MOSL-IT (Init Cov) - 2006 PDF

August 2006
Information Technology
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IS ALSO
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Sandeep R Shah (SRShah@MotilalOswal.com); Tel: +91 22 3982 5405
Diviya Nagarajan (DNagarajan@MotilalOswal.com)
Contents
Page No.
Demand for IT services continues to be robust ............................................... 4
Higher offshoring – India to continue its leadership ........................................ 4
Benefits will percolate to smaller, niche players .............................................. 6
We identify some potential winners .................................................................. 7
Concerns .......................................................................................................... 13
Companies ................................................................................................ 17-102
Infotech Enterprises ...................................................... 17-26
KPIT Cummins .............................................................. 27-39
MegaSoft ....................................................................... 40-50
Subex Azure ................................................................... 51-63
Geometric Software ....................................................... 65-77
Hexaware Technologies ................................................ 78-86
i-flex solutions ................................................................ 87-93
MphasiS-BFL .............................................................. 94-102
1 August 2006 2
Detailed Report
SECTOR: INFORMATION TECHNOLOGY
BSE Sensex: 10,752 S&P CNX: 3,148 1 August 2006
COMPANY NAME PG. The demand for offshore IT services remains robust. Large companies like Infosys, Satyam
Initiating Coverage
and Cognizant have guided sales growth of over 25% during FY07, despite a high base.
Infotech Enterprises 17 We believe that the benefits of the robust demand scenario would also percolate to smaller
(Buy, Rs187) players, especially those that have created strong niches for themselves. We have identified
KPIT Cummins 27 eight mid-cap IT companies in India that we believe could be potential winners.
(Buy, Rs390)
Demand for IT services continues to be robust: International Data Corporation (IDC)
Megasoft 40
(Buy, Rs135) projects that worldwide IT (including hardware, software and services) and related business
service spends would grow by 7.2% CAGR from US$1,384b in CY04 to US$1,964 in
Subex Azure 51
CY09. Given the significant cost advantage, offshoring of IT and related services would
(Buy, Rs402)
continue to rise and India would be a key beneficiary.
Existing Coverage
Geometric Software 65 Benefits will percolate to smaller, niche players: The rising trend towards a larger
(Buy, Rs82) number of smaller single function contracts and increasing use of multiple vendors is
Hexaware Technologies 78
creating opportunities for a wider range of service providers. We believe that the benefits
(Buy, Rs141) of the robust demand scenario would not be restricted to the large, established players.
India’s mid-cap IT companies that have created strong niches would also benefit.
i-flex solutions 87
(Buy, Rs1,291)
We identify some potential winners: We have identified eight mid-cap IT companies
MphasiS-BFL 94
that could be potential winners. (See table below for details). All of these are specialists
(Buy, Rs158)
with considerable strengths in their chosen niches; have a strong client base; and are
arranged alphabetically
profit-making. Our top picks are i-flex solutions and Subex Systems in the products segment
and Geometric Software and Infotech Enterprises in the services segment.
COMPARATIVE VALUATION (FY08 /CY07)
COMPANY RECO CMP TARGET MARKET CAP EPS P/E EV/ EV/ ROE ROCE
(RS) (RS) (RS B) ($ M) (RS) (X) EBITDA (X) SALES (X) (%) (%)
Products
i-flex Buy 1,291 1,440 98.7 2,117 56.3 22.9 15.5 3.4 23.9 29.3
Subex Buy 402 635 13.9 298 43.9 9.2 6.2 2.2 15.6 15.7
Megasoft Buy 135 200 4.2 89 14.7 9.2 7 1.8 32.1 31.6
Services
Geometric Buy 82 145 5 106 9.9 8.3 4.5 1 24.6 23.5
Infotech Buy 187 250 8.5 183 17.8 10.5 6.4 1.2 25.8 23.1
KPIT Cummins Buy 390 530 5.8 124 40.1 9.7 6.5 1 26.8 20.9
Hexaware Buy 141 180 18.3 393 12.1 11.6 8 1.2 19.5 21.5
Mphasis* Buy 158 200 25.5 547 11.3 14 9.4 1.7 24.8 28.2
arranged in order of preference Source: Motilal Oswal Securities
* EPS is after considering EDS (I) merger, resulting equity dilution and upside from/through EDS Global.
1 August 2006 3
Demand for IT services continues to be robust

Our interactions with the tier-I IT companies indicate that the demand outlook for offshore
IT services is robust. Companies like Infosys, Satyam and Cognizant have guided strong
sales growth of over 25% during FY07, despite a high base. Their recruitment plans for
the year also reflect the robust demand outlook.
GUIDANCE BY TIER-I COMPANIES INDICATES ROBUST DEMAND OUTLOOK
COMPANY FY07 SALES GROWTH RECRUITMENT * GROWTH OVER FY06
GUIDANCE (%) PLANS – GROSS EMPLOYEE BASE (%)
Infosys 35-36 25,000 ~ 31-32

Satyam 25-27 10,000-12,000 ~ 25-26
TCS NA 30,500 ~ 34-35
Cognizant 47 ~10,700 (Net) ~ 44
* Reflects assumed net addition (from guided gross addition) over FY06 employees
Source: Company/Motilal Oswal Securities
International Data Corporation (IDC) has projected that worldwide IT (including hardware,
software and services) and related business service spends would grow by 7.2% CAGR
from US$1,384b in CY04 to US$1,964 in CY09. The following table shows the category-
wise break-up of growth expected in worldwide IT spends.
ESTIMATED TREND IN WORLDWIDE IT SPENDS (US$B)
2004 2005 2006E 2007E 2008E 2009E CAGR (%)
2004-2009E
Services Total 800.6 863.2 935.6 1,013.2 1,099.5 1,197.8 8.4

IT Services 418.1 440.7 466.9 495.3 525.5 556.6 5.9
Product Engg 22.1 27.3 32.8 38.8 45.4 53.0 19.1
ITES/BPO 360.4 395.2 435.9 479.1 528.6 588.2 10.3
Software Total 193.2 205.7 219.8 234.8 250.2 266.0 6.6
Hardware Total 390.4 410.4 430.5 448.8 472.6 499.8 5.1
Worldwide Aggregate 1,384.2 1,479.3 1,585.9 1,696.8 1,822.3 1,963.6 7.2
Source: IDC
IT services are projected to grow at 5.9% CAGR over CY04-09, including spending on
product engineering. IT spending for services excluding ITES/BPO is expected to grow
by 6.7% CAGR over CY04-09.
Higher offshoring – India to continue its leadership

On the back of cost advantage, IDC forecasts that offshore adoption will continue to rise.
According to the Nasscom–McKinsey report 2005, less than 10% of the potential US$300b
addressable offshore market has been captured so far. This is true even in industries like
retail banking and insurance that have led the offshoring wave. Of this 10%, India contributes
US$17b. The rest is shared by Philippines, China, Russia, Eastern Europe, Ireland and
Mexico. India has successfully leveraged its fundamental advantages of abundant talent,
quality focus and low cost, coupled with an enabling business environment to attain the
leadership position in this space.
1 August 2006 4
India’s share of the overall penetrated offshore IT market was 58% in FY05. Over FY01-
05, India’s share in global sourcing has increased from 62% to 65% for IT services and
from 39% to 46% for ITES-BPO. According to the AT Kearney Global Services Location
Index 2005 study, India ranks highest in a detailed analysis comparing 40 sourcing
destinations across the world. Considering the potential size of the untapped market, we
believe that there is huge scope for Indian IT players to grow. India is well positioned to
extend its leadership in the global IT-ITES industry, given its depth of service offerings and
demonstrated process excellence at continued cost advantage.
INDIAN IT INDUSTRY: HUGE GROWTH OPPORTUNITY
Addressable markets of at least

US$300b
Global offshore IT industry, FY05 Global BPO industry, FY05

US$ Billion US$ Billion
Key drivers
Offshoring of
150-180 120-150
- large 'white spaces'
in major industries
- More complex and
9x 12x
high risk services
- Fragmented and
high - interaction
process thanks to
advances in telecom
and workflow 18.4 11.4
management Others 6.4 Others 6.2
technologies India 12.0 India 5.2
Current Addressable Current Addressable
Size Market Size Market
Others include Phillipines, China, Russia, Eastern Europe, Ireland and Mexico Source: N asscom
McKinsey
Also, TPI (a sourcing advisory company) estimates that nearly US$100b in total contract
value in IT services is due to come up for renewal over CY06-07. TPI reveals that 325
deals are due for renewal during CY06 and CY07, representing over 1/5th of active
contracts. It observes a trend towards a larger number of smaller deals – 293 deals were
signed in CY05, of which 70% were small to medium sized contracts (US$50-200m), up
from 65% in CY04 and 61% in CY03. In CY05, Indian IT service providers were invited
to pitch for 30% of the contracts and they won 70% of these. The trend towards a larger
number of smaller contracts represents an opportunity for smaller, niche players.
1 August 2006 5
Benefits will percolate to smaller, niche players

According to TPI, the trend towards a larger number of smaller single function contracts
and increasing use of multiple vendors is creating opportunities for a wider range of service
providers. We believe that this trend will benefit India’s mid-cap IT companies that have
created strong niches for themselves. Our belief is further strengthened by the five wining
approaches recommended by Nasscom for aspiring industry leaders:
Global champions: These players are characterized by full service portfolios, driving
multi-line service growth and integrated offerings to large global accounts across multiple
verticals. (E.g. Infosys, TCS, Wipro, Satyam and other mid-tier-I IT companies).
Focused vertical and IT application specialists: Focused players capturing top-5 global
revenue share in 1-2 select verticals by providing IP-led/niche multi-client solutions/services.
They also include focused IT led providers capturing top-5 global revenues from 2-3 major
software/enterprise applications by providing package implementation and related application
management services. (Potential candidates: KPIT Cummins, Hexaware, MphasiS-BFL,
i-flex, Subex, Megasoft).
ADM factories: These are low-cost ADM providers with lean, large-scale operations.
BPO specialists: These include players focused on global platforms or process re-
engineering BPO.
Niche specialists: These include players in focused market service lines, with large
certified specialist talent pools. (Potential candidates: Geometric Software, Infotech).
So far, tier-I Indian vendors have been the primary beneficiaries of the growing global
demand for IT services. We believe that the benefits would now percolate to smaller,
niche players as well. Brand India has become synonymous with world class IT-ITES and
overseas clients are becoming increasingly comfortable dealing with smaller players in
India. There are several instances where smaller, niche players are actually preferred by
clients. For instance, there are numerous overseas clients that are not large enough to
interest the tier-I IT service providers in India. Also, clients that require specialized skills
that are better sourced from niche specialists prefer to work with smaller vendors.
To compete effectively, however, smaller players need to sharpen their focus on identifying
and building strengths in defensible niche areas. According to Nasscom, successful niche
player strategies may be strengthened through strategic acquisitions and alliances in the
chosen niche areas (may be specific verticals/technologies/products or components/
customer segments). Quality of the front-end team would be an essential lever, as unlike
the tier-I companies, smaller players may not have the benefits of an established brand.
1 August 2006 6
We identify some potential winners

We have identified eight mid-cap IT companies that we believe could be potential winners.
Four of these – Geometric Software, i-flex solutions, Hexaware and MphasiS-BFL – are
companies on which we have existing coverage. We are initiating coverage on the other
four – Subex Systems, Megasoft, Infotech Enterprises, and KPIT Cummins – in this
report. Also, while three of these companies – i-flex solutions, Subex Systems and Megasoft
– can largely be classified as product companies, five – Geometric Software, Infotech
Enterprises, KPIT Cummins, Hexaware and MphasiS-BFL – are IT services companies.
All our chosen companies satisfy the following criteria:

1. Specialists with considerable strengths in defensible niches: All the eight mid-
cap companies that we have covered in this report are specialists with considerable
strengths in their chosen niches. Geometric Software, for instance, is the only Indian
IT company specializing in the fast growing product lifecycle management (PLM)
market. i-flex has developed competencies in the banking, financial services and
insurance (BFSI) domain.
2. Strong base of loyal, marquee clients: All the eight companies boast of key marquee
clients, who have been on their client lists for at least three years. In some cases –
Infotech Enterprises for instance, key clients have even gone to the extent of making
strategic equity investments. Most of our chosen companies have already instituted
effective client mining strategies to make the most of their client relationships.
3. Good management/alliances: We have interacted with the top managements of

each of the eight companies covered in this report over a prolonged period. We are
convinced about the quality of the management of every one of them. Besides, a
number of these companies have the added advantage of strategic partners. Cummins’
equity holding in KPIT Cummins, for instance, gives the company a strong reference
base besides the business preference by Cummins group companies.
4. Presence in high growth markets: The addressable markets of all the companies
covered in this report offer high growth potential.
5. Respectable financial track record: All the eight companies that we have chosen
are profit-making. The smallest one (in terms of annual revenues), Megasoft, posted
revenues of over Rs1b and post-tax profit of Rs201m in FY06. All of them, barring
Megasoft, have grown their revenues at least at 30% CAGR over the last three years
and have made profits consistently during the last three years.
1 August 2006 7
THE CHOSEN EIGHT: WHY THEY COULD BE POTENTIAL WINNERS

COMPANY NICHE / CUSTOMERS MANAGEMENT / MACRO LEVEL LAST 3 YRS
SPECIALIZATION STRATEGIC INVESTOR GROWTH REV. CAGR (%)
/ALLIANCE PARTNERS
Geometric PLM (93%), Volvo, Ford, Daimler Godrej & Boyce holds PLM spend expected to 38.5
Software EDS (7%) Chrysler, GM, Honda 19.9%, Manu Parpia grow at a CAGR of 7.8%
through Partners (MD) -10%, Patnerships over 2005-2010
with IBM, HP
Hexaware ERP - Peoplesoft, Deutsche Leasing,Exult, General Atlantic has Nasscom expects global 39.8
Technologies HR IT services; Citibank, Lufthansa, invested Rs3b through ERP sales to grow at 8.5%
Europe focus Virgin, Air Canada preferential allotment CAGR over CY04-CY08;
of 15% equity stake IT investment in the airlines
(post conversion) industry increased to 4.6%
of revenue in 2005, up from
4.1% in 2004
i-flex solutions Product IPRs for core Citigroup Oracle now owns Estimated market of US$80b 32.3
banking solutions 50.7% stake; is also for banking applications
(FLEXCUBE), reseller for Reveleus worldwide, 80% still using
BI (Reveleus) legacy in-house systems
Infotech GIS (41%) GIS: TeleAtlas, BT, US Pratt & Whitney GIS market to grow at a 31.0
Enterprises EMI (59%) state governments, holds 8%, CAGR of 6.4% over
Swisscom TeleAtlas - 3% 2003-10 to US$8.3b by 2010,
EMI: Pratt & Whitney, Nasscom expects Engineering
Boeing, Hamilton and R&D segment to grow
Bombardier, Alstom at 29% CAGR over 2003-10
KPIT Cummins Manufacturing (77%), Cummins,Unilever,Hitachi Cummins Worldwide Group Global market for Non 61.0
Advanced -Renesas, BNP Paribas, holds 13.9%, Lehman Entertainment Auto
Technology (20%) Business Objects, HP Brothers Group - 7.9% Electronics was US$26.9b
in 2002 and expected to
grow to $35.4b in 2007,
Electrical and Electronic
content in Vehicle to increase
to 40% in 2010 from 25%.
Megasoft IPR for Wireless OSS, BTC Bulgaria, BPL Megasoft’s Telecom Market for INfinet,InstaRoam Total revenue
IPR for Life Sciences Mobile India, Hutchi- practice XIUS is a HP around US$15b, market for CAGR 20.3%,
market (Clinical Trial) son, TM Cel, Aircel, certified partner, XIUS MVNO to reach US$10.7b Product
Mobitel, Xero Mobile, awarded technology by 2010, annual spend revenue
PPD Corp partner of the year for on clinical trials is around of Rs396m
2003 by HP US$5b (10-15% penetrated in CY05.
by software)
Mphasis BFL BFSI (58%), JP Morgan Chase, EDS holds 52%, with Estimated market of US$80b 29.9
Technology (25%) Charles Schwab, EDS' low presence in for banking applications
Fedex, HP, Samsung, India before acquisition, worldwide, 80% still using
Philips potential for offshoring legacy in house systems
to Mphasis is very high
Subex Systems Product IPR for Vodafone, Hutch, Bharti, New Venture Partners, Addressable market likely Total revenue
Telecom Service AT&T, Cable & Wireles, Doughty Hanson Tech. to grow from US$250m CAGR 37.4%,
providers in the BT, O2, T-Mobile, AT&T Ventures, Intel Capital to US$400m in the next 2-3 Product
revenue maximisation together hold 34.5% years revenue CAGR
of 66.1%
Source: Company/ Motilal Oswal Securities
1 August 2006 8
6. Ability/willingness to grow inorganically: To maintain their competitive advantage

and grow within their chosen niches, we believe mid-cap IT companies should have
the ability and willingness to grow inorganically. Most of our chosen companies have
used acquisitions/planning to make acquisition as a route to acquire competencies,
clients, market presence and critical size. We list below the recent/planned acquisitions
by our chosen companies.
RECENT/PLANNED ACQUISITIONS
COMPANY RECENT ACQUISITIONS/ BENEFITS/PURPOSE OF ACQUISITIONS
ACQUISITIONS PLANNED
Geometric Plans to acquire an engineering Impetus to engineering design services

Software services company with an estim- business
ated size of US$30-35m
Hexaware Plans acquisitions in ERP services Deeper domain expertise in the package
Technologies with target size of US$10-15m implementation space
Infotech Plans acquisitions in engineering Strengthen presence in Engineering services
Enterprises services domain, help achieve critical mass
KPIT Pivolis, SolvCentral and CG Smith Pivolis to strengthen presence in France,
Cummins SolvCentral to add Business Intelligence
capabilities, CGS to fortify ATS offerings
Megasoft Beam AG; plans acquisition in US Beam to enable deeper penetration into
in the telecom space, with target Germany and other European markets
size of US$10-15m
Subex Alcatel, Lightbridge, Azure Azure to ensure leadership in the FMS space,
Systems offer cross selling opportunities, Alcatel and
Lightbridge acquisition enabled entry into US
and Europe
7. Margin levers to protect against wage inflation: We believe that getting required
manpower – especially lateral employees – will be a challenge for mid-cap IT companies
in the near future. However, most of the companies we have selected have various
margin levers to fight margin pressures resulting from wage inflation.
Product companies: We believe that product companies – Subex Systems, Megasoft, i-

flex solutions and, to some extent, Geometric Software – will not be affected greatly by
the pressure on margins resulting from wage inflation. This is because we expect strong
growth in their high margin product business. As the contribution of their product business
rises, so would their overall margins, compensating for the pressure due to wage inflation.
1 August 2006 9
PRODUCT COMPANIES: RISING PRODUCT CONTRIBUTION TO HELP PROTECT OVERALL MARGINS
COMPANY PRODUCT REVENUE PRODUCT PRODUCT
CAGR (%) CONTRIBUTION (%) MARGINS (%)
(FY06-08) FY06 FY08 FY06
Subex Systems 97.8 64.3 84.6 42.7

Megasoft * 77.0 34.3 56.7 38.9
i-flex solutions 35.6 51.0 53.9 33.2
Geometric Software * 53.3 15.5 17.9 49.3
* Margins refer to PBIT margins, for the rest to EBITDA margins
Services companies: We believe that Hexaware, Infotech Enterprises, KPIT Cummins,

Mphasis BFL and Geometric Software will find it difficult to hire lateral employees in the
short term. However, our interactions with most of these companies indicate that the
composition of employees with more than three years’ experience is higher than 60%.
These companies are also looking at increasing the composition of freshers. We believe
that getting fresher employees will also be difficult in the short term. However, most of
these companies have various margin levers to fight the impending pressure on margins.
These include increasing offshore revenue contribution, savings in SG&A expenses, higher
billing rates from existing clients as well as from high value add services, improvement in
utilization rates, etc. Though attrition rates are high for some of these companies, the
attrition rates are lower than the company average for employees with more than three
years’ experience.
SERVICES COMPANIES ALSO HAVE MARGIN LEVERS
COMPANY EMPLOYEE ATTRITION MARGIN LEVERS
BASE RATE (%)
Hexaware 4,730 14 Offshore revenue composition,SG&A,billing rates

Infotech Enter. 3,954 14 Billing rate hikes within top clients,utilization rates
i-flex* 3,533 17* Employee pyramid, utilization rates, SG&A
expenses, robust growth in high margin products
Mphasis BFL* 3,670 18* Offshore utilization rates, SG&A expenses,
robust volume growth through EDS
Geometric 1,524 18-20 SG&A expense, robust growth in high margin
products
KPIT 2,544 +20 Growth in value added services, offshore
composition, employee pyramid, SG&A expenses
* Employee base and attrition rates for IT services Source: Company/ Motilal Oswal Securities
8. Valuations attractive – significant upside potential: Our chosen mid-cap IT

companies (excluding i-flex), which are expected to register higher growth in future,
are trading 40-45% discount to large cap companies. While we expect the discount to
continue, current valuations do not fully discount the visible earnings growth resulting
from their efforts to strengthen current offerings/client base or upside potential from
changing management profile.
1 August 2006 10
DESPITE HIGHER GROWTH POTENTIAL, MID-CAPS TRADE AT A STEEP DISCOUNT TO LARGE-CAPS
COMPANY REVENUE CAGR (%) EPS CAGR (%) PEG
(FY06-08) (FY06-08) (X)
Large-caps
Infosys Technologies 34.5 32.4 1.1
Satyam Computer Services 32.2 26.1 0.9
TCS 29.5 26.5 1.2
Wipro 30.8 27.1 1.3
Total 1.1
Mid-caps
Geometric Software 42.6 57.5 0.4
Hexaware Technologies 28.9 29.3 0.7
i-flex solutions 32.0 39.9 1.1
Infotech Enterprises 33.9 32.3 0.6
KPIT Cummins 33.2 33.9 0.5
Megasoft 37.6 36.4 0.5
Mphasis-BFL* 45.3 10.0 1.0
Subex Systems 72.4 58.8 0.4
Total 0.7
Total without i-flex 0.5
* After considering EDS (I) merger and upside from EDS Source: Company/Motilal Oswal Securities
P/E BAND: CHOSEN-8 V/S LARGE-CAPS
Large-Caps Chosen-8
26
23
20
17
14
Jul-03
Jul-04
Jul-05
Jul-06
Jan-04
Jan-05
Jan-06
Oct-03
Oct-04
Oct-05
Apr-03
Apr-04
Apr-05
Apr-06
P/E BAND: CHOSEN-8 (EXCLUDING I-FLEX) V/S LARGE-CAPS
Large-Caps Chosen-8 excl i-flex

26
22
18
14
10
Jul-03
Oct-03
Jan-04
Jul-04
Oct-04
Jan-05
Jul-05
Oct-05
Jan-06
Jul-06
Apr-03
Apr-04
Apr-05
Apr-06
1 August 2006 11
CHOSEN-8: TREND IN SALES AND NET PROFIT (RS M)
FY03 FY04 FY05 FY06 CAGR (FY03-FY06)
SALES NET PROFIT SALES NET PROFIT SALES NET PROFIT SALES NET PROFIT SALES PAT
Geometric Software 841 171 1,060 208 1,682 275 2,234 226 38.5 9.8
Hexaware Technologies 2,486 459 3,390 240 5,459 637 6,787 915 39.8 25.9
i-flex solutions 6,409 1,771 8,054 1,704 11,404 2,031 14,835 2,190 32.3 7.3
Infotech Enterprises 1,613 149 1,875 90 2,571 274 3,625 463 31.0 45.9
KPIT Cummins 763 57 1,270 145 2,525 281 3,182 325 61.0 78.2
Megasoft* 399 -8 797 19 849 -64 1,154 201 42.5 229.5
Mphasis BFL 4,293 669 5,806 986 7,656 1,244 9,401 1,499 29.9 30.8
Subex Systems 700 100 879 178 1,166 257 1,814 379 37.4 55.9
* PAT CAGR from FY04-FY06 Source: Company/ Motilal Oswal Securities
Considering the niche offerings/business models of our chosen-8, coupled with the various
margin levers that they have, we expect consistent earnings visibility in the long term.
However, we believe that the market is not fully discounting the upside. Our chosen
companies (except i-flex solutions and Mphasis) are trading at 8-12x FY08E earnings,
with an attractive PEG of 0.5.
i-flex and Subex are our top picks in the products segment
i-flex solutions: i-flex occupies a unique position in the Indian IT services segment,
with its strong suite of leading core banking and business intelligence solutions in the
financial services domain. We believe that the recent change in its parentage (Oracle)
would help buoy growth in both its products and services business beyond FY08.
Given the increased revenue/earnings visibility, we believe that i-flex provides relatively
better risk-reward ratio going forward. We also believe that current valuations do not
fully capture the improving traction of i-flex with tier-I banks in the developed countries
which could provide significant positive surprises in future.
Subex Systems: Post its acquisition of UK-based Azure Solutions, Subex Systems
has become the leader in the global Telecom OSS - Revenue Maximization (RM)
market. We expect FY08 to be the watershed year for Subex, with full benefits of the
acquisition beginning to reflect in its consolidated financials. The global Telecom OSS
(operating support system) - RM market offers huge growth opportunity and we estimate
that Subex's post-tax profits would register 100% CAGR over FY06-08. At 9.2x FY08E
earnings, we believe that current valuations do not adequately reflect the company's
growth potential.
Geometric and Infotech are our top picks in the services segment:
Geometric Software: Geometric Software is amongst the very few IT services
companies in India, focusing on the product lifecycle management (PLM) segment. It
has a presence across the PLM value chain - R&D services for PLM product
developers, implementation and other PLM-related services, and PLM-related IP
development. We believe that it would be a major beneficiary of the robust growth in
PLM investment, globally. Valuations at 8.3x FY08E earnings do not adequately factor
in the possible upside, in our opinion.
1 August 2006 12
Infotech Enterprises: Infotech Enterprises is one of the few Indian IT services

companies, which has focused offerings in geospatial services (GS) and engineering
design services (EDS). While its marquee client relationships offer significant mining
potential, its recent multi-million multi-year deal wins have considerably improved
revenue visibility. Infotech is one of the very few Indian IT services providers to have
received rate hikes from existing clients in FY07. This would help counter the pressure
on margins due to salary hikes. Given Infotech's niche services in fast growing markets
with marquee clients, we expect high revenue/earnings visibility in future.
COMPARATIVE VALUATION (FY08 /CY07)
COMPANY RECO CMP TARGET MARKET CAP EPS P/E EV/ EV/ ROE ROCE
(RS) (RS) (RS B) ($ M) (RS) (X) EBITDA (X) SALES (X) (%) (%)
Products
i-flex Buy 1,291 1,440 98.7 2,117 56.3 22.9 15.5 3.4 23.9 29.3
Subex Buy 402 635 13.9 298 43.9 9.2 6.2 2.2 15.6 15.7
Megasoft Buy 135 200 4.2 89 14.7 9.2 7 1.8 32.1 31.6
Services
Geometric Buy 82 145 5 106 9.9 8.3 4.5 1 24.6 23.5
Infotech Buy 187 250 8.5 183 17.8 10.5 6.4 1.2 25.8 23.1
KPIT Cummins Buy 390 530 5.8 124 40.1 9.7 6.5 1 26.8 20.9
Hexaware Buy 141 180 18.3 393 12.1 11.6 8 1.2 19.5 21.5
Mphasis* Buy 158 200 25.5 547 11.3 14 9.4 1.7 24.8 28.2
arranged in order of preference Source: Motilal Oswal Securities
* EPS is after considering EDS (I) merger, resulting equity dilution and upside from/through EDS Global.
Concerns
Supply side issues – a short-term challenge
According to Nasscom-McKinsey projections, India will need an additional 500,000
professionals just to maintain its share of global offshore IT-ITES. India’s share of the
penetrated global offshore IT market in FY05 was 58%. The turnout of engineers in FY06
is estimated at 441,000 including 222,000 degree-holders and 219,000 diploma-holders.
The Nasscom-McKinsey report highlights that the Indian IT industry is targeting US$60b
in exports by FY10, which translates into an estimated demand for 850,000 IT professionals
and 1.45m ITES professionals by FY10, up from the current employment of 350,000 each
for IT and ITES segments.
Further, Nasscom states that if the current trends in graduate turnout and employment are
maintained, India will be well positioned to meet the demand for IT professionals. This
also assumes that India would continue to increase output in higher education at the current
rate of 6.5% p.a. and the suitability of engineers for IT jobs would remain at 25%, and
80% of the engineers would be willing to work in IT jobs. In the following table, we have
tried to confirm whether at the above mentioned assumptions, the IT services segment
will have any difficulty to get/source fresh engineers.
1 August 2006 13
ESTIMATED FRESH ENGINEER GRADUATE AVAILABILITY FOR IT SECTOR ('000)
ANNUAL TURNOUT SUITABILITY WILLINGNESS TO JOIN EMPLOYMENT
OF ENGINEERS @25% @ 80% = SUPPLY POSSIBLE
FY05E 365 350

FY06E 441 110 88 438
FY07E 470 117 94 532
FY08E 500 125 100 632
FY09E 533 133 107 739
FY10E 567 142 113 852
CAGR (%) 9.2 6.5 6.5 19.5
The above table shows that the IT sector would employ 852,000 engineers by FY10,
which is slightly more than what is projected by Nasscom-McKinsey (850,000 engineers
required by FY10 to meet the export target of US$60b).
A closer look reveals the following:

IT services exports are expected to register 23.9% CAGR over FY05-10, while ITES-
BPO services are expected to increase at a CAGR of 36.9%. The CAGR of 19.5% in
demand for IT services employees to meet the target of US$35b in IT services exports by
FY10, therefore, assumes some billing rate increase during the period.
We believe that the expected growth of 19.5% in the supply of engineers will be sufficient
to meet fresher recruitment; however, demand for lateral employees could be a challenge
for most companies.
We also believe that shortage of manpower could be higher in the initial years considering
expected volume growth of 30-35% in FY06-08. Our belief is further strengthened by the
fact that Infosys and TCS are hiking the campus salaries for FY08 by 10-25%.
The annual turnout of non-engineering graduates for FY06 is expected to be 2.6m. If we

assume that 2-3% of this pool is suitable and available for IT services, then it would
account for 8% of the 850,000 requirement of employees by FY10 (this assumes no
growth in 2.6m annual turnout in FY06 over the next four years till FY10).
Our interactions with various IT companies have indicated that non-engineering graduates
can be suitable for jobs relating to testing and verification. Many tier-I IT companies are
looking at recruiting non-engineering graduates and giving them intense in-house training.
This also implies that in the long run the battle for recruiting quality engineers will not be
that intense.
Out of the expected annual turnout 441,000 engineers in FY06, 195,000 engineers are
expected to be non-IT engineers (non Computer Science, Electronics and Telecom). These
engineers are suitable for engineering jobs like CAD/CAM Design and GIS.
1 August 2006 14
Possible slowdown in US economy

The Indian IT industry largely depends on the US economy; 65-70% of revenues still
come from the US. Any sharp decline in the US economy could lead to an adverse impact
on the financial growth of most Indian IT companies. We believe that the impact on mid-
cap IT companies will be greater considering the high client concentration. However,
outperforming growth in Europe is likely to reduce the impact of any slowdown in the US
economy. Most of our chosen mid-cap IT companies’ US exposure is in line with the
large-cap companies.
GEOGRAPHICAL REVENUE DISTRIBUTION FOR OUR CHOSEN COMPANIES
COMPANY NORTH AMERICA EUROPE ROW
Geometric Software 60.0 33.0 7.0

Hexaware Technologies 69.4 26.5 4.1
i-flex solutions 44.0 25.0 31.0
Infotech Enterprises 53.0 41.8 5.2
KPIT Cummins 64.8 28.9 6.4
MegaSoft* 58.0 17.0 25.0
Mphasis BFL 65.6 23.8 10.6
Subex Systems* 40.0 57.0 3.0
*Subex and Megasoft report revenue from Europe, Middle East and Africa together
Rupee-dollar exchange rate volatility

The rupee has been volatile against the US dollar in the past few quarters. Most of the
Indian IT companies are now adequately hedged. However, a sharp rupee appreciation
against the dollar could impact the operating performance of most of the IT companies.
1 August 2006 15
Detailed Report
Companies
COMPANY NAME PG.

