IT

23 Jun

Navigating through the challenges of the IT industry

During the 4QFY22 result season, stocks of IT services companies plummeted due to managements’ comments on probable medium-term margin pressures. IT stocks have been in a slump since then and have been struggling to show some signs of reversal. How does one navigate through this sector?

Demand prospects for Digital and Cloud Services:

Digital services comprise of service and solution offerings of an IT company that enable clients to transform their businesses. These include offerings that enhance customer experience, leverage AI-based analytics, and big data, engineer digital products and IoT, modernize legacy technology systems, migrate to cloud applications and implement advanced cybersecurity systems. Most firms are transitioning through IT and cloud-based solutions to meet competition and cut costs. Global lockdowns and work from home (WFH) culture have accelerated the expansion of digital services.

The BFSI sector is the largest contributor to the revenues of many IT companies. Enterprise clients in the Financial Services sector have ramped up tech spending to enhance customer experience, digitize core systems, and leverage technology to strengthen risks and controls.

Source: Company quarterly update

Cloud migration has picked up pace in the last 3 years. The recent global lockdowns and WFH culture led by Covid-19 have acted as a trigger to accelerate this journey. Enterprise clients are looking to migrate to cloud-based operations, which act as a business continuity tool in times of uncertainty. The shift to hybrid working models has contributed to the demand for IT services. Cloud transformation helps clients deploy streamlined operational efficiencies, increased adaptability and scalability, data security, and cost management.

Supply-side constraints

The IT industry has been facing certain structural headwinds such as:

Attrition levels: Voluntary attrition is when employees leave an organization for better prospects in the industry. With a robust demand environment, IT services organizations have seen higher attrition, resulting in supply-side constraints since 2QFY22. These challenges are expected to put pressure on margins over the medium term. IT companies are taking measures to stabilize attrition levels by correcting compensations, faster career growth, skill development programs, and greater engagement with employees.

Source: Company quarterly update

Subcontracting costs: Subcontracting is the process of outsourcing partial obligations of a contract. Due to tight labor market conditions and the non-availability of talent in-house, IT firms have turned to subcontractors. Rising subcontracting costs have brought margins under pressure. Reduced dependency on these services through increased hiring programs and stabilization of attrition levels can subside margin pressures.

Higher retention, hiring costs, and travel costs: Wage increments, employee retention costs, and accelerated hiring are some of the key factors that could drive margin pressures. With the reopening of economies, we expect travel costs to normalize over the medium term.

Industry-wide outlook:

While the above-mentioned factors are expected to take a hit on the profitability of IT services companies, we expect demand prospects to be robust with digital transformation and cloud migration being a key area of focus for enterprise clients. We expect margin pressures to persist over the medium term.

Should one invest now?

We believe the favorable long-term outlook remains intact, driven by enterprise client demand for cloud and automation, improved utilization levels, as well as the normalization of inflationary pressures. Increased costs due to supply challenges are likely to be transient. This may be the right time for investors with a longer time frame for investing to look at the sector.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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30 May

A three-dimensional approach to 5G -TCS

Update on the Indian Equity Market:

On Monday, NIFTY closed in the green at 16,661 (+1.9%), led by M&M (+5.0%), TITAN (+4.9%), and INFY (+4.6%). KOTAKBANK (-2.0%), JSWSTEEL (-1.9%), and SUNPHARMA (-1.7%) were few of the laggards. Among the sectoral indices, CONSUMER DURABLES (+4.2%), REALTY (+4.1%), and IT (+3.9%) led the gainers, and there were no losers for the day.

