Strong Demand Continues to Drive Growth in 2QFY22, Margins Start Feeling the Pressure

Q2FY22 Performance Analysis of Top 3 Indian Publicly Listed Technology Services Companies (TCS, Infosys and Wipro)

The overall deal pipeline remains healthy with the top three companies announcing a deal pipeline of over US$10 billion, reflective of promising business sentiments across clients. With respect to size of the deals – large deal wins seem to be slightly down (as reflective in case of Infosys), while mid and small sized deals continue to drive a large part of the deal pipeline.
Net client addition[1] remained positive with Infosys and Wipro adding over 110 clients (an increase of 3.8% q-o-q) this quarter, with revenue per client increasing for both on a sequential basis.

Clients in the 1mn+ bracket increased 3.7% together for the TCS, Infosys, and Wipro to over 2,500.

Geographies – All the major markets witnessed growth in revenues sequentially as well as y-o-y. North America (5.7% q-o-q and 21.6% y-o-y) continued to witness recovery with Europe maintaining a healthy growth trend (3.2% q-o-q and 26.3% y-o-y). India, which was a drag for TCS last quarter, witnessed a rebound growing at 14.1% q-o-q; however, it was down for Infosys at 5.2% q-o-q.
Verticals – All segments continued to witness growth sequentially as well as y-o-y led by Manufacturing and High-Tech which grew 7.5% q-o-q (21.9% y-o-y), followed by Telecom (6.0% q-o-q, 18.4% y-o-y), Banking and Finance (4.6% q-o-q 24.3% y-o-y), Retail (4.5% q-o-q, 23.1% y-o-y), Healthcare (4.0%% q-o-q, 18.4% y-o-y), and Energy and Utilities (2.0% q-o-q, 18.8% y-o-y).

Digital revenues² [2]– For Infosys grew 10.0% sequentially and 43.0% y-o-y, the share of digital in total revenues increased to 56.1% during the quarter from 53.9% in 1QFY22.

Net margins declined sequentially to 18.8% from 19.1% in 1QFY22, primarily driven by salary hikes, new hires as well as increased sub-contracting costs. Notably, this quarter the y-o-y margins are also down compared to 19.8% in 2QFY21 highlighting the increasing pressure of talent shortage on margins.
Attrition witnessed a significant increase across all three companies as the demand for new-age skills remains on the rise.

TCS, Infosys, and Wipro reported attrition of 11.9%, 20.1%, and 20.5%, higher compared to last quarter by 330 bps, 620 bps, and 500 bps, respectively.

Together the three companies added ~43,000 in 2QFY22.
TCS which hired 43,000 freshers in 1HFY22, plans to add another 35,000 in 2HFY22.

Utilization remained at record levels with both Infosys and Wipro reporting utilization (excluding trainees) at 89.2% – highest since 1QFY17.
With the rise of digital, skilling of employees remains a key focus.

TCS reported 496k AGILE-trained associates (~94% of total employees), and 14.3 million learning hours (~14 hours per employee) in 2QFY22.

Guidance from companies continues to reaffirm the double-digit growth for FY22.
- Infosys increased its revenue growth guidance for the year to 16.5% to 17.5% from 14% to 16% previously, reiterating its operating margin guidance of 22% to 24% for the full year.
- Wipro has given a revenue guidance for its IT Services business to be in the range of $2,631 million to $2,683 million, which translates into a sequential growth of 2.0% to 4.0% for 3QFY22.

APPENDIX:

KEY AGGREGATE METRICS (TCS+WIPRO+INFOSYS)

Source: Company Reports and NASSCOM Analysis

Note – Aggregated margins are weighted average margin

[1] TCS doesn’t report active clients details

²Includes only Infosys as others don’t report digital separately

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