Infotech Enterprises 17
(Buy, Rs187)
KPIT Cummins 27
(Buy, Rs390)
Megasoft 40
(Buy, Rs135)
Subex Systems 51
(Buy, Rs402)
Initiating Coverage
1 August 2006 16
Initiating Coverage
Infotech Enterprises
BLOOMBERG
STOCK INFO.
INFTC IN
1 August 2006 Buy
BSE Sensex: 10,752
REUTERS CODE
S&P CNX: 3,148 INFE.BO Previous Recommendation: Not Rated Rs187
Y/E MARCH 2005 2006 2007E 2008E Infotech Enterprises is one of the few Indian IT services companies,
with focused offerings in geospatial services (GS) and engineering design
Sales (Rs m) 2,571 3,625 5,100 6,503
EBITDA (Rs m) 470 673 935 1,163
services (EDS). While its marquee client relationships offer significant
Adj. Net Inc. (Rs m) 274 463 673 814
mining potential, its recent multi-million multi-year deal wins have
Adj. EPS (Rs) 6.2 10.1 14.7 17.8 considerably improved revenue visibility. Infotech is one of the very few
EPS Growth (%) 201.1 63.7 45.0 20.7 Indian IT services providers to have received rate hikes from existing
BV/Share (Rs) 35.4 47.2 60.8 76.8 clients in FY07. This would help counter the pressure on margins due to
P/E (x) 30.1 18.4 12.7 10.5 salary hikes. Given the high revenue/earnings visibility and attractive
P/BV (x) 5.3 3.9 3.1 2.4 valuations, we recommend Buy.
EV/EBITDA (x) 16.6 11.8 8.4 6.4
EV/Sales (x) 3.0 2.2 1.5 1.2 Specialization in GS and EDS to ensure accelerated growth:
RoE (%) 19.1 24.9 27.2 25.8 Infotech is an end-to-end service provider in the fast growing GS and
RoCE (%) 18.8 24.3 25.3 23.1 EDS domains. Both these domains are likely to witness robust growth
over the next few years. Given its marquee client relationships, we believe
that Infotech is well positioned to exploit the opportunity. We expect the
company’s overall revenues to grow at 34% CAGR over FY06-08.
KEY FINANCIALS
Shares Outstanding (m) 45.8
Market Cap. (Rs b) 8.5 Recent multi-million multi-year contracts enhance revenue
Market Cap. (US$ b) 0.2 visibility: The company has bagged several large deals in FY06, most
Past 3 yrs. Sales Growth (%) 39.1
of which would translate into revenue inflows from 1HFY07. These
Past 3 yrs. NP Growth (%) 126.8
Dividend Payout (%) 7.4 include multi-million dollar deals with Swisscom, KPN Telecom, Alstom
Dividend Yield (%) 0.4 Transport and several state governments in the US. These deal-wins
have significantly enhanced revenue visibility for the company.
Billing rate hikes from top existing clients to protect margins:

STOCK DATA Infotech has the rare distinction of receiving rate hikes of 3-5% from
52-Week Range 232/88 two of its existing top clients effective 1HFY07. Given the high
Major Shareholders (as of March 2006) % concentration of top clients in Infotech’s revenues, the rate hikes would
Promoters 29.1
have a considerable impact on revenue growth in FY07 and would help
Domestic Institutions 16.6
FIIs/FDIs 35.1
counter the pressure on margins due to salary hikes.
Others 19.2
Valuations attractive; Buy: We expect Infotech’s revenues to grow
Average Daily Turnover
at 34% CAGR and post-tax adjusted profit to grow at 33% CAGR over
Volume ('000 shares) 130.6
Value (Rs million) 55.0
FY06-08. Valuations at 12.7x FY07E and 10.5x FY08E earnings do not
1/6/12 Month Rel. Performance (%) 15/-7/58 adequately factor the robust revenue and earnings visibility. We initiate
1/6/12 Month Abs. Performance (%) 16/2/98 coverage on the stock with a Buy recommendation. Our target price of
Rs250 (14x FY08E earnings) implies a 33% upside from current levels.
1 August 2006 17
Specialization in GS and EDS to ensure accelerated growth

Infotech is an end-to-end service provider in the fast growing geospatial services (GS)
and engineering design services (EDS) domains. Both these domains are likely to witness
robust growth globally over the next few years. The offshorability of these services is
high, and this would mean higher growth rates in outsourcing to India. Given its marquee
client relationships, we believe that Infotech is well positioned to exploit the opportunity.
We expect its overall revenues to grow at 34% CAGR over FY06-08.
Both GS and EDS markets offer high growth potential…

GS is one of the faster growing markets: Global revenues for commercial remote
sensing imagery, geographic information systems (GIS) software, data, and value-added
services were estimated at US$5.4b in CY03. Frost & Sullivan, a global market research
and consultancy firm, expects this to grow to US$8.3b in CY10, with a 5.9% revenue
growth during CY10. GIS software is estimated to make up about 39% of the total market,
which implies a target market of US$3.3b for geospatial services. At an implied CAGR of
6.4%, geospatial services are expected to be one of the fastest growing verticals over the
next 2-3 years. Industry data suggests that 90% of the GIS services can be offshored,
which opens up a big opportunity for players in this domain.
EDS sourced from India to grow at 29% CAGR over CY03-10: Engineering design
services are largely offshore centric in nature and India is a key outsourcing destination.
The total value of engineering and R&D services sourced from India is estimated to have
grown from US$1.7b in FY04 to US$2.8b in FY06, a CAGR of 28%. Nasscom estimates
indicate that this segment would grow at a 29% CAGR over CY03-10. Costs in India are
estimated to be 40-50% of those in the overseas market, as India has a large pool of
engineers in the automotive, aerospace and industrial engineering segments. We expect
this to accelerate offshoring of engineering services to India.
…and Infotech is well entrenched in both these niches

Infotech has been offering geospatial services for over 10 years and employs more than
2,100 GIS specialists. It has built technology partnerships and associations with OEMs
and industry leaders such as AutoDesk, ESRI, GE Network Solutions, GE SmallWorld,
MapInfo, Microsoft, Oracle and Plumtree. It also has considerable domain expertise in
utilities, telecommunications, government, transportation, architecture, engineering &
construction, environment & forestry, and retail. GS contributed 41% of Infotech’s topline
in 1QFY07.
TREND IN GS REVENUES
1QFY05 2QFY05 3QFY05 4QFY05 1QFY06 2QFY06 3QFY06 4QFY06 1QFY07
GS Revenue (Rs m) 242 234 277 272 382 384 423 470 484
Growth (%) 12.7 -3.2 18.4 -1.9 40.5 0.4 10.3 11.1 2.8
1 August 2006 18
The company made significant inroads to this domain through the acquisition of VARGIS.
This acquisition enhanced the annual run rate of the GS unit from US$12m in FY04 to
US$19-20m in FY05, an increase of almost 67%. The acquisition added Baltimore Gas &
Electric, Black & Veatch, Camp, Dresser & McKee, SBC Communication, Lockheed
Martin and SAIC to Infotech’s client list. It also helped mitigate the setback due to the
ramp down from the Analytical Surveys Inc (ASI) account. Further, in 1QFY06, Infotech
acquired Noida-based Tele Atlas India (TAIND), a wholly owned subsidiary of Tele Atlas
BV, Netherlands. TAIND had revenues of Rs350m in FY05 and 656 professionals (one-
third of the total employee base of Tele Atlas). The acquisition enhanced Infotech’s annual
run rate, and strengthened its dominance in the GS offshore segment.
Of the US$3.3b target market for GS, 40-50% is estimated to be in the government
domain. Currently, Infotech Enterprises services the state governments of New York
State, Texas, Michigan, and Virginia, and the UK government. The share of the government
domain in the US has grown with the acquisition of VARGIS in January 2004. The company
recently signed an agreement with the LA County, which would give it access to around
25 states in the US. We believe that Infotech Enterprises can leverage its experience in
the government domain to bag new contracts. Post the recent acquisition of TAIND, the
company’s chances of winning request for proposals (RFPs) in the government domain
are high.
GS REVENUE GROWTH AIDED BY ACQUISITIONS (RS M)
560
Jump due to
TeleAtlas agreement
420
Jump due to
280 VARGIS acquisition
140
0
Q1FY04
Q2FY04
Q3FY04
Q4FY04
Q1FY05
Q2FY05
Q3FY05
Q4FY05
Q1FY06
Q2FY06
Q3FY06
Q4FY06
Q1FY07
In the EDS segment, Indian players – especially TCS, Infosys, Satyam, and Infotech –
have been experiencing increased growth momentum over the past few quarters. Infotech
has witnessed the fastest growth, as the applicability of EDS is higher in its key domains of
aerospace, automotive, industrials, and construction.
1 August 2006 19
EDS: INFOTECH THE FASTEST GROWING PLAYER (RS M)
Infosys 288 350 413 358 373 436 481 499 543
% Change QoQ 6.8 21.4 17.9 -13.3 4.2 16.9 10.4 3.6 8.9
Satyam 337 388 381 380 401 441 519 606 689
% Change QoQ - 9.6 14.8 8.0 9.1 -1.0 6.3 3.5 3.2
Infotech 337 388 381 380 401 441 519 606 689
% Change QoQ 62.9 15.1 -1.9 -0.2 5.4 10.0 17.7 16.7 13.6
GS revenues to grow at 26.4% CAGR over FY06-08

Infotech has launched new offerings such as technical publications and geospatial systems
integration in the GS space. The new services are aimed at increasing client mining and
establishing Infotech as an end-to-end GS provider. The technical publications practice
has already been effectively sold to a few top clients and is likely to gain traction in FY07
and FY08. Given the indications of strong demand in the global markets, we expect GS
revenues to grow at a CAGR of 26.4% over the next two years. We estimate revenue at
Rs2.1b for FY07 and Rs2.6b for FY08. We expect revenue contribution from GS to
decrease from 45.8% in FY06 to 40.7% by FY08.
QUARTERLY TREND IN GS REVENUES (RS M)
CQGR of 5.9%
800
600
400
200
0
Q2FY07E
Q3FY07E
Q4FY07E
Q1FY08E
Q2FY08E
Q3FY08E
Q4FY08E
Q1FY05
Q2FY05
Q3FY05
Q4FY05
Q1FY06
Q2FY06
Q3FY06
Q4FY06
Q1FY07
EDS revenues to grow at 40% CAGR over FY06-08

Infotech has the distinction of receiving rate hikes from its top EDS clients. Higher
realizations would aid growth in EDS revenues. The full impact of the 5% hike in billing
rates offered by Bombardier in September 2005 would be visible in FY07. Additionally, the
company would also receive a rate hike of 3-5% from its top EDS client. Infotech is
negotiating such rate hikes with other top clients as well. Given the high client concentration,
the rate hikes would have a considerable impact on revenue realizations and operating
margins, especially in FY07.
1 August 2006 20
QUARTERLY TREND IN EDS REVENUES (RS M)
CQGR of 6.7% due to ramp up in

1,200 exisiting clients and client additions
900
600
300
Q2FY07E
Q3FY07E
Q4FY07E
Q1FY08E
Q2FY08E
Q3FY08E
Q4FY08E
Q1FY06
Q2FY06
Q3FY06
Q4FY06
Q1FY07
Infotech has been awarded significant contracts by Alstom Transport and Hamilton
Sundstrand. These are likely to ramp up during FY07, which would also add to the growth
momentum. We expect the company’s EDS revenues to grow at a CAGR of 40% over
the next two years. We estimate revenues at Rs3b for FY07 and Rs3.9b for FY08. We
expect revenue contribution from EDS to increase from 54.2% in FY06 to 59.3% by
FY08.
Marquee client relationships offer scope for greater account mining

Infotech’s top customers are multi-billion dollar entities with high IT budgets. The company
primarily services the automotive, aerospace, government and transportation domains, which
have high R&D and design outsourcing expenditure. Its top clients include Alstom, Boeing,
Bombardier, British Telecom, Carrier, Hamilton Sundstrand, Otis, Pratt & Whitney,
Swisscom Fixnet and TeleAtlas. Infotech is well placed to grab the bulk of the outsourcing
contracts from these players through effective client mining.
Length of relationships an effective entry barrier in GS segment

Infotech’s clients in the GS segment include TeleAtlas, British Telecom, KPN Telecom,
Bharti Airtel, and several local and state governments in the US (e.g. New York State and
LA County). Its top GS clients have been with Infotech for a minimum of three years.
TeleAtlas has been a customer for almost seven years. The length of relationships with
clients provides the single largest entry barrier in this business.
TeleAtlas continues to be top client: TeleAtlas, one of the world’s leading independent
mapping agencies, is Infotech’s top client. The transfer of what constituted one-third of
TeleAtlas’ workforce to Infotech and acquisition of 2% equity stake in Infotech indicates
the strength of the relationship. We believe that Infotech would remain a strategic partner
for TeleAtlas, with steady revenues post FY08.
1 August 2006 21
British Telecom to hold steady: The British Telecom (BT) account, which ramped
down considerably by the end of September 2005, is expected to remain flat. BT has
reduced dependence on tier-II vendors in preference to larger players such as Infosys,
and no incremental growth is expected. However, BT would continue to remain among
the top-10 clients in FY07/FY08 with a steady revenue stream.
New clients offer potential for migration into top-10 list: Some of the clients added
in FY06, such as Swisscom and LA County, have directly moved into the top client list for
the GS unit. In addition to the above, the US$50m dollar deal signed with KPN Telecom
has added it to Infotech’s list of top clients. The management expects that more multi-
million dollar deals would see further churn in the top client list in the coming quarters.
Demonstrated client mining capabilities in EDS segment

Some of Infotech’s top customers in the EDS space include Pratt & Whitney (P&W),
Bombardier, Boeing, Alstom Transport and Hamilton Sundstrand. The company has already
demonstrated its client mining capabilities with two of its key customers - P&W and
Bombardier. It has ramped up P&W to over 350 employees, while Bombardier has over
250 dedicated employees. Infotech has won contracts against leading Indian IT vendors
such as Infosys, TCS, Satyam and HCL Tech in this domain despite charging higher billing
rates in some cases.
MARQUEE CLIENTS HAVE HIGH MINING POTENTIAL
CLIENTS TOPLINE (US$B)
Alstom 1.6
Boeing 52.5
Bombardier 15.8
Carrier 10.6
Hamilton Sundstrand 3.9
Otis 9.0
Pratt & Whitney 9.3
P&W relationship effectively used to mine UTC group companies

Pratt & Whitney (P&W), the aerospace division of United Technologies Corporation
(UTC) is Infotech’s largest EDS client. It has 14.2% equity stake in Infotech through
UTC’s wholly owned subsidiary, Carrier International, Mauritius. It also has a 51%
stake in Infotech’s Puerto Rico based subsidiary, Infotech Aerospace Services Inc.
(IASI), which was set up as a near-shore development center for P&W. With more
than 9,000 customers that operate its large commercial engines in more than 180
countries, P&W reported revenues of US$9.3b in CY05.
1 August 2006 22
UTC GROUP REVENUE (US$B)
UTC 42.7
Pratt & Whitney 9.3
Carrier 12.5
Otis 9.6
Hamilton Sundstrand 4.4
Sikorsky 2.8
The UTC group has other large companies such as Sikorsky, Hamilton Sundstrand,
Otis Elevators, and Carrier, which we believe offer good client mining opportunity.
Infotech has leveraged its association with P&W to increase the share of work from
UTC group companies such as Carrier and Hamilton Sundstrand. We believe that this
opportunity, if explored further, could increase traction from the UTC group.
Bombardier – another example of Infotech’s client mining ability

Infotech Enterprises signed a 4-year, multi-million dollar deal with Bombardier Inc in
FY04 for providing engineering design services at its Hyderabad facility. This was
later extended to a deal size of around US$100m over 8 years. Following its successful
relationship with Bombardier Inc, Infotech was awarded contracts by Bombardier
China in FY06. Infotech currently operates dedicated centers for both Bombardier
Inc and Bombardier China. Infotech could leverage its present relationship to start
engagements with Bombardier subsidiaries in various geographies, which would ensure
steady revenue inflow from the Bombardier account. Infotech’s association with
Bombardier would enable it to qualify for major RFPs in the transportation segment.
Recent multi-million multi-year contracts enhance revenue visibility

The company has bagged several large deals in FY06, most of which would translate into
revenue inflows from 1HFY07. These include multi-million dollar deals with Swisscom,
KPN Telecom, Alstom Transport and several state governments in the US. These deal-
wins have significantly enhanced revenue visibility for the company. The management
claims a 70% revenue visibility over the next 12 months. This is a marked improvement
after the termination of the Analytical Surveys Inc contract in FY05, which had resulted in
uncertainty regarding revenue flows for a few quarters.
Billing rate hikes from top existing clients to protect margins

Infotech has the rare distinction of receiving rate hikes of 3-5% from two of its existing
top clients effective 1HFY07. Infotech had also received a 5% rate hike from Bombardier,
a leading railways manufacturer, in September 2005, the full impact of which would be
visible in FY07. Given the high concentration of top clients in Infotech’s revenues, the rate
hikes would have a considerable impact on revenue growth in FY07 and would help counter
the pressure on margins due to salary hikes.
1 August 2006 23
HIGH CLIENT CONCENTRATION (%)
Top 5 Client Billing 57.0 51.0 49.0 53.2 54.7 55.7 52.7 49.5 52.0
Top 10 Client Billing 67.0 61.0 61.0 64.7 64.3 64.8 65.8 63.2 66.5
Others 33.0 39.0 39.0 35.3 35.7 35.2 34.2 36.8 33.5
Performance of overseas subsidiaries improving

Infotech Enterprises has a pan-global presence through its various subsidiaries in the US,
Europe and Latin America. The US and Latin American subsidiaries have boosted growth,
while Europe is witnessing a turnaround, especially in the UK (a loss making subsidiary till
1QFY05). The company has also opened offices in Singapore and Australia in a bid to
widen its global presence.
Infotech Enterprises’ global presence through its subsidiaries in the US, UK and Germany
is consistent with its strategy of direct marketing & selling. These subsidiaries have presence
in high IT spend areas. Infotech’s business transition and the re-alignment of marketing
efforts have resulted in improved contribution from its subsidiaries. Expected improvement
in performance of some of its subsidiaries (Infotech Europe, Infotech Germany, Infotech
US) would help buoy consolidated margins.
Valuations attractive; Buy

We expect Infotech’s overall revenues to grow at 34% CAGR over FY06-08. However,
margins are likely to contract by 70bp during the period due to wage inflation. As a result,
growth in net profit would be lower at 33% CAGR.
HIGH REVENUE VISIBILITY
7,200 Revenue (Rs m) - LHS Operating Margin (%) - RHS 20
5,400 18
3,600 16
1,800 14
0 12
2004 2005 2006 2007E 2008E
1 August 2006 24
Although the stock has seen some re-rating post the announcement of large deals, current
valuations at 12.7x FY07E and 10.5x FY08E earnings do not adequately factor the robust
revenue and earnings visibility. We initiate coverage on the stock with a Buy
recommendation. Our target price of Rs250 (14x FY08E earnings) implies a 34% upside
from current levels.
PER BAND
240 16x
13x
180
10x
120
7x
60
0
Jun-03
Oct-03
Dec-03
Feb-04
Jun-04
Oct-04
Dec-04
Feb-05
Jun-05
Oct-05
Dec-05
Feb-06
Jun-06
Apr-03
Aug-03
Apr-04
Aug-04
Apr-05
Aug-05
Apr-06
Aug-06
Source: Motilal Oswal Securities
Concerns
GS billing rates are comparatively low: Billing rates in the GS market are
comparatively low, given the nature of work. Nonetheless, this gets partially
compensated by high offshore-centric nature of the business unit. Secondly, employee
costs are lower, as the company can deploy even diploma holders. Supply is not a
constraining factor, and the company is insulated from wage inflation in this division.
GS revenues are volatile: Being a project-oriented business unit, GS revenues are
volatile in nature.
Big clients, bigger fallouts: The company’s client concentration remains distorted,
with the top-5 clients and the top-10 clients contributing 52% and 67%, respectively of
the overall revenues. Earlier, the company had faced a drop in volumes due to ramp-
down by Analytical Surveys Inc. Though it has now strengthened relationships with its
clients either by offering equity stake or through long-term contracts, the exit of a big
client could adversely impact the company’s fortunes.
Wage inflation threatens to erode margins: Infotech would have higher than
industry average wage hikes (4-5% onsite and 15-18% offshore) in FY07. Onsite
salary hikes are expected to be high in FY08 (especially for EDS) to bring the salaries
at par with industry averages.
1 August 2006 25
INCOME STATEMENT (RS MILLION) RATIOS
Y/E MARCH 2004 2005 2006 2007E 2008E Y/E MARCH 2004 2005 2006 2007E 2008E
Sales 1,875 2,571 3,625 5,100 6,503 Basic (Rs

Change (%) 16.2 37.2 41.0 40.7 27.5 EPS* 2.1 6.2 10.1 14.7 17.8
Software Develop. Exp. 922 1,234 1,696 2,521 3,411 Cash EPS* 6.8 10.0 14.2 20.1 24.6
SG&A 661 867 1,256 1,644 1,929 Book Value 29.9 35.4 47.2 60.8 76.8
DPS 0.4 0.5 0.8 1.3 1.5
EBITDA 292 470 673 935 1,163 Payout %(Incl.Div.Taxes) 20.3 8.1 7.4 8.5 8.4
% of Net Sales 15.6 18.3 18.6 18.3 17.9
Depreciation 207 167 186 245 312 Valuation (x)
Interest 4 2 11 13 24 P/E 30.1 18.4 12.7 10.5
Other Income 35 39 21 82 72 Cash P/E 18.7 13.1 9.3 7.6
EV/EBITDA 16.6 11.8 8.4 6.4
PBT 116 339 498 759 899 EV/Sales 3.0 2.2 1.5 1.2
Tax 26 90 93 152 175 Price/Book Value 5.3 3.9 3.1 2.4
Rate (%) 22.5 26.6 18.8 20.1 19.5 Dividend Yield (%) 0.3 0.4 0.7 0.8
PAT 90 249 404 606 724 Profitability Ratios (%)

Share of Profit from JV (IASI) 0 25 59 66 90 RoE 7.1 19.1 24.9 27.2 25.8
Adjusted PAT 90 274 463 673 814 RoCE 6.8 18.8 24.3 25.3 23.1
Change (%) -39.6 204.1 69.2 45.3 20.9
Reported PAT 90 274 505 693 814 Turnover Ratios
Change (%) -39.6 204.1 84.5 37.2 17.4 Debtors (Days) 123.8 143.2 140.0 138.0 135.0
Fixed Asset Turnover (x) 3.7 5.5 5.4 5.6 6.9
BALANCE SHEET (RS MILLION)

Leverage Ratio (x)
Y/E MARCH 2004 2005 2006 2007E 2008E Debt/Equity Ratio(x) 0.0 0.0 0.0 0.1 0.1
Share Capital 146 147 152 229 229 * 1:2 bonus and split of Rs10 share into 2 shares of Rs5 each in FY07
Share Premium 454 463 586 586 586
Reserves 706 954 1,419 1,969 2,705
Net Worth 1,306 1,564 2,157 2,784 3,520 CASH FLOW STATEMENT (RS MILLION)
Secured Loans 6 14 14 307 292 Y/E MARCH 2004 2005 2006 2007E 2008E
Deferred Tax Liability 5 -13 -13 -14 -15 CF from Operations 304 421 612 878 1,083
Capital Employed 1,318 1,565 2,158 3,077 3,797 Cash for Working Capital -79 -121 -356 -325 -292
Net Operating CF 225 300 256 553 792
Gross Block 1,215 1,324 1,715 2,127 2,439
Less : Depreciation 704 860 1,045 1,224 1,497 Net Purchase of FA -254 -237 -300 -383 -312
Net Block 511 463 669 903 942 Net Purchase of Invest. -31 -107 104 -112 -12
CWIP 12 141 50 20 20 Net Cash from Invest. -286 -344 -196 -495 -324
Investments 20 100 183 183 183
Proceeds from Equity. 1 1 5 77 0
Curr. Assets 1,159 1,326 1,956 2,953 3,881 Proceeds from LTB/STB -1 8 0 293 -15
Debtors 636 872 1,390 1,928 2,405 Dividend Payments -20 0 -25 -39 -65
Cash & Bank Balance 375 340 380 769 1,158 Cash Flow from Fin. -20 9 -20 331 -79
Loans & Advances 126 112 181 251 313
Other Current Assets 21 2 5 5 5 Free Cash Flow -29 63 -44 170 480
Current Liab. & Prov 384 465 699 981 1,229 Net Cash Flow -80 -35 40 389 389
Current Liabilities 316 358 550 753 929
Provisions 68 108 149 228 299 Opening Cash Balance 455 375 340 379 768
Net Current Assets 775 861 1,257 1,972 2,652 Add: Net Cash -80 -35 40 389 389
Capital Employed 1,319 1,565 2,159 3,078 3,797 Closing Cash Balance 375 340 379 768 1,157
E: MOSt Estimates
1 August 2006 26
Initiating Coverage
KPIT Cummins Infosystems

BLOOMBERG
STOCK INFO.
NKIPT IN
1 August 2006 Buy
BSE Sensex: 10,752
REUTERS CODE
S&P CNX: 3,148 KPIT.BO Previous Recommendation: Not Rated Rs390
Y/E MARCH 2005 2006 2007E 2008E KPIT Cummins is an emerging niche IT play, with revenues of close to
US$100m expected in FY07. It focuses on the manufacturing vertical,
Sales (Rs m) 2,525 3,182 4,459 5,646
EBITDA (Rs m) 334 459 711 880
with niche offerings in advanced technology solutions (ATS), business
Net Income (Rs m) 284 326 476 596
intelligence, and high value added BPO/ITES. The company has a rich
EPS (Rs) 19.9 22.4 32.0 40.1 client base, which will aid consistent growth. Expected improvement in
EPS Growth (%) 62.2 12.2 43.1 25.2 offshore revenue contribution, and savings in G&A cost through
BV/Share (Rs) 75.7 97.9 132.5 169.1 productivity gains and considerable improvement in billing rates will
P/E (x) 19.6 17.5 12.2 9.7 provide greater earnings visibility. We are initiating coverage on KPIT
P/BV (x) 5.2 4.0 2.9 2.3 Cummins with a Buy recommendation.
EV/EBITDA (x) 16.5 13.4 8.5 6.5
EV/Sales (x) 2.2 1.9 1.4 1.0
Manufacturing expertise to position KPIT as a specialized player:
RoE (%) 39.0 26.2 28.2 26.8
Its strategic focus on manufacturing is a key factor that differentiates
RoCE (%) 29.2 20.3 21.4 20.9
KPIT Cummins. Its expertise and presence of referenceable clients
such as Cummins Inc would enable KPIT to position itself as a specialty
services provider in the manufacturing domain.
ATS to provide a niche within manufacturing: ATS practice provides

KEY FINANCIALS
Shares Outstanding (m) 14.9 specialized services in the very large scale integration (VLSI), auto and
Market Cap. (Rs b) 5.8 embedded systems. It enjoys higher margins due to higher billing rates.
Market Cap. (US$ b) 0.1
ATS would continue to post high growth and contribute around 25% of
overall sales in FY07, positively impacting overall margins.
Dividend Payout (%) 7.8
Dividend Yield (%) 0.4
Marquee client base offers immense mining potential: KPIT has
been focusing its domain expertise on marquee clients (most being
Fortune-500 / Global-1000 companies) with large IT budgets. Its total
revenues for FY06 amount to just 1% of total IT spend of its star
STOCK DATA
customers excluding Cummins Inc, indicating immense mining potential.
52-Week Range 502/261
Strengthening offerings/presence, adding marquee clients through
Major Shareholders (as of June 2006) %
Promoters 26.2
M&A: We believe that recent acquisitions – Pivolis (to strengthen
Domestic Institutions 20.5 presence in Europe), SolvCentral (to strengthen business intelligence
FIIs/FDIs 31.0 practice) and CG Smith (automotive electronic software services) –
Others 22.3 would strengthen KPIT’s service offerings, expand geographical reach
and add marquee clients.
Valuations attractive; Buy: Over FY06-08, we expect KPIT’s
1/6/12 Month Rel. Performance (%) -5/9/-7 consolidated revenues to grow at 33% CAGR. With margins likely to
1/6/12 Month Abs. Performance (%) -4/18/33 expand, PAT should grow faster at 35% CAGR. The stock trades at
9.4x FY08E diluted EPS, which is attractive. Buy with a 1-year target
price of Rs530 (13.5x diluted FY08E EPS) – an upside of 36%.
1 August 2006 27
KPIT Cummins
Manufacturing expertise to position KPIT as a specialized player

