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Weak operating margin but near to medium term outlook remains strong

Our view and valuation

Overall, the sequential revenue growth was inline with expectation; but the EBIT margin came much below estimates. The revenue growth is led by the Services segment (IT Services and ER&D), that continues to maintain growth momentum. The P&P Segment is expected to grow at mid single digit YoY. We expect revenue growth to be more predictable and robust going ahead as IT services contribution rises in revenue mix. Deal booking remains strong and that offers strong growth visibility for FY23. We expect it to maintain 18% + EBIT margin for FY23 led by improving employing pyramid, better utilization and positive operating leverage. Employee attrition should come in control over next few quarters. We expect revenue CAGR of 14.2% over FY22-24E, with average EBIT margin of 18.6%

Valuation remains attractive as it trades at PE of 14.7x on FY24E EPS. We maintain BUY Rating on the stock with revised target price of Rs 1,140/share at 18x on FY24E.

Result Highlights

*  Reported revenue of Rs 234.6bn (up 3.8% QoQ in INR terms, up 1.1% QoQ in USD terms). The CC revenue growth for the quarter was 2.7%. In terms of segments, IT services grew 2.0% QoQ in cc terms, ER&D Services grew 3.7% QoQ in cc terms; while product and platform grew 5.1% QoQ in cc terms. Mode 2 segment continues to lead the growth momentum growing at 39.3% YoY in cc terms.

* Among verticals, the growth was led by Technology and Services (up 10.9% QoQ); Telecom, Media and Entertainment (up 4.3% QoQ)

* EBIT margin declined by 100 bps QoQ to 17% was due to productivity related commitments to clients, supply side constraints and Travel and Visa related costs.

* Reported strong deal win with TCV of new deal wins at $2,054mn (up 23.4% YoY), with good mix of big and medium sized deals

* $100mn clients increased by 3 YoY, $50mn clients increased by 5 YoY

* Added 2089 employees during the quarter to reach 210,966 employees. LTM attrition increased by 190 bps QoQ to 23.8%.

* DSO increased by 4 days QoQ to 65 days.

* Net cash stands at $1.7bn compared to $2.4bn as of Q4FY22.Declared dividend of Rs 10/ share

* Maintained FY23E guidance with revenue growth for FY23 to be between 12-14% in cc terms; with EBIT Margin expected to be between 18-20%.

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