Excerpts of an interview with Mr. N Ganapathy Subramanium, Chief Operating Officer, TCS published in Business Standard on 30th May 2022:

  • The annual report outlines the company’s ambition to reach USD 50bn revenue. Currently, TCS has 600,000 employees with revenues of USD 25bn. It doesn’t want to double the employees to double its revenues, so there is an element of nonlinearity there. The company doesn’t just want to work with clients, it wants a play in the ecosystem.
  • TCS wants to create systems that give real-time information.
  • Metaverse is currently a hype cycle. If it succeeds, the COO would like TCS to be present in that segment as well.
  • TCS will continue to enter unchartered territories. Currently, it is not present in B2B businesses, it may get into consumer businesses in the future.
  • BFSI, being one of the early adopters of technology consumes the largest amount of technology talent and resources. Almost every aspect of banking is changing and demand for transformative solutions in the banking space is at an all-time high.
  • TCS is the largest provider of technology services and has a solid play in the BFSI segment. About 30-35 percent of the world’s population uses the company’s product. In insurance as well, it has built a solid platform, with about 20-25mn policies administered across major markets.
  • Many Indian insurance companies use the TCS platform for processing policies and claims, in both life and non-life.
  • Discussions with clients don’t seem to suggest the peak is over for the IT sector.
  • For FY22, the total contract value (TCV) stood at USD 11.3bn. The quarterly run rate is USD 8-9bn. A year back, it was USD 6-7bn. The company’s focus is on getting the deals, irrespective of the size.
  • TCS is supporting several customers in rolling out the 5G network. Its approach to 5G is three-dimensional. First act as a systems integrator to integrate, deploy the network, and operate it for telco customers. Second how to help enterprises build a private 5G network within their facilities. Third, leverage the two network layers to build vertical applications on top of it. The company’s strength is in software, and with more networks getting softwarised TCS will have a bigger role to play beyond applications.

Asset Multiplier Comments

  • Post FY22 earnings, the management alluded that tech spending continues to remain strong and believes it would be the last to be cut despite an economic downturn. The company is focusing on tech integration led hyperscaler deals in its Industry 4.0 initaitive helping it win more transformational deals.
  • Deal wins across segments, reduction in subcontractor costs and better realisation would likely drive revenue growth in the medium term, while employee costs and attrition are likely to be a drag.

Consensus Estimates: (Source: market screener and investing.com website)

  • The closing price of TCS was ₹ 3,380/- as of 30-May-2022.  It traded at 29x/ 25x/ 23x the consensus earnings estimate of ₹ 118/ 133/ 146/- for FY23E/FY24E/FY25E respectively.
  • The consensus target price of ₹ 3,939/- implies a P/E Multiple of 27x on the FY25E EPS estimate of ₹ 146/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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24 May

E-Sports to be the new driver of growth – Nazara Technologies

 

 

Update on the Indian Equity Market:

On Tuesday, NIFTY settled lower at 16,125 (-0.6%). DIVISLAB (-6.0%), TECHM (-4.0%), and GRASIM (-3.9%) were the top losers. DRREDDY (+2.0%), HDFC (1.7%), and KOTAKBANK (+1.4%) were the gainers. Among the sectors, MEDIA (-2.6%), IT (-1.9%), and HEALTHCARE (-1.5%) led the losers. FINANCIAL SERVICES (+0.3%), and BANK (+0.1%) led the gainers.

Excerpts of an interview with Mr. Manish Agarwal, CEO, Nazara Technologies with Economic times on 24th May 2022:

  • The company’s revenue mix is an evolving pie chart as it is operating in 5 growth segments viz gamified learning / E-Sports / freemium / ad tech and skill-based real money gaming. All of these areas have a very large Target Audience Market and strong tailwinds based on organic growth momentum and inorganic velocity in different segments.
  • Gamified learning was the largest segment in FY21 and now E-Sports is the largest segment in FY22 the company believes E-Sports has the potential to further evolve if mid-size M&A were to happen in skill-based real money gaming.
  • The online gaming segment has been on the rise for a few years now. In 2020, this segment grew to Rs 79 billion and had a steady growth of 28% in 2021. Even with the lockdown being lifted, this sector has continued to show growth.
  • The Online Gaming sector was valued at Rs 101 billion in 2021, according to an EY FICCI report. The number of esports players doubled from 3,00,000 in 2020 to 6,00,000 in 2021. Additionally, the number of online gamers grew by 8% from 360 million in 2020 to 390 million in 2021, and is expected to rise to 450 million by 2023. The gaming segment is expected to grow exponentially in all verticals including E-Sports for the company.
  • The management expects the online gaming industry to reach 500 million gamers by 2025 and will become the fourth largest segment of India’s M&E sector. It is expected to reach Rs 153 billion at a CAGR of 15%. This growth is expected to be mainly driven by three things: NFTs, Metaverse, and esports.
  • For the next few quarters – the management expects esports to continue to build on the momentum of Q4 and the opening of offline events and the growth of D2C biz with M&A of Wings and Planet Super Hero will be key drivers of growth for the company.
  • The company is present in 5 of the most dominant consumer trends in gaming and will also participate in web 3 so besides this, the management doesn’t think there are any unexplored new opportunity segments. The management’s aim this year is to strengthen leadership in each of the segments that the company operates across emerging markets outside the Indian subcontinent.