A key parameter that differentiates KPIT Cummins from peers is its strategic focus on
the manufacturing vertical, which contributes over 77% of its revenues. With an annual
run-rate of over US$70m from the manufacturing domain, KPIT’s share of India’s exports
in this segment was 2.6% in FY06, up from 1.8% in FY05. We believe that KPIT’s
expertise in the manufacturing domain and presence of referenceable clients such as
Cummins Inc would enable the company position itself as a specialty IT services provider
in the manufacturing domain.
KPIT’S MANUFACTURING VERTICAL - A SNAPSHOT
Revenue Contribution (1QFY07) 77%

Service Offerings IT Strategy/Consulting, Business Intelligence Services, Supply Chain
Solutions, Package Implementation (SAP, Oracle Apps, Movex, Mapics),
PLM Services, BI, Groupware, E-Business Solutions
Employee Base >1,700
Marquee Clients Cummins, HP, Unilever, Hitachi – Renesas, a Swedish dairy solution
company, a large Denmark-based retailer
ATS to provide a niche within manufacturing

KPIT launched its advanced technology solutions (ATS) practice in FY04 to strengthen its
presence in the VLSI, auto and embedded systems segments of the manufacturing vertical.
Its ATS practice primarily services industries such as automotive electronics, industrial
automation, semiconductor solutions and independent software vendors. The recent
acquisition of CG Smith is likely to strengthen the ATS practice in the third party service
providers’ space in the automotive vertical. CG Smith’s strong expertise in automotive
cluster and safety systems amongst others complements KPIT’s strength in power train
and body electronics. KPIT will now have a wider set of offerings for the automotive
sector. Marquee clients in this segment include Renesas, top-10 auto OEMs, 13 top tier-I
and tier-II automotive vendors in USA and Japan.
ATS currently contributes 20% to KPIT’s overall revenues and is its fastest growing
practice – CAGR of over 226% during the last three years. Its employee deployment of
450+ will increase to around 700 post CG Smith integration. Being a specialized offering,
ATS commands higher billing rates and enjoys higher-than-company-average margins.
Non-entertainment auto electronics is multi-billion dollar market globally, and is expected

to register good growth. Besides, the electrical & electronic content in vehicles is likely to
grow from 25% to 40% by 2010. Thus, we believe that the target market for KPIT Cummins
in the auto electronic embedded systems is poised for good growth.
1 August 2006 28
KPIT Cummins
ADVANCED TECHNOLOGY SOLUTIONS

AUTOMOTIVE ELECTRONICS INDUSTRIAL AUTOMATION SEMI-CONDUCTOR INDEPENDENT
POWER- BODY SAFETY/ SENSORS MOTION HMI/ MOBILE CONS. SOFTWARE
TRAIN ELECTR- SECURITY CONTROL SCADA ELECTR- VENDORS
ONICS DRIVES ONICS
Product Engineering Services

Pre-product Technology X X
Architecture/ Design/ Testing X X X X X
Rapid Prototyping X X
Product Development X X X X X X X
Product Implementation
Product Continuity Services
Continuous Product Support X X X X
Feature Development/ Enhancements X X X
Re-engineering X X X
Verification & Validation/ Testing X X X
Systems Engineering X
X Indicates offerings provided by KPIT Source: Company
We believe that KPIT’s ATS practice would continue its fast growth and contribute around
25% of overall revenues in FY07. The company is witnessing new customer additions in
business intelligence, auto embedded systems and VLSI. The offshore billing rates for
these new customers are 8-10% higher. The higher rates would positively impact overall
offshore billing rates going forward, thereby positively impacting overall margins in the
years ahead.
Marquee client base offers immense mining potential

KPIT Cummins has adopted a strategy of focusing its domain expertise on marquee clients
with large IT budgets. We believe that this approach would offer KPIT higher operating
leverage should it be successful in mining these marquee clients. The company classifies
a client as a star customer if the latter has the potential of generating revenues of over
US$5m per year. The company currently has 10 star customers (up from 6 in FY04, 7 in
FY05) including Cummins, Unilever, Deutsche Bank, Hitachi-Renesas, BNP Paribas
Business Objects and HP. KPIT’s total revenues of US$73m for FY06 amount to a mere
1.8% of the total IT spend of its star customers including Cummins Inc and 1% of their
total IT spend excluding Cummins Inc. KPIT currently receives around 48% of Cummins’
outsourced IT spend; further mining potential in Cummins’ case is therefore minimal.
However, mining potential from the other star customers is considerably high.
1 August 2006 29
KPIT Cummins
KPIT’S STAR CUSTOMERS OFFER SIGNIFICANT MINING POTENTIAL
STAR CUSTOMER LENGTH OF RELATIONSHIP (YRS) REVENUE ($B) ANNUAL IT SPEND ($M)
Cummins Inc 4 9.9 100

Unilever 7+ 70.6 1,060
Capital One 4 3.7 180
Deutsche Bank 5+ 7.3 350
BNP Paribas 3 5.7 285
Hitachi – Renesas 6 9.2 750
HP 3 86.7 1,300
Total 4,025
KPIT’s 2006 revenue 73
Excluding Cummins 39
KPIT’s Revenue as % of Total IT Spend of Star Customers 1.8
KPIT’s Revenue as % of Total IT Spend excl. Cummins 1.0
Cummins relationship offers excellent reference opportunity

Cummins is KPIT’s single largest client. It contributed US$34m in revenues during FY06,
amounting to 46.7% of KPIT’s overall revenues. Currently, the Cummins account
contributes 44.3%. KPIT Cummins is a preferred vendor for Cummins Inc (other offshore
vendors include TCS and i-Gate).
KPIT – A PREFERRED VENDOR FOR CUMMINS INC
Revenues from Cummins (US$m) - LHS % to Cummins IT Spend - RHS

60 80%
45 60%
30 40%
15 20%
0 0%
FY03 FY04 FY05 FY06 FY07E
Currently, KPIT accounts for 48% of Cummins’ total IT spend and management expects
revenues from Cummins to reach 40% of its consolidated revenues in FY07 (indicating
~57% of Cummins’ outsourced IT spend ), after which the account is expected to grow at
a steady pace. However, we expect Cummins to reach 43.8% of consolidated revenues
by FY07 (YoY growth of 31%). Therefore, the potential for further mining in Cummins is
limited. However, the company has already started tapping Cummins’ customers and
suppliers by leveraging its expertise in the engine business and manufacturing vertical. We
believe that this will take some time to effect into material results. We are given to believe
that these revenues will be booked to Cummins and will be treated as revenues from
Cummins while calculating its contribution to overall revenues.
1 August 2006 30
KPIT Cummins
We believe that the ramp-up and execution excellence demonstrated by KPIT with
Cummins Inc could be replicated with the other star customers, where mining potential is
much higher. As mentioned earlier, KPIT Cummins has a good composition of marquee
clients and currently accounts for a mere 1% of the IT spend of its star customers excluding
Cummins. We expect these star customers to outpace growth in Cummins, given the
maturity of the Cummins account.
Strengthening offerings/presence, adding marquee clients through M&A

KPIT Cummins has successfully strengthened its offerings/practices, expanded global
reach and won marquee clients through M&A. Apart from these obvious benefits, its
recent acquisitions of Pivolis, SolvCentral and CG Smith would also help reduce the
contribution of the Cummins account to KPIT’s overall revenues.
In FY06, the company struggled to grow its non-Cummins star customers, which declined
4% YoY compared with 65% YoY growth in the Cummins account. Contribution from
Cummins grew to 46.8% in FY06 from 35.6% in FY05. Cummins currently holds 13.9%
in KPIT, with the potential to raise its holdings by June 2007 should revenue from Cummins
touch 46% or 51% or 55% of KPIT’s total business (indicating a YoY growth of 40% or
56% or 69% respectively in Cummins in FY07 to result into dilution), leading to dilution in
equity from current outstanding 14.9m shares to 18.1m shares. Following the recent
acquisitions, the company hopes to lower the revenue share of Cummins to around 40% in
FY07 (we expect 44%).
Panex has added to ERP capabilities

In August 2003, KPIT Cummins acquired 100% equity stake in the US-based SAP
consulting company, PanexConsulting for US$1.7m. The Panex acquisition added SAP
expertise to KPIT’s ERP practice (over and above organic presence in Oracle), in addition
to presence of key clients such as HP, Hercules, SAP America and Accenture. Panex has
since been integrated successfully into KPIT Cummins, and registered revenues of
US$14.1m in CY05, up from US$7m in CY03.
Pivolis to strengthen presence in France

In November 2005, KPIT acquired 70% stake in Pivolis, France, which has an annual
revenue run rate of €2.5m. Pivolis provides offshore consulting for French companies in
the manufacturing and BFSI verticals with the help of its offshore partners. The acquisition,
therefore, would ensure that the entire offshore component would now accrue to KPIT
Cummins alone. Additionally, KPIT services one of the company’s BFSI star customers
through a partnership with Pivolis. Besides this common customer, KPIT will get an entry
into two top global banks through Pivolis. Revenue from Pivolis is expected to show a
good jump going forward, effectively strengthening KPIT’s presence in France as well as
enabling it to win more quality clients.
1 August 2006 31
KPIT Cummins
SolvCentral to ramp up business intelligence (BI) practice

In November 2005, KPIT Cummins acquired 90% stake in SolvCentral for a total
consideration of about US$4.8m. SolvCentral.com, with revenue run rate of US$3.5m and
employee base of 30+ (17 onsite and around 15 in India), offers high-end consulting in the
BI space in the manufacturing and BFSI domains. The acquisition would deepen KPIT’s
expertise in BI. Also, the acquisition would add 20 clients, including 8 Fortune-500 clients
(four each in the manufacturing and BFSI space).
SolvCentral has reported strong 81% revenue CAGR over CY01-04, and 95% profit CAGR
over the same period. SolvCentral has high net margins of 35-40% compared with KPIT’s
10-11%. Initially, margins are likely to reduce due to expected higher sales and marketing
spend by KPIT’s management in its endeavor to: (1) cross-sell its services to clients of
SolvCentral; and (2) cross-sell services of SolvCentral to its other clients.
SolvCentral.com has strengthened KPIT’s presence in BI and set up BI as an independent

line of business. We expect the BI practice, which currently makes a marginal contribution
to KPIT’s overall revenues, to grow significantly going forward considering its high demand
as well as KPIT’s deep domain expertise.
CG Smith to fortify ATS service offerings

In March 2006, KPIT Cummins acquired 100% equity stake in CG Smith Software Pvt.
Ltd., a Crompton Greaves IT JV. CG Smith has more than 10 years of experience in
automotive real time embedded systems/software. It derives around 92% of its revenues
from the automotive vertical, and the rest from aerospace, locomotive and medical/scientific
instruments. About 15% of CG Smith’s overall revenue accrues from its products business,
where the company holds IP for network operating system (NOS) components in the
automotive market.
CG Smith has 24 customers in its products business, while in the services space, the
company works for four leading auto OEMs and 13 tier I & II automotive suppliers. More
than 70% of KPIT’s customers have revenue run rate of more than US$1b, with engagement
of more than three years. The company has strong presence in UK and continental Europe,
and is starting to tap the lucrative markets of Japan and US. We believe that the acquisition
of CG Smith offers a big opportunity for KPIT to mine these new clients within the embedded
space as well as by cross-selling other services.
Post the acquisition of CG Smith, KPIT’s ATS practice would include staff of over 650
(about 450 from KPIT and around 200 from CG Smith), which we believe is a strong
practice for a company of KPIT’s size. We believe that this will widen the domain expertise
of KPIT Cummins in the ATS segment, which will enable it to position itself as a niche
player specializing in the ATS segment of the manufacturing vertical.
1 August 2006 32
KPIT Cummins
BPO, BFSI & geographic expansion to help de-risk business

In 2HFY06, KPIT forayed into BPO operations through a 100%-owned subsidiary, KPIT
Cummins Global Business Solutions. The company provides HR-related services, financial
accounting services, and transaction processing in the mortgage and insurance segments.
It also offers technology-based BPO services such as infrastructure management services,
network operation services and technical help desk. In the knowledge based services
domain, the company’s offerings include risk management & compliance, business
intelligence & data analytics, and business process transformation services. The company
does not intend to provide voice-related services.
We believe that the growth potential for KPIT’s BPO business is high, considering its
strong leverage in accounting related jobs and the company’s ongoing investment for building
a risk-management practice. For BPO, KPIT adopts a strategy of initially scouting for
business and then ramping up employee base. We believe this helps to reduce the gestation
period and minimizes the adverse impact on operating margins during the expansion phase.
This apart, taking into account the nature of services the company intends to offer in the
non-voice segment, we believe that average billing rates are likely to be higher than the
industry average. However, considering the requirement of skilled manpower, this could
result in relatively higher employee costs. According to the management, the BPO team
includes employees with superior professional qualifications such as CA, ICWA, CISA,
CPA and MBA.
KPIT’s strong relationships with leading players in the BFSI space also provide a good
opportunity to ramp up its BPO services in future. Within a short span of time, the company
has won 10 clients in the manufacturing, technology and BFSI segments. In 2QFY06,
KPIT won its first significant deal – a global support contract for a technical helpdesk
solution from Business Objects, a large multinational. On the back of this win, the company
has already started generating revenues from BPO in 4QFY06, albeit in a small way with
better ramp-up expected from 1QFY07. For Business Objects, KPIT expects to ramp up
its employee team to over 190 by end-CY06 (currently 150 employees), with expected
revenue run rate of US$4-5m per year.
The company has already ramped up its consolidated BPO employee base to more than
300. Besides Business Objects, other clients could also ramp up going forward, indicating
a further de-risking of the business model. We also believe that strong growth in the BPO
business would lead to higher offshore revenues for the company. Besides this, KPIT’s
strategy of focusing on relatively higher value services in the BPO business with ramp-up
in accordance with the business won would also lead to positive impact on the consolidated
operating margins.
Expanding geographic reach

The US has been the major revenue contributor for KPIT, with contribution from Europe
declining to 29% in 1QFY07 (up from 27% in 4QFY06) from 34% in 1QFY04. The recent
1 August 2006 33
KPIT Cummins
acquisition of Pivolis will afford the company an opportunity to expand its presence in
France and other European countries. In 3QFY06, KPIT entered into a JV with some
onsite consultants (ex-employees of Bearing Point) to tap the German market, which is a
hub for the automotive industry. Going forward, the company plans to increase the share
of revenues from Europe by tapping auto OEMs and tier-I vendors in Europe.
KPIT also plans to increase focus on Japan (revenues from Japan doubled in FY06),
which is a big automotive market, and on China, Singapore and India, which are upcoming
automotive majors. In 4QFY06, the company announced the opening of a wholly-owned
subsidiary in Poland. It is considering flagging-off a near shore center in Poland to offer
services to its clients in Europe and thereby strengthen its presence in Europe. Poland has
an attractive mix of relatively low cost, highly educated, multi-lingual workforce, good
infrastructure and high quality standards.
REVENUE BY GEOGRAPHY (%)
USA Europe RoW
100%
80%
60%
40%
20%
0%
1QFY05
2QFY05
3QFY05
4QFY05
1QFY06
2QFY06
3QFY06
4QFY06
1QFY07
BFSI – likely growth trigger post-FY07

Revenue contribution from the BFSI domain has declined over the past few quarters to
9% in 1QFY07 from an average of 21% in 1QFY05, due to slowdown in project ramp-ups
from two of its star customers in FY06. The management has indicated that while one of
the two BFSI customers has bottomed, the other BFSI customer is likely to underperform
in FY07. Hence, the company has adopted a conservative view while stating revenue
growth guidance from these customers for FY07.
KPIT has acquired some quality BFSI client relationships through Pivolis and SolvCentral.
Pivolis enjoys strong relationships with three of the top-5 global banks. SolvCentral too has
some good quality clients in the BFSI space. However, given lower visibility for some of
the existing older BFSI star customers, we believe that the BFSI vertical will likely continue
to underperform in FY07.
1 August 2006 34
KPIT Cummins
In 2QFY06, the company recruited a domain expert with over two decades of institutional
experience to oversee the sales & marketing function in the BFSI vertical. The company
has also recruited experienced personnel to gear up traction in the insurance vertical. It
has already started some pilot projects with Lehman Brothers in FY06, which could also
lead to good ramp-up going forward. Going by the remedial measures adopted and the
developments mentioned above, as well as the lower base of existing BFSI star customers,
we expect the BFSI vertical to deliver higher growth post-FY07. This would help KPIT
de-risk its business model by reducing dependence on manufacturing.
Infrastructure ramp-ups indicate ambitious growth plans

Having completed construction of phase-I, with capacity to accommodate 1,500 employees
at its new facility in Hinjawadi, Pune in FY05, the company is close to completing phase-
II at a cost of around US$13.5m. This would increase the seating capacity from 1,500 to
4,000 by end-1HFY07. The second facility would be financed by a combination of internal
accruals/equity and foreign currency loans amounting to US$11m from International
Finance Corporation (IFC). We believe that this reflects the management’s expectations
of improved business traction and better operational performance. Further, this indicates
the management’s capability to ramp up quickly to meet growing demand and establish an
industry presence as a committed offshore vendor. Earlier, KPIT was operating from 5-6
leased facilities based out of Pune.
Operational levers to facilitate margin expansion

As mentioned earlier, ATS, being a specialized service offering, commands higher billing
rates and enjoys higher-than-company-average margins. We expect the contribution from
ATS to grow to 25% of overall revenues from 20% in FY06, which would positively
impact overall margins. The company is witnessing new customer additions in BI, auto
embedded systems and VLSI at 8-10% higher offshore billing rates. The higher rates are
expected to positively impact overall offshore billing rates in forthcoming years.
Additionally, the offshorable share of IT spend for both ATS and manufacturing is high (in
some services in the manufacturing segment, offshorability could be as high as 70%,
while for VLSI and auto embedded business lines, offshorability could be 80-90%), which
would help increase the offshore revenue contribution. The management expects offshore
revenue contribution to increase to over 50% by end of FY07 from 39% in FY06. It has
increased to 47% in 1QFY07 from 43% in 4QFY06.
In addition to the above, KPIT has additional margin levers in the form of lower fresher
composition (less than two years experience currently around 40%) and rationalization of
G&A expenses. The company plans around 50% fresher recruitment out of a total
recruitment of 650-700 (excluding addition through CG Smith and Pivolis) for FY07, which
would help flatten the employee pyramid and effectively manage wage costs. The company
has recently initiated the Six Sigma quality processes, which could, with efficient project
1 August 2006 35
KPIT Cummins
execution, improve employee productivity, resulting in savings in G&A expenses as well

improvement in utilization rates. However, considering the higher fresher recruitment,
improvement in utilization rates is unlikely to be significant. To train fresh employees, the
company has invested in building in-house training capabilities. KPIT has also started
establishing connections with universities to create its brand within campuses.
We expect operating margins to improve to 16% in FY07 from 14.4% in FY06, owing to
the effect of the various margin levers discussed above. However, FY07 guidance (revenues
of US$98-100m, dollar growth rate of 34-40%, PAT of US$11.25-12m, dollar growth rate
of 51-61%) appears to factor in higher than 16% EBITDA margins, which we believe
would be difficult to achieve considering the higher salary hikes needed in order to control
attrition rates (high at +20%). Therefore, we expect the company to underachieve its
lower end of the PAT guidance by 5% in FY07.
EBITDA MARGINS (%)
6,000 Revenue (Rs m) - LHS EBITDA (%) - RHS 18.0
4,500 13.5
3,000 9.0
1,500 4.5
0 0.0
FY03 FY04 FY05 FY06 FY07E FY08E
We expect KPIT’s overall revenues to grow by 40% in FY07 and by 27% in FY08. Our
estimates indicate volume growth of 44% in FY07 and 31% in FY08. Newer business
offerings such as VLSI, embedded services, BI and BPO would have higher growth
rates. Higher offshore volume growth and improvement in offshore billing rates would
result in higher offshore revenue at 51% in FY08 from 39% in FY06. We expect profit
growth of 46% in FY07 and 25% in FY08.
Employee base is estimated at 3,016 at the end of FY07 and 3,869 at the end of FY08. Our
estimates are inclusive of the recent acquisitions. Subsequent inorganic initiatives by the
company, if any, would change our estimates, accordingly.
1 August 2006 36
KPIT Cummins

Over FY06-08, we expect KPIT to report revenue CAGR of 33%, driven by full-year
consolidation of the acquired companies (SolvCentral, Pivolis, CG Smith) as well as good
traction in the BPO and ATS businesses. Consequent to the expansion in margins in FY07,
we expect PAT to grow at a CAGR of 35% over FY06-08.
Given KPIT’s specialization in the manufacturing vertical and its niche in the ATS segment,
we believe it is poised for better growth rates in future. KPIT Cummins also has various
margin levers to fight wage inflation. We believe that KPIT is one of the better bets in the
mid-cap IT space, with better earnings visibility.
Despite better return ratios and expected growth outperformance, KPIT Cummins trades
at 9.4x FY08E likely diluted EPS. Valuations appear attractive at current levels, considering
KPIT’s historical P/E band of 13-14x. We are initiating coverage on the stock with a Buy
recommendation. Our 1-year target price of Rs530 (13.5x likely diluted FY08E EPS)
implies a 36% upside from current levels.
PER BAND
600
15x
450 13x
10x
300
7x
150
0
Jun-03
Oct-03
Dec-03
Feb-04
Jun-04
Oct-04
Dec-04
Feb-05
Jun-05
Oct-05
Dec-05
Feb-06
Jun-06
Apr-03
Aug-03
Apr-04
Aug-04
Apr-05
Aug-05
Apr-06
Aug-06
Concerns
Cummins account near maturity; up for renegotiation in FY08: The high growth
rates in the Cummins account could taper off, as existing service lines would achieve
critical mass. We believe that any further growth related to Cummins would largely be a
function of penetration among its suppliers, clients and distributors.
High client concentration: Client concentration for KPIT is skewed, with top-client
(Cummins) and top-10 clients contributing 44% and 80% of the topline, respectively. KPIT
accounts for a mere 1% of the IT spend of its star customers excluding Cummins, implying
that it is currently a small vendor for those clients. Any change in the outsourcing policy of
these clients could therefore negatively impact revenue growth. However, KPIT has multi-
year relations with most of the star customers and its ability to mine customers indicates
1 August 2006 37
KPIT Cummins
that KPIT Cummins has high mindshare with its clients. Besides, acquisitions and organic
client additions in FY06 provide a big opportunity for KPIT to mine the new customers,
which would help de-risk its business model.
Equity dilution: Cummins currently holds ~13.9% in KPIT Cummins Infosystems, with
the potential to raise its holdings by June 2007 on revenue from Cummins touching 46%,
51% and 55% of KPIT’s total business. This could lead to dilution in current outstanding
equity shares from 14.9m to 18.1m shares. Also, any future acquisitions made by the
company could lead to further dilution in equity.
Margin pressures on account of salary increases: Scalability of the employee base

and availability of people with the right skill-sets remains a key constraint. Attrition at
+20% is high, which could result in higher wage costs as the company tries to retain
employees. However, the expected increase in offshore revenue contribution, likely increase
in contribution from high margin ATS and BI businesses, increasing fresher recruitment
and reduction in G&A cost are likely to compensate for the margin pressures arising from
possible salary increases.
1 August 2006 38
KPIT Cummins
Sales 1,270 2,525 3,182 4,459 5,646 Basic (Rs)

Change (%) 66.4 98.8 26.0 40.1 26.6 EPS 12.3 19.9 22.4 32.0 40.1
Likely Diluted EPS 31.4 39.3
Software Develop. Exp. 792 1,665 2,061 2,775 3,617 Cash EPS 14.8 22.4 28.1 41.0 52.0
SG&A 283 526 662 972 1,149 Book Value 32.7 75.7 97.9 132.5 169.1
EBITDA 196 334 459 711 880 DPS 2.0 1.8 1.8 2.8 3.5
% of Net Sales 15.4 13.2 14.4 16.0 15.6 Payout %(Incl.Div.Taxes) 8.1 8.7 7.8 8.6 8.7
Depreciation 29 32 82 129 170
Interest 16 9 19 51 42 Valuation (x)
Other Income 0 1 0 2 3 P/E 19.6 17.5 12.2 9.7

Cash P/E 17.5 13.9 9.5 7.5
PBT 150 294 359 534 671 EV/EBITDA 16.5 13.4 8.5 6.5
Tax 5 13 33 53 67 EV/Sales 2.2 1.9 1.4 1.0
Rate (%) 3.3 4.4 9.3 10.0 10.0 Price/Book Value 5.2 4.0 2.9 2.3
PAT 145 281 325 480 604 Dividend Yield (%) 0.4 0.4 0.7 0.9
Extraordinary items 1 -3 0 0 0
Minority Interest 0 0 0 4 8 Profitability Ratios (%)
Net Income 144 284 326 476 596 RoE 46.2 39.0 26.2 28.2 26.8
Change (%) 156.3 96.9 14.7 46.1 25.2 RoCE 34.4 29.2 20.3 21.4 20.9
Turnover Ratios
Debtors (Days) 107 72 100 99 88
Y/E MARCH 2004 2005 2006 2007E 2008E Fixed Asset Turnover (x) 10.5 7.8 5.4 4.3 4.0
Share Capital 59 70 73 74 74
Subs. Money Recd. in Adv. 19 45 26 26 26 Leverage Ratio (x)
Share Premium 110 502 577 687 687 Debt/Equity Ratio(x) 0.7 0.3 0.6 0.6 0.5
Reserves 189 445 742 1,171 1,708
Net Worth 377 1,061 1,417 1,958 2,495
CASH FLOW STATEMENT (RS MILLION)
Minority Interest 0 0 4 9 17
Loans 266 370 875 1,206 1,156 Y/E MARCH 2004 2005 2006 2007E 2008E
Deferred tax liability 7 6 8 13 20 CF from Operations 194 318 420 665 823
Capital Employed 650 1,436 2,305 3,185 3,688 Cash for Working Capital 146 55 590 -31 133
Net Operating CF 47 263 -169 696 690
Gross Block 214 614 863 1,726 1,876
Less : Depreciation 75 109 190 315 450 Net Purchase of FA -94 -401 -499 -622 -300
Net Block 139 504 673 1,411 1,426 Net Purchase of Invest. 2 4 18 0 0
Curr. Assets 617 1,173 1,721 2,323 2,770 Inc/dec in Equity 0 429 59 111 0
Debtors 372 501 868 1,209 1,359 Proceeds from LTB/STB 192 104 505 331 -50
Cash & Bank Balance 186 546 411 847 1,099 Dividend & Interest Payments -28 -38 -49 -80 -88
Loans & Advances 58 127 442 267 312 Cash Flow from Fin. 164 495 516 362 -138
Current Liab. & Prov 134 274 370 584 658
Creditors 91 205 288 435 435 Free Cash Flow -46 -138 -669 74 390
Other liabilites 0 0 1 0 0 Net Cash Flow 119 360 -135 436 252
Provisions 43 69 81 148 223
Net Current Assets 483 899 1,351 1,739 2,111 Opening Cash Balance 67 186 546 411 847
Add: Net Cash 119 360 -135 436 252
Application of Funds 650 1,436 2,304 3,185 3,688 Closing Cash Balance 186 546 411 847 1,099
E: MOSt Estimates
1 August 2006 39
Initiating Coverage
Megasoft
BLOOMBERG
STOCK INFO.
MGSF IN
1 August 2006 Buy
BSE Sensex: 10,752
REUTERS CODE
S&P CNX: 3,148 MSFT.BO Previous Recommendation: Not Rated Rs135
Y/E DECEMBER 2004 2005 2006E 2007E From a generic software services provider, Megasoft is fast transforming
into a specialized products company. It has acquired strong domain
Sales (Rs m) 849 1,154 1,665 2,186
EBITDA (Rs m) -6 268 411 578
expertise in two high potential niches – telecom products and life sciences
Net Income (Rs m) -69 201 336 476
products, which it is leveraging to drive its services business, as well. It
EPS (Rs) -2.5 7.9 10.4 14.7 is taking the inorganic route to expand its global reach quickly and we
EPS Growth (%) - - 31.0 41.9 expect the company’s high margin product revenues to grow at 77%
BV/Share (Rs) 12.3 18.5 39.3 52.3 CAGR during CY05-07. Valuations are attractive at 9.2x CY07E earnings
P/E (x) - 17.1 13.0 9.2 and a PEG of 0.5x based on a two-year EPS CAGR of 36%. Buy.
P/BV (x) 11.0 7.3 3.4 2.6
Transforming into a specialized products company: Megasoft was
EV/EBITDA (x) - 14.2 9.9 7.0
EV/Sales (x) 4.3 3.3 2.5 1.8
a generic provider of software services till CY03. However, it has since
RoE (%) - 50.9 38.3 32.1
re-aligned its business focus to telecom and life sciences products.
RoCE (%) - 27.8 29.7 31.6 Telecom products already contribute 69% of Megasoft’s PBIT. The
company has acquired strong domain expertise in both its chosen niches,
which give it a unique positioning. Mr GV Kumar, the founder of XIUS
– the telecom products company that Megasoft acquired in CY04 – is
KEY FINANCIALS now the CEO of Megasoft. Also, the CTO of its life sciences client,
Enmed Inc, has joined Megasoft.
Market Cap. (Rs b) 4.2
Taking the inorganic route to expand reach: In July 2005, Megasoft
acquired 64% stake in Germany-based Beam AG, which provides
Dividend Payout (%) 0.0 consulting and project oriented services to various German telecom
Dividend Yield (%) 0.0 companies. Beam AG will spearhead the sales of Megasoft’s telecom
products in the European market. The management has indicated that it
is looking for a similar acquisition in the telecom space in USA, as well.
The company is already in advanced stage of negotiations with three
STOCK DATA US-based companies. We have not factored any such acquisition in our
financials, however.
Promoters 20.7 Financials robust; valuations attractive – Buy: Megasoft has a
rich product portfolio, with first mover advantage in a few. It has recently
FIIs/FDIs 17.4
Others 31.1
won a multi-million, multi-year deal from US-based Xero Mobile for its
VOISE product, significantly enhancing revenue visibility. We expect
Average Daily Turnover the contribution of products to increase from 34% of overall sales in
CY05 to 57% in CY07. Therefore, EBITDA margins should expand
1/6/12 Month Rel. Performance (%) -10/3/-8
from 23.3% to 26.4%. Average RoCE should improve from 28% in
1/6/12 Month Abs. Performance (%) -9/12/32 CY05 to 32% in CY07, with average RoE of 32% in CY07. We initiate
coverage with a Buy recommendation. Our 1-year target price of Rs200
(14x CY07E EPS) implies a 48% upside.
1 August 2006 40
Megasoft
Transforming into a specialized products company

