Tata Consultancy Services

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Tata Consultancy Services

TCS.NS TCS IN

EQUITY: SOFTWARE & SERVICES

Some further moderation

Moderating growth incorporating Chennai floods,

cross currency and increased caution on demand

Action: Weaker growth versus INFO to lead to equalisation of valuations

Global Markets Research

12 December 2015

Rating

Remains

Neutral

Target Price

Reduced from 2670

INR 2500

Closing price

11 December 2015

INR 2386

Potential upside

+4.8%

Anchor themes

We prefer companies that

provide revenue upside potential

with margin comfort and are

available at reasonable

valuations.

Nomura vs consensus

Our TP is 10% lower than

consensus on caution on

multiples in light of tapering

growth

Research analysts

India Technology/Services &

Software

Ashwin Mehta - NFASL

[email protected] +91 22 4037 4465

Rishit Parikh - NSFSPL

[email protected] +91 22 4037 4360

After our interaction with the TCS management and their revenue warning on

the Chennai flood impact; we are moderating our 2HFY16F revenue growth

expectations from ~2% to ~1.4% CQGR over 3Q/4Q. We lower our FY16/17F

USD revenue growth expectations to 7.8/10.7% (vs 8.4/12.4% previously)

given 1) Weaker exit rates of below 10% y-y in 4Q and 2) our cautious stance

on demand in light of weakening macro indicators (Client financials, US PMI).

We believe TCS is likely to underperform INFO on revenue growth in

FY16/17F (after five years of outperformance) and in such a scenario

valuations are likely to equalise. Slowing growth in developed markets, weaker

traction in ADM/ES and high margins in a scenario where commoditisation

pressures are increasing, keeps us cautious. Maintain Neutral, with a lower TP

of INR2500 (vs INR2670 previously). HCL Technologies (HCLT IN), Cognizant

(CTSH US) followed by Infosys (INFO IN) are our top Buy rated stocks.

Catalyst: Faster than anticipated growth

Slower momentum in key segments

TCS is seeing slower momentum in key segments with 1) INFO growing better

in US/BFSI and equalising on growth in Europe 2) Enterprise solutions

revenue growth is declining after outperformance over the last three years and

gaps with INFO increasing to double digit percentages and 3) While IMS

growth is still healthy, it has seen moderation lately.

Slower growth countered by INR deprecation, TP cut on valuation reset

We incorporate 1) Chennai flood impact (~60bp q-q) 2) Incremental cross

currency impact (~40bp q-q) and 3) increased caution on demand leads to our

lower USD revenue growth estimates. However, our EPS estimates are largely

flat on USD-INR reset to 66 (vs 64.5 previously). Our target multiple to 18x 1

year forward EPS of INR139.1 up to Sep-17 (vs 19x before), inline with Infosys.

Year-end 31 Mar FY15 FY16F FY17F FY18F

Currency (INR) Actual Old New Old New Old New

Revenue (mn) 946,484 1,080,477 1,087,997 1,214,561 1,217,087 1,361,260 1,356,561

Reported net profit (mn) 196,484 238,631 240,915 264,104 264,742 292,814 288,941

Normalised net profit

(mn) 216,961 238,631 240,915 264,104 264,742 292,814 288,941 FD normalised EPS 110.85 121.92 123.09 134.94 135.26 149.61 147.63

FD norm. EPS growth (%) 13.5 10.0 11.0 10.7 9.9 10.9 9.1

FD normalised P/E (x) 21.5 N/A 19.4 N/A 17.6 N/A 16.2

EV/EBITDA (x) 16.2 N/A 14.0 N/A 12.4 N/A 11.1

Price/book (x) 8.1 N/A 6.8 N/A 5.5 N/A 4.5

Dividend yield (%) 3.3 N/A 1.7 N/A 1.8 N/A 1.9

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Key data on Tata Consultancy Services

Relative performance chart

Source: Thomson Reuters, Nomura research

Notes:

Performance

(%) 1M 3M 12M

Absolute (INR) -3.4 -6.5 -4.3 M cap (USDmn) 69,947.2 Absolute (USD) -4.3 -6.9 -10.7 Free float (%) 23.0 Rel to MSCI India -2.4 -4.8 5.8 3-mth ADT (USDmn) 86.7

