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TCS’ growth shines bright in Indian markets but loses its shine in global markets

by 5paisa Research Team 19/10/2021

The IT giant great recorded a phenomenal recorded a strong performance in India but faltered overseas. While Indian market grew by 14.1% QoQ, it declined by 2% in Continental Europe. While the dollar revenue grew 15.5% YoY and 4% QoQ on CC basis the INR revenue grew by 16.8% YoY and 3.2% QoQ. The key growth drivers were increased outsourcing, investment in building a digital core and growth & transformation agendas of clients. The industry level inflationary headwinds drove the EBIT margins to 25.6% (up by 10bps QoQ and down by 60bps YoY). Net Margin stood at 20.5% (up by 70bps QoQ and down by 50bps YoY). Negative currency impact and increase in sub-contractor expenses were two of the reasons that strained the margins.

All TCS verticals witnessed a double-digit YoY growth CC basis with Manufacturing leading the pack with 21.7% growth and Technology & Services showing the lowest numbers (14.8%). Manufacturing ran the show for TCS as there was a sharp growth due to increasing demand within the auto industry, specifically the EV segment. BFSI was a stellar performing vertical achieving quarterly run-rate of US $2bn alone by gaining momentum in winning large insurance deals. BFSI’s such outstanding performance makes TCS one of the largest providers of IT Consulting services & solutions in the BFSI industry globally.

Geographically, TCS gained maximum revenue in North American by 17.4% YoY CC basis across all the markets and while India led the show with revenue growth of 20.1% YoY CC basis in the regional markets.

The growth in North America was due to strong demand in BFSI, which is likely to continue. The growth in India was driven by demand in the insurance sector, banks in need of digital transformation, enhancement of payment infrastructure by the RBI and newly launched services to help market infrastructure institutions such as exchanges and depositories. Europe showed a muted growth as a large project came to completion, customers offshored more due to supply-side challenges that led to value compression, some issues surrounding demand and continent is expected to get better post vaccination drives. Q2FY22 witnessed various sizes of deals. Vertical wise, BFSI bagged deals worth US $2.1bn, Retail bagged deals worth US$1.2bn. Country wise, North America won deals worth US $3.9Bn

With their expertise in aviation industry over the years and their belief in the resilient behavior of the industry, TCS anticipates another 12-18 months for the industry return to normalcy. Hence, they believe to revive Air India, the perfect time would be now. With this vision, they successfully bought out the airline for US $2.4bn.

TCS’ Ignio, its cognitive software, also showed great performance over the quarter signing up 22 new customers and 8 go-lives. Ignio has helped one of the largest mid-western consumer banks of USA in reducing downtime of critical applications besides significantly improving operational resilience.

Along with this, TCS has successfully gained deals under their Horizon 1 initiative, many of which have turned to Horizon 2 and/or 3. The company has applied for 6,169 patents, including 180 applied during 2QFY22 and has been granted 2,100 patents

TCS seems to feel the heat of talent acquisition as it has the lowest LTM attrition rate (11.9%) in the industry even though it has increased compared to its previous quarters. Surely, the company will catch up on this front as Employees logged over 14.3mn learning hours in 2QFY22, 496,000 employees have been trained in agile methods, over 417,000 employees have been trained in multiple new technologies and would hire a total of ~78,000 freshers in FY22. By the year-end, TCS plans to resume 80-85% working from office with hybrid model and desired level of flexibility.

TCS continues to sound confident, not only about FY22 but also about the medium term with great performance across markets.

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India VS UK – who rules, who wins? How the tables turn!

by 5paisa Research Team 19/10/2021

Indian Equity Market has shown an aggressive growth even after the economy was beaten down by the pandemic. The Indian equity market has soared from its lows of March 2020, edging to beat the UK equity market in terms of market value and cut the chase to be among the top 5 world equity markets.

                 

 

As per the Bloomberg data of the combined value of companies with a primary listing alone, the Indian equity market value stands at $3.46 trillion, representing a 37% surge this year. While the UK market value stood at $3.59 trillion representing only a 9% surge for the same period of time. These numbers exclude the secondary listings and depositary receipts, which could show a far larger divergence between the two markets.

The boom seen in the Indian Equity Market was led by the higher growth potential of the Indian market, and IPO rush in the tech sector, with ample Indian startup companies going public. The latter has fueled the growth more, giving the developed markets a good competition, as the sentiment towards the Chinese markets seem to turn sour. Indian equity market strikes as a promising domestic stock market from among the developing nations. This potential was realised and backed by a stable and reformist political base.

