CMP (Rs) Target Price (Rs) Potential Upside Sensex Nifty Key Stock data BSE Code NSE Code Bloomberg Shares o/s, Cr (FV 1) Market Cap (Rs Cr) 1 Year Avg Volume 52 week H/L Shareholding Pattern (%) Promoter FII DII Others 1 Year price performance 15 125. 1 75. Sep-15 Analyst Nov-15 Dec-15 Dec-15 51.5 1.3 47. Feb-16 Cigni Mar-16 Archana Gude archana.gude@religare.com +91-22 - 6728853 419 538 28.3% 28,334 8,769 534758 CIGNITITEC CIGN:IN 2.5 1,63 38,191 517/369 Mar-16 Jun -16 51.4.1 48.3 May-16 Ni y Jun-16 51.3.1 48.5 Aug-16 Sep-16 is the second largest Independent Quality Testing provider with its 2,2+ headcount in the world. The company has emerged as pure play software testing provider and offers a variety of testing services to diverse industry vertical across geographies. Cigniti operates from US, UK, Australia, Canada and its global delivery centre is at Hyderabad, India. The company has over 2+ active clients comprising enterprises as well as independent software vendors. We believe the company is well placed to benefit from growth of quality testing services industry, which is growing at CAGR of 7%, higher than IT industry growth rate. Investment rationale Cigniti is the world's first CMMI-SVCv1.3, Maturity Level 5 certified Independent Software Testing Services (STS) company. The company's IP led offerings include Quality Assurance, Quality Engineering, Digital Assurance and Advisory & Transformation services. Cigniti's SMART Tools and testing labs in Enterprise Mobility, cloud enabled performance engineering, Robotics, IoT & Smart meters differentiates it from its peers. Considering Cigniti's experience of working with Fortune 5 companies and its expertise in quality testing services, we believe, it is well placed to capture incremental quality testing industry revenue pie. The company has strong 2+ active clients base across BFSI, Healthcare, Travel and Hospitality, Energy and Utilities, Media and e-commerce. Cigniti's revenue contribution from the clients is well spread and the deals are multi-year in nature. In FY216, 46% of the revenue was from top 2 clients while over 47 clients were under Rs 2cr and above deal size. Cigniti's profound expertise, timely execution skills and ability to handle cross verticle, cross functional deals will support growth momentum in future. Globally specialised software testing industry is estimated to grow at a CAGR of ~7% over CY15-2 to reach USD 25.9bn. Growth in STS spends is higher than total IT spends, depicting huge growth opportunity for specialised testers like Cigniti. Also, the company is looking at a small/mid-sized inorganic acquisition in Europe, which if happens will give access to growing EMEA region to the company and will aid in higher revenue growth. Outlook and Valuation, the second largest independent quality testing company in the world by headcount, has 2+ active clients across Latin America, Europe, India and rest of the world. Cigniti's expertise in quality testing across verticals and the company's SMART Tools and test labs differentiates it with its peers. We estimate Revenue, Ebitda and PAT to grow at a CAGR 25.3%, 26.3% and 31.3% respectively over FY16-18E. The stock is trading at 12.5x PE @ FY18E. We recommend BUY on the stock with a price target of Rs 538. Financial Summary Particulars, Rs Cr Net sales EBITDA EBITAM (%) PAT PATM (%) EPS, Rs PE, (x) RoE (%) 259.1 35.6 13.7% 25.6 9.9% 12.3 34.1 31.2 379.3 38.5 1.1% 25.4 6.7% 1.4.3 13.6 594.9 98.1 16.5% 49.7 8.4% 19.5 21.5 15.8 748.7 121.2 16.2% 64.9 8.7% 25.5 16.5 16.6 933.4 156.5 16.8% 85.7 9.2% 33.6 12.5 18.3 October 5, 216
