 30,454 270,825 134,669 61,141 70,555 2,993 1,467 270,825 FY12E 35,850 264,080 299,930 691 30,454 331,075 145,625 108,136 72,854 2,993 1,467 331,075 FY13E 35,850 318,863 354,713 691 30,454 385,858 154,446 142,530 84,423 2,993 1,467 385,858 Year ended 31 Mar OPM (%) Net margin (%) Dividend yield (%) Net debt/Equity (x) Net Working Capital (days) Asset turnover (x) ROCE (%) RoE (%) EV/Net sales (x) EV/EBITDA (x) PER (x) Price/Book (x) FY09 17.3 13.8 0.8 0.0 4 0.9 24.7 21.9 3.2 15.8 23.7 5.4 FY10 19.2 16.9 1.4 0.0 45 0.8 23.5 22.8 3.0 13.6 17.8 4.2 FY11 18.4 17.1 1.8 (0.0) 83 0.8 21.1 22.1 2.6 12.4 15.4 3.4 FY12E 17.0 14.9 1.7 (0.2) 74 0.8 18.4 17.7 2.2 10.9 15.4 2.7 FY13E 16.3 14.7 1.7 (0.2) 74 0.8 17.5 17.1 1.8 9.4 13.5 2.3

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13

IT Services HCL Tech


Income Statement Year ending 30 Jun (Rs mn) Net sales growth (%) Gross profit Other operating charges EBITDA growth (%) Depreciation Other income EBIT Interest paid PBT (before E/o items) Tax provision E/o Income / (loss) Net profit Adjusted net profit growth (%) Diluted EPS (Rs) Diluted EPS Growth (%) FY09 105,046 37.5 39,563 17,362 22,201 31.1 4,493 (2,416) 17,708 15,292 2,543 27 12,749 12,776 13.6 19.0 15.1 FY10 125,650 19.6 43,693 17,964 25,729 15.9 5,010 (5,289) 20,719 15,430 2,403 2 13,027 13,029 2.0 18.9 -0.3 FY11 158,554 26.2 50,633 23,443 27,190 5.7 4,919 (545) 22,271 21,726 4,808 1 16,918 16,919 29.9 24.3 28.6 FY12E 188,711 19.0 59,495 27,571 31,925 17.4 5,716 642 26,209 26,851 6,579 20,273 20,273 19.8 29.0 19.2 FY13E 222,239 17.8 68,904 32,599 36,304 13.7 6,609 1,131 29,695 30,826 6,782 24,044 24,044 18.6 34.4 18.6 Cash Flow Statement Year ending 30 Jun (Rs mn) Profit After Tax Depreciation Total tax paid Chg in working capital Other operating activities Cash flow from oper. (a) Capital expenditure Chg in investments Other investing activities Cash flow from inv. (b) Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Chg in Minorities int. Dividend (incl. tax) Other financing activities Cash flow from fin. (c) Net chg in cash (a+b+c) FY09 12,784 4,458 0 (5,725) (1,567) 9,950 (5,280) (43,268) 14,650 (33,898) (23,948) 222 29,745 0 (7,156) 1,630 24,442 494 FY10 13,026 4,997 0 1,449 0 19,472 (6,116) 0 0 (6,116) 13,356 0 0 0 (3,149) 0 (3,149) 10,208 FY11 16,912 4,916 0 (4,518) 0 17,310 (7,692) 0 0 (7,692) 9,618 0 0 0 (5,126) 0 (5,126) 4,492 FY12E 20,273 5,284 0 (4,659) 432 21,330 (9,907) 0 0 (9,907) 11,422 0 0 0 (2,749) 0 (2,749) 8,674 FY13E 24,044 6,223 1 (4,951) 386 25,704 (10,667) 0 0 (10,667) 15,036 0 0 0 (2,749) 1 (2,748) 12,289

ISIEmergingMarketsPDF in-bseinstitute1 from 203.199.49.100 on 08:57:21 EDT. DownloadPDF. == 2011-08-30 Balance Sheet Key Ratios
Year ending 30 Jun (Rs mn) Equity capital Reserves & surplus Shareholders' funds Minorities interests Total Debt Capital Employed Net fixed assets Cash & Cash Eq. Net other Current Assets Investments Net Deferred Tax Assets Total assets FY09 56,843 0 56,843 16 37,405 94,264 69,795 4,203 19,899 370 0 94,267 FY10 70,368 0 70,368 0 34,018 104,386 71,248 4,686 27,745 707 0 104,386 FY11 84,345 0 84,345 0 28,127 112,472 74,435 5,198 30,059 2,780 0 112,472 FY12E 95,990 0 95,990 0 30,188 126,178 77,464 11,216 34,718 2,780 0 126,178 FY13E 113,897 0 113,897 0 30,188 144,085 81,522 20,115 39,668 2,780 0 144,085 Year ending 30 Jun OPM (%) Net margin (%) Dividend yield (%) Net debt/Equity (x) Net Working Capital (days) Asset turnover (x) ROCE (%) RoE (%) EV/Net sales (x) EV/EBITDA (x) PER (x) Price/Book (x) FY09 21.1 12.2 2.8 0.5 69 0.8 23.6 22.5 2.3 9.4 20.3 4.8 FY10 20.5 10.4 1.0 0.4 81 0.9 24.6 18.5 1.9 8.3 20.0 3.9 FY11 17.1 10.7 1.9 0.3 69 1.1 24.2 20.1 1.6 8.0 15.6 3.2 FY12E 16.9 10.7 1.0 0.2 67 1.1 25.3 21.1 1.3 6.7 13.1 2.8 FY13E 16.3 10.8 1.0 0.2 65 1.1 25.2 21.1 1.1 5.9 11.1 2.4