The failure of the UK market to keep up with its stellar performance and hold its high horse is stained with the uncertainties with the Brexit concerns looming over it.

The BSE index, S&P BSE Sensex, has outperformed the major national benchmarks and surged more than 130% since its March 2020 lows. The investors were handsomely rewarded with ~15% (in dollar terms) annualized RoE over five years which is more than double of U.K.’s benchmark FTSE 100 Index returns that clocked at 6%.

According to Goldman Sachs Group Inc., India will attain the $5 trillion dollar share market capitalization milestone by 2024. The IPOs introduced in the next 2-3 years, alone, would add a whopping $400 billion to the market value.

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As Paytm’s IPO gains momentum, it attracts more and more foreign bidders.

19/10/2021

In 2009, Paytm was launched by One 97 Communications as their first digital mobile payment platform. The platform has found popularity among the crowds and now has a brand value of $6.3 billion. The platform allows cashless transactions at stores, mobile data recharge and top-ups, digital money transfers, bill payments, digital banking services, purchase tickets, play games, make investments and lots more. The platform also serves merchants’ needs such as advertising, loyalty solutions, offer products, etc.

The company has 333 million total customers, 114 million annual transacting users, and 21 million registered merchants.

Paytm is seeking to raise funds worth $2.2 billion through this IPO making it the largest ever Indian IPO over a decade. The IPO seems to gain traction since it was announced as it has been receiving demand from sovereign wealth funds (SWFs) and foreign institutional investors (FIIs) who value the company at $20-22 billion. There have also been talks of a SWF offering an investment of $500 million of shares as it expects the valuation of the company to grow to $30billion.

At present, the IPO has gained new investors on their list of bidders such as US-based Alkeon Capital, funds managed by Morgan Stanley, Goldman Sachs and Canada's CPPIB continues to be in talks with the firm’s anchor investment slot. Potential European companies who were looking to invest in, now scrapped off, Ant Group’s IPO, may invest their funds in Paytm’s IPO.

Paytm is hoping for a pre-Diwali IPO launch and waiting for the final green signal from SEBI, which should come through soon.

The $2.2bn IPO will be divided between fresh issuance of share and OFS (Offer For Sale) by its existing shareholders each worth $1.1bn, allowing Pre-IPO round to raise ~$270mn (approx. Rs.2000cr). The details of Pre-IPO round are not written in stone as they would depend on investor requirements, tax implications and the lock-in period.

Founder Vijay Shekar Sharma, and firm’s key shareholders such as SoftBank, Ant Group and Elevation Capital will sell a part of their stake in OFS.

Paytm IPO’s draft red herring prospectus said 75% of public issue will be reserved for qualified institutional buyers (QIBs) out of which Up to 60% may be allotted to anchor investors, 15% is for non-institutional investors and the balance 10% for retail investors.
 

 

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Tata Motors wins binding agreements worth US$1Bn with TPG and ADQ for expansion in the EV industry.

by 5paisa Research Team 19/10/2021

Tata Motors won a binding agreement with PE firm, TPG, and ADQ worth US$1Bn for an 11-15% stake in its newly formed subsidiary, TML EVCo. Post money, the valuation of the new company would stand at ~US $9.1Bn.

The investment will be down in two phases. First 50% will be done by March 2022, post completion of setting up of the EVCo and second 50% by 3QCY22 on accomplishing “Go Live” actions. The investment will be in compulsory preference shares which will later convert to Equity, generating revenue threshold for 11-15% stake.

With this valuation, the revenue and EV penetration estimation would stand at ~9.8x EV/Sales ratio for FY24E. Such high EV/Sales valuation makes the company at par with world EV leaders such as Tesla which commands an EV/Sales of 10x.

However, the right valuation of an EV would be on the basis of strong correlation between EV OEMs’ valuation (EV/Sales) and their revenue growth expectations with the OEMs' market share. Even though Tata Motors does suffice this criterion, it might not be a “winner” just yet in India EV reason being its low volumes and the markets demands hierarchy changes as many players enter the market. Also, the valuation may also stand the test of low public charging infra roll out and low range of cars on sale as the popularity for EV is yet to gain traction from the general masses.

The new venture investment would serve as a boon to the new subsidiary. The company focuses to infuse excess of US$ 2.2 bn over the next 5 years and launch 7 new EV models, EV platform and transitioning from pure conversion models to an adapted platform for EVs gradually. In the 5-year road plan, the company aims to 20% sales from the EV division EV penetration of PVs in double digit. The management aims to achieve EBITDA break even by next year as the contribution margin of EVs is close to rest of PVs for Tata Motors.

