IT

Best Demand Environment in a Decade – Tech Mahindra

Update on the Indian Equity Market:

On Wednesday, NIFTY closed lower at 18,211 (-0.3%) dragged by MEDIA (-2.0%), METAL (-1.5%) and PRIVATEBANK (-1.4%). PSU BANK (+2.1%), IT (+1.0%) and PHARMA (+0.9%) were the gaining sectors. The top gainers in NIFTY50 were ASIANPAINT (+4.1%), UPL (+3.8%), and DIVISLAB (+2.3%). The top losers were AXISBANK (-6.5%), BAJFINANCE (-4.8%), and ONGC (-3.5%).

Edited excerpts of an interview with Mr. C P Gurnani, MD, and CEO of Tech Mahindra with CNBCTV18 on 26th Oct 2021:

  • The company is committed to the high growth trajectory over the full year of FY22, which resulted in its highest ever sequential growth in a decade. Every business segment has reported sequential growth in Q2FY22.
  • The Company has a best-in-class geographic mix with North America contributing less than 50%, Europe contributing 25%, and the Rest of the World Contributing 25%, with a geographical presence in 90 Countries. The company is well diversified in terms of geography.
  • The Company increased its guidance of around 500-600 Mn USD in Deal wins to 750 Mn to 1 Bn USD over the next few quarters, on the back of a robust deal pipeline and sustained growth in the demand environment.
  • The Company plans to improve its margins by keeping control on sub-contracting costs which are at historically high levels. Utilisation has reduced due to fresher intake in the last quarter, which the company expects to improve over time.
  • Cloud Migration and 5G are the biggest drivers of growth in new deal wins. There’s a huge movement in the legacy to digital business which is expected to continue over the next few quarters.
  • The company made two acquisitions during the quarter- Loadstone and WeMake website. Loadstone has revenue of about 35 Mn USD and is EPS accretive, the other acquisition was IP Driven and is insignificant to the topline.
  • Current levels of attrition are hurting the demand fulfillment of the company and the company plans to reduce attrition by shifting to tier-2 cities and new HR Policies.

 Asset Multiplier Comments

  • The management commentary of continued strength in end demand aided by significant deal wins, and healthy deal pipelines driven by 5G and cloud will help the company sustain its revenue growth guidance.
  • Attrition and supply-side issues are the biggest headwinds for IT Companies. The company’s bottom-line can only see sustained growth if these challenges are dealt with in the upcoming quarters.

Consensus Estimate (Source: market screener website)

  • The closing price of Tech Mahindra was ₹ 1,568/- as of 26-October-21. It traded at 25x/22x/19x the consensus EPS estimate of ₹ 64/73/81 for FY22E/ FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,703/- implies a PE multiple of 21x on FY24E EPS of ₹ 81/-.

 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Increased revenue guidance due to robust demand environment – Larsen & Toubro Technology services

Update on the Indian Equity Market: 

On Thursday, NIFTY closed lower at 18,178 (-0.5%) led by IT (-2.5%), CONSUMER DURABLES (-1.8%), and METAL (-1.8%). PSU BANK (+2.7%), BANK (+1.3%), and FINANCIAL SERVICES (+1.2%)  were the gaining sectors. Top gainers in NIFTY50 were KOTAKBANK(+6.9%), TATAMOTORS (+4.5%), and GRASIM (+3.5%). The top losers were ASIAN PAINTS (-4.9%), HINDALCO (-3.8%), and INFOSYS(-2.5%). 

