RESULTS REVIEW 2QFY20 11 OCT 2019 Tata Consultancy Services NEUTRAL Growth vectors at risk We downgrade TCS to NEUTRAL (BUY earlier) and strike it off our list of conviction picks following ~4% EPS cut and a weak growth trajectory (core verticals/ deceleration in digital). Our TP is Rs 1,975 at 20x Sep-21E (24x earlier). HIGHLIGHTS OF THE QUARTER Revenue growth was +8.4% YoY CC (USD rev at +0.6/5.8% QoQ/YoY), a steep decelerating trajectory following 12.7/10.6% YoY clocked in 4Q-1Q. Digital (33.2% of rev) decelerated (including absolute) to 28% YoY in 2Q (vs. tracking >40% YoY earlier). While deal bookings have been healthy (USD 6.4bn TCV and book-to-bill at 1.16x), we reckon that higher deal duration distorts the linkage between deal win momentum and revenue growth. Improving deal booking trajectory reflected in NorthAm TCV at USD 3.4bn and BFSI TCV at USD 2.2bn. Incremental weakness in Retail & CPG vertical (14.8% of rev) and Regional markets segment (20.6% of rev), continued softness in BFSI (31% of rev) has led to deceleration. Near-term headwinds in core verticals expected to persist. Limited positives comprised strong growth in large client bucket and continued traction in Europe (growth skew a risk). EBIT% was flat QoQ (-14bps) at 24%. Flattish margin performance resulted from the twin impact of growth slowdown and accelerated hiring (highest-ever 3M and 6M headcount addition at 14k/26k over 3M/6M). Adverse cross-currency (high exposure to GBP/EUR) also impacted margins. We reckon that margin trajectory will improve ‘gradually’ (factored EBIT% at 24.2/24.5/25.0 for FY20/21/22E) supported by a protracted growth recovery and slight moderation in sub-con. STANCE TCS’ trinity of ‘growth’, scale and durability is challenged and we find our conviction displaced. While multiple attributes of scale/durability (offshore-leverage in digital, attrition) remain intact, the impact of macros and client specifics across core verticals dent the growth outlook. We expect USD rev/EPS CAGR of 8.2/7.7% over FY19-22E, factoring USD rev growth of 6.3/9.0/9.4% for FY20/21/22E. In its downward drift however, strong payout policy (80-100% of FCF) and industry-leading margins/RoIC offer respite to valuations. Financial Summary YE March (Rs bn) 2QFY20 2QFY19 YoY (%) 1QFY20 QoQ (%) FY18 FY19 FY20E FY21E FY22E Net Revenues 389.77 368.54 5.8 381.72 2.1 1,231.04 1,464.63 1,565.24 1,732.92 1,936.10 EBIT 93.61 97.71 (4.2) 92.20 1.5 305.02 374.50 378.16 425.18 484.35 APAT 80.42 79.01 1.8 81.31 (1.1) 258.26 314.72 320.97 348.62 393.12 Diluted EPS (Rs) 21.4 21.1 1.8 21.7 (1.1) 68.8 83.9 85.5 92.9 104.8 P/E (x) 29.1 23.9 23.4 21.6 19.1 EV / EBITDA (x) 22.4 18.3 17.3 15.5 13.7 RoE (%) 30.1 36.1 35.3 37.1 40.0 Source: Company, HDFC sec Inst Research # Consolidated INDUSTRY IT CMP (as on 10 Oct 2019) Rs 2,004 Target Price Rs 1,975 Nifty 11,235 Sensex 37,880 KEY STOCK DATA Bloomberg TCS IN No. of Shares (mn) 3,752 MCap (Rs bn) / ($ mn) 7,521/105,858 6m avg traded value (Rs mn) 6,136 