Income statement (INRmn)

Year-end 31 Mar FY14 FY15 FY16F FY17F FY18F Revenue 818,094 946,484 1,087,997 1,217,087 1,356,561 Cost of goods sold -433,984 -529,393 -607,755 -687,361 -778,506 Gross profit 384,110 417,091 480,243 529,726 578,055 SG&A -146,031 -162,848 -186,338 -206,785 -229,961 Employee share expense

Operating profit 238,079 254,243 293,905 322,942 348,094 EBITDA 251,322 272,941 312,638 343,677 371,219 Depreciation -13,243 -18,698 -18,734 -20,735 -23,125 Amortisation

EBIT 238,079 254,243 293,905 322,942 348,094 Net interest expense

Associates & JCEs

Other income 15,891 31,396 24,773 27,390 34,078 Earnings before tax 253,970 285,639 318,678 350,332 382,172 Income tax -60,712 -66,564 -75,993 -84,080 -91,721 Net profit after tax 193,258 219,075 242,685 266,252 290,451 Minority interests -2,089 -2,114 -1,771 -1,510 -1,510 Other items 0 0 0 0 0 Preferred dividends Normalised NPAT 191,169 216,961 240,915 264,742 288,941 Extraordinary items 0 -20,477 0 0 0 Reported NPAT 191,169 196,484 240,915 264,742 288,941 Dividends -73,275 -182,898 -94,251 -99,015 -106,087 Transfer to reserves 117,893 13,586 146,663 165,728 182,853

Valuations and ratios

Reported P/E (x) 24.4 23.8 19.4 17.6 16.2 Normalised P/E (x) 24.4 21.5 19.4 17.6 16.2 FD normalised P/E (x) 24.4 21.5 19.4 17.6 16.2 Dividend yield (%) 1.3 3.3 1.7 1.8 1.9 Price/cashflow (x) 29.1 21.7 24.3 19.4 18.3 Price/book (x) 8.4 8.1 6.8 5.5 4.5 EV/EBITDA (x) 17.6 16.2 14.0 12.4 11.1 EV/EBIT (x) 18.6 17.4 14.9 13.2 11.8 Gross margin (%) 47.0 44.1 44.1 43.5 42.6 EBITDA margin (%) 30.7 28.8 28.7 28.2 27.4 EBIT margin (%) 29.1 26.9 27.0 26.5 25.7 Net margin (%) 23.4 20.8 22.1 21.8 21.3

Effective tax rate (%) 23.9 23.3 23.8 24.0 24.0 Dividend payout (%) 38.3 93.1 39.1 37.4 36.7 ROE (%) 39.7 34.8 38.2 34.4 30.6 ROA (pretax %) 59.8 54.2 56.7 56.2 54.2 Growth (%) Revenue 29.9 15.7 15.0 11.9 11.5 EBITDA 39.0 8.6 14.5 9.9 8.0 Normalised EPS 37.1 13.5 11.0 9.9 9.1 Normalised FDEPS 37.1 13.5 11.0 9.9 9.1

Source: Company data, Nomura estimates

Cashflow statement (INRmn)

Year-end 31 Mar FY14 FY15 FY16F FY17F FY18F EBITDA 251,322 272,941 312,638 343,677 371,219 Change in working capital -28,115 10,822 -42,758 -17,186 -23,356 Other operating cashflow -62,801 -68,678 -77,763 -85,590 -93,231 Cashflow from operations 160,406 215,085 192,117 240,902 254,632 Capital expenditure -34,373 -30,200 -25,261 -32,570 -34,570 Free cashflow 126,033 184,885 166,855 208,332 220,062

Reduction in investments 0 0 0 0 0

Net acquisitions

Dec in other LT assets -12,327 -15,746 -8,851 -18,151 -20,028

Inc in other LT liabilities 0 0 0 0 0

Adjustments -7,076 1,691 -746 0 0

CF after investing acts 106,630 170,830 157,258 190,181 200,034 Cash dividends -73,275 -182,898 -94,251 -99,015 -106,087