Edited excerpts of an interview with Amit Chadha, MD, and CEO of L&T Tech Services  with CNBCTV18 on 20th October 2021: 

  • The company has increased its FY22 revenue guidance for the second consecutive quarter to 19-20 percent from the previous 15-17 percent owing to the strong demand and robust supply chain. 
  • Earlier the company had anticipated a USD 1 bn runrate between Q2FY23E and Q3FY23E, which could be met sooner than expected. 
  • The company took on board about 1,200 freshers in the last six months and plans to hire about 2,000 in 3QFY22E and 4QFY22E. 
  • On the margin front, the company has delivered EBITDA margins in the 18% range despite the wage hikes and the overhead costs in FY21, going forward the company expects them to stay in the 18 percent range. 
  • With the robust market environment and the company’s order pipeline improvement to about 18% over 1QFY22, the company’s overall aim is to reach a USD 1.5 billion run rate by FY25.
  • The company expects the demand for CY22 and CY23 to remain at the current level.
  • The average deal size in the engineering business is between USD 10 million and USD 25 million. The firm has landed a number of transactions ranging from USD 10 to USD 25 million. They are also looking for agreements worth more than USD 50 million.
  • The offshoring revenue has increased by 100 bps. The company expects the offshoring revenue percentages to stabilize and improve further on account of the optimistic demand environment from its clients in the United States and Europe, in CY22.
  • On the acquisition front, the company is looking for a US or European-based company in the ISV segment or transportation segment, or in the medical technologies segment. The company is currently assessing different companies for the purpose and is in various stages of conversation with different companies.  The company has an appetite for acquiring a company with a revenue of 50 million dollars as well, given the company’s strong balance sheet and cash flow.

 Asset Multiplier Comments 

  • The management commentary of continued strength in end demand aided by significant deal wins, and healthy deal pipelines suggest growth could significantly exceed the upper end of the revised guidance.
  • The aggressive recruiting and re-skilling initiatives, will assist the business to overcome supply-side limitations.

Consensus Estimate (Source: market screener websites) 

  • The closing price of Larsen & Toubro Technology services was ₹ 4726/- as of 21-Oct-21. It traded at 54x/46x/39x the consensus EPS estimate of ₹ 88/102/121 for FY22E/ FY23E/FY24E respectively. 
  • The consensus target price of ₹ 3,965/- implies a PE multiple of 32x on FY24E EPS of ₹ 125/-. 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.” 

 

Cyber Security and ESG emerging as new pockets of growth – Larsen & Toubro Infotech

Update on the Indian Equity Market:

On Wednesday, NIFTY closed lower at 18,266 (-0.83%) led by CONSUMER DURABLES (-2.91%), REALTY (-2.16%) and METAL (-2.06%). PSU BANK (+1.54%) and MEDIA (+1.03%) were the only gaining sectors.

Top gainers in NIFTY50 were BHARTIARTL (+3.96%), SBIN (+2.66%) and TATAMOTORS (+1.62%). The top losers were HINDALCO (-3.94%), BPCL (-2.66%), and TITAN (-2.61%).

Edited excerpts of an interview with Mr. Sanjay Jalona, Chief Executive Officer and Managing Director, Larsen & Toubro Infotech with CNBCTV18 on 19th Oct 2021:

  • The company is seeing three key drivers of revenue growth
    • Restructuring: Every industry is reimagining its processes to deal with the new normal. All industrial manufacturing companies, which typically have been business-to-business (B2B) companies, are spending to transform from B2B to business-to-consumer (B2C) and that creates a lot of opportunities for the company in the tech world.
    • Cyber Security and environmental, social, and governance (ESG) are emerging as new pockets of growth. Work from home culture requires information security which is a big area of growth. ESG is another area having potential as every company has a goal on carbon neutrality and sustainability. So, ESG creates a lot of data opportunities for the industry, unlike in the past.
    • Great Resignation: Companies are currently seeing a double-digit attrition rate which they are not used to.
  • There has been a change in the way, format, and size of the deals. There are a lot of deals for the transformation journeys of the customers.
  • Large deals typically are consolidation deals that have taken a back seat in their (customers) priorities as customers are focusing on their digital transformation journey. The bulk of investment, time, and efforts are going into the digital transformation journey.
  • Overall, the deal pipeline will be stronger for the company. The large deal pipeline will continue to be strong for at least the next two to three years.
  • Even after giving 2 consecutive wage hikes, the attrition rate for 3QFY22 stands at ~19.6% (up 470 bps QoQ). The reason for such a high attrition rate is that the talent market is very hot currently as every company is hiring tech talent. The overall demand is high and will continue to be high for the next 2-3 years. The need for automating is creating a further gap in the skill set that is required.
  • To cope up with the high attrition rate:
    • The company have increased the freshers hiring target to 5,500 v/s 4,500 for FY22E,
    • Plans to hire additional 1000 employees on Hired Trained Deployed (HTD) basis,
    • It is also ramping up the skilling and upskilling program for the company’s talent, and
    • Evaluating ways to hire non-tech (non-engineers) bright talents across India who desire to enter the computer field to create a talent pool.
  •  The company has given guidance to cross Rs 2 bn in revenues.