Megasoft was a generic provider of software services till CY03. However, it has since re-
aligned its business focus to telecom and life sciences products. The products business
currently (in CY05) contributes about 34% of its overall revenues. We expect this figure
to rise to over 57% by the end of CY07.
Megasoft acquired XIUS, a telecom products and solutions company, in CY04. Through
this acquisition, Megasoft entered the wireless mobile operating support system business,
with products enabling ‘authentication and authorization in real time’ (ART). Telecom
products already constitute 37% of Megasoft’s revenues and 69% of its PBIT (in 2QCY06).
Afferenz, Megasoft’s life sciences products division develops solutions that meet the
specialized information management needs of organizations involved in the development
of new drugs. Though this division currently contributes just 7-8% of revenues and 3-4%
of PBIT, we believe the life sciences space offers good potential for future growth.
Megasoft has acquired strong domain expertise in both its focus verticals for its products
business – telecom and life sciences. XIUS’ founder, Mr GV Kumar is now Megasoft’s
MD and CEO. Also, the CTO of its life sciences client, Enmed Inc, has joined Megasoft.
The company is leveraging this domain expertise to drive its services business, as well.
Currently, services constitute 57% of revenues and 28% of PBIT.
TRANSFORMING INTO A PRODUCTS COMPANY
Services (Rs m) Telecom Products (Rs m)

Life Science Products (Rs m) Product Contribution (%) - RHS
900 797 40%
759
684
675 30%
450 353 20%
225 148 10%
18 43
0 0
0 0%
CY03 CY04 CY05
1 August 2006 41
Megasoft
PRODUCT CONTRIBUTION TO MARGINS ON THE RISE
Services EBIT (Rs m) Telecom Products EBIT (Rs m)

Life Science Products EBIT (Rs m) Product EBIT Contribution (%) - RHS
180 80%
120 60%
60 40%
0 20%
CY03 CY04 CY05
-60 0%
Telecom products – driving profit growth

Although telecom products contribute just about a third of Megasoft’s revenues, they
account for more than two-thirds of its PBIT. The telecom products division – XIUS has
been the key driver of the expansion in the company’s overall margins. It has recently won
a multi-million, multi-year deal from US-based Xero Mobile for its VOISE product. The
management expects this deal alone to yield revenues of US$20-25m over the next few
years. We expect XIUS’ revenues to grow at 75% CAGR over CY05-07. Margins,
however, could see a small contraction due to higher S&M expenditure.
TELECOM PRODUCTS WOULD CONTRIBUTE ALMOST HALF OF MEGASOFT’S REVENUES BY CY07
Telecom Revenues (Rs m) - LHS PBIT (Rs m) - LHS Share of Revenues (%) - RHS
1,200 55
900 45
600 35
300 25
0 15
CY04 CY05 CY06E CY07E
1 August 2006 42
Megasoft
XIUS’ chief product offerings

XIUS provides unique switch/vendor independent OSS technologies and solutions to
telecom service providers that enable them to authenticate and charge subscribers in
real time for convergent services and inter-operate their legacy infrastructure to launch
new revenue streams. Its key products are INfinet (real-time billing system), InstaRoam
(full-fledged roaming services for mobile operators) and VOISE (solution for mobile
virtual network operators). INfinet and InstaRoam currently contribute 80-85% of
Megasoft’s telecom product revenues.
Megasoft has divided its telecom products into four broad categories
Interconnect billing system – INfinet: INfinet is a convergent intelligent network
solution built for multi-network service providers looking for a common billing solution
that can span wireline, wireless, data and video technologies, treating them as “ONE
Network”. It also creates a “ONE Subscriber” view, where all services share
subscriber information unlike out-of-sync copies in disparate, unconnected applications.
The established vendor independence coupled with open architecture eases integration
with existing infrastructure, resulting in faster time to market of services and reduced
total cost of ownership. With support for real-time rating and session control, INfinet
enables operators to introduce innovative services quickly to their subscribers. It also
enables them to charge for all kinds of services provided within the predefined credit
limits, with no risk of bad debts or fraud. INfinet Interconnect billing systems is a
complete solutions for interconnect billing for convergent networks. The billing system
can be eliminate excessive interconnect charges and issue accurate bills.
Advanced roaming: XIUS’ advanced roaming & interoperability solutions target
the needs of the profitable global roaming market segment including prepaid. They
enable operators to acquire and retain roamers, drive roaming ARPU and optimize
operational costs. These solutions enable the operator to offer the right-mix of roaming
services, thus helping to create subscriber loyalty and drive new revenue streams.
Hosted roaming: XIUS’ range of hosted roaming solutions enables operators to
create an immediate worldwide roaming coverage. It breaks the technology barrier
and allows subscribers to roam in heterogeneous networks. Through XIUS’ hosted
roaming solutions, not only GSM operators but also CDMA Wifi, and CDMA 450
subscribers can roam in GSM networks. These solutions enable a new operator to
create an international roaming footprint for subscribers. XIUS’ hosted roaming solutions
can connect over 400 networks across 150 countries - all with a single agreement.
VOISE: Virtual Operator Integrated Service Engine (VOISE) is an integrated
NextGen convergent platform for mobile virtual network operators (MVNOs). It
helps to provide a homogeneous service experience to subscribers independent of the
network and location. It gives the MVNOs service flexibility, pricing flexibility, brand
flexibility and complete subscriber ownership. It is a pure plug-n-play solution that
enables the MVNOs to concentrate on their core business (brand building, customer
loyalty, increasing ARPU, roll out innovative subscriber specific services, etc) rather
than be entangled with network intricacies. (More details under “VOISE – an ace up
Megasoft’s sleeve” on page 45.)
1 August 2006 43
Megasoft
XIUS’ target segments offer immense growth potential…

According to the management, the market for Megasoft for its two flagship products –
INfinet and InstaRoam is multi billion dollar and is likely to grow steadily, with East Europe,
West Africa, South East Asia and Middle East being the main growth drivers. In US and
Europe, most telecom subscribers opt for post-paid plans, where the need for real-time
monitoring and billing is much lower (post-paid subscribers are billed monthly). Therefore,
the market for Megasoft’s INfinet and InstaRoam products in US and Europe is small.
However, due to legacy systems, integration of GSM and CDMA in the developed markets
is difficult. Therefore, Megasoft expects the demand for its roaming products to increase
even in US and Europe. Considering Megasoft’s unique offering of seamless integration
between various switches as well as networks, we believe that revenue growth is likely to
be outstanding, especially given its low base.
Megasoft has sold its IN platform to more than 15 operators and InstaRoam platform to
more than 8 operators. Its key clients for telecom solutions include BTC (Bulgaria), BPL
Mobile (India), Hutchison, the GSM Association, TM cel, Omantel, Aircel, Mobitel (Srilanka)
and EDCH Etisalat (UAE). As most of its clients are based in developing countries, the
expected growth in subscriber base in these countries itself offers significant growth
opportunity within its existing customers.
…and competition is limited

For its IN platform products, Megasoft faces competition directly from switch providers
like Nokia, Ericsson and Siemens. However, unlike Megasoft’s offering, the software
provided by these OEMs is not vendor/switch independent. These vendors charge US$6.5-
7 per subscriber against Megasoft’s pricing of US$2.5-3 per subscriber. Besides, the business
that Megasoft’s IN platform products are targeting is very small for these big OEMs and
the mindshare with customers for these services is not very high. Considering these facts,
we believe that Megasoft will continue to thrive in this segment.
For its InstaRoam product, Megasoft faces competition from 3-4 players. Its main competitor
is Comverse, a company with a turnover of more than US$1b, which offers solutions for
real time billing, handset software, content & messaging solutions, and 3G solutions. Other
competitors are CBoss, Roamware (US), Huawei Technologies (China).
Forging marketing alliances to drive sales

Besides direct selling, Megasoft has also forged alliances with Teleglobe and HP to drive
up sales. The Teleglobe alliance enables it to sell its products to Teleglobe’s 350-400 GSM
operators. The HP alliance enables Megasoft to sell its products to various telecom operators
based in the Far East and Malaysia. Megasoft is planning more such tie-ups with vendors
in USA.
1 August 2006 44
Megasoft
XIUS’ revenues come from three different streams – ASP services (where it ties up with
an existing telecom infrastructure provider, hosts its solutions/services and shares revenues),
software licensing (selling products independently on license basis), and professional services
(earns revenues from implementation, up-gradation as well as annual maintenance charges
that range from 10-12% of license fees). Currently, Megasoft receives 75-80% of its
revenues from license sales. It sells licenses in batches of 500,000 and charges US$2.5-3
per subscriber. It has sold licenses for around 5m users.
VOISE – an ace up Megasoft’s sleeve

In February 2006, Megasoft launched VOISE, a product targeted at mobile virtual network
operators (MVNOs). These are carriers that rent infrastructure from other telecom
operators, using which they offer communication services to their subscribers. MVNOs
are therefore able to provide their subscribers a choice of networks. Besides, subscribers
are able to get voice, data and video services through Wi-Fi instead of GPRS, which
reduces their operational cost. MVNOs constitute the fastest growing segment in the
telecom services market both in US and Europe. According to the Yankee Group, the
MVNO market will reach US$10.7b in service revenues by CY10. It projects that the
MVNO market will be comprised of three subscriber tiers, totaling 29m customers, largely
owned by Tier-I MVNOs.
According to Megasoft, its VOISE product is one-of-a-kind, with huge potential. The
company has recently won a multi-million, multi-year deal from US-based Xero Mobile.
This deal would give Megasoft up-front license fees of US$4-5m beside assured annuity
of US$0.6m for maintaining upto 1m subscribers for the next three years. Subscriber base
beyond 1m would be charged US$0.55 per month per subscriber. The management believes
that this deal could yield revenues of US$20-25m over next few years. Xero Mobile is a
VC-funded company, with initial fund-raising of US$140m. It intends to target US college
students in the 16-24 age group. Services would be launched in September/December
2006, with 1m subscribers (Xero Mobile is planning to give the first 1m handsets free).
Xero Mobile plans to increase its subscriber base to around 5m in the next 3-4 years.
Students looking at advertisement through their Wi-Fi phones would be allotted free minutes,
which should result in accelerated subscriber growth.
Besides Xero Mobile, there are other MVNOs based in US and Europe, that are also
looking to launch similar products, indicating a sizeable market for VOISE. The management
has indicated that there are 3-4 MVNOs based in the US (e.g. 7-Eleven, Xero Mobile)
and 3-4 MVNOs based in Europe (e.g. Virgin Mobile). The management has said that it is
currently negotiating possible deals for the VOISE product with a couple of UK and US
based players. In 2QCY06, the company has signed a deal with UK-based CLOUD 9
with operations in three countries. The total deal value is likely to exceed US$2m. While
we believe that VOISE would be a significant growth driver for Megasoft, we also note
that its success would depend on the growth of MVNOs.
1 August 2006 45
Megasoft
Life sciences products – another promising area

Megasoft’s life sciences products division, Afferenz develops products/solutions that meet
the specialized information management needs of organizations involved in new drug
development. Afferenz currently offers two products:
1. Acceliant – an end-to-end clinical trial platform that accelerates clinical trials by enabling
multi-mode and multi-site trials
2. Med Studio – a web-based medical image management application
According to the management, around US$33b is spent on clinical trials globally. Of this,
around US$5b is spent on clinical information processes. According to Forrester research,
the Electronic Data Capture (EDC) applications for clinical trials have finally been embraced
by the Pharmaceutical Industry as the best practice. EDC applications for clinical trials
have matured from risky pilots to desired global infrastructure. In the EDC market, software
sales represented a $200 million in sales in 2005. Management expect the market to grow
significantly over the next 5 years up to a potential $500 million market. Of this market,
only 10-15% is currently penetrated by software applications. Therefore, we believe that
life sciences products present a huge opportunity. Entry barriers are high, thus favoring
early movers like Megasoft. The company’s key clients for life sciences solutions include
PPD corporation (USA), Registrat (USA) and SIRO (India).
Megasoft’s Acceliant, an e-clinical solution creates efficiencies in the work flow process
within clinical development and enhances data accuracy, thereby accelerating the clinical
development critical path. Acceliant provides a fully integrated, end-to-end (from drug
discovery to drug release) platform with the unique ability to integrate electronic data
capture, online image analysis, and data & document management against traditional paper-
based processes. Megasoft employees had spent three years to develop this software for
Enmed Inc, which later went bankrupt. Megasoft acquired the intellectual property (IP)
from Enmed.
Enmed Inc’s CTO, a PHD, has joined Megasoft and is helping to further develop its life
sciences products business. Apart from Enmed’s former CTO, Megasoft also has two
other senior engineers, who have hands-on experience with pharmaceutical companies.
We believe that Megasoft’s strong domain expertise and early mover advantage would
stand it in good stead and aid its future growth. Megasoft’s products are based on web
technologies and help to reduce clinical trial time. For drug developers, a reduction in
clinical trial period means a higher exclusivity period, enabling them to earn higher revenues
and profits. During the exclusivity period, a drug developer has considerable pricing power,
as no competitors are allowed.
Megasoft’s Acceliant faces competition from Oracle’s clinical trial solution. However,
Oracle’s is a totally integrated solution for phase I-IV trials unlike Megasoft’s product,
where a client can independently buy a solution for any phase of the trial. The management
1 August 2006 46
Megasoft
has indicated that Oracle’s solution is more focused towards data management/enterprise
application while Megasoft’s product is more focused towards clinical trial application.
Also, Megasoft sells its solution at 50% discount to Oracle’s.
We believe that Megasoft’s life sciences products division is now poised for high growth.
We expect 93% CAGR in revenues during CY05-07, with PBIT contribution likely to
improve from 3% in CY05 (up from negative 3.3% in CY04) to 5% in CY07.
LIFE SCIENCES PRODUCT DIVISION IS POISED FOR HIGH GROWTH
Life Sciences Revenues (Rs m) - LHS PBIT (Rs m) - LHS

200 Share of Revenues (%) - RHS 5.0
150 4.0
100 3.0
50 2.0
0 1.0
-50 0.0
Taking the inorganic route to expand reach

In July 2005, Megasoft acquired 64% stake in German company, Beam AG for €0.25m. In
addition, it would provide €0.1m towards working capital. Beam AG provides consulting
and project management services for automotive, telecom and production industries in
Germany. Deutsche Telekom is one of its customers. Beam AG will spearhead the sales
of XIUS advance roaming and convergent billing products in the European market. This
would help XIUS to expand its reach to telecom operators in the European market.
The management has indicated that it is looking for a similar acquisition in the telecom
space in USA to spearhead its sales and marketing efforts there. The company is in
advanced stage of negotiations with three US-based companies with a turnover of US$15-
30m. The indicated price is around 0.8-1.4x sales. Considering its recent FCCB issue as
well as available unutilized credit and working capital limits with banks, we do not expect
any further dilution in equity. We believe that any such acquisition in the near future could
result in stronger growth in Megasoft’s product business. We have not factored any such
acquisition our financials, however.
1 August 2006 47
Megasoft
Software services – steady cash flows

Megasoft began operations as a software services company, with large onsite presence.
However, after 9/11 and the dot-com bust, the company shifted its focus to becoming an
IP-driven product company. Currently, its services business predominantly caters to the
staffing requirements of its US and Europe-based clients. The services division has around
240 employees, including over 140 employees onsite. Some of its main clients are Sun
Chemcial, DTCC, Collation, and Acso Nobel.
Due to low value added services, margins in this business are low. Currently, the services
division operates at PBIT margins of 12-14%. We expect margins to come down further
due to growing competition, but given its reasonable size and low debtors days, we expect
steady cash flows from this business. The management has indicated that it wants to
leverage its domain expertise in telecom and life sciences products to drive its services
business, going forward.
We expect Megasoft’s services business to grow at a CAGR of just 12%, which will
result in its contribution to overall revenues declining from 66% in CY04 to 43% in CY07.
CONTRIBUTION OF SERVICES BUSINESS IS DECLINING
Services Revenues (Rs m) - LHS PBIT (Rs m) - LHS Share of Revenues (%) - RHS
1,000 100
750 75
500 50
250 25
0 0
Financials robust; valuations attractive – Buy

We expect Megasoft’s high margin products business to post 77% CAGR over CY05-07.
As its low margin services business is likely to grow at just 12% CAGR, the company’s
operating margins should expand from 23.3% in CY05 to 26.4% in CY07. While we
expect post-tax profits to grow at 54% CAGR during this period, EPS would grow at 36%
CAGR. The recent FCCB issue, redeemable convertible preference shares and warrants
issued to promoters would lead to dilution in equity. The management has indicated that it
is looking at a possible acquisition in the US, but we do not anticipate any further equity
dilution in the near future. We believe any such acquisition would help buoy product revenues
and profits.
1 August 2006 48
Megasoft
TRANSITIONING TO A HIGH-MARGIN PRODUCTS COMPANY
Product business (Rs m) - LHS Services business (Rs m) - LHS

1,600 35
EBITDA margins (%) - RHS
1,200 25
800 15
400 5
0 -5
While we expect post tax profit to grow at 54% CAGR over CY05-07, growth in capital
employed is likely to be lower at 31% CAGR. Therefore, capital return ratios should
improve considerably. We expect average RoCE to improve from 28% in CY05 to 32% in
CY07, with average RoE of 32% in CY07. Given this backdrop, we believe valuations are
attractive at 9.2x CY07E earnings and a PEG of 0.5x based on a two-year EPS CAGR of
36%. We initiate coverage with a Buy recommendation. Our 1-year target price of Rs200
(14x CY07E EPS) implies a 48% upside.
Concerns
Changing technology in telecom: We believe that the telecom industry is the most
prone to changing technologies. If Megasoft is not able to upgrade its products to keep
pace with changing technology, it could see significant fall in earnings growth.
Success of VOISE is dependent on MVNO ramp-up: VOISE revenues are dependent

on the success of MVNOs, who are not specialist service providers in the telecom space.
If MVNOs are not able to ramp-up subscriber base quickly enough, Megasoft’s growth
would receive a set-back.
Small size – competition from established players: Despite the traction in Megasoft’s
product revenues since its acquisition of XIUS in July 2004, it is still small and not established
in developed markets like US and Europe. It currently faces competition from players like
Nokia, Ericsson, Comverse and CBoss, that are far more experienced. However, there is
currently no competition for its VOISE product and for several of its products, competition
is limited. Also, its strategy of acquiring companies in Europe and USA to gain market
presence should result in strong traction, going forward.
High debtors days: Megasoft has average debtors days of around 150 in CY05, which
we believe is on account of increasing contribution from telecom business. High debtors
days are likely to have negative impact on working capital. Increasing traction of VOISE
as well as Megasoft’s inorganic expansion in developed markets like US and Europe,
could ease the pressure on debtors days. However, if for some reason, debtors days rise,
it would pose a downward risk to our estimates.
1 August 2006 49
Megasoft
Y/E DECEMBER *2003 2004 2005 2006E 2007E Y/E DECEMBER 2003 2004 2005 2006E 2007E
Sales 797 849 1,154 1,665 2,186 Basic (Rs)

Change (%) 6.5 35.9 44.3 31.3 EPS 0.7 -2.5 7.9 10.4 14.7
Cash EPS 3.5 -0.9 9.3 11.7 16.4
Employee Costs 587 625 669 944 1,237 Book Value 16.7 12.3 18.5 39.3 52.3
Travelling & Conveyance 29 37 52 75 98 DPS 0.0 0.0 0.0 1.0 1.5
Other Operating Expenses 97 194 165 236 273 Payout %(Incl.Div.Taxes) 0.0 0.0 0.0 11.0 11.6
EBITDA 85 -6 268 411 578 Valuation (x)

% of Net Sales 10.6 -0.7 23.3 24.7 26.4 P/E 17.1 13.0 9.2
Depreciation 36 43 42 44 50 Cash P/E 14.5 11.5 8.2
Interest 29 17 20 15 13 EV/EBITDA 14.2 9.9 7.0
Other Income -2 2 2 9 11 EV/Sales 2.8 4.3 3.3 2.5 1.8
Price/Book Value 8.1 11.0 7.3 3.4 2.6
PBT 18 -65 209 361 526 Dividend Yield (%) 0.0 0.0 0.0 0.7 1.1
Tax 0 0 8 24 46
Rate (%) -0.2 0.6 3.7 6.8 8.8 Profitability Ratios (%)
PAT 19 -64 201 336 479 RoE 7.3 50.9 38.3 32.1
Minority Interest 0 0 0 1 3 RoCE 9.3 27.8 29.7 31.6
Extraordinary 0 4 0 0 0
Net Income 19 -69 201 336 476 Turnover Ratios
Change (%) 66.9 41.9 Debtors (Days) 136 141 190 178 184
* Reflects 18 month period

Leverage Ratio
Y/E DECEMBER 2003 2004 2005 2006E 2007E
Debt/Equity Ratio(x) 1.0 0.8 1.2 0.1 0.0
Share Capital 151 254 258 324 324
Preference share capital 0 0 90 0 0
Share Premium 72 152 127 558 558
Reserves 34 -92 93 392 813
Net Worth 257 315 568 1,273 1,695 Y/E DECEMBER 2003 2004 2005 2006E 2007E
Minority Interest 0 0 -8 -7 -4 CF from Operations 85 2 258 386 537
Loans 249 246 465 66 70 Cash for Working Capital -109 17 -279 -169 -320
Capital Employed 506 561 1,025 1,332 1,760 Net Operating CF -23 19 -21 217 216
Goodwill 77 77 102 102 102

Net Purchase of FA -47 -83 -54 -75 -125
Gross Block 156 259 324 399 524
Goodwill on consolidation -77 0 -25 0 0
Less : Depreciation 78 145 198 242 292
Net Purchase of Invest. 4 3 -4 9 11
Net Block 78 115 126 157 232
Net Cash from Invest. -120 -80 -82 -66 -114
Curr. Assets 478 526 1,002 1,462 1,897

Debtors 297 328 601 813 1,103 Inc/Dec in Equity 13 119 4 496 0
Cash & Bank Balance 24 62 227 362 418 Inc/Dec in Pref S. Cap 0 0 90 -90 0
Loans & Advances 88 105 139 227 301 Proceeds from LTB/STB 135 -4 194 -399 4
Other Current Assets 69 31 35 60 75 Interest/ Dividend Payments -29 -17 -20 -23 -50
Current Liab. & Prov 129 155 204 388 466 Cash Flow from Fin. 120 99 268 -16 -46
Creditors 84 104 131 212 238

Other Liabilites 44 48 52 106 102 Free Cash Flow -70 -64 -74 142 91
Provisions 1 4 21 70 126 Net Cash Flow -23 37 165 135 56
Net Current Assets 349 370 798 1,073 1,432

Deferred tax liability -2 -4 -1 -1 -6 Opening Cash Balance 48 25 62 227 362
Misc. Expenses 5 3 0 0 0 Add: Net Cash -23 37 165 135 56
Application of Funds 506 561 1,025 1,332 1,760 Closing Cash Balance 25 62 227 362 418
E: MOSt Estimates
1 August 2006 50
Initiating Coverage
Subex Azure
BLOOMBERG
STOCK INFO.
SUBX IN
1 August 2006 Buy
BSE Sensex: 10,752
REUTERS CODE
S&P CNX: 3,148 SUBX.BO Previous Recommendation: Not Rated Rs402
Y/E MARCH 2005 2006 2007E 2008E Post its acquisition of UK-based Azure Solutions, Subex Systems has
become the leader in the global Telecom Operating Support Systems
Sales (Rs m) 1,166 1,814 3,281 5,396
EBITDA (Rs m) 355 502 842 1,927
(OSS) – Revenue Maximization (RM) market. We expect FY08 to be
Net Income (Rs m) 257 379 652 1,519
the watershed year for Subex, with full benefits of the acquisition
EPS (Rs) 12.8 17.4 18.8 43.9 beginning to reflect in its consolidated financials. The global Telecom
EPS Growth (%) 5.8 36.3 8.1 133.4 OSS – RM market offers huge growth opportunity and we estimate
BV/Share (Rs) 123.2 83.2 261.9 300.8 that Subex’s post-tax profits would register 100% CAGR over FY06-
P/E (x) 31.5 23.1 21.4 9.2 08. At 9.2x FY08E earnings, we believe that current valuations do not
P/BV (x) 3.3 4.8 1.5 1.3 adequately reflect the company’s growth potential. Buy.
EV/EBITDA (x) 11.5 16.6 15.1 6.2
EV/Sales (x) 3.5 4.6 3.9 2.2
Azure integration to yield significant synergies: Subex was the
RoE (%) 27.7 24.8 12.0 15.6
leader in the Telecom OSS – Fraud Management market in terms of the
RoCE (%) 22.3 23.9 12.1 15.7
number of installations even before it acquired Azure. While its acquisition
of Azure makes it the leader in terms of revenues as well (not only for
fraud management but also for revenue assurance), we believe that
significant synergies would also emerge post integration. Azure has
KEY FINANCIALS marquee clients, but has been making losses due to its high cost operations
in London. Access to Azure’s large clients would enable Subex to post
a quantum jump in its consolidated revenues. Also, shifting most of
Past 3 yrs. Sales Growth (%) 43.6 Azure’s operations into India would cut costs drastically.
Dividend Payout (%) 10.0 Telecom OSS – RM market offers huge opportunity: Currently,
Dividend Yield (%) 0.4 the size of Subex’s addressable market is US$250m. Penetration of
RM products amongst telecom operators is low – 40% for fraud
management systems (FMS) and 10% for revenue assurance (RA)
solutions and almost 60% of the current RM solutions being used are
STOCK DATA house-built. However, given that the industry loses 12-15% of its
revenues due to various reasons, telecom operators are fast adopting
Major Shareholders (as of June 2006) % RM products. Subex’s management projects its target market at
Promoters 11.7
US$400m in the next 2-3 years, and expects its consolidated product
FIIs/FDIs 53.7 revenues to jump from US$25m in FY06 to US$100m by FY08.
Others 17.4
Valuations do not adequately reflect growth potential: We expect
Average Daily Turnover Subex’s post tax profits to grow at 100% CAGR and EPS to grow at
59% CAGR during FY06-08. Despite the high growth visibility, the stock
1/6/12 Month Rel. Performance (%) -10/-12/-1
quotes at just 9.2x FY08E earnings. We initiate coverage on the stock
1/6/12 Month Abs. Performance (%) -8/-3/39 with a Buy rating. Our one-year target price of Rs635 (14.5x FY08E
earnings) implies a 58% upside from current levels.
1 August 2006 51
Subex Systems
Leader in global Telecom OSS – RM market

Subex operates in a niche market, providing revenue maximization (RM) solutions to telecom
service providers worldwide. Post its acquisition of Azure in April 2006, Subex’s market
share (in terms of revenues) has nearly doubled to 25%, making it the global leader in the
Telecom OSS – RM segment. Even before it had acquired Azure, Subex was the global
leader in the fraud management segment in terms of number of installations.
SUBEX: THE LEADER IN GLOBAL TELECOM OSS - RM MARKET
COMPANY REVENUES (US$M)
Subex Azure 56
HP ~45
ECTel ~25
Cape Tech ~10-11
Neural Tech ~6-7
RM solutions enable telecom service operators to identify and eliminate leakages in their
revenue chain, thus protecting their revenues and improving their profitability. Before it
acquired Azure, Subex had two product offerings – Ranger, a fraud management system,
and INcharge, a revenue assurance system. It has recently developed a risk management
system. With the acquisition of Azure, Subex has also added products like SAIBS – an
interconnect billing system, SAIMS – an interparty management system, and SAROS – a
routing optimization system, to its overall portfolio.
Besides its telecom software products business, Subex also has a telecom software
consulting division. We believe this unit predominantly offers staffing services to its US-
based clients; AT&T is the largest customer for this business unit. Given the low value
added services the unit offers and the management’s focus on software products, Subex
had transferred this division to a wholly-owned subsidiary. We believe that this is a precursor
to the eventual sale of this business.
A CLEAR FOCUS ON THE PRODUCTS BUSINESS
TREND IN REVENUES AND MARGINS
Products (Rs m) - LHS Services (Rs m) - LHS EBITDA Margins (%) - RHS
1,400 32
1,167
1,050 30.5 30
27.7
700 26.5 628 648 27
538
446 482
397
350 255 25
22.4
0 22
FY03 FY04 FY05 FY06
1 August 2006 52
Subex Systems
CURRENT EBITDA BREAK-UP
600 Products EBITDA (Rs m) Services EBITDA (Rs m)
450
300
150
0
FY04 FY05 FY06
Subex Systems’ chief product offerings

Subex’s defined space of operation for products is revenue maximization for
communications service providers. Its chief products are Ranger – a fraud management
system and INcharge – a revenue assurance system.
Ranger – Subex’s fraud management solution