Equity issue 25,243 -10,417 -41,887 0 0

Debt issue 3,028 802 2,257 1,582 1,945

Convertible debt issue 0 0 0 0 0

Others 15,891 31,396 24,773 27,390 34,078

CF from financial acts -29,113 -161,117 -109,109 -70,043 -70,065 Net cashflow 77,517 9,713 48,149 120,138 129,969 Beginning cash 168,063 245,580 255,292 303,442 423,580 Ending cash 245,580 255,292 303,442 423,580 553,548 Ending net debt -245,580 -255,292 -303,442 -423,580 -553,548

Balance sheet (INRmn)

As at 31 Mar FY14 FY15 FY16F FY17F FY18F

Cash & equivalents 245,580 255,292 303,442 423,580 553,548 Marketable securities

Accounts receivable 222,360 242,670 277,733 309,019 347,486

Inventories 0 0 0 0 0

Other current assets 16,907 21,739 18,827 20,948 23,555 Total current assets 484,846 519,701 600,001 753,547 924,590

LT investments 0 0 0 0 0

Fixed assets 103,644 115,716 122,813 134,648 146,093 Goodwill 41,568 39,308 39,484 39,484 39,484

Other intangible assets 0 0 0 0 0

Other LT assets 59,067 74,813 83,664 101,815 121,843 Total assets 689,125 749,537 845,962 1,029,493 1,232,009 Short-term debt

Accounts payable 110,752 146,716 136,108 152,330 170,048 Other current liabilities

Total current liabilities 110,752 146,716 136,108 152,330 170,048 Long-term debt Convertible debt Other LT liabilities 18,117 18,919 21,175 22,757 24,701 Total liabilities 128,869 165,634 157,283 175,087 194,750 Minority interest 6,905 9,136 2,723 2,723 2,723 Preferred stock 0 0 0 0 0 Common stock 1,959 1,959 1,957 1,957 1,957 Retained earnings 551,393 572,808 683,999 849,726 1,032,580 Proposed dividends

Other equity and reserves

Total shareholders' equity 553,352 574,767 685,956 851,683 1,034,537 Total equity & liabilities 689,125 749,537 845,962 1,029,493 1,232,009

Liquidity (x)

Current ratio 4.38 3.54 4.41 4.95 5.44

Interest cover na na na na na

Leverage

Net debt/EBITDA (x) net cash net cash net cash net cash net cash Net debt/equity (%) net cash net cash net cash net cash net cash

Per share

Reported EPS (INR) 97.67 100.39 123.09 135.26 147.63 Norm EPS (INR) 97.67 110.85 123.09 135.26 147.63 FD norm EPS (INR) 97.67 110.85 123.09 135.26 147.63 BVPS (INR) 282.72 293.66 350.47 435.15 528.57 DPS (INR) 32.00 79.00 40.00 42.00 45.00 Activity (days) Days receivable 88.1 89.7 87.5 88.0 88.3 Days inventory 0.0 0.0 0.0 0.0 0.0 Days payable 83.8 88.8 85.2 76.6 75.6 Cash cycle 4.3 0.9 2.4 11.4 12.7

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Nomura | Tata Consultancy Services 12 December 2015

Moderating growth expectations, TP cut

to INR2500 (vs INR2670 previously)

After our interaction with the TCS management and the revenue warning on the Chennai

flood impact on revenues, we are lowering our 2HFY16F revenue growth expectations

from ~2% to ~1.4% CQGR over 3Q/4Q. Weaker exit rates of below 10% y-y in 4Q and

our cautious stance on demand in light of weakening macro demand indicators (Client

financials, US PMI), leads us to cut our FY16/17F USD revenue growth estimates to

7.8/10.7% (vs 8.4/12.4% earlier). Our EPS estimates are largely unchanged as the

growth moderation is countered by USD-INR reset to 66 (vs 64.5 previously).

Fig. 1: Change of estimates

We believe after five years of outperformance, TCS is unlikely to outperform INFO on

revenue growth over FY16/17F and in such a scenario, we expect valuation multiples to

equalise. Valuing TCS in-line with INFO at 18x 1 year forward (vs 19x previously) EPS of

INR139.1 up to Sep-17, our TP is now INR2500 (vs INR2670 previously).

