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Epam stock analytics 2 april 2012

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Otkritie Capital's review and analytics of EPAM's growth

Otkritie Capital's review and analytics of EPAM's growth

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  • 1. EQUITY | US Research analysts IT Alexander Vengranovich alexander.vengranovich@otkritie.com +7 (495) 213 1830 2 April 2012INITIATIONEPAM SystemsHigh-end growth but already fairly priced We initiate coverage of EPAM systems with an end-2012 target HOLD price of $20/share and a HOLD rating. Our target price implies that Ticker EPAM US EPAM is fairly priced. Although we like company fundamentals, Target price, $ 20 which are related to its direct exposure to growing CEE and CIS IT Last price of common shares, $ 20.5 offshoring and concentration on the fast growing software Upside -3% Number of common shares, mn 42.0 development market, the stock gained 70% since its February 2012 Market cap, $mn 862 IPO and now trades with a small 12% discount to its Indian and Net debt, $mn (115) Chinese peers and on par with our DCF-derived equity value. EV, $mn 747 Direct exposure to growing CEE and CIS IT offshoring. By its nature, IT Free float 16% offshoring is a very cost efficient form of IT expenditure, therefore big global firms are 52-week min, $ 13.4 increasingly offshoring their IT budgets, while the CEE and CIS regions have become 52-week max, $ 21.1 important outsourcing destinations. IDC forecasts the global IT offshoring market will Sources: Bloomberg, Otkritie Capital Research see a 15.3% CAGR in 2010-2015. EPAM focuses on the fast growing application outsourcing and development markets, which IDC expects to grow at a 16-19% CAGR in 2010-2015. We expect EPAM Systems to benefit even beyond this growth Share price performance thanks to its superior personnel quality. More liquid than IBS Group, but Luxoft could join the race soon. The average 160 daily trading volume (excluding 1 day of trading) in EPAM is 0.26mn shares or 150 ~$4.5mn. This liquidity is substantially better than that of IBS Group (parent of 140 Luxoft). Luxoft‟s IPO, which is expected in later in 2012 on NYSE, could offer investors another exposure to the sector. 130 Closest peer to Luxoft, with more focus on Independent Software Vendors and 120 Technology companies. The choice between the 2 companies depends on the 110 evolution of demand in their target industries: EPAM focuses more on ISVs, while Luxoft‟s main clients are banks. 100 Growth story trading in line with peers. In 2008-2011 EPAM posted 28% top-line 90 growth CAGR. We expect some slowdown in 2011-2014 to 21%, which is still above Feb-12 Feb-12 Feb-12 Mar-12 Mar-12 Mar-12 Mar-12 Mar-12 market growth and the average peer CAGR of 15%. As the stock has had a good run since its IPO in February 2012, gaining 70%, it is trading on a 2012E EV/EBITDA EPAM Systems (Rebased) SP500 (Rebased) multiple of 9.8.x; this is in line with Indian and Chinese peers, but at 46% premium to Sources: Bloomberg IBS Group. Personnel costs growth could negatively affect company fundamentals. Management estimates that around 80% of the company COS and SG&A costs represent personnel salaries. We assume 10% annual personnel cost inflation until 2015, while each additional 1% increase will have $2/share negative impact on TP. Substantial share overhang risk to emerge after the end of the lock-up period. A formal 180-day post-IPO lock-up period applies for all pre-IPO shareholders; no additional lock-ups are set for the founders and management. We estimate that the lock-up period ends on 6 August 2012. 85% of the company shares could potentially be released for trading on that date.Figure 1. Key metrics ($mn) Figure 2. Valuation 2011 2012E 2013E 2014E 2011 2012E 2013E 2014ERevenues 335 419 502 597 P/E 16.7 15.5 14.6 12.7EBITDA 62 76 88 98 EV/EBITDA 12.4 9.8 8.1 6.7EBIT 55 66 70 80 EV/Sales 2.3 1.8 1.4 1.1Net Income 44 56 59 68 P/BV 4.1 3.2 2.6 2.2Net Debt (89) (115) (155) (202) EBITDA margin 18.7% 18.2% 17.5% 16.4%EPS, $ 1.23 1.32 1.41 1.62 Net margin 13.3% 13.3% 11.8% 11.4%CEPS, $ 1.44 1.58 1.84 2.05 Revenue growth 51% 25% 20% 19%BVPS, $ 5.02 6.46 7.87 9.49 EPS growth 57% 8% 6% 15%DPS, $ 0.00 0.00 0.00 0.00 Div Yield 0% 0% 0% 0%Sources: Bloomberg, Otkritie Capital estimates Sources: Bloomberg, Otkritie Capital estimates Important disclosures are found at the Disclosures Appendix and are available at http://research.otkritie.com/ is accessible via hyperlink: Disclosures & Disclaimer. This investment research is produced by Otkritie Securities Ltd, authorised and regulated by the Financial Services Authority (FSA), and has been prepared by non-US research analysts who are not FINRA registered/qualified as research analysts.
  • 2. EPAM Systems | INITIATION | Russia | 2 April 2012 Table of contents Investment summary.................................................................................... 3 Valuation ........................................................................................................ 5 Financial assumptions ................................................................................. 7 Sensitivity analysis..................................................................................... 11 Business description ................................................................................. 12 High-end software developer ........................................................................ 12 Diversified revenue streams ......................................................................... 13 M&A activity has supported growth .............................................................. 17 Professional staff located in CEE and CIS is a key success factor.............. 18 Market .......................................................................................................... 23 Rising importance of offshore IT services .................................................... 23 CEE and CIS is a top growing offshore delivery region ............................... 24 IPO, liquidity and shareholding structure ................................................ 25 Key management and board members .................................................... 27 Financial forecasts ..................................................................................... 29 Disclosures appendix ................................................................................ 30Otkritie Capital 2
  • 3. EPAM Systems | INITIATION | Russia | 2 April 2012 Investment summary We initiate coverage of EPAM Systems with an end-2012 target price of $20/share and a HOLD rating. Our target price, which we base on a combination of DCF and target 2012E EV/EBITDA valuation methodologies, implies no upside potential from the current share price. EPAM is currently trading at 12% discount to Indian and Chinese peers on 2012E EV/EBITDA. Positives Direct exposure to growth in CEE and CIS IT offshoring. In an increasingly competitive environment, companies from all industries are seeking new ways to grow and protect their market positions while sustaining profitability levels. Investment into IT is one way to achieve this. By its nature IT offshoring is a very cost efficient form of IT spending, hence big global firms are increasingly offshoring their IT budgets, with the CEE and CIS regions becoming important outsourcing destinations. IDC forecasts that the global IT offshoring market will see a 5-year 15.3% CAGR in 2010-2015, while the application outsourcing and application development markets, on which EPAM is focused, are expected to grow at 16-19% over this period. As a CEE offshore software developer, EPAM provides direct exposure to these growth markets. Superior CEE and CIS IT specialists‟ skills are EPAM‟s main differentiating factor. We think that personnel quality is a key point of differentiation in the company‟s value proposition to clients. EPAM Systems‟ specialists have an average 6 years of industry experience, with more than 90% having Masters or above degrees in science, math and engineering, and more than 90% speaking English. IT specialists from Eastern Europe and CIS are also known for being very creative and capable of solving the most difficult problems that occur in customized software development. This, in our view, gives the company a qualitative advantage over its Indian and Chinese peers. This view is confirmed by the results of an ACM programming contest in which Russia has been the leader over the last 5 years, while Poland and Ukraine, despite being smaller countries, are also among the prize winners every year. Moreover, Russian programmers are rated #1 by TopCoder rating, followed by Japan and China. Ukrainian, Polish and Belarusian programmers are also in the top-10. Proven historical growth track record with optimistic outlook. In 2008- 2011, EPAM posted a 28% top-line CAGR. We expect some slowdown over 2011-2014 to 21%, which is still above market growth and the peer average CAGR of 15%. Good revenue visibility with high proportion of recurring revenue. Thanks to the project type services provided, EPAM estimates that 80-85% of its revenue is visible at the beginning of each year and 95% of revenue is visible before each quarter starts. EPAM expects that 85-90% revenue will be generated by existing clients in 2012. The management sees significant potential to increase revenue from 7-8 of top-10 clients, and most of the revenue growth in 2012 is expected to be generated by top-30 accounts. Business model is not sensitive to exchange rate volatility. 50% of UK and Europe revenues are derived in local currencies, while the rest revenues are denominated in US dollars. Most of the costs in Belarus and Ukraine are USD denominated, while Russian Ruble costs are offset by Russian Ruble revenues, which tend to be equal. Therefore EPAM is slightly exposed to Euro and British pound volatility. Stable high profitability and strong balance sheet. EPAM posted a healthy 19% EBITDA margin in 2011, which gained 1ppts YoY. We forecast flat EBITDA margins of 18% in 2012-2015, which corresponds to the average profitability of its peers. The company has no debt on its balance sheet and positive net cash. EPAM has an open $30mn revolver credit line, which it can use anytime when needed.Otkritie Capital 3