STOCK PERFORMANCE (%) 52 Week high / low Rs 2,296/1,784 3M 6M 12M Absolute (%) (4.9) (1.8) (1.9) Relative (%) (3.2) 0.1 (10.9) SHAREHOLDING PATTERN (%) Jun-19 Sep-19 Promoters 72.05 72.05 FIs & Local MFs 7.87 8.21 FPIs 15.88 15.52 Public & Others 4.20 4.22 Pledged Shares 1.53 1.53 Source : BSE Apurva Prasad [email protected]+91-22-6171-7327 Amit Chandra [email protected]+91-22-6171-7345 Akshay Ramnani [email protected]+91-22-6171-7334 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
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RESULTS REVIEW 2QFY20 11 OCT 2019 Tata Consultancy Services - 2QFY20 - HDFC sec... · While deal bookings have been healthy (USD 6.4bn TCV and book-to-bill at Absolute (%)1.16x),
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RESULTS REVIEW 2QFY20 11 OCT 2019
Tata Consultancy Services NEUTRAL
Growth vectors at riskWe downgrade TCS to NEUTRAL (BUY earlier) and strike it off our list of conviction picks following ~4% EPS cut and a weak growth trajectory (core verticals/ deceleration in digital). Our TP is Rs 1,975 at 20x Sep-21E (24x earlier). HIGHLIGHTS OF THE QUARTER Revenue growth was +8.4% YoY CC (USD rev at
+0.6/5.8% QoQ/YoY), a steep decelerating trajectory following 12.7/10.6% YoY clocked in 4Q-1Q. Digital (33.2% of rev) decelerated (including absolute) to 28% YoY in 2Q (vs. tracking >40% YoY earlier).
While deal bookings have been healthy (USD 6.4bn TCV and book-to-bill at 1.16x), we reckon that higher deal duration distorts the linkage between deal win momentum and revenue growth. Improving deal booking trajectory reflected in NorthAm TCV at USD 3.4bn and BFSI TCV at USD 2.2bn.
Incremental weakness in Retail & CPG vertical (14.8% of rev) and Regional markets segment (20.6% of rev), continued softness in BFSI (31% of rev) has led to deceleration. Near-term headwinds in core verticals expected to persist. Limited positives comprised
strong growth in large client bucket and continued traction in Europe (growth skew a risk).
EBIT% was flat QoQ (-14bps) at 24%. Flattish margin performance resulted from the twin impact of growth slowdown and accelerated hiring (highest-ever 3M and 6M headcount addition at 14k/26k over 3M/6M). Adverse cross-currency (high exposure to GBP/EUR) also impacted margins. We reckon that margin trajectory will improve ‘gradually’ (factored EBIT% at 24.2/24.5/25.0 for FY20/21/22E) supported by a protracted growth recovery and slight moderation in sub-con.
STANCE TCS’ trinity of ‘growth’, scale and durability is challenged and we find our conviction displaced. While multiple attributes of scale/durability (offshore-leverage in digital, attrition) remain intact, the impact of macros and client specifics across core verticals dent the growth outlook. We expect USD rev/EPS CAGR of 8.2/7.7% over FY19-22E, factoring USD rev growth of 6.3/9.0/9.4% for FY20/21/22E. In its downward drift however, strong payout policy (80-100% of FCF) and industry-leading margins/RoIC offer respite to valuations.
