Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Computer Services
Deep dive: Significance of
organisation structure
How organization structures are driving revenue & profits
Its 3 years since the last significant organization restructuring by IT majors. We do
a deep dive on how org structure may have helped client mining, new client wins
and profitability. Three key takeaways a) TCS’ creation of manageable sized P&L
units has boosted client mining and profitability (tbl 1&2) b) HCL Tech’s dual sales
including service line sales has led to highest number of client wins. Mining of
these clients should lead to superior revenue & profit growth. c) Wipro’s delivery
modification seems to have paid off in sharp improvement in profitability. Client
mining steps to be watched. CTSH well poised & Infy largely optimal structure.
TCS: 2008 restructuring key driver of rev & profit growth
In 2008, TCS undertook a fundamental org restructuring into industry groups
(verticals) & service lines (horizontals) and gave them P&L responsibility, similar
to what peers already had. Moreover, unlike peers, it established a separate
group (geography based) to focus on new client hunting, so that verticals could
focus on growing existing clients. This has led to improved revenue per client and
a sharp 20% CAGR in EBIT per client over FY08-11e vs 5% over FY05-08.
HCLT: Dual selling has helped client wins; Mining key now
HCL Tech has a two-pronged selling approach where both verticals and service
lines have selling responsibility, unlike peers where primary responsibility is with
the vertical. This has helped it win ‘must have’ accounts through both industry
specific offerings and its differentiated service offerings in IT infra management
services & enterprise solutions, leading to a high 17% CAGR in new client wins.
Client mining should boost rev growth & profitability ahead. Longer term, it may
need to adopt a vertical led structure to sharpen accountability.
WPRO: Delivery changes help; To watch client mining steps
In 2008, Wipro established a centralized delivery group, which has likely helped
grow EBIT per client by 16% CAGR over FY08-11e vs 1% in FY05-08. While
strengthened sales force has helped client mining, the move to a vertical led client
facing structure from April, should help further. However, removal of P&L
responsibility for service lines could impact diversified growth. Secondly, the
proposal to make 70% of junior resources fungible across verticals could impact
confidence of industry heads on resource availability while bidding for new deals.
CTSH: Separate sales team; Dedicated delivery manager
Two key org structure differences that may be helping CTSH’ (not rated) client
mining & wins are a) A sales organization distinct from industry groups, for new
client hunting, similar only to TCS and b) In addition to a dedicated client partner
CTSH also has a dedicated delivery manager who coordinates all projects for a
client (‘Two-in-a-box’), which has likely helped strengthen relationship and mining.
Significance of org structure
It is about 3 years since the last significant organization restructuring by
the leading IT majors. This report is one of the first deep dives into what seems to
have worked, how organization structures compare today across vendors &
implications thereof for revenue growth and profitability.
We have analyzed trends in 3 key metrics
1. Client mining (average revenue per client, average size of top 10 clients and
clients with greater than US$1mn in revenue per annum)
2. Client wins (increase in active clients)
3. Profitability per client
Key takeaways
1. TCS’ major 2008 restructuring into manageable sized P&L units by industry
groups (verticals) and service lines (horizontals), appears to be paying off in
improving client mining and profitability. Revenue per client jumped by 14%
CAGR in FY08-11e vs 10% in FY05-08. EBIT per client at 20% CAGR in
FY08-11e vs 5% in FY05-08, highest among peers.
2. HCL Tech adopted a dual selling structure around 2009, with both industry
groups and service lines, sharing selling responsibility. This likely helped
leverage its differentiated offerings in infrastructure management services
and enterprise solutions to get an entry into quality clients. In our view, this
has been key to the 17% CAGR jump in clients over FY08-11e, highest
among peers. Successful mining should help outperform peers on rev &
profit growth ahead. We forecast 28% EBITDA growth over FY11-13 highest
among peers. However, it may need to sharpen accountability longer term.
