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  • 26 Jul 2022
  • ICICIdirect Research

TECH M MARGINS ARE EXPECTED TO RECOVER FROM Q2 ONWARDS

TECHM - 1681 Change: 30.35 (1.84 %)

News: The company’s revenues increased by 3.5% QoQ in constant currency terms, while it was up 1.5% QoQ in dollar terms to US$ $1,632 million. In terms of geographies , the revenue growth was aided by 4.2% QoQ growth in US ( 50% of mix) , while the sequential growth in Europe/ RoW was weak as they declined by 1.9%/0.4% respectively. In terms of verticals, the growth was aided by Technology & Media , Retail & Manufacturing which grew by 6.4%/5.5%/3.9% QoQ respectively, while BFSI/ Communication (57% of the revenue mix together) reported -2.9%/+1.0 QoQ revenue growth. The company’s EBIT margin dip 220bps QoQ to11.0% (-100bps) impact of higher salary and sub-contractor expenses, (-80bps) impact of visa costs & seasonality, (-100 bps) on SG&A cost normalisation while there was (+50bps) pricing benefit in the quarter . The Net new deal TCV 2%/20.7% on YoY/QoQ to US$802mn. The company added 6,862 employees in Q1, taking its total employee base at 158,035. LTM attrition declined 130bps QoQ to 22.2%.

Views: The company’s growth for the quarter was strong while management not seeing any evidence on moderation of tech spending by its clients and demand pipeline continue to be robust. New deal TCV was in the guided range of US$700mn –US$1bn range. LTM attrition is down QoQ which is expected to support margins in the medium term. Management indicated that 100-150bps margins are expected to recover in Q2 itself and now guiding for 14% exit EBIT margins in Q4. The company got +50bps pricing benefit for the quarter and expects pricing to be one of the levers for margin expansion going forward. Pyramid optimisation is another lever where the company will continue to add freshers ( they added 10,000 freshers in FY22).

Impact: Positive.