Intellect Design Arena

INDUSTRY IT PRODUCTS CMP (as on 07 May 2018) Rs 209 Target Price Rs 275 Nifty 10,716 Sensex 35,208 KEY STOCK DATA Bloomberg INDA IN No. of Shares (mn) 126 MCap (Rs bn) / ($ mn) 26/391 6m avg traded value (Rs mn) 124 STOCK PERFORMANCE (%) 52 Week high / low Rs 218/97 3M 6M 12M Absolute (%) 12.3 45.3 73.8 Relative (%) 9.0 39.8 55.8 SHAREHOLDING PATTERN (%) Promoters 31.04 FIs & Local MFs 7.29 FPIs 15.66 Public & Others 46.01 Source : BSE Amit Chandra amit.chandra@hdfcsec.com +91-22-6171-7345 Apurva Prasad apurva.prasad@hdfcsec.com +91-22-6171-7327 Robust deal wins & execution Intellect Design Arena (INDA) posted robust both on the revenue and margin front. Revenue stood at USD 47.7mn (higher than our est. of USD 43.6mn), up 14.1% QoQ and 27.6% YoY. Growth was driven by higher license component (+42.3% YoY). The company has a strong order backlog of Rs 10.40bn (excluding GeM project) which is ~79% of FY19E revenue. EBITDA margin expanded 207bps QoQ to 8.0% (in-line with our est. of 8.0%). There is non-linearity in the business and margins will expand with growth in licence revenue (led by new deal wins). Deal wins have improved significantly in the last one year, which signifies better acceptance of the Intellect products. The company won four large transformational deals in the quarter (total 11 deal wins in 4Q and 50 in FY18). The deal funnel expanded to USD 521mn (vs USD 440mn QoQ, ~USD 250mn is licence component), with 143 opportunities and 32 active pursuits. The digital deal size has increased to USD 3-8mn and the win ratio is at ~20%. We maintain our positive stance based on (1) Huge addressable market opportunity (2) Highly-rated and RESULTS REVIEW 07 MAY 2018 Intellect Design Arena BUY (4) Recovery in large deal wins, (5) Monetization of the product portfolio, and (6) Increased focus on improving margins and collections. Maintain BUY with a TP of Rs 275, based on 2.2x FY20E EV/rev multiple (2.0x earlier). Highlights of the quarter Gross margin stood at 49.8%, up 47bps QoQ, and will remain in the range of 50-52%. SG&A/R&D expenses were up 11.2/-0.5% QoQ to 35.4/6.3% of rev. Out of the 32 active pursuits six are more than Rs 0.5bn in size and nine deals are in the range of Rs 0.3-0.5bn. The company was burning cash till FY17 which has reduced significantly in the last three quarters (cash burn in the quarter was only ~Rs 34mn). Net cash stands at Rs 428mn vs Rs (793) in FY17. Due to efficient collections DSO days stand at 122 days. Near-term outlook: We expect quarterly swings in revenue (1QFY19E will be soft), top-line growth will be fuelled by new deal wins, and margins will increase with operating leverage. The stock is up 44% in the last six months, and we expect this momentum to continue. digital-ready product portfolio, (3) Robust deal funnel Financial Summary (Consolidated) YE Mar (Rs mn) YoY (%) QoQ (%) FY16 FY17 FY18 FY19E FY20E Net Revenue 3.07 2.50 22.6 2.71 13.4 8.11 9.14 10.87 13.10 15.58 EBITDA 0.25 0.16 57.2 0.16 53.0 (0.27) (0.25) 0.79 1.40 2.09 APAT 0.26 0.15 75.1 0.12 112.8 (0.17) (0.21) 0.47 1.07 1.63 Adjusted EPS (Rs) 2.1 1.2 75.1 1.0 112.8 (1.3) (1.7) 3.7 8.5 13.0 P/E (x) NM NM 56.2 24.6 16.1 EV / Revenue (x) 3.2 3.0 2.4 2.0 1.7 RoE (%) (2.7) (3.4) 6.5 11.9 15.8 # Consolidated HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

