Technology. Sector Update Traditional sourcing growth forecast at 4.5% for CY19. Nifty vs CNX IT

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1 Technology Sector Update Traditional sourcing growth forecast at 4.5% for CY19 CMP(`) 3M ret.(%) Yearly (%) Index Returns Nifty 10, CNX IT 14,307 (2) 18 Large-Caps TCS 1,843 (4) 33 INFO WPRO HCLT 940 (5) 2 TECHM Mid-Caps MTCL 832 (13) 31 MPHL 899 (11) 23 HEXW 325 (16) (9) ECLX 1,070 1 (30) KPIT NITEC 1, CYL 594 (10) 3 PSYS 548 (20) (30) Rating FDEPS (`) FY19E FY20E TCS Hold INFO Buy WPRO Hold HCLT Buy TECHM Buy MTCL Buy MPHL Sell HEXW Hold ECLX Hold KPIT Hold NITEC Buy CYL Buy PSYS Hold Nifty vs CNX IT CNXIT Index Nifty 90 Jan-18 May-18 Sep-18 Jan-19 ANALYST Naushil Shah naushil.shah@trustgroup.in ISG Outsourcing (TPI) came out with its findings on global outsourcing industry for Q4CY18. Commercial Combined Market ACV, up 18% YoY. Traditional Sourcing increases nearly 20%, at US$6.4bn. Americas ACV up 23%, EMEA ACV up 5% and Asia Pacific ACV up 35%. Deal values are expected to remain small with focus on Digital and Cloud. For CY19, on a global basis, ISG forecasts 25%+ growth in as-a-service sourcing, and 4.5% growth in traditional sourcing. Key highlights: 1) 4Q18 ACV up 18% YoY with As-a-Service establishing new highs; Traditional Sourcing ACV up slightly on record number of contract awards, 2) Americas ACV produced best quarter ever; As-a-Service continues quarterly record-setting pace; Traditional Sourcing up 9% YoY with strong results in Applications and several BPO functions, 3) EMEA ACV up slightly YoY; As-a- Service exceeds US$1.5bn for the third straight quarter; Traditional Sourcing declines YoY on weakness in UK and DACH., 4) Asia Pacific up significantly YoY; As-a-Service ACV remains above US$1bn, accounting for over 60% of market; Traditional Sourcing rebounds, up 20% on strong results in ANZ and Japan, 5) By total contracts awarded, 2018 was the most bullish year in outsourcing history; ITO and BPO also reached all-time highs. Trends across geographies: Global Contracting Trends - 4Q18 Combined Market ACV up 18% YoY with As-a-Service sector reaching new heights and Traditional Sourcing up 2% YoY; full-year 2018 Combined Market at record levels driven by 40% As-a-Service growth, while Traditional Sourcing remains in a tight range. Americas Contracting Trends - 4Q18 Combined Market ACV up 23% YoY supported by 45%+ growth in As-a-Service and nearly 10% growth in Traditional Sourcing; full-year 2018 Combined Market ACV up 21% on record highs in Traditional Sourcing and As-a-Service ACV. Asia Pacific Contracting Trends - 4Q18 Combined Market ACV rebounds, up 35%; both Traditional Sourcing and Asa-Service segments up 35%+; full-year 2018 Combined Market ACV up 30% with As-a-Service ACV doubling in past two years; Traditional Sourcing ACV up 3%, remaining in a tight range. EMEA Contracting Trends - 4Q18 Combined Market ACV up 5% YoY as strength in As-a-Service was weighed down by 12% YoY decline in Traditional Sourcing. Full-year 2018 Combined Market ACV driven by 40%+ growth in SaaS and IaaS; Traditional Sourcing down 7% on weakness in BPO. Market Summary: 1) Macro forces are more volatile than a year ago but the demand environment remains quite strong., 2) Each region generated highs in Combined Market ACV; path to achieve growth was different for each., 3) As-a-Service segment saw record highs in each region for 2018; growth led by Asia Pacific and EMEA, 4) In Traditional Sourcing, the Americas saw record-setting highs in 2018 on strength in Applications and BPO; Asia Pacific saw marginal gains with strength in the South Korea/Japan corridor; EMEA fell back with pockets of weakness in the UK, Telco and Energy and the BPO market. Market Outlook: 1) For the overall As-a-Service market, we forecast a 25% blended growth rate with Public Cloud Infrastructure growing at 42% and SaaS projected up 17%, 2) Even with ongoing macro-economic challenges in CY19, digital tailwinds to continue to push the Traditional Sourcing market forward at a 4.5% growth rate. Virtusa and Mindtree had strong deal signings across Americas and EMEA among midcaps: Top 5 omnipresent: Among the mid caps in our coverage universe, Mindtree (Americas, EMEA), Hexaware (Americas), Virtusa (Americas, EMEA), and KPIT (Americas) was mentioned in The Breakthrough 15 Sourcing Standouts.