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14

RESEARCH

T E A M
EQUITY DESK
Sadanand Raje Head - Institutional Sales Technical Analyst sadanand.raje@pinc.co.in 91-22-6618 6366

RESEARCH
Vineet Hetamasaria, CFA Head of Research, Auto, Cement Auto, Auto Ancillary, Cement Nikhil Deshpande Auto, Auto Ancillary, Cement Tasmai Merchant Vinod Nair Construction, Power, Capital Goods Capital Goods, Engineering Ankit Babel Power Hitul Gutka Construction Subramaniam Yadav Power Madhura Joshi Fertiliser, Natural Gas Satish Mishra Fertiliser, Natural Gas Urvashi Biyani FMCG Naveen Trivedi IT Services Rohit Kumar Anand Media Namrata Sharma Media Sakshee Chhabra Metals, Mining Bikash Bhalotia Harleen Babber Metals, Mining Metals, Mining Dipti Vijaywargi Pharma Sushant Dalmia, CFA Pharma Poonam Sanghavi Real Estate, Mid caps Suman Memani ISIEmergingMarketsPDF in-bseinstitute1 from 203.199.49.100 Real Estate, Mid caps Abhishek Kumar Technical Analyst C Krishnamurthy vineet.hetamasaria@pinc.co.in 91-22-6618 nikhil.deshpande@pinc.co.in 91-22-6618 tasmai.merchant@pinc.co.in 91-22-6618 vinod.nair@pinc.co.in 91-22-6618 ankit.b@pinc.co.in 91-22-6618 hitul.gutka@pinc.co.in 91-22-6618 subramaniam.yadav@pinc.co.in 91-22-6618 madhura.joshi@pinc.co.in 91-22-6618 satish.mishra@pinc.co.in 91-22-6618 urvashi.biyani@pinc.co.in 91-22-6618 naveent@pinc.co.in 91-22-6618 rohit.anand@pinc.co.in 91-22-6618 namrata.sharma@pinc.co.in 91-22-6618 sakshee.chhabra@pinc.co.in 91-22-6618 bikash.bhalotia@pinc.co.in 91-22-6618 harleen.babber@pinc.co.in 91-22-6618 dipti.vijaywargi @pinc.co.in 91-22-6618 sushant.dalmia@pinc.co.in 91-22-6618 poonam.sanghavi@pinc.co.in 91-22-6618 suman.memani@pinc.co.in 91-22-6618 on 2011-08-30 08:57:21 EDT. DownloadPDF. abhishek.kumar@pinc.co.in 91-22-6618 krishnamurthy.c@pinc.co.in 91-22-6618 6388 6339 6377 6379 6551 6410 6371 6395 6488 6334 6384 6372 6412 6516 6387 6389 6393 6462 6709 6479 6398 6747

SALES
Rajeev Gupta Ankur Varman Himanshu Varia Shailesh Kadam Ganesh Gokhale
Equities Equities Equities Derivatives Derivatives

rajeev.gupta@pinc.co.in ankur.varman@pinc.co.in himanshu.varia@pinc.co.in shaileshk@pinc.co.in ganeshg@pinc.co.in

91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618

6486 6380 6342 6349 6347

DEALING
Mehul Desai Naresh Panjnani Amar Margaje Ashok Savla Sajjid Lala Raju Bhavsar Kinjal Mehta Chandani Bhatia Hasmukh D. Prajapati Kamlesh Purohit
Head - Sales Trading Co-Head - Sales Trading

mehul.desai@pinc.co.in naresh.panjnani@pinc.co.in amar.margaje@pinc.co.in ashok.savla@pinc.co.in sajjid.lala@pinc.co.in rajub@pinc.co.in kinjal.mehta@pinc.co.in chandani.bhatia@pinc.co.in hasmukhp@pinc.co.in kamlesh.purohit@pinc.co.in

91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618 91-22-6618

6303 6333 6327 6321 6337 6322 6333 6324 6325 6357

SINGAPORE DESK
Amul Shah amul.shah@sg.pinc.co.in 65-6327 0626

DIRECTORS
Gaurang Gandhi Hemang Gandhi Ketan Gandhi gaurangg@pinc.co.in hemangg@pinc.co.in ketang@pinc.co.in 91-22-6618 6400 91-22-6618 6400 91-22-6618 6400

COMPLIANCE
Rakesh Bhatia Head Compliance rakeshb@pinc.co.in 91-22-6618 6400

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Infinity.com
bright thinking
Financial Securities Ltd
SMALL WORLD, INFINITE OPPORTUNITIES

Member : Bombay Stock Exchange & National Stock Exchange of India Ltd. : Sebi Reg No: INB 010989331. Clearing No : 211 1216, Maker Chambers V, Nariman Point, Mumbai - 400 021; Tel.: 91-22-66186633/6400 Fax : 91-22-22049195
Disclaimer: This document has been prepared by the Research Desk of M/s Infinity.com Financial Securities Ltd. (PINC) and is meant for use of the recipient only and is not for public circulation. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors The information contained herein is obtained and collated from sources believed reliable and PINC has not independently verified all the information given in this document. Accordingly, no representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The opinion expressed or estimates made are as per the best judgement as applicable at that point of time and PINC reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval PINC, its affiliates, their directors, employees and their dependant family members may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of PINC. The views expressed are those of analyst and the PINC may or may not subscribe to all the views expressed therein This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. Neither this document nor any copy of it may be taken or transmitted into the United State (to U.S.Persons), Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions Neither PINC, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Copyright in this document vests exclusively with PINC and this document is not to be reported or circulated or copied or made available to others.

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