Investment Rationale Software testing - Fastest growing amongst IT services Total testing spends to grow at a CAGR of 2.3% over CY15-2 Software testing accounts for 6% of total IT spending. Total testing industry is estimated to reach USD 42.8bn in CY22 from USD 38.2bn in CY215, growing at a CAGR 2.3% over CY15-2E. Interestingly, total IT spends and spends on software testing are growing at same level, though latter was not considered as crucial spends globally in the past. IT Spend by category 6% IT Services spending 94% Tes ng spending Total Testing Industry size (USD bn) 44 43 42 41 39 38 37 36 35 38.2 39.1 39.9.7 41.7 42.8 CY15 CY16E CY17E CY18E CY19E CY2E Total Tes ng spending Source : Nelson Hall IT Industry Report Software Testing is divided into traditional software testing (TST) and specialised software testing (SST). Earlier, IT service providers used to do in - house software testing, which is known as traditional software testing. However, with complexity of business environment, enterprises are now focused on third party certification for reliability and accuracy of software, which is also known as specialised software testing. In CY212, Specialised testing contributed only 3% of total testing spends. However, with increase in demand for specialised testing globally, shift of spends from traditional testing to specialised testing is imminent. As per Nelson Hall's report, Specialised Testing will contribute 71% of total testing spends at USD 25.9bn. Though software testing is expected to grow at a CAGR of 2% over CY15-2E, Specialised software testing is estimated to grow at a CAGR of 7% during the same period. Shift from Traditional testing to Specialised testing STS Spending growing steadily Share of STS spending to increase to 71% in CY2 12% 1% 8% 6% % 2% % 3% 7% CY12 71% 39% CY2E (USD bn) (%) 3 9.% 8.% 7.5% 6.6% 27 7.% 6.5% 6.6% 8.% 24 7.% 21 6.% 18 5.% 15 4.% 12 9 3.% 6 2.% 3 1.% 18.6 2 21.4 22.8 24.3 25.9 % CY15 CY16E CY17E CY18E CY19E CY2E Tradi onal Tes ng Specialised Tes ng STS Spending, USD bn YoY Growth Source : Nelson Hall IT Industry Report
Well placed to capture increasing spends across the industry verticals As per Nelson Hall's report, in CY15, BFSI, telecom and media contributed over 5% of total testing spends. Another 25% is contribued by manufacturing and retail companies. Rest of the testing spends pie is occupied by healthcare, energy & utilities, transportation, etc. In FY16, Cigniti's 18% revenue came from BFSI sector while 19% was contributed by travel and hospitality. Considering Cigniti's expertise to work with Fortune 5 companies, we believe the company has major scope to grow and capture higher pie of testing spends. Also, retail and consumer product goods, booming sectors in India and across the globe, were just 2% of total Cigniti's sales in FY16. We believe, Cigniti is well placed to get higher revenue from these verticals. Testing spending breakdown by sector (CY15) Cigniti - Revenue contribution by sector (FY16) 18% 2% 4% 3% 5% 38% 17% 2% 3% 35% 6% 5% 1% 16% Financials Telecom & Media Retail CPG Healthcare Manufacturing Transporta on Energy & U li es Government Others 19% Independent So ware Vendors Travel and Hospitality Energy and U li es Others 18% BFSI Healthcare Retail & E-Commerce Strong clientele base to support growth projection Working with 2+ active clients Cigniti has worked with over 5 clients since inception and has currently 2+ active clients. The company s strategic decision of not to depend on a few clients for revenue has paid off well. In FY16, top client accounted for 15% of total sales of the company while top 2 clients contributed 46% of total sales. In terms of deal size, the company has focused approach towards size and tenure of the deals. Company's 47 project deals were above Rs 2crs while 167 deals were from Rs.1cr -.5cr size. This strategy will not only act as a cushion in case of loss of a client but also helps to get clients with small testing spends initially. Revenue contribution - As per clients Revenue contribution - As per dealsize 5% 45% % 35% 3% 25% 2% 15% 1% 5% % 46% 35% 26% 15% Top client Top 5 Top 1 Top 2 (Rs cr) 18 16 1 12 1 8 6 2 167 83 83 61 47 2Crs + 1Cr - 2Cr.5Cr - 1Cr.1Cr -.5Cr Less than.1cr