Key takeaways from our interaction with TCS management

In light of 1) TCS underperforming INFO on overall revenue growth over the last three

quarters (Fig 2) 2) seeing weakening momentum in both the US and Europe with

contrasting trends at INFO (Fig 3 & 4) 3) Equalising of growth in ADM with INFO and

slowing growth in ES after three years of outperformance (Fig 5 & 6) 4) Though still

healthy growth in IMS, but some slowing of momentum lately (Fig 7) and 5) TCS now

underperforming both CTSH and INFO on BFSI (Fig 8), we interacted with the company

to get a sense of whether these trends are likely to reverse and what is causing the

recent slowdown.

We are not yet convinced in terms of a sharp acceleration in demand.

FY16F FY17F FY18F FY16F FY17F FY18F FY16F FY17F FY18F

Revenue (USD mn) 16,659 18,441 20,554 16,752 18,830 21,105 -0.6 -2.1 -2.6 Revenue (INR bn) 1,088.0 1,217.1 1,356.6 1,080.5 1,214.6 1,361.3 0.7 0.2 -0.3 EBITDA margin (%) 28.7 28.2 27.4 28.7 28.1 27.3 10 bps 10 bps 0 bps

Tax Rate (%) 23.8 24.0 24.0 23.8 24.0 24.0 0 bps 0 bps 0 bps

Diluted EPS (INR) 123.1 135.3 147.6 121.9 134.9 149.6 1.0 0.2 -1.3

Change (%)

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Fig. 2: TCS vs INFO USD revenue growth (% y-y)

After outperforming for five years, TCS is starting to underperform INFO on USD revenue growth. We expect TCS to underperform INFO on growth in FY16/17F

Fig. 3: TCS: One-year forward P/E premium vs INFO

TCS is currently trading at a premium, despite expectation of lower growth than INFO

Source: Bloomberg, Nomura research

Fig. 4: USD revenue growth in North America (% y-y)

Infosys has started to outperform TCS on growth…

Source: Company data, Nomura research

Fig. 5: USD revenue growth in Europe (% y-y)

… while the gap in growth has narrowed in Europe

7.1% _6.5% 5.6% 3.2% 5.8% 8.7% 8.4% 12.6% 16.7% 17.7% 14.3% 11.3% 9.3% 5.8% 6.7% 9.6% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% _Infosys TCS 7% 13% -15% -5% 5% 15% 25% 35% 45% Jan -11 Ap r-1 1 Jul -1 1 Oc t-11 Jan -12 Ap r-1 2 Jul -1 2 Oc t-12 Jan -13 Ap r-1 3 Jul -1 3 Oc t-13 Jan -14 Ap r-1 4 Jul -1 4 Oc t-14 Jan -15 Ap r-1 5 Jul -1 5 Oc t-15 8% 13% 17% 9% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% _Infosys _TCS 14% 1% 28% 1% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% _Infosys _TCS

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Fig. 6: ADM USD revenue growth (% y-y)

TCS has seen growth decelerate to similar levels as INFO in ADM…

Fig. 7: ES USD revenue growth (% y-y)

... while growth in ES is now significantly lower than at INFO

Fig. 8: IMS USD revenue growth (% y-y)

While TCS is growing the fastest in IMS, there has been a sharp moderation lately

Fig. 9: BFSI USD revenue growth (% y-y)

TCS has consistently outperformed INFO in BFSI growth, but of late it has started to underperform both INFO and CTSH

2HFY16F likely to be weaker than 2HFY15; near 60bp q-q impact likely from

Chennai floods in 3Q

• The company believes that 3Q typically see a relative deceleration versus growth in

2Q. In FY15, 2Q organic constant currency growth was 4.6% q-q (vs 2.5% q-q in 3Q).

In comparison 2QFY16 constant growth was 3.9% q-q. We believe the 2HFY15

momentum of ~2.1% CQGR in 3Q/4Q, might not be maintained in FY16F on account of

1) slower momentum in 2Q and consequently deceleration in 3Q likely being higher

than last year 2) Chennai flood impact, which on our calculation could be ~60bp q-q

and 3) Additional cross currency impact in 3QFY16F of ~40bp q-q. Accordingly, we

lower our previous estimate of ~2% USD revenue CQGR over 3Q/4Q to ~1.4%.