 Asset Multiplier Comments

  • The company has been performing consistently well with robust and broad-based growth – across verticals, geographies, and service lines.
  • We believe that the large deal wins, strong large deal pipeline, and aggressive hiring/re-skilling plans, which would help overcome the supply-side constraints will help the company to drive profitable and sustainable growth in the medium term.

Consensus Estimate (Source: market screener websites)

  • The closing price of Larsen & Toubro Infotech was ₹ 6,960/- as of 20-Oct-21. It traded at 52x/44x/38x the consensus EPS estimate of ₹ 131/156/179 for FY22E/ FY23E/FY24E respectively.
  • The consensus target price of ₹ 6,090/- implies a PE multiple of 34x on FY24E EPS of ₹ 179/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Organic growth to sustain as guided, no big bang acquisitions planned– HCLTECH

Update on the Indian Equity Market:

On Tuesday, NIFTY50 ended its 7-day winning streak to close at 18,419 (-0.3%), dragged down by REALTY (-4.7%), PSUBANK (-3.7%), and FMCG (-3.2%). The sectoral gainers were IT (2.2%), and FINANCIAL SERVICES (0.2%). Among the stocks, TECHM (+4.3%), LT (+3.3%), and INFY (+1.8%) led the gainers while ITC (-6.3%), TATAMOTORS (-4.9%), and EICHERMOT (-4.5%) were the top laggards.

HCLTECH missed the street estimates in the declared earnings for the quarter ended 30th September 2021. Mr. C Vijayakumar, Chief Executive Officer, and Mr. Prateek Aggarwal, Chief Financial Officer at HCL Technologies discussed the quarter gone by and reaffirmed its annual FY22 guidance in an interview with CNBC-TV18 on 18th October 2021:

  • The Products and Platforms business has been a laggard in FY22, with quarterly slippages affecting the guidance of the segment but the impact is immaterial to the top-line growth, where the company has reaffirmed its EBIT margin guidance of 19-21%.
  • Q2FY22 was the best quarter for the company with unprecedented growth in client mining, large deal wins, and total headcount. The company has introduced a formal dividend pay-out policy on the back of its commitment to rationalise capital allocation.
  • The Company has rolled out the first tranche of wage hikes in Q2FY22 and expects the second tranche to be rolled out in Q3FY22. It expects the slippages in the Products and Platforms business to be recovered in the upcoming quarter.
  • The company had a track record of a high dividend pay-out until FY20. With a significant outflow due to an acquisition, the pay-outs were subdued over the past few quarters. With a recovery in free cash flows and demand from investors, the company has decided to come up with a formal dividend policy with higher pay-outs.
  • The current demand environment has established momentum in the organic business. The company plans to focus on executing current demands rather than go all-in after a major acquisition. The company may add small tuck-ins to expand capabilities or geographies.
  • In Q2Fy22, the company had a strong deal win rate. The pipeline in Q1FY22 was at the highest level ever, it slightly moderated because the company closed a lot of deals.
  • The pipeline has a good mix of mid-size and large deals. There is also a lot of momentum in existing accounts, where customers are ramping up on several digital initiatives, with smaller ticket transformational projects are being taken up by the company.
  • The company expects to exceed its initial guidance on hiring 20,000-22,000 freshers on the back of robust demand and backfilling attrition in the recent quarters.
  • Momentum is seen across all verticals with BFSI and Manufacturing being the leaders. The manufacturing vertical is seeing an uptick in engineering services with various transformational deals and projects being undertaken.