  • 4. EPAM Systems | INITIATION | Russia | 2 April 2012 Risks and negatives Shareholder structure implies substantial overhang risk after the end of the lock-up period. 56.2% of the company is controlled by private equity funds, which sold part of their shares at the IPO in February 2012; therefore we see a high risk of potential share overhang. Altogether, 34.872mn shares (83% of total shares) could enter the market at various dates after the end of the lock-up period on 6 August 2012, we estimate. The founders control 18.2% of the company, with the rest being owned by management and floated on the market. Major revenue loss risk lies in deterioration of general economic environment. Clients may decide to reduce spending on technology services or sourcing due to a challenging economic environment, or other internal and external factors relating to their businesses, such as corporate restructuring, pricing pressure, changes to its outsourcing strategy, switching to another IT services provider or returning work in-house. High reliability on qualified personnel. As EPAM Systems is heavily exposed to the quality of its personnel, we point out the risk of financials deterioration in case of higher attrition rate. In 2011 EPAM had lower attrition rate in comparison to its Indian and Chinese peers. Personnel costs growth could negatively affect company fundamentals. Management estimates that around 80% of the company COS and SG&A costs represent personnel salaries. Based on the management guidance we estimate that the headcount will increase by 20% in 2012 (vs 25% revenue growth), while going forward we expect the headcount to increase at 7ppts lower than annual revenue growth. We assume 10% annual personnel cost inflation until 2015, while each additional 1ppt increase will have $2/share negative impact on TP. High exposure to Belarus political risk, as almost half of EPAM staff is located there. Belarus has been governed since 1994 by President Alexander Lukashenko, who was most recently re-elected in December 2010. The president has a wide (and excessive) range of powers including: call elections; make appointments to the executive arms of the government, judiciary, the local executive and administrative bodies; issue edicts, orders and decrees that have the force of law. Progress on structural reform and a reduction in the extent of direct state support in the economy has been slow in Belarus, and reforms of this nature are likely to be politically unpopular. Belarus has a bad political image and poor relations with the EU and US, therefore we see a risk that this situation could adversely affect EPAM‟s ability to service it western clients. Political and governmental instability in CIS and CEE countries could badly affect operations in these countries. Since the early 1990s, Belarus, Russia, Ukraine, Hungary and other CIS and CEE countries have sought to transform from one-party states with centrally planned economies to democracies with market economies of various degrees. The sweeping nature of these reforms, and the failure of some of them, has left the political systems of many CIS and CEE countries vulnerable to popular dissatisfaction, including demands for autonomy from particular regional and ethnic groups. More liquid than IBS Group, but Luxoft could join the race later in 2012. The average daily trading volume (excluding 1 day of trading) in EPAM is 0.26mn shares or ~$4.5mn. This is substantially higher than for IBS Group (parent of Luxoft), which is listed on the Frankfurt stock exchange with average trading volumes of only $100,000/day. Luxoft‟s IPO, which is expected in later this year on NYSE, could offer investors further exposure to the sector. No dividends to be paid in foreseeable future. EPAM systems currently anticipates retaining all available funds for use in the operation and expansion of the business, and does not envisage paying any cash dividends in the foreseeable future.Otkritie Capital 4
  • 5. EPAM Systems | INITIATION | Russia | 2 April 2012 Valuation Our $20/share target price is calculated as an average between our DCF valuation and target 2012E EV/EBITDA multiple. Both methods generate relatively close valuations: our DCF methodology generates a $19.7/fully diluted share valuation, while from our target 2012E EV/EBITDA multiple of 11.1x, we derive $20.2/fully diluted share target equity value. DCF valuation is based on 13.5% WACC and 4% terminal growth rate. This is a 0.5% higher discount rate than for IBS Group: this accounts for the higher country/political risk in Belarus (where the bulk of EPAM‟s production personnel is located), than Russia (where most of IBS Group personnel is located). We use 46.3mn as a number of shares, which is an estimate of fully diluted amount of shares for end-2012.Figure 3. EPAM Systems DCF valuation 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenue, $mn 335 419 502 597 705 811 908 990 1,069 1,133EBITDA, $mn 62 76 88 98 106 131 156 179 202 215Capex and acquisitions, $mn (16) (36) (18) (18) (18) (18) (18) (18) (18) (18)Change in working capital, $mn (3) (39) (19) (21) (24) (25) (23) (20) (19) (15)Taxes on EBIT, $mn (9) (11) (12) (14) (15) (19) (23) (27) (31) (33)Free cash flow, $mn 35 (10) 39 45 49 69 91 114 134 149Discount Factor, % 88% 78% 68% 60% 53% 47% 41% 36% 32%Years from now, # 1 2 3 4 5 6 7 8 9PV of FCF, $mn (9) 30 31 30 36 43 47 49 48WACC 13.5%Terminal growth 4%Value of period 2012-2020, $mn 304Terminal value, $mn 520Enterprise value, $mn 824Net debt, $mn -89Equity value, $mn 912.8Fully diluted # shares (mn) 46.3Equity per share, $ 19.7Sources: Otkritie Capital ResearchOtkritie Capital 5
  • 6. EPAM Systems | INITIATION | Russia | 2 April 2012 The figure below indicates that EPAM Systems is trading with only 12% discount to Indian and Chinese software developers on 2012E EV/EBITDA, but at a premium to Eastern European and Russian IT companies. We attribute the latter to the greater focus of public companies such as IBS Group and Armada on low-margin IT systems integration, which also offers lower growth.Figure 4. Peers‟ valuation comparison PE EV/EBITDA EV/Sales EBITDA margin 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013EOff-shore software developers 21.4 15.4 13.3 15.6 11.1 9.1 2.9 2.3 1.9 18% 19% 20%Indian software developers 23.9 17.4 15.2 16.1 11.8 10.2 3.5 2.8 2.4 21% 22% 22%TCS IN TATA CONSULTANCY SVCS LTD 26.1 21.3 17.8 19.8 15.1 12.9 5.9 4.5 3.8 30% 30% 29%INFY US INFOSYS TECHNOLOGIES-SP ADR 24.7 19.3 17.4 16.5 13.0 11.6 5.3 4.0 3.6 32% 31% 31%WPRO WIPRO LTD 20.1 18.8 16.1 15.4 13.7 11.6 3.3 2.7 2.3 21% 20% 20%HCLT IN HCL TECHNOLOGIES LTD 19.6 14.5 12.4 11.9 8.8 7.9 2.0 1.6 1.3 17% 18% 17%SCS IN SATYAM COMPUTER SERVICES LTD 28.3 9.6 9.9 16.7 6.8 6.0 1.3 1.1 0.9 8% 16% 16%ctsh us equity COGNIZANT TECH SOLUTIONS-A 24.5 21.0 17.4 16.5 13.5 11.3 3.4 2.8 2.3 21% 20% 20%Chinese software developers 17.4 13.2 10.8 14.8 10.6 7.6 1.8 1.4 1.1 12% 13% 15%SAPE US SAPIENT CORPORATION 21.2 16.3 13.6 10.6 9 7.4 1.4 1.2 1 13% 13% 14%iss us equity ISOFTSTONE HOLDINGS LTD-ADS 14.1 10.7 8.6 15.4 9.9 6.3 1.7 1.3 1 11% 13% 16%hsft us equity HISOFT TECHNOLOGY INT-ADR 17 12.6 10.3 18.5 13.1 9 2.2 1.6 1.3 12% 13% 15%Eastern European and Russian IT companies 23.2 13.8 11.1 7.2 5.7 4.7 0.7 0.6 0.5 10% 11% 12%ACP PW ASSECO POLAND SA 10.5 10.2 10.0 3.8 3.6 3.5 0.6 0.6 0.6 17% 17% 17%CMR PW COMARCH SA 29.5 18.0 14.1 7.3 6.3 4.8 0.6 0.6 0.5 8% 9% 10%CMP PW COMP SA 24.7 18.5 16.8 9.3 8.1 7.4 1.0 0.9 0.9 11% 11% 12%ARMD RX ARMADA 9.5 7.5 5.7 4.2 3.5 2.6 0.5 0.4 0.3 12% 12% 13%SGN PW SYGNITY SA 42.9 13.1 9.1 9.2 6.2 5.2 0.5 0.4 0.4 5% 7% 7%IBSG GR IBS GROUP-REGS GDR 22.2 15.6 10.8 9.5 6.7 4.7 0.8 0.6 0.5 8% 9% 10%EPAM US Equity EPAM Systems 19 15.2 14.3 12.1 9.6 7.9 2.3 1.7 1.4 19% 18% 17% vs Off-shore software developers -9% 1% 10% -21% -12% -11% -20% -21% -27% 0.7 p.p. -0.9 p.p. -2.3 p.p. vs India software developers -19% -11% -4% -23% -17% -21% -34% -36% -41% -2.7 p.p. -4.1 p.p. -4.8 p.p. vs China Software developers 12% 17% 35% -17% -8% 6% 32% 29% 24% 6.7 p.p. 5.2 p.p. 2.4 p.p. vs EE and Russia IT companies -16% 12% 31% 72% 70% 72% 244% 201% 163% 82% 68% 49%Sources: Otkritie Capital Research, Bloomberg We think that EPAM valuation in line with Indian and Chinese peers is justified as the company offers even faster growth profile in 2011-2014. While EPAM was growing in line with the average of its peers in 2007-2010, we expect it to grow faster than the market and its Chinese and Indian peers in 2011-2014. EPAM and Luxoft (CEE software development subsidiary of IBS Group) offer similar growth profiles.Figure 5. EPAM Systems historical revenue Figure 6. EPAM Systems forecast revenue CAGRCAGR 2007-2010 vs peers 2011-2014 vs peers ORACLE FS MPHASIS WIPRO ORACLE FS SAPIENT SAPIENT INFOSYS SATYAMTATA CONSULTANCY WIPRO LUXOFT INFOSYS EPAM SYSTEMS HCL TECH MINDTREE MINDTREEHCL TECHNOLOGIES COGNIZANT MPHASIS TATA CONSULTANCY COGNIZANT EPAM SYSTEMS HISOFT LUXOFT ISOFTSTONE HISOFT CAMELOT ISOFTSTONE 0% 10% 20% 30% 40% 50% 60% 0% 5% 10% 15% 20% 25% 30% 35%Sources: Otkritie Capital Research, Bloomberg, company data Sources: Otkritie Capital Research, Bloomberg, company dataOtkritie Capital 6