• TCS in a press release on 11

th

Dec 2015 indicated that there would be a material

impact on 3Q revenue growth due to Chennai flood led disruptions. The company

indicated that it has 65,000 employees in Chennai, which is close to 19% of its

headcount. Operations in Chennai were affected for four days in the first week of

5% 4% 13% 0% 2% 4% 6% 8% 10% 12% 14% 16% _Infosys _TCS 28% 10% 20% -2% -5% 0% 5% 10% 15% 20% 25% 30% 35% _Infosys _TCS 13% 0% 5% 10% 15% 20% 25% 30% 35% 40% 19% 9% 6% -5% 0% 5% 10% 15% 20% 25% _Cognizant _Infosys _TCS

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December and prior to that there was a one day impact due to rains. Since 7

December, while work has started, attendance has been lower. This we believe will

likely lead to an impact on time and material work at TCS (nearly half of its revenues in

our view) and also cause some disruption in fixed price projects in terms of pushing out

of timelines. In essence, nearly five days of revenue from Chennai could be hit, which

on our estimates could lead to an impact of ~60bp q-q on 3Q revenues.

Material slowdown in enterprise solutions after outperformance over the last three

years

• TCS enterprise solutions (ES) revenue growth has declined to -2% y-y in 2QFY16 (a

differential of ~12% versus growth at INFO in this service line). This is after TCS

outperformed INFO in this service line over the last three years.

• The company does not believe that the decline is due to a shift towards SaaS from

on-premise as areas like human capital management (HCM) and customer relationship

management (CRM) , where the moves are more prominent are smaller portions and in

the larger core ERP side, this move is not necessarily as pronounced.

• They believe that the reason for the slowdown is largely to do with client focus on

simplification and standardisation of their ERP environment, where there were multiple

instances of ERP software running and each of these required separate

support/customisation. Now as ERP has matured, this redundancy is being addressed,

which has led to maintenance revenues going down. TCS has historically had a higher

dependence on ERP maintenance related work versus implementation in its ES

practice, in our view.

• Further, SaaS implementation revenues are smaller and implementation cycles are

shorter, the integration or add on revenue opportunities which can be huge will only

likely develop over time. So this too has contributed to sluggish growth.

• We believe this service line will probably plateau and then over a period start to see an

improvement as the mix of on-premise vs SaaS + integration opportunities turn more

favourable.

IMS though healthy, has moderated lately

• TCS had been growing in the range of 20-30%+ y-y in IMS, which has as of 2QFY16

come down to 13% y-y growth in USD terms.

• The company believes that this slowdown has little to do with adoption of public cloud

and any associated cannibalisation of revenue. The slowdown has more to do with

timing of large deal flow and their reaching steady state and secondly, there has been

some lull in deal flow from Europe, lately (which from ~20% y-y growth in CC terms has

come down to ~10% y-y growth).

• Structurally, the company does not see any issue with the service line and believes that

as clients move from on-premise data centers to private and public cloud combinations

there will be significant opportunities in 1) Helping clients move to private/public cloud

and associated rationalisation of the technology stack as this move will require a more

standardised and modernised stack, versus the disparate elements of the current

technology stack and 2) Managed services wherein the service provider takes

ownership of the compute and storage layer across multiple instances of the cloud

(both private and public).

• An associated repercussion of this would be that the manual work would go down as

work gets done by software and automation e.g monitoring, manual provisioning of

additional storage.

Slower growth in BFSI versus CTSH and INFO

• TCS has historically been growing ahead of its Indian IT peers. As of 2QFY16, TCS

had started to underperform both INFO and CTSH on BFSI growth.

• The company continues to see strong momentum in BFS, driven by digital,

simplification and regulatory work. However, the slowdown has been caused by

insurance which is nearly a third of its BFSI revenues (partly influenced by declines in

Diligenta BPO platform). The company expects the drag from Diligenta to continue,

however the remaining insurance services business will perform better.