3. Wipro’s move to centralize delivery supervision in 2008 seems to have
helped growth in profit per client jump from 1% in FY05-08 to 16% over
FY08-11e. Effective April, the move to a industry group (vertical) led client
facing structure should help client mining. However, removal of P&L
responsibility for service lines could impact diversified growth. Secondly, the
proposal to make 70% of junior resources fungible across verticals could
impact confidence of industry heads on resource availability while bidding for
new deals
4. Cognizant (not rated) Two key org structure differences that may be
helping CTSH’ client mining & wins are a) A sales organization distinct from
industry groups, for new client hunting, similar only to TCS and b) In addition
to a dedicated client partner CTSH also has a dedicated delivery manager
who coordinates all projects for a client (‘Two-in-a-box’), which has likely
helped strengthen relationship and mining. Rev per client grew 19% over
FY08-11 up from 15% in the prior 3yr period and EBIT per client has jumped
by 21% vs 10% earlier.
5. Infosys established vertical and horizontal P&L units about 5 or 6 years ago
and has been a leader in client mining (23% CAGR in rev per client over
FY05-08). Over the last 3 years it has performed in line with peers (at 13%
growth in rev/client), perhaps due to softness in a few of its telecom clients. It
has largely maintained steady profitability.
Investment Thesis
HCL (XHCLF)
We like HCL Tech for its favorable exposure to the rapidly growing Infrastructure
Management Services. We also expect it to be a key beneficiary of the increased
spends in R&D services and enterprise solutions, as discretionary spending
returns. Moreover we expect investments in sales, BPO and enterprise solutions
to start paying off in 2011. This should lead to stock re-rating. Sharply reduced
forex losses and intangible amortisation charge to further boost earnings growth.
Infosys Tech (INFYF)
Infosys should be a key beneficiary of increased global sourcing and the uptrend
in discretionary IT spending, particularly in enterprise solutions. EBITDA growth
could be a tad lower than peers if Infosys decides to ramp up investments in
growing local delivery capability and developing new growth markets. However,
Infosys should report the highest FY12 EPS growth among peers, given the tax
holiday expiry hit is behind them this year. Revenue led strong earnings growth
should drive stock upside
Tata Consultancy (TACSF)
TCS should be a key beneficiary of the uptrend in discretionary IT spending and
increased global sourcing, particularly in the banking, financial services and
insurance vertical. We also like TCS for its strong competitive position across
service lines, including high-growth areas like Infrastructure Management
Services. We expect pricing, productivity and revenue mix focus to largely offset
wage pressures.
Wipro (WIPRF)
Our Neutral reflects a) possible churn in senior/mid management following the
change of CEO b) Wipro's lower exposure to discretionary IT spend e.g.
enterprise solutions and banking vertical which are likely to lead spend this year
and c) likely underperformance vs peers in 4Q, as reflected by the relatively
muted hiring vs peers.
Price objective basis & risk
HCL (XHCLF)
Our Price Objective of Rs620 assumes a one-year forward FY13e P/E of nearly
15x as margins bottom. We believe this is justified as it implies a conservative
FY12 EV/EBITDA to 2yr EBITDA growth (EEG) of 0.5x, a discount of over 30% to
Wipro' s target EEG. Downside risks stem from higher than expected investments
delaying margin recovery, macro led delays in discretionary IT spending, higher
than expected wage hike pressures and Rupee appreciation.
Infosys Tech (INFYF)
Our Price Objective of Rs4,000 (US$87 for ADR, at parity) is based on a target
FY12 EV/EBITDA to 2yr EBITDA growth of 0.85x, in-line with its 5yr avg multiple.
This implies a FY13e P/E of approximately 22x, broadly in line with current 1yr
forward (FY12e) PE. Downside risks to estimates stem from macro led delays in
IT spend or sharp appreciation of the Rupee.
Tata Consultancy (TACSF)
Our Price Objective of Rs1,400 is based on a target FY12 EV/EBITDA-to-2-year
EBITDA growth of 0.85x, in line with Infosys. This implies a target FY13e PE of
22x, in line with the current 1-year forward (FY12e) PE. Downside risks to our
estimates stem from macro-led delays in IT spending or a sharp appreciation of
the Rupee.
Wipro (WIPRF)
Our Price Objective of Rs500 is set at 17x FY13e EPS, at a 20% discount to our
target multiple for Infosys. This is higher than the average P/E discount of about
15% in past 3 years due to slower earnings growth trajectory. Downside risks to
our price objective are delays in recovery of IT spending by technology and
telecom verticals apart from macro risks relating to IT spending and Rupee.
