Team Swastik

Amit Rander (+91-8882052650)

Jeyaram Raveendran (+91-9540189873)

29-01-2011 Wipro - Mindtree 1

 Information Technology Industry
Industry Overview IT Services spending by Geography

• World-wide technology and related products and Geography

services spend is estimated to have crossed USD (USD Billion) 2008 2013 CAGR(%)
1.5 trillion in 2009, Asia Pacific 147 166 2.5
• Total IT-BPO industry to reach USD 71.7 billion Europe 170 189 2.1
accounting for 5.8% of India’s GDP; America 316 380 3.8
• Software and Services export revenues estimated to India 6 11 14.5
grow over 16-17% to reach USD 47 billion Middle East &
• Direct employment of nearly 2.23 million Africa 14 16 3.2
Iberoamerica 44 57 5.6
United
Global technology spend forecast Kingdom 77 88 2.3
Grand Total 774 907 3.2
1,400 2009 2012 1,250
1,200 Key Growth Drivers
1,100
1,000 • Low cost of delivery
• High caliber talent pool
800 695 680
589 • Robust process delivery
600 550
• Business environment and infrastructure
381 •
400 307 Growing Indian market
• Transformational capabilities
200 112148
• Global footprint
0 • Focus on sustainable growth
IT Services BPO Packaged Hardware R&D and
Software Engineering

Source: IDC-Nasscom Strategic Review 2010 , 2009

TCS AR 2010, Gartner Forecast World Wide IT Spending

29-01-2011 Wipro - Mindtree 2

 Acquirer- Wipro Limited
Company Overview Revenue breakdown by Geography and service
lines
• Incorporated in 1945 and headquartered in
Bangaluru, Wipro Limited , provides comprehensive 11%
IT Solutions and Services
• 3rd largest Software exporter in India 14%
• The company has presence over 55 countries. The
workforce consists of over 1 lakh employees serving
over 800 clients
• Wipro gets an enviable 95 percent repeat business 75%
• World’s first SEI CMM Level 5 Company
IT Services
Company Financial overview (Rs. Cr)
IT Products
FY 2010 Q3 2011 Consumer Care and Others
Revenues 2,77,543 80,204
Total = Rs.2,77,543 mm
EBITDA 63,800 18,346
Top Management
Total Assets 3,29,928 3,60,955
Total debt 62,511 58,527 Mr. Azim H. Premji Chairman
Book value of equity 1,96,549 2,30,292 Mr. T. K. Kurien CEO, IT Business & Executive
Director
Market value of equity 10,37,373 11,99,236
EPS 30.69 5.41 Mr. Suresh C. Senapaty Executive Director & Chief
Finance Officer
P/E 21.75 25.4
Mr. Girish S. Paranjpe Member of the Board
FV/EBITDA 16.25 19.2
Total Debt/Total Assets 19% 16% Mr. Suresh Vaswani Member of the Board

Source: Company reports , Capitaline

29-01-2011 Wipro - Mindtree 3
 Wipro loosing its steam, underperforms its rivals and
Sensex…
Share price performance of major large Cap companies over the last year
180.0
170.0 Wipro TCS Infosys Sensex
160.0 162
150.0
140.0
130.0
120.0 128
110.0 115
100.0 109
90.0
80.0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1
201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
/ 01 /02 /02 /02 /03 /03 /03 /04 /04 /05 /05 /05 /06 /06 /06 /06 /07 /07 /07 /08 /08 /08 /09 /09 /09 /10 /10 /10 /11 /11 /11 /12 /12 /12 /01 /01 /01
28 06 17 26 10 19 31 12 22 03 12 21 01 10 21 30 09 20 29 09 18 27 07 17 28 07 18 27 05 16 26 07 16 28 06 17 27

Increasing revenue gap with the Indian rivals remains a concern

Revenues ($mm) Dec’08 Mar’09 Jun’09 Sep’09 Dec’09 Mar’10 Jun’10 Sep’10 Dec’10

Infosys 1171 1121 1122 1154 1232 1296 1358 1496 1585
TCS 1483 1433 1481 1538 1635 1686 1794 2004 2140
Wipro 1100 1046 1033 1065 1127 1166 1204 1273 1344
Infosys-Wipro Gap 71 75 89 89 105 130 154 223 241