 

Asset Multiplier Comments

  • COVID-19 pandemic has unmistakably created a paradigm shift in the ITES Industry, with a strong focus on digitisation around the world across both size and verticals will result in a high growth period for the industry.
  • HCL Tech like its peers will also continue to face supply-side crunch and attrition problems. The situation is expected to improve over the next few quarters which will help to reduce the margin pressures.

Consensus Estimate: (Source: market screener website)

  • The closing price of HCLTECH was ₹ 1,232/- as of 19-October-2021. It traded at 25x/ 22x/20x the consensus earnings estimate of ₹ 49/ 56/ 63. for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1360/- implies a PE multiple of 22x on FY24E EPS of ₹ 63/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Expect 30% YoY constant currency revenue growth in 3QFY22 – WIPRO

Update on the Indian Equity Market:

On Monday, NIFTY50 rose for the seventh consecutive session to close at 18,477 (+0.8%), led by PSU BANK (+4.0%), METAL (+3.9%), and IT (+1.6%). The sectoral losers were PHARMA (-0.9%), and MEDIA (-0.7%). Among the stocks, HINDALCO (+5.2%), INFY (+4.8%), and TECHM (+3.7%) led the gainers while M&M (-2.2%), HCLTECH (-2.1%), and DRREDDY (-1.8%) led the laggards.

Wipro recently declared earnings for the quarter ended 30th September 2021, which beat street estimates. Mr. Thierry Delaporte, CEO, Wipro discussed the quarter gone by and his plans for the upcoming quarters with The Economic Times on 18th October 2021:

  • Mr. Delaporte took charge as the CEO of the company during the Covid pandemic. During that time, the company moved into execution mode and it has been fast at defining the people who are going to drive the organisation forward.
  • During the last year, the company has taken bold steps and changed about 30% of the top 200 leaders. It has been an unprecedented change and a lot of talent has also been brought in from outside. Wipro made its biggest acquisition, Capco which is delivering great results.
  • The CEO’s responsibility was to ensure the company remains driven by a sense of purpose and pays attention to the world around it.
  • What needed to change was assertiveness about strategy, running operations, making decisions, and sticking to it. The second thing he wanted to change was raising the bar in terms of ambition, and the third is a ruthless focus on accountability and outcome.
  • Wipro will deliver ~30% year-on-year constant currency revenue growth in 3QFY22E. He expects the growth to continue in FY23E as well, as the company is firing on all cylinders. Wipro will continue to do more acquisitions and possibly a big one.
  • The best performing company in the IT industry is the one with the best talent in terms of quality – people who understand the business and how technology can be leveraged to transform. These are the people Wipro is hiring. The talent is also in terms of quantity because of the increased demand and higher attrition levels.
  • Wipro plans to integrate a lot more freshers. In FY22E, Wipro plans to hire about 16,000-17,000 and 25,000-30,000 in FY23E.
  • He expects higher attrition to continue for the next 3-4 quarters. In 2QFY22, Wipro’s attrition was 20.5% and he expects it to worsen. There’s always seasonality, in the last quarter of the year and people tend to stick around, according to Mr. Delaporte.
  • Wipro would be investing more in 5G and artificial intelligence than in quantum computing right now. He is betting big on engineering services.

 Asset Multiplier Comments

  • The IT sector has been a beneficiary of the increased investment in technologies due to shifting to work from anywhere post the pandemic. While revenue growth is expected for the quarters to come, the sector was also a beneficiary of lower operating costs.
  • As people return to the office for work, some of these costs are expected to come back. The increased pace of vaccinations around the world will likely increase people traveling for work. The talent war has already led to companies rolling out 2-3 wage hikes in a year. With the costs increasing, Wipro like all other IT companies may face margin pressures in the near term.