As new products and services are emerging in the Telecom market, the issues of fraud
are becoming increasingly complex. Operators worldwide are moving towards offering
unified services – voice/data/3G/m-commerce and a host of value-added services to
customers to garner higher revenues. However, fraudsters are devising advanced
techniques to defraud networks, leading to significant revenue leakages. Frauds also
lead to network congestion, security breaches and customer dissatisfaction.
Independent surveys show that about 3-4% of the industry’s revenues are lost on account
of fraud. Though digital technologies like GSM and CDMA are secure to a large extent
from technical frauds, subscription related and behavioral frauds are on the upswing.
Higher fraudulent activities result in additional administrative costs. While the operator
defrauded would not be able to make recoveries from the fraudsters, it would have to
make payment to other network providers, resulting in losses.
The types of fraud that are generally encountered by the telecom operators are:
Subscription fraud
Call selling fraud
Premium rate service fraud
Cloning fraud
Internal fraud
PABX hacking fraud
Clip-on fraud
Pre-paid fraud
Roaming fraud
1 August 2006 53
Subex Systems
Combating fraudsters calls for high-end preventive solutions by communication service

providers. Successful management of fraud depends upon the ability of the solution to
pre-empt the occurrence of fraud rather than reacting after the fraud has occurred.
Subex’s FMS, Ranger detects fraud at an early stage, thus limiting the revenue loss
that the operator may suffer. Ranger employs a unique mix of events, rules, profiling,
pattern matching, subscriber pre-check and credit management to identify and curb
fraudulent activity. The call data of each subscriber is mapped and analyzed to furnish
accurate alarms and reports to the operator. Comprehensive information provided by
Ranger enables the investigator to quickly settle a case, reducing exposure to fraud
considerably.
Subex faces competition from players like HP, ECTel and Neural Technologies in the
FMS space. It displaced HP as the leading vendor of FMS products globally, following
the acquisitions of Alcatel’s and Lightbridge’s FMS businesses and product improvements
in Ranger.
Ranger’s competitive strengths include the following:

¾ Seamless integration with overall OSS: Ranger has in-built integrated case
management and workflow. It integrates with the overall OSS environment in a
seamless manner. It provides links to work with multiple data sources such as CDRs
(inbound, outbound), service platforms (e.g. pre-paid), and roaming data (TAPIN
files). It also integrates with billing & customer care, audit logs, interconnection
monitoring systems, links to front-end desks. All alerts belonging to a subscriber are
collated into a single alarm view, from which the fraud analyst can make decisions.
¾ Pre-screening subscribers: Ranger is the first fraud management solution to

provide an integrated, full-fledged subscriber pre-screening module. The module
provides the ability to check new subscriber details against a gray/black-list, using
techniques such as word compare, phonetics, and sub-strings.
¾ Exposure management: Another unique feature of Ranger is its capability of

calculating dynamic and static credit limits. Its credit management module (CMM)
aids exposure management by providing a color-coded report within the FMS.
¾ Ranger Automated Threshold Engine (RATE): Static subscriber grouping

generates more false positives during alert generation. RATE uses slow learning
statistical techniques to adjust the thresholds for individual subscribers. Calculating
thresholds at subscriber level drastically reduces the number of false positives.
¾ Scalability and performance: Ranger has been deployed in networks ranging

from a capacity of 5m call records per day to more than 100m call records per day.
Ranger provides multiple deployment options. Ranger can be deployed either on a
single server and as need be, can also be deployed on multiple servers, thus reducing
the TCO for the network operator.
1 August 2006 54
Subex Systems
¾ Hybrid model – AI and rules: Ranger provides a hybrid model for fraud detection
that integrates rules and threshold-based alerts with those generated by artificial
intelligence (AI). The hybrid model provides for usage of rules for known fraud
types and AI is used for detecting previously unknown fraud types as well as to
detect usage pattern mismatches for a subscriber.
¾ Flexible architecture: Ranger is useful for current networks as well as for future
networks based on value-added services. It has been deployed in various
combinations for combating fraud in voice and data networks, supporting post-paid
as well as pre-paid subscribers. Ranger has been deployed on wireless (GSM/
CDMA) as well as wireline networks.
INcharge – Subex’s revenue assurance solution

INcharge, Subex’s revenue assurance solution helps carriers to identify and accurately
measure revenue leakage across their organization in an automated manner. INcharge’s
flexible modules are designed to identify and address issues specific to each business
group – unbilled subscriber usage, overpayment of interconnect charges and
discrepancies between multiple OSS in order to provide the carriers with an overall
view into the revenue leaks that are occurring within their organizations.
An estimated 2-15% of annual billing revenues are lost due to ineffective Revenues
Maximization Measures. Operators are at a greater risk of revenue leakage, with the
introduction of new infotainment and m-commerce services. INcharge, an end-to-end
revenue assurance solution, provides the flexibility and cost reduction associated with
an integrated, forward-looking system that is structured to handle multiple, existing and
future technologies.
INcharge also helps ensure compliance with regulations (e.g. UK’s OTR003 and the
Sarbanes-Oxley Act). Subex has released Version 3.0 of INcharge that provides
significant improvements and benefits over earlier versions. It now offers enterprise
level revenue assurance capability that allows operators to complete the cycle of revenue
assurance practice from Reactive Revenue Assurance to Active Revenue Assurance
to Proactive Revenue Assurance.
In the RA space, Subex faces competition from companies like Cape Technologies and
Vibrant Solutions. Given the low penetration of RA systems and Subex’s strong brand
recall in FMS, we expect the company to achieve high growth in the RA segment.
Subex’s stronger position in the RM space since the acquisition of Azure would also aid
strong growth, going forward.
1 August 2006 55
Subex Systems
Azure integration to yield significant synergies

Subex acquired 100% stake in Azure Solutions for US$140m, by issuing 11.73m GDRs (1
GDR = 1 equity share) and making a cash payment of US$4m, in April 2006. Azure
Solutions is a UK-based revenue-assurance company, with an end-to-end revenue-
assurance product portfolio. Azure has annual revenues of around US$31m, implying that
Subex paid a price equivalent to 4.5x annual sales. British Telecom (BT) contributes about
US$18-20m (almost 60%) to Azure’s revenues.
We believe that the integration of Azure’s operations into Subex’s would yield significant
synergies. The two companies mostly have different sets of customers. Azure has 80
clients and post-integration, Subex’s net client addition would be 70. Azure has been making
losses mainly due to its high cost operations in London, UK. The transfer of these operations
to India, where Subex operates from, would help to reduce costs significantly. Azure is not
Subex’s first overseas acquisition. It has acquired and successfully integrated the FMS
businesses of Alcatel and Lightbridge. Therefore, we believe integration risks are low.
Not its first overseas acquisition

In October 2004, Subex Systems acquired the FMS businesses of Alcatel and Lightbridge.
With the acquisition of Alcatel’s FMS business, Subex got an entry into Europe. It
added 20-25 new clients, including reputed names like Vodafone, Energis, UK, and
Tiscali, Italy. Subex merged the features of Alcatel’s FMS with Ranger, thus achieving
a far superior product. It also took over the support of Alcatel’s FMS clients globally.
Under the agreement, Alcatel has become a reseller of Subex Systems’ fraud
management and revenue assurance solutions to telecom operators worldwide.
With the acquisition of Lightbridge’s FMS business, Subex got an entry into US. It
added 10-15 new customers, including reputed names like US Cellular, AllTel, and
TMobile. Following the two acquisitions, Subex has replaced Hewlett-Packard to become
the world’s largest supplier of fraud management software to telecom operators in
terms of number of customers and installations. It has set up new sales and support
offices in US and UK to better serve its clients in these regions. As can be seen from
the exhibit below, Subex has successfully leveraged its acquisitions to grow its revenues.
OVERALL PRODUCT REVENUES BREAK UP (RS M)
FY03 FY04 FY05
EMEA * 213 378 642

US 86 155 420
APAC 98 95 105
% Growth in EMEA 77.3 69.7
% Growth in USA 80.9 170.8
* EMEA indicates Europe, Middle East, Africa Source: Company
1 August 2006 56
Subex Systems
We outline below the benefits that Subex could derive from its Azure acquisition.
¾ Addition of 80 customers – leader in both FMS and RA

Azure has 80 customers in 32 countries (some of the respected names include BT,
Verizon, Vodafone, O2, and T-Mobile). Subex Azure (Subex Systems’ new name post
merger with Azure) would service 23 of the top-40 telecom operators worldwide in
the Telecom OSS – Revenue Maximization space. It would have a total of 150 customers
in 60 countries (against 80 customers in 42 countries pre-acquisition) with global
leadership in FMS and RA systems. Subex Azure’s tier-1 customers include Vodafone,
Hutch, Bharti, AT&T, Cable and Wireless, BT, O2, T-Mobile USA, Verizon, and AT&T.
ADDING CLIENTS THROUGH ACQUISITIONS
NO. OF CUSTOMERS NO. OF COUNTRIES
Before Alcatel and Lightbridge 26 17

After Alcatel and Lightbridge 59 37
Before Azure Solutions 80 42
After Azure Solutions 150 60
¾ Strong relations with BT

Azure was spun out of British Telecom (BT) in April 2003, and is backed by New
Venture Partners, Doughty Hanson Technology Ventures and Intel Capital. Azure has
annual revenues of around US$31m, almost 60% of which come from BT. Azure’s
contract with BT is for five years (four years from now) and is likely to extend to
seven years. Under this managed services contract, Azure receives annuity revenues
from BT. Besides this contract, Azure has also been selected as one of the six likely
vendors of BT for developing its 21st Century network. If it were finally made a
vendor, it would result in a big revenue opportunity for Subex Azure.
¾ Big opportunity for cross-selling and up-selling

Subex and Azure have different sets of customers. Only about 25% of these customers
have installed both FMS and RAS. Therefore, Subex would have an opportunity to
cross-sell its offerings. Also, Subex has launched an advanced version of its revenue
maximization solution, which gives it the opportunity to up-sell to its existing customers.
¾ Addition of new product offerings within revenue maximization

Subex’s management has indicated that Azure is the second largest player in
interconnect billing systems and interparty management systems. The Azure acquisition
also adds a routing optimization system to Subex’s overall product portfolio.
Interconnect billing systems: The Subex Azure Interconnect Billing System (SAIBS)
allows operators to quickly and accurately settle charges with their network partners.
Shrinking margins have highlighted the increased need for visibility of each deal’s impact
on the operator’s bottom-line. For interconnect agreements with domestic and international
1 August 2006 57
Subex Systems
operators, SAIBS provides the ability to manage major costs and revenues on a day-to-
day, hour-to-hour basis. New types of interconnect agreements, in areas such as IP and
SMS, require new system capabilities to ensure that operators have accurate data available
to assure revenues. SAIBS’ flexibility, scalability and ease of use empower all types of
operators – fixed or mobile, a national PTT or a new entrant.
Interparty management systems: The Subex Azure Interparty Management System

(SAIMS) enables operators to bill their customers and settle with their partners on a single
modular platform. SAIMS supports all operational and management information needs.
Its unique architecture allows calculation of multiple charges for each transaction and the
correlation of retail revenues with interconnect cost. As product bundles and their related
tariff plans become more complex, the ability to see all revenues and related costs is vital
to ensuring a healthy bottom-line. SAIMS is able to support multiple business models
within a single implementation through seamless addition of necessary modules. Examples
of such modules include Retail, Wholesale, Satellite, IP and Inter-Company. The SAIMS
framework has been designed to evolve with minimal impact on ongoing operations.
Routing optimization system: The Subex Azure Routing Optimization System (SAROS)
is designed to provide operators with the tools to manage network cost information supplied
by other operators with additional analysis on the impact of current operator tariffs as well
as forecasts on potential operator tariffs. The system is capable of taking into account
factors such as call quality rate information, capacity and network costs in calculating the
optimum choice of operators. SAROS ensures that the entire end-to-end process from
dial code/destination operator rate imports to switch updates is controllable and auditable.
¾ Strong domain pool

Azure also brings to the table a strong domain expertise of 85-90 employees out of its
total base of 190 employees. Of these 85-90 employees, 40-45 employees are working
on the BT contract, and 25-30 employees are for client support. The management has
indicated that the balance employees are likely to be laid off in FY07.
Telecom OSS – RM market offers huge opportunity

The market that Subex operates in – revenue maximization solutions for communications
services providers – is growing consistently. Several studies and market surveys have
established the significance and potential of this market segment. OSS Market Forecast
by RHK, Inc indicates a CAGR of 7% in the worldwide OSS market during 2003-07 from
US$31.1b to US$40.5b. For the commercial off-the-shelf (COTS) segment (third party
software) it estimates a growth of 11% CAGR, as more telecom operators are likely to
opt for COTS as against internal development. As can be seen from the table below, the
size of the RM market is likely to grow from US$500m to US$800m over CY05-07, a
CAGR of 26.5%.
1 August 2006 58
Subex Systems
TELECOM OSS – RM MARKET OFFERS HUGE OPPORTUNITY (US$B)
2002 2003 2004 2005 2006 2007 * CAGR
Billing Mgt and Rating 3.8 3.7 4 4.2 4.4 4.6 4.7
Billing Mediation 0.2 0.3 0.3 0.4 0.5 0.7 32.3
Revenue Assurance * 0.2 0.3 0.4 0.5 0.6 0.8 26.5
Customer Care 2.2 2.4 2.7 3 3.3 3.7 11.1
* Revenue Assurance indicates market for Revenue Maximization, CAGR is for the period CY05-07
Source: Company
Another study conducted by Analysts in UK has established that operators lose about
13.7% of their revenues due to leakages. Of this, 3-4% is attributable to fraud. Thus, fraud
continues to be a major problem for operators aiming to reduce total loss to less than
1.5%. To reach that target, they would have to make substantial investments in people,
processes and software solutions. Subex straddles almost the entire area of leakages, with
its deep and broad product portfolio. Of the current RM market of about US$500m, the
management indicates that Subex’s target market is around US$250m. As the penetration
of RM products increases, Subex would stand to benefit enormously. The management
indicates that the current penetration is around 40% for FMS and around 10% for RAS,
and almost 60% of the current RM solutions being used are house-built.
Risk management and ROC – new growth areas

Subex is now planning to provide risk management and revenue operation center (ROC)
services to telecom operators. The company claims that such services would be one-of-a-
kind, with virtually no competition, currently.
Risk management system

The Subex Azure Risk Management System (SARMS) empowers operators to continuously
assess and mitigate risk presented by subscribers throughout their lifecycle. SARMS tracks
risk on a near real-time basis during subscriber acquisitioning, ongoing usage, and collections
and recovery. SARMS provides the operator with a holistic view that helps in understanding
subscriber risk profile and thereby aids its management. Further, SARMS can quickly, and
seamlessly, accommodate new service information to provide an accurate picture of the
exposure at any point in time. Allowing the operator to easily, and quickly, define various
risk indicators and controls enables SARMS to adapt to local cultural and regulatory
requirements. This also enables the operator to stay agile in changing socio-economic
conditions that affect the overall level of risk in a region.
Benefits of SARMS for telecom operators

Slash bad debt
Improve debtor turnover ratio
Improve subscriber experience
Trim operational expenses
Subex claims that currently there is no such offering available in the market. Therefore,
the company is confident of getting good traction for this product from FY08.
1 August 2006 59
Subex Systems
Revenue operation center (ROC)

Post the acquisition of Azure, Subex is focusing on complete solutions for revenue operating
centers (ROC). In an intensely competitive environment and under incessant pressure to
increase average revenue per user (ARPU) and average margin per user (AMPU),
operators are seeking breakthrough business practices to ensure sustained, profitable growth.
They are realizing that in addition to winning new subscribers and offering new services,
it is important to ensure that all accrued revenue from existing subscribers for the services
used, is captured and realized. RM is the business practice of continual optimization of the
revenue chain to increase revenues realized and reduce costs incurred. The key to
operationalizing the RM practice is the ROC.
Expect strong growth ahead

We expect strong growth in Subex’s revenues, going forward. While consolidation of
Azure would drive near-term revenue growth, even over the longer term, we expect
organic growth to remain impressive. Subex licenses its software solutions on per subscriber
or per transaction basis. Therefore, after the initial contract amount, as the telecom
operator’s revenues grow, Subex’s revenues also grow. As the number of subscribers or
number of transactions grow, the operator buys additional licenses.
STREAM-WISE PRODUCT REVENUE BREAK-UP (RS M)
FY04 FY05 FY06 CAGR (%)
License Sale 340 406 782 51.7

Support 26 110 222 192.7
Customization 16 79 58 90.1
3rd Party Items 15 32 105 165.7
Total Revenues 397 628 1,167 71.5
Another continuous stream of revenues for Subex is annual maintenance charges (AMC),
calculated as a percentage of license fees (10-15%). These three streams – new license,
additional license and support – are likely to lend stability to the company’s overall revenues.
Subex also has another revenue stream – customization. Besides, during implementation,
Subex sometimes supplies third-party hardware required by the client – the margins on
third-party items are, however, very low.
PRODUCT-WISE REVENUE BREAK-UP (FY06)
3rd Party
RevMax 9%
8%
INcharge
7%
Ranger
76%
1 August 2006 60
Subex Systems
The management has guided Product revenue of Rs2.4b and net profit of Rs650m for
FY07. It has indicated that the revenue guidance would be met through 20% organic
Product revenue growth to Rs1.4b and consolidation of Azure effective July 2006, which
would add Rs1b (for 9 months). Azure reported revenues of US$31m (about Rs1.4b) in
FY06 and the management guidance assumes no growth in Azure’s revenues in FY07.
The management intends to focus on integrating Azure with Subex during FY07 and making
its operations profitable by relocating from UK to India and cutting Azure’s staff strength
from 190 to 85-90. The company estimates one-time cost of Rs300-350m towards integration
during FY07, which would suppress post-tax profits. EPS growth would be much lower
than net profit growth due to equity dilution. Subex issued shares worth US$136m and
GDRs worth US$10m (partly used) in connection with its acquisition of Azure.
For FY08, however, the management has guided very strong growth in both topline and
bottomline. It expects Product revenues of Rs4.5b – a growth of 88%, and post-tax profit
of Rs1.5b – a growth of 131%. Assuming full-year consolidation of Azure for FY07
(consolidated for only 9 months), Product revenue growth would be 58%. Post-tax profit
growth would be 60% if we were to exclude the one-time integration cost incurred in
FY07. The increasing contribution of high-margin products business and bigger deal sizes
would help enhance margins. The management expects average deal size to increase
from US$950,000 in FY06 to US$1.3-1.5m in the next 2-3 years. The cost of sales &
implementation does not rise in proportion to the rise in the average contract size.
FY08 – THE WATERSHED YEAR
Products (Rs m) - LHS Services (Rs m) - LHS EBITDA Margins (%) - RHS
5,000 40
3,750 35
2,500 30
1,250 25
0 20
FY04 FY05 FY06 FY07E FY08E
1 August 2006 61
Subex Systems
Valuations do not adequately reflect growth potential

We expect Subex’s post tax profits to grow at 100% CAGR and EPS to grow at 59%
CAGR during FY06-08. The stock quotes at 9.2x FY08E earnings. Its PEG is 0.4x on
FY06-08E EPS CAGR, despite equity dilution of over 59% during FY07. Considering
Subex’s robust business model and the opportunities that the RM segment offers, we
expect growth to remain strong even beyond FY08. We initiate coverage with a Buy
rating. Our 1-year target price of Rs635 (14.5x FY08E EPS) implies an upside of 58%.
Concerns
Changing technology in telecom: We believe that the telecom industry is the most
prone to changing technologies. If Subex is not able to upgrade its products to keep pace
with changing technology, it could see significant fall in earnings growth. For consistent
growth, Subex would have to constantly bring about relevant product innovations.
Integration with Azure: In FY07, Subex management will be focusing on integrating

Azure Solutions, which has annual revenues of about US$31m against Subex’s product
revenues of around US$25m in FY06. Subex is likely to spend Rs300-350m towards
integration in FY07. Any delay or difficulty in integrating Azure with Subex could lead to a
significant downward revision in our estimates for FY07 and FY08.
High debtors days: Subex had average debtors days of around 255 in FY04, which has
consistently declined to 193 days in FY06 on the back of higher revenue contribution from
developed countries like US and Europe. The management expects debtor days to decline
further due to higher growth in revenues from developed countries. However, if for some
reason, debtors days rise, it would pose a downward risk to our estimates.
1 August 2006 62
Subex Systems
Sales 879 1,166 1,814 3,281 5,396 Basic (Rs)

Change (%) 25.6 32.6 55.7 80.8 64.4 EPS* 12.1 12.8 17.4 18.8 43.9
Cash EPS* 15.2 16.1 21.5 23.5 50.7
Software Develop. Exp. 515 668 1,048 1,792 2,699 Book Value 84.0 123.2 83.2 261.9 300.8
SG&A Exp. 132 142 264 648 769 DPS 1.0 1.5 1.7 1.9 4.4
Payout %(Incl.Div.Taxes) 8.3 11.4 10.0 10.0 10.0
EBITDA 233 355 502 842 1,927
% of Net Sales 26.5 30.5 27.7 25.7 35.7 Valuation (x)
Depreciation 42 72 92 160 225 P/E 31.5 23.1 21.4 9.2
Interest 14 24 27 12 10 Cash P/E 25.0 18.7 17.1 7.9
Other Income 13 7 29 69 31 EV/EBITDA 11.5 16.6 15.1 6.2
EV/Sales 3.5 4.6 3.9 2.2
PBT 189 266 412 740 1,723 Price/Book Value 3.3 4.8 1.5 1.3
Tax 12 9 33 88 204 Dividend Yield (%) 0.4 0.4 0.5 1.1
Rate (%) 6.1 3.4 8.1 11.9 11.8
PAT 178 257 379 652 1,519 Profitability Ratios (%)
Net Income 178 257 379 647 1,519 RoE 32.6 27.7 24.8 12.0 15.6
Change (%) 77.7 44.8 47.3 70.8 134.8 RoCE 20.3 22.3 23.9 12.1 15.7
Turnover Ratios
BALANCE SHEET (RS MILLION) Debtors (Days) 255 229 193 193 163
Y/E MARCH 2004 2005 2006 2007E 2008E

Share Capital 74 101 218 347 347

Share Premium 166 542 656 7,214 7,214 Leverage Ratio (x)
Reserves 378 598 937 1,506 2,854 Debt/Equity Ratio(x) 0.6 0.2 0.0 0.0 0.0
Net Worth 618 1,241 1,811 9,068 10,416

Preference Capital 185 0 0 0 0
Loans 168 309 14 11 8 Y/E MARCH 2004 2005 2006 2007E 2008E
Deferred tax liability 2 -4 -8 -7 4 CF from Operations 240 359 524 750 1,734
Capital Employed 972 1,546 1,817 9,072 10,427 Cash for Working Capital 196 61 206 976 618
Net Operating CF 44 298 318 -226 1116
Goodwill 309 309 309 5,541 5,541
Gross Block 215 562 666 1,150 1,350 Net Purchase of FA -55 -351 -95 -484 -200
Less : Depreciation 125 193 273 432 657 Goodwill on consolidation 0 0 0 -5,233 0
Net Block 91 369 393 718 693 Net Purchase of Invest. -64 5 16 69 31
Curr. Assets 692 1,068 1,441 3,469 5,408 Inc/dec in Equity 32 218 19 6,683 0
Debtors 615 732 962 1,735 2,404 Proceeds from LTB/STB -50 137 -60 -3 -3
Cash & Bank Balance 34 278 406 1,176 2,037 Dividend & Interest Payments -35 -63 -71 -37 -83
Loans & Advances 43 57 74 309 511 Cash Flow from Fin. -53 292 -111 6642 -86
Other Current Assets 0 0 0 249 456
Current Liab. & Prov 120 200 331 661 1,219 Free Cash Flow -12 -53 223 -710 916
Creditors 65 60 160 201 393 Net Cash Flow -129 245 128 769 861
Other liabilites 15 99 104 257 337
Provisions 40 41 66 203 490 Opening Cash Balance 162 34 278 406 1,175
Net Current Assets 572 868 1,111 2,808 4,189 Add: Net Cash -129 245 128 769 861
Application of Funds 972 1,546 1,817 9,072 10,427 Closing Cash Balance 34 278 406 1,175 2,037
E: MOSt Estimates
1 August 2006 63
Detailed Report
Companies
COMPANY NAME PG.

Geometric Software 65
(Buy, Rs82)
Hexaware Technologies 78
(Buy, Rs141)
i-flex solutions 87
(Buy, Rs1,291)
MphasiS-BFL 94
(Buy, Rs158)
Existing Coverage
1 August 2006 64
Update
Geometric Software
BLOOMBERG
STOCK INFO.
GMSS IN
1 Agust 2006 Buy
BSE Sensex: 10,752
REUTERS CODE
S&P CNX: 3,148 GEOM.BO Previous Recommendation: Neutral Rs82
Y/E MARCH 2005 2006 2007E 2008E

Geometric Software is amongst the very few IT companies in India,
focusing on the product lifecycle management (PLM) segment. It has a
Sales (Rs m) 1,682 2,234 3,289 4,541
presence across the PLM value chain – R&D services for PLM product
EBITDA (Rs m) 466 494 791 1,069
developers, implementation and other PLM-related services, and PLM-
Net Income (Rs m) 275 259 419 600
related IP development. We believe that it would be a major beneficiary
EPS (Rs) 4.9 4.0 6.9 9.9
EPS Growth (%) 28.4 -18.9 73.4 43.1
of the robust growth in PLM investment, globally. Valuations do not
BV/Share (Rs) 21.6 25.1 36.3 44.1
adequately factor in the possible upside, in our opinion. Buy.
P/E (x) 16.6 20.5 11.8 8.3
R&D services sales to grow at 22.5% CAGR over FY06-08:
P/BV (x) 3.8 3.2 2.2 1.8
Geometric derives about 45% of its sales from PLM software OEMs
EV/EBITDA (x) 9.8 9.3 6.1 4.5
by assisting them in their R&D activities. It caters to most of the leading
EV/Sales (x) 2.7 2.1 1.5 1.0
global PLM players through dedicated offshore development centers
RoE (%) 25.5 17.2 23.1 24.6
(ODCs) in India. As its relationships are over three years old, we expect
RoCE (%) 24.4 16.4 22.2 23.5
Geometric to receive higher share of their incremental R&D outsourcing,
driving its R&D sales at 22.5% CAGR over FY06-08.
PLM-related services revenues likely to grow much faster:

KEY FINANCIALS
Geometric derives about 33% of its revenues from PLM-related services.
Market Cap. (Rs b) 5.0 The total size of the PLM services market in CY06 is estimated at
Market Cap. (US$ b) 0.1 US$138b, with an offshoreable component of US$17b. Given
Geometric’s superior offshore capabilities and its strong alliances with
leading PLM vendors and system integrators, we believe it would grow
Dividend Yield (%) 1.0 its PLM-related services revenues at over 55% CAGR over FY06-08.
P/E to Grwoth 0.4
PLM-related products/solutions could be the ace in the pack:
Geometric has developed some PLM-related products/solutions, which
contribute about 15% of its revenues. Considering its strong global
STOCK DATA

reseller network and recognition of its products/solutions by PLM
software OEMs, we expect its product revenues to grow at 53% CAGR
Promoters 28.5 over FY06-08. Geometric is working on integrating PLM software with
Domestic Institutions 15.3 enterprise software, which could yield large upsides.
FIIs/FDIs 13.7
Others 42.5 Valuations attractive; upgrading stock recommendation to Buy:
We expect Geometric’s revenues to grow at 43% CAGR and post-tax
profits (before extra ordinary) to grow at 63% CAGR over FY06-08.
Value (Rs million) 30.0 The stock trades at attractive valuations of 8.3x FY08E earnings (7.6x
1/6/12 Month Rel. Performance (%) -9/-28/-66 FY08E earnings if we consider its impending acquisition in the EDS
1/6/12 Month Abs. Performance (%) -7/-19/-26 space). We are upgrading our recommendation from Neutral to Buy.
Our 1-year target price of Rs145 (13-14x FY08E earnings with
acquisition and dilution) implies an upside of 78%.
1 August 2006 65
Geometric Software
R&D services revenues to grow at 22.5% CAGR over FY06-08

Geometric derives about 45% of its revenues from PLM software OEMs by assisting
them in their R&D activities. It caters to most the leading global PLM players through
dedicated offshore development centers (ODCs) in India. Given that most of its relationships
are over three years old, we expect Geometric to receive higher share of their incremental
R&D outsourcing, driving its R&D services revenues at 22.5% CAGR over FY06-08 to
Rs1.5b.
PLM segment on a high growth trajectory

According to recent estimates by CIM Data, a specialized PLM research firm, spending
on PLM software and services topped US$18.1b in CY05, up 10.8% over CY04 due to
strong investment by large and small enterprises in PLM technologies. The growth in
PLM spending exceeded CIM Data’s expectations. PLM investment is forecasted to
grow at 7.8% CAGR over the next five years to touch US$26.3b by CY10.
PLM CYCLE TRENDING UP (OVERALL PLM MARKET GROWTH HISTORY AND FORECAST - US$B)
32
cPDM Tools
24
16
0
2001 2002 2003 2004 2005 2006E 2007E 2008E 2009E 2010E
Source: CIM Data
PLM PRODUCT SALES (UNITS)
PRODUCT SALES CURRENT PERIOD PREVIOUS PERIOD GROWTH (%)
Dassault: (Curr. Period CY05 – Dec Ending)

CATIA (Units) 34,798 32,695 6.4
Solid Work (Units) 37,280 29,882 24.8
Autodesk: (Curr. Period FY06 – Jan Ending)
AutoCAD – Installation Base – (M Units) 3.87 3.4 13.8
PTC: (Curr. Period FY05 – Sep Ending)
ProENGINEER (Units) 330,850 314,150 5.3
Windchill (Units) 348,300 297,800 17.0
MatrixOne: (Curr. Period FY05 – July Ending)
All MatrixOne products 320,000 218,000 46.8
1 August 2006 66
Geometric Software
The strong growth in license sales of various PLM products across leading players is a
pointer to a revival in the PLM market. During the 1990s, companies essentially focused
on operational efficiency, which led to significant expenditure on ERP deployments. Over
the last few years, companies have been shifting funding to comprehensive PLM initiatives
that enable product innovation and boost business performance with both revenue growth
and increase in profitability. According to CIM Data there is growing awareness that both
product and process innovation are critical elements for achieving success in business.
PLM is, thus, a competitive necessity for companies that wish to succeed in their markets.
R&D expenditure of PLM majors on an upswing