Upside risks are faster than expected success of new CEO in the rebuild process
and mining top accounts.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Computer Services
Deep dive: Significance of
organisation structure
How organization structures are driving revenue & profits
Its 3 years since the last significant organization restructuring by IT majors. We do
a deep dive on how org structure may have helped client mining, new client wins
and profitability. Three key takeaways a) TCS’ creation of manageable sized P&L
units has boosted client mining and profitability (tbl 1&2) b) HCL Tech’s dual sales
including service line sales has led to highest number of client wins. Mining of
these clients should lead to superior revenue & profit growth. c) Wipro’s delivery
modification seems to have paid off in sharp improvement in profitability. Client
mining steps to be watched. CTSH well poised & Infy largely optimal structure.
TCS: 2008 restructuring key driver of rev & profit growth
In 2008, TCS undertook a fundamental org restructuring into industry groups
(verticals) & service lines (horizontals) and gave them P&L responsibility, similar
to what peers already had. Moreover, unlike peers, it established a separate
group (geography based) to focus on new client hunting, so that verticals could
focus on growing existing clients. This has led to improved revenue per client and
a sharp 20% CAGR in EBIT per client over FY08-11e vs 5% over FY05-08.
HCLT: Dual selling has helped client wins; Mining key now
HCL Tech has a two-pronged selling approach where both verticals and service
lines have selling responsibility, unlike peers where primary responsibility is with
the vertical. This has helped it win ‘must have’ accounts through both industry
specific offerings and its differentiated service offerings in IT infra management
services & enterprise solutions, leading to a high 17% CAGR in new client wins.
Client mining should boost rev growth & profitability ahead. Longer term, it may
need to adopt a vertical led structure to sharpen accountability.
WPRO: Delivery changes help; To watch client mining steps
In 2008, Wipro established a centralized delivery group, which has likely helped
grow EBIT per client by 16% CAGR over FY08-11e vs 1% in FY05-08. While
strengthened sales force has helped client mining, the move to a vertical led client
facing structure from April, should help further. However, removal of P&L
responsibility for service lines could impact diversified growth. Secondly, the
proposal to make 70% of junior resources fungible across verticals could impact
confidence of industry heads on resource availability while bidding for new deals.
CTSH: Separate sales team; Dedicated delivery manager
Two key org structure differences that may be helping CTSH’ (not rated) client
mining & wins are a) A sales organization distinct from industry groups, for new
client hunting, similar only to TCS and b) In addition to a dedicated client partner
CTSH also has a dedicated delivery manager who coordinates all projects for a
client (‘Two-in-a-box’), which has likely helped strengthen relationship and mining.
Significance of org structure
It is about 3 years since the last significant organization restructuring by
the leading IT majors. This report is one of the first deep dives into what seems to
have worked, how organization structures compare today across vendors &
implications thereof for revenue growth and profitability.
We have analyzed trends in 3 key metrics
1. Client mining (average revenue per client, average size of top 10 clients and
clients with greater than US$1mn in revenue per annum)
2. Client wins (increase in active clients)
3. Profitability per client
Key takeaways
1. TCS’ major 2008 restructuring into manageable sized P&L units by industry
groups (verticals) and service lines (horizontals), appears to be paying off in
improving client mining and profitability. Revenue per client jumped by 14%
CAGR in FY08-11e vs 10% in FY05-08. EBIT per client at 20% CAGR in
FY08-11e vs 5% in FY05-08, highest among peers.
2. HCL Tech adopted a dual selling structure around 2009, with both industry
groups and service lines, sharing selling responsibility. This likely helped
leverage its differentiated offerings in infrastructure management services
and enterprise solutions to get an entry into quality clients. In our view, this
has been key to the 17% CAGR jump in clients over FY08-11e, highest
among peers. Successful mining should help outperform peers on rev &
profit growth ahead. We forecast 28% EBITDA growth over FY11-13 highest
among peers. However, it may need to sharpen accountability longer term.
