Buy TCS, target Rs 1248: IDBI Capital

Investment highlights ! Building global competency TCS is India’s largest IT company, with global ambitions to be among the top 10 global IT players by 2010. The company has a three-pronged strategy to achieve the same – strong delivery capability through Global Network Delivery Model (GNDM), changing business mix (full services play) and inorganic growth through strategic acquisitions. Ability to win and address large engagements The strong business model has helped the company win and address large complex global engagements. The company won 12 USD 50 million plus deals in FY07 alone, which supports the large volume player strategy of TCS. Some of the large ongoing projects include Bank of China (USD 100 million, 5-years) and Bank of Pichincha (USD 140million, 7-years). Recently, TCS won a USD 140 million deal (2 year development, 7-8 years maintenance) from BSNL, India’s largest state owned telecom service provider and a USD 35 million multi year outsourcing contract from healthcare major Roche. Increasing focus on products division Product services division – TCS Financial Solutions has shown considerable growth (>50% YoY) in the last 2-years driven by strong customer addition across geographies. Management expects a revenue contribution in high single digits within next 3-years driven by growing business traction enhanced by inorganic growth momentum. Strong demand environment with growth across geographies TCS has witnessed robust growth across geographies especially established markets (US and Europe – 46% YoY FY07) and emerging markets Middle East Asia (MEA), Latin America and Asia Pacific – 79% YoY FY07). This continued growth has been propelled by leveraging global support capability, changing business mix and acquisition leading to significant customer additions and deal wins Balance sheet analysis " Cash and cash equivalents stood at healthy Rs.8,021m which we believe could be further used for acquisitions. " TCS has consistently maintained a strong Return on Net Worth (RoNW) of greater than 50% in the last 3-years. The RoNW stood at 51% as on 30 June, 2007. Valuation TCS currently trades at 18.6x and 15.3x FY08E and FY09E earnings which is lower than its closest competitor Infosys. We expect TCS to trade at a premium to its close peers bolstered by strong revenue growth, GNDM, full services play and continued acquisitions. Furthermore, there is strong IT demand environment with IT exports expected to cross US$ 60bn by 2010 and TCS’s global ambitions, we believe a revenue growth of 25%+ is achievable on a long term basis. This is further supported by healthy pipeline, strong employee metrics, recent large deal wins and a strong domestic presence, which adds value to our recommendation. We assume 26% revenue and 21% EPS CAGR through FY10. Moreover possible inorganic growth and continued large deal wins, add to protracted revenue growth over a long period with sustainable margins. We argue that the stock should trade 20-25% higher than the current level at Rs.1,248/share within 12-months.

