04 January 2022 Q3FY22E Results Preview Information Technology

04 January 2022 Q3FY22E Results Preview

Information Technology

HSIE Research is also available on Bloomberg ERH HDF <GO> & Thomson Reuters

On a strong footing The IT sector (coverage universe) is set to post another quarter of strong

growth (+3.6/17.5 QoQ/YoY) in a seasonally weak quarter (furlough impact).

The growth outlook remains robust, based on (1) increasing velocity of

digital transformation/shift to cloud, (2) strong ACV as large deals are

broken into mid-sized deals, (3) improving deal pipeline, (4) accelerated

fresher hiring, and (5) improving alignment/investment in the

hyperscalers/SaaS ecosystem. Tier-1 IT is expected to deliver +3.3% QoQ

(+3.9% CC terms) and 16.6% YoY (best Q3 performance). In comparison, mid-

tier IT is expected to post 5.5% QoQ (range of +2.4% to +7.8% QoQ) with

larger mid-tier averaging >4% QoQ. The margin during the quarter is

expected to remain stable on a sequential basis; however, there will be a YoY

margin decline as companies rolled out two cycles of wage hikes since Dec-

20 to counter attrition. Primary margin headwinds that remain are higher

cost of talent replacement, a decline in utilisation rate due to fresher hiring,

and a rise in discretionary cost.

Deal wins (TCS - Cainz, Heritage Life, Celcom, Jaguar, Royal Academy,

Juniper, South32, AGL, Plaza Premium, La Mobilidre; INFY - ATP Tour,

Brent Council, Posten Norge, Financial Times, Orion Corp; HCLT -

Innovaccer, Euroclear, Cemex); WPRO – Aggreko, Telefonica continued to

remain strong in Q3FY22. The acquisition remains a key focus area (INFY -

Global Enterprise International Malaysia; HCLT – Gesellschaft; WPRO –

LeanSwift, Edgile; TECHM – Beris Consulting, Infostar LLC, Activus) for

augmenting capabilities in the digital transformation journey.

Revenue outperformance, led by INFY, HCLT, PSYS, MPHL and LTI: In

Q3FY22E, we expect INFY to lead the growth with 3.8% QoQ in USD

terms, supported by the full ramp-up of the Daimler deal, followed by

HCLT with 3.7% QoQ growth, led by a recovery in P&P business.

WPRO/TECHM/TCS are expected to post +3.5/3.3/2.8% USD revenue

growth. Within mid-tiers, PSYS/MPHL/LTI would lead growth at

+7.8/6.1/5.8% QoQ (USD terms). MTCL, TELX and LTTS are expected to

post 5.3%, 5% and 4.7% QoQ growth. SSOF is expected to grow by 3.5%

QoQ (organic), supported by Microsoft portfolio and CYL is expected to

report growth of 3.9% QoQ, helped by steady services business and

growth in DLM business.

Key monitorable: (1) Revenue guidance: INFY and LTTS expected to

increase guidance by ~100bps, HCLT will maintain its double-digit

guidance, WPRO (+2-4% QoQ for Q4); (2) large deal pipeline/bookings; (3)

supply-side situation, hiring intensity and WFH status; (4) demand

environment for cloud/digital led services and outlook; (5) IT budget of

clients for the next year and decision making for large deals.

Maintain positive outlook: We roll over valuations to Mar-24E and raise

target multiples for most of the companies in our coverage universe

(TECHM, LTI, MTCL, MPHL, LTTS and ZENT) to reflect higher-

visibility/longevity of growth, followed by strong commentary and

~700bps increase in guidance by Accenture. We expect the sector (coverage

universe) to post +14.7/16% USD revenue/APAT CAGR over FY21-24E,

compared to 6.5/7.5% over the past five years. The mid-tier valuation is at

~30% premium (vs. average 10Y discount of ~10%) to tier-1, driven by

strong business momentum, while risk-reward is favourable for tier-1 IT.

Our preferred picks are Infosys, HCL Tech, Mphasis, Cyient, and Zensar.

Company CMP*

(INR) RECO

TP

(INR)

TCS 3,818 ADD 4,350

Infosys 1,898 BUY 2,100

Wipro 719 ADD 750

HCL Tech 1,326 BUY 1,510

TechM 1,785 BUY 2,100

LTI 7,533 ADD 7,700

Mindtree 4,842 ADD 5,040

Mphasis 3,423 BUY 3,900

LTTS 5,727 ADD 5,880

Tata Elxsi 5,894 REDUCE 5,620

Persistent 4,872 ADD 4,960

Cyient 1,066 BUY 1,350

Zensar 533 BUY 625

Sonata 867 BUY 1,100

Mastek 3,042 BUY 3,410

*CMP as on 3rd Jan 2022

Amit Chandra

[email protected]

+91-22-6171-7345

Vinesh Vala [email protected]

