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Strong Demand Continues to Drive Growth in 3QFY22, Traditionally a Weak Quarter
Strong Demand Continues to Drive Growth in 3QFY22, Traditionally a Weak Quarter

January 20, 2022

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Margins Continue to be Under Pressure

Q3FY22 Performance Analysis of Top 3 Indian Publicly Listed Technology Services Companies (TCS, Infosys and Wipro)

 

The top three companies continued to maintain a good growth trajectory in the third quarter with total revenues of nearly US$13.5 billion increasing 3.9% q-o-q and 18.8% y-o-y (reported currency), with a very promising double-digit growth expectations being reaffirmed for FY22.

 

Positive demand sentiments continue this quarter as well …

  1. The overall deal pipeline continues to remain healthy with the top three companies announcing a deal pipeline of over US$10 billion, reflective of promising business sentiments across clients. Deal pipeline size continues to be reflective of a good mix across large, medium and small deals. Mid and small sized deals continuing to expand driving large part of the deal pipeline.
  2. Net client addition[1] remained positive with Infosys and Wipro adding over 50 clients (an increase of 1.8% q-o-q) this quarter, with revenue per client increasing for Infosys and maintaining for Wipro, on a sequential basis.
  • Clients in the 1mn+ bracket increased 3.4% together for the TCS, Infosys, and Wipro to ~2,700.

 

 

…And continue to drive the revenue growth

  1. Revenues increased 3.9% q-o-q/ 18.8% y-o-y with demand acceleration by technology initiatives for longer term growth led by Cloud, Cyber Security, Consulting & Services Integration and IoT & Digital Engineering.
  • TCS attained an important milestone in - hitting the $25 billion revenue mark in CY 2021.
  1. This strong demand is broad based across geographies as well as verticals.
  • Geographies - All the major markets witnessed growth in revenues sequentially as well as y-o-y. North America (4.6% q-o-q and 21.4% y-o-y) remained strong with Europe also maintaining a healthy growth trend (2.6% q-o-q and 22.1% y-o-y). India market also witnessed growth both for TCS as well as Infosys at 11.1% and 22.7%, respectively. q-o-q.
  • Verticals – All segments continued to witness growth sequentially as well as y-o-y led by Telecom (4.9% q-o-q, 18.2% y-o-y), Healthcare (4.7%% q-o-q, 16.4% y-o-y), Retail (4.5% q-o-q, 22.9% y-o-y), Manufacturing and High-Tech which grew (3.3% q-o-q, 21.2% y-o-y), Banking and Finance (2.9% q-o-q 21.8% y-o-y), and Energy and Utilities (2.2% q-o-q, 13.4% y-o-y).

 

Digital and Cloud the key drivers of growth

  1. Digital revenues2[2]- For Infosys grew 10.9% sequentially and 41.2% y-o-y, the share of digital in total revenues increased to 58.5% during the quarter from 56.1% in 2QFY22.

 

 

Maintaining Profitability is Becoming a challenge amidst rising Attrition…

  1. Net margins witnessed a decline sequentially to 18.5% from 18.8% in 3QFY22, as supply pressures continue to weigh in. Notably, this quarter the y-o-y margins are also down compared to 20.3% in 3QFY21 highlighting the increasing pressure of talent shortage on margins.  
  2. Attrition witnessed a significant increase across all three companies as the demand for new-age skills remain on the rise.
  • TCS, Infosys, and Wipro reported attrition of 15.3%, 25.5%, and 22.7%, higher compared to last quarter by 340 bps, 540 bps, and 220 bps, respectively, higher compared to pre-covid levels.

 

 

….while record level of hiring continues

  1. Employee count increased 5.0% q-o-q and was up 18.9% y-o-y as hiring remains a priority to manage talent shortage. Moreover, companies are highlighting plans to hire more in the coming quarter.
  • Together the three companies added ~51,000 in 3QFY22.
  • Notably, the top three companies have hired 1,34,000+ employees for YTDFY22, already 2X hiring compared to net addition in the year FY21
  • Fresher Hirings: The top three companies plan to hire nearly 150,000 freshers in FY22
    • Infosys revised its fresher hiring target for FY22 to 55,000 from 45,000 last quarter.
    • TCS has hired 77,000 freshers during the year till 3QFY22.
    • Wipro plans to hire around 17,000 freshers in FY22 and 30,000 freshers in 2023.

 

  1. Utilization was down this quarter after being at record levels with both Infosys and Wipro reporting lower utilization (excluding trainees) at 86.3% and 84.5%, respectively. The rising share of freshers joining the workforce could be a possible reason behind this.
  2. With the rise of digital, skilling of employees remains a key focus.
  • TCS reported 508k AGILE-trained associates (~91% of total employees), 421K Digital Trained Associates (~76% of total employees), and 14+ million in learning hours (~25 hours per employee) in 3QFY22. Over 100,000 market-relevant deep skills were gained by TCSers in Q3. 32.3% of open positions were fulfilled through up-skilling/cross-skilling. Over 38,000 Contextual Masters were identified across the organization represent a large, internally groomed cadre of specialists powering the company’s expanding foray into the growth and transformation opportunity.
  1. Diversity maintained
    • TCS and Infosys together employ over 300,000 women employees:
      • With the share of women at TCS holding up at 36% (crossing 200,000 women employees; +68% growth in women at senior levels during 2016-21). TCS also reported employing people from 156 nationalities.
      • Infosys reported a share of 39.6% women in total employees.

 

Innovation remains a key focus

  1. As on December 31, 2021, TCS had applied for 6,396 patents (+3.7% q-o-q), including 227 (+26.1% q-o-q) applied during the quarter, and has been granted 2,201 patents (+4.8% q-o-q).

 

Return to office plans on hold in lieu of the new variant, vaccination continues   

  1. All three companies have vaccinated more than 90% of their employees with at least one dose. Wipro also highlighted over 65% employees are fully vaccinated with the recommended two doses.

 

Strong demand sentiments fuels further optimism with companies revising their guidance upwards reiterating the “Double-digit growth theme for FY22

 

  1. Guidance from companies continues to reaffirm the double-digit growth for FY22.
    • Infosys increased its revenue growth guidance for the year to 19.5%-20.0% from 16.5% to 17.5% last quarter, while the operating margin guidance of 22% to 24% for the full year remains unchanged.
    • Wipro has given a revenue guidance for its IT Services business to be in the range of $2,692 million to $2,745 million, which translates into a sequential growth of 2.0% to 4.0% for 4QFY22.

 

APPENDIX:

KEY AGGREGATE METRICS (TCS+WIPRO+INFOSYS)

 

Source: Company Reports and NASSCOM Analysis

Note - Aggregated margins are weighted average margins based on revenues

 

[1] TCS doesn’t report active clients details

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


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Neha Jain
Senior Analyst

Neha Jain

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