The PLM cycle is witnessing an upturn, with improving license sales. In line with rising
product sales growth, the R&D initiatives of most PLM leaders have picked up over the
past few years. We believe that the PLM software OEMs would have to sustain these
initiatives to remain competitive. They would have to launch new products/upgrade existing
products to meet customer requirements such as greater process efficiency and cost
rationalization.
TREND IN R&D EXPENDITURE OF SOME PLM LEADERS (US$ M)
300
MatrixOne PTC Autodesk Dassault Systems
225
150
75
0
FY01 FY02 FY03 FY04 FY05
Source: Respective Companies
From the above exhibit, we can infer that R&D expenditure is trending upward for most
of leading industry players. Dassault spends the highest on R&D as a proportion of total
revenues at nearly 27%, while PTC lowered R&D spend to 16% from 19% following
revenue decline in FY03. We believe that companies would ramp up R&D aggressively to
be able to bring a larger bouquet of offerings to tap a growing market.
US$400m target market for PLM R&D outsourcing

Following the decline of the PLM market in FY03, most global PLM OEMs have embraced
outsourcing of their R&D activities to low-cost countries to reduce operating costs. On an
average, software OEMs spend 20-22% of their total sales on R&D, with Dassault spending
the highest at 27%, followed by Autodesk at close to 22% and PTC at 16%. Considering
1 August 2006 67
Geometric Software
that the estimated market size for PLM software is around US$15.3b in CY06, the estimated
R&D spend by various PLM OEMs would be around US$3.2b. Assuming that the
offshorable component is 25% of total R&D expenditure at 50% of the cost, this would
translate to a target market of around US$400m for PLM R&D outsourcing. However,
Geometric does not cater to the entire PLM market/PLM OEMs considering its larger
focus on the automotive & aerospace verticals.
Geometric well placed to capture increase in R&D spend

Currently, Geometric derives around 45% of its revenues from the PLM software OEMs
by assisting them in their R&D activities. It caters to leading global PLM players with the
exception of Autodesk and PTC. PTC has its own captive unit in India; while Autodesk
chiefly caters to the AEC (architecture, civil and construction) segment of the PLM market
(75% of its revenues). Geometric is more proficient in the mechanical segment.
Currently, Geometric has offshore development centers (ODCs) for UGS PLM, Dassault,
MatrixOne, MSC, and Powerway, most of whom have been clients for more than three
years. This represents the confidence of these vendors in Geometric. Given that Geometric
provides ODCs that cater to the needs of software OEMs, we believe that it would receive
the incremental share of the outsourcing of R&D spends of key clients like Dassault and
UGS PLM.
Leaders such as Dassault have enhanced their R&D spend, the total market for which is
expected to reach US$3.2b in CY06. Dassault has the highest R&D spend amongst the
top OEM vendors, which would result in increased revenue growth for Geometric’s JV
with Dassault – 3DPLM. We expect 3DPLM to grow at a CAGR of 25% over FY06-08
to reach Rs931m in revenues. We believe that there is huge potential for Geometric to
ramp up its OEM revenues going forward, as most leaders are increasingly looking at
offshoring to low cost destinations.
In the following table we have explained the percentage of R&D spend being offshored to
3DPLM by Dassault in the past three years.
R&D SPEND BEING OFFSHORED TO 3DPLM BY DASSAULT
FY04 FY05 FY06
3DPLM Revenue (US$m) 7.0 10.0 13.4

Dassault Systems R&D Budget (US$ M)* 215.6 221.9 250.0
As a % of Dassault’s R&D spend 3.2 4.5 5.3
* Corresponding calendar year Source: Company/Motilal Oswal Securities
We expect Geometric’s R&D services business to grow at a CAGR of 22.5% over FY06-
08 to Rs1.5b.
1 August 2006 68
Geometric Software
PLM-related services revenues likely to grow much faster

Geometric derives about 33% of its revenues from PLM-related services. The total size
of the PLM services market in CY06 is estimated at US$138b, with an offshoreable
component of US$17b. Given Geometric’s superior offshore services capabilities and its
strong alliances with leading PLM vendors and leading system integrators, we believe it
would grow its PLM-related services revenues at over 55% CAGR over FY06-08.
Expect 55%+ CAGR over FY06-08…

Based on a 9:1 cost ratio for manpower cost:PLM license expenses, the total size of the
PLM services (PLM software implementation, customization, support, etc.) market in
CY05 is estimated at US$138b. Industry sources suggest that 25% of this can be offshored
at 50% of the current cost, which is a US$17b market. However, Geometric does not
cater to the entire PLM market/PLM OEMs, considering its larger focus on automotive &
aerospace. Taking into account its current offshore project revenues and its strong alliances
with leading PLM vendors, channel partners and its considerable offshore capabilities, we
believe there is potential for accelerated revenue growth for Geometric. Considering the
expected growth in PLM spending, we expect Geometric’s PLM-related services revenues
to grow at a CAGR of 55%+ over FY06-08.
EXPECT ROBUST GROWTH IN GEOMETRIC’S PLM SERVICES REVENUES (RS M)
2,400
1,800
1,200
600
0
FY05 FY06 FY07E FY08E
…aided by increasing offshoring by industrial customers

Geometric Software caters to industrial customers such as Ford, Daimler Chrysler, GM,
Volvo, Honda and BMW through the partnership model. The company has constituted
alliances with global/local majors including IBM, HP and UGS despite the fact that these
companies have a presence in India through their subsidiaries/associate companies.
1 August 2006 69
Geometric Software
GEOMETRIC HAS ALLIED WITH GLOBAL/LOCAL SYSTEM INTEGRATORS
GLOBAL EUROPE JAPAN US
IBM Softlab Agrographics Modern Engg.

UGS PLM Solutions Technia INCAT
HP Cenit Intgware
Volvo-IT
T-Systems
Geometric has acquired considerable expertise in the development of offshore competency

centers (OCCs), with client specific requirements. OCCs lower IT costs (by as much as
30% or more), and support users more effectively. Geometric has set up such an OCC for
Ford in Chennai. It expects to establish more OCCs for its industrial customers in future,
considering increasing demand for these on account of various cost cutting measures
initiated by major auto OEMs.
GROWING REVENUES FROM INDUSTRIAL CUSTOMERS (RS M)
400
300
200
100
0
3QFY05
4QFY05
1QFY06
2QFY06
3QFY06
4QFY06
1QFY07
Revenues from industrial customers have been growing consistently over the past few
years. Contribution from these customers has grown to 45% (including engineering services,
which started operations in FY04) of the overall revenues in 1QFY07 from 10% at the
end of FY02. Given the greater thrust towards outsourcing to cost effective locations, we
believe Geometric would be able to increase market share among its industrial customer
base. We expect the share of industrial customers to improve to 49% of overall revenue
by the end of FY08 (we expect pure PLM services to contribute 39% and engineering
services to contribute 10%, without considering any acquisition). We expect the industrial
customer segment to report Rs2.2b revenues in FY08, when it would be the largest business
segment for Geometric.
EDS – taking the inorganic route to growth

Geometric Software launched engineering design services (EDS) in FY04 as part of its
strategy to position itself as an end-to-end solution provider – from the design stage to
1 August 2006 70
Geometric Software
enterprise solutions in the PLM space. The company currently services several clients in
this space, including Modern Engineering and Volvo. In FY05, its EDS practice registered
revenues of around US$1.5m, which has more than doubled in FY06 to US$3.3m. Based
on its 4QFY06/1QFY07 revenue run-rate, the company is confident of significant revenue
growth in FY07.
Despite expectation of high organic growth in revenues, the company intends to increase
its presence in EDS through the inorganic route. Currently, Geometric competes with
players including TCS, Infosys, Satyam and HCL Technologies in the EDS space. To
achieve differentiation in EDS, particularly in areas such as migration, re-modeling, re-
engineering and reverse engineering, Geometric is planning an acquisition that would add
to its revenue base in FY07.
Impending acquisition to be EPS accretive from FY08

Geometric Software is on the verge of acquiring a company in the EDS space for
which it would take on debt of US$10-15m. It is making a preferential issue to ICICI
Ventures at Rs117.66/share, through which it would raise US$10m (already raised in
1QFY07). This would result in equity dilution of 6.38% post the completion of
transaction. We expect Geometric to acquire around 85% of equity in the target
entity, while the rest would be acquired from the management of the acquired entity
against cash payment in future, based on a certain earnings objectives.
The management has indicated that the probable acquisition would help Geometric to
achieve US$100m revenues in FY07. This implies that the target company would
have a revenue run-rate of US$30m-35m. Taking into account the impending acquisition
and resulting scale in EDS (expected annual run rate of more than US$40m after
acquisition), we believe this activity would be a revenue growth driver for Geometric.
Offshoring of engineering design services is likely to register strong growth in the
future.
Although our current estimates are derived without considering the probable acquisition,
in the following table we have explained the potential upside.
POTENTIAL UPSIDE FROM THE IMPENDING ACQUISITION (RS M)
WITHOUT ACQUISITION WITH ACQUISITION
FY07E FY08E FY07E FY08E
Sales 3,289 4,541 4,215 6,421

PAT 419 600 435 673
Equity Cap 121.4 121.4 124.9 124.9
EPS 6.9 9.9 7.0 10.8
P/E (x) 11.8 8.3 11.7 7.6
Assumptions:
We have assumed revenues of US$32.5m for FY07 w.e.f. mid August 2006 from the probable target
company. We have assumed 2% PAT margin in FY07, with Geometric’s stake at 85% in the target
company.
1 August 2006 71
Geometric Software
For FY08, we have assumed that Geometric would repay debt of US$2.5m from the expected debt
of US$15m for the probable acquisition in FY07. Repayment is likely to be from the proceeds of
probable sell-off property in FY08.
The company has ESOPs of 35m equity shares, which could be diluted once the company achieves
the US$100m revenue mark. However, we have taken only 50% dilution from these ESOPs
considering non-fulfillment of the second requisite condition of PBT margins of 24-28% in FY07.
PLM-related products/solutions could be the ace in the pack

Geometric has developed some PLM-related products/solutions, which contribute about
15% of its revenues. Considering its strong global reseller network and recognition of its
products/solutions by PLM software OEMs, we expect its product revenues to grow at
53% CAGR over FY06-08. Geometric is working on integrating PLM software with
enterprise software, which could yield large upsides.
Strong reseller chain, recognition from OEMs to drive growth

Geometric has developed certain technologies to cater to PLM software developers and
end-users. Currently, the products business contributes 15% of Geometric’s overall
revenues. It has a rich desktop product portfolio that includes e-Drawings, GeomCaliper,
Nestlib, Feature Recognition, Instant Messaging, CollabView, as well as CAM solutions,
viz. CAMWorks. The company has a strong network of 80 resellers (40 active) worldwide
to sell its desktop products.
Besides the reseller chain, Geometric has also been licensing these technologies to OEM
software vendors. It has patented its Feature Recognition technology and has licensed it
to several OEMs. Dassault has included this as a component in its CATIA V5 offering.
Considering the healthy reseller chain as well as recognition of technologies by PLM
software OEMs, we expect the strong growth rate in products to continue.
CAMWorks holds immense potential

Geometric added the CAMWorks suite to its product portfolio through the acquisition of
TekSoft in 4QFY05. At the time of acquisition, TekSoft had a revenue run rate of US$2.7m
per year, at which it was barely breaking even. A year after the acquisition, TekSoft’s
revenue run rate has increased to more than US$4m and it is now reporting decent margins.
CAMWorks is currently one of Geometric’s largest selling products. After acquiring TekSoft,
Geometric has added various features and technologies to CAMWorks to increase its
offerings portfolio.
The market size for this product is estimated at around US$250m. The target segment for
CAMWorks is small and medium enterprises. The market is currently fragmented, with 5-
6 major competitors having revenues of US$15-20m. Geometric plans to increase its market
share by leveraging its low cost R&D base in India. TekSoft has turned profitable in
FY06, and margins are expected to improve to Geometric’s average in FY07. We believe
that CAMWorks would contribute positively to both revenue growth and margin expansion
over FY06-08.
1 August 2006 72
Geometric Software
CAD-PDM / X-PDM to fire the products business

Geometric has signed agreements with Dassault Systems and UGS Corp to integrate their
respective technologies (Dassault’s CAD/CAM software, CATIA V5 and UGS’ cPDM
product, Teamcenter – both leaders in their respective spaces). Geometric would be the
only approved vendor to know of the changes in the technologies of both these OEMs. We
believe that this would give it an edge in terms of adapting technologies for CAD as well
as the PDM software of these leaders and build intelligent integration tools that are superior
to competing products.
Two strong competitors agreeing to integrate their competing products indicates the strong
demand for integration tools from end users. Pilot projects to integrate Dassault’s CATIA
V5 with UGS’ Teamcenter were started 2-3 quarters ago, and are likely to be completed
in the next 2-3 quarters. When fully developed, the CAD-PDM product would showcase
Geometric’s capability to integrate design software with PDM software across various
other platforms. We believe that it would enable Geometric to create a niche for itself in
the PLM market.
Once commercialized, we expect the CAD-PDM product to improve revenue visibility

for Geometric’s product business. The company has tied up with leading system integrators
IBM and UGS to distribute the CAD-PDM product. License fees and implementation
fees could be significant considering the substantial IT-spend of the large automobile/
aerospace companies that would be the primary targets for this product. The relatively
larger deal sizes would result in higher margins for the CAD-PDM product.
Considering the significant revenue potential from this product in the long run, contribution
from product revenues could increase beyond 15% going forward (without considering
any acquisition), enabling Geometric to expand operating margins. In the following table,
we have tried to estimate the market for CAD-PDM product.
EXPECTED MARKET FOR CAD-PDM (US$ M)
2004 2005
UGS (Product Revenues) 715 863

Dassault Systems (Product Revenues) 964 1,161
Total 1,679 2,024
Expected Target Market for CAD-PDM Product
1% of Total Revenue 16.8 20.2
5% of Total Revenue 83.9 101.2
Even considering just 1% of total product revenues of UGS and Dassault, the target
market for the CAD-PDM product would be US$20m. This is around 40% of Geometric’s
consolidated revenues for FY06. Therefore, we believe that upside from this product
could be huge beyond FY07.
1 August 2006 73
Geometric Software
Integrating ERP/SCM with PLM software (X-PDM) – another big opportunity

Considering the increasing demand for PLM software by manufacturing companies
worldwide, Geometric is eying the big opportunity for integrating PLM with Enterprise
Software, which would enable linking changes in manufacturing departments with finance,
as well as creating more effective supply chain management tools. The company has
already started prototypes for integrating ERP with PLM and is also looking to develop an
integration tool for SCM with PLM. We believe that while these products will take time to
develop, they will expand Geometric’s product portfolio, which will result in strong brand
creation in the PLM industry.
Expect robust financial performance over FY06-08

With the upswing in the PLM cycle, Geometric’s financials have witnessed a marked
improvement. From 1QFY04 to 1QFY07, the company’s sales posted a compounded QoQ
growth of 10%, while operating profit grew at 9%. This is despite poor performance in
1HFY06 due to delay in start up of some projects, lack of execution capabilities and delay
in achieving a milestone in one of the bigger fixed-price projects. The company has adopted
remedial measures by replacing its sales team in major regions of US and Europe with
experienced staff from reputed IT companies to create a healthy pipeline of projects and
reduce the volatility of quarterly earnings.
QUARTERLY SALES TREND
800 Sales (Rs m) - LHS % change QoQ - RHS 24
600 16
400 8
200 0
0 -8
1QFY05E
1QFY04
2QFY04
3QFY04
4QFY04
2QFY05
3QFY05
4QFY05
1QFY06
2QFY06
3QFY06
4QFY06
1QFY07
In the recent past, the company has set up a training institute to provide training to fresh
engineers in the practical aspects of the PLM industry. This has created room for Geometric
to recruit more freshers and train them internally to make them billable. This has also
resulted in higher utilization rates in the past few quarters.
Considering the strong demand for PLM, the company’s internal restructuring and expansion
into EDS, we believe Geometric is now poised to register robust growth. Despite salary
hikes, we expect margins to improve in FY07 due to better performance in 1HFY07
1 August 2006 74
Geometric Software
(versus poor performance in 1HFY06) as well as robust growth in products. We expect

margins to move in narrow band in FY08. The CAD-PDM product would gain traction
from FY08, compensating for the pressure on margins due to salary hikes.
The company had earlier indicated a US$100m target in FY07. With performance falling
short of expectations and subsequent earnings revisions by the company during FY06, we
expect the company to report growth of 47.2% YoY in rupee terms in FY07 to touch
Rs3.3b (US$72m) in revenue. The deficit (to achieve US$100m) could, however, be
made up through an acquisition in FY07.
Valuations attractive; upgrading stock recommendation to Buy

We expect Geometric’s revenues to grow at 43% CAGR and post-tax profits to grow at
63% CAGR over FY06-08. The stock trades at attractive valuations of 8.3x FY08E
earnings (7.6x FY08E earnings if we consider its impending acquisition in the EDS space).
Based on our discussion with the management post the 1QFY07 results, we believe that
the acquisition is likely in August 2006.
Despite high growth visibility, better operating margins and higher return ratios, Geometric
is trading at a discount to peers such as Hexaware. We are upgrading our recommendation
from Neutral to Buy. Our 1-year target price of Rs145 (13-14x FY08E earnings including
acquisition and dilution) implies an upside of 78%.
PER BAND
200
24x
150 19x
15x
100
11x
50 7x
0
Jun-03
Oct-03
Dec-03
Feb-04
Jun-04
Oct-04
Dec-04
Feb-05
Jun-05
Oct-05
Dec-05
Feb-06
Jun-06
Apr-03
Aug-03
Apr-04
Aug-04
Apr-05
Aug-05
Apr-06
Aug-06
1 August 2006 75
Geometric Software
Concerns
Client concentration remains skewed, which is typical of a mid-tier company. Geometric
derives around 27% of its consolidated revenues from its top client – Dassault Systems.
Top-10 customers contribute 72-73% of revenues. The company is predominantly
looking at the partnership/alliance model rather than approaching user companies
directly. This strategy creates high dependence on a particular vendor/partner
notwithstanding the fact that the company might be working with various end customers
of that vendor/partner.
Lack of skilled PLM resources in the market would be a key constraint to growth.
Geometric has 1,524 software professionals in 1QFY07, which in our opinion represents
a key challenge for growth given the optimism in the PLM segment. Secondly, the
composition of mechanical engineers is lower in comparison to other engineering
disciplines. Hence, Geometric would be a key poaching ground for other Indian/MNC
players that are expanding their base in India. The company is addressing the issue by
developing an in-house training facility that would be capable of training 300 people at
any given time.
Given the large sized acquisition planned by the company, issues like management of
the integration process, smooth handling of personnel expectations, effective evaluation
of value of buy-out, shifting work offshore, etc. will be a challenge. Non-availability of
a target with the right PLM/EDS fit could impact market sentiment.
The company derives around 58% of its sales from offshore projects and approximately
60% of its revenues from US. Its profits could be negatively impacted by a rupee
appreciation, given that its natural hedge is lower than other companies. However, we
would also like to mention that revenues from Europe are relatively higher at 33%.
Any slowdown in R&D spends by the OEM vendors and their clients would have
much higher deceleration in earnings compared to other mid-tier players. In such an
eventuality, the stock could depreciate much more than others.
1 August 2006 76
Geometric Software
Sales 1,060 1,682 2,234 3,289 4,541 Basic (Rs)

Change (%) 26.0 58.6 32.8 47.2 38.1 EPS 7.7 4.9 4.0 6.9 9.9
Cash EPS 10.7 7.2 7.0 10.5 14.6
Employee Costs 569 923 1,251 1,820 2,618 Book Value 35.3 21.6 25.1 36.3 44.1
Travelling & Conveyance 53 80 119 151 194 DPS 0.6 0.8 0.8 1.3 1.8
Other Operating Expenses 149 213 370 526 660 Payout %(Incl.Div.Taxes) 14.4 16.2 17.5 18.1 18.2
EBITDA 289 466 494 791 1,069 Valuation (x)

% of Net Sales 27.3 27.7 22.1 24.1 23.5 P/E 16.6 20.5 11.8 8.3
Depreciation 82 128 172 220 284 Cash P/E 11.3 11.6 7.8 5.6
EV/Sales 2.7 2.1 1.5 1.0
PBT 271 389 350 592 836
Price/Book Value 3.8 3.2 2.2 1.8
Tax 29 70 61 96 137
Dividend Yield (%) 1.0 1.0 1.5 2.2
Rate (%) 10.5 18.1 17.4 16.2 16.4
PAT 242 319 289 497 699
Profitability Ratios (%)
RoE 24.1 25.5 17.2 23.1 24.6
Extraordinary 0 1 -33 0 0
RoCE 23.1 24.4 16.4 22.2 23.5
Net Income 208 275 259 419 600
Change (%) 22.2 31.8 -5.8 62.1 43.1
Turnover Ratios
Debtors (Days) 57 61 64 62 62
Y/E MARCH 2004 2005 2006 2007E 2008E
Share Capital 54 112 113 121 121 Leverage Ratio

Share Premium 130 100 127 567 567 Debt/Equity Ratio(x) 0.0 0.0 0.0 0.0 0.0
Reserves 777 990 1,184 1,516 1,992
Net Worth 962 1,203 1,424 2,205 2,680
Minority Interest 31 43 65 90 124 CASH FLOW STATEMENT (RS MILLION)
Loans 0 15 0 0 0
Y/E MARCH 2004 2005 2006 2007E 2008E
Capital Employed 993 1,261 1,490 2,295 2,804
CF from Operations 312 427 490 644 892
Gross Block 780 1,111 1,538 1,788 2,138 Cash for Working Capital 19 -142 -51 -106 -129
Less : Depreciation 230 357 516 736 1,020 Net Operating CF 331 286 439 538 763
Net Block 550 754 1,022 1,052 1,118

CWIP 50 88 46 50 50 Net Purchase of FA -322 -273 -395 -254 -350
Investments 178 135 214 264 364 Net Purchase of Invest. 44 53 15 -50 -100
Net Cash from Invest. -278 -220 -381 -304 -450
Curr. Assets 505 747 799 1,865 2,496
Debtors 200 366 423 694 849 Proceeds from Pvt. Place 24 24 28 472 34
Cash & Bank Balance 53 91 57 713 973 Proceeds from LTB/STB -30 15 -15 0 0
Loans & Advances 238 276 318 458 674 Dividend Payments -53 -66 -105 -52 -87
Other Current Assets 14 13 0 0 0 Cash Flow from Fin. -58 -28 -92 421 -53
Current Liab. & Prov 266 430 555 894 1,174
Creditors 12 44 61 70 111 Free Cash Flow 9 13 43 285 413
Other Liabilites 167 226 281 475 552 Net Cash Flow -6 38 -34 655 260
Provisions 88 161 212 349 511
Net Current Assets 239 316 244 970 1,322 Opening Cash Balance 58 53 91 57 713
Deferred tax liability -24 -31 -36 -41 -49 Add: Net Cash -6 38 -34 655 260
Application of Funds 993 1,261 1,490 2,295 2,804 Closing Cash Balance 53 91 57 713 973
E: MOSt EstimatesE: MOSt Estimates
1 August 2006 77
Update
Hexaware Technologies
BLOOMBERG
STOCK INFO.
HEXW IN
1 August 2006 Buy
BSE Sensex: 10,752
REUTERS CODE
S&P CNX: 3,148 HEXT.BO Previous Recommendation: Buy Rs141
Y/E DECEMBER 2004 2005 2006E 2007E Hexaware has been showing signs of a strong, earlier-than-expected
revival from the loss in revenues resulting from the transfer of the
Sales (Rs m) 5,459 6,787 8,513 11,285
EBITDA (Rs m) 787 1,087 1,332 1,731
PeopleSoft ISC to Oracle. Its current outstanding order book stands at
Net Income (Rs m) 637 915 1,243 1,577
over US$200m, which provides good revenue visibility. The company
EPS (Rs) 5.5 7.2 9.5 12.1 has sufficient margin levers to protect against wage inflation. Given the
EPS Growth (%) 162.5 32.3 31.7 27.0 high revenue visibility and the presence of sufficient margin levers, we
BV/Share (Rs) 20.5 26.6 57.3 67.0 reiterate our Buy recommendation.
P/E (x) 25.7 19.4 14.8 11.6
Strength in HR IT to act as differentiator: Hexaware has built
P/BV (x) 6.9 5.3 2.5 2.1
considerable expertise in the HR IT domain, providing consulting, IT
EV/EBITDA (x) 22.4 15.8 10.5 8.0
EV/Sales (x) 3.2 2.5 1.7 1.2
and BPO services. Revenue from HR IT solutions has grown at 113%
RoE (%) 26.4 29.8 22.7 19.5
CAGR over CY03-05. Revenue contribution from HR IT has increased
RoCE (%) 29.5 32.4 24.0 21.5 from nil in 1QCY03 to 7% as in 2QCY06. Going forward, we expect
Hexaware to establish itself as the leading vendor for HR IT offshoring.
Strong presence in Europe could accelerate revenue growth:

Hexaware was one of the early players to penetrate the European
KEY FINANCIALS
Shares Outstanding (m) 130.4 geography, generating about US$35m business from Europe in CY05.
Market Cap. (Rs b) 18.3 Given its strong presence in Europe, especially Germany, we expect
Hexaware to gainfully exploit the increasing offshoring trend in Europe.
Association with General Atlantic to open up opportunities:
Dividend Yield (%) 1.0
General Atlantic has infused Rs3b, which Hexaware intends to utilize to
create infrastructure assets, meet working capital needs and enable
suitable acquisitions. Besides, the association with General Atlantic would
act as a door opener for Hexaware in acquiring new clients.
STOCK DATA
Sufficient margin levers to protect against wage inflation: Higher
offshore salary hikes are likely to put pressure on margins. However,
Promoters 25.9
Hexaware has levers like high offshore composition and possibility to
Domestic Institutions 7.0 cut SG&A expenses to protect its margins.
FIIs/FDIs 54.7
Others 12.5 Valuations attractive; Buy: Hexaware is a niche player in the
PeopleSoft and HR IT domains. This would help it to weather the
Average Daily Turnover onslaught of large players while bidding for new deals. We expect
revenues to grow at 29% CAGR over CY05-07. Net profit is likely to
1/6/12 Month Rel. Performance (%) 3/5/-1 grow faster at 31% CAGR. Valuations are attractive, with the stock
1/6/12 Month Abs. Performance (%) 5/14/40 trading at 14.8x CY06E and 11.6x CY07E EPS. We reiterate Buy with
a target price of Rs180, an upside of 28%.
1 August 2006 78
Hexaware
Expertise in enterprise solutions helps tide over loss of PeopleSoft ISC

In October 2004, the PeopleSoft ISC was transferred to Oracle and Hexaware lost what
constituted about 10% of its total revenue base. However, Hexaware has been showing
signs of a strong revival. Revenues and profits, which were expected to revive post 1HCY06,
rebounded in 1QCY05 itself. This is primarily due to strong wins in the ERP solutions
space, especially in the PeopleSoft domain. Following Oracle’s decision to continue
supporting PeopleSoft technology and the release of PeopleSoft 8.0, customers have started
investing in PeopleSoft technologies again. This has led to significant deal wins in the
PeopleSoft space for Hexaware.
Hexaware continues to have a dominant PeopleSoft practice. It currently employs over

750 PeopleSoft certified professionals, the largest in India and one of the largest globally.
Following the uncertainty regarding the future of PeopleSoft technology post the acquisition
by Oracle, Hexaware also has built up expertise in other enterprise application solutions
such as SAP, Oracle and SEIBEL. Enterprise solutions currently contribute over 40% of
Hexaware’s total revenues, as opposed to 40.3% for Satyam, 16.5% for Infosys and
25.3% for TCS. According to NASSCOM estimates, global spnding on ERP is likely to
grow at 8.5% CAGR from $26.7b in 2004 to $37b in 2008. Given its strong presence in the
ERP domain, we expect Hexaware to outperform the industry in terms of revenue growth
post CY06 (CY06 growth would be hurt by the loss of PeopleSoft ISC).
ENTERPRISE SOLUTIONS REVENUES OF TOP PLAYERS (RS M)
JUN-04 SEP-04 DEC-04 MAR-05 JUN-05 SEP-05 DEC-05 MAR-06 JUN-06
Infosys 2,276 2,641 2,888 3,041 3,149 3,625 4,127 4,487 4,975
% of Revenue 15.0 15.1 15.4 15.3 15.2 15.8 16.3 17.1 16.5
TCS 4,715 5,469 5,698 5,358 5,879 6,906 7,734 9,145 10,485
% of Revenue 22.1 22.5 22.1 20.7 21.7 23.4 22.4 24.5 25.3
Satyam 2,521 3,005 3,146 3,402 3,866 4,403 4,822 4,949 5,583
% of Revenue 32.7 35.4 35.3 35.7 37.4 39.4 39.4 39.3 40.3
Strength in HR IT to act as differentiator

Hexaware has built considerable expertise in the HR IT domain, providing consulting, IT
services and BPO services. Its HR IT practice, which started out as a PeopleSoft
specialization, has been extended to non-PeopleSoft technologies – notably SAP HR.
Hexaware launched its SAP HR practice in 1QCY04, with the intention of tapping customers
in Germany, where the number of SAP users are high. The company currently employs
over 400 people in the consultancy and IT services, while BPO is addressed through its
100% subsidiary – Caliber Point.
1 August 2006 79
Hexaware
HEXAWARE’S OFFERINGS IN THE HR IT SPACE
2QCY06 REVENUE SERVICE OFFERINGS 2QCY06 EMPLOYEE
CONTRIBUTION DEPLOYMENT
7% HR Consulting Services + 400