+91-22-6171-7332

TCSINFY

WPRO

HCLT TECHM

LTI

MTCL

MPHL

LTTS

TELX

PSYS

CYLZENT

SSOF

MAST

5

15

25

35

45

55

65

10 15 20 25 30 35 40

P/E

(x)

FY

23E

EPS CAGR % (FY21-24E)

Page | 2

Q3FY22E Results Preview

IT Services: Q3FY22E Quarterly Financial Summary

Company

Net Sales (USD mn) Net Sales (INR bn) EBIT (INR bn) EBIT Margin (%) APAT (INR bn) Adj. EPS (INR)

Q3

FY22E

QoQ

(%)

YoY

(%)

Q3

FY22E

QoQ

(%)

YoY

(%)

Q3

FY22E

QoQ

(%)

YoY

(%)

Q3

FY22E

QoQ

(bps)

YoY

(bps)

Q3

FY22E

QoQ

(%)

YoY

(%)

Q3

FY22E

Q2

FY22

Q3

FY21

TCS 6,510 2.8 14.2 488.22 4.2 16.2 125.98 5.0 12.6 25.8 20 -82 101.26 5.2 16.4 27.4 26.0 23.5

Infosys 4,148 3.8 18.0 311.11 5.1 20.0 73.31 5.2 11.3 23.6 1 -185 55.65 2.7 7.1 13.3 12.9 12.4

Wipro 2,670 3.5 28.9 204.36 3.9 30.4 34.91 2.8 5.0 17.1 -19 -414 30.51 4.1 2.8 5.6 5.3 5.4

HCLT 2,894 3.7 10.6 217.07 5.1 12.5 41.37 5.6 -6.3 19.1 10 -382 33.49 2.6 -2.5 12.3 12.0 12.7

Tech M 1,521 3.3 16.2 114.04 4.8 18.2 17.65 6.8 14.8 15.5 30 -45 14.63 9.3 11.7 16.6 15.1 14.8

Tier-1 IT 17,743 3.3 16.6 1,334.80 4.5 18.6 293.22 5.0 8.4 22.0 9 -206 235.55 4.3 9.0

L&T

Infotech 539 5.8 25.9 40.39 7.2 28.1 7.07 9.0 8.7 17.5 28 -313 5.71 3.6 10.0 32.8 31.7 29.8

Mindtree 369 5.3 34.6 27.66 7.0 36.7 5.14 9.5 29.8 18.6 42 -99 3.87 -3.1 3.6 23.5 24.2 22.7

Mphasis 409 6.1 22.5 30.67 6.9 23.9 4.60 6.5 13.7 15.0 -6 -136 3.60 5.5 10.7 19.3 18.3 17.5

L&T Tech 228 4.7 19.7 16.84 4.8 20.2 3.00 1.1 40.5 17.8 -65 257 2.42 5.2 35.3 23.2 22.0 17.1

Tata Elxsi 84 5.0 30.3 6.33 6.3 32.7 1.76 3.4 32.7 27.8 -78 1 1.39 10.7 31.8 22.3 20.1 16.9

Persistent 196 7.8 34.4 14.73 9.0 37.0 1.97 5.4 44.8 13.4 -46 72 1.74 7.5 43.8 22.8 21.2 15.8

Cyient 156 3.9 10.3 11.70 5.2 12.0 1.52 -2.3 30.8 13.0 -101 187 1.22 0.4 27.9 11.1 11.0 8.7

Zensar 148 4.3 20.5 11.10 5.6 22.4 1.05 -8.0 -27.0 9.5 -140 -642 0.88 -7.0 -11.0 3.9 4.2 4.3

Sonata 52 6.2 28.0 17.13 77.8 22.7 1.24 11.3 22.7 7.2 -433 0 0.99 8.7 31.0 9.5 8.8 7.3

Mastek 74 2.4 22.7 5.53 3.6 24.9 1.04 1.4 12.7 18.8 -39 -203 0.75 3.6 30.4 25.5 24.6 20.2

Mid-Tier IT 2,255 5.5 25.1 182.08 10.8 26.5 28.39 5.6 18.9 15.6 -76 -99 22.56 3.1 15.7

Aggregate 19,998 3.6 17.5 1,516.88 5.3 19.5 321.61 5.0 9.3 21.2 -5 -198 258.11 4.2 9.6

Source: HSIE Research, Wipro USD Rev is IT services, Sonata USD rev is IITS, Inorganic growth: Wipro 40bps, TECHM 75bps, Mphasis 215bps,

Persistent 250bps, Zensar 80bps, Sonata 250bps

USD revenue QoQ growth trend

Source: HSIE Research; Inorganic growth QoQ: Wipro 40bps, TECHM 75bps, Mphasis 215bps, Persistent

250bps, Zensar 80bps, Sonata 250bps

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Page | 3


IT Services: valuation metrics

Company MCap

(INR bn)