In FY18 USD revenue was up 23.9% led by 50 deal wins EBITDA margin for expansion will come with revenue growth. USD 48-49 mn runrate is cash the breakeven level The company s main focus area is Global Transaction Banking (igtb) and Core banking (igcb) R&D capitalisation of Rs 270-280mn will happen every quarter for the development of new product INDA has tied up with System Integrators (S.I.) for selling Intellect products in developed markets. S&M cost also includes commission paid on the sales of products through S.I. Quarterly Consolidated Financials Snapshot Particulars (Rs mn) YoY (%) QoQ (%) Net Revenue US$ mn 47.7 37.4 27.6 41.8 14.1 Net Revenue 3,070 2,504 22.6 2,707 13.4 Software development expenses (SDE) 1,541 1,247 23.6 1,371 12.4 SG&A 1,088 933 16.6 979 11.2 R&D 195 167 16.4 196 (0.5) EBITDA 246 157 57.2 161 53.0 Depreciation 82 60 36.5 65 25.7 EBIT 164 96 70.0 96 71.7 Other Income 94 18 425.5 48 95.8 Interest Cost 26 40 (35.0) 31 (15.2) PBT 231 74 212.6 112 105.8 Tax 5 (71) NM 11 NM Minority Interest (32) (3) NM (20) NM RPAT 259 148 75.1 122 112.8 EO Items (Adj For Tax) 0 0 NM 0 NM APAT 259 148 75.1 122 112.8 Margin Analysis MARGIN ANALYSIS % YoY (%) QoQ (%) Employee Expenses % Net Revenue 50.2 49.8 41 50.7 (47) SG&A Expenses % Net Revenue 35.4 37.3 (183) 36.2 (72) R&D Expenses % Net Revenue 6.3 6.7 (34) 7.2 (89) Gross Margin % 49.8 50.2 (41) 49.3 47 EBITDA Margin (%) 8.0 6.3 176 5.9 207 EBIT Margin (%) 5.3 3.9 149 3.5 181 Tax Rate (%) 2.0 (95.3) NM 9.8 NM APAT Margin (%) 8.4 5.9 253 4.5 394 Page 2

Clocked highest YoY revenue growth of 27.6% in the last ten quarters SG&A investment is sufficient to support top-line growth of 20%, will need more investments if growth accelerates R&D capitalisation stood at Rs 280mn in the quarter Intellect USD Revenue Trend 50 45 40 35 30 25 20 15 (US$ mn) SG&A Trend 41.8 41.8 37.4 37.4 34.5 33.6 31.9 32.1 29.4 30.7 2QFY16 (Rs mn) 1,200 1,100 1,000 900 800 700 600 820 803 2QFY16 Revenue (US$ mn) SG&A Expenses QoQ growth (RHS) 983 1,013 1,056 1,032 933 882 923 (%, QoQ) 47.7 20 % of Revenue (RHS) 979 1,088 15 10 5 0 (5) (10) 60% 50% 40% 30% 20% 10% 0% USD Revenue YoY Growth Rate (%, YoY) 30.0 25.0 20.0 15.0 10.0 5.0 0.0 13.8 24.0 1.2 R&D Expense Trend (Rs mn) 400 350 300 250 200 150 100 50 0 338 336 2QFY16 93 156 8.0 R&D Expenses 14.3 16.5 21.7 21.0 24.6 199 198 167 142 192 196 195 % of Revenue (RHS) 27.6 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Page 3

R&D And SG&A Investment Burning Cash License & Implementation Fee As % Of Revenue Total R&D expenses (including capitalisation) increased 1.5% QoQ to Rs 474.8mn (15.5% of revenue) R&D Expenses (including cap.) (Rs mn) 500 416 421 428 447 400 336 321 300 200 422 % of Revenue (RHS) 452 468 475 25% 20% 15% 10% 80% 70% 60% 50% 40% Licence +AMC % Implemention % 65% 64% 65% 70% 67% 67% 66% 35% 36% 35% 30% 33% 33% 34% 57% 43% 66% 61% 63% 61% 40% 37% 39% 34% 100 5% 30% 0 0% 20% 1QFY16 2QFY16 ; TTM basis Page 4