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View on other verticals: Positive on most verticals except energy, telecom and

insurance

• Manufacturing:

TCS believes that the deceleration in manufacturing is largely Japan

led, otherwise the momentum in the vertical is strong.

• Healthcare:

Sees strong momentum in life sciences, but on the payer side will have to

wait and watch on the impacts of impending M&A’s. Overall expects positive impacts

post M&A.

• Retail:

Is seeing strong momentum, with especially strong traction on digital initiatives

across most UK retailers.

• Telecom:

Expects volatility to continue.

• Energy:

No sign of pickup in energy, though the exposure remains small at ~2%.

Sees current sales structure as optimal and not too keen on owning startups, sees

co-innovation a better approach

• Does not see a change in sales structure to tap into digital demand and target spends

from lines of business or CMO/CEO budgets. Believes that the account client partner is

the best person to identify newer spend opportunities within an account and has the

access to all the key stakeholders.

• Does not believe that the role of CIO is shrinking rather thinks that the CIO role has

expanded with greater say of CIO’s in spend decisions of lines of business or

CMO/CEO.

• Believes its strategy of collaborating with startups through its COIN (Co-Innovation)

programme is optimal and is not focused on taking minority stakes or acquiring stakes

in start-ups (something that the competitors like INFO/ACN have been focused on, in

our view). It believes that its approach helps startups reach out to Global 1000

corporations through joint solutions, while TCS retains the flexibility of not being tied up

with a particular startup in a specific area.

• The company screens close to 1,000 startups globally every year with assistance from

its VC partners and university connects, which are typically filtered down to 100 startup

partners with whom the company builds joint solutions which are taken to their

customers.

Valuation Methodology and Risks

Our TP of INR2500 (vs 2670 previously) is based on a lower multiple of 18x 1 year

forward EPS of INR139.1 up to Sep-17 (vs 19x previously).

Upside risks include faster-than-anticipated growth and downside risks include INR

appreciation.

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Appendix A-1

Analyst Certification

We, Ashwin Mehta and Rishit Parikh, hereby certify (1) that the views expressed in this Research report accurately reflect our

personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our

compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this

Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by

Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures

The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.

Materially mentioned issuers

Issuer Ticker Price Price date Stock rating Sector rating Disclosures

Cognizant CTSH US USD 60.37 10-Dec-2015 Buy N/A

HCL Technologies HCLT IN INR 841 11-Dec-2015 Buy N/A

Infosys INFO IN INR 1053 11-Dec-2015 Buy N/A

Tata Consultancy

Services TCS IN INR 2386 11-Dec-2015 Neutral N/A

Tata Consultancy Services (TCS IN) INR 2386 (11-Dec-2015)

Rating and target price chart (three year history)

Neutral (Sector rating: N/A)

Date Rating Target price Closing price

14-Oct-15 Neutral 2,483.70 10-Jul-15 2,670.00 2,474.35 17-Apr-15 2,800.00 2,474.85 07-Apr-15 2,845.00 2,585.00 16-Jan-15 2,800.00 2,532.15 18-Oct-14 2,760.00 2,441.15 18-Jul-14 2,700.00 2,403.728 17-Apr-14 2,570.00 2,188.778 17-Jan-14 2,600.00 2,179.08 16-Oct-13 2,440.00 2,181.394 04-Oct-13 Buy 2,002.384 04-Oct-13 2,330.00 2,002.384 14-Aug-13 Neutral 1,805.356 14-Aug-13 1,970.00 1,805.356 24-May-13 Reduce 1,446.992 24-May-13 1,360.00 1,446.992 18-Apr-13 1,540.00 1,430.45 28-Mar-13 1,560.00 1,551.562 15-Jan-13 1,470.00 1,316.92

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology

Our target price of INR2500 is based on 18x one-year forward EPS up to Sep-17 of INR139.1. The

18x multiple is in line with Infosys as we expect growth deceleration. The benchmark index for this stock is the MSCI India.

Risks that may impede the achievement of the target price

Upside risks include faster-than-anticipated growth and

downside risks include INR appreciation.