TCS-Wipro Gap 383 387 448 473 508 520 590 731 796

Source: Capitaline

29-01-2011 Wipro - Mindtree 4

 The Strong Capital Structure Supports Expansion
Capital Structure Sources of funds (INR mm except per share data)

Market value of equity Long term debt

Rs. mm Short term debt
Cash in hand 26,162
1,400,000
Marketable Securities 74,814

Total 1,00,976
1,200,000
Short term debt (33,254)

1,000,000 Funds available 67,722

Liquidity Analysis
800,000
Credit availability:
95% • The term loans and external borrowings of Wipro
600,000 require it to maintain certain ratios as covenants. The
company has not breached them as of 31/12/2010.
• With funds available of more than 67,722 mm, the
400,000
company should be in a position for acquisitions to
the tune of Rs. 25,000 mm without hurting its balance
200,000 sheet covenants.

2%
3%
0
Total = Rs.11,74,104 mm

Source: Wipro Q3 data, Wipro AR 2010

29-01-2011 Wipro - Mindtree 5

 Possible Target – Mindtree Limited
Company Overview Percentage revenue by industry (Q3’11)

• MindTree ,incorporated in 1999, is a global IT Revenue by Geography Revenue by Business

Solutions company specializing in IT Services,
Independent Testing, IMTS, Knowledge Services and 19.4
Product Engineering, which comprises of R&D 40.7
Services, Software Product Engineering and Wireless Marketable 59.3
11.8
Molecules
Products. 60.4
8.4
• The company recorded a net profit of Rs.215 cr. on CRAMS
revenues of Rs.1373 cr. for the year ended
31/03/2010 and Rs.30.5 cr. on revenues of Rs.394.4 ITS
cr. for the Quarter ending 31/12/10. US India Product Engineering services
• 269 customers,48 Fortune 500 Companies Rest of world Europe
Total = Rs.394 cr.
Share price performance of Mid cap IT companies over the last one year

Rs.160
Hexaware Mindtree Mastek Polaris Rolta BSE_SENSEX
140
120 131
100 113
80 106
60 85
40 80
20
10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 11 11 43
/ 20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20
1 2 2 2 3 3 3 4 4 4 5 5 5 6 6 6 7 7 7 8 8 8 9 9 9 0 0 0 1 1 1 2 2 2 1 1
/0 / 0 /0 /0 /0 /0 /0 /0 /0 / 0 /0 /0 /0 /0 /0 /0 /0 / 0 /0 /0 /0 /0 /0 /0 /0 / 1 /1 /1 /1 /1 /1 /1 /1 /1 /0 / 0
25 04 15 24 08 17 29 08 20 29 10 19 28 08 17 28 07 16 27 05 16 25 03 15 24 05 14 25 03 12 24 03 14 24 04 13
Source: Mindtree company reports, Capitaline
29-01-2011 Wipro - Mindtree 6
 Mindtree Valuation - DCF
F re e C a s h F lo w 2 0 11E 2 0 12 E 2 0 13 E 2 0 14 E 2 0 15 E
EBIT 2 ,3 72 3 ,76 8 5,0 9 2 6 ,0 4 1 7,19 3
Tax o n EBIT (3 0 5) (517) (711) (8 4 1) (1,0 0 0 )
P ro f i t A f t e r Ta x 2 ,0 6 7 3 ,2 51 4 ,3 8 1 5,2 0 0 6 , 19 4
Dep reciat io n 6 53 72 7 835 9 73 1,13 3
(Inc) Dec in Cap it al WIP 13 (51) (57) (55) (56 )
Inc (Dec) in Defrred Tax 12 (6 ) 3 (1) 1
(Inc) Dec in Op erat ing Wo rking Cap it al (13 1) (711) (78 8 ) (757) (76 8 )
Cap it al Exp end iture (9 4 9 ) (1,157) (1,3 8 9 ) (1,6 11) (1,8 3 7)
F re e C a s h F lo w 1, 6 6 5 2 ,0 52 2 ,9 8 4 3 ,74 9 4 ,6 6 6