CMP

(INR)

TP

(INR) RECO

EPS (INR) P/E (x) RoE (%) USD Rev

CAGR%

FY21-24E

EPS

CAGR%

FY21-24E FY21 FY22E FY23E FY24E FY21 FY22E FY23E FY24E FY21 FY22E FY23E FY24E

TCS 14,122 3,818 4,350 ADD 90.2 105.5 122.5 135.8 42.3 36.2 31.2 28.1 39.1 43.6 46.6 46.8 13.1 14.6

Infosys 8,070 1,898 2,100 BUY 46.2 53.7 62.0 70.0 41.1 35.3 30.6 27.1 27.3 31.1 36.1 36.7 14.3 14.9

Wipro 3,939 719 750 ADD 19.7 23.2 25.9 31.2 36.5 31.0 27.7 23.0 19.4 21.7 21.6 23.1 17.0 16.6

HCL Tech 3,599 1,326 1,510 BUY 45.9 49.7 59.0 68.7 28.9 26.7 22.5 19.3 22.4 21.2 22.4 23.0 12.4 14.3

TechM 1,723 1,785 2,100 BUY 51.1 64.1 75.0 87.5 34.9 27.9 23.8 20.4 19.3 21.7 23.2 24.5 15.2 19.7

Tier-1 IT Median

36.5 31.0 27.7 23.0 22.4 21.7 23.2 24.5 14.3 14.9

LTI 1,312 7,533 7,700 ADD 111.3 130.5 160.0 192.2 67.7 57.7 47.1 39.2 29.8 28.5 29.2 29.0 20.8 20.0

Mindtree 798 4,842 5,040 ADD 70.3 93.8 113.9 136.1 68.9 51.6 42.5 35.6 29.7 31.9 31.2 30.0 22.2 24.7

Mphasis 638 3,423 3,900 BUY 65.3 77.0 97.1 121.6 52.4 44.5 35.3 28.1 19.7 20.9 23.5 25.7 19.2 23.0

L&T Tech 598 5,727 5,880 ADD 60.1 90.0 110.9 140.1 95.4 63.6 51.6 40.9 20.1 24.5 25.1 26.3 19.1 32.6

Tata Elxsi 367 5,894 5,620 REDUCE 59.1 83.5 105.2 127.8 99.7 70.6 56.0 46.1 30.1 36.3 38.4 37.1 26.6 29.3

Persistent 372 4,872 4,960 ADD 59.0 88.8 115.0 141.7 82.6 54.9 42.4 34.4 17.4 22.3 24.4 25.2 25.9 34.0

Cyient 117 1,066 1,350 BUY 33.8 45.1 52.9 61.2 31.5 23.6 20.2 17.4 13.5 16.1 17.4 18.4 12.7 21.9

Zensar 122 533 625 BUY 15.3 16.9 19.7 26.0 34.8 31.5 27.1 20.5 15.7 15.3 16.2 19.2 14.8 19.3

Sonata 90 867 1,100 BUY 23.5 34.5 42.3 49.8 36.9 25.1 20.5 17.4 31.0 36.7 38.6 39.0 20.1 28.5

Mastek 90 3,042 3,410 BUY 73.5 99.4 118.2 142.1 41.4 30.6 25.7 21.4 25.4 30.4 28.9 28.0 19.0 24.6

Mid-Tier IT AVG

61.1 45.4 36.8 30.1 23.2 26.3 27.3 27.8 20.0 25.8

Mid-Tier IT Median 60.1 48.0 38.8 31.3 22.7 26.5 27.0 27.2 19.6 24.6

Source: HSIE Research, CMP as on 3rd Jan 2022

Global IT Peers: valuation metrics

Company MCap

(USD bn)

CMP

(USD)

TP

RECO

EPS (USD) P/E (x) RoE (%) USD Rev

CAGR%

FY21-24E

EPS

CAGR%

FY21-24E FY21 FY22E FY23E FY24E FY21 FY22E FY23E FY24E FY21 FY22E FY23E FY24E

Accenture 272.9 415 NA NR 8.8 10.6 11.8 12.8 47.1 39.2 35.1 32.3 32.3 32.3 31.6 30.0 11.1 6.7

Cognizant 46.6 89 NA NR 3.4 4.1 4.5 5.0 25.9 21.9 19.7 17.7 12.7 18.4 18.4 17.1 14.0 11.2

Capgemini^ 36.9 214 NA NR 7.3 8.5 9.8 11.1 29.4 25.3 21.8 19.2 13.2 20.3 20.4 19.7 15.1 14.7

EPAM 37.9 668 NA NR 6.3 8.8 11.2 14.3 105.4 76.0 59.7 46.9 18.3 23.1 23.3 23.7 51.6 27.3

Globant 13.0 314 NA NR 2.5 3.7 4.3 5.5 128.2 84.9 72.4 56.7 8.2 12.3 11.9 12.4 59.3 22.4