  • 7. EPAM Systems | INITIATION | Russia | 2 April 2012 Financial assumptions Revenue growth to slow from 50% in 2011 to 25% in 2012. The slowdown in 2012 is explained by the higher base in 2011 and a mature client portfolio. The management conservatively expects revenue to go up by 23-25% in 2012. We regard this guidance as conservative but for now project 25% top line growth in 2012. This estimate could be revised after the publication of 1Q12 results. Going forward we conservatively expect a 21% 3-year revenue CAGR in 2011- 2014. Figure 7. EPAM Systems revenue forecast, $mn 1,200 1,133 60% 1,069 990 1,000 50% 908 811 40% 800 705 597 30% 600 502 419 20% 400 335 10% 222 161 150 200 0% 0 -10% 2019E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2020E 2008 2009 2010 2011 Revenue, $mn Revenue growth, % (rhs) Sources: Otkritie Capital Research, company data We expect most of the new revenue to be generated by existing clients, EPAM expects that 85-90% revenue will be generated by existing clients in 2012. The management sees significant potential to increase revenue from 7-8 of top-10 clients, and most of the revenue growth in 2012 is expected to be generated by top-30 accounts. On-boarding of new clients could become tougher if economic turbulence persists. We forecast generally declining EBITDA margin until 2015 on the back of persistently higher than average market top-line growth. In 2012-2015 we forecast an adjusted EBITDA margin of 20%, flat vs 2011. The company expects to increase headcount by 20-22% in 2012, which should be the main cost inflation factor for 2012. EBITDA margin adjusted for non-recurring is expected to bottom at 17% in 2015. Figure 8. EPAM Systems adjusted EBITDA forecast, $mn 250 235 25% 221 196 200 20% 172 145 150 15% 118 108 97 100 84 10% 68 44 50 5% 20 25 0 0% 2013E 2012E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2008 2009 2010 2011 EBITDA, $mn EBITDA margin, % (rhs) Sources: Otkritie Capital Research, company dataOtkritie Capital 7
  • 8. EPAM Systems | INITIATION | Russia | 2 April 2012 EPAM systems EBITDA margin corresponds to the average level of profitability for its peers. Generally bigger players like Oracle FS and Infosys enjoy higher margins on the back of scalability of the business. Figure 9. EPAM systems‟ profitability vs peers (EBITDA margin, 2011) 40% 37% 35% 33% 30% 30% 25% 21% 21% 19% 20% 18% 18% 18% 17% 15% 13% 12% 12% 10% 6% 5% 0% Cognizant Luxoft Infosys EPAM Sapient Hisoft Isoftstone Oracle FS Camelot HCL Technologies Mphasis Minftree TATA Consultancy WIPRO Sources: Otkritie Capital Research, Bloomberg, company data We assume a flat 17% tax rate going forward. Our forecast corresponds with the management 2012 guidance of 17%, which is based on the assumption that EPAM continues to benefit from tax exemptions in Belarus and Hungary. EPAM‟s subsidiary in Belarus is a member of the Belarus Hi-Tech Park, in which member technology companies are 100% exempt from the current Belarusian income tax rate of 24%. This exemption is expected to last until July 2021, when the “On High-Technologies Park” Decree expires. EPAM‟s subsidiary in Hungary benefits from a tax credit of 10% of annual qualified salaries, taken over a four-year period, for up to 70% of the total tax due for that period. The company has been able to take the full 70% credit for 2007, 2008, 2009 and 2010 and expects to continue to do so in the foreseeable future.Otkritie Capital 8
  • 9. EPAM Systems | INITIATION | Russia | 2 April 2012 We estimate annual capex to stay at the level of $18mn, which is in the middle of management‟s guidance range of $17-22mn. Our assumption implies that the capex/revenue ratio gradually falls from 6% in 2011 to 3% in 2015. On December 7, 2011, EPAM entered into an agreement with IDEAB Project Eesti AS of approximately for the construction of a 14,071m2 office building within the High Technology Zone in Minsk, Belarus. The building is expected to be operational in the second half of 2012. In 2011 the company already spend $1.5mn as the CAPEX for the construction, the total cost of the project is expected to reach $19mn. The rest $17.5mn should be spend in 2012. Figure 10. CAPEX/Revenue forecast, % 40 14% 35 12% 30 10% 25 8% 20 6% 15 4% 10 5 2% 0 0% 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2008 2009 2010 2011 CAPEX, $mn Capex/revenue, % (rhs) Sources: Otkritie Capital Research, company data We assume that no dividends will be paid in foreseeable future. EPAM currently anticipates that it will retain all available funds for use in the operation and expansion of the business, and does not envisage paying any cash dividends in the foreseeable future.Otkritie Capital 9
  • 10. EPAM Systems | INITIATION | Russia | 2 April 2012Figure 11. EPAM Systems selected financials 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020EP&LRevenue 334.5 419 502 597 705 811 908 990 1,069 1,133Cost of revenues (exclusive of depreciation and amortization) 205.3 260.0 314.8 379.6 455.4 516.6 571.6 616.3 658.7 697.6Selling, general and administrative expenses 64.9 82.2 99.5 120.0 144.0 163.3 180.8 194.9 208.3 220.6Depreciation and amortization expense 7.5 10.6 18.1 18.1 18.0 18.0 18.0 18.0 18.0 18.0Goodwill impairment loss 1.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other operating expenses, net (0.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Income from operations 55.0 65.7 69.6 79.8 87.6 112.8 137.6 160.5 184.0 196.9EBITDA 62.5 76.4 87.7 97.8 105.6 130.8 155.6 178.5 202.0 214.9EBITDA margin 19% 18% 17% 16% 15% 16% 17% 18% 19% 19%Adjusted EBITDA 68.3 84 97 108 118 145 172 196 221 235Adjusted EBITDA margin 20% 20% 19% 18% 17% 18% 19% 20% 21% 21%Interest income 1.3 1.3 1.7 2.3 3.0 3.8 4.8 6.2 8.0 10.1Interest (expense) (0.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other income 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Foreign exchange (loss) (3.6) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Income before provision for income taxes 52.7 67.0 71.3 82.1 90.6 116.6 142.4 166.7 192.0 207.0Provision for income taxes 8.4 11.4 12.1 13.9 15.4 19.8 24.2 28.3 32.6 35.2Net income 44 55.6 59.2 68.1 75.2 96.7 118.2 138.4 159.4 171.8Net income margin 13% 13% 12% 11% 11% 12% 13% 14% 15% 15%Adjusted net income 53.9 63.0 68.0 78.6 87.5 111.0 134.1 155.7 178.1 191.7Adjusted net income margin 16% 15% 14% 13% 12% 14% 15% 16% 17% 17%Balance SheetCash and cash equivalents 88.8 115.0 155.4 202.2 253.7 325.5 420.6 539.4 679.6 836.5Accounts receivable, net 59.5 78.3 93.9 111.7 131.9 151.6 169.8 185.1 199.9 211.9Unbilled revenues, net 24.5 45.1 54.1 64.3 75.9 87.3 97.8 106.6 115.1 122.0Prepaid and Other current assets 6.4 10.8 13.0 15.7 18.9 21.4 23.7 25.5 27.3 28.9Deferred tax assets, current 4.4 5.9 7.1 8.4 9.9 11.4 12.8 13.9 15.0 15.9Total current assets 183.6 255.0 323.4 402.4 490.2 597.2 724.6 870.5 1036.9 1215.2Property and equipment, net 35.5 60.3 60.2 60.2 60.1 60.1 60.1 60.0 60.0 60.0Restricted cash 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6Intangible assets 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3Goodwill 8.2 8.2 8.2 8.2 8.2 8.2 8.2 8.2 8.2 8.2Deferred tax assets, long-term 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9Other long-term assets 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7Total non-current assets 52.1 76.9 76.8 76.7 76.7 76.6 76.6 76.6 76.6 76.6Total assets 235.6 331.9 400.2 479.1 566.9 673.8 801.3 947.1 1,113.5 1,291.8Accounts payable 2.7 3.7 4.5 5.5 6.6 7.4 8.2 8.9 9.5 10.1Accrued expenses 24.8 28.1 34.1 41.1 49.3 55.9 61.9 66.7 71.3 75.5Deferred revenue 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9Due to employees 8.2 10.8 13.1 15.8 18.9 21.5 23.7 25.6 27.4 29.0Taxes payable current 8.7 8.7 8.7 8.7 8.7 8.7 8.7 8.7 8.7 8.7Deferred tax liabilities 1.7 0.6 0.7 0.9 1.1 1.2 1.4 1.5 1.6 1.7Other liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Revolving line of credit 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total current liabilities 53.1 59.0 68.1 78.9 91.5 101.7 110.9 118.3 125.4 131.9Deferred taxes 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3Taxes payable, long-term 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2Total long-term liabilities 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5Total liabilities 54.6 60.5 69.6 80.4 93.0 103.2 112.3 119.8 126.9 133.4Total stockholders‟ equity 181.0 271.4 330.6 398.7 473.9 570.7 688.9 827.3 986.7 1,158.5Cash FlowNet income 44.4 55.6 59.2 68.1 75.2 96.7 118.2 138.4 159.4 171.8D&A 7.5 10.6 18.1 18.1 18.0 18.0 18.0 18.0 18.0 18.0Change in WC (2.7) (39.4) (18.9) (21.4) (23.7) (25.0) (23.1) (19.6) (19.1) (14.9)Net cash provided by (used in) operating activities 49.2 26.9 58.4 64.8 69.5 89.8 113.1 136.8 158.2 174.9Net cash used in investing activities -16 (35.5) (18.0) (18.0) (18.0) (18.0) (18.0) (18.0) (18.0) (18.0)Net cash (used in) provided by financing activities 1.6 34.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Effect of exchange-rate changes on cash and cash equivalents 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net increase (decrease) in cash and cash equivalents 34.8 26.2 40.4 46.8 51.5 71.8 95.1 118.8 140.2 156.9Cash and cash equivalents, beginning of period 54.0 88.8 115.0 155.4 202.2 253.7 325.5 420.6 539.4 679.6Cash and cash equivalents, end of period 88.8 115.0 155.4 202.2 253.7 325.5 420.6 539.4 679.6 836.5Sources: Otkritie Capital Research, company dataOtkritie Capital 10
  • 11. EPAM Systems | INITIATION | Russia | 2 April 2012 Sensitivity analysis Our model is not sensitive to discount rate and terminal growth rate assumptions… Worst case scenario – which literally implies only 2.5% growth after the end of the forecast period and a 15% discount rate – implies 7% downside from the current share price. Figure 12. Target price sensitivity to discount and growth rates, $/share WACC 12.0% 12.5% 13.0% 13.5% 14.0% 14.5% 15.0% 2.5% 20.9 20.2 19.6 19.1 18.6 18.2 17.8 3.0% 21.2 20.5 19.9 19.4 18.9 18.4 18.0 Terminal 3.5% 21.7 20.9 20.2 19.6 19.1 18.6 18.2 growth rate 4.0% 22.1 21.3 20.6 20.0 19.4 18.9 18.4 4.5% 22.7 21.8 21.0 20.3 19.7 19.1 18.6 5.0% 23.3 22.3 21.4 20.7 20.0 19.4 18.9 5.5% 24.0 22.9 21.9 21.1 20.4 19.7 19.2 Sources: Otkritie Capital Research …but personnel costs growth could negatively affect company fundamentals. Management estimates that around 80% of the company COS and SG&A costs represent personnel salaries. Based on the management guidance we estimate that the headcount will increase by 20% in 2012 (vs 25% revenue growth), while going forward we expect the headcount to increase at 7ppts lower than annual revenue growth. We assume 10% annual personnel cost inflation until 2015, while each additional 1% increase will have $2/share negative impact on EPAM target price. Figure 13. Target price sensitivity to personnel costs, $/share Personnel growth vs revenue growth2012-2015 -10% -9% -8% -7% -6% -5% -4% Salary 8% 25.0 24.6 24.2 23.8 23.4 23.0 22.6 annual 9% 23.1 22.7 22.3 21.9 21.5 21.1 20.7 inflation, 2012- 10% 21.2 20.8 20.4 20.0 19.5 19.1 18.7 2015 11% 19.3 18.8 18.4 18.0 17.5 17.1 16.7 12% 17.3 16.8 16.4 15.9 15.5 15.0 14.6 Sources: Otkritie Capital Research Sensitivity to exchange rate volatility is low. 50% of UK and Europe revenues are derived in local currencies, while the rest revenues are denominated in US dollars. Most of the costs in Belarus and Ukraine are USD denominated, while Russian Ruble costs are offset by Russian Ruble revenues, which tend to be equal. Therefore EPAM is only slightly exposed to Euro and British pound volatility. Figure 14. Target price sensitivity to exchange rates volatility, $/share Euro appreciation to US Dollar -3% -2% -1% 0% 1% 2% 3% -3% 19.4 19.5 19.6 19.8 19.9 20.0 20.2 -2% 19.4 19.6 19.7 19.8 20.0 20.1 20.2 British pound -1% 19.5 19.6 19.8 19.9 20.0 20.2 20.3 appreciation 0% 19.5 19.7 19.8 20.0 20.1 20.2 20.4 to US Dollar 1% 19.6 19.7 19.9 20.0 20.2 20.3 20.4 2% 19.7 19.8 19.9 20.1 20.2 20.4 20.5 3% 19.7 19.9 20.0 20.1 20.3 20.4 20.6 Sources: Otkritie Capital ResearchOtkritie Capital 11