Revenue came at USD 5,517mn, 0.6/5.8% QoQ/YoY In Constant currency terms revenue grew 8.4% YoY CC (Accenture at 7.2%) Digital (33.2% of rev) grew at 27.9% YoY CC (vs. 42% YoY CC in 1QFY20) EBIT margin came at 24.0% -14bps QoQ, higher employee cost (-57bps) on Variable payouts was offset by lower SG&A (+51bps) TCS announced a special dividend of Rs 40 per share along with an interim dividend of Rs 5 per share, in-line with their capital allocation policy Page | 2
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
QoQ growth was slowest in past 11 qtrs and YoY CC lowest in last six quarters Deceleration in YoY CC revenue growth from 4QFY19 EBIT margin has stabilized at 24% -14bps QoQ, we expect margins to expand hereon given upfront investment in employees (strong net additions of ~26.4K in 1HFY20 vs. 29.2K in FY19) Digital stood at 33.2% of revenue but the growth slowed down to 27.9% YoY CC vs. 42.1% YoY in CC in 1QFY20, slowdown in Digital comes on a high base and pressure in Retail and CPG vertical
3.5
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3.2
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1QFY
162Q
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FY16
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3QFY
184Q
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(%, YoY CC)
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164Q
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(%)
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TATA CONSULTANCY SERVICES: RESULTS REVIEW 2QFY20
TCS vs. Accenture: Revenue Growth (% YoY CC) TCS vs. Accenture: EBIT Margin (%) Trend
Source: Company, HDFC sec Inst Research, Accenture Aug YE
Source: Company, HDFC sec Inst Research
TCS vs. Accenture: Deal TCV (USD bn) Trend TCS vs. Accenture: Deals Book to Bill (x) Trend
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
TCS superior to Accenture (including inorganic) both in terms of revenue growth and EBIT margin profile, but rev growth converging TCS’ deal bookings were strong but witnessing increase in deal size and duration of deals, Accenture had stronger wins in outsourcing TCS’ deal TCV in 2Q was USD 6.4bn (book-to-bill of 1.16 vs. to book-to-bill of 1.4 for Accenture’s outsourcing business) TCS’ BFSI TCV was USD 2.2bn (book-to-bill of 1.29) and NorthAm TCV was USD 3.4bn (book-to-bill of 1.22) Accenture’s deal TCV of USD 12.9bn included Consulting at USD 6.0bn (book-to-bill of 0.98) and Outsourcing at USD 6.9bn (book-to-bill of 1.4)
6.3 7.1
6.2 7.2
9.3
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10.6
8.4 7
8
10 1011 11
9.59 8.4
7.2
0
2
4
6
8
10
12
14
1QFY
18
2QFY
18
3QFY
18
4QFY
18
1QFY
19
2QFY
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3QFY
19
4QFY
19
1QFY
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2QFY
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TCS Accenture(%)
25.1 25.2 25.4 25.0 26.5 25.6 25.1 24.2 24.0
14.2 15.213.1
15.1 13.815.4
13.315.5 14.2
0
5
10
15
20
25
30
2QFY
18
3QFY
18
4QFY
18
1QFY
19
2QFY
19
3QFY
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4QFY
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1QFY
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TCS Accenture(%)
4.9
4.9 5.
9 6.2
5.7 6.4
11.8
10.8
10.2
11.8
10.6
12.9
0
2
4
6
8
10
12
14
1QFY
19
2QFY
19
3QFY
19
4QFY
19
1QFY
20
2QFY
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TCS Accenture(USD bn)
0.97
0.94
1.12
1.15
1.04
1.16
1.10
1.03
0.96
1.13
0.95
1.17
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1QFY
19
2QFY
19
3QFY
19
4QFY
19
1QFY
20
2QFY
20
TCS Accenture(x)
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TATA CONSULTANCY SERVICES: RESULTS REVIEW 2QFY20
TCS vs. Accenture: NorthAm Growth (% YoY) Trend TCS vs. Accenture: Europe Growth (% YoY) Trend