TietoEVRY^ 3.3 28 NA NR 2.2 2.3 2.5 2.6 12.7 12.2 11.1 10.5 5.7 16.6 13.7 14.6 3.3 8.1

Global IT AVG

58.1 43.3 36.6 30.5 15.1 20.5 19.9 19.6 25.7 15.1

Global IT Median

38.3 32.2 28.5 25.8 13.0 19.4 19.4 18.4 14.5 13.0

Source: Bloomberg Consensus, HSIE Research, CMP as on 3rd Jan 2022, ^ in EUR

Page | 4


IT Services stock performance (%)

Companies 1M (%) 3M (%) 6M (%) 12M (%) 3Yr (%) 5Yr (%) 10Yr (%)

TCS 4.9 2.3 14.8 30.4 100.9 222.4 537.6

Infosys 9.4 14.0 21.1 50.6 183.7 282.0 430.2

Wipro 12.2 13.0 33.4 85.2 194.4 310.4 415.9

HCL Tech 13.2 4.1 34.7 39.5 179.7 217.6 1215.6

TechM 12.0 30.2 63.8 82.5 158.2 263.1 1090.0

LTI 10.0 31.0 86.3 103.6 333.4 NA NA

Mindtree 8.2 15.7 87.5 191.8 480.0 853.3 4716.2

Mphasis 10.9 13.1 58.8 123.7 260.7 536.8 1006.2

LTTS 5.7 23.3 99.0 137.7 253.1 NA NA

Tata Elxsi -0.1 1.9 33.1 215.5 472.4 740.5 6452.1

Persistent 12.4 33.7 66.3 225.3 694.1 676.1 2969.0

Zensar 21.4 11.5 59.0 119.5 130.8 181.9 1725.7

Cyient 6.1 0.3 21.8 107.7 71.5 116.6 852.9

Sonata 3.3 -2.1 15.0 120.3 193.5 330.2 3968.1

Mastek 5.9 -0.3 29.9 151.5 593.1 1642.2 10677.6

NSE IT 9.1 12.5 34.9 60.0 173.2 277.6 515.5

Nifty 50 2.5 0.5 12.1 25.7 65.2 115.2 269.9

Source: Bloomberg, HSIE Research, CMP as on 3rd Jan 2022

Note:

Green indicates out-performance to Nifty 50 during the respective period

Red indicates under-performance to Nifty 50 during the respective period

IT Sector P/E and EPS Growth

Source : Company, HSIE Research, Size of the bubble denotes market cap

Infosys

Wipro

HCLTTechM

L&T Infotech

Mphasis

Mindtree

L&T Tech

Cyient

TCS

Persistent

Zensar

Sonata

Mastek

Tata Elxsi

5

15

25

35

45

55

65

10 15 20 25 30 35 40

FY

23

E P

/E

EPS CAGR FY21-24E

Page | 5


Change in estimates

IT Services

Company

Revenue USD Mn

(NEW) Change (%) EBIT % (NEW) Change (bps) EPS (Rs) NEW Change (%)

FY22E FY23E FY24E FY22E FY23E FY24E FY22E FY23E FY24E FY22E FY23E FY24E FY22E FY23E FY24E FY22E FY23E FY24E

TCS 25,668 29,200 32,118 0.1% 0.7% 0.9% 25.6 26.1 26.3 26 14 17 105.5 122.5 135.8 1.7% 1.3% 1.5%

Infosys 16,191 18,446 20,387 0.0% 0.1% 0.5% 24.0 23.5 24.0 57 32 51 53.7 62.0 70.0 3.0% 1.5% 2.7%

Wipro 10,428 11,824 13,041 0.4% 1.0% 1.0% 17.4 17.9 19.4 71 61 63 23.2 25.9 31.2 4.0% 4.1% 4.0%

HCL Tech 11,397 12,909 14,435 -0.1% -0.2% 0.1% 19.5 20.4 20.8 13 -8 17 49.7 59.0 68.7 1.1% -0.5% 0.9%

Tech

Mahindra 5,945 6,884 7,810 -0.4% 0.4% 1.0% 15.1 15.4 15.8 -7 1 34 64.1 75.0 87.5 -0.3% 1.7% 4.1%

LTI 2,095 2,536 2,940 -0.4% 0.3% 1.4% 17.4 17.7 18.0 -4 -5 -21 130.5 160.0 192.2 1.4% 0.9% 0.5%

Mindtree 1,419 1,704 1,962 0.5% 1.5% 2.1% 18.4 18.5 19.0 67 41 25 93.8 113.9 136.1 4.4% 4.3% 3.6%

Mphasis 1,586 1,903 2,216 -0.9% 0.1% 0.7% 15.4 16.0 16.9 -18 -3 -6 77.0 97.1 121.6 -1.6% -0.1% 0.3%