Asset Multiplier Comments

  • The online gaming sector is still an underpenetrated segment in India. With increasing internet accessibility and smartphone availability, India offers a largely untapped market in the online gaming segment, which has been accelerated by the pandemic and lockdowns.
  • Being the market leader in this segment, Nazara Technologies is well poised to strengthen its leadership in the E-sports category for the medium term.

Consensus Estimate: (Source: market screener website)

  • The closing price of Nazara Technologies was ₹ 1,200/- as of 24-May-2022.  It traded at 28x/ 21x the consensus earnings estimate of ₹ 43/ 58/- per share for FY23E/FY24E respectively.
  • The consensus target price of ₹ 1796 /- implies a P/E Multiple of 31x on the FY24E EPS estimate of ₹ 58/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

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10 May

Banking on technological transformations in BFSI sector – Intellect Design Arena

Update on the Indian Equity Market:

On Tuesday, NIFTY ended at 16,240 (-0.4%). HINDUNILVR (+3%), ASIANPAINT (+2.9%) and INDUSINDBK (+2.4%) were the top gaining stocks. COALINDIA (-7.5%), TATASTEEL (-7.3%) and ONGC (-7%) lost the most.

Within the sectoral indices, PRIVATE BANK (+0.8%), BANK (+0.6%) and FINANCIAL SERVICES (+0.5%) closed in the green while METAL (-5.2%), REALTY (-2.9%) and OIL & GAS (-2.3%) ended in the red.

 

Excerpts of an interview with Mr. Arun Jain, Chairman & MD, Intellect Design Arena (INTELLECT) with The Economic Times on 9th May 2022:

  • The company, which mainly sells software to banks and financial institutions, showcased an FY22 revenue growth of 25%. EBITDA and PAT grew by 33% and doubled their cash balance over the previous year. Subscription revenues grew by 112%.
  • Sequentially, EBITDA Margins were lower due to an increase in salary costs, a multi-million-dollar deal with a Russian Bank in Germany falling through owing to the Russia-Ukraine war, and capacity building for a USD 75mn quarterly revenue run rate.
  • The company’s license-linked products have a life cycle of about 10 years. This translates into continuing revenue streams in the form of maintenance, production support agreements, change requests, etc. The revenue from these license-linked products crossed the mark of ₹ 10bn in FY22. The company joined hands with 48 new clients in FY22.
  • An improvement in margins over the last two years was achieved by shrinking the product delivery cycle to 6 months against the industry average of 12-18 months. This was made possible by being operationally efficient. Also, the pandemic led cost savings in travel and business promotion upped the margins.
  • Its license-linked revenues (license, AMC, and subscription) make up 56% of revenues. The subscription revenue growth of 112% YoY translated to higher margins.
  • The company is moving its products to platform-based. Platforms consist of multiple products. It is experiencing a YoY increase in average deal size by winning large transformational deals in multiple countries. Banks and financial institutions’ digital transformation & cloud adoption journeys play a big role in achieving the company’s target of a 20% revenue growth year on year.
  • Focusing on ‘destiny deals’, the company is making additional investments in geographies like Vietnam, France, and Saudi Arabia, to deepen engagements with their major clients. This will bring in more subscription deals.
  • The company enjoyed success with Government eMarketplace, LIC, and AMFI. Going ahead, the company expects to offer a retail / corporate banking ecosystem.

