Sector Update

31 July 2024

Sector Update |

| Technology

Technology

Valuation snapshot

Company

TCS

Infosys

Wipro

HCL Tech

TechM

LTIM

LTTS

Mphasis

Coforge

Persistent

Zensar

Cyient*

Target

Rating

P/E

(x)

Buy

30

Buy

Neutral

Buy

Neutral

Buy

Buy

Neutral

Neutral

Buy

Neutral

Buy

25

20

27

23

35

38

27

30

50

23

22

Target

Price

(INR)

4,660

2,000

500

1,850

1,470

7,000

5,950

2,800

6,100

5,700

750

2,070

Deep Dive

–

Analyzing client trends in GCC expansion…

…and

inception over the past two years

It is no secret that Global Capability Centers (GCCs) have amassed significant scale

over the last decade in India. While revenue for GCCs has reported ~11% CAGR over

FY15-FY23, revenue of the top 5 IT services companies has clocked an 8% CAGR

during the same period (albeit on a much higher base). The increase in scale is also

visible from total headcount additions; the headcount for GCCs posted a 12% CAGR

over 2010-2023 vs. 8% for the top 5 companies during the same period. This trend is

structural rather than cyclical, in our view, and we believe this has far-reaching

implications for the next recovery cycle in technology spends. In this report, we take

stock of new as well as expanding GCCs and analyze which verticals are garnering

the most interest from enterprises. Mature industries such as BFSI, where most

large banks already have significant GCC outposts, could route a higher chunk of

their technology spends through GCCs, impeding a J curve recovery in some sectors

for service vendors. Software and hi-tech companies value control over data and IP,

and they have been the most active in terms of expanding and opening new GCCs.

On the other hand, there are many clients just setting up GCC outposts, and service

vendors can add value by hand holding clients and helping them set up shop.

Software expands the most in the past two years; BFSI close on the heels



New GCC set up:

Data suggest that software and internet accounted for 54%

and 36% of the new GCCs set up in CY22 and CY23, respectively. Some of the

major companies with new GCC setups overall are Pratt and Whitney

(aerospace), Suzuki, Daimler (automotive), Triton EV (automotive), Llyods

(BFSI), Greenlight (BFSI), and Ethos (BFSI), et al.



Expansion of GCCs:

Clients from the BFSI vertical were among the most active in

expanding GCCs between CY22 and CY23. Marquee client names that have

expanded their presence in the Indian GCC space over the past two years are: JP

Morgan, Goldman Sachs, Fidelity, Metlife, DE Shaw (BFSI), Pfizer, Boston

Scientific, Sanofi, GSK (healthcare), Nissan Motors, Air Asia, Boeing, Bombardier

(autos and aero), IBM, Fictiv, and Blackberry (software), et al.

GCCs at an inflection point in India

The evolution of GCCs in India can be explained in three waves.



Wave 1 (700+ GCCs and 400K+ Talent base):

Until the 2010s, GCCs established

in India primarily aimed for cost arbitrage and efficient scaling of operations.



Wave 2 (2010-15; 1000+ GCCs and 750K+ Talent base):

In this wave, GCCs in

India began to specialize in specific areas, evolving into Delivery Excellence

Centers and functioning as satellite offices for their parent organizations.



Wave 3 (2015- now; 1580+ GCCs and 1600K+ talent base):

In this wave, GCCs

now possess notable domain knowledge and are of strategic importance to their

parent organizations.

*Only DET Business

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Investors are advised to refer through important disclosures made at the last page of the Research Report.

31 July 2024

1

Abhishek Pathak - Research analyst

(Abhishek.Pathak@MotilalOswal.com)

Keval Bhagat - Research analyst

(Keval.Bhagat@MotilalOswal.com)

Sector Update | Technology

The Indian GCC landscape is now at an inflection point and evolving into a

transformation hub beyond traditional roles of cost arbitrage and delivery centers

for parent organizations. Of the USD200b of Indian IT services exports, GCCs account

for c22% of revenues and c30% of the IT services workforce. We believe clients with

significant scale GCCs can match the cost pyramid of service vendors, and the

incentive of delivery excellence and a more strategic role to play in the parents’ tech

transformation journey makes GCCs more relevant than ever.