Change In Estimates Particulars Earlier estimates Revised estimates % change FY19E Revenue (USD mn) 193 202 4.2 Revenue (Rs bn) 12.57 13.10 4.2 EBITDA (Rs bn) 1.36 1.40 2.6 EBITDA margin (%) 10.8 10.7 (17) EPS (Rs) 7.8 8.5 8.8 FY20E Revenue (USD mn) 227 240 5.5 Revenue (Rs bn) 14.76 15.58 5.5 EBITDA (Rs bn) 1.97 2.09 6.1 EBITDA margin (%) 13.4 13.5 7 EPS (Rs) 12.1 13.0 7.7 Peer Valuation Assumptions Particulars FY16 FY17 FY18 FY19E FY20E License & AMC Growth (%) 30.2 16.2 29.5 19.5 19.9 System Integration Growth (%) 21.7 6.8 20.7 19.5 18.2 Total USD Revenue Growth (%) 24.4 10.0 23.9 19.5 18.9 USD/INR Rate 65.5 67.1 64.5 65.0 65.0 EBITDA Margin (%) (3.4) (2.7) 7.2 10.7 13.5 Revenue (USD mn) 18-20E EBITDA (Rs bn) EBITDA Margin % EV/revenue (x) EV/EBITDA (x) Relative Mcap YE CAGR Valuation (Rs bn) FY17 FY18 FY19E FY20E % FY17 FY18 FY19E FY20E FY17 FY18 FY19E FY20E FY17 FY18 FY19E FY20E FY17 FY18 FY19E FY20E Majesco Mar 15.0 121.8 123.5 144.9 171.3 17.7 0.3 0.2 0.6 1.2 3.9 2.6 6.5 10.5 1.5 1.4 1.2 0.9 39.8 51.2 17.9 8.9 Intellect Mar 26.1 136.2 168.7 201.6 239.6 19.2 (0.2) 0.8 1.4 2.1 (2.7) 7.2 10.7 13.5 3.0 2.4 2.0 1.7 NM 33.2 18.9 12.5 Page 5

Income Statement (Consolidated) YE March (Rs bn) FY16 FY17 FY18 FY19E FY20E Net Revenues (USD mn) 123.8 136.2 168.7 201.6 239.6 Growth (%) 24.5% 10.0% 23.9% 19.5% 18.9% Net Revenues (Rs mn) 8.11 9.14 10.87 13.10 15.58 Growth (%) 33.2% 12.7% 19.0% 20.5% 18.9% Software development expenses (SDE) 3.91 4.63 5.49 6.49 7.62 SG&A 3.40 4.03 3.87 4.43 5.02 R&D 1.06 0.72 0.72 0.79 0.84 EBITDA (0.27) (0.25) 0.79 1.40 2.09 EBITDA Margin (%) -3.4% -2.7% 7.2% 10.7% 13.5% EBITDA Growth (%) NM NM NM 47.3% 26.2% Depreciation 0.21 0.24 0.27 0.28 0.28 EBIT (0.48) (0.49) 0.52 1.12 1.82 Other Income (Including EO Items) 0.23 0.36 0.20 0.20 0.23 Interest 0.01 0.11 0.14 0.12 0.11 PBT (0.26) (0.25) 0.59 1.20 1.94 Tax (Incl Deferred) (0.09) 0.03 0.07 0.23 0.39 Minority Interest (0.01) (0.07) 0.05 (0.10) (0.08) RPAT (0.17) (0.21) 0.47 1.07 1.63 EO (Loss) / Profit (Net Of Tax) 0.00 0.00 0.00 0.00 0.00 APAT (0.17) (0.21) 0.47 1.07 1.63 APAT Growth (%) NM NM NM 128.6% 53.0% Adjusted EPS (Rs) (1.3) (1.7) 3.7 8.5 13.0 EPS Growth (%) NM NM NM 128.6% 53.0% Balance Sheet (Consolidated) YE March (Rs bn) FY16 FY17 FY18 FY19E FY20E SOURCES OF FUNDS Share Capital - Equity 0.50 0.51 0.63 0.63 0.63 Reserves 5.69 5.47 7.84 8.91 10.55 Total Shareholders Funds 6.19 5.98 8.47 9.54 11.17 Total Debt 0.23 2.32 1.29 1.29 1.29 Net Deferred Taxes -0.07-0.11-0.18-0.18-0.18 Long Term Provisions & Others 0.03 0.00 0.00 0.00 0.00 TOTAL SOURCES OF FUNDS 6.39 8.20 9.68 10.64 12.19 APPLICATION OF FUNDS Net Block 1.95 2.00 2.39 2.44 2.56 CWIP 0.66 1.38 1.96 2.86 3.70 Goodwill 0.78 0.77 0.77 0.77 0.77 Investments 0.31 0.38 0.47 0.47 0.47 LT Loans & Advances 0.89 0.79 1.20 1.51 1.79 Total Non-current Assets 4.58 5.33 6.80 8.05 9.29 Debtors 1.60 2.05 2.41 2.87 3.41 Other Current Assets 2.53 2.82 2.96 3.22 3.62 Cash & Equivalents 0.85 1.53 1.71 1.47 1.74 Total Current Assets 4.98 6.40 7.08 7.57 8.77 Creditors 1.82 0.99 1.17 1.44 1.66 Other Current Liabilities & Provns 1.35 2.54 3.04 3.54 4.21 Total Current Liabilities 3.17 3.53 4.20 4.98 5.87 Net Current Assets 1.81 2.86 2.88 2.59 2.90 TOTAL APPLICATION OF FUNDS 6.39 8.20 9.68 10.64 12.19 Page 6