  • 12. EPAM Systems | INITIATION | Russia | 2 April 2012 Business description High-end software developer EPAM Systems is an IT services provider focused on high-end software development. EPAM Systems is a global IT services provider, founded in 1993 and focused on software development services, software engineering and vertically-oriented custom development solutions. Since its inception EPAM Systems has been focused on software product development for Independent Software Vendors (ISV). Unlike custom application development, which is usually tailored to very specific business requirements, software products of ISVs must be designed with a high level of product configurability and operational performance to address the needs of a diverse set of end-users working in multiple industries and operating in a variety of deployment environments. This demands a strong focus on upfront design and architecture, strict software engineering practices, and extensive testing procedures. The company‟s focus on software product development services for ISVs and technology companies requires high-quality talent, advanced knowledge of up-to-date tools, and strong project management practices. As a result, EPAM Systems‟ work with ISVs and technology companies, exposes it to its customers‟ business and strategic challenges, allowing it to develop vertical-specific domain expertise. EPAM strategy rests on 5 pillars: Technical expertise. The company has spent over a decade working with industry-leading ISVs and technology companies to develop various key features of their product portfolios. The focus on complex software product development has shaped key aspects of the service offerings as well as the culture of software engineering excellence, enabling the company to accelerate expansion of its services into other key industry verticals. EPAM plans to continue focusing on software engineering services for industry-leading ISVs and emerging technology companies to further develop the technical expertise and advance the knowledge of new software engineering and technology trends. Deep vertical expertise. EPAM has traditionally focused on enterprises that are technology- and information-centric, where the deep software development expertise is highly valued. To further enhance client solutions in each of the verticals, the company has recruited IT professionals with significant industry expertise and understanding of vertical-specific business operations and issues. EPAM plans to continue enhancing the expertise in different verticals by recruiting IT professionals with industry expertise Highly-skilled employees. EPAM places a high priority on attracting, training and retaining employees, which is integral to the company‟s ability to meet the challenges of the complex software product development projects. Scalable proprietary processes, applications and tools. To streamline and accelerate the software development process, EPAM has created a full suite of proprietary software development lifecycle processes, applications and tools. From managing every aspect of a development project, to automated testing tools, to management and hosting options for delivered solutions, applications and tools help ensure that the clients achieve faster turn-around times, high- quality results and superior value Selective strategic acquisitions. EPAM has historically pursued strategic acquisitions focused on expanding vertical-specific domain expertise, geographic footprint, service portfolio, client base and management expertise. Furthermore, as part of the strategy to expand the geographic footprint with high-quality global resources, EPAM targets to pursue acquisitions of companies with significant presence in China, Latin America or elsewhere.Otkritie Capital 12
  • 13. EPAM Systems | INITIATION | Russia | 2 April 2012 Diversified revenue streams EPAM service offerings cover the full software development lifecycle from complex software development services through maintenance and support, custom application development, application testing, enterprise application platforms and infrastructure management. The company provides the following services: Software Product Development Services. That includes product research, design and prototyping, product development, component design and integration, full lifecycle software testing, product deployment and end-user customization, performance tuning, product support and maintenance, as well as porting and cross-platform migration. EPAM focuses on development services for enterprise software products covering a wide range of business applications as well as product development for multiple mobile platforms and embedded software product services. Custom Application Development Services. EPAM provides business and technical requirements analysis, solution architecture creation and validation, development, component design and integration, quality assurance and testing, deployment, performance tuning, support and maintenance, legacy applications re-engineering/refactoring, porting and cross-platform migration and documentation. Enterprise Application Platforms. EPAM integrates the clients‟ chosen application platforms with their internal systems and processes and to create custom solutions filling the gaps in their platforms‟ functionality. As a proven provider of software product development services to major ISVs, EPAM participated in the development of industry standard technology and business application platforms and their components in such specific areas as customer relationship management and sales automation, enterprise resource planning, enterprise content management, business intelligence, e-commerce, mobile, Software-as-a-Service and cloud deployment. The experience in such areas allowed the company to offer services around Enterprise Application Platforms, which include requirements analysis and platform selection, deep and complex customization, cross-platform migration, implementation and integration, as well as support and maintenance. Application Testing Services. That includes software application testing, including test automation tools and frameworks; testing for enterprise IT, including test management, automation, functional and non-functional testing, as well as defect management and consulting services focused on helping clients improve their existing software testing and quality assurance practices. EPAM Quality Management System complies with global quality standards such as ISO 9001:2000. Application Maintenance and Support. That service includes incident management, fault investigation diagnosis, work-around provision, application bug fixes, release management, application enhancements and third-party maintenance. Infrastructure Management Services. EPAM has significant expertise in implementing large infrastructure monitoring solutions, providing real-time notification and control from the low-level infrastructure up to and including applications. The solutions cover the full lifecycle of infrastructure management including application, database, network, server, storage and systems operations management, as well as incident notification and resolution. EPAM Systems is highly concentrated on software development services, however the share of other offerings in the service mix is constantly increasing. In 2011 EPAM generated 66% of its revenue from software development services, which is down 7 ppts from 2008, indicating EPAM‟s transition from a software programming focused company to a full scope offshoring services provider that is diversified into many verticals.Otkritie Capital 13
  • 14. EPAM Systems | INITIATION | Russia | 2 April 2012 Figure 15. EPAM Systems revenue breakdown by types of services provided, $mn 400 74% 350 18 72% 300 29 70% 250 68 8 68% 200 19 5 44 66% 4 150 11 12 27 28 64% 219 100 150 50 117 105 62% 0 60% 2008 2009 2010 2011 Other services Application maintenance and support Application testing services Software development Software development services share, % (rhs) Sources: Otkritie Capital Research, Company data Experience with ISV and technology clients made it possible for the company to develop business in multiple industries, including Banking and Financial Services, Business Information and Media, Travel and Hospitality and Retail and Consumer. Travel and Hospitality Group was fastest growing vertical in 2011 showing 114% YoY growth, it was followed Retail and Consumer and Banking and Finance verticals, which posted 79% and 78% growth correspondingly. Software Vendors and Technology vertical seems to be mature, but still showed 27% YoY growth in 2011. In future we expect EPAM to continue to develop other verticals, which should be the main growth driver. Figure 16. EPAM Systems client distribution by industry, $mn 350 32 300 40 250 31 18 200 19 76 12 24 10 150 5 10 43 37 25 62 100 17 22 46 22 29 50 87 59 58 69 0 2008 2009 2010 2011 Software Vendors and Technology Business Information and Media Banking and Financial Services Other verticals Travel and Hospitality Retail and Consumer Other verticals Sources: Otkritie Capital Research, company dataOtkritie Capital 14
