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Hiring remains robust and likely to surpass prior peaks

The hiring by the Indian IT Services companies continues to remain very solid and robust lending confidence to the broader street expectations of demand strength. The ‘TWITCH’ group or the top 6 Tier I companies added 58k people at a net level in 1QFY22 and we continue to find more confidence that the net hiring will exceed the prior peak seen in FY12 (in line with our viewpoint, refer link here). The aggressive hiring has been driven by the demand strength as the Covid crisis has resulted in compressed demand for digital transformation and the increased validation of the benefits and value of the Global Delivery Model.

This is leading to significant confidence in offshore led delivery (offshore % of revenues has increased by 200-600 bps over the past 12 months) and is also driving significant recruitment. Multiple companies have increased their fresher hiring plans as well in order to fulfil demand and address supply side/cost pressures through a broader pyramid.

The emerging dynamic typically favours scale players over Tier II companies albeit underlying growth and pricing leverage could keep margins steady in the foreseeable future. We continue to see a very strong FY22 (with further upgrades to FY23 growth) with the current cycle being reminiscent of the 2004-07 period of strong volume as well as pricing growth for Indian IT that could continue to support the rich valuations for the sector as a whole in the near term.

* Hiring confidence fuels optimism:

The ‘TWITCH’ group or the top 6 offshore firms added 58k+ on a net level in 1QFY22, continuing the trend of pick up in hiring seen through the past few quarters. TechM also added 5k+ people during 1QFY22, reversing the trend of sequential decline in headcount seen through 5 of the 6 prior quarters for it. Even Tier II techs continue to hire aggressively reflecting the strong demand environment as clients embrace a compressed move towards digital transformation.

Further the Covid crisis has reaffirmed the faith in the Global Delivery model as is evident in the 200-600 bps increase in offshore % of revenues across the industry. The aggregate hiring by the Tier I techs has not crossed the FY12 levels since then and is certain to exceed that in FY22 , in line with our viewpoint (refer link here)

* Companies expand fresher hiring targets to fulfil demand and manage cost side pressures:

Companies like INFO have raised their fresher hiring targets for FY22 with the company now looking to hire 35k freshers in FY22 ( V/s 25K earlier). Similarly peers like CTSH (Unrated) and HCLT have scaled up their fresher hiring plans for the year. CTSH has suggested that it will hire 30k freshers in CY21 and plans to increase the intake to 45k in CY22. Similarly Global Techs like CAP (Unrated) also plans to hire 60k people in India ( at a gross level, ~150k people in India as of 2QCY21) with an equal mix of freshers and laterals.

We reckon that the increased impetus on fresher hiring is reflective of increased confidence in demand strength sustaining as well as would aid in terms of managing the emerging supply side/cost side pressure through a broader employee pyramid. The emerging dynamic as such favours scale peers but we believe that the growth and pricing leverage could limit margin pressures in the near term across the sector.

* Current cycle reminiscent of the 2004-07 period for Indian techs:

We reckon that the current up-cycle is reminiscent of the 2004-07 period for Indian techs when they enjoyed the benefit of strong volume as well as pricing growth which helped negate the talent side pressures and helped the companies maintain and manage profitability.

The 1QFY22 results and our channel checks continue to confirm the demand strength which could drive upgrades to FY23 growth expectations and support the rich valuations across the broader sector. HCLT and INFO are our top picks amongst the Tier I techs; PSYS and MPHL are our preferred BUY’s in the Tier II coverage.

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