Asset Multiplier Comments:

  • The banking services penetration in India will rise with a rise in India’s per capita income. The expansion of the banking & financial services sector in rural India will create more demand for digital transformation which provides scalability.
  • This may eventually result in better revenue prospects for a company like Intellect Design Arena from banks, NBFCs, insurance companies, and the likes.

Consensus Estimates:

  • The closing price of Intellect was ₹ 608/- as of 10-May-2022. It traded at 23x/16x the consensus EPS estimate of ₹ 26.3/37.9 for FY23E/FY24E respectively.
  • The consensus price target price for Intellect is ₹ 940/-. It implies a P/E multiple of 25x on the FY24E EPS of ₹ 37.9/-

 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

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09 May

Plan to become USD 500 mn company by 2026 – Cigniti Tech

Update on the Indian Equity Market:

On Monday, NIFTY ended at 16,302 (-0.7 %) as it closed near the day’s opening level of 16,228. Among the sectoral indices, IT (+0.1%), was the only gainer, whereas MEDIA (-2.7%), PSU BANK (-2.3%), and OIL&GAS (-2.1%) led the losers. Among the stocks, POWERGRID (+3.1%), HCL TECH (+3.1%), and INFY (+2%) led the gainers, while RELIANCE (-4.3%), NESTLEIND (-2.9%), and HEROMOTOCO (-2.8%) led the losers.

Excerpts of an interview with Mr. Shrikanth Chakkilam, CEO & Non-Executive Director of Cigniti Technologies (CIGNITITEC) with The Economic Times on 8th May 2022:

  • The company’s 75% revenues come from five sectors: Banking, Financial Services and Insurance BFSI (20%), Travel and Hospitality TTH (16%), Retail and Ecommerce (15%), Healthcare and Life sciences HCLS (13%), and independent software vending ISV (12%). The management believes that these sectors support Cigniti’s revenue growth and will continue to do so during the digital transformation in these sectors in the coming years.
  • Attrition in FY22 was at an all-time high of 30%. The revenue per employee in US dollar terms is USD 45,378. The current job market has become highly volatile and more complicated than usual.
  • The high attrition has increased the cost of hiring, and also the cost of training new employees, direct and indirect costs for advertising available positions, performing background checks, paying out referral bonuses, etc.
  • Intangible costs to the company include management’s time spent reviewing resumes, making calls, and conducting interviews, as well as the time spent by dedicated recruiting staff and the HR department.
  • To deal with these challenges, the company is increasing freshers’ hiring, increasing re-skilling programs through online learning, and ensuring engagement initiatives.
  • The plan is to become USD 500 mn company by 2026, effective from 2021. The company increased its investment in building capabilities, sales, marketing infrastructure, and investment in employee retention and rehiring. These investments reduced the company’s margins which it expects to neutralize in FY23.
  • The company’s 85% of revenues come from North America, yet Mr. Chakkilam believes that the dollar variation is not a concern. He considers inflation as a nominal worry which is constant across businesses.
  • The company’s recently approved acquisition of Aparaa Digital (RoundSqr), a specialist in AI/ML, data, and blockchain engineering services would help strengthen its digital ambitions and help offer digital engineering services to its clients. The company is confident of retaining a high teen growth rate in FY23.

Asset Multiplier Comments

  • Though the management doesn’t consider dollar variation a concern for the company, a strengthening dollar, and its adverse rate movements may hamper the earnings of the company.
  • We expect the margins to remain impacted in the medium term due to the sectoral headwinds.
  • The company may not be impacted by commodity inflation as it provides software services. But as the employees start coming back to offices, its transport and commuting costs will go up thereby increasing its other expenses, which will also end up impacting its margins.