LTTS 889 1,064 1,243 -1.4% -1.4% -0.9% 17.8 18.2 18.5 -28 -14 13 90.0 110.9 140.1 -3.5% -2.8% -0.2%

Tata Elxsi 329 413 501 0.9% 1.7% 1.7% 27.2 27.0 26.6 51 35 36 83.5 105.2 127.8 2.4% 1.9% 1.8%

Persistent 754 946 1,131 0.0% 1.2% 2.1% 13.7 13.8 14.3 19 80 115 88.8 115.0 141.7 0.6% 6.2% 9.4%

Cyient 617 704 798 -0.7% -1.9% -2.2% 13.5 13.5 13.9 -22 -39 -4 45.1 52.9 61.2 0.0% -3.5% -1.5%

Zensar 572 657 733 -0.5% -0.4% 1.7% 11.3 12.0 13.7 -135 -128 -33 16.9 19.7 26.0 -7.0% -9.8% -0.6%

Sonata 201 239 278 0.3% 0.5% 0.5% 8.4 8.4 8.4 7 8 8 34.5 42.3 49.8 0.6% 1.0% 0.8%

Mastek 293 343 391 0.5% 2.0% 1.4% 19.1 18.7 19.5 138 74 17 99.4 118.2 142.1 4.2% 0.9% -1.6%

Source: Company, HSIE Research

Companies M-cap

(INR bn)

CMP

(INR)

TP Old

(INR)

New TP

(INR) Old Rating

New

Rating

Old

multiple

(x)

New

multiple

(x)

5Y Avg (x) 10Y Avg

(x)

TCS 14,122 3,818 4,180 4,350 ADD ADD 32 32 24 21

Infosys 8,070 1,898 1,995 2,100 BUY BUY 30 30 20 18

Wipro 3,939 719 690 750 ADD ADD 24 24 17 16

HCL Tech 3,599 1,326 1,450 1,510 BUY BUY 22 22 15 15

Tech Mahindra* 1,723 1,785 1,710 2,100 BUY BUY 21 24 15 14

LTI* 1,312 7,533 6,400 7,700 ADD ADD 35 40 22 NA

Mindtree* 798 4,842 4,400 5,040 ADD ADD 35 37 22 18

Mphasis* 638 3,423 3,450 3,900 BUY BUY 30 32 18 15

LTTS* 598 5,727 5,350 5,880 ADD ADD 40 42 24 NA

Tata Elxsi 367 5,894 5,275 5,620 REDUCE REDUCE 44 44 24 20

Persistent 372 4,872 4,350 4,960 ADD ADD 35 35 18 16

Cyient 117 1,066 1,330 1,350 BUY BUY 22 22 14 13

Zensar* 122 533 550 625 BUY BUY 22 24 14 11

Sonata 90 867 1,050 1,100 BUY BUY 22 22 14 10

Mastek 90 3,042 3,300 3,410 BUY BUY 24 24 13 9

Source: HSIE Research, * PE multiple increased, TP based on Mar-24E EPS, CMP as on 3rd Jan 2022

Page | 6


IT Sector USD revenue growth (% YoY) IT Sector USD revenue growth (% QoQ)



IT Sector EBIT margin trend (%) IT Sector EBIT margin change (QoQ bps)



IT Sector aggregate revenue growth and margin trend Tier 1 revenue growth and margin trend