Source: Company, HDFC sec Inst Research
Source: Company, HDFC sec Inst Research
TCS vs. Accenture: BFSI Growth Trend (% YoY) TCS vs. Accenture: Attrition Trend (%)
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
TCS continued to witness slowdown in NorthAm vs. stable growth for Accenture in the geography TCS’ performance in Europe has been consistently strong but heightened macro weakness adds risk to this growth TCS posted superior growth in BFSI (vs. Accenture) for the past 5 qtrs Stable and industry best attrition for TCS at 11.6% vs. 19% for Accenture
3.53.6
2.8
4.9
78.1 8.2
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7.08.0
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9.08.0
0
2
4
6
8
10
12
1QFY
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18
3QFY
18
4QFY
18
1QFY
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2QFY
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TCS Accenture(%)
6.39.2 8.2
10.7
18.7 22.825.1
21.316
13.316.5 18.2
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15
16
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0
5
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20
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18
4QFY
18
1QFY
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2QFY
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19
4QFY
19
1QFY
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TCS UK TCS Continental EuropeAccenture Europe
(%)
5.1 4.70.2 2.9
4.1
6.1
8.6
11.6
9.28.06.0 9.0
11.0
7.08.0
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4.0 4.0
0
2
4
6
8
10
12
14
1QFY
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18
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18
4QFY
18
1QFY
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2QFY
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3QFY
19
4QFY
19
1QFY
20
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TCS Accenture(%)
11.6 11.3 11.1 11 10.9 10.9 11.2 11.3 11.5 11.6
15.0 15.013.0 13.0
17.018.0
15.0 15.0
18.019.0
0 2 4 6 8
10 12 14 16 18 20
1QFY
18
2QFY
18
3QFY
18
4QFY
18
1QFY
19
2QFY
19
3QFY
19
4QFY
19
1QFY
20
2QFY
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TCS Accenture(%)
Page | 5
TATA CONSULTANCY SERVICES: RESULTS REVIEW 2QFY20
Vertical Revenue Break-up (% of revenue) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 BFSI 32.6 31.6 31.1 31.1 31.2 30.8 30.9 30.8 31.0 Regional Markets & Others 17.6 17.4 18.0 19.9 20.4 20.7 21.3 20.8 20.6 Retail & CPG 15.9 16.7 16.6 15.4 15.4 15.5 15.1 15.0 14.8 Manufacturing 7.4 7.5 7.4 10.2 9.8 9.8 9.6 9.8 9.8 Technology & Services 8.0 7.9 7.8 9.0 8.9 8.7 8.6 8.8 8.7 Life Sciences & Healthcare 7.2 7.3 7.2 7.3 7.5 7.6 7.7 7.9 8.1 Communication & Media 7.1 7.1 7.1 7.1 6.8 6.9 6.8 6.9 7.0 Energy & Utilities 4.2 4.5 4.8 NA NA NA NA NA NA Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Company, HDFC Sec Inst Research
Vertical-wise Revenue Growth (QoQ, %) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 BFSI NA NA NA NA 3.6 (0.6) 3.1 1.3 1.2 Regional Markets & Others NA NA NA NA 5.8 2.2 5.8 (0.8) (0.4) Retail & CPG NA NA NA NA 3.2 1.3 0.1 1.0 (0.8) Manufacturing NA NA NA NA (0.8) 0.7 0.7 3.7 0.6 Technology & Services NA NA NA NA 2.1 (1.6) 1.6 4.0 (0.6) Life Sciences & Healthcare NA NA NA NA 6.1 2.0 4.2 4.3 3.1 Communication & Media NA NA NA NA (1.1) 2.2 1.3 3.1 2.0 Energy & Utilities NA NA NA NA NA NA NA NA NA Total 3.2 1.0 3.9 1.6 3.2 0.7 2.8 1.6 0.6 Source: Company, HDFC Sec Inst Research
BFSI (31% of rev) growth has been soft for two consecutive qtrs impacted by challenges in NorthAm Capital markets and Large European Banks Retail & CPG growth has been soft for three straight qtrs impacted by macro weakness and industry disruption Strong growth in Life sciences & Healthcare for the fourth consecutive quarter, life-sciences growth is on drug development projects at large Pharma companies