Consensus Estimates:

  • The closing price of Cigniti was ₹ 412/- as of 09-May-2022. The consensus price target estimate for Cigniti’s stock is unavailable. It traded at 17x the earnings of ₹ 33 for FY22.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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27 Apr

Citec acquisition helps to eliminate some cyclicality from the market – Cyient

Update on the Indian Equity Market:

On Wednsday, NIFTY settled 162 points lower at 17,038 (-0.9%). BAJFINANCE (-7.2%), BAJAJFINSV (-3.8%), and TATACONSUM (-2.8%) were the top losers. HEROMOTOCO (+3.9%), TATASTEEL (+1.3%), and ASIANPAINT (+0.6%) were the gainers. Among the sectorial indices, MEDIA (+0.07%) only were the gainer while FINANCIAL SERVICES (-1.5%),  FINANCIAL SERVICES 25/50 (-1.4%) and CONSUMER DURABLES (-1.1%) led the losers

Cyient announced the acquisition of Citec on 25th April 2022 for EUR 94mn. Citec is a plant and product engineering services company that serves customers in the energy and mining industry.

Excerpts of an interview with Mr. Krishna Bodanapu, MD & CEO, Cyient  on CNBC-TV18 on 25th April 2022:

  • The idea behind Citec acquisition is to expand Cyient’s footprint into plant engineering space where Citec is well-positioned. This is a good opportunity for the company to diversify the risk which exists in its current product portfolio and this acquisition helps to eliminate some cyclicality from the markets where the company operates.
  • Citec primarily operates in plant design and plant engineering. All the new plants are coming that especially focus on diversifying from some of the traditional sources of energy and focusing on renewables such as hydrogen, LNG, etc. These are the unique capabilities that Cyient is getting with this acquisition.
  • Margins of Citec are approximately similar to what Cyient generates. Citec has a good global mix and has strong capabilities in Europe, especially in the Nordic countries. Citec has a large team in India and it has built a good balance of domain expertise and cost.
  • Bodanapu said they see similar growth potential in the Citec business as that of Cyient. The growth of Citec will converge more towards the Cyient growth including the guidance that management provided of 13% to 15% in the next one or two years because the company has to leverage some of the synergies and harmonize some of the operations. The company expects double-digit growth in the immediate term and then converges into Cyient’s growth.
  • From the revenue side company expects good synergies because Citec primarily operates in three areas such as plant engineering, digital plant engineering, and product engineering where the capabilities of Cyient align very well with the Citec capabilities.
  • In terms of the transport business the growth in this segment will be a little bit lower but the company seeing the recovery in the transport business as the defense business continues to do well, the engineering work started to happen and the maintenance, repair, and operations continue to come up steeply. The company expects the transport growth will be lower but other sectors will deliver good growth.
  • Bodanapu said, the company is going to add a significant batch of freshers over the next few months. The supply crunch coupled with significant wage inflation and a rise in the other expenses is likely to cause inflation in the mid-single digits. The company expects there are going to be headwinds, especially with the cost inflation but also the company seeing good tailwinds where the company broke the linearity of adding people to add revenue.

Asset Multiplier Comments:

  • We believe that this acquisition helps Cyient to diversify its product portfolio and services because it is heavily concentrated in aerospace, rail transportation, and communication. Post this acquisition the company can expand its presence in Energy, Industrial, and Plant Engineering which currently contributes ~2% of total revenues.
  • Citec will provide access to multiple European-based global companies and this will also provide a cross-selling opportunity for Cyient.
  • We think that this acquisition enables Cyient to expand its presence in the Europe region, especially in the Nordic countries with the help of the strong brand value of Citec where Cyient has a relatively smaller presence.

Consensus Estimate: (Source: Marketscreener website)

  • The closing price of CYIENT was ₹ 899/- as of 27-Apr-2022. It traded at 17x/ 15x the consensus earnings estimate of ₹ 53/ 61 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,140/- implies a P/E Multiple of 19x on the FY24E EPS estimate of ₹ 61/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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26 Apr

Transport and Plant Engineering to drive growth going ahead – L&T Technology Services

 

Update on the Indian Equity Market:

On Tuesday, the Nifty 50 closed 247 points higher (+1.5%) at 17,200. The move was led by ADANIPORTS (+6.1%), BAJAJ-AUTO (+6%), and HEROMOTOCO (+4.9%). However, ONGC (-2%), APOLLOHOSP (-1%) and AXISBANK (-0.7%) were the top losers.