19

-85

-13

7

89

26

-24

-11

24

0

87

-51

-13

9

-4 -5

-200

-150

-100

-50

0

50

100

150

200

250

300

Q3

FY

19

Q4

FY

19

Q1

FY

20

Q2

FY

20

Q3

FY

20

Q4

FY

20

Q1

FY

21

Q2

FY

21

Q3

FY

21

Q4

FY

21

Q1

FY

22

Q2

FY

22

Q3

FY

22

E

8.7

%

8.0

%

8.4

%

8.0

%

7.7

%

3.6

%

-3.9

% -0.2

%

2.7

%

8.2

%

20

.4%

19

.1%

17

.5%

-10%

-5%

0%

5%

10%

15%

20%

25%

Q3

FY

19

Q4

FY

19

Q1

FY

20

Q2

FY

20

Q3

FY

20

Q4

FY

20

Q1

FY

21

Q2

FY

21

Q3

FY

21

Q4

FY

21

Q1

FY

22

Q2

FY

22

Q3

FY

22

E

2.2

%

2.4

%

1.2

% 2.0

%

1.9

%

-1.5

%

-6.2

%

5.9

%

4.9

%

3.8

%

4.4

%

4.8

%

3.6

%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Q3

FY

19

Q4

FY

19

Q1

FY

20

Q2

FY

20

Q3

FY

20

Q4

FY

20

Q1

FY

21

Q2

FY

21

Q3

FY

21

Q4

FY

21

Q1

FY

22

Q2

FY

22

Q3

FY

22

E

21.3

20.5

19.1

20.0

20.3

20.0

19.9

22.323.2

22.7

21.321.3

21.2

17

18

19

20

21

22

23

24

Q3

FY

19

Q4

FY

19

Q1

FY

20

Q2

FY

20

Q3

FY

20

Q4

FY

20

Q1

FY

21

Q2

FY

21

Q3

FY

21

Q4

FY

21

Q1

FY

22

Q2

FY

22

Q3

FY

22

E

7.2 8.4 8.5 6.9 1.9 17.9 14.5 11.3

20.8

20.3

20.9

20.0

22.2

21.521.8

22.3

18.5

19.0

19.5

20.0

20.5

21.0

21.5

22.0

22.5

0.0

5.0

10.0

15.0

20.0

FY

17

FY

18

FY

19

FY

20

FY

21

FY

22

E

FY

23

E

FY

24

E

USD Revenue Growth % EBIT Margin % (RHS)

7.2 7.9 7.7

6.9

1.917.5 13.8 10.8

21.621.1

21.6

20.7

22.9

22.122.4

22.9

18.5

19.5

20.5

21.5

22.5

23.5

0.0

5.0

10.0

15.0

20.0

FY

17

FY

18

FY

19

FY

20

FY

21

FY

22

E

FY

23

E

FY

24

E

USD Revenue Growth % EBIT Margin % (RHS)

Page | 7


Currency movements

Favourable movement of USD-INR (1.2% QoQ)

Negative Cross-currency impact in Q3FY22 due to depreciation of GBP, EUR and AUD

USD-INR trend GBP-USD trend

Source: NSE, Bloomberg, HSIE Research

Source: NSE, Bloomberg, HSIE Research

EUR-USD trend AUD-USD trend

Source: NSE, Bloomberg, HSIE Research Source: NSE, Bloomberg, HSIE Research

64

.7

64

.3

67

.0

70

.0

72

.1

70

.5

69

.6 70

.4 71

.2 72

.3

75

.9

74

.4

73

.8

72

.9 73

.7

74

.1 75

.0

(3)

(2)

(1)

0

1

2

3

4

5

6

60.0

62.0

64.0

66.0

68.0

70.0

72.0

74.0

76.0

78.0

Q3

FY

18

Q4

FY

18

Q1

FY

19

Q2

FY

19

Q3

FY

19

Q4

FY

19

Q1

FY

20

Q2

FY

20

Q3

FY

20

Q4

FY

20

Q1

FY

21

Q2

FY

21

Q3

FY

21

Q4

FY

21

Q1

FY

22

Q2

FY

22

Q3

FY

22

USD-INR Average Change QoQ % - RHS

1.3

3 1.3

9

1.3

6

1.3

0

1.2

9

1.3

0

1.2

9

1.2

3 1.2

9

1.2

8

1.2

4 1.2

9

1.3

2 1.3

8

1.4

0

1.3

8

1.3

5

(6)

(4)

(2)

0

2

4

6

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

Q3

FY

18

Q4

FY

18

Q1

FY

19

Q2

FY

19

Q3

FY

19

Q4

FY

19

Q1

FY

20

Q2

FY

20

Q3

FY

20

Q4

FY

20

Q1

FY

21

Q2

FY

21

Q3

FY

21

Q4

FY

21

Q1

FY

22

Q2

FY

22

Q3

FY

22

GBP-USD Average Change QoQ % - RHS

1.1

8

1.2

3

1.1

9

1.1

6

1.1

4

1.1

4

1.1

2

1.1

1

1.1

1

1.1

0

1.1

0

1.1

7 1.1

9

1.2

1

1.2

1

1.1

8

1.1

4

(4)

(2)

0

2

4

6

8

1.00

1.05

1.10

1.15

1.20

1.25

Q3

FY

18

Q4

FY

18

Q1

FY

19

Q2

FY

19

Q3

FY

19

Q4

FY

19

Q1

FY

20

Q2

FY

20

Q3

FY

20

Q4

FY

20

Q1

FY

21

Q2

FY

21

Q3

FY

21

Q4

FY

21

Q1

FY

22

Q2

FY

22

Q3

FY

22

EUR-USD Average Change QoQ % - RHS

0.7

7 0.7

9

0.7

6

0.7

3

0.7

2

0.7

1

0.7

0

0.6

9

0.6

8

0.6

6

0.6

6

0.7

2 0.7

3

0.7

7

0.7

7

0.7

4

0.7

3

(6)

(4)

(2)

0

2

4

6

8

10

0.60

0.65

0.70

0.75

0.80

Q3

FY

18

Q4

FY

18

Q1

FY

19

Q2

FY

19

Q3

FY

19

Q4

FY

19

Q1

FY

20

Q2

FY

20

Q3

FY

20

Q4

FY

20

Q1

FY

21

Q2

FY

21

Q3

FY

21

Q4

FY

21

Q1

FY

22

Q2

FY

22

Q3

FY

22

AUD-USD Average Change QoQ % - RHS

Page | 8


Revenue and margin performance (Q3FY22E)