W e ig ht e d A v e ra g e C o s t o f C a p i t a l ( W A C C )
Ind ian Go vernment 10 Yr b o nd yield 8 .2 % Effect
Cred itive tax rate
Rating (Lo ng 16 .0 % Share Price 54 2 .9 0
Term
Cred it Sp read Cap ital
2 .5% Cred Struct
it Sp readure) A+ Shares Outs t and ing (Dilut ed ) 41
Ris k Free Rate 5.7% Over Ris k Free 0 .2 % Market Cap italizatio n 2 2 ,0 9 5
M arket Ris k Premium 7.3 % Deb t Co s t Pre Tax 8 .4 % To t al Deb t ETC 45
Levered Beta 1.10 Deb t Co s t Po s t Tax 7.0 % To t al Cap ital 2 2 ,14 0
Eq uity Co s t 16 .2 % Cap ital St ructure (% Eq uit y) 9 9 .8 %
Cap ital St ructure (% Deb t) 0 .2 %
WACC 16.1%
Term inal Grow th rate 2.25%
D i s c o unt ing M o d e l
Year Co unt 1.0 2.0 3.0 4.0 5.0
PV o f FCF 1,434 1,522 1,905 2,061 2,209
Terminal Value 34,360.2
NPV 25,393.8
Int rins ic value p er s hare 624.0

Source: Company reports,

Note: The data is just a sample of one pair of values of Beta and Terminal growth rate. Please refer to the excel sheet for te entire valuation
29-01-2011 Wipro - Mindtree 7
 Sensitivity analysis for Beta and Terminal growth
rate
Terminal growth rate
Beta
0.8 0.9 1.0 1.1 1.2 1.3

1.50% 724.4 678.6 637.7 600.9 567.8 537.7

1.75% 735.6 688.3 646.2 608.4 574.4 543.6
2.00% 747.2 698.4 654.7 615.9 581.2 549.7
2.25% 759.3 708.9 663.9 624.0 588.3 555.9
2.50% 772.0 719.8 673.7 632.5 595.6 562.4
2.75% 785.2 731.2 683.5 641.2 603.2 569.1
The values denote the intrinsic share price of the company.

Low High The projected share price

represents a premium of
Share Price 615.9 663.9 16% - 25% to the average
Market Cap price of Mindtree over the
25,067.1 27,018.8
last 30 days. The premium
EV 23,628.7 25,580.4 is slightly higher but
P/E brings to the table a
9.2 10.0
diversified portfolio and
EV/EBITDA 5.3 5.7 new product lines for
Wipro

Source: Company reports, Capitaline

Note: The P/E and EV/EBITDA are forward multiples. They represent the FY12 ie March ‘12 multiples
29-01-2011 Wipro - Mindtree 8
 The projected share price is in line with the
industry standards
Market Cap/
Company P/E EV/EBITDA Valuation analysis
Sales
TCS 33.2 26.8 8.4 • The acquisition price suggested represents an
Infosys 32.5 20.6 8.2 FY’12 PE multiple in the range of 9.2-10.0 and
HCLTech 31.8 21.7 5.4 an EV/EBITDA multiple of 5.3-5.7
Wipro 25.4 19.2 4.8
• Although the multiples are greater than the
Patni 9.8 6.6 2.9
estimated FY’12 multiples, they are still at a
Tech Mahindra 13.4 10.3 1.9
discount to the industry average
Hexaware 14.7 7.7 2.7
Mphasis 12.9 10.9 3.4 • Recently Patni Ltd. was acquired by I-Gate
Polaris 9.8 7.3 1.3 which commanded forward multiples of 10 (PE)
Average (all companies) 20.4 14.6 4.3 and 6.5 (EV/EBITDA) respectively.
Average (mid cap companies) 14.9 8.6 2.5
Mindtree (current) 13.4 8.3 1.6
FY'11 13.8 7.2 1.4
FY'12 8.1 4.8 1.1