Within the sectoral indices, REALTY (+3.6%), AUTO (+2.8%) and PSU BANK (+2.3%) were the top gainers and no index closed in the red.

Excerpts of an interview with Mr. Amit Chadha, MD & CEO, L&T Technology Services (LTTS) on CNBC-TV18 taken on 24th April 2022:

  • The company had to face a minor slowdown in its telecom and Hi-tech business due to dropping a low-margin project from one of its top 30 clients. These two segments contribute around 20% to the revenue.
  • It had the highest quarterly deal wins and the deal pipeline is at a record level. The company got its 2nd USD 100mn deal in the last two years. The effect of these will reflect in the coming quarters.
  • FY23 growth will be driven by transportation and plant engineering segments. It bagged a large deal in the electric vehicle space.
  • To achieve and support this growth, the company is planning to employ 2,500 freshers in FY23. It employed 3,000 freshers last year. It is not seeing any respite in attrition levels for at least two quarters.
  • Despite the hiring, proposed wage increments, and travel costs coming back, the company has given guidance of an 18% EBIT margin for FY23. It has set its target to achieve a USD 1.5 bn revenue by FY25.
  • It has launched a new vertical within its Hi-tech segment for metaverse that will predominantly focus on experience through devices, platforms, and software. This vertical is expected to be much more profitable than the rest of the Hi-tech business.
  • Along with that, the company is making investments in 5G labs in Munich and transportation labs in the United States. The company has filed 98 new patents this year as compared to 28 filed last year.
  • The company is also looking to acquire a USD 50-100mn revenue company, as it has been acquiring companies every 18-24 months. A company within medtech space in the US and an automotive company in Europe are on the radar.

Asset Multiplier Comments:

  • High attrition has become an industry-wide phenomenon and hasn’t left any IT company unaffected. We think on the similar lines of most managements that attrition is unlikely to come down for at least a few quarters.
  • Attrition along with increased travel and wage hike is likely to be the headwinds in the near term. The company plans to offset these headwinds with growth, better quality revenues, and operational efficiency gains.
  • Given LTTS’s experience in the Engineering-R&D domain and the 6 new deal wins in 4QFY22, including one 100 million+ transaction, we believe the firm is on track to achieve its revenue target of USD 1.5 bn by FY25 and retain its EBIT margin projection of 18% or above.

Consensus Estimate: (Source: Marketscreener and TIKR websites)

  • The closing price of LTTS was ₹ 4,049/- as of 26-Apr-2022. It traded at 37x/ 31x the consensus earnings estimate of ₹ 108/129 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 4,621/- implies a P/E Multiple of 36x on the FY24E EPS estimate of ₹ 129/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

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20 Apr

Guidance of 20%+ EBITDA Margin for FY23E – Mindtree

Update on the Indian Equity Market:

On Wednesday, the Nifty bounced back and closed at 17,137 (+1.5%) with support from recovery in the beaten-down HDFC stocks and the IT sector. AUTO (+2.2%), OIL & GAS (+1.9%), and IT (+1.2%) were the top sectoral gainers. MEDIA (-0.5%), METAL (-0.3%), and PSU BANK (-0.2%) were the top losing sectors.

The top losers were BAJAJFINANCE (-2.9%), BAJAJFINSV (-1.3%), and ICICIBANK (-1.3%) while BPCL(+4.2%), TATAMOTORS (+3.8%), and SHREECEM (+3.7%) were the top gainers.