  • 15. EPAM Systems | INITIATION | Russia | 2 April 2012 Luxoft has higher focus on Financial services vertical, which represents 48% of its total revenue.Figure 17. EPAM revenue breakdown by Figure 18. Luxoft revenue breakdown bygeographies, 2011 geographies, 2010 Other Energy Automotive Other Retail and Software verticals and Transport 4% 2% Consumer 2% Vendors and 7% 9% Technology Travel and 26% Hospitality Telecom 12% 12% Financial services Other 48% verticals 9% Business Technology Information 13% Banking and and Media Financial 19% Services Travel and 23% aviation 14%Sources: Otkritie Capital Research, company data Sources: Otkritie Capital Research, company data Half of EPAM revenue comes from North America. Historically EPAM has been very focused on the US market, which was 50% of total revenue in 2011, and the share of the US market has been pretty much stable over the years. UK was the top performing market in 2011, which showed 118% YoY growth rate. We expect UK and Europe to remain the fastest growing market for EPAM Systems, that should be driven mainly by the geographical proximity of the regions. Figure 19. EPAM Systems revenue breakdown by geographies, $mn 350 6 12 300 44 250 36 4 11 200 71 31 3 2 26 150 10 11 33 43 25 100 8 14 16 19 165 117 50 80 80 0 2008 2009 2010 2011 North America UK Other Europe Russia Other CIS Other Sources: Otkritie Capital Research, company dataOtkritie Capital 15
  • 16. EPAM Systems | INITIATION | Russia | 2 April 2012 EPAM has higher exposure to CIS clients in comparison to Luxoft.Figure 20. EPAM revenue breakdown by Figure 21. Luxoft revenue breakdown bygeographies, 2011 geographies, 2Q11 Other CIS Russia Other 4% 6% 2% Russia 13% Other Europe 24% North America North Americ Other Europe 45% a 11% 50% UK 22% UK 23%Sources: Otkritie Capital Research, company data Sources: Otkritie Capital Research, company data EPAM is servicing top multinationals, most of which are included in the „Forbes Global 2000„ list. There are also some clients in the CIS public sector. Figure 22. EPAM client list Finance Business Information, Travel, Hospitality ISV Other and Banking Media and Entertainment and Consumer services Google Sberbank Thomson Reuters Thomas Vook Chevron Oracle Barclays HIS Coca-Cola Telefonica EMC Citigroup Viacom Adidas Schlumberger Kazakhstan Tax SAP Credit Suisse Disney Expedia Committee State tax Administration IBM UBS Wolters Kluwer Intercontinental of Ukraine Sources: Otkritie Capital Research, company data EPAM Systems derives a significant portion of revenues from a small number of clients, but we expect big clients to contribute greater share of revenue going forward. During 2009, 2010 and 2011, the largest client, Thomson Reuters, accounted for about 10% of revenues, while the share of top-10 clients has been increasing over time, which indicates a more mature stage of business development. EPAM expects that 85-90% revenue will be generated by existing clients in 2012 and sees significant potential to increase revenue from 7-8 of top-10 clients, and most of the revenue growth in 2012 is expected to be generated by top-30 accounts. On-boarding of new clients could become tougher if economic turbulence persists.Figure 23. Share of top EPAM Systems clients Figure 24. Client distribution by annual revenue, # of clients45% 42.6% 300 440% 36.8% 1 11 35.3% 250 6 1 2 4235% 43 29.7% 3830% 200 24.0% 23.6% 64 7525% 64 15020%15% 10010% 145 137 148 50 5% 0% 0 2008 2009 2010 2008 2009 2010 top-10 clients share in revenues, % top-5 clients share in revenues, % >$0.1mn >$0.5mn >$1mn >$5mn >$10mnSources: Otkritie Capital Research, company data Sources: Company data, Otkritie Capital Research, company dataOtkritie Capital 16
  • 17. EPAM Systems | INITIATION | Russia | 2 April 2012 Number of clients, which generate more than $5mn revenue has increased from 3 to 15 in 2010 vs 2009, which is the direct impact of gradual annual revenue increase per client. Therefore the ability to maintain and develop close relationships with clients is essential to the growth and profitability of the business. However, the volume of work performed for a specific client is likely to vary from year to year, especially since EPAM is generally not the exclusive IT services provider for its clients and does not have long-term commitments from any clients. Although a substantial majority of EPAM‟s revenues are generated from repeat business, (in 2011 86% of revenues were generated by the clients which work with EPAM for more than 2 years and 17.5% - more than 3 years), the engagements are typically projects that are singular in nature. In addition, its clients can terminate many of its master services agreements and work orders without stipulating the cause, and in most cases without any cancellation charge. Therefore it is critical for management to constantly seek new engagements with new and current clients. Major revenue loss risk lies in deterioration of general economic environment. Clients may decide to reduce spending on technology services or sourcing due to a challenging economic environment or other internal and external factors relating to its business such as corporate restructuring, pricing pressure, changes to its outsourcing strategy, switching to another IT services provider or returning work in-house. Banks and Financial institutions are more vulnerable to the macro environment, often forcing them to reduce IT-related spending. At the same time, however, financial crises can stimulate more projects that enable these institutions to cut their IT budgets in the future. Figure 25. Clients‟ 2007-2010 revenue growth CAGR, % Intercontinental Expedia Adidas Coca-Cola Consumer & Travel Thomas Cook Wolters Kluwer Disney Viacom Business Information & HIS Media Thomson Reuters UBS Credit Suisse Citigroup Barclays Banks and FInancial Sberbank Institutions IBM SAP EMC Oracle ISV Google -40% -30% -20% -10% 0% 10% 20% 30% Sources: Otkritie Capital Research, Bloomberg EPAM revenue benefits from European currencies appreciation to US Dollar. Around 67% of EPAM revenue is derived in US Dollar, while approximately 17% is generated in EURO and British pounds and the rest being denominated in RUB. M&A activity has supported growth Successful growth across geographies and verticals has been supported by acquisitions. Historically, EPAM Systems has made a number of acquisitions, primarily aimed at expanding the vertical-specific domain expertise, geographic footprint, service portfolio, client base and management expertise.Otkritie Capital 17
  • 18. EPAM Systems | INITIATION | Russia | 2 April 2012 Figure 26. EPAM Systems‟ historical M&A Activity Acquired Revenues, Serviced Date Headcount company $mn markets Fathom Technologies Mar-04 4.4 160 Europe Vested Development Jul-06 13.4 319 Russia B2Bits Corp. Nov-07 1.3 23 US And Ukraine PLUS MICRO Jun-08 5 62 CIS US, Belarus. Business Information Rodmon Systems May-09 1.9 28 and media focus US, Belarus. Business Information Instant Information Aug-10 1.5 53 and media focus, cloud deployment Sources: Otkritie Capital Research, company data Going forward the company may look at more M&As in China and Latin America, which could materialize in 2012 via cash raised at the IPO. As the company has limited experience in those markets, we see some risks of value dilutive transactions. Professional staff located in CEE and CIS is a key success factor EPAM Systems is an offshore programming company, with most of its workforce located in CIS and Eastern Europe. EPAM Systems has delivery centers located in Belarus, Ukraine, Russia, Hungary, Kazakhstan and Poland. The company has in total 6,968 employees as of end 2011. Figure 27. EPAM Systems vs Luxoft staff geographical location, 2010 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 EPAM Systems Luxoft Belarus Ukraine Russia Hungary Romania Poland Other Sources: Otkritie Capital Research, company data EPAM‟s biggest delivery centers, with approximately 2,900 IT professionals (47% of staff), are located in Belarus, implying high political risk for the company‟s operations, in our view. 2,500 IT professionals are located in Minsk, the capital of Belarus, which is a major educational and industrial center in CEE, and where the company was initially set up by the founders. If we compare EPAM with Luxoft in this respect, we believe that EPAM‟s personnel location implies higher political risks, though we recognise the benefits that both companies continue to derive from their favourable staff locations. EPAM Delivery centers in Ukraine have approximately 1,500 IT professionals, while 1,000 IT professionals are located in Russia. The locations in Ukraine and Russia offer many of the same benefits as Belarus, including educational infrastructure, availability of qualified software engineers and government sponsorship of the IT industry. Delivery centers in Hungary have approximately 650 IT professionals and are the hub for servicing European clients.Otkritie Capital 18