Page | 6
TATA CONSULTANCY SERVICES: RESULTS REVIEW 2QFY20
Geographic Revenue Break-up (% of revenue) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 Americas 54.1 54.2 52.2 52.9 53.1 53.2 52.7 52.4 52.5 North America 51.9 52.0 50.2 51.0 51.1 51.2 50.7 50.6 50.6 Latin America 2.2 2.2 2.0 1.9 2.0 2.0 2.0 1.8 1.9 Europe 27.4 27.6 29.4 29.5 29.6 29.6 30.0 30.1 30.2 UK 14.0 14.1 15.2 15.5 15.6 15.5 15.9 15.8 15.6 Continental Europe 13.4 13.5 14.2 14.0 14.0 14.1 14.1 14.3 14.6 Asia-Pacific 9.8 9.5 9.7 9.6 9.6 9.4 9.5 9.4 9.4 India 6.3 6.3 6.2 5.8 5.6 5.7 5.8 6.0 5.7 Middle East and Africa 2.4 2.4 2.5 2.2 2.1 2.1 2.0 2.1 2.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Company, HDFC Sec Inst Research Geographic Revenue Growth (QoQ, %) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 Americas 2.3 1.2 0.0 3.0 3.6 0.9 1.8 1.1 0.8 North America 2.0 1.2 0.3 3.2 3.4 0.9 1.8 1.4 0.6 Latin America 8.1 1.0 (5.6) (3.5) 8.7 0.7 2.8 (8.5) 6.2 Europe 7.1 1.8 10.6 1.9 3.6 0.7 4.2 2.0 0.9 UK 4.0 1.7 12.0 3.6 3.9 0.0 5.5 1.0 (0.7) Continental Europe 10.7 1.8 9.3 0.2 3.2 1.4 2.8 3.1 2.7 Asia-Pacific 6.5 (2.1) 6.1 0.5 3.2 (1.4) 3.9 0.6 0.6 India (7.1) 1.0 2.2 (5.0) (0.3) 2.5 4.6 5.1 (4.4) Middle East and Africa (0.9) 1.0 8.2 (10.6) (1.4) 0.7 (2.1) 6.7 5.4 Total 3.2 1.0 3.9 1.6 3.2 0.7 2.8 1.6 0.6 Source: Company, HDFC Sec Inst Research Geographic Revenue Growth (Constant Currency) (YoY, % CC) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 North America 3.6 2.8 4.9 7.0 8.1 8.2 9.9 7.7 5.3 Latin America 13.6 5.4 5.0 5.2 6.8 7.6 16.2 6.4 7.3 UK 9.2 8.2 10.7 18.7 22.8 25.1 21.3 16.0 13.3 Continental Europe 18.2 22.3 19.1 18.6 17.4 17.6 17.5 15.0 16.0 Asia-Pacific 4.1 6.2 8.6 10.8 12.5 12.6 11.5 9.5 6.5 India 14.3 4.1 (2.3) (4.7) 7.4 9.7 11.3 15.9 7.7 Middle East and Africa 7.6 3.7 2.2 (3.6) (4.4) (3.3) (4.0) 6.4 7.3 Total 7.1 6.2 7.2 9.3 11.5 12.1 12.7 10.6 8.4 Source: Company, HDFC Sec Inst Research
Growth was soft across geographies except in Continental Europe (+2.7% QoQ), heightening macro challenges adds risk to growth for this geography Deceleration in YoY CC growth trend in NorthAm Europe geo has been strong growth contributor for TCS (+17.3% in FY19) but YoY growth rate in Europe particularly in UK is now normalizing
Large account performance was strong with 3 sequential additions in >$ 100mn client bucket Steady working capital with DSO (including unbilled) at 83 days (vs. 82 days at FY19)
TCS’ valuation premium over INFY expected to converge with increasing growth divergence TCS’ valuations similar to industry leader Accenture now Lower FY21/22E rev est by 2.5/2.6% and margins by 63/66bps respectively
Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
HDFC securities Institutional Equities Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel,Mumbai - 400 013 Board : +91-22-6171-7330 www.hdfcsec.com
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TATA CONSULTANCY SERVICES: RESULTS REVIEW 2QFY20
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HSL or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from t date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction in the normal course of business. HSL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither HSL nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report. HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600 HDFC Securities Limited, SEBI Reg. No.: NSE, BSE, MSEI, MCX: INZ000186937; AMFI Reg. No. ARN: 13549; PFRDA Reg. No. POP: 11092018; IRDA Corporate Agent License No.: CA0062; SEBI Research Analyst Reg. No.: INH000002475; SEBI Investment Adviser Reg. 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