Consensus Estimate: (Source: market screener website)

  • The closing price of WIPRO was ₹ 711/- as of 18-October-2021. It traded at 32x/ 28x/ 25x the consensus earnings estimate of ₹ 22/ 25/ 28 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 676/- implies a PE multiple of 24x on FY24E EPS of ₹ 28/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

This quarter is all about consolidation of growth momentum – TCS

Update on the Indian Equity Market:

On Monday, NIFTY ended higher at 17,946 (+0.3%) as it closed near the intraday high level of 18,041. All the sectoral indices were gainers, led by AUTO (+3%), REALTY (+1.7%), and METAL (+1.5%) except IT which was down by (-3.3%). Among the stocks, TATAMOTORS (+9.1%), COALINDIA (+4.4%), and MARUTI (+3.4%) led the gainers while TCS (-6.3%), TECHM (-2.7%), and INFY (-1.8%) led the losers. 

Excerpts of an interview with Mr. Rajesh Gopinathan, CEO and MD, of TCS  with Business Standard on 11th October 2021:

  • TCS believes that this is one of the best quarters they have had. The growth was broad-based. From a deal win standpoint, every vertical has come back strongly.
  • Large verticals like retail and manufacturing have all done well.
  • Growth has been driven by three aspects: increased outsourcing, building a digital core, and growth and transformation agenda of clients.
  • This growth is evident in customer metrics as the numbers are above pre-pandemic baselines and each layer of the customer pyramid has grown.
  • This growth momentum is expected to continue as the demand is strong but there could be seasonality of demand and operations which are specific to industries and regions. How this seasonality pans out remains to be seen.
  • Two years ago, TCS experimented by taking in 32,000-35,000 freshers in the first two quarters and this model proved to be successful. They plan to do this in FY22 as well, as their approach to providing fresher training is modified.
  • Fresher training is no longer looked at as a standalone activity. Rather, it is deeply integrated into business units themselves. The training is more aligned to where demand is and the focus of the curriculum is in tune with the business units.
  • By participating in G&T (Growth and Transformation) projects, TCS has been trying to be aware of which part of the customer agenda they were partnering with. Creating awareness and articulating what TCS does, both internally and externally are the key part.
  • What matters is that TCS is relevant to its customer base. They have over 1,000 customers and 98% of its business is repeat business’s relevance to customers should continue and increase.

Asset Multiplier Comments

  • TCS like the entirety of the IT Industry has been facing the brunt of attrition-related margin pressures. Strong brand building and employee satisfaction have helped it keep attrition at an industry low.
  • We expect these input pressures to sustain over the next 2-3 quarters post which TCS’ long-term growth levers would kick in and help the company venture into the next phase of growth.

 Consensus Estimate: (Source: market screener website)

  • The closing price of TCS was ₹ 3,686/- as of 11-Oct-2021. It traded at 38x/33x/30x the consensus earnings per share estimate of ₹ 105/119/132 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 3,978/- implies a PE multiple of 30x on FY24E EPS of ₹/132-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Growth of the Indian gaming market to come in the next 4-5 years – Nazara Tech

Update on the Indian Equity Market:

On Monday, NIFTY closed flat at 17,855. The top gainers in NIFTY50 were MARUTI (+6.4%), M&M (+4.3%), and TATAMOTORS (+4.1%). The top losers were HCLTECH (-4.4%), TECHM (-3.3%), and WIPRO(-3.2%).

The top gaining sectors were AUTO (+3.2%), REALTY (+3.0%), and MEDIA (+1.6%), while the top sectoral losers were IT (-2.9%), HEALTHCARE (-1.3%), and PHARMA (-0.9%).  