Organic growth continues; Inorganic expansion on cards Inorganic expansion will aid revenue growth Cigniti's focused approach towards increasing footprints in Europe and India has helped in reducing revenue share from North America in total sales from 91% in FY15 to 86% in FY16. Europe and India had a share of 5% each in total sales. The company is also looking at a small/mid - sized company acquisition in Europe to get easier access to testing markets in UK/Europe and increase visibility. EMEA is estimated to have % share in total STS spends of USD 25.9bn. Inorganic expansion will give access to growing EMEA region and aid revenue growth. Total STS Spending - by region CY2E Revenue contribution - by region FY16 1% 3% 5% 4% 5% 47% % 86% North America EMEA APAC La n America North America Europe India Rest of the World
Financial Analysis Net sales & YoY growth EBITDA & EBITDAM (Rs cr) (%) (Rs cr) 1 9 8 7 6 5 3 2 1 1 9 8 71.7 57. 7 46.2 6 5 3 25.9 24.7 2 1 259.1 379.3 594.9 748.7 Net sales yoy Growth (%) 933.4 18 16 1 12 1 8 6 2 16.8 13.7 16.2 16.5 1.2 35.6 38.5 98.1 121.2 156.5 EBITDA EBITAM (%) (%) 18 16 14 12 1 8 6 4 2 PAT & PATM Cash Flow (Rs cr) (%) (Rs cr) 9 8 7 6 5 3 2 1 9.9 8.4 8.7 9.2 6.8 25.6 25.4 49.7 64.9 85.7 16 14 12 1 8 6 4 2 25 2 15 1 5-5 -1-15 -2-25 Cashflow from Opera ng ac vi es Cashflow from Inves ng ac vi es PAT PATM (%) Cashflow from Financing ac vi es RoE & RoCE Working Capital Cycle (%) 35 32.4 1 3 25 2 15 1 5 31.2 23.4 21.5 23.9 15.3 18.3 15.8 16.6 13.6 12 1 8 6 2 13 9 18 95 9 46 49 35 18 RoE RoCE Debtors days Creditors days
Company background, formerly known as Chakkilam Infotech Ltd., was incorporated in 1998. In September 211, the company acquired Cigniti Inc. and changed the name to The company is focused on software testing services through a combination of onsite consulting and offshore delivery. Ciginiti has 2,2+ career testers servicing over 2+ clients across 5 continents. Its offices are in US, UK, India, Canada and Australia. Cigniti is the first company to be rated as CMMI-SVC v1.3 Maturity Level 5. The company's IP led offerings include Quality Assurance, Quality Engineering, Digital Assurance and Advisory & Transformation services. Cigniti's SMART Tools and testing labs in Enterprise Mobility, cloud enabled performance engineering, Robotics, IoT & Smart meters differentiates it amongst its peers. In 216, the company's Cigniti 4. Quality Engineering strategy that focuses on Digital assurance for the new age enterprises backed by patented IP led approach, investments into cutting-edge cloud-enabled test labs, and impeccable focus to accelerate the market readiness of its clients' software through best in class testing services has resulted in better positing amongst the peers. Key Clients across business verticals BFSI Energy & Utility HCLS Strong clientele base across industry vertical Travel & Hospitality Media & Technology Retail & E-Commerce
Board of directors Name C V Subrahmanyam Sudhakar Pennam C Srikanth K Ch. Subba Rao Mani Subramanian K Nageswara Rao K Krishna Priya Designation Chairman & Managing Director Director Executive Director Independent Director Independent Director Independent Director Independent Director Key Risks: Slower pace of IT spending growth is expected due to economic weakness in emerging markets. As per NASSCOM IT Industry report, global IT spends grew by 5 6% in constant currency terms since recovery from the financial crisis in 21. However, IT market is now expected to grow by just 2% in CY16. Cut down in IT spends will impact negatively to Quality Testing companies as well. Software quality testing is fragmented between traditional testing companies and specialised testing companies. Top 15 IT companies in the world had 73% share in total spend on quality testing in CY15 while remaining 27% was contributed by independent software companies like Cigniti. Increase in competitive intensity will weigh on earnings for software testing companies.