Aligning HR Strategy with corporate goals
HR-IS Architecture & Design
Business Process Re-engineering for HR
HR - IT Services
Employee Portals - 24 x 7 Support and Maintenance of HR Systems
HR Analytics, Data Warehousing & Reporting
Implementation of HR Applications
Integration of disparate HR systems
Conversion/ Upgrade of HR Systems
Globalization and Consolidation of HR Systems
HR BPO Services
Payroll Processing
Benefits Administration
Resume Processing
Reporting
Help desk Management
General Administrative activities and records management
Revenue from HR IT solutions has increased from Rs91m in CY03 to Rs480m in CY05,
a CAGR of 113%, albeit on a small base. Revenue contribution from HR IT has increased
from nil in 1QCY03 to 7% as at end-4QCY05. Going forward, we expect Hexaware to
establish itself as the leading vendor for HR IT offshoring.
CONTRIBUTION OF HR IT TO HEXAWARE’S REVENUES IS RISING
Revenue (Rs m) - LHS % Contribution - RHS

160 8%
120 6%
80 4%
40 2%
0 0%
Mar-03
Mar-04
Mar-05
Mar-06
Jun-03
Sep-03
Dec-03
Jun-04
Sep-04
Dec-04
Jun-05
Sep-05
Dec-05
Jun-06
1 August 2006 80
Hexaware
HR outsourcing on the increase

According to NASSCOM estimates, global ERP spending is estimated to touch US$37b
by CY08. Increased IT spending, mainly in industries such as healthcare and
manufacturing, is driving growth in this segment. According to the NASSCOM Strategic
Review 2006, HR administration outsourcing has been increasing steadily over the
past 6-8 quarters. According to the study, over 100 major HR outsourcing deals have
been announced during the past 24 months. Since organizations can achieve 25-30%
cost reduction through outsourcing HR and administration related services, more and
more of them are looking at this as a route to optimizing costs.
According to a recent study by Hewitt Associates, the most common outsourced HR

functions include outplacement services, employee assistance programs, contribution
and welfare administration, and defined benefits. Companies are planning to outsource
activities such as leave management, learning and development, payroll, recruiting,
health and global mobility by CY08. Reports indicate that 70-80% of all HR activities
have the potential to be outsourced. Currently, the leading players in HR outsourcing
are MNCs such as ADP, Hewitt and Fidelity. Indian IT vendors do not have a significant
presence in this domain.
Strong presence in Europe could accelerate revenue growth

Hexaware was one of the early players to penetrate the European geography, generating
about US$35m business from Europe in CY05. Europe contributed 27% of total revenue
for Hexaware in 2QCY06. Germany is the largest contributor to revenue from Europe for
Hexaware, with estimated revenue of around US$21m in CY05.
REVENUES FROM EUROPE FOR TOP PLAYERS (RS M)
Infosys 3,369 3,744 4,145 4,630 4,951 5,437 6,305 6,691 7,899
% of Revenue 22.2 21.4 22.1 23.3 23.9 23.7 24.9 25.5 26.2
TCS 4,715 5,540 6,059 6,224 6,367 6,434 7,665 9,108 11,480
% of Revenue 22.1 22.8 23.5 24.1 23.5 21.8 22.2 24.4 27.7
Satyam 1,175 1,357 1,588 1,611 1,779 2,049 2,259 2,349 2,439
% of Revenue 15.2 16.0 17.8 16.9 17.2 18.3 18.5 18.6 17.6
Hexaware 305 308 389 463 360 351 400 453 548
% of Revenue 23.8 21.1 24.8 28.2 21.8 20.0 23.0 25.7 26.5
Hexaware is amongst the top Indian IT services providers in Germany, despite its smaller
size. With Europe opening up to increased offshoring, industry players have expressed
confidence in bagging increased number of contracts from Europe. Forrester estimates
suggest that the IT spending in Europe is expected to grow at a CAGR of 6% over the
next five years. European firms are likely to spend €146b on IT services by CY11. UK is
expected to be the top market for IT outsourcing, with Germany and France following
suit. Forrester expects German IT services spending to grow at 5.7% CAGR from €24.8b
in 2006 to €32.7b in 2011. Given the strong presence of Hexaware in Europe, especially
Germany, we expect Europe to contribute a larger proportion of Hexaware’s revenues in
the coming quarters.
1 August 2006 81
Hexaware
CONTRIBUTION FROM EUROPE RISING FOR HEXAWARE (RS M)
MAR-04 JUN-04 SEP-04 DEC-04 MAR-05 JUN-05 SEP-05 DEC-05 MAR-06 JUN-06
Revenue by Geography
USA 766 898 1,061 1,096 1,099 1,236 1,347 1,258 1,240 1,436
% Change QoQ 67.0 70.0 72.6 69.8 67.0 74.9 76.7 72.3 70.4 69.4
% Change QoQ 5.1 17.2 18.2 3.3 0.3 12.5 8.9 -6.6 -1.4 15.8
Europe 305 305 308 389 463 360 351 400 453 548
% Change QoQ 26.7 23.8 21.1 24.8 28.2 21.8 20.0 23.0 25.7 26.5
% Change QoQ 28.1 0.0 1.0 26.2 18.8 -22.2 -2.4 14.0 13.1 21.1
Opportunity to carve a niche in airlines and transportation

The airlines sector, which had been witnessing troubled times post 9/11 has improved
visibly over the past couple of years. According to estimates by the International Air
Transport Association (IATA), international traffic data for May 2006 showed 7% growth
in passenger demand and 5.1% growth for freight over May 2005. According to the Airline
IT Trends Survey 2005 by SITA, the leading IT business solutions and communications
services provider to the air transport industry, investment in IT was up to 4.6% of revenues
in CY05, up from 4.1% in CY04 and 2.1% in CY02-03.
An increasing number of airports and airlines offices are moving to self-service models,
which would lead to increased dependence on technologies such as RFID, biometric
identification and managed networks. Concerns that a rising oil price scenario could cut
into profitability have resulted in airlines looking for cost effective solutions from their IT
services providers. While IT spend as a percentage of revenue has increased, airlines are
now looking at extracting maximum value from their IT investments.
Hexaware has built technology expertise around IBM and Unisys, the two main technologies
used by airlines to provide services to clients. The airlines & transportation vertical
contributed 16.2% of Hexaware’s overall revenues in CY05 and 17% of its overall revenues
in 2QCY06 (down from 19% in 1QFY06). The top clients in this vertical include six of the
world’s top-10 airlines, including Lufthansa, Virgin, Air Canada and Northwest. Hexaware
has created a sizeable practice, with about 260 experts. Given its relationships with large
airlines and technology providers, we believe that Hexaware has the potential to transform
into a leading provider of IT services for the airline and transport industry.
Association with General Atlantic to open up further opportunities

In December 2005, Hexaware announced an agreement with General Atlantic LLC
(GA). Under this agreement, GA invested Rs3b (US$67.6m) in Hexaware, which
made a preferential allotment of 10.57m equity shares and 1.056m optionally convertible
preference shares to GA. Post conversion, GA would hold 14.99% stake in Hexaware.
The deal was signed at an allotment price of Rs142.1, with a 10:1 ratio for conversion
of preference shares into equity. The preference shares carry a coupon rate of 2.95%
for the first 18 months. In case the conversion option is not exercised, the shares
1 August 2006 82
Hexaware
would carry a coupon rate of 5%, thereafter. The deal values Hexaware at Rs20b
(US$450m) post-investment.
Hexaware will utilize the proceeds to create infrastructure assets, enable suitable
acquisitions and to meet working capital needs. We believe that the association with
GA, a keen investor in the Indian IT services industry, is likely to act as a door opener
for Hexaware in acquiring new clients. There are also likely to be some benefits in
terms of additional/new business from GA’s associate companies.
Acquisitions to strengthen domain expertise

The Hexaware management has in the past indicated that it would look at acquisitions that
are in line with its ‘Enter-Penetrate-Radiate’ strategy. This implies that potential targets
for acquisitions would be companies that would deepens Hexaware’s domain expertise
and strengthen its presence in existing geographies. It is targeting high growth companies
that would not dilute existing operating margins. Industry sources suggest that Hexaware
is looking at an acquisition size of US$15-25m. Following the recent infusion of funds from
dilution of stake to General Atlantic, Hexaware would have around US$100m cash on its
balance sheet. The capex plans for CY06-07 are expected to be US$20-25m. We expect
a significant part of the infused funds to be used for acquisitions.
Revenue visibility high, with US$200m order book

Following Oracle’s decision to transfer the PeopleSoft ISC to itself, Hexaware had to
revise its revenue guidance downwards. Unexpected delays in project ramp-ups and slower
growth from top clients also led to lowering of revenue guidance for CY05. However,
revenue visibility has improved since then, with the company averaging US$30-40m in
new orders per quarter. The outstanding order book at present amounts to over US$200m,
which provides good revenue visibility over the coming quarter. In the prevailing strong
demand scenario, we expect the robust order flows to further strengthen the order book
and improve revenue visibility.
Margins to move within a narrow band despite higher than industry wage
hikes
Hexaware announced hikes to the extent of 5% in onsite salaries and 15-17% in offshore
salaries in 2QCY06. The onsite hikes were higher than the industry average of 2-3% in
order to guard against poaching by MNC competitors, and due to the high demand scenario
in the ERP space. The offshore salary hikes were higher than the industry average of 13-
15%, as freshers (who were at lower base) were given significant hikes during the quarter.
While higher offshore salary hikes are likely to put pressure on margins, the company has
sufficient levers available , including offshore composition and SG&A expenses. We expect
margins to move in a narrow band over the next 2 years.
1 August 2006 83
Hexaware
Sufficient margin levers to protect against wage inflation

High composition of onsite revenues: Onsite composition for Hexaware is
high at 60.4% (2QCY06). This is up from 57.2% in CY05, primarily due to the
transfer of the PeopleSoft ISC, which had a high offshore component. The start of
new projects also contributed to a high onsite ratio. As projects start moving offshore,
we expect the onsite composition to reduce over the coming quarter, which would
result in improved margins for the company. The company expects to increase
offshore composition to mid-40% (currently at 39.6%) by the end of CY06.
TRANSFER OF ISC HAS INCREASED ONSITE COMPOSITION (%)
80 Onsite Offshore
60
40
20
0
Mar-05
Mar-06
Jun-04
Sep-04
Jun-05
Sep-05
Jun-06
Dec-04
Dec-05
Scope to reduce SG&A expenses: Hexaware’s SG&A expenses have risen

from 18-19% in CY02-03 to 22.5% in CY05. This is due to increased selling and
marketing expenses in a bid to gain more orders to make up for the loss of revenue
due to the transfer of the PeopleSoft ISC. SG&A expenses of top industry players
hover at 13-15% of revenue. In 2QCY06, Hexware has reduced its SG&A expenses
to 21% of revenue
SG&A EXPENSES ARE HIGH AT 22.5% OF REVENUE
Revenue (Rs m) - LHS % SG&A Expenses - RHS

8,000 28
6,000 21
4,000 14
2,000 7
0 0
2002 2003 2004 2005
1 August 2006 84
Hexaware
Billing rates could see upside post ISC transfer: While the PeopleSoft ISC
had higher margins due to high offshore composition and lower sales & marketing
expenses, billing rates were lower than the company average. Post the transfer of
the PeopleSoft ISC, 1QCY06 saw offshore billing rates increase by 5.1% QoQ
(billing rate improvement in 1QCY06 without ISC over 4QCY05 with ISC). As the
company starts to derive higher percentage of revenues from newer businesses,
we expect further improvement in billing rates, which would push up margins.

Hexaware is a niche player in the PeopleSoft and HR IT domains. This would help it to
weather the onslaught of large players while bidding for new deals. We expect revenues
to grow at 29% CAGR over CY05-08. Net profit is likely to grow faster at 31% CAGR
due to expected decline in tax rate on account of merger of loss making subsidiary in the
US. Valuations are attractive, with the stock trading at 14.8x CY06E and 11.6x CY07E
EPS. On a fully diluted basis, the stock trades at 15.9x CY06E and 12.6x CY07E EPS
(our estimates do not factor in any upside from future acquisitions). We reiterate Buy with
a target price of Rs180, an upside of 28%.
PER BAND
240
21x
180 17x
13x
120
10x
7x
60
0
Jun-03
Oct-03
Dec-03
Feb-04
Jun-04
Oct-04
Dec-04
Feb-05
Jun-05
Oct-05
Dec-05
Feb-06
Jun-06
Apr-03
Aug-03
Apr-04
Aug-04
Apr-05
Aug-05
Apr-06
Aug-06
1 August 2006 85
Hexaware
Y/E DECEMBER 2003 2004 2005 2006E 2007E Y/E DECEMBER 2003 2004 2005 2006E 2007E
Sales 3,390 5,459 6,787 8,513 11,285 Basic (Rs)

Change (%) 36.4 61.0 24.3 25.4 32.6 EPS 2.1 5.5 7.2 9.5 12.1
Fully Diluted EPS 1.5 5.5 7.2 8.8 11.2
Cost of Services 2,150 3,392 4,173 5,394 7,323 Cash EPS 2.5 6.1 8.7 22.3 28.5
SG&A Expenses 929 1,280 1,526 1,786 2,230 Book Value 16.6 20.5 26.6 57.3 67.0
DPS 0.0 1.0 1.4 1.9 2.4
EBITDA 311 787 1,087 1,332 1,731 Payout %(Incl.Div.Taxes) 0.0 18.3 20.0 20.0 20.0
% of Net Sales 9.2 14.4 16.0 15.7 15.3
Other Income 50 98 146 203 308 P/E 25.7 19.4 14.8 11.6
Cash P/E 23.0 16.2 6.3 4.9
PBT 211 724 1,012 1,327 1,755 EV/EBITDA 22.4 15.8 10.5 8.0
Tax 39 86 97 83 179 EV/Sales 3.2 2.5 1.7 1.2
Rate (%) 18.6 11.9 9.6 6.3 10.2 Price/Book Value 6.9 5.3 2.5 2.1
Dividend Yield (%) 0.7 1.0 1.4 1.7
PAT 172 637 915 1,243 1,577

Share of profit in Asso. Cos. 68 0 0 0 0
RoE 11.2 26.4 29.8 22.7 19.5
Net Income 240 637 915 1,243 1,577
RoCE 9.4 29.5 32.4 24.0 21.5
Change (%) -47.8 165.8 43.6 35.9 26.8
Turnover Ratios
Debtors (Days) 96 91 99 87 94
BALANCE SHEET (RS MILLION) Fixed Asset Turnover (x) 2.9 3.9 4.3 3.9 3.9
Y/E DECEMBER 2003 2004 2005E 2006E 2007E
Share Capital 229 233 239 261 261 Leverage Ratio

Convertible Pref Sh. Cap 0 0 0 1,502 1,502 Debt/Equity Ratio (x) 0.0 0.0 0.0 0.0 0.0
Share Premium 1,693 1,719 1,750 3,228 3,228
Reserves 239 718 1,486 2,484 3,744 CASH FLOW STATEMENT (RS MILLION)
Net Worth 2,161 2,670 3,474 7,475 8,735 Y/E DECEMBER 2003 2004 2005E 2006E 2007E
Loans 26 52 62 50 40 CF from Operations 370 805 1,130 1,249 1,553
Capital Employed 2,187 2,722 3,536 7,525 8,775 Cash for Working Capital 18 -388 -431 -232 -664
Net Operating CF 388 417 699 1,017 889
Gross Block 1,165 1,402 1,564 2,164 2,914
Less : Depreciation 419 541 633 842 1,124 Net Purchase of FA -272 -364 -175 -848 -600
Net Block 746 861 931 1,322 1,790 Net Purchase of Invest. -153 9 -201 203 308
Other LT Assets 130 67 30 25 20 Net Cash from Invest. -425 -356 -377 -645 -292
Investments 392 393 653 653 653
Equity and other related items 24 37 31 1,501 0

Curr. Assets 1,530 2,437 3,090 6,712 8,138 Proceeds from Pvt. Place. 0 0 0 1,502 0
Debtors 888 1,361 1,836 2,036 2,911 Proceeds from LTB/STB -161 26 10 -12 -10
Cash & Bank Balance 316 391 534 3,693 3,953 Interest/ Dividend Payments -18 -49 -220 -204 -327
Loans & Advances 326 685 720 982 1,275 Cash Flow from Fin. -154 14 -179 2,787 -337
Current Liab. & Prov 612 1,145 1,170 1,437 1,926
Creditors 170 165 173 294 325 Free Cash Flow 115 53 524 169 289
Other liabilites 343 606 587 773 1,060 Net Cash Flow -192 75 143 3,159 259
Provisions 100 373 411 370 541
Net Current Assets 918 1,293 1,920 5,275 6,212 Opening Cash Balance 508 316 391 534 3,693
Misc. Expenses 2 0 0 0 0 Add: Net Cash -192 75 143 3,159 259
Application of Funds 2,187 2,722 3,536 7,525 8,775 Closing Cash Balance 316 391 534 3,693 3,953
E: MOSt Estimates
1 August 2006 86
Update
i-flex solutions
BLOOMBERG
STOCK INFO.
IFLEX IN
1 August 2006 Buy
BSE Sensex: 10,752
REUTERS CODE
S&P CNX: 3,148 IFLX.BO Previous Recommendation: Buy Rs1,291
Y/E MARCH 2005 2006 2007E 2008E i-flex occupies a unique position in the Indian IT services segment, with
its strong suite of core banking and business intelligence solutions in the
Sales (Rs m) 11,404 14,835 20,064 25,851
EBITDA (Rs m) 2,770 2,950 4,286 5,660
financial services domain. We believe that the recent change in its
Net Income (Rs m) 2,031 2,190 3,289 4,304
parentage would help buoy growth in both its products and services
EPS (Rs) 27.2 28.7 43.0 56.3 business. Given the increased revenue/earnings visibility, we reiterate
EPS Growth (%) 19.1 5.9 49.6 30.8 our Buy recommendation.
BV/Share (Rs) 148.3 178.8 213.0 258.4
P/E (x) 47.5 44.9 30.0 22.9 Oracle branding to start reflecting in higher revenue for
P/BV (x) 8.7 7.2 6.1 5.0 FLEXCUBE: With the acquisition of i-flex by Oracle, the main hurdles
EV/EBITDA (x) 32.4 30.4 20.4 15.5 to its growth – the Citigroup parentage and lack of marketing muscle
EV/Sales (x) 7.9 6.0 4.4 3.4 have been removed. Reseller agreements for FLEXCUBE product would
RoE (%) 20.1 17.6 22.0 23.9 ensure acceleration in i-flex’s products business.
RoCE (%) 26.2 21.8 27.0 29.3
Reseller agreement with Oracle, Basel II deadline to boost

Reveleus Basel II: Post the reseller agreement with Oracle, i-flex’s
Reveleus Basel II has bagged significant client wins. The deadline for
KEY FINANCIALS
Shares Outstanding (m) 76.5 implementing the Basel II basic module is 2006, which should also
Market Cap. (Rs b) 98.7 increase deal wins for the product.
Deal sizes to get larger, with greater composition of license fees:
Dividend Payout (%) 5.0 The number of large size deals (>US$5m) for i-flex has been increasing
Dividend Yield (%) 0.4 over the past few quarters. These deals are likely to have longer
implementation cycles and higher composition of license fees, which
would result in higher margins per deal.
STOCK DATA Increased contribution from products to lead to margin

52-Week Range 1,475/750 improvement: Following the pick-up in product sales, we expect strong
Major Shareholders (as of June 2006) % growth in license fees (CAGR of 37% over FY06-08), which should
Promoters 52.5
boost margins. Margins in the services business are likely to move in a
FIIs/FDIs 9.3
narrow band.
Others 24.3
Valuations attractive; Buy: We estimate revenue growth of 35% in
FY07 and 28.8% in FY08. We expect that net profit would grow faster
at 50.2% in FY07 and 30.8% in FY08. i-flex trades at 22.9x FY08E
1/6/12 Month Rel. Performance (%) 13/7/15 EPS of Rs56.3. We maintain Buy with a target price of Rs1,440 (25-
1/6/12 Month Abs. Performance (%) 14/16/55 26x FY08E EPS).
1 August 2006 87
i-flex solutions
Oracle branding to start reflecting in higher revenues for FLEXCUBE

The global market for banking applications is estimated at US$80b. Almost 80% of the IT
spend on banking applications is on homegrown systems. However, an increasing number
of banks in Europe and US are now looking at replacement of homegrown legacy
applications with third-party software. Hence, there is immense potential for independent
third-party software developers specializing in banking applications. New markets such as
China and Japan also offer scope for growth.
One of the reasons why i-flex was unable to fully exploit the market potential was its
parentage. Until recently, it was a Citigroup company. Though this helped i-flex acquire
strong domain expertise and develop top-class products, a number of tier-I multi-national
banks were loath to do business with a competitor group company. With Oracle having
acquired majority stake in August 2005, i-flex no longer suffers this disadvantage.
Temenos, i-flex’s main competitor, had gained ground and i-flex faced rough weather in
late FY05 and early FY06. It had to raise S&M expenditure steeply, which adversely
impacted its overall financial performance. i-flex’s flagship product, FLEXCUBE, topped
the industry in terms of number of installations. However, Temenos continued to have
much bigger deal sizes – almost twice the average for i-flex.
We believe that following its acquisition by Oracle, i-flex is now positioned to grab the
lion’s share in the banking software market. Currently, 17 of the top-20 banks are Oracle
customers. Also, Oracle services 8,500 financial institutions, which would now be accessible
to i-flex. Top-tier banks that previously shied away from i-flex due to concerns over its
association with Citibank would no longer perceive any threat to working with i-flex. The
Oracle branding has already begun to reflect in i-flex’s product revenues.
I-FLEX'S PRODUCT REVENUE GROWING POST ACQUISITION BY ORACLE
3,200
Oracle
2,400
acquisition
1,600
800
0
Jun-03
Dec-03
Mar-04
Jun-04
Dec-04
Mar-05
Jun-05
Dec-05
Mar-06
Jun-06
Sep-03
Sep-04
Sep-05
1 August 2006 88
i-flex solutions
Post the change in its parentage, i-flex has already signed deals for FLEXCUBE with two
tier-I US banks. Oracle’s sales force is already pushing i-flex’s products and post the end-
to-end reseller agreement, overseas marketing would get further impetus. We expect the
integration with Oracle’s sales and marketing team (with an estimated size of 7,500) to be
completed in 6-9 months. The full benefits of Oracle’s sales and marketing backing would
be visible from FY08.
Reseller agreement, Basel II deadline to boost Reveleus Basel II

Following the reseller agreement with Oracle and integration with the Oracle sales force,
i-flex’s Reveleus Basel II has been gaining traction. Oracle has discontinued its own
Basel II module from its BI product known as OFSA. Reveleus Basel II has since bagged
significant client wins, including a tier-I banking institution in North America.
REVELEUS BASEL II HAS BEEN GAINING TRACTION
JUN-05 SEP-05 DEC-05 MAR-06 JUN-06
Client Additions (Nos)

Products 16 8 20 21 13
Reveleus 2 2 3 3 3
Total 33 16 22 27 22
In US and Europe, the deadline for implementing the Basel II basic module is 2006 and the
advanced module has to be implemented by 2007. In India, the RBI has fixed a deadline of
2006 for the basic module. Since the Reveleus Basel II offering can meet the requirements
of both the basic and advanced modules, the traction in Reveleus Basel II is expected to
be robust, going forward. The company has already started gaining traction for its Basel II
advanced module in Europe.
Deal sizes to get larger, with greater composition of license fees

The number of large size deals (>US$5m) has been increasing for i-flex over the past few
quarters. These deals are likely to have longer implementation cycles and higher composition
of license fee revenues (30-40%), which would result in higher margins per deal. Large
deals are also likely to increase implementation fees in future. In certain Tier I deals, the
master agreement would include a certain number of countries for rollout but the license
fees would be added to the tank only upon confirmation from each country. We expect
that this would result in higher additions to tank size towards the end of FY07. In FY06, i-
flex won orders worth US$76m, a growth of 38%.
1 August 2006 89
i-flex solutions
BACK ENDED TIER-I DEALS TO PUSH UP TANK IN 2HFY07
80 Tank Size - LHS License Fee Signings - RHS 32
60 24
40 16
20 8
0 0
Mar-04
Jun-04
Dec-04
Mar-05
Jun-05
Dec-05
Mar-06
Sep-04
Sep-05
There was a spike in license fee signings in 2HFY06, indicating early results of the
association with the Oracle brand name. Going forward, we expect license revenue booking
to remain high as the number of deals continues to increase. The growth in order wins
indicates higher visibility for product revenues and earnings. We expect the products
business to grow at a CAGR of 35.6% over FY06-08. Contribution of products to overall
revenues would increase to 53.% from 51 %.
Increased contribution from products to lead to margin improvement

Following the drop in revenues in 1QFY07, i-flex’s margins fell sharply from near 30% in
4QFY06 to 11.2% in 1QFY07. The primary reason for this was a sharp decline in license
fee booking during the quarter, coupled with increase in wage costs due to salary hikes.
With sales of FLEXCUBE and Reveleus picking up, we expect strong growth in license
fees – CAGR of 37% over FY06-08. This in turn should boost margins.
EXPECT EBITDA MARGINS TO MOVE IN A NARROW BAND GOING FORWARD
28,000 Revenue (Rs m) - LHS EBITDA (%) - RHS 40
21,000 30
14,000 20
7,000 10
0 0
2003 2004 2005 2006 2007E 2008E
1 August 2006 90
i-flex solutions
Services business to witness healthy growth

Oracle does not have IT services capabilities of its own. According to industry sources,
Oracle diverts almost US$200m p.a. worth of service requirements to Indian vendors
including Infosys, TCS and Wipro, which i-flex could corner using its status as an Oracle
company. Oracle is primarily a product-focused company that might not be interested in
growing a lower margin services business. However, i-flex continues to be upbeat about
the services business and has already set up an Oracle Excellence Center in Bangalore,
with 150-200 personnel working on Oracle-related services.
BFSI REVENUES (RS M)
Infosys 5,159 6,140 6,602 6,717 7,520 8,190 9,115 9,446 10,975
% Change QoQ 15.2 19.0 7.5 1.7 12.0 8.9 11.3 3.6 16.2
TCS 7,745 9,067 10,211 10,258 11,054 12,189 14,432 15,603 17,075
% Change QoQ 0.0 17.1 12.6 0.5 7.8 10.3 18.4 8.1 9.4
Wipro 2,003 2,339 2,634 2,753 3,082 3,503 4,096 4,676 5,133
% Change QoQ 10.0 16.8 12.6 4.5 11.9 13.6 16.9 14.2 9.8
Satyam 2,109 2,707 2,693 2,736 2,792 3,211 3,428 3,631 4,112
% Change QoQ -4.5 28.3 -0.5 1.6 2.0 15.0 6.8 5.9 13.2
i-flex 981 1,288 1,422 1,604 1,509 1,825 1,805 1,891 1,984
% Change QoQ 11.6 31.4 10.4 12.8 -5.9 20.9 -1.1 4.7 4.9
i-flex expects its services business to grow in line with industry growth rates (25-30%)
considering its strong domain expertise in BFSI. The management is also open to acquisitions
in this space, but has asserted that it would not be interested in a typical IT services
company. Possible acquisition targets are likely to be BFSI specialists possessing either
IP-based or high-end niche business. We expect the services business to grow organically
at a CAGR of 27% over FY06-08. The contribution of services to overall revenues would,
however, reduce to 43.8% from 47.4%.
Reiterate Buy
The Oracle parentage has led to a revival in i-flex’s products business, with both FLEXCUBE
and Reveleus winning significant deals over the past three quarters. The reseller agreements
would further fuel the pace of growth, as i-flex would be able to use the Oracle sales force
to expand its global reach. We estimate revenue growth of 35.2% in FY07 and 28.8% in
FY08. Net profit would grow faster at 50.2% in FY07 and 30.8% in FY08.
i-flex is one-of-a-kind in the Indian market. Its peers are international players such as
Temenos and Misys. We present a comparative valuations table below:
1 August 2006 91
i-flex solutions
I-FLEX: VALUATIONS ATTRACTIVE
EPS CAGR (%) STOCK P/E (X)
(FY06-08) PRICE FY07 FY08
Temenos 32.2 16.7 42.6 29.0

Misys 0.6 2.4 17.2 15.5
i-flex 39.9 1,291 30.0 22.9
Source: Bloomberg/Motilal Oswal Securities
Though i-flex is trading at a premium to Misys on P/E basis, it is trading at a significant

discount on a PEG basis. While i-flex’s EPS is likely to grow at 39.9% CAGR over FY06-
08, Misys’ EPS is expected to grow at 0.6%. Also, i-flex compares favorably with Temenos,
which currently quotes at 29x FY08E EPS despite estimated lower growth than i-flex. i-
flex trades at 22.9x FY08E EPS of Rs56.3. We maintain Buy with a target price of
Rs1,440 (25-26x FY08E EPS) despite limited upside of 12% due to expected
outperformance in the product business beyond FY08. Higher than expected order inflow
could also result in EPS upgrade for FY08 as well.
PER BAND
1,500
32x
1,200 28x
24x
900
20x
16x
600
300
Jun-03
Oct-03
Dec-03
Feb-04
Jun-04
Oct-04
Dec-04
Feb-05
Jun-05
Oct-05
Dec-05
Feb-06
Jun-06
Apr-03
Aug-03
Apr-04
Aug-04
Apr-05
Aug-05
Apr-06
Aug-06
Concerns
While i-flex’s R&D efforts would benefit from Oracle’s deep pockets and technical
expertise, the Oracle parentage could limit i-flex’s ability to adopt non-Oracle
technologies. The company currently works closely with IBM, one of Oracle’s biggest
competitors, and several other technology partners, who could view Oracle as a
competitor as it tries to position itself as an application vendor rather than a database
vendor.
Oracle has recently picked up additional stake of 3.2%, taking its total stake in i-flex to
50.7%. At present, the management control lies in the hands of the i-flex management.
Oracle might decide to assume management control, which could result in possible
loss of identity and entrepreneurship at i-flex.
1 August 2006 92
i-flex solutions
Sales 8,054 11,404 14,835 20,064 25,851 Basic (Rs)