Outlook: Co-existence the new reality

Co-existence with GCCs will be the new reality for technology vendors, and we

believe service vendors are an attractive proposition for clients who are just

beginning and looking to set up GCC outposts in India. For mature clients in verticals

such as BFSI, the equation could be tricky, and vendors may have to share the plate

with GCCs when it comes to transformation projects as well. This could imply

diminishing scale benefits, as project sizes and headcount requirements from

vendors may be lower compared to earlier years. We believe this benefits small and

mid-players, who could play an instrumental role in the next recovery cycle as well.

We reiterate Persistent and LTIMindtree as our top picks in the mid-to-large tier,

and prefer HCLT as our top pick in the large cap space.

New GCC set up in India



India saw the establishment of 47 new GCCs (45 in Tier-I cities) in CY23, a dip

from 65 new GCCs (62 in Tier-I cities) in CY22. In both years, Software & Internet

verticals established the most GCCs at 35/17 (in CY22/CY23).



In CY23, the Semiconductor sector accounted for ~9% of GCCs. India has over

55+ Semiconductor GCCs, as per NASSCOM. Moreover, BFSI vertical also

consistently contributed ~5% in the newly set up GCCs in CY22/23.

Exhibit 1:

Tier-I vs Tier-II – new GCCs set up

19

17

15

11

9

9

9

Tier - I Cities

Tier - II Cities

18

1

1Q22

2

-

2Q22

3Q22

-

4Q22

-

1Q23

-

2Q23

1

3Q23

1

4Q23

Source: NASSCOM, MOFSL

31 July 2024

2

Sector Update | Technology

Exhibit 2:

New GCC set up across verticals in CY22

Others

16%

Electrical &

Electronics/Consu

mer Elect.

8%

Travel &

Hospitality

5%

Retail

6%

BFSI

5%

Automotive

6%

Software &

Internet

54%

Source: NASSCOM, MOFSL

Exhibit 3:

New GCC set up across verticals in CY23

Medical

Devices/Pharma

6%

Electrical &

Electronics/Consu

mer Elect.

4%

Semiconductors

9%

Others

32%

BFSI

4%

Industrial

9%

Software &

Internet

36%

Source: NASSCOM, MOFSL

Expansion of centers for the established GCCs



In CY22, the established GCCs expanded into 36 new centers, with the Software

& Internet vertical accounting for the largest share at 39%, followed by the

Electrical & Electronics/Consumer Electronics sector at 17%.



The expansion of GCCs continued to follow the trend of opening in Tier-I cities.

In CY22, 30 out of 36 expansions occurred in Tier-I cities, and in CY23, 30 out of

37 expansions were in Tier-I cities.



In CY23, clients from the BFSI vertical were among the most active in expanding

GCCs, accounting for 14% of the total GCC expansions.

Exhibit 4:

Tier-I cities attract more GCC expansions and accounted for ~80% in CY23

Tier - I Cities

13

10

7

3

1

2Q22

3Q22

7

3

3

-

4Q22

1Q23

2Q23

3Q23

4Q23

11

Tier - II Cities

9

2

2

2

Source: NASSCOM, MOFSL

31 July 2024

3

Sector Update | Technology

Exhibit 5:

Expansion of the established GCCs across verticals in CY22

Others

18%

FMCG

6%

Electrical &

Electronics/Consu

mer Elect.

17%

Professional

Services

8%

Industrial

6%

Automotive

6%

Software &

Internet

39%

Source: NASSCOM, MOFSL

Exhibit 6:

Expansion of the established GCCs across verticals in CY23

Others

19%

BFSI

14%

Electrical &

Electronics/Consu

mer Elect.