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Cognizant (CTSH US) USD 60.37 (10-Dec-2015)

Buy (Sector rating: N/A)

06-Aug-15 76.00 67.08 05-May-15 70.00 61.00 07-Apr-15 67.00 62.045 05-Feb-15 64.00 57.635 16-Dec-14 63.00 51.21 06-Nov-14 60.00 52.64 16-Sep-14 56.00 44.98 07-Aug-14 53.00 44.38 12-Mar-14 56.00 51.59 06-Feb-14 54.00 47.745 11-Dec-13 53.00 46.75 06-Nov-13 50.50 45.34 04-Oct-13 48.50 42.425 07-Aug-13 45.50 36.905 24-May-13 39.00 31.885 09-May-13 41.50 34.225 25-Mar-13 44.50 37.195

Valuation Methodology

Our target price of USD76 is based on 21x one-year forward EPS (up to Sep-17) of USD3.6. Our

target P/E multiple is at a 10-15% premium to our valuation multiple for TCS/INFO. The benchmark index for this stock is MSCI

India.

Risks that may impede the achievement of the target price

Key downside risks include disruption in global macro,

integration risks associated with the Trizetto acquisition and any slowdown in demand.

HCL Technologies (HCLT IN) INR 841 (11-Dec-2015)

19-Oct-15 1,020.00 857.75 05-Oct-15 1,050.00 859.90 04-Aug-15 1,110.00 932.90 01-Jun-15 1,130.00 973.30 22-Apr-15 1,060.00 877.30 07-Apr-15 1,100.00 934.55 30-Mar-15 1,030.00 980.45 31-Jan-15 1,030.00 895.875 16-Dec-14 975.00 779.45 18-Oct-14 950.00 752.75 31-Jul-14 925.00 771.547 18-Apr-14 865.00 706.875 17-Jan-14 850.00 684.50 17-Oct-13 700.00 537.344 04-Oct-13 640.00 544.166 01-Aug-13 560.00 461.757 24-May-13 438.00 365.928 18-Apr-13 455.00 365.283 28-Mar-13 450.00 394.431 18-Jan-13 425.00 350.101 10-Dec-12 375.00 308.277

Valuation Methodology

Our target price of INR1,020 is based on 16x one-year forward EPS up to Sep-17 of INR63.9, which is

a ~15% discount to our valuation multiple for TCS. The benchmark index for this stock is the MSCI India.

Risks that may impede the achievement of the target price

Key downside risks include deterioration in global macros,

weaker-than-expected revenue rebound in 2H, and any deterioration in margin outlook.

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Infosys (INFO IN) INR 1053 (11-Dec-2015)

13-Oct-15 1,225.00 1,099.40 22-Jul-15 1,190.00 1,103.15 23-Jun-15 1,070.00 1,000.40 25-Apr-15 1,070.00 997.60 07-Apr-15 1,130.00 1,079.75 03-Dec-14 1,110.00 1,061.75 11-Oct-14 1,075.00 972.162 14-Jul-14 948.00 806.312 13-Mar-14 943.00 839.40 11-Jan-14 1,005.00 887.812 11-Oct-13 940.00 818.625 04-Oct-13 910.00 754.10 14-Aug-13 Buy 767.412 14-Aug-13 883.00 767.412 15-Jul-13 625.00 685.675 24-May-13 Reduce 586.975 24-May-13 530.00 586.975 28-Mar-13 755.00 722.338 14-Jan-13 725.00 701.625

Valuation Methodology

Our target price of INR1,225 is based on 18x one-year forward EPS (upto Sep-17) of INR68, which is

a 5% discount to our valuation multiple for TCS. The benchmark index for this stock is the MSCI India.

Risks that may impede the achievement of the target price

Faster than anticipated deceleration, INR appreciation,

higher-than-anticipated pricing pressure in commoditized services remain key risks to our target price.

Important Disclosures

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9% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 19% of companies with this rating are investment banking clients of the Nomura Group*.

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Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America, and

Japan and Asia ex-Japan from 21 October 2013

The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock, subject to limited management discretion. An analyst’s target price is an assessment of the current intrinsic fair value of the stock based on an appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated

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STOCKS

A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex-Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed

at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap.

SECTORS

A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as

'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned.

Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013

STOCKS

Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A

'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies.

SECTORS

A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.

Target Price

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