Edited excerpts of an interview with Mr. Debashis Chatterjee, MD & CEO, Mindtree with CNBC-TV18 on 19th April 2022:

  • When asked about the merger of Mindtree and L&T Infotech, the CEO stated that it is speculation at this point and will not be able to comment on it. There were opportunities where both the companies have worked together in the past on specific deals.
  • If the management change happens, some leverages can be gained by working together. It will be able to extract synergies if the merger happens as the portfolio of both entities is complementary to each other.
  • The demand environment is robust as the need for getting future-ready has never been more than what it is today. To become future-ready, one has to do it with digital transformation.
  • There is a change in deal patterns as the deal cycles tend to be more iterative and of shorter spends. But over some time, it tends to become a large engagement with the particular client.
  • The deals 2 years ago were more of manage services deals which were annuity deals for 3-4 years and would give revenue visibility for a longer period. Currently, some of these deals are getting converted into digital transformation deals which are used by the clients to maximize their revenue stream. These deals are iterative deals that are of shorter period, but over some time when these short deals are added, it does become large.
  • Mindtree has adopted the strategy where it leverages its consulting-led capabilities, creates outcome-based opportunities, and works with clients as their transformation partners for a long period.
  • The CEO commented to look at the Total Contract Value (TCV) on annual basis. TCV for FY22 is up by 17% YoY at USD 1.6 bn and the TCV annual growth is on track.
  • It maintains the EBITDA Margin guidance of 20%+ for FY23E.
  • CEO commented that margin is a factor of many levers and disciplined execution. Two years back, Mindtree had spent a lot of time putting up proper processes to ensure margin management, use the levers consistently, and get a predictable model.
  • The objective of the company is sustainable margins and to re-invest the excess profit into the business.
  • The mantra of the organization is profitable growth for which margins are equally important.
  • Wage hikes are expected from time to time and will impact the margins by 100-200 bps. But, this is already baked in the margin guidance given by the company.

Asset Multiplier Comments

  • With Mindtree’s strong capabilities in all layers of digital i.e. experience, data, and back-end/core systems, it is well-positioned to become a digital transformation partner and participate in Clients’ revenue growth.
  • Looking at the deal wins momentum, focus on garnering multi-year engagements and scaling up top accounts would aid in sales traction moving forward.

 Consensus Estimate (Source: market screener website)

  • The closing price of Mindtree was ₹ 3,668/- as of 20-April-2022. It traded at 32x/27x the consensus EPS estimate of ₹115/134 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 4,381/- implies a PE multiple of 33x on the FY24E EPS estimate of ₹ 134/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

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12 Apr

Aspiring for double-digit revenue growth in FY23 – TCS

Update on the Indian Equity Market:

On Tuesday, NIFTY ended at 17,530 (-0.8 %) as it closed near the day’s opening level of 17,585. Among the sectoral indices, PRIVATE BANK (+0.5%), and BANK (+0.4%) were the gainers, whereas REALTY (-2.8%), METAL (-2.7%), and OIL&GAS (-2.4%) led the losers. Among the stocks, AXISBANK (+1.6%), KOTAKBANK (+1.2%), and POWERGRID (+0.8%) led the gainers, while HINDALCO (-5.8%), COALINDIA (-5.0%), and GRASIM (-3.7%) led the losers.

Excerpts of an interview with Mr. Rajesh Gopinathan, MD & CEO, Mr. Samir Seksaria, CFO, and Mr. N Ganapathy Subramaniam, COO & ED of Tata Consultancy Services (TCS) with CNBC TV18 on the 12th April 2022:

  • The company’s deal wins of USD 11.3 bn comprise large deals and even spread deals of all sizes. The regular pipeline is strong, with the third-largest deal worth around USD 250mn. The management is focused to keep on moving up the median level of the deals.
  • The company’s average quarterly deal wins used to be in the range of USD 6-7 bn, and are now between the USD 8-9 bn range. The management feels that this number will keep on increasing due to the demand visibility that it can see.
  • The company believes that its employee cost is stabilizing. The attrition rate is reaching a higher level and in the next 6-8 months it will stabilize. In the last 2.5 years, the company has invested heavily in building its talent pool and upskilling it. The management believes that it will help the company in improving its operational performance to the 26-28% margins range.
  • The management believes that the pricing and realization will be key levers for improving the company’s margins. The better realization will be achieved by 3 things- 1) Incremental pricing for renewals and new deals, 2) Better realization through a better portfolio mix, and 3) Improving realization per FTE (full-time equivalent employee) basis.
  • The company aspires to grow its revenues with a double-digit growth rate in FY23. The management believes that the industry is still far away from the peak of the digital investment cycle. They believe that they are still in the early to mid-stage of their clients’ migration to hyper scaler space and the leveraging of native technologies.
  • Speaking of its big-size deal wins, the company is looking toward cloud transformation deals as the biggest opportunity in almost every industry. The company used technologies like metaverse and augmented reality features for one of its telecom retail clients in North America so that its customers could feel the retail stores and products. All of this comes at a decent price point for the company due to the technologies that it employs