Tier-1 IT revenue performance (QoQ %) Mid-Tier IT revenue performance (QoQ %)

Source: HSIE Research; Inorganic growth QoQ: Wipro 40bps, TECHM

75bps

Source: HSIE Research; Inorganic growth QoQ: Mphasis 215bps,

Persistent 250bps, Zensar 80bps, Sonata 250bps

Tier-1 IT revenue performance (YoY %) Mid-Tier IT revenue performance (YoY %)

Source: HSIE Research Source: HSIE Research

Tier-1 IT margin performance (QoQ bps)

Mid-Tier IT margin performance (QoQ bps)

Source: HSIE Research Source: HSIE Research

42 28

-6-39 -46 -65 -76 -78 -101

-140

-433-500

-400

-300

-200

-100

0

100

Min

dtr

ee

L&

T I

nfo

tech

Mp

ha

sis

Ma

stek

Per

sist

ent

L&

T T

ech

Tie

r-2

IT

Ta

ta E

lxsi

Cy

ien

t

Zen

sar

So

na

ta

3.8 3.73.5

3.3 3.3

2.8

0

1

1

2

2

3

3

4

4

Info

sys

HC

LT

Wip

ro

Tie

r-1

IT

Tec

h M

TC

S

7.8

6.2 6.1 5.8 5.5 5.3 5.04.7 4.3

3.9

2.4

0

1

2

3

4

5

6

7

8

9

Per

sist

ent

So

na

ta

Mp

ha

sis

L&

T I

nfo

tech

Tie

r-2

IT

Min

dtr

ee

Ta

ta E

lxsi

L&

T T

ech

Zen

sar

Cy

ien

t

Ma

stek

28.9

18.016.6 16.2

14.2

10.6

0

5

10

15

20

25

30

35

Wip

ro

Info

sys

Tie

r-1

IT

Tec

h M

TC

S

HC

LT

34.6 34.4

30.328.0

25.9 25.122.7

22.520.5 19.7

10.3

0

5

10

15

20

25

30

35

40M

ind

tree

Per

sist

ent

Ta

ta E

lxsi

So

na

ta

L&

T I

nfo

tech

Tie

r-2

IT

Ma

stek

Mp

ha

sis

Zen

sar

L&

T T

ech

Cy

ien

t

30

20

10 9

1

-19

(30)

(20)

(10)

-

10

20

30

40

Tec

h M

TC

S

HC

LT

Tie

r-1

IT

Info

sys

Wip

ro

Page | 9


Tier-1 IT quarterly USD revenue growth trend (QoQ %)

Source: Company, HSIE Research; Inorganic growth QoQ: Wipro 40bps, TECHM 75bps

Tier-1 IT quarterly EBIT Margin trend (%)


Mid-Tier IT quarterly USD revenue growth trend (QoQ %)

Source: Company, HSIE Research; Inorganic growth QoQ: Mphasis 215bps, Persistent 250bps, Zensar

80bps, Sonata 250bps

Mid-Tier quarterly EBIT Margin trend (%)


(10)

(5)

0

5

10

15

Q3

FY

18

Q4

FY

18

Q1

FY

19

Q2

FY

19

Q3

FY

19

Q4

FY

19

Q1

FY

20

Q2

FY

20

Q3

FY

20

Q4

FY

20

Q1

FY

21

Q2

FY

21

Q3

FY

21

Q4

FY

21

Q1

FY

22

Q2

FY

22

Q3

FY

22

E

TCS Infosys Wipro HCLT TechM(%, QoQ)

8

11

14

17

20

23

26

29

32

Q3

FY

18

Q4

FY

18

Q1

FY

19

Q2

FY

19

Q3

FY

19

Q4

FY

19

Q1

FY

20

Q2

FY

20

Q3

FY

20

Q4

FY

20

Q1

FY

21

Q2

FY

21

Q3

FY

21

Q4

FY

21

Q1

FY

22

Q2

FY

22

Q3

FY

22

E

TCS Infosys Wipro HCLT TechM(%)

-14.0

-10.0

-6.0

-2.0

2.0

6.0

10.0

14.0

18.0

3Q

FY

18

4Q

FY

18

1Q

FY

19

2Q

FY

19

3Q

FY

19

4Q

FY

19

1Q

FY

20

2Q

FY

20

3Q

FY

20

4Q

FY

20

1Q

FY

21

2Q

FY

21

3Q

FY

21

4Q

FY

21

Q1

FY

22

Q2

FY

22

Q3

FY

22

E

LTI Mphasis Mindtree LTTS

Persistent Cyient Zensar Tata Elxsi(%)