P&L Account - Consolidated Particulars, Rs Cr Net sales 259.1 378.9 594.8 748.7 933.4 Increase/(Decrease) in stock.4.1 Total income 259.1 379.3 594.9 748.7 933.4 Expenditure Employee cost 173.2 223.6 38.7 382.8 478.5 Other expenses 5.3 117.3 188.1 244.6 298.4 Total expenditure 223.5 3.8 496.9 627.4 776.9 EBITDA 35.6 38.5 98.1 121.2 156.5 Other income.9 1.2 3.3 5.8 8.7 Depreciation 2.4 5.4 11.3 19.4 22.9 PBIT 34.1 34.2 9.1 17.7 142.3 Interest expenses 1.2 2.9 6. 7.8 1.5 PBT 32.9 31.3 84.1 99.9 131.8 Tax 7.3 5.5 34.4 35. 46.1 PAT 25.6 25.7 49.7 64.9 85.7 Source : Company ; RSL Research Balance sheet - Consolidated Particulars, Rs Cr Share Capital 2.8 24.7 25.5 25.5 25.5 Reserves & Surplus 87.4 244.3 334.1 399. 484.7 Total Shareholder's Fund 18.2 269.1 359.6 424.5 51.2 Share application money pending 4.2 Long term borrowings.2 3.6 Trade payables 12.9 36. 64.6 94.6 124.6 Short term Borrowings 25.2 38.3 96.6 111.6 131.6 Other current liabilities 34.2 37.1 115.2 137. 169.8 Total liabilities 184.9 384.1 635.9 767.6 936.1 Net Block 78.6 126.2 25.7 226.3 253.5 Other non current assets 19.1 16.3 148.9 163.8 182.4 Sundry Debtors 63.9 134.7 175.8 194.9 23.2 Cash & Cash equivalents 5.7 33.9 4.2 71.2 136.4 Other current assets 17.8 73. 11.3 111.4 133.7 Total assets 184.9 384.1 635.9 767.6 936.1 Source : Company ; RSL Research
Cash Flow - Consolidated Particulars, Rs Cr Net profit before tax & extraordinary items 24.5-28.1 84. 99.9 15.7 Operating profit before working capital changes 34.2 65. 141.5 127. 165.2 Cash geenrated from/(used in) operations 24.5-28.1 182.7 132. 148.1 Cash flow from operations 24.5-28.1 182.7 99.9 15.7 Cash flow from Investing activities -53.4-51.2-23.5-4 -5 Cash flow from Financing activities 32.5 17.5-8.9 7.2 9.5 Net Inc/(Dec) Cash & Cash equivalents 3.7 28.2-29.7 67.1 65.2 Cash & Cash equivalents at the beginning of the year 2. 5.7 33.9 4.2 71.2 Cash & Cash equivalents at the end of the year 5.7 33.9 4.2 71.2 136.4 Source : Company ; RSL Research Key Financial ratios Particulars Profitability Ratios Gross Profit/ Net sales (%) 33.8 27.6 32. 31.5 32.1 EBITDA / Net Sales (%) 13.7 1.2 16.5 16.2 16.8 NPM / Total income (%) 9.9 6.8 8.4 8.7 9.2 ROE (%) 31.2 13.6 15.8 16.6 18.3 ROCE (%) 32.4 15.3 23.4 21.5 23.9 Turnover Days Debtors Velocity 9 13 18 95 9 Creditors Velocity 18 35 46 49 Gross Asset Ratio 3.6 3.2 3.1 2.9 3.1 Liquidity Ratios Gross Debt-Equity Ratio.2.2.3.3.3 Interest Coverage 27.9 11.2 14.4 13. 12.7 Current Ratio (x) 1.2 2.2 1. 1.1 1.2 Source : Company ; RSL Research
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