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Continuing the growth momentum with stable margins 

Indian offshore techs continue to see strong growth momentum from recent quarters with reasonable margin defence despite the supply side pressures that have emanated in terms of high employee turnover across the board. Companies remain confident of CY22/FY23 growth prospects as the need for compressed digital transformation and cloud migration drives demand. Companies continue to sound more confident of pricing strength in an inflationary environment and expect stability on attrition to emerge over the next couple of quarters. While we remain confident of underlying demand strength heading into CY22/FY23, we reckon some relative growth differentials emerge as the tech upcycle matures and hence remain selective. HCL, INFO and TECHM are our BUY’s amongst Tier I’s. PSYS and MPHL are our top picks amongst Tier II techs.

* Revenue growth continued to be strong in a seasonally weak Dec quarter:

Despite the typical weak seasonality of the Dec quarters, the Indian offshore techs continued to see strong sequential revenue performance broadly. YoY c/c revenues growth was stable to improving across the TWITCH group during 3QFY22. Similarly the Tier II techs recorded strong sequential growth performance and thereby maintained the ‘flat to improving’ YoY revenue growth trajectory in 3QFY22.

* Margins continue to hold up well for most companies with the exception of Zensar amongst the Tier II techs:

Tier I techs saw broadly stable EBIT margins on a sequential basis (unlike the usual trend of growth leverage aiding QoQ improvement in 3Q!). Tier II techs saw ‘stable to improvement in EBIT margins’ with the exception of Zensar. Margin perfromance continues to be supported by growth leverage , offshore shift even as the supply side pressures in the form of higher attrition, strong employee addition and retenton costs continue to pose downside risks.

* Companies stepping up fresher hiring further even as overall hiring remains robust:

TWITCH group added 77k+ employees during 3QFY22 which was down QoQ but quite strong given the hiring seen through the course of the past 12 months. Both Infosys (55k V/s 45k earlier , note that this was 25k at the start of the year) and TCS raised fresher hiring targets (onboarded 34k freshers in 3Q on the back of 43k freshers hired in 1HFY22) for FY22.

* More confident commentary on pricing by Indian techs finally!:

Indian offshore techs have been reluctant to call out pricing strength unlike their global peers until recent quarters. 3QFY22 results saw Indian techs explicitly calling out pricing strength in an overall inflationary environment as a margin lever. We reiterate our viewpoint ( as expressed here and here) that Indian techs are seeing a repeat of the ‘2004-08’ phase wherein they enjoyed both volume and pricing leverage.

* EPS cuts for a few; time to remain selective as we see relative growth differentials start showing up:

3QFY22 earnings season was a mixed bag with regards to EPS changes post 3QFY22 results. We cut earnings estimates for TechM and Wipro amongst the Tier I techs and Coforge and Zensar amongst the Tier II techs. While we continue to see strong industry demand for CY22/FY23, we reckon that some relative growth differentials are likely to emerge as compared to a quasi uniform rebound seen in the sector over the past 6 quarters as also highlighted by our analysis in the past (refer Indian IT Services Rising tide lifts all boats? dated Feb 10’2021). We see some relative growth leadership emerge within the sector as the tech up-cycle matures. Thereby continue to retain faith with BUY rated INFO, HCLT and TECHM amongst the Tier I Techs. PSYS and MPHL are our top picks amongst the Tier II techs.

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