Buy HCL Technologies: Edelweiss Posted: 25 Sep 2007 07:57 AM GMT-06:00 How will the appreciating RS bear down on earnings? We believe that hedging has protected EPS for FY08E but FY09E is still vulnerable to the appreciating RS. Our FY09E EPS assumes a base-case RS-USD equation of 40.5. We have laid out the scenario table outlining our estimated impact on FY09 EPS for various RS-USD exchange rates. We can see that if the RS were to strengthen to 39.0 vis-àvis the USD, the downside to our FY09E EPS estimates from the base case is the range of 8%. This does not include hedging income which we cannot forecast and therefore an upside risk is inherently present. In such an appreciating RS environment there will likely be an accompanying de-rating of our FY09E target P-E by at about 3-4%. So taken together, there could be a downside of about 11-12% to our appraised return of near-30% over a 12-month horizon on account of the appreciating RS. In other words, a 12 month price target of RS 350-355 stands reduced to about RS 315-320. We must be cognizant of the risk to earnings and our target price of an appreciable strengthening of the RS. This should a constant watch point for the investor. HCLT has strengthen its execution capability by aggressively recruiting quality middle-tosenior management talent One of the company’s success factors in the recent past has been its improved execution and a good reason for that has been its ability to aggressively hire senior managers from firms such as TCS, Satyam and Infosys (Indian peers) and IBM among the global names. This has helped HCLT close the gap between peers with respect to the enterprise application portfolio. HCLT unveils its progress on its innovation initiatives but it is premature to predict success yet. HCLT has focused its mindshare in the last couple of years to move towards a business model driven by IP. It has commercial offerings to address areas such as SOA, MDM, WIMAX etc. These emerging services have not yet turned mainstream but the company is betting on their taking off in the near future. We believe that while such initiatives serve to differentiate HCLT from the Indian IT pack, it is far too early to declare success here. To impact a company of HCLT’s size positively in a meaningful manner, we believe that we will have to wait till FY10E. What’s noteworthy is that clients have already been signed up for HCLT’s proprietary offering in SOA (called Penstock) and this quickens the pace with which HCLT signs up transformation deals. HCLT is striving to bring differentiation to its pricing model to delink revenues and manpower As part of its efforts to drive an increasing proportion of incremental revenues from outputbased measures as opposed to input-based measures, the company has begun to deploy several pricing models such as risk-reward, outcome-based pricing, gain sharing mechanisms etc. We believe that these still largely remain in the paradigm phase and HCLT’s largest peers such as Infosys and TCS are also articulating such possibilities equally seriously. HCLT is winning its fair share of large deals on the back of its three-pronged business model The company is increasingly on the final stage shortlist in deals that other Indian vendors do not make it to. In those instances it faces Indian vendor competition at the final stage; the most common player it runs into is TCS. We believe that this is due to the fact that apart from HCLT, the only other Indian vendor with comparable maturity on the Infrastructure Management Space (specifically, remote infrastructure management) and bundling it with application management/optimization is TCS. This strength enables HCLT to win a good proportion of multi-service client deals and the frequency of such client wins is on the rise. Is HCLT diversifying its growth sufficiently and quickly enough? Yes, we believe so. Growth is deriving from investments already made in emerging sub-verticals such as media & entertainment, Consumer Products Group, life sciences and healthcare and telecoms. The company has been following a micro-vertical strategy identifying pockets where it should dominate versus those pockets where it should differentiate. Many of these sub-verticals will grow at least 50% in FY08 over FY07 in USD (admittedly over a smaller base). In addition, there is low-hanging fruit to be profitably captured in these less penetrated verticals being in the initial stages of the adoption curve. In our view, HCLT’s broad-based multi-service existing model with its top 30 clients (most of them USD 10 mn plus clients) gives the company further flexibility in managing its order books and ensuring that its q-o-q revenue momentum can absorb the impact of incremental investments. Our outlook on valuations From the chart below, we see that excluding that quick aberration in May 2006, HCLT’s valuations are reaching near 2 year-lows. HCLT has lost much of the P-E gains that it has accomplished over the past 20-24 months. We believe that stock prices will continue to be volatile in the short-term. Observers are trying to assess the multiplier impacts of developments in the US. We believe that HCLT’s valuations have become fairly reasonable for investors at this point in time within the Re contained within 39.5 to the USD. It currently trades at 14.5x FY08E and 11.3x FY09E, and we maintain our ‘BUY’ rating on the stock.

Buy Indoco Remedies, target Rs 350: Almondz Posted: 25 Sep 2007 07:55 AM GMT-06:00 Investment Rationale * Indoco has reorganized its business in order to add strength by bringing all the manufacturing units of the group under its fold. * During the first nine months ending March 2007, Indoco’s net sales were up 38% and the net profits increased by 28%. * Indoco’s top 10 products are ranked within the first five in the segment. * Indoco’s research team is working on 9 molecules mainly in the ophthalmic segment. * Indoco’s facility for manufacturing sterile eye drops is US FDA approved and is in a segment that has 5-6 players in the world. • The company has its manufacturing facilities approved by USFDA, UKMHRA, GMP, etc... * Indoco has received the ANDA approval for Ciprofloxacin, used in sterile eye drops. * The company has growth plans in the semi regulated markets and has filed dossiers in CIS, South Africa, Australia and New Zealand. * IMS ORG ranks Indoco 21st in the Prescription Audit and 33rd in the Retail Audit for July 2007. Financials and Valuation Indoco is currently trading at 7.1x FY07E and 5.6x FY08E EPS of Rs. 35.4 and Rs. 45.1 respectively. Given the reorganization of business, the growth in both domestic business and exports, the rankings of the company’s products and the business strategy for growth, we estimate the revenues to grow at 33% CAGR from FY06-08E. We initiate our coverage with a ‘BUY’ rating with a 12 month target of Rs. 350.