TECH M TO CONTINUE PORTFOLIO RESTRUCTURING IN H2 TO BOOST MARGINS

News:

  The company’s revenues increased 2.9% QoQ, 16.8% YoY in CC terms (3.4% QoQ, ~18% YoY in CC terms, adjusted for exit of some low margin portfolios). In terms of geographies, revenue growth was aided by 2.8% QoQ growth in the US (51% of mix) while Europe, RoW reported decline of 3.6%, 0.5%, QoQ, respectively, due to currency impact ( ex- currency impact, it grew 3.6%, 3.4% in CC terms, respectively). In terms of verticals, growth was aided by manufacturing, technology, retail, which grew 4.9%, 4.5%, 2.9% QoQ, respectively, while BFSI, vommunication (56% of revenue mix together) reported 1.4%, 2.1% QoQ revenue decline (+3.1% CC growth for CME and +0.5% CC growth for BFSI). The EBIT margin grew 32 bps QoQ to 11.4%. In CC terms, margins were at 11.7% (+60 bps on utilisation improvement, +20 bps on low margin portfolio exits, +60 bps on lower SG&A expenses, +50 bps pricing benefit, -120 bps wage hike impact, -30 bps currency impact). TCV for the quarter was at US$716 mn ( -5% YoY,-11% QoQ). The company added 5,877 employees in Q2, taking its total employee base at 163,912. LTM attrition declined 260bps QoQ to 19.6% (~400 bps decline in last two quarters)

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Q2 numbers were above our estimates. Q3 revenue are expected to be impacted by furlough. The management indicated a cautious outlook on Europe geography (24% of mix) due to high inflation and energy prices as they expect slower decision making in the region. On CME vertical, the management indicated that some re-prioritisation of tech spending may happen, especially on customer experience and platform building sub-segments but core spending in this vertical continues. The company will continue its portfolio restructuring in H2 as well especially on those portfolios where scalability is the issue as well as the portfolios where they are not able to raise prices. Pricing, utilisation improvement, moderation of subcontractor cots, portfolio restructuring will be key drivers for margin improvement ahead. The company expects TCV to be in the guided range for H2 as well

Impact:

Positive