Cash Flow Statement (Consolidated) YE March (Rs bn) FY16 FY17 FY18 FY19E FY19E Reported PBT (0.26) (0.25) 0.59 1.20 1.94 Non-operating & EO items 0.03 (0.36) (0.20) (0.20) (0.23) Interest expenses 0.01 0.11 0.14 0.12 0.11 Depreciation 0.21 0.24 0.27 0.28 0.28 Working Capital Change (0.88) (0.30) (0.24) (0.26) (0.33) Tax Paid (0.20) (0.03) (0.07) (0.23) (0.39) OPERATING CASH FLOW ( a ) (1.10) (0.58) 0.47 0.90 1.37 Capex (0.83) (1.03) (1.23) (1.22) (1.23) Free cash flow (FCF) (1.93) (1.61) (0.76) (0.32) 0.14 Investments (0.05) (0.08) 0.06 0.00 0.00 Non-operating Income 0.08 0.36 0.20 0.20 0.23 INVESTING CASH FLOW ( b ) (0.80) (0.74) (0.97) (1.03) (1.00) Debt Issuance/(Repaid) 0.15 2.09 (1.04) 0.00 0.00 Interest Expenses (0.01) (0.11) (0.14) (0.12) (0.11) FCFE (1.79) 0.37 (1.93) (0.44) 0.03 Share Capital Issuance/Rights Issue 0.04 0.00 2.11 0.00 0.00 Dividend 0.00 0.00 0.00 0.00 0.00 FINANCING CASH FLOW ( c ) 0.18 1.99 0.93 (0.12) (0.11) NET CASH FLOW (a+b+c) (1.72) 0.66 0.44 (0.24) 0.26 EO Items, Others (0.01) (0.02) 0.25 0.00 0.00 Closing Cash & Equivalents 0.85 1.53 1.71 1.47 1.74 Key Ratios (Consolidated) FY16 FY17 FY18 FY19E FY19E PROFITABILITY (%) GPM 51.7 49.3 49.5 50.5 51.1 EBITDA Margin (3.4) (2.7) 7.2 10.7 13.5 APAT Margin (2.1) (2.3) 4.3 8.2 10.5 RoE (2.7) (3.4) 6.5 11.9 15.8 RoIC (or Core RoCE) (7.7) (9.5) 6.4 10.7 15.2 RoCE (1.7) (0.8) 4.6 7.9 10.2 EFFICIENCY Tax Rate (%) 34.3 (11.5) 12.0 19.3 20.0 Fixed Asset Turnover (x) 1.9 2.0 2.1 2.4 2.6 Debtors (days) 72 82 81 80 80 Other Current Assets (days) 114 113 99 90 85 Payables (days) 79 39 42 45 45 Other Current Liab & Provns (days) 61 101 102 99 99 Cash Conversion Cycle (days) 46 54 36 26 21 Debt/EBITDA (x) (0.8) (9.3) 1.6 0.9 0.6 Net D/E (x) (0.1) 0.2 (0.0) 0.0 (0.0) Interest Coverage (x) (22.8) (2.2) 5.7 11.8 18.5 PER SHARE DATA (Rs) EPS (1.3) (1.7) 3.7 8.5 13.0 CEPS 0.3 0.3 5.8 10.7 15.2 Dividend 0.0 0.0 0.0 0.0 0.0 Book Value 49.3 47.7 67.5 76.0 89.0 VALUATION P/E (x) NM NM 56.2 24.6 16.1 P/BV (x) 4.2 4.4 3.1 2.8 2.3 EV/EBITDA (x) (95.4) (109.9) 33.2 18.9 12.5 EV/Revenues (x) 3.2 3.0 2.4 2.0 1.7 OCF/EV (%) (4.2) (2.1) 1.8 3.4 5.3 FCF/EV (%) (7.5) (5.9) (2.9) (1.2) 0.5 FCFE/Mkt Cap (%) (6.8) 1.4 (7.4) (1.7) 0.1 Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0 ; N.A Not Applicable, NM Not Meaningful Page 7

RECOMMENDATION HISTORY Intellect Design Arena 260 210 160 110 TP Date CMP Reco Target 4-May-17 123 BUY 205 15-Aug-17 103 BUY 180 4-Oct-17 119 BUY 184 10-Nov-17 146 BUY 190 21-Dec-17 166 BUY 215 10-Jan-18 180 BUY 215 31-Jan-18 178 BUY 230 12-Apr-18 169 BUY 240 7-May-18 209 BUY 275 60 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Page 8

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