  • 19. EPAM Systems | INITIATION | Russia | 2 April 2012 Superior CEE and CIS IT specialist skills is EPAM‟s key differentiating factor. We think that personnel quality is a key point of differentiation in the company‟s value proposition to clients. IT specialists from CEE and CIS are known for being very creative and capable of solving the most difficult problems that occur in the process of customized software development. We believe this gives the company a qualitative advantage over its Indian and Chinese peers. This view is confirmed by the results of an ACM programming contest for which Russia has been the stable leader over the last 5 years. China‟s universities are also very successful in this contest, while Poland and Ukraine, despite being smaller countries, are also among the winners every year. Moreover, Russian programmers are rated #1 by TopCoder rating, followed by Japan and China. Ukrainian, Polish and Belarusian programmers are also in the top-10. Figure 28. ACM International collegiate programming contest prize winners (# of universities) 14 1 1 1 12 1 1 1 1 1 1 1 1 1 10 1 1 1 1 1 8 2 2 2 5 1 1 6 2 2 1 3 4 5 5 5 5 2 4 0 2007 2008 2009 2010 2011 Russia China Ukraine US Canada Poland Belarus Sweden Georgia UK Croatia Netherlands New Zealand Sources: Otkritie Capital Research, ACM Despite being very professional, programmers from CEE and CIS receive an average salary that is comparable to China. Indian programmers are usually low-paid, but at the same time have a higher attrition rate, which makes it more difficult to develop a high level of expertise there. Figure 29. Software engineer average annual salaries, 2011, $ „000 100 92 90 80 70 60 50 40 27 30 21 19 18 20 12 11 10 0 Ukraine Moscow USA China India Belorussia Russia (regions) USA Moscow Ukraine China Russia (regions) Belorussia India Sources: Otkritie Capital Research, Glassdoor, Yandex Job, National Statistic committee of BelorussiaOtkritie Capital 19
  • 20. EPAM Systems | INITIATION | Russia | 2 April 2012 Cultural proximity to the US and Western Europe makes cooperation with clients easier. Given a similar culture and a common attitude to work, companies from the Eastern Europe and CIS are better positioned to develop sustainable relationships with North American and European clients. EPAM has very professional and experienced staff. Specialists have an average 6 years of industry experience, with more than 90% of employees having Masters level and above degrees in science, math and engineering, and more than 90% speaking English. This is a similar profile to Luxoft employees, 80% of which have a Master‟s degree or higher, with more than 80% having 5+ years‟ experience. EPAM has over 160 dedicated full-time employees who oversee all aspects of the human capital management process. EPAM Systems has developed its pool of employees by hiring highly-qualified, experienced IT professionals from the CEE region and by recruiting students from leading technical institutions. The company has strong relationships with the leading technical institutions in the region, and has established EPAM delivery centers near many of these campuses. These relationships provide the company with access to a highly-qualified talent pool of programmers, and enable it to consistently attract highly-skilled students. EPAM also employs a dedicated talent acquisition team whose objective is to locate and attract qualified and experienced IT professionals within the region. Apart from formal recruiting events and activities, the company‟s image as a leader in the development of high-end products should also help it to recruit and retain the best people. Figure 30. Eastern Europe IT specialists talent pool 600 30% 542.7 500 27% 25% 26% 400 20% 20% 300 15% 15% 200 162.5 10% 84.3 73.6 100 5% 0 0% Russia Ukraine Poland Romania Number of iniversity graduates in science and engeneering, 000 (2010) % graduated in science and engeneering Sources: Otkritie Capital Research, Euromonitor Entry-level IT professionals undergo a training program as well as hours of hands-on training through actual engagements. This program results in employees who are highly proficient and possess deep technical expertise that enables them to immediately serve clients‟ needs. There are also continuing education programs aimed at helping experienced employees to advance in their careers. High reliability on qualified personnel is one of the main risks for the company. As EPAM Systems is heavily exposed to the quality of its personnel, we point out the risk of financials deterioration in case of higher attrition rate. Low attrition is a key success factor in developing high-profile employee expertise in the industry. EPAM has a low attrition rate, which has gradually declined from the top level of 11.2% in 2009. That compares to mid-teen rates for Indian and Chinese developers; while Luxoft has consistently managed to keep its attritionOtkritie Capital 20
  • 21. EPAM Systems | INITIATION | Russia | 2 April 2012 rate below 10%. Low attrition is a key success factor in developing high-profile employee expertise in the industry.Figure 31. Peers‟ staff attrition rates, 2011 Figure 32. EPAM Systems staff attrition rates peer comparison12% 11.2% 25% 10.9% 19.8%11% 20% 16.0% 15.4%11% 10.2% 15% 13.5% 12.8% 10.0% 9.6% 10.0%10% 10% 9.4%10% 5%9% 0% LUXOFT EPAM COGNIZANT ISOFTSTONE HISOFT TATA INFOSYS9%8% 2007 2008 2009 2010 2011Sources: Otkritie Capital Research, company data Sources: Otkritie Capital Research, company data EPAM has a high staff utilization rate. Staff utilization rate shows the effectiveness of business planning and allocation of resources. EPAM has a utilization rate of 76%, which is above the Infosys level of 69.5%, but lower than the Luxoft rate of 85%. The company sees 76% as comfortable utilization rate and forecasts it to remain stable going furtherFigure 33. Peers‟ staff utilization rates Figure 34. EPAM Systems utilization dynamics90% 85.0% 78% 76% 76%80% 76.0% 76% 69.5%70% 74% 72%60% 72%50% 70% 68%40% 65% 66%30% 64%20% 62%10% 60% 0% 58% EPAM INFOSYS LUXOFT 2008 2009 2010 2011Sources: Otkritie Capital Research, company data Sources: Otkritie Capital Research, company data Higher utilization drives higher revenue per employee. Although the company had to lower prices for its services on average by around 16% in 2009, it managed to offset the drop in revenue per employee by higher utilization of labour resources. Revenue per employee continued to grow further in 2011, and we expect this trend to continue. In 2012 the management expects 20-22% increase in headcount, which could reach 8,400 people. Going further we expect some 11-13% headcount growth in 2013-2015.Otkritie Capital 21
  • 22. EPAM Systems | INITIATION | Russia | 2 April 2012 Figure 35. EPAM Systems revenue per employee dynamics, „000 $ 14,000 70 12,000 60 10,000 50 8,000 40 6,000 30 4,000 20 2,000 10 0 0 2012E 2013E 2014E 2015E 2008 2009 2010 2011 Headcount Revenue per employee, $ 000 Sources: Otkritie Capital Research, company dataOtkritie Capital 22
  • 23. EPAM Systems | INITIATION | Russia | 2 April 2012 Market Rising importance of offshore IT services In an increasingly competitive environment, companies from all industries are seeking new ways to grow and protect their market positions while sustaining profitability levels. Investment into IT is a key means to achieving this. By its nature, offshoring is a very cost efficient form of IT spending. This has encouraged big global firms to increasingly offshoring their IT budgets, while the Eastern Europe and CIS regions have become important outsourcing destinations. IDC forecasts the worldwide offshore IT services market to grow at a 15.3% CAGR in 2010-2015, while the application outsourcing and application development markets, which are EPAM Systems key focus, are expected to grow at 16-19% CAGRs. Figure 36. Offshore lT services market , $bn 80 70 14 60 13 50 12 17 10 15 40 8 13 30 6 12 5 5 10 8 20 4 7 7 16 3 6 14 10 12 2 4 8 9 10 4 5 6 6 4 13 2 8 9 10 11 12 5 6 7 7 8 0 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E Other Systems Integration Infrasructure outsourcing IT consulting Custom application development Application outsourcing Sources: IDC, Otkritie Capital Research Offshore outsourcing model has become an embedded component of IT services delivery. Many corporations throughout the world have found it difficult to access high-quality IT talent and stay current with the evolution of development methodologies and tools. The demand for offshore outsourcing is driven by clients seeking not only cost-effective solutions, but also improved productivity and quality as well as access to high-quality labor. Outsourcing can result in significant productivity improvement and operating cost reduction, as organizations choose IT services providers with specialized knowledge, development methodologies and processes, and that understand the unique needs of their clients. Specialization provides the efficiency and flexibility that allows for quicker turnaround times and higher levels of quality. These benefits have served as a catalyst for the increase in the number of global companies incorporating offshore outsourcing of IT services into their operating strategies. According to IDC, offshore IT services spending in the US, Europe, the Middle East and Africa, or EMEA, grew from $12.7bn in 2005 to $30bn in 2009, representing a CAGR of 24.0%. We expect that offshore IT services spending should also benefit from adoption of new technologies and convergence of platforms, software vendor consolidation, increased emphasis on quality, innovation, and R&D, continued corporate focus on cost reduction and regulations, which dictate the implementation of sophisticated systems, controls and technologies.Otkritie Capital 23
