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Weaker quality revenue growth

Revenue growth in Q1FY22 was largely in-line with our estimates. However, the quality of growth was weaker than usual. The Rs1.82bn incremental revenue (QoQ) in Jun-21 was accompanied by Rs1.45bn rise in receivables. This was despite a drop in revenue share from fixed price projects (71% to 68%). The normalisation impact of this in subsequent quarters needs to be seen. Lower D&A run-rate (by 90bps) led to 60bps beat on our EBIT margin expectations. Management reiterated the outlook of industry leading double-digit growth for FY22. We factor in sales growth of 20% YoY (CC) in FY22 partly aided by low base effect of FY21 (or 9.5% CAGR over FY20-22E). Investor focus will likely shift to steady state growth / margins in FY23 and ahead. (1) Expected moderation in cloud activity, (2) rise in share of onsite effort and (3) reversal of covid-led cost savings (e.g. travel) are the key headwinds to watch out. At 28x FY23E EPS, street is already factoring in mid-teens revenue growth with 20%+ EBITDA margin over the medium term. Scope for further surprises / upgrades are less likely.

* In-line revenue and margins. Revenue growth was largely in-line with our estimates. Across verticals, growth was broad based. Strong recovery in Travel, Transportation & Hospitality (~13% QoQ, US$) was the key growth driver for Q1FY22. BFSI (+6.4% QoQ, US$), which has been stagnant for some time, fired well during this quarter. Key geographies like North America (7.7% QoQ, US$) reported strong growth. Large deal ramp up in continental Europe seems to have driven lumpy growth in the geography (+30.4% QoQ, US$). Growth in top account was healthy (5% QoQ, US$).

EBITDA margin contracted 160bps QoQ, largely in-line with our expectations. Headcount addition (-170bps impact), visa cost (-40bps impact), cross currency, operating leverage and operational efficiencies (+50bps impact) were the key margin movers for the quarter. Lower D&A run-rate (by 90bps) and higher other income led to strong beat on earnings. TCV of deal wins remained healthy at US$504mn.

* Investor focus will shift towards steady state growth / margins in FY23++. We factor in sales growth of 20% YoY (CC) in FY22 partly aided by low base effect of FY21 (or 9.5% CAGR over FY20-22E). Investor focus will likely shift to steady state growth / margins in FY23 and ahead. (1) Expected moderation in cloud activity, (2) rise in share of onsite effort and (3) reversal of covid-led cost savings (e.g. travel) are the key headwinds to watch out. At 28x FY23E EPS, street is already factoring in mid-teens revenue growth with 20%+ EBITDA margin over the medium term. Scope for further surprises / upgrades are less likely. Maintain HOLD.

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