Tag - attrition

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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16 Feb

Deal closures in the USD 700mn- 1bn band expected to continue – Tech Mahindra

Update on the Indian Equity Market:

On Wednesday, NIFTY50 ended the volatile session in the red at 17,322 (-0.2%). Among the sectoral indices, REALTY (+1.1%), CONSUMER DURABLES (+0.8%), and PHARMA (+0.5%) were the few gainers. PSU BANK (-1.2%), MEDIA (-0.6%), and METAL (-0.6%) led the laggards.

Among the NIFTY50 constituents, DIVISLAB (+3.1%), ONGC (+2.7%), and ADANIPORTS (+2.3%) led the gainers. SBIN (-1.9%), ICICIBANK (-1.7%), and NTPC (-1.7%) led the laggards.

Edited excerpts of an interview with Mr. Milind Kulkarni, CFO, Tech Mahindra (Tech M) published in Financial Express on 16th February 2022:

  • Due to furloughs, Q3 was a slow quarter. In 3QFY22 the communication, media, and entertainment (CME) vertical grew faster than the enterprise vertical for Tech M.
  • There are supply-side pressures for which the company has various offset actions. It has increased its presence in tier-II and tier-III cities. The company expects to mitigate the supply side pressure over the next few months and be on the path articulated in the past.
  • Attrition has been reduced by 300bps in 3QFY22 on the LTM (last 12 months) basis. This is a reversion of the trend witnessed in previous quarters.
  • The new deals were worth USD 704mn in 3QFY22. This was an increase from the average order book of USD 400mn. The deal pipeline in the last 8 quarters has gone up. The deal closures in the USD 700mn- 1bn range are expected to continue.
  • The company has hired 10,000 freshers in 9MFY22 and plans to hire 15,000 freshers in FY23. The intention is to get freshers, train them, put them on the right project early, and benefit from the structural change. This is the opposite of doing just lateral hiring.
  • Tech M will continue to hire in the business process services segment, and IT as there is a continuous demand for transformation projects- artificial intelligence, metaverse, etc.
  • Tech M is getting into more tier-II cities such as Coimbatore, Vijayawada, Nagpur, Indore, Bhubaneshwar, and Chandigarh to get access to talent and help in containing attrition. It is also expanding existing centers such as Pune, Bengaluru, and Hyderabad. The company is developing virtual centers in Mexico, Costa Rica, Romania, and Latvia.
  • The BFSI vertical was separated into two separate revenue streams as insurance is a prominent vertical that requires different skill sets. This followed the recent acquisition of European IT solutions provider Com Tec Co. As the company has another large insurance company as a customer, it has made a separate vertical for insurance.
  • The M&A strategy is to fill up niche capability gaps, and certain verticals it wants to scale up. The specific verticals are manufacturing, digital engineering, and BFSI. The focus is on areas such as cloud capability, where it will grow organically.
  • On the 5G front, IT firms will be providing support to service providers and for Tech M, it will boost the CME vertical. It will be playing a bigger role to boost demand for services and application in the telecom sector.

Asset Multiplier Comments

  • The entire IT sector faced supply-side pressures in FY22 due to a sudden spurt in demand. With WFH (work-from-home) settling down, in FY23 the focus is likely to be on reducing attrition and improving utilization levels.
  • Tech M has been investing in the areas of 5G, customer experience, data analytics, AI, IoT, and Cloud capabilities through organic or inorganic routes over the past few years. These investments are yielding results in terms of higher deal TCVs.
  • 5G has been a focus area for Tech M for the past few years. With 5G activity gradually picking up among the Indian telecom companies, Tech M’s investments into this vertical will start yielding results in terms of higher revenue growth.

Consensus Estimate (Source: market screener website)

  •  The closing price of Tech Mahindra was ₹ 1,440/- as of 16-February-2022. It traded at 23x/ 20x/ 18x the consensus earnings estimates of ₹ 63/ 72/ 82/- for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,791/- implies a P/E Multiple of 22x on FY24E EPS estimate of ₹ 82/-.

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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18 Jan

Expect higher demand for application modernization, cloud transformation, and digital engineering – HCL Tech

Update on the Indian Equity Market:

On Tuesday, Nifty closed lower at 18,113 (-1.1%) led by REALTY (-2.6%), AUTO (-2.4%), and METALS (-2.2%) were the top losers while there were no gainers.The top losers were MARUTI (-4.1%), TATACONSUM (-3.9%), and ULTRACEMCO (-3.8%) while AXISBANK (+1.8%), ICICIBANK (+0.5%), and HDFCBANK (+0.4%) were the top gainers.

Edited excerpts of an interview with Mr. Vijayakumar, MD & CEO, and Mr. Prateek Aggarwal, CFO, HCL Tech with CNBC TV18 on 17th January 2021:

  • The company’s order pipeline is healthy, with transaction wins increasing by 64% YoY in 3QFY22. Application modernization and cloud computing were driving the growth.
  • Hiring has grown to around 10,500 employees in the 3QFY22E. The management expects greater demand visibility for application modernization, cloud transformation, and digital engineering.
  • The management expects a strong 4QFY22E due to increased booking and order visibility as a result of the services segment’s hiring of over 10,000 individuals. Even if the firm has a flat 4QFY22E, management anticipates the company will expand at a rate of 12.6-12.7 percent in FY22E.
  • The company’s margins were five basis points (bps) higher in 3QFY22 QoQ, while services were a little weaker on the margin. Due to expenditures associated with growth, such as knowledge transfer fees, the IT services margin was lower. The management also highlighted that wage hikes in 3QFY22 and attrition levels, both of which have expenses, had an impact on margins. Management believes that attrition levels have reached a peak and that attrition should begin to decline. The management expects the margin to return to typical levels of approximately 20% by 2QFY23E to 3QFY23E.
  • In terms of fresher recruiting, the company plans to hire 20,000-22,000 freshers for FY22E.
  • The company’s recent acquisition of Hungary-based data engineering services provider Starschema Ltd for $ 42.5 mn is expected to help scale the company’s Eastern European footprint, particularly in Hungary. This is a data engineering consulting organization that offers front-end consulting, which can be a good trigger for a lot of downstream work. In Hungary, the corporation has solid mindshare attracting top personnel. As a result, the firm will be able to develop its Eastern European footprint more quickly, particularly in Hungary. The company will continue to seek assets that can enhance its capabilities, particularly in a high-demand market.
  • When it comes to the products and platforms business, management expects it to increase in the low single digits. The management anticipates that this will be a long-term play that is still getting modernized.
  • In terms of deal wins, the net new TCV in 3QFY22 was $2140 mn, a 64 percent increase from the previous year. The high TCV was due to 8 significant transactions on the services side, another 8 deals on the products and platforms side, and a large number of smaller deals.

 

Asset Multiplier Comments

  • We believe HCL Tech has a solid business model and a track record of successful execution. The company plans to hire at least 20,000 additional freshers by FY22E (with 15,000 already on board) and double the amount by FY23E. This reflects management’s confidence in future deal wins.
  • We believe the company will likely be at the lower end of the 19-21 percent EBIT guidance band in 4QFY22E, but the long-term growth narrative remains intact, bolstered by greater growth in cloud, ER&D, and data modernization.

Consensus Estimate (Source: market screener website)

 

  • The closing price of HCL Tech was ₹ 1,220/- as of 18-January-2022. It traded at 25x/22 x/ 19x the consensus earnings estimates of ₹ 49/ 56/ 63 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,460 /- implies a P/E Multiple of 23x on FY24E EPS estimate of ₹ 63/-.

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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13 Jan

EBIT margin of 17-17.5% sustainable – Wipro

 

 

 

 

 

 

 

 

 

 

 

Update on the Indian Equity Market:

On Thursday, after a volatile session the benchmark index NIFTY50 ended at 18,258 (+0.3%). Among the sectoral indices, METAL (+3.5%), PHARMA (+1.6%), and PSU BANK (+0.6%) led the gainers while REALTY (-0.7%), BANK (-0.7%), and PRIVATE BANK (-0.6%) led the laggards.

Among the NIFTY50 components, TATASTEEL (+6.3%), JSWSTEEL (+4.3%), and SUNPHARMA (+3.6%) led the gainers. WIPRO (-6.0%), ASIANPAINT (-2.4%), and HCLTECH (-1.9%) were the top losers.

Wipro recently announced 3QFY22 earnings, which were lower than street estimates. But the fourth-quarter guidance seems to provide some relief to investors.

The top management, MD & CEO Mr. Thierry Delaporte, CFO Mr. Jatin Dalal, and President and CHRO, Mr. Saurabh Govil discussed the highlights of 3QFY22 and their outlook for the upcoming quarters with CNBC-TV 18 on 13th January 2021. Following are the excerpts:

  • Wipro had guided for 2-4% sequential revenue growth in constant currency term for 3Q. The company delivered 3% QoQ revenue growth. There weren’t any one-offs or client loss or massive delivery issues. This is the normal volume of business.
  • The 3% sequential revenue growth is 28% YoY growth. The 3QFY22 revenue growth is the continuation of the growth seen over the last 5 quarters.
  • The CEO does not expect a significant contribution to revenues from the recently concluded acquisitions of Edgile and LeanSwift.
  • The reported EBIT margin was 17.6%, ahead of the guidance of 17-17.5%. The margin delivery has been despite 2 months of salary increment to 80% of its employees. The utilisation is such that there is some headroom for subsequent quarters.
  • The EBIT margin band of 17-17.5% is sustainable for the company in the long term.
  • The attrition for LTM was 22.7% in 3QFY22 and remains a concern industry-wide. It has taken certain measures to cope with higher levels of attrition. First, the company onboarded 10,000 plus employees every quarter and continues to onboard new people. Wipro has increased campus hiring by 70% in FY22. The company is looking at 30,000plus hiring in FY23E. Second, the company continues to laterally hire all skill sets across the globe based on demand. Some of the high-demand areas are cyber security, data, cloud, and newer areas like Salesforce. The company believes the attrition has peaked and expects to see moderate attrition going forward.
  • The company closed the biggest quarter in terms of bookings in 3QFY22. It reflects Wipro’s ability to win in the market. It has the biggest pipeline it ever had as it begins 4QFY22. It has a better win rate compared to previous quarters.
  • The CEO believes the clients’ budgets across industries will continue to increase. The win rate has improved by 300bps over the previous two years.
  • Improvement in price realisation is seen due to the move to high-value services such as cyber security, cloud, and digital. Wipro had made investments in certain skill sets and improved visibility, for which clients are willing to invest.

Asset Multiplier Comments

  • We believe revenue growth will be driven by strong demand, strong pipeline, and order book. The company’s order pipeline has a mix of small, medium, and large deals with the company seeing expansion in mid-sized deals.
  • There is a massive opportunity in the cloud business over the next five years. The Company has been making investments in cloud technology. Cloud opportunity, higher offshoring, and synergies from acquired business are expected to drive profitability for Wipro in the near term.

Consensus Estimate: (Source: market screener website)

  • The closing price of Wipro was ₹ 650/- as of 13-January-2022. It traded at 30x/ 25x/ 22x the consensus earnings estimates of ₹ 22/ 26/ 29/- for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 703/- implies a P/E Multiple of 24x on FY24E EPS estimate of ₹ 29/-.

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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