  • 24. EPAM Systems | INITIATION | Russia | 2 April 2012 CEE and CIS is a top growing offshore delivery region The growing acceptance of the offshore delivery model, beyond the traditional India and China-based IT services providers, has created significant opportunities for CEE and CIS-based companies, which now compete against the largest and more-established global IT services providers Factors contributing to their growth include: Availability of highly-educated, multilingual IT professionals. CEE has a focus on rigorous mathematical and scientific educational training. According to the most recent data available from UNESCO, nearly 950,000 students with science and technology degrees graduate from universities and training academies in CEE each year. This sizeable talent pool provides an abundant supply of qualified, well-educated IT professionals. Furthermore, CEE has a significant number of individuals who speak multiple languages, including English, German, French, Spanish, Italian and Swedish, which provides a distinct advantage in accessing key markets in the CIS, the US and Europe. Cultural compatibility with the European market. As the European market increasingly adopts outsourcing of IT services as an integral component of corporate strategy, we believe CEE-based IT outsourcing organizations are well-positioned to capture such growth given similar language and cultural attributes and geographic proximity. Additionally, according to IDC, the 2008 economic crisis resulted in the increased use of offshore IT outsourcing by European companies, including geographically proximate or “nearshore” IT outsourcing, with a 10% increase in the number of IT outsourcing contracts signed in 2010 compared to the prior year. Corporations diversifying their use of offshore IT services to multiple delivery locations and IT services providers. Clients are increasingly engaging CEE- based IT organizations to reduce their dependence on traditional IT offshoring destinations such as India. CEE maintains skilled IT professionals, favorable labor costs and relatively low attrition rates compared to other offshore outsourcing destinations.Otkritie Capital 24
  • 25. EPAM Systems | INITIATION | Russia | 2 April 2012 IPO, liquidity and shareholding structure In February 2012 EPAM Systems raised $83mn in gross proceeds at its IPO on NYSE, including primary proceeds of $35mn, having sold 16.4% of its shares. The company‟s pre-IPO shareholders including founders and management sold part of their stakes at the IPO and are now subject to a 180- day lock-up period, which ends on 6 August 2012. As a result of the offering, EPAM Systems has 42,025,981 common shares outstanding. The company intends to use the IPO proceeds to finance its day-to-day operations and further acquisitions. EPAM Systems is a more liquid stock than IBS Group. EPAM Systems‟ shares have been trading on NYSE under the ticker EPAM since 8 February 2012. The free float is 6.9mn shares, or 16.4%. The average daily trading volume (excluding 1 day of trading) is 0.2mn shares or ~$3mn. Although the liquidity is not high, it is substantially better than IBS Group‟s (parent of Luxoft), which is listed on the Frankfurt stock exchange with average trading volumes of only $100,000/day. Luxoft IPO, which is expected in May-June 2012 on NYSE, could offer investors another liquid exposure to the sector. Shareholder structure implies substantial overhang risk after the end of the lock-up period. 56.2% of the company is controlled by private equity funds, which already sold part of their shares at the IPO, implying a high risk of potential share overhang. In total 34.872mn shares (83% of total shares) could enter the market at various dates after the end of the lock-up period. The founders control 18.2% of the company, with the rest being owned by management and floated on the market.Figure 37. EPAM Systems shareholder structure before and after the IPO Ownership before the offering Ownership after the offering Shares Stake Shares offered Shares StakeRussia Partners (Siguler Guff Holders) 20,468,144 53.5% 2,528,471 17,939,672 42.7%Arkadiy Dobkin (Founder) 5,492,256 14.4% 370,846 5,121,410 12.2%Rainmeadow Holdings Limited (VTB Capital) 2,995,400 7.8% 379,448 2,437,944 5.8%Leonid Lozner (Founder) 2,552,424 6.7% 16,666 2,540,659 6.0%Da Vinci CIS Private Sector Growth Fund Limited 2,407,872 6.3% 305,016 1,959,760 4.7%Euroventures III Limited Partnership (EV Capital partners) 1,477,392 3.9% 187,152 1,290,240 3.1%Karl Robb (Management) 1,000,624 2.6% 55,614 942,927 2.2%Balazs Fejes (Management) 674,168 1.8% 43,436 628,649 1.5%Ilya Cantor (Management) 261,576 0.7% 15,420 243,920 0.6%Other shareholders 896,125 2.3% 97,931 2,020,800 4.8%Free float - - - 6,900,000 16.4%Total 38,225,981 100.0% 4,000,000 42,025,981 100.0%Sources: Otkritie Capital Research, company data EPAM Systems shares have gained 70% since its IPO in February 2012. The company outperformed all Chinese and Indian and Russian peers, which we primarily attribute to the large 40-50% discount to its peer group multiples at the placement.Otkritie Capital 25
  • 26. EPAM Systems | INITIATION | Russia | 2 April 2012 Figure 38. EPAM Systems share price performance vs Chinese peers 180% 170% 160% 150% 140% 130% 120% 110% 100% 90% 80% 7-Feb 2-Mar 5-Mar 8-Mar 1-Apr 11-Mar 14-Mar 17-Mar 20-Mar 23-Mar 26-Mar 29-Mar 10-Feb 13-Feb 16-Feb 19-Feb 22-Feb 25-Feb 28-Feb EPAM us equity MTCL IN Equity ISS US Equity SAPE US Equity SCS IN Equity MPHL IN Equity OFSS IN Equity HCLT IN Equity WPRO IN Equity INFY US Equity TCS IN Equity Sources: Otkritie Capital Research, Bloomberg Figure 39. EPAM Systems share price performance vs Indian peers 180% 170% 160% 150% 140% 130% 120% 110% 100% 90% 80% 10-Feb 13-Feb 16-Feb 19-Feb 22-Feb 25-Feb 28-Feb 7-Feb 2-Mar 5-Mar 8-Mar 1-Apr 11-Mar 14-Mar 17-Mar 20-Mar 23-Mar 26-Mar 29-Mar EPAM us equity CTSH US Equity CIS US Equity HSFT US Equity Sources: Otkritie Capital Research, Bloomberg Figure 40. EPAM Systems share price performance vs Russian peers 180% 170% 160% 150% 140% 130% 120% 110% 100% 90% 80% 2-Mar 5-Mar 8-Mar 7-Feb 11-Mar 14-Mar 17-Mar 20-Mar 23-Mar 26-Mar 29-Mar 1-Apr 10-Feb 13-Feb 16-Feb 19-Feb 22-Feb 25-Feb 28-Feb EPAM us equity IBSG GR equity ARMD rx equity Sources: Otkritie Capital Research, BloombergOtkritie Capital 26
  • 27. EPAM Systems | INITIATION | Russia | 2 April 2012 Key management and board members EPAM Systems has a recognized and professional management team and board members. The board consists of 7 members: 3 representatives of Russia Partners, 2 top- managers and 2 independent directors. Arkadiy Dobkin (age 51), Chairman of the board, CEO and President since December 2002. Mr Dobkin began his career in Minsk, Belarus where he worked for several emerging software development companies. After immigrating to the United States, he held thought and technical leadership positions in Colgate-Palmolive Company and SAP Labs. Mr Dobkin holds an MS in Electrical Engineering from the Belarusian National Technical University. Karl Robb (age 49), Board member, President of EU Operations and Executive Vice President since March 2004. Mr Robb is a 29-year global software engineering industry veteran, having worked 9 years in Europe, 9 years in the US and 11 in Eastern Europe. In March 2004, Fathom Technology, a Hungarian software development outsourcing firm where Mr Robb was a co- founder and CEO, merged with EPAM Systems, whereupon Mr Robb became Executive VP, Global Operations, and a member of the Board of Directors, of EPAM. Mr Robb has been employed as a consultant by Landmark Business Development Limited, a consulting firm, since 1986. Ilya Cantor (age 43), CFO, Vice President and Treasurer since July 2006. Prior to joining EPAM, Mr Cantor spent 7 years in a variety of financial and operational positions at Dow Jones, including Executive Director of Operations of The Wall Street Journal, Chief Financial Officer of The Wall Street Journal and Group Finance Director of The Wall Street Journal International. Between 2002 and 2005, Mr Cantor served on the board of directors of CNBC International. Before joining Dow Jones in 1999, he was the Chief Financial Officer of Independent Media (now Independent Media–Sanoma), a leading publishing house based in Moscow, Russia. Previous to this, Mr Cantor was an Audit Manager with Coopers & Lybrand, LLP in Moscow. He started his career with Coopers & Lybrand in Los Angeles in 1991, after graduating from California State University at Long Beach. Balazs Fejes (age 36), CTO since March 2004. Mr Fejes joined EPAM when Fathom Technology, a Hungarian software engineering firm, which he co- founded and for which he served as CTO, merged with EPAM. Prior to co- founding Fathom Technology, Mr Fejes was a chief software architect/line manager with Microsoft Great Plains (Microsoft Business Solutions). He also served as a chief software architect of Scala Business Solutions. Mr Fejes has been employed as a consultant by Redlodge Holdings Limited, a consulting firm, since July 2007. Between January 2001 and July 2007, Mr Fejes was employed as a consultant by Landmark Business Development Limited, a consulting firm. He currently serves as Managing Director for EPAM Systems Switzerland GmbH, EPAM Systems Kft, EPAM Systems Aps and EPAM Systems Nordic AB. Andrew J. Guff (age 50), non-executive director since 2006. Mr Guff is a Managing Director and founding partner of Siguler Guff & Company. Prior to founding Siguler Guff, Mr Guff was with PaineWebber for 10 years in a range of both principal and advisory capacities within PaineWebber‟s Merchant Banking and Mergers and Acquisitions groups. In 1994, Mr Guff founded Russia Partners Company, LP, one of the first private equity funds to operate in Russia and the CIS region. Today, Russia Partners manages approximately $1bn of investments and commitments to private deals in the region. Mr Guff sits on the board of directors of a number of portfolio companies owned by Russia Partners.Otkritie Capital 27