Possible concerns about the projections

• Slower recovery in Europe and US: Due to high exposure to R&D/PES space, a slow recovery or another dip is
likely to negatively impact the growth prospect of the company
• Backlash against offshore outsourcing: There could be regulatory or visa restrictions and customers might defer
decisions, leading to lengthening sales cycles. The possibility of such a backlash in the medium term looks low
• Rupee appreciation: A sudden appreciation in rupee could erode the operational growth delivered by the company
• Volatility in Margins: The margins of the company have decreased over the last year. The valuations might be
dented if they do not improve. Considering that the company has absorbed its restructuring costs due to acquisitions,
the margins should improve

Source: Capitaline , Mindtree AR, Refer Excel workings for Valuation

29-01-2011 Wipro - Mindtree 9

+ =
Total Revenues (TTM): Rs. 3,04,270 mm
• One of the largest IT services
company in India.
• Strong Brand.
• Robust Quality Process.
• Global Delivery Footprint.
• Huge Client base.
• Looking for newer growth
opportunities.
• IT products business.
Source: Mindtree company reports, Wipro Company Report.
29-01-2011
Synergies
Marketable
Molecules
Total Revenues (TTM): Rs. 14.978 mm
• Diversified services offering strong
presence in growth area like R&D
and PES.
• IDC forecasts a five-year CAGR of
14% for R&D/PES
• Has grown at a CAGR of 45% over
the last eight years (2002-10).
• Multiple levers to maintain stable
margin with accelerated growth.
• Wireless product portfolio.
Wipro - Mindtree
• Entry into PES and R&D Services
Domain.
• Entry into Wireless and mobility
product domain.
• Access to the well diversified
clients of Mindtree (Volvo,
Microsoft, Symantec, HUL,
Pepsico etc)
• Get a boost in the BFSI sector.
• Safeguard the position as the third
largest IT exporter in India.
• Combined revenues of greater
than Rs 320 bn and Combined
EDITDA of Approximately 75 bn.
• Combination will bring together
world class leadership that can
create scale synergies and
growth.
• Increased access to global
customers and entry into new
geographies.
• Well diversified client based.
• Cross-selling opportunities.
10
 Deal Structure
Shareholding pattern of Wipro Shareholding pattern of Mindtree

10% Wipro can buyout the entire 32%

9% promoter stake, followed by a 42%
Non Institution Non Institution
Institutional 20% open offer in the market Institutional
which could give it a controlling 26%
Promoter 79% Promoter
stake.
It can also look forward towards 32%
buying out the entire company if
Total no of shares = 38,63,090 the institutional investors agree Total no of shares = 38,63,090
to it
Deal type

All cash deal

• The deal would be an all cash deal, with the acquisition price being anywhere in the range of Rs.25,000 mm to Rs.
27,000 mm for a 100 % stake. The price would be in proportionate with the stake acquired
• The entire amount should be funded by the balance sheet assets (cash and marketable securities). If any debt
covenants are breached (a rare possibility), the company can raise equity for the same but it will dilute the earnings.

Top management concerns Mindtree Top Management

Mindtree was co founded by 3 ex-Wipro eecutives. As of Mr.Ashok Soota Executive Chairman

now , Mindtree has many key members as Wipro alumni
Mr. Krishnakumar Natarajan CEO & Managing Director
including Mr. Ashok Soota.
The new management would have those members on Mr. Janakiraman S President and Group
board as well. This could actually be a blessing in CEO, PE Services
disguise as the employees are accustomed to the Wipro
Mr. Subroto Bagchi Vice Chairman and
culture and can easily adjust .
Gardener
It would be easier for the new management to take
strategic decisions without a lot of friction between them Mr. Rostow Ravanan Chief Financial Officer
29-01-2011 Wipro - Mindtree 11
Source: Capitaline for ownershi data,, Company AR and Q3 results