0.0

10.0

20.0

30.0

40.0

2Q

FY

18

3Q

FY

18

4Q

FY

18

1Q

FY

19

2Q

FY

19

3Q

FY

19

4Q

FY

19

1Q

FY

20

2Q

FY

20

3Q

FY

20

4Q

FY

20

1Q

FY

21

2Q

FY

21

3Q

FY

21

4Q

FY

21

Q1

FY

22

Q2

FY

22

Q3

FY

22E

LTI Mphasis Mindtree LTTS

Persistent Cyient Zensar Tata Elxsi(%)

Page | 10


Valuation charts

NIFTY IT Index Valuation Trend (P/E 1-yr fwd) IT Index Valuation Trend vs NIFTY

Source: Bloomberg, HSIE Research Source: Bloomberg, HSIE Research

TCS P/E (1-yr fwd) Trend Infosys P/E (1-yr fwd) Trend Wipro P/E (1-yr fwd) Trend

Source: Bloomberg, HSIE Research

HCL Tech P/E (1-yr fwd) Trend TECHM P/E (1-yr fwd) Trend L&T Infotech P/E (1-yr fwd) Trend


5

10

15

20

25

30

35

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Jan

-21

Jul-

21

Jan

-22

NIFTY IT Index Median

+1 SD -1 SD

+2 SD -2 SD

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

5

10

15

20

25

30

35

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Jan

-21

Jul-

21

Jan

-22

(P/E) Prem/ (Disc) to NIFTY IT Index P/E

10

15

20

25

30

35

40

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Jan

-21

Jul-

21

Jan

-22

P/E (1-yr fwd) 5 Yr Mean

1SD + 1SD -

2SD + 2SD -

5

10

15

20

25

30

35

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Jan

-21

Jul-

21

Jan

-22


1SD + 1SD -

2SD + 2SD -

4

8

12

16

20

24

28

32

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Jan

-21

Jul-

21

Jan

-22


1SD + 1SD -

2SD + 2SD -

4

8

12

16

20

24

28

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Jan

-21

Jul-

21

Jan

-22

P/E (1-yr fwd) 5 Yr Mean1SD + 1SD -2SD + 2SD -

8

11

14

17

20

23

26

29

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Jan

-21

Jul-

21

Jan

-22


510152025303540455055

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Jan

-21

Jul-

21

Jan

-22


1SD + 1SD -

2SD + 2SD -

Page | 11


Mindtree P/E (1-yr fwd) Trend Mphasis P/E (1-yr fwd) Trend L&T Tech P/E (1-yr fwd) Trend


Tata Elxsi P/E (1-yr fwd) Trend Persistent P/E (1-yr fwd) Trend Cyient P/E (1-yr fwd) Trend


Zensar P/E (1-yr fwd) Trend Sonata P/E (1-yr fwd) Trend Mastek P/E (1-yr fwd) Trend


05

10152025303540455055

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Jan

-21

Jul-

21

Jan

-22


0

5

10

15

20

25

30

35

40

45

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Jan

-21

Jul-

21

Jan

-22


1SD + 1SD -

2SD + 2SD -

048

1216202428323640444852

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Jan

-21

Jul-

21

Jan

-22


1SD + 1SD -

2SD + 2SD -

05

1015202530354045505560

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Jan

-21

Jul-

21

Jan

-22


4

12

20

28

36

44

52

60

68

76

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Jan

-21

Jul-

21

Jan

-22


1SD + 1SD -

2SD + 2SD -

4

8

12

16

20

24

28

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Jan

-21

Jul-

21

Jan

-22


1SD + 1SD -

2SD + 2SD -

4

8

12

16

20

24

28

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Jan

-21

Jul-

21

Jan

-22


4

8

12

16

20

24

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Jan

-21

Jul-

21

Jan

-22


0

4

8

12

16

20

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Jan

-21

Jul-

21

Jan

-22


1SD + 1SD -

2SD + 2SD -

Page | 12


Rating Criteria

BUY: >+15% return potential

ADD: +5% to +15% return potential

REDUCE: -10% to +5% return potential

SELL: > 10% Downside return potential

Disclosure: We, Amit Chandra, MBA & Vinesh Vala, MBA authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock –No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is solely for information of the recipient only. The report must not be used as a singular basis of any investment decision. The views herein are of a general nature and do not consider the risk appetite or the particular circumstances of an individual investor; readers are requested to take professional advice before investing. Nothing in this document should be construed as investment advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in securities of the companies referred to in this document (including merits and risks) and should consult their own advisors to determine merits and risks of such investment. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete. HSL is not obliged to update this report for such changes. HSL has the right to make changes and modifications at any time. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HSL or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently sent or has reached any person in such country, especially, United States of America, the same should be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published in whole or in part, directly or indirectly, for any purposes or in any manner. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. This document is not, and should not, be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report should not be construed as an invitation or solicitation to do business with HSL. HSL may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HSL and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the

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