The key concerns for Tata Motors still remain with revival of JLR and tackling with the competition in luxury end EV market players such as BMV, Tesla, Merc and Audi. Thus, if the demand persists and grows, it will get more difficult to keep up.

Additional concerns that the company have to tackle would be Brexit, US tariffs, higher than expected incentives, and slowdown of key auto markets its caters to such as US, China and Europe.

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Reliance Industries steadily moves towards green energy with two new partners – Stiesdal and NexWafe

by 5paisa Research Team 19/10/2021

Reliance Industries is slowly stepping towards green energy. In recent deals to achieve to its green goal, Reliance announced a collaboration with Denmark-based Stiesdal that has technology for producing g hydrogen electrolyzers and acquire stake in NexWafe provides access to wafer technology for solar photovoltaic modules.

RIL aims to spend US$10bn over the next three years in (1) Integrated Solar Photovoltaic Module factory, (2) Advanced Energy Storage Battery factory for storage of intermittent energy, (3) Electrolyser factory for production of green hydrogen, and (4) Fuel Cell factory for converting hydrogen into motive and stationary power.

With the collaboration with Stiesdal, Reliance aims to produce Hydrogen electrolyzers for India which produce green hydrogen. The company operates at a more cost-efficient process than its peers which will contribute to RIL’s aim to provide green hydrogen at US $1/kg which is much lesser than industry cost of US $5/kg. To support this bias, Stiesdal’s HydroGen claims to convert electricity to hydrogen at a cheaper rate than other electrolysis technologies on the market. RIL may also extend an agreement with Stiesdal for fuel cells that convert hydrogen to electricity.

NexWafe deals in developing wafers which are an intermediate process in development of solar cells and modules. NexWafe manufactures cost-efficient and energy-efficient wafter made out of silicon instead of expensive and materials such as polysilicon production and ingot pulling RIL’s stake acquisition in the company will help RIL to get access to wafer technology and create end-to-end manufacturing of components in solar energy value chain.

RIL has also invested 25 million euros in Series C funding of NexWafe. This investment done under India Strategic Partnership Agreement will allow both the countries to develop high-efficiency monocrystalline “green solar wafers” with NexWafe's proprietary technology and processes and commercialize it.

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Quarterly IT services update

by 5paisa Research Team 19/10/2021

Indian IT services continued to perform strongly in Q3CY21 as the strong momentum continued in winning deals in managed and as-a-services deals.

It is estimated more than 2000 medium to small deals were won through CY22, a record high so far. Despite strong ACVs, pipeline remains strong. Managed services deals worth $8.4bn were signed, showcasing a strong growth of +21.7% YoY, and+2.4% QoQ even after a strong Q2 performance. Among these, ITO grew at +12% YTD21 and BPO grew at +40% YoY. As-a-Service generated deals worth $13.4bn and grew at +55.8% YoY, and +14.5% QoQ. Going forward, Managed services are estimated to grow at +10.1% YoY (revised from +9% YoY) and As-a-Service to grow at +25% YoY (revised from +21% YoY).

Between 2019 and 2021, the companies have been effective in passing on the cost to the clients in new contracts. A 4% growth in the new contract prices have already been witnessed and accepted. However, the pressure remains on the existing contracts.

Even with the increase in prices, the demand still high, especially in ADM, ER&D Services and Industry specific BPO. ER&D services are gaining high demand in Manufacturing, Hitech and Healthcare industries. Going forward, the tech companies may face issues as the spendings are estimated to increase in CY22 itself. Discretionary spending is improving and there is shift of spending from hardware to new-age tech services like Cloud, cybersecurity, analytics, data.

The maximum demand came from Retail & CPG (+38% YoY), followed by Travel (31% YoY), Business services (+30% YoY), Telecom (+28% YoY), Manufacturing (+27% YoY), Energy (+26% YoY), and BFSI (+20% YoY). While, there was a muted growth from the healthcare with only +13% YoY.

Geographically, Americas posted the maximum growth at 36.5% YoY and +19.6% QoQ while APAC reported a mute growth of 59.6% YoY, and -6.4% QoQ. EMEA contributed and grew at +35.4% YoY, and +3.2% QoQ

The future outlook and prospects look very positive and robust for the Indian IT industry.

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