2 1) 4Q18 ACV up 18% YoY with As-a-Service establishing new highs; Traditional Sourcing ACV up slightly on record number of contract awards, 2) Americas ACV produced best quarter ever; As-a-Service continues quarterly recordsetting pace; Traditional Sourcing up 9% YoY with strong results in Applications and several BPO functions, 3) EMEA ACV up slightly YoY; As-a-Service exceeds US$1.5bn for the third straight quarter; Traditional Sourcing declines YoY on weakness in UK and DACH., 4) Asia Pacific up significantly YoY; As-a-Service ACV remains above US$1bn, accounting for over 60% of market; Traditional Sourcing rebounds, up 20% on strong results in ANZ and Japan, 5) By total contracts awarded, 2018 was the most bullish year in outsourcing history; ITO and BPO also reached all-time highs. Exhibit 1: Deal signings in Q4CY18 At a glance Scorecard 4Q18 4Q YoY Full Year Full Year ACV (US$ bn)* Change (%) ACV (US$ bn) Change (%) Global Commercial Combined Market By Type Outsourcing By Type As-a-Service By Region Americas By Region EMEA By Region Asia Pacific , *Contracts with ACV $5M from the ISG Contracts Knowledgebase Global Commercial Sector Contracting Trends 4Q18 Combined Market ACV up 18% YoY with As-a-Service sector reaching new heights and Traditional Sourcing up 2% YoY; full-year 2018 Combined Market at record levels driven by 40% As-a-Service growth, while Traditional Sourcing remains in a tight range.. Exhibit 2: Global Commercial Sector Full Yr ACV ($B)* Exhibit 3: Global Comm. Sector Full Yr ACV by type Exhibit 4: Global Combined Market Quarterly ACV (US$bn)*, *Contracts with ACV $5M from the ISG Contracts Knowledgebase 2

3 Exhibit 5: Global Sourcing Standouts Sourcing standouts grouped by company size, Placements based on the annual value of commercial contract awards in the past 12 months sourced from ISG Contracts Knowledgebase Global Commercial Sector Industry Award Trends - Financial Services leads among industry verticals with positive growth in Traditional Sourcing and As-a-Service. CPG, Healthcare & Pharma and Retail all see double-digit growth in both Traditional Sourcing and As-a-Service. Exhibit 6: Global Commercial Industries Full Year ACV (US$ bn)*, *Contracts with ACV $5M from the ISG Contracts Knowledgebase Our view: ISG commentary is in sync with the financial performance of Indian IT companies with companies pointing out to revenue visibility being better than CY18, since Indian IT companies are still dependent on traditional outsourcing as their main business. We continue to prefer companies with stronger revenue momentum and margin of safety in valuations HCLT, Tech Mahindra and INFO in large-caps. Top 5 omnipresent: Virtuasa and Mindtree had strong deal signings across Americas and EMEA among midcaps: Top 5 omnipresent: Among the mid caps in our coverage universe, Mindtree (Americas, EMEA), Hexaware (Americas), Virtusa (Americas, EMEA), KPIT (Americas) was mentioned in The Breakthrough 15 Sourcing Standouts. 3

4 Americas Commercial Sector Contracting Trends - 4Q18 Combined Market ACV up 23% YoY supported by 45%+ growth in As-a-Service and nearly 10% growth in Traditional Sourcing; full-year 2018 Combined Market ACV up 21% on record highs in Traditional Sourcing and As-a-Service ACV. Exhibit 7: Americas Commercial Sector Quarterly ACV (US$bn)*, *Contracts with ACV $5M from the ISG Contracts Knowledgebase Exhibit 8: Americas Commercial Sector Full Yr ACV Exhibit 9: America Comm. Sector Full Yr ACV by type Exhibit 10: Americas Top 15s Sourcing standouts grouped by company size, Placements based on the annual value of commercial contract awards in the past 12 months sourced from ISG Contracts Knowledgebase 4

5 Asia Pacific Commercial Sector Contracting Trends - 4Q18 Combined Market ACV rebounds, up 35%; both Traditional Sourcing and As-a-Service segments up 35%+; full-year 2018 Combined Market ACV up 30% with As-a-Service ACV doubling in past two years; Traditional Sourcing ACV up 3%, remaining in a tight range. Exhibit 11: Asia Pacific Commercial Sector Quarterly ACV ($B) *, *Contracts with ACV $5M from the ISG Contracts Knowledgebase Exhibit 12: APAC Comm. Sector Full Yr ACV ($bn)* Exhibit 13: APAC Comm. Sector Full Yr ACV Type ($bn) Exhibit 14: Asia Pacific Top 15s Sourcing standouts grouped by company size, Placements based on the annual value of commercial contract awards in the past 12 months sourced from ISG Contracts Knowledgebase 5

6 EMEA Commercial Sector Contracting Trends - 4Q18 Combined Market ACV up 5% YoY as strength in As-a-Service was weighed down by 12% YoY decline in Traditional Sourcing. Full-year 2018 Combined Market ACV driven by 40%+ growth in SaaS and IaaS; Traditional Sourcing down 7% on weakness in BPO. Exhibit 15: EMEA Commercial Sector Quarterly ACV (US$ bn)*, *Contracts with ACV $5M from the ISG Contracts Knowledgebase Exhibit 16: EMEA Comm. Sector Full Yr ACV ($B)* Exhibit 17: EMEA Comm. Sector Full Yr ACV by Type Exhibit 18: EMEA Top 15s Sourcing standouts grouped by company size, Placements based on the annual value of commercial contract awards in the past 12 months sourced from ISG Contracts Knowledgebase 6

7 Institutional Equity Team Names Designation Sectors ID's Desk-Number Naren Shah Head Of Equity Sales Trading & Dealing Rajesh Ashar Sales Trader Dealing Desk Sales Vijay Shah Sales Mayur Joshi Sales Research Team Binyam Taddese Analyst Rates & Credit Research Naushil Shah Analyst Technology, Media & Telecom Tushar Chaudhari Analyst Commodities, Auto & Mid-caps

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