The Global Lens - March 2022
In this quarter’s edition, we highlight (1) global peers continue to confirm underlying demand strength despite recent macro volatility, (2) pricing confidence (also seen in strong improvement in revenue productivity) seen across global techs over the recent quarters (in line with our view - Indian IT Services : Higher offshore pricing possible? and Offshore pricing increase 2.0) and (3) continued strength for the Global Hyperscalers. Akin to Indian techs, global techs have also seen sharp pullbacks in CY22YTD (and despite EPS upgrades!) due to broader market weakness and increasing concerns on global uncertainty. Industry checks and commentary from companies suggest no near term hit either; though we note that consensus USD estimates will see forex related adjustments. HCLT, INFO and TECHM are preferred picks amongst Tier I techs. PSYS and MPHL are top picks amongst the Tier II’s.
Global peers continue to ‘beat and raise’: The global peers reported strong revenue growth performance in 1QCY22 beating expectations (both consensus and guidance) and raising their outlook for CY22/FY23. The companies continue to reaffirm the demand strength despite global macro volatility with players like Globant and Endava suggesting that the elevated level of growth is likely to continue in CY22/FY23. EPAM which had to withdraw its outlook due to the Russia-Ukraine war hopes to get back to sequential growth from 3QCY22 onwards after seeing a blip in 2QCY22. Similarly Globant raised its CY22 revenue growth outlook to ‘at least 36.3%’ YoY USD revenue growth (V/s ‘atleast 35% YoY’ earlier) despite baking in ~200 bps forex headwinds for the year now.
Increased confidence on pricing leverage with high labour inflation: Global peers continue to highlight pricing strength aided by elevated demand and the tight labour inflation in client markets as well. Companies like Endava suggested that they have increased onshore wages by ~4% average in CY22 (2-3% in normal times) and expect to get higher than usual pricing increases as well through the course of the year. Similarly peers like Globant and EPAM expect pricing strength to neutralise the cost pressure and help defend margins in the historical range.
Hyperscalers marching strongly: The Hyperscalers continued to do well in 1QCY22 with YoY revenue growth of 37-49% YoY for the 3 hyperscalers. Clients are increasingly open to longer term commitments on the cloud which is reflected in (1) increase in duration of the Cloud contracts for both AWS and GCP and (2) increase in performance obligations and weighted average period of remaining obligations. We believe this could be led by the fact that the Covid crisis has accelerated the trend towards digital transformation for enterprises, which is leading them to commit to longer-term contracts and secure cheaper annual rates
Global techs have also seen sharp correction CY22YTD even as they exude confidence on growth momentum: Global IT Services peers have seen a sharp pull back in CY22YTD on valuation multiples driven by macro concerns and broader market weakness even as the companies have expressed confidence on elevated levels of demand continuing through CY22/FY23 which has aided the EPS upgrade cycle for Globant and Endava through recent months as well. We note that the commentary from Indian techs coupled with our industry checks also confirms no let-up in near term demand though cross currency headwinds are likely to pull down reported USD growth estimates while the downside risks to EPS estimates remain limited. INFO, HCLT and TECHM are our preferred picks amongst Tier I techs. Amongst Tier II/III techs, we prefer PSYS, MPHL, Zensar and Firstsoruce
Hyper scalers continue to see strong revenue growth
The Hyperscalers continued to do well in 1QCY22 with YoY revenue growth of 37-49% YoY for the 3 hyperscalers. While Azure saw an increase in YoY growth trajectory in 1QCY22, GCP’s YoY revenue growth trajectory has remained unchanged in 1QCY22. AWS saw a slight moderation in revenue growth in 1QCY22 though we note that the performance obligations continue to grow strongly for AWS during the period.
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