3. Wipro’s move to centralize delivery supervision in 2008 seems to have
helped growth in profit per client jump from 1% in FY05-08 to 16% over
FY08-11e. Effective April, the move to a industry group (vertical) led client
facing structure should help client mining. However, removal of P&L
responsibility for service lines could impact diversified growth. Secondly, the
proposal to make 70% of junior resources fungible across verticals could
impact confidence of industry heads on resource availability while bidding for
new deals
4. Cognizant (not rated) Two key org structure differences that may be
helping CTSH’ client mining & wins are a) A sales organization distinct from
industry groups, for new client hunting, similar only to TCS and b) In addition
to a dedicated client partner CTSH also has a dedicated delivery manager
who coordinates all projects for a client (‘Two-in-a-box’), which has likely
helped strengthen relationship and mining. Rev per client grew 19% over
FY08-11 up from 15% in the prior 3yr period and EBIT per client has jumped
by 21% vs 10% earlier.
5. Infosys established vertical and horizontal P&L units about 5 or 6 years ago
and has been a leader in client mining (23% CAGR in rev per client over
FY05-08). Over the last 3 years it has performed in line with peers (at 13%
growth in rev/client), perhaps due to softness in a few of its telecom clients. It
has largely maintained steady profitability.
Investment Thesis
HCL (XHCLF)
We like HCL Tech for its favorable exposure to the rapidly growing Infrastructure
Management Services. We also expect it to be a key beneficiary of the increased
spends in R&D services and enterprise solutions, as discretionary spending
returns. Moreover we expect investments in sales, BPO and enterprise solutions
to start paying off in 2011. This should lead to stock re-rating. Sharply reduced
forex losses and intangible amortisation charge to further boost earnings growth.
Infosys Tech (INFYF)
Infosys should be a key beneficiary of increased global sourcing and the uptrend
in discretionary IT spending, particularly in enterprise solutions. EBITDA growth
could be a tad lower than peers if Infosys decides to ramp up investments in
growing local delivery capability and developing new growth markets. However,
Infosys should report the highest FY12 EPS growth among peers, given the tax
holiday expiry hit is behind them this year. Revenue led strong earnings growth
should drive stock upside
Tata Consultancy (TACSF)
TCS should be a key beneficiary of the uptrend in discretionary IT spending and
increased global sourcing, particularly in the banking, financial services and
insurance vertical. We also like TCS for its strong competitive position across
service lines, including high-growth areas like Infrastructure Management
Services. We expect pricing, productivity and revenue mix focus to largely offset
wage pressures.
Wipro (WIPRF)
Our Neutral reflects a) possible churn in senior/mid management following the
change of CEO b) Wipro's lower exposure to discretionary IT spend e.g.
enterprise solutions and banking vertical which are likely to lead spend this year
and c) likely underperformance vs peers in 4Q, as reflected by the relatively
muted hiring vs peers.
Price objective basis & risk
HCL (XHCLF)
Our Price Objective of Rs620 assumes a one-year forward FY13e P/E of nearly
15x as margins bottom. We believe this is justified as it implies a conservative
FY12 EV/EBITDA to 2yr EBITDA growth (EEG) of 0.5x, a discount of over 30% to
Wipro' s target EEG. Downside risks stem from higher than expected investments
delaying margin recovery, macro led delays in discretionary IT spending, higher
than expected wage hike pressures and Rupee appreciation.
Infosys Tech (INFYF)
Our Price Objective of Rs4,000 (US$87 for ADR, at parity) is based on a target
FY12 EV/EBITDA to 2yr EBITDA growth of 0.85x, in-line with its 5yr avg multiple.
This implies a FY13e P/E of approximately 22x, broadly in line with current 1yr
forward (FY12e) PE. Downside risks to estimates stem from macro led delays in
IT spend or sharp appreciation of the Rupee.
Tata Consultancy (TACSF)
Our Price Objective of Rs1,400 is based on a target FY12 EV/EBITDA-to-2-year
EBITDA growth of 0.85x, in line with Infosys. This implies a target FY13e PE of
22x, in line with the current 1-year forward (FY12e) PE. Downside risks to our
estimates stem from macro-led delays in IT spending or a sharp appreciation of
the Rupee.
Wipro (WIPRF)
Our Price Objective of Rs500 is set at 17x FY13e EPS, at a 20% discount to our
target multiple for Infosys. This is higher than the average P/E discount of about
15% in past 3 years due to slower earnings growth trajectory. Downside risks to
our price objective are delays in recovery of IT spending by technology and
telecom verticals apart from macro risks relating to IT spending and Rupee.
Upside risks are faster than expected success of new CEO in the rebuild process
and mining top accounts.
No comments:
Post a Comment