  • 28. EPAM Systems | INITIATION | Russia | 2 April 2012 Donald P. Spencer (age 56), non-executive director since 2006. Mr Spencer is a managing director and founding partner of Siguler Guff & Company and is responsible for Siguler Guff‟s legal and compliance matters. Prior to joining Siguler Guff in 1995, Mr Spencer served as senior vice president of Mitchell Hutchins Institutional Investors Inc. and senior vice president of Atlanta/Sosnoff Capital Corp. He was an associate at Shereff, Friedman, Hoffman & Goodman, LLP, where he specialized in representing financial services companies, and an associate at Sullivan & Cromwell LLP. Mr. Spencer received a Juris Doctor in 1980 from New York University School of Law and holds a Bachelor of Arts from Wesleyan University. Ross Goodhart (age 32), non-executive director since 2009. Mr Goodhart is a Principal at Siguler Guff and has responsibility for the portfolio management, investment evaluation, due diligence, structuring and coordination of all aspects of Siguler Guff‟s Russian and CIS investment operations. Prior to joining Siguler Guff in 2003, Mr Goodhart was an Investment Banking Financial Analyst at Peter J. Solomon Company, L.P., where he specialized in mergers and acquisitions and restructuring advisory services within a broad array of industry sectors. Mr Goodhart holds a Bachelor of Business Administration with high distinction from the Stephen M. Ross School of Business at the University of Michigan with emphases on Finance and Accounting. Robert Segert (age 43), non-executive director since January 2012. Since 2008, Mr Segert has been President and Chief Executive Officer and a director of GXS Worldwide, Inc. (GXS), a leading global provider of business-to- business e-commerce and data integration services. Prior to joining GXS in 2008, he spent 10 years at EDS in various capacities, until it was acquired by Hewlett-Packard. He has also held roles at A.T. Kearney and Frito-Lay. Mr Segert holds a Bachelor of Science degree in Mechanical Engineering from Purdue University and a Masters in Business Administration from Harvard Business School. Ronald P. Vargo (age 57), non-executive director since January 2012. Mr Vargo served as Executive Vice President and Chief Financial Officer of ICF from April 2010 to May 2011. Prior to joining ICF, Mr Vargo held several managerial positions in EDS from 2004 to 2008. Prior to joining EDS, he was employed from 1991 to 2003 by TRW, a former $17bn global manufacturing and service company strategically focused on providing products and services with a high technology or engineering content to the automotive, space and defense markets. TRW was acquired by Northrop Grumman Corporation in 2002. Mr Vargo serves as a director of Ferro Corporation and as chair of its audit committee. Mr Vargo holds an MBA in Finance and General Management from Stanford University and a Bachelor of Arts degree in Economics from Dartmouth College.Otkritie Capital 28
  • 29. EPAM Systems | INITIATION | Russia | 2 April 2012 Appendix: Financial forecasts $mn unless otherwise statedProfitability 2009 2010 2011 2012E 2013E 2014E Income Statement 22% 150 Revenues 150 222 335 419 502 597 Depreciation 6 6 8 11 18 18 20% 130 EBITDA 22 39 62 76 88 98 18% 110 Operating profit (EBIT) 16 33 55 66 70 80 16% 90 Net Interest expense 0 0 1 1 2 2 14% 70 Non-op. expenses (2) (2) (3) 0 0 0 Pretax Profit 14 31 53 67 71 82 12% 50 Taxes (1) (3) (8) (11) (12) (14) 10% 30 Minority interest - - - - - - 8% 10 Net Profit 14 28 44 56 59 68 2008 2009 2010 2011 2012E 2013E 2014E Cash Flow Statement EBITDA margin (LHS) EBITDA,$m Net Change in work. cap. (2) (13) (3) (39) (19) (21) Provisions and write-offs - - - - - - Other - - - - - - Operating cashflow 26 20 49 27 58 65Cash flows, $m Capex (9) (11) (16) (36) (18) (18) 80 Disposals (Acquisitions) 0 0 0 0 0 0 Investing cashflow (9) (11) (16) (36) (18) (18) 60 Equity 0 (3) 0 0 0 0 40 Debt - - - - - - Financing cashflow 5 (9) 2 35 0 0 20 Net Change in Cash 22 1 35 26 40 47 0 Balance sheet Cash & equivalents 53 54 89 115 155 202(20) Current Assets 94 128 184 255 323 402(40) PP&E 23 25 35 60 60 60 2008 2009 2010 2011 2012E 2013E 2014E Goodwill and other - 13 13 13 13 13 Operating cash flow Investing cash flow Total Assets 135 171 236 332 400 479 Current Liabilities 16 36 53 59 68 79 S-T Debt 7 0 0 0 0 0 L-T Debt 0 0 0 0 0 0Momentum, % Other L-T Liabilities 14 0 1 1 1 1 250% Shareholders Funds 17 135 181 271 331 399 Total Liabilities & Equity 47 171 236 332 400 479 200% Net Debt (46) (54) (89) (115) (155) (202) 150% Margins and profitability EBIT Margin 10.7% 14.8% 16.5% 15.7% 13.9% 13.3% 100% EBITDA Margin 14.4% 17.6% 18.7% 18.2% 17.5% 16.4% 50% Net Margin 9.0% 12.8% 13.3% 13.3% 11.8% 11.4% ROE 81.8% 21.0% 24.5% 20.5% 17.9% 17.1% 0% ROA 10.0% 16.6% 18.8% 16.8% 14.8% 14.2% ROIC 19.3% 32.3% 47.0% 33.3% 31.5% 32.2% 0.5 2008 2009 2010 2011 2012E 2013E 2014E Momentum Revenue growth -7% 48% 51% 25% 20% 19% Revenue growth EPS growth EBITDA growth 43% 81% 60% 22% 15% 12% EPS growth 234% 109% 57% 8% 6% 15% Liquidity and solvencyValuation Cash Ratio 3.2 1.5 1.7 2.0 2.3 2.6 Current Ratio 5.8 3.6 3.5 4.3 4.7 5.160 Interest Coverage 380.5 67.5 43.1 50.0 40.9 34.750 Debt/Equity 0.4 0.0 0.0 0.0 0.0 0.0 Debt/Total assets 0.1 0.0 0.0 0.0 0.0 0.040 Net debt / EBITDA (2.1) (1.4) (1.4) (1.5) (1.8) (2.1)30 Valuation P/E nm 26.1 16.7 15.5 14.6 12.720 P/CE 38.6 21.4 14.2 13.0 11.2 10.010 P/BV 44.7 5.5 4.1 3.2 2.6 2.2 EV/Sales 5.4 3.6 2.3 1.8 1.4 1.1 0 2008 2009 2010 2011 2012E 2013E 2014E EV/EBITDA 37.8 20.7 12.4 9.8 8.1 6.7 Dividend yield, (ords) 0.0% 0.5% 0.0% 0.0% 0.0% 0.0% P/E EV/EBITDA Dividend yield, (prefs) - - - - - - Per Share Data EPS 0.38 0.79 1.23 1.32 1.41 1.62 DPS, ords 0.00 0.10 0.00 0.00 0.00 0.00 DPS, prefs - - - - - - BVPS 0.46 3.75 5.02 6.46 7.87 9.49 Source: Company data, Otkritie Capital estimatesOtkritie Capital 29
  • 30. EPAM Systems | INITIATION | Russia | 2 April 2012Disclosures appendixAnalyst certificationThe research analysts whose names appear on the front cover of investment research reports produced by Otkritie Securities Ltd (the “Otkritie Capitalresearch”) certify that: i) all of the views expressed in the Otkritie Capital research accurately reflect their personal views about the subject security or issuer,and ii) no part of the research analysts‟ compensation was, is, or will be directly or indirectly related to the specific opinions or views expressed by theresearch analysts in the Otkritie Capital research. Research analysts‟ compensation is based upon various factors including the total revenues of the group ofcompanies operating under the Otkritie Capital brand name, a portion of which are generated by investment banking activities. If the date of the OtkritieCapital research is not current, the views and contents may not reflect the research analysts‟ current thinking.Important issuer disclosuresImportant issuer disclosures outline currently known conflicts of interest that may unknowingly bias or affect the objectivity of the analyst(s) with respect to anissuer that is the subject matter of this report.Disclosures information is available at http://www.otkritie.com/en/about/terms_of_business/ or for a complete set of disclosures associated with the issuersdiscussed in Otkritie Capital research may be obtained by telephoning +44 20 7826 8283 or writing to: Compliance Department, Otkritie Securities Ltd, 12thFloor, 88 Wood Street, London, EC2V 7RS, UK.Meaning of target prices and ratingsTarget prices represent the research analyst‟s expectation of absolute return on equity (forecast price appreciation derived by the valuation methodologystated at initial time of publication, and dividend yield) within 12 months.A three-tier rating system is used for stocks under coverage, set for each stock at the initial date of publication:Buy: target price exceeds the market price by 15%Hold: target price is within the range from -15% to +15% of the market priceSell: target price exceeds the market price by -15%.Coverage Policy: Coverage of an issuer is updated as deemed appropriate based on developments with the subject company, sector, and/or market thatmay have a material impact on the analyst‟s published views or opinions. At times, the expected absolute returns may fall outside of the range used at thetime of setting a rating because of price movement and/or volatility. Such interim deviations are permitted and are subject to review by Otkritie Capital‟sResearch Management.Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the security‟sexpected performance and risk.Otkritie Capital 30
  • 31. EPAM Systems | INITIATION | Russia | 2 April 2012Important noticesThis report has been produced by Otkritie Securities Limited (“OSL”), member of the London Stock Exchange and authorised and regulated by the FinancialServices Authority (“FSA”) in relation to designated investment business as listed under licensed permissions on the FSA‟s website. OSL is a subsidiary ofOtkritie Financial Corporation JSC, which together with other subsidiaries specialising in a full range of investment banking and prime services products, usethe brand name Otkritie Capital. These subsidiaries are not credit institutions licensed to accept deposits or other repayable funds from the public or toengage in any other business classified as banking under Russian law. 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  • 32. www.otkritie.comBloomberg: OTKRRESEARCHAlexander BurganskyHead of Researchalexander.burgansky@otkritie.com+7 (495) 213 1825Equity Research Fixed Income ResearchVladimir Savov Vadim SobolevskiHead of Equity Research Head of Fixed Income Researchvladimir.savov@otkritie.com vadim.sobolevski@otkritie.com+7 (495) 213 1826 +44 (20) 7826 8211Strategy Metals & Mining Fixed Income StrategyTom Mundy Robert Mantse Vadim Sobolevskithomas.mundy@otkritie.com robert.mantse@otkritie.com vadim.sobolevski@otkritie.com+7 (495) 213 1833 +7 (495) 213 1832 +44 (20) 7826 8211Taryn Arthur Denis Gabrielik Sovereign Credittaryn.arthur@otkritie.com denis.gabrielik@otkritie.com+7 (495) 777 5656 (x4307) +7 (495) 213 1831 Maxim Grebtsov maksim.grebtsov@otkritie.comEconomics Utilities +7 (495) 777 5656 (x4340)Vladimir Tikhomirov Sergey Beiden Quantitative Researchvladimir.tikhomirov@otkritie.com sergey.beiden@otkritie.com+7 (495) 213 1829 +7 (495) 213 1835 Gareth Wessels gareth.wessels@otkritie.comPolina Badasen Telecommunications, Media, +44 (20) 7826 8255polina.badasen@otkritie.com Technology+7 (495) 777 5656 (x4663) Alexander VengranovichOil & Gas alexander.vengranovich@otkritie.comAlexander Burgansky +7 (495) 213 1830alexander.burgansky@otkritie.com Consumer, Real Estate+7 (495) 213 1825 Mikhail TerentievTatyana Kalachova mikhail.terentiev@otkritie.comtatiana.kalachova@otkritie.com +7 (495) 213 1834+7 (495) 777 5656 (x4717) Yury RodionovRoman Odarich yury.rodionov@otkritie.comroman.odarich@otkritie.com +7 (495) 777 5656 (x4486)+7 (495) 777 5656 (x4487) TransportationFinancial Services Irina StupachenkoVladimir Savov irina.stupachenko@otkritie.comvladimir.savov@otkritie.com +7 (495) 777 5656 (x4294)+7 (495) 213 1826 Chemicals, Industrials, Infrastructure Alexander Churikov alexander.churikov@otkritie.com +7 (495) 777 5656 (x4435)