5%

Semiconductors

8%

Industrial

16%

Professional

Services

14%

Software &

Internet

24%

Source: NASSCOM, MOFSL

Growth of GCCs in India: A closer look



In 2012, there were ~760 GCCs operating in India. By 2016, this number went

over 1,000, and as of March 2023, India hosted over 1,600 GCCs. According to a

report by PwC and Economic survey 2023-24, this number is expected to reach

2,100 by 2028.



GCCs have gained market share over the years. As shown in Exhibit 13, other

business services (a proxy for GCCs) increased to 25% of total service exports by

Mar’24, up from 19% in Mar’19.



GCCs' revenue is expected to reach USD90b by 2028, surging from USD46b in

2023 at a CAGR of 14%. As per NASSCOM, ~50% of the new GCCs established in

India were set up by the US-headquartered MNCs.

31 July 2024

4

Sector Update | Technology

Exhibit 7:

No. of GCCs anticipated to reach 2,100 by 2028

No. of GCCs

1600

1000

700

2100

Till 2010

2011-2015

2015-2023

2023-2028*

(Projections)

Source: Economic Survey (2023-24), PwC, MOFSL

Exhibit 8:

GCC revenue is likely to reach USD90b by 2028, at 14% CAGR

Revenue (USD b)

90

46

11.5

Till 2010

19.4

2015

2023

2028*

Source: Economic Survey (2023-24), PwC, MOFSL







Revenue from India's GCCs has increased to USD46b in FY23 from USD19b in

FY15, at a CAGR of 11.4%. ER&D now constitutes 56% of total GCC revenue in

FY23, up from 35% in FY19. The key drivers for the growth of ER&D in India

include strategic long-term partnerships, extensive digitalization, and the

adoption of cloud technologies.

GCCs in India have experienced substantial growth, increasing from over 1,000

centers in FY15 to 2,740 units by FY23. These centers provide high-quality

employment opportunities.

The software, internet, and BFSI sectors collectively account for about 58% of

India's IT GCC talent. Of this workforce, over 42% are engaged in ER&D, 34.5% in

BPM, and 23.4% in IT services.

31 July 2024

5

Sector Update | Technology

Exhibit 9:

Breakup of revenue of GCCs by functions (in USD b)

BPM

IT

ER&D

25.6

16

6.9

7.5

FY19

19.8

7.7

8.4

FY21

9.7

10.7

FY23

Source: Economic Survey (2023-24), NASSCOM, MOFSL

Exhibit 10:

Talent employed in Indian GCCs exceeded 1.6m in FY23

Installed GCCs talent (in Thousand)

3400

1659

400

Till 2010

745

2011-2015

2015-2023

2023-2028*

(Projections)

Source: Economic Survey (2023-24), PwC, MOFSL

Exhibit 11:

GCC units have grown significantly to 2,740

No. of GCC units

3200

2740

1448

1000

Till 2010

2011-2015

2015-2023

2023-2028*

(Projections)

Source: Economic Survey (2023-24), PwC, MOFSL





Telecom, Computer, and Information exports as a % of total service exports

have grown consistently, increasing by ~8% over the last five years to reach

47%. As of Mar’24, these exports totaled USD42.1b.

GCCs have gained market share over the years. Other business service (a proxy

for GCCs) rose 6% over the same period, reaching 25% of total service exports.

31 July 2024

6

Sector Update | Technology

Exhibit 12:

IT & Telecom services constitute nearly half of the service exports

Telecom, Computer and Information as a % of Service Exports

Source: economic survey, MOFSL

Exhibit 13:

Other business services contributed 25% of service exports and reached

USD89b in Mar’24

Other business services as a % of Service Exports

Source: economic survey, MOFSL

Exhibit 14:

Valuation table

Company

TCS

Infosys

Wipro

HCL Tech

TechM

LTIM

LTTS

Mphasis

Coforge

Persistent

Zensar

Cyient*

Price MCap

Rating

(INR) (INR b)