Growth of the Indian gaming market to come in the next 4-5 years – Nazara Tech

Edited excerpts of an interview with Mr. Manish Agarwal, Chief Executive Officer, Nazara Technologies (Nazara) with ETNow on 23rd September 2021:

  • Nazara categorizes its consumers based on the age group and all their acquisitions fit in these cohorts. One is 2-12-year-old young kids, 14-25-year-old male sports fans, and then above 25 gamers.
  • Nazara is present in emerging markets like India, South Asia, South Africa, and the Middle East which are seeing a strong tailwind across gaming and adjacencies to gaming.
  • The company’s last acquisition Publishme allows the company to build gaming IPs in the Middle East.
  • Having an on-the-ground understanding of what the consumer needs and how it would pan out in terms of retention engagement, consumer acquisition, and community building are important aspects for the company to succeed.
  • Nazara three years back took a call that gaming is a talent-driven business and that talent is passionate about what they create and you need to work with that talent to grow those companies.
  • Nazara’s telco business which is 15 years old, contributes around 13-14% to the company’s overall portfolio and its acquired IPs are in their growing phase like kiddopia, Nodwins, Sportskeeda, and the World Cricket Championship.
  • The company’s strategy has been to build all the friends of Nazara as a concept and then continue to build value with those founders at subsidiary levels.
  • Gaming as a secular trend was in a very advanced stage even before COVID due to two key reasons i.e launch of Jio and UPI transactions.
  • Pre-pandemic, the company was growing around 48-50% YoY. The combination of acquisition and organic growth helped the company to grow ~87% and continues to see the same momentum of growth in different businesses.
  • India is still 2-4 years old in e-gaming and esports. India’s gaming is still a very small market and is limited to mobile as an access device. The growth of this market is expected to come in the next 3-5 years.
  • It is always important as an industry to look into the markets which are far ahead (seven-eight years ahead) and then work with stakeholders today to ensure creating and evangelising the benefits of gaming.
  • Looking at the risk of gaming, it is predominantly limited to skill-based real money gaming where people are waging their money to win a large part of the money. The non-real money gaming part which is free to play mobile gaming, e-sports, or gamified learning does not fall into this bracket.
  • Clarity regarding the difference between games of chance and games of skill will help to bring clarity to the policy.
  • The company expects National E-sport Championship in the coming time to create a positive perception about gaming. This will take time and can only change through large ticket items like Olympics plus constant engagements with the stakeholders.

Asset Multiplier Comments

  • We believe rising gaming culture, evolving E-sports, improvement in digital payment and tech infrastructure, favorable macro-economic, and demographic drivers in India provide an opportunity for the growth of the company.
  • Nazara has created the entire network through selective acquisitions. This will help to explore the gaming sector boom in India.

 

Consensus Estimate (Source: market screener websites)

  •  The closing price of Nazara Technologies was ₹ 2,280/- as of 27-Sep-21. It traded at 146x/90x/61x the consensus EPS estimate of ₹ 14.7/23.6/35 for FY22E/ FY23E/FY24E respectively.
  • The consensus target price of ₹ 2,060/- implies a PE multiple of 59x on FY24E EPS of ₹ 35/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Expect attrition rate to get a little worse before improving – Happiest Minds Technologies

Update on Indian Equity Market:

On Monday, NIFTY ended at 17,397 (-1.07%). Among the sectoral indices, FMCG (+0.9%) was the only sector that ended higher, whereas Metal (-6.6%), PSU Bank (-4.2%), and Realty (-2.10%) ended lower. Among the stocks HUL (+2.9%), Bajaj Finserv (+1.1%), and ITC (+0.8%) led the gainers while Tata Steel (-10%), JSW Steel (-7.7%), and Hindalco (-6.1%) led the losers.

