Bernstein - Indian IT Services - Have Margins Bottomed

20 September 2022
India Technology, Media & Internet

Indian IT services - Have margins bottomed ?
A key investor question is on 'margin erosion' in the sector and whether margins have bottomed
Rahul Malhotra
+65 6230 2344 out. We look back at past cycles in 2001 (Y2K) & in 2009 (GFC) and how margins panned out. In
rahul.malhotra@bernstein.com 2001, industry margins were reset lower but helped drive 40%+ CAGR growth over 2004-08.
However, in 2009 (GFC) the margins were protected driven by deep cost/wages cuts. In this
Sanjit Shinde note we look at the likely margin outcomes & analyze the micro variables of costs for the sector.
+91 226 842 1469
Sanjit.Shinde@bernstein.com
Cost structure: We believe the current scale of the business and flexibility in cost structure
allows the Indian IT companies the margin leverage. Salary costs have the highest mix within
total costs with 50-55% of revenues (incl. variable pay at ~5-7%). Few companies have
announced variable pay cuts Subcontractor costs are 7-8% of revenues. Travel is 1.5-1.6%
of revenue but has come down to ~0.7% post Covid. Other costs are ~ 2.5% of revenues
Historical margin performance: The period of 2004-08 was a period of high growth which
led to IT services companies relaxing hiring & performance norms. Salary costs expanded as
companies absorbed the limited talent leading to margin erosion. During the GFC in 2009,
variable pay were realigned to get flexibility on margins. In 2020 margins expanded led by
increase in offshoring & limited travel costs. In 2022 (Q1FY23), margin impact was led by
wages/high attrition (150-200 bps)
Profitability drivers: The EBIT margins for Indian IT services companies are driven by a few
key variables a) pricing power from customers, b) wage inflation c) currency d) pyramid, mix/
offshoring. With headwinds from wage inflation, Indian IT companies are using other levers
(incl. operating efficiencies/utilization/offshoring) to manage margins in the near/medium
term
Levers to support margins: Key levers to support margins are higher offshoring and better
pyramid mix. Pricing discussions have been constructive with expectations of improvement,
however back-ended in H2FY23. Other margin levers include lowering attrition. Infosys
attrition peaked to 28% LTM Q1FY23 (has moderated during the quarter). TCS hired 100K
freshers in FY22 (plans to hire ~40K in FY23)
Margin outlook : Infosys believes it has sufficient levers to improve margins (from bottoms
of Q1FY23). Margin improvement to be driven by Potential pricing increase in digital, higher
utilization as more freshers get billed. Offshoring remains a lever. Subcontractor costs
moderating as onsite visa backlogs soften.
Top picks: We remain positive on