Change (%) 25.7 41.6 30.1 35.2 28.8 EPS 22.8 27.2 28.7 43.0 56.3
Cash EPS 24.8 31.7 35.4 52.3 68.1
Cost of Goods Sold 3,656 5,948 8,148 11,199 14,632 Book Value 117.3 148.3 178.8 213.0 258.4
Selling Expenses 1,157 1,529 2,038 2,460 3,070 DPS 3.5 4.2 5.0 7.5 9.8
G&A Expenses 996 1,157 1,700 2,119 2,489 Payout %(Incl.Div.Taxes) 3.5 4.2 5.0 7.5 9.8
EBITDA 2,244 2,770 2,950 4,286 5,660 Valuation (x)

% of Net Sales 27.9 24.3 19.9 21.4 21.9 P/E 47.5 44.9 30.0 22.9
Depreciation 147 337 505 708 902 Cash PE 40.8 36.5 24.7 19.0
Share of (Losses)/ Profits -3 -1 3 6 6 EV/Sales 7.9 6.0 4.4 3.4
of Associate Companies Price/Book Value 8.7 7.2 6.1 5.0
PBT 2,219 2,658 2,726 4,038 5,281
Tax 515 627 535 749 977 Profitability Ratios (%)
Rate (%) 23.2 23.6 19.6 18.5 18.5 RoE 20.5 20.1 17.6 22.0 23.9
RoCE 26.7 26.2 21.8 27.0 29.3
PAT 1,704 2,031 2,190 3,289 4,304
EO Item (net) 0 0 0 0 0 Turnover Ratios
Net Income 1,704 2,031 2,190 3,289 4,304 Debtors (Days) 111 112 117 115 110
Change (%) -3.8 19.2 7.8 50.2 30.8 Asset Turnover (x) 4.1 4.6 3.8 3.9 4.2
BALANCE SHEET (RS MILLION) Leverage Ratio
Y/E MARCH 2004 2005 2006 2007E 2008E

Debt/Equity Ratio (x) 0.0 0.0 0.0 0.0 0.0
Share Capital 374 374 381 382 382

Reserves 8,565 10,923 13,241 15,909 19,379
Networth 8,938 11,298 13,623 16,291 19,762
Loans 23 22 20 20 20 Y/E MARCH 2004 2005 2006 2007E 2008E
Capital Employed 8,961 11,320 13,642 16,311 19,781 Cash Flow from Oper. 1,802 2,438 2,695 3,997 5,206
Cash for Working Capital 756 607 1,335 139 652
Gross Block 1,972 2,469 3,863 5,113 6,213 Net Operating CF 1,046 1,832 1,360 3,859 4,554
Less :Depreciation 847 1,184 1,689 2,397 3,299
Net Block 1,125 1,285 2,174 2,716 2,914 Net Purchase of FA -800 -1,450 -1,316 -1,160 -1,000
CWIP 17 970 893 803 703 Net Purchase of Invest. -123 419 7 -140 -50
Investments 380 66 59 199 249 Net Cash from Inv. -923 -1,031 -1,309 -1,300 -1,050
Curr. Assets 9,014 11,605 14,639 17,627 22,115 Proc. from Share Issue 30 411 564 1 0
Debtors 2,446 3,822 5,552 6,322 7,791 Proceeds from LTB/STB 11 -1 -2 -4 -3
Cash & Bank Balance 5,662 6,631 6,864 8,845 11,592 Dividend Payments -262 -242 -380 -576 -753
Loans & Advances 559 454 798 1,000 1,250 Net CF from Finan. -221 168 182 -578 -756
Other Current Assets 347 698 1,425 1,460 1,482
Current Liab. & Prov 1,575 2,607 4,123 5,033 6,200 Free Cash Flow 246 381 44 2,699 3,554
Creditors 140 128 140 250 250 Net Cash Flow -97 969 233 1,981 2,748
Other liabilites 1,410 2,398 3,915 4,698 5,850
Provisions 24 80 69 85 100 Open. Cash Balance 5,759 5,662 6,631 6,864 8,845
Net Current Assets 7,439 8,998 10,516 12,593 15,915 Add: Net Cash -97 969 233 1,981 2,748
Application of Funds 8,961 11,320 13,642 16,311 19,781 Close Cash Balance 5,662 6,631 6,864 8,845 11,593
E: MOSt Estimates
1 August 2006 93
Update
MphasiS-BFL
BLOOMBERG
STOCK INFO.
BFL IN
1 August 2006 Buy
BSE Sensex: 10,752
REUTERS CODE
S&P CNX: 3,148 MBFL.BO Previous Recommendation: Buy Rs158
Y/E MARCH 2005 2006 2007E 2008E MphasiS-BFL has been reporting disappointing growth over the past 4-
Sales (Rs m) 7,656 9,401 11,088 13,164
8 quarters. Its BPO arm suffered four successive quarters of declining
EBITDA (Rs m) 1,410 1,981 1,882 2,351 revenue following the loss of some top clients. Growth in IT services
Net Income (Rs m) 1,244 1,499 1,192 1,519 has also lost momentum over the last 3-4 quarters. However, we believe
EPS (Rs) 8.2 9.3 7.4 9.4 that the worst is over for the company. Post integration with EDS India,
EPS Growth (%) 17.9 13.5 -20.7 27.5 it would emerge stronger and would be back on the growth path.
BV/Share (Rs) 19.0 24.9 33.8 43.0 Valuations, however, do not factor in the possible upsides. We reiterate
P/E (x) 19.3 17.0 21.4 16.8 our Buy recommendation.
P/BV (x) 8.3 6.4 4.7 3.7
EV/EBITDA (x) 17.0 12.4 12.7 9.4
The future looks promising: We believe that the worst is over for
EV/Sales (x) 3.1 2.6 2.2 1.7
MphasiS-BFL. In BPO services, the management has started focusing
RoE (%) 39.4 43.8 25.6 24.8 on growing its high margin non-voice business. Though we expect
RoCE (%) 33.3 45.0 29.2 28.2 MphasiS’ BPO business to continue showing lower than industry growth,
Note: Above estimates do not considermerger of EDS profitability would improve. In IT services, growth momentum should
India and upside from EDS Global gather steam, with the management concentrating on increasing annuity
revenues. Given MphasiS’ strong domain expertise in the BFSI,
KEY FINANCIALS technology and logistics verticals, and EDS backing, we believe that
MphasiS’ future looks promising.
Valuations do not factor in upside from EDS takeover: The stock
price has not risen significantly post the completion of the conditional
Dividend Payout (%) 32.2 offer by EDS in June 2006. MphasiS and EDS have capabilities that
Dividend Yield (%) 1.9 complement each other. There is very little overlap in their domain
skills and service offerings. Also, EDS does not bid for deals of US$2-
20m, which could now be addressed through MphasiS. We expect
significant upside to consolidated financials from FY08.
STOCK DATA
52-Week Range 229/118 Multiple factors support possible stock re-rating; Buy: We believe
Major Shareholders (as of June 2006) % that there are multiple factors that support possible re-rating of the stock.
Promoters 51.4 The EDS backing would help MphasiS win large deals and gain entry
into new domains. Also, it could benefit from increased offshoring by
FIIs/FDIs 16.3
Others 28.0
EDS. Considering 27% equity dilution post the integration of EDS India,
we expect the stock to command 15-20% premium to its historic P/E
Average Daily Turnover band of 15x. We maintain Buy with a target price of Rs200, which
discounts FY08E earnings (considering merger of EDS India and EDS
1/6/12 Month Rel. Performance (%) 3/-18/-19
Global upside) by 17-18x and implies an upside of 27% from current
1/6/12 Month Abs. Performance (%) 4/-9/21 levels.
1 August 2006 94
MphasiS-BFL
Growth has been disappointing over the past few quarters…

Following the loss of some of the top clients in FY05, MphasiS-BFL’s financial services
business was adversely impacted. While IT services seemed to show signs of recovery
post 3QFY05, BPO continued to decline quarter after quarter. Growth in IT services has
also lost momentum over the last 2-3 quarters, with quarterly growth rates dropping from
over 10% in late FY05/early FY06 to 4-6% in last couple of quarters. This is especially
significant in a scenario where other players are witnessing high growth momentum.
GROWTH IN IT SERVICES LOSING STEAM
Services Revenue (Rs m) - LHS % QoQ Grow th - RHS

2,000 15.0
1,500 10.0
1,000 5.0
500 0.0
0 -5.0
Jun-04
Dec-04
Mar-05
Jun-05
Dec-05
Mar-06
Jun-06
Sep-04
Sep-05
After four successive quarters of declining revenues, following the loss of a few top
clients, which adversely impact the financial services business, the BPO business reported
7% QoQ growth in 3QFY06. This was primarily due to the start of large domestic projects,
Bharti in particular, which boosted domestic revenues by over 500% to Rs97m in 3QFY06.
In 4QFY06 and 1QFY07, however, BPO revenues struggled to grow in the absence of
new inflows.
BPO REVENUE STRUGGLES TO GROW
BPO Revenue (Rs m) - LHS % QoQ Grow th - RHS

820 11.0
770 7.0
720 3.0
670 -1.0
620 -5.0
Dec-04
Mar-05
Jun-05
Dec-05
Mar-06
Jun-06
Sep-04
Sep-05
1 August 2006 95
MphasiS-BFL
Average billing rate, which declined to US$9/hour in 3QFY06 due to greater proportion of
revenue from the domestic business, stayed flat in 4QFY06 and 1QFY07 due to lack of
growth in international business.
RISING PROPORTION OF DOMESTIC REVENUES RESULTING IN BILLING RATE DECLINE
Billing Rates (US$) - LHS Domestic Business (%) - RHS

16 16
12 12
8 8
4 4
0 0
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Mar-05
Mar-06
Sep-04
Sep-05
…but the future looks promising

Besides restructuring within the top clients affecting the project ramp up, we believe that
the underperformance in the IT services was largely on account of MphasiS’ project-
based revenues, where predictability was low. The management has realized this and has
increased the contribution of annuity kind of revenues, including maintenance. Currently,
annuity revenues contribute around 33% of the IT revenues, up from 15% around 18
months back. The management expects to increase this contribution to around 40% by
end-FY07. This indicates that the volatility in IT revenues will be low going forward.
MphasiS has strong domain expertise in the BFSI (retail banking, credit cards, loan
origination, insurance claims, brokerages), technology (operating systems, switching
solutions, 3G solutions for telecom companies, embedded solutions for automotive electronics,
medical instruments, infotainment) and logistics verticals. With EDS backing, we believe
that MphasiS’ future looks promising. The company has a strong team of 40 employees
focusing on usability engineering for architectural design – one of MphasiS’ core
differentiating points. Onsite rates for MphasiS are still one of the highest – average of
US$64-65/hour. We expect 22% CAGR in IT services volumes (without capturing any
upside from EDS) over FY06-08. Growth would be low on account of expected slowdown
in volume growth in FY07 due to integration of EDS India with Mphasis. Mphasis has
indicated that many existing clients are waiting for the completion of integration process
for future ramp ups. This is likely to impact volume growth in FY07.
For MphasiS’ BPO services, we believe that the worst after the loss of some of its top
clients in the international business will be over in coming 2-3 quarters. The management
has started focusing on growing its high margin non-voice business. The contribution of
1 August 2006 96
MphasiS-BFL
non-voice business has risen from 17% in FY05 to 20% in FY06. The company expects
the contribution of this business to increase to around 30%; it is focusing on growing
insurance as well as finance and accounting related jobs. We expect a CAGR of 12% in
ITES-BPO services (without capturing any upside from EDS) over FY06-FY08.
Though the volume growth in BPO is likely to be 17%, expected decline in billing rates due
to increasing composition of domestic revenues would keep revenue growth subdued.
Besides, some of its top clients have reached maturity and further ramp-up would be
difficult. However, the pipeline in the international business seems strong – both from UK
and USA. We expect MphasiS’ BPO business to show lower than industry growth. However,
EDS is very strong in non-voice BPO services. India being a preferred destination for
outsourcing, robust growth in BPO through EDS is a strong possibility.
Valuations do not factor in upside from EDS takeover

Due to disappointing financial performance, the stock has more-or-less languished over
the past few months. It has underperformed the Sensex by 18% over the past six months
and by 19% over the past 12 months.
ONE-YEAR STOCK PERFORMANCE
Mphasis (Rs) - LHS Rel. to Sensex (%) - RHS

220 40
Risen from Rs140 to Rs225

190 20
since annoucement of EDS
looking to acquire control
160 0
130 -20
100 -40
Aug-05 Oct-05 Dec-05 Mar-06 May-06 Aug-06
The stock price has not appreciated significantly post the completion of the conditional
offer by EDS in June 2006. Considering EDS (I) merger as well as upsides from EDS
global with fully diluted Equity, we are estimating an EPS of 11.3 in FY08, which discounts
current price by 14x. We expect around 15-20% P/E rerating in future to its historic P/E
band of 15x on back of strong upside from EDS from FY08 onwards.
EDS has a relatively small presence in India

EDS has around 140,000 employees, with little presence in low cost destinations including
India. It has more than 3,000 employees in India through its 100% subsidiary, 900 of whom
are employed in the BPO division. This compares unfavorably with competitors such as
IBM, which has close to 43,000 employees (total global size of 191,000), and Accenture,
1 August 2006 97
MphasiS-BFL
which has 17,500 employees (total global size of 129,000) in India. EDS India is primarily
into application maintenance in IT services, and its BPO business is mostly transaction
oriented.
MphasiS and EDS have capabilities that complement each other

EDS has presence in government and manufacturing verticals, while MphasiS
has strong presence in BFSI: EDS currently derives 35% of revenues from the
government vertical, 21-22% from financial services, 17% from manufacturing and
the rest from other verticals such as communication, transport, retail, energy, healthcare
& others. MphasiS derives 54.4% from BFSI, 27.2% from technology and 18.4%
from retail, logistics & transport. EDS’ strong presence in government, manufacturing
and automotive sectors would help MphasiS penetrate these verticals better, while
EDS could leverage MphasiS’ deep domain expertise in the BFSI and technology
domains.
EDS India focuses on maintenance-related work, while MphasiS has

development expertise: EDS India primarily focuses on relatively low-end application
maintenance related work while MphasiS is more into custom application development
services. Going forward, we expect EDS to outsource more application development
services to India to leverage MphasiS’ capabilities in the same.
EDS’ BPO services are transaction oriented, while MsourcE’s services are
primarily voice-based: MSourcE, MphasiS-BFL’s BPO division, which had to turn
towards the lower margin domestic market following the decline in revenues from
international business, is also likely to benefit from the EDS association. BPO currently
forms around 14% of EDS’ revenues and is largely non-voice. MphasiS, on the other
hand, has a high voice component (80% of total BPO revenue), with expertise in
certain high-end voice businesses such as technical helpdesk.
EDS’ strong practice of infrastructure services to offer MphasiS next big

opportunity: EDS currently derives 55% of its revenues from infrastructure related
services, where MphasiS does not have much experience. Demand for outsourcing
and offshoring of infrastructure-related services is increasing. Infrastructure services
could be a big opportunity, which MphasiS could exploit through its EDS association.
US$2-20m deals to be addressed by MphasiS: EDS does not bid for deals of
US$2-20m, which could now be addressed through MphasiS. This includes potential
cross-selling of services to existing clients of EDS. The overlap in clientele between
EDS and MphasiS is minimal, with just two customers being serviced by both. One of
these customers is a top client for MphasiS in the banking domain. However, MphasiS
management believes that it can penetrate the account deeper by leveraging the EDS
parentage. The existence of complementary capabilities in both IT services and BPO
could be leveraged to result in increased revenues for MphasiS.
1 August 2006 98
MphasiS-BFL
Combined headcount to touch 20,000 by end-FY07

Currently, EDS has 40,000-50,000 employees operating of its ‘best shore’ centers that
include India, South Africa, South America and China. These centers contribute 30% of
EDS’ overall revenues. However, the India presence has been relatively small with over
3,000 employees till date. The combined headcount for MphasiS and EDS in India is
expected to touch 20,000 by the end of FY07, a net addition of around 5,000 employees.
This move would significantly improve EDS’ offshore presence in India.
Integration of EDS India dilutes equity by 27%

The board of directors of MphasiS-BFL has approved the merger of 100% subsidiary of
EDS, EDS India Pvt. Ltd. with MphasiS-BFL. The bard of directors of Mphasis BFL has
recently announced the merger ratio for EDS (India) with Mphasis. Mphasis will issue 5
shares for every 4 shares in EDS (India). The equity stake of EDS in Mphasis will go up
from 51.4% at present to 61.8%. This would result in equity dilution of 27% in Mphasis'
equity capital. There has also been a re-shuffling of the MphasiS board, with six directors
added from EDS.
Six EDS directors on MphasiS board

Mr Stephen Heidt, Vice-President of Business Workforce and Capacity Management,
EDS, has been designated Chairman of the board. He will take over from Mr Jaithirth
Rao, who will relinquish the designation of Chairman to meet statutory requirements
under the listing agreement executed with the stock exchanges. Mr Rao will continue to
serve on the board as CEO and Managing Director.
The other directors to the board appointed by EDS are Mr Thomas Haubenstricker, Mr
Ron Vargo, co-CFOs at EDS, Mr Paul Currie, Executive Vice-President, Corporate
Strategy and Business Development, Mr Joseph Eazor, Vice-President and General
Manager, Asia Pacific North Region and Mr Douglas Davis, Vice President, Service
Delivery - Europe, West Asia and Africa. MphasiS’ reconstituted board will now consist
of 11 directors, of which six will be from EDS.
Higher upside to financials ahead due to upside from EDS

EDS (India) reported revenue of US$78m in FY06. The Mphasis management has indicated
that EDS (India) is a profit making entity and integration is not likely to result in earnings
dilution. PAT margins of EDS (India) are around 13%. In our scenario analysis of the
possible upside from the EDS acquisition as well as additional business from/through EDS
Global, we have calculated the revenue and profit upsides for MphasiS-BFL in FY07 and
FY08. We have assumed integration of EDS India effective 1st April 2006. We have
factored minimal upside in FY07, considering integration issues. We believe that any
significant upside to financials would accrue only from FY08.
1 August 2006 99
MphasiS-BFL
SCENARIO ANALYSIS – FINANCIAL UPSIDE OF EDS PARENTAGE AND EDS (I) MERGER (RS M)
CURRENT ESTIMATES UPSIDE IN ESTIMATES
SCENERIO 1 SCENERIO 2
FY07E FY08E FY07E FY08E FY07E FY08E
IT Services 7,899 9,416 7,899 9,416 7,899 9,416

Additional business from/thru EDS 0 445 91 890
EDS India 3,488 4,360 3,767 5,085
Total IT services 7,899 9,416 11,387 14,221 11,757 15,391
% change 23.0 19.2 77.3 24.9 83.1 30.9
BPO Services 3,189 3,748 3,189 3,748 3,189 3,748
Additional business from/thru EDS 0 445 0 668
EDS India 541 677 585 789
Total IT Services 3,534 4,457 3,795 5,030 3,795 5,629
Change (%) 18.6 26.1 27.3 32.6 27.3 48.3
Total Revenues 11,088 13,164 15,117 19,091 15,531 20,596
% change 17.9 18.7 60.8 26.3 65.2 32.6
PAT 1,192 1,519 1,695 2,222 1,746 2,396
% change -20.5 27.5 13.1 31.1 16.5 37.2
EPS @ 27% equity dilution 8.3 10.8 8.5 11.7
P/E (x) 19.1 14.6 18.6 13.5
Assumptions:
We have assumed 25-35% growth in revenues from EDS India over FY06-FY08E.
We have assumed 11% PAT margin for business from EDS.
We estimate Mphasis to register EPS of Rs11.3 in FY08. (Average of our scenarios 1 and 2).
Multiple factors support possible stock re-rating; Buy

We believe that there are various factors that support possible re-rating of the MphasiS
stock. We enumerate them below:
EDS backing to help in large deals: Prior to the EDS acquisition, MphasiS had no
significant presence in the bidding space for multi-million deals. With the EDS parentage
and backing of the EDS sales and marketing machinery, MphasiS would be able to bid
for large deals.
Entry into new domains – manufacturing and automotive: EDS has significant
presence in the government, manufacturing and automotive verticals. While the
government vertical offers very little scope for offshoring, MphasiS can deploy its
application development skills in the manufacturing and automotive verticals, with EDS
acting as a door opener.
Increased offshoring by EDS: With its headcount in India going up from more than
3,000 to 20,000 by end FY07 (almost 1/3rd of the global offshore strength of EDS),
India would become a significant offshore centre for EDS. We believe that EDS
would start offshoring a greater proportion of work to India in order to leverage its
presence in a low cost, high quality delivery location.
1 August 2006 100

MphasiS-BFL
PER BAND
240 19x
190 16x
13x
140
10x
90
40
Jun-03
Oct-03
Dec-03
Feb-04
Jun-04
Oct-04
Dec-04
Feb-05
Jun-05
Oct-05
Dec-05
Feb-06
Jun-06
Apr-03
Aug-03
Apr-04
Aug-04
Apr-05
Aug-05
Apr-06
Aug-06
Historically, the stock has traded at a P/E of around 15x. Considering EDS (I) merger as
well as upsides from EDS global with fully diluted Equity, we are estimating an EPS of
11.3 in FY08, which discounts current price by 14x. We expect around 15-20% P/E rerating
in future to its historic P/E band of 15x on back of strong upside from EDS from FY08
onwards. Therefore, we reiterate Buy for a target price of Rs200 (upside of 27%).
1 August 2006 101

MphasiS-BFL
Revenues 5,806 7,656 9,401 11,088 13,164 Basic (Rs)

Change (%) 35.2 31.9 22.8 17.9 18.7 EPS 7.0 8.2 9.3 7.4 9.4
Cost Of Goods Sold 3,801 4,956 6,043 7,609 9,076 Cash EPS 9.0 10.4 12.5 11.3 14.1
SG&A Expenses 850 1,290 1,378 1,597 1,737 Book Value 26.8 19.0 24.9 33.8 43.0
DPS 0.5 1.5 3.0 2.2 2.8
EBITDA 1,156 1,410 1,981 1,882 2,351 Payout %(Incl.Div.Taxes) 7.8 19.0 32.2 30.0 30.0
% of Net Sales 19.9 18.4 21.1 17.0 17.9
Interest -39 -41 -17 -45 -55 P/E 19.3 17.0 21.4 16.8
Other Income 146 72 77 75 85 Cash P/E 15.1 12.6 14.0 11.2

EV/EBITDA 17.0 12.4 12.7 9.4
PBT 1,055 1,127 1,557 1,373 1,741 EV/Sales 3.1 2.6 2.2 1.7
Tax 69 -117 58 181 221 Price/Book Value 8.3 6.4 4.7 3.7
Rate (%) 6.5 -10.4 3.7 13.2 12.7 Dividend Yield (%) 0.9 1.9 1.4 1.8

PAT 986 1,244 1,499 1,192 1,519
RoE 34.2 39.4 43.8 25.6 24.8
Net Income 986 1,244 1,499 1,192 1,519
RoCE 32.4 33.3 45.0 29.2 28.2
Change (%) 47.3 26.2 20.4 -20.5 27.5
Turnover Ratios
Debtors (Days) 100 87 80 89 81
BALANCE SHEET (RS MILLION) Asset Turnover (x) 2.9 3.0 3.0 3.0 2.9
Y/E MARCH 2004 2005 2006 2007E 2008E
Leverage Ratio
Share Capital 354 786 1,610 1,615 1,615
Debt/Equity Ratio(x) 0.0 0.0 0.0 0.0 0.0
Share Premium 871 2,464 1,165 1,201 1,201
Reserves 2,189 -344 1,154 2,565 4,062
Net Worth 3,414 2,906 3,929 5,382 6,879
Minority Interest 375 0 0 0 0 Y/E MARCH 2004 2005 2006 2007E 2008E
Loans 27 46 37 40 40 CF from Operations 1,273 1,640 2,017 1,821 2,270

Capital Employed 3,816 2,953 3,966 5,422 6,919 Cash for Wkg. Capital 12 -665 723 320 -823
Net Operating CF 1,260 2,305 1,294 1,500 3,093
Gross Block 2,003 2,557 3,143 3,743 4,493
Net Purchase of FA -448 -543 -605 -586 -750
Less : Depreciation 1,085 1,455 1,802 2,431 3,181
Net Purchase of Invest. 0 -3,570 312 0 0
Net Block 918 1,102 1,341 1,312 1,312
Net Cash from Invest. -448 -4,113 -293 -586 -750
CWIP 107 96 114 100 100
Proceeds from Pvt. placement 166 1,651 -475 41 0

Curr. Assets 3,471 3,747 3,918 5,657 7,537
Proceeds from LTB/STB 13 19 -9 3 0
Debtors 1,588 1,835 2,050 2,689 2,937
Dividend Payments -76 -236 -483 -357 -456
Cash & Bank Balance 1,326 955 989 1,589 3,476
Net CF from Financing 103 1,434 -968 -313 -456
Loans & Advances 533 806 711 1,285 1,085
Other Current Assets 24 152 169 94 38 Free Cash Flow 812 1,762 689 337 1,910
Current Liab. & Prov 681 1,992 1,407 1,647 2,030 Net Cash Flow 915 -374 34 601 1,887
Sundry Liabilities 507 1,602 767 885 1,047
Provisions 174 390 640 763 984 Opening Cash Balance 414 1,328 955 989 1,590
Net Current Assets 2,791 1,755 2,511 4,009 5,506 Add: Net Cash 915 -374 34 601 1,887
Application of Funds 3,816 2,953 3,966 5,422 6,919 Closing Cash Balance 1,328 955 989 1,590 3,476
E: MOSt Estimates; Note: The above financial statements do not consider merger of EDS India or upside from/ through EDS Global.
1 August 2006 102

N O T E S
1 August 2006 103

For more copies or other information, contact

Institutional: Navin Agarwal. Retail: Manish Shah, Mihir Kothari
Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: inquire@motilaloswal.com
Motilal Oswal Securities Ltd, 3rd Floor, Hoechst House, Nariman Point, Mumbai 400 021
This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal Oswal
Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely
for your information and should not be reproduced or redistributed to any other person in any form.
The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or
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MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.
Disclosure of Interest Statement

Neither the covering analysts nor the MOSt group/directors own shares of any of the stocks covered in this report. MOSt has no broking/investment banking
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This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required
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August 2006

Demand for IT services continues to be robust ............................................... 4

Higher offshoring – India to continue its leadership ........................................ 4

Benefits will percolate to smaller, niche players .............................................. 6

We identify some potential winners .................................................................. 7

Companies ................................................................................................ 17-102

Infotech Enterprises ...................................................... 17-26

KPIT Cummins .............................................................. 27-39

MegaSoft ....................................................................... 40-50

Subex Azure ................................................................... 51-63

Geometric Software ....................................................... 65-77

Hexaware Technologies ................................................ 78-86

i-flex solutions ................................................................ 87-93

MphasiS-BFL .............................................................. 94-102

COMPARATIVE VALUATION (FY08 /CY07)

Demand for IT services continues to be robust

GUIDANCE BY TIER-I COMPANIES INDICATES ROBUST DEMAND OUTLOOK

COMPANY FY07 SALES GROWTH RECRUITMENT * GROWTH OVER FY06

GUIDANCE (%) PLANS – GROSS EMPLOYEE BASE (%)

Infosys 35-36 25,000 ~ 31-32

ESTIMATED TREND IN WORLDWIDE IT SPENDS (US$B)

2004 2005 2006E 2007E 2008E 2009E CAGR (%)

Services Total 800.6 863.2 935.6 1,013.2 1,099.5 1,197.8 8.4

Higher offshoring – India to continue its leadership

INDIAN IT INDUSTRY: HUGE GROWTH OPPORTUNITY

Addressable markets of at least

Global offshore IT industry, FY05 Global BPO industry, FY05

Benefits will percolate to smaller, niche players

We identify some potential winners

All our chosen companies satisfy the following criteria:

3. Good management/alliances: We have interacted with the top managements of

THE CHOSEN EIGHT: WHY THEY COULD BE POTENTIAL WINNERS

6. Ability/willingness to grow inorganically: To maintain their competitive advantage

COMPANY RECENT ACQUISITIONS/ BENEFITS/PURPOSE OF ACQUISITIONS

Geometric Plans to acquire an engineering Impetus to engineering design services

Product companies: We believe that product companies – Subex Systems, Megasoft, i-

PRODUCT COMPANIES: RISING PRODUCT CONTRIBUTION TO HELP PROTECT OVERALL MARGINS

COMPANY PRODUCT REVENUE PRODUCT PRODUCT

CAGR (%) CONTRIBUTION (%) MARGINS (%)

(FY06-08) FY06 FY08 FY06

Subex Systems 97.8 64.3 84.6 42.7

Services companies: We believe that Hexaware, Infotech Enterprises, KPIT Cummins,

SERVICES COMPANIES ALSO HAVE MARGIN LEVERS

COMPANY EMPLOYEE ATTRITION MARGIN LEVERS

BASE RATE (%)

Hexaware 4,730 14 Offshore revenue composition,SG&A,billing rates

8. Valuations attractive – significant upside potential: Our chosen mid-cap IT

DESPITE HIGHER GROWTH POTENTIAL, MID-CAPS TRADE AT A STEEP DISCOUNT TO LARGE-CAPS

COMPANY REVENUE CAGR (%) EPS CAGR (%) PEG

(FY06-08) (FY06-08) (X)

P/E BAND: CHOSEN-8 V/S LARGE-CAPS

P/E BAND: CHOSEN-8 (EXCLUDING I-FLEX) V/S LARGE-CAPS

Large-Caps Chosen-8 excl i-flex

Source: Company/ Motilal Oswal Securities

CHOSEN-8: TREND IN SALES AND NET PROFIT (RS M)

FY03 FY04 FY05 FY06 CAGR (FY03-FY06)

 Infotech Enterprises: Infotech Enterprises is one of the few Indian IT services

COMPARATIVE VALUATION (FY08 /CY07)

ESTIMATED FRESH ENGINEER GRADUATE AVAILABILITY FOR IT SECTOR ('000)

ANNUAL TURNOUT SUITABILITY WILLINGNESS TO JOIN EMPLOYMENT

OF ENGINEERS @25% @ 80% = SUPPLY POSSIBLE

FY05E 365 350

A closer look reveals the following:

Infotech Enterprises: Infotech Enterprises is one of the few Indian IT services