Excerpts of an interview with Mr. Venkatraman Narayanan (MD & CFO) and Mr. Joseph Anantharaju (Executive VC) with CNBC TV18 on 17th September 2021:

  • The demand scenario has only got better from where they are at the end of the first quarter. Things are looking very well for customer additions and the growth of existing customers. So, demand is looking good.
  • On the supply side they said, the supply situation is not as good, but they are managing to hold on with employee net additions of about 300 in the first quarter. They are trying to keep similar numbers for the next three to four quarters.
  • Most verticals that they are operating in seem to be showing strong demand growth with customers initiating or implementing digital transformation initiatives. A few of them should be a little ahead or having spent more, like edutech which continues to be strong for them. In high tech and retail they are seeing a good spend with the whole e-commerce move. They are seeing some initiatives in digital media as well.
  • They further said, in terms of technologies, the cloud is almost a done deal now. Most of their clients are operating on the cloud, and a lot of work is happening around leveraging artificial intelligence and analytics.
  • One thing they have noticed in the last few months is that more clients are looking at more automation. They have seen a strong uptick in automation as well, from a technology angle.
  • On attrition, they said things are going to get a little bit worse and then start improving. As there is always a slow build-up when it comes to attrition. People move out looking for new opportunities but the company keeps adding and backfilling the opened positions.
  • So demand was increasing but along with supply-side affected due to high attrition rate that’s why it is likely to get worse. The attrition rate was 15% in last quarter it will increase and then they will stabilise it over some time.
  • On margins, they said the sustainable margins should be in the range of about 22% to 24%.

 

Asset Multiplier Comments

  • The IT sector is witnessing a high attrition and there is a talent war among the competitors, which might affect the margins. The companies are trying to decrease the attrition rates which might help in margin expansion in the medium term.
  • Happiest Minds is seeing healthy demand and is targeting industry leading growth in the medium to long term.
  • The company also has a strong demand growth in verticals that they are operating.

Consensus Estimate: (Source: market screener website)

  • The closing price of Happiest Minds was ₹ 1,491/- as on 20-Sept-2021. It traded at 113x/ 90x/ 78x the consensus EPS estimate of ₹ 13.2/ ₹16.5/ ₹19.1 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,155/- implies a PE multiple of 60x on FY24E EPS of ₹19.1/-

 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Large sized deal ramp-up due to Evosys acquisition – MASTEK

Update on the Indian Equity Market:

On Tuesday, the benchmark Nifty 50 index ended at a record closing of 17,383 (+0.2%). The top gainers on the index were INDUSINDBK (+4.0%), HCLTECH (+2.5%), and HEROMOTOCO (+2.2%). The laggards were led by ULTRACEMCO (-1.1%), HDFC (-1.1%), and BPCL (-1.1%). Among the sectoral indices, MEDIA (+14.4%), PRIVATE BANK (+1.1%), and CONSUMER DURABLES (+0.9%) led the gainers while METAL (-0.4%), FMCG (-0.3%), and FINANCIAL SERVICES (-0.1%) led the losers.

Excerpts of an interview with Mr. Hiral Chandrana, Global CEO, Mastek with Economic Times on 13th September 2021:

  • The Company has a strong business in the UK and is working with the leading public sector institutions. MASTEK has a healthy business and is not going to reduce its UK exposure. They expect to continue the run in many areas including the private sector.
  • 1QFY22 was a good quarter in terms of the order book. The company is witnessing a good momentum in 2QFY22 along with an increase in deal size. The acquisition of Evosys (cloud business) is helping MASTEK get involved in larger-sized deals.
  • There are delays in some deals due to their large size and higher competition.
  • While the talent market remains challenging, MASTEK has taken a lot of steps in terms of salary hikes and skill transformation. They are looking at various elements of how training and reskilling are done.
  • 12-15 months back, the company was operating in the 13-14% EBITDA margin range. Now, they are comfortable in the 20plus percentage EBITDA margin. While there could be some margin fluctuation on a QoQ basis, the CEO believes they have good leverage in terms of fixed cost to achieve margins in the 20% plus range.
  • In some of their cloud implementation business, which was acquired through Evosys, the work is delivered through business outcomes. There are elements of pricing and realisation that can be leveraged based on the outcome delivered.
  • In cases where skills-based work is in high demand, customers realise they need to pay more. There are certain skills for which the company can command higher prices.
  • Customers are going through digital adoption and they are changing business models. They are changing their supply chains. It is a huge transformation and technology is a big enabler. Mr. Chandrana believes this trend will continue at least for the next one and a half or two years.
  • There is a huge opportunity for automation and digital adoption. Cloud has taken off in a big way, and MASTEK is investing heavily in that space for the next 18-24 months.

