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Mixed operating performance as it continues to face pressure on margin

Our view and valuation

Overall, it reported mixed performance as revenue was inline with estimates; while margin was below expectation. It continues to face supply side challenges which has impacted the margin. However, improving employee pyramid led by fresher hiring, increasing utilization, higher offshoring trend and pricing action should support operating margin going ahead in FY23. Deal wins remain healthy as it reported deal win of ~$802mn in the quarter and that provides revenue growth visibility.  It is expected to benefit from rising 5G related deal momentum as it remains highly dependent on telecom vertical(~40% of revenue); While the enterprise vertical seems to be getting traction led by BFSI and Technology verticals. We estimate revenue CAGR of 13.4% over FY22?FY24E with average EBIT margin of 14.1%

We maintain ADD Rating on the stock with revised target price of Rs 1,172 per share at 15.5x on FY24E EPS.  We have cut down our target PE multiple from 17.0x to 15.5x to account higher cost of capital(WACC) in this environment of high macroeconomic uncertainty. The stock trades at PE of 13.4x on FY24E EPS.

Result Highlights

* Reported revenue of Rs 127.1bn( up 4.9% QoQ in INR terms, up 1.5% QoQ in USD terms). The sequential growth was led by industry verticals such as Technology( up 6.4% QoQ), Retail and Transport( up 5.5% QoQ). While, Communication and Media( up 1% QoQ) and BFSI( down 2.9% QoQ) had muted quarter.

* EBIT margin declined by 220 bps QoQ to 11%, led by wage hikes and higher other expenses. SG&A increased by 16.6% QoQ.

* Demand environment remained strong as it reported net new deal wins of $802mn vs $1,011mn in Q4FY22 and $815 mn in Q1FY22.

* Offshore effort mix remained flat QoQ at 72.8%. Reported 1,262  no of active clients vs 1,224 active clients in Q4FY22.

* Added ~6,800( up 4.5% QoQ) employees in the quarter to reach 1,58,035 employees. LTM attrition down 2 percentage points QoQ to 22%. Utilization was down 1 percentage point QoQ to 83%.

* DSO( Including unbilled ) increased by 3 days QoQ to 100 days.

* Cash and equivalents was almost flat QoQ to $1.1bn

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