Buy

Buy

Neutral

Buy

Neutral

Buy

Buy

Neutral

Neutral

Buy

Neutral

Buy

4,397

1,868

521

1,638

1,547

5,643

5,220

2,884

6,321

4,844

803

1,750

15,900

7,736

2,721

4,431

1,513

1,713

552

544

421

740

182

192

Upside/

TP

Downside

(INR)

(%)

FY24

4,660

6%

126.3

2,000

7%

58.4

500

-4%

20.4

1,850

13%

57.9

1,470

-5%

41.1

7,000

24% 154.8

5,950

14% 123.0

2,800

-3%

81.8

6,100

-4%

133.2

5,700

18%

75.1

750

-7%

29.1

2,070

18%

62.7

Revenue growth

EBIT margin

(%) (USD)

(%)

FY25E FY26E FY24 FY25E FY26E FY24 FY25E FY26E FY24 FY25E FY26E

143.5 155.4 35

31

28

4.1 5.9

8.0 24.7 25.4 25.5

65.4 78.1 32

29

24

1.9 4.7

9.1 20.7 21.1 22.0

22.0 24.5 26

24

21 -3.8 -1.9

4.9 15.2 15.9 16.4

62.5 68.5 28

26

24

5.4 5.2

9.2 18.2 18.3 18.6

44.5 63.6 38

35

24 -5.0 2.3

6.6

7.6 9.2

12.4

166.8 198.8 36

34

28

4.4 5.3

10.7 15.7 15.8 17.1

129.2 156.1 42

40

33 17.6 8.3

12.1 17.1 15.9 17.3

91.2 103.4 35

32

28 -6.3 5.3

9.9 15.1 15.4 15.8

150.3 202.8 47

42

31 11.7 10.6 14.5 12.8 13.4 15.1

88.9 114.0 65

54

42 14.5 16.4 17.7 14.4 14.5 15.5

28.2 32.8 28

29

25 -2.0 8.4

13.3 15.1 13.5 14.2

61.0 80.6 28

29

22 12.9 -0.7 11.0 16.2 14.5 17.5

Source: Company, MOFSL; Note: *Only DET Business

EPS

P/E (x)

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

31 July 2024

7

Sector Update | Technology

NOTES

31 July 2024

8

Sector Update | Technology

Explanation of Investment Rating

Investment Rating

BUY

SELL

NEUTRAL

UNDER REVIEW

NOT RATED

Expected return (over 12-month)

>=15%

< - 10%

< - 10 % to 15%

Rating may undergo a change

We have forward looking estimates for the stock but we refrain from assigning recommendation

*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall be within following

30 days take appropriate measures to make the recommendation consistent with the investment rating legend.

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********************************************************************************************************************************

The associates of MOFSL may have:

-

financial interest in the subject company

31 July 2024

9

Sector Update | Technology

-

-

-

-

-

-

-

actual/beneficial ownership of 1% or more securities in the subject company at the end of the month immediately preceding the date of publication of the Research Report or date of the

public appearance.

received compensation/other benefits from the subject company in the past 12 months

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there might exist an inherent conflict of interest in some of the stocks mentioned in the research report.

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provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The

Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval. MOFSL, its associates, their directors and

the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform

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separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information that is

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Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

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Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022 - 71934200 / 71934263;

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query@motilaloswal.com

Ms. Kumud Upadhyay

022 40548082

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Mr. Ajay Menon

022 40548083

am@motilaloswal.com

Registration details of group entities.: Motilal Oswal Financial Services Ltd. (MOFSL): INZ000158836 (BSE/NSE/MCX/NCDEX); CDSL and NSDL: IN-DP-16-2015; Research Analyst:

INH000000412 . AMFI: ARN .: 146822. IRDA Corporate Agent – CA0579. Motilal Oswal Financial Services Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Insurance, Bond, NCDs

and IPO products.

Customer having any query/feedback/ clarification may write to query@motilaloswal.com. In case of grievances for any of the services rendered by Motilal Oswal Financial Services Limited

(MOFSL) write to grievances@motilaloswal.com, for DP to dpgrievances@motilaloswal.com.

31 July 2024

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