Asset Multiplier Comments

  • MASTEK’s presence in the local government has been established through the Evosys acquisition. There could be new business opportunities for the company with the UK government as a result of Brexit.
  • A strong order book, ramp-up of large deal wins, revival of the UK and US businesses are indicative of the revenue growth for MASTEK in the near term.

Consensus Estimate: (Source: market screener website)

  • The closing price of MASTEK was ₹ 2,899/- as on 14-September-2021. It traded at 31x/ 25x the consensus earnings estimate of ₹ 94/ 114 for FY22E/ 23E.
  • The consensus target price of ₹ 2,890/- implies a PE multiple of 25x on FY23E EPS of ₹ 114/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Wage hikes impacted margins in Q1FY22 – Tech Mahindra

Update on the Indian Equity Market:

On Monday, NIFTY ended higher at 15,885 (+0.8%) as it closed near the intraday high level of 15,983. Among the sectoral indices, REALTY (+4.8%), AUTO (+1.4%), and IT (+1.1%) ended higher, and there were no sectoral losers. Among the stocks, TITAN (+3.6%), SHREECEM (+3.5%), and BPCL (+3.1%) led the gainers while UPL (-2.3%), TATASTEEL (-1.5%), and BAJAJFINSV (-0.6%) led the losers. 

Excerpts of an interview with Mr. CP Gurnani, MD&CEO, and Mr. Milind Kulkarni, CFO of Tech Mahindra (TECHM) with CNBC TV18 on 30th July 2021:

  • A few of the things that worked well for TECHM over 1QFY22 were that the company focused on bringing in large deals that help in bringing order backlog and predictability in the operations. 
  • All of the company’s capital allocation is towards cloud and artificial intelligence (AI). TECHM has also made 5G investments in software-defined networks and cloud-based networks. The company usually looks forward to deal wins of US$ 800-1,000 mn every quarter and has signed one of its largest deals in healthcare in 1QFY22.
  • The company did better in a seasonally weak quarter and was able to maintain margins of 15%. There could be tailwinds coming from operating leverage and headwinds coming in terms of a higher cost of the employee addition and retention. Yet, the company is confident of maintaining the EBITDA margin.
  • Speaking of the company’s costs, there have been two increases. One is the salary increments, second is that the company had to employ a higher number of onsite contractors due to Covid restrictions. The company recovered from the impact partly through operational efficiency with improved utilisation of 60 bps and through increased offshoring.
  • Inorganic growth is going to continue to be the company’s differentiator. The company has improved a lot of synergy goal delivery, and integration capability. The company is also getting a lot of management talent through its acquisitions.
  • The company had planned for 16-18% attrition as the overall demand is not only for Tech Mahindra. The management has repurposed the company to look at tier 2 cities like Nagpur, Trivandrum, Chandigarh, Bhubaneshwar, and Kolkata for hiring. But the management may give another salary hike if the market moves in that direction.

Asset Multiplier Comments

  • As the country recovers from the second covid wave, the strong demand for the entire IT sector augurs well for the company in the mid to long term.
  • With strong deal wins, robust pipeline, margin levers like automation, offshoring, and cost optimization by centralising the back offices of newly acquired entities, TECM is confident of delivering 15%+ EBIT Margins. We believe this confidence is justified. 

Consensus Estimate: (Source: market screener website)

  • The closing price of TECHM was ₹ 1,206/- as on 2-August-2021.  It traded at 19x/18x/16x the consensus earnings estimate of ₹ 63/69/77 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,210/- implies a PE multiple of 16x on FY24E EPS of ₹ 77/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”