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Mixed financial performance for the quarter

Our view and valuation

Overall, it reported mixed financial performance for the quarter as revenue was inline with estimates; but the EBIT margin was below estimates, on supply side pressure and higher Sales and Marketing costs The outlook remains strong led by robust demand environment and that is also reflected in increased revenue growth guidance of 14? 16% in cc terms for FY23. Deal pipeline remains strong and that provides strong revenue visibility. It continues to invest in scaling up its cloud offerings and automation tools to capitalize on the demand environment. Certain cost related to travel and admin are expected to come back but with improving employee pyramid and moderation in employee attrition, it is expected to report sequential improvement in margin over next 3 quarters. Hybrid model of work should help to optimize admin costs. We estimate revenue CAGR of 15.3% over FY22?24E with average EBIT margin of 22.7%

We maintain BUY rating on the stock with revised  target price of Rs 1,848 at 25x on FY24E EPS. We have cut down our target valuation PE multiple from 27.5x to 25.0x to account for higher cost of capital(WACC) in this environment of high macroeconomic uncertainty. Trades at PER 20.4x on FY24E EPS.

Result Highlights

* Reported revenue of Rs 344.7bn(up 6.8% QoQ in INR terms, up 3.8% QoQ in USD terms).The sequential growth was broadbased  across verticals, with strong uptick seen in Manufacturing( up 46% YoY), Communication( up 24.7% YoY)

* Digital now contributes 61% to revenue compared to 59.2% in Q4FY22

* EBIT margin declined by 150 bps QoQ to 20.1%, led by higher direct cost that grew 9.5% QoQ.

* Large deal TCV was slightly muted at $1.7bn( vs $2.3bn in Q4FY22 and $2.6bn in Q1FY22). The volume of mid/ small sized deals have increased in last few quarters.  

* Offshore effort mix declined by 30 bps QoQ to 75.7%. Added 106 clients during the quarter compared to 110 in Q4FY22

* Added ~21k employees( 6.5% QoQ) in the quarter to reach headcount of 3,35,186. LTM Attrition increased by 70 bps QoQ to 28.4%.

* Excluding trainees, utilization was down 230 bps QoQ to 84.7%.

* DSO reduced by 4 days QoQ to 63 days in the quarter.

* Cash and investments was down to $4.4bn compared to $4.9bn as of Q4FY22.

* Increased FY23 revenue growth guidance to 14?16% compared to 13?15% earlier guidance; Maintained EBIT margin guidance at 21% to 23%

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