Asset Multiplier Comments

  • TCS’ size and capabilities have positioned it well to benefit from the technological upcycle, cloud migration, and digital transformation that the IT industry has entered into.
  • We also believe that the continued strong deal wins with a suitable portfolio mix will help the management retain its double-digit revenue growth even in FY23.

Consensus Estimate: (Source: market screener website)

  • The closing price of TCS was ₹ 3,686/- as of 12-Apr-2022. It traded at 31x/28x the consensus earnings estimate of ₹ 118/134 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 4,041/- implies a P/E Multiple of 30x on the FY24E EPS estimate of ₹ 134/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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11 Apr

Entertainment first company that contains learning: Nazara Technologies

Update on the Indian Equity Market:

On Monday, NIFTY settled 109 points lower at 17,675 (-0.6%). HCLTECH (-2.7%), LT (-2.6%), and INFY (-2.5%) were the top losers. GRASIM (+2.6%), ADANIPORTS (+1.8%), and CIPLA (+1.5%) were the gainers. Among the sectors, IT (-1.1%), FINANCIAL SERVICES (-0.56%) and FINANCIAL SERVICES 25/50  (-0.53%) led the losers OIL&GAS (+1.9%), MEDIA (+1.4%), and REALTY (+1.1%) were the gainers.

Excerpts of an interview with Mr. Manish Agarwal, CEO, Nazara Technologies (NAZARA) published in Business Standard on 9th April 2022:

  • The journey from a telco value-added services provider in 2017 to a diversified e-sports company gives the belief that the company had volume, velocity, leadership, IPs, and also the predictability and visibility of revenues.
  • The telco subscription business segment currently contributes less than 10% of total business and the business that the company was not operating in the last five years, is now dominating the portfolio.
  • Skill-based real money gaming contributes only 4% of the company’s business while its market share in the gaming industry is almost 80%.
  • But the company is not aggressively expanding its offerings in the real money gaming business segment as it doesn’t have more clarity. With more clarity on taxation of skill-based real money gaming, the offerings will be expanded.
  • NAZARA is an entertainment-first company that also contains learning, NAZARA is not a learning-first company like Byju’s or Unacadamy. NAZARA has an aim that the child should get entertained and along with entertainment children can get a certain amount of learning.
  • The Company’s product portfolio has varied offerings for different age groups. For the age group of 2-7 years the company has the subscription-based product which is Kiddopia and for the age group of 7-12 years company has games like Roblox where kids have a social community and they can create their games.
  • To expand its business the company is making investments to acquire more IP’s, distribution capabilities, and advertising tech stacks for better monetization. After expanding in India, the company plans to expand its business in the Middle East and Africa.
  • NAZARA’s positioning as a gaming company from India has a halo effect and other benefits that will result in the coming years but it’s tough to explain the company’s diversified portfolio and gaming business model.

Asset Multiplier Comments

  • We expect that the increased penetration of skill-based real money gaming and which contributes ~80% to the gaming market to create new opportunities for the company where the company doesn’t have a strong presence.
  • We believe that the reopening of schools and colleges may impact the number of users as students are now busy with offline schools and examinations. However, 1QFY23 might be a strong quarter for the company due to school vacations. Its diversified product offering is a key positive for the company.

Consensus Estimate: (Source: market screener website)

  • The closing price of Nazara Technologies was ₹ 1,675/- as of 11-April-2022. It traded at 81/ 54x the consensus EPS estimate of ₹ 21/31/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 2,428/- implies a P/E Multiple of 78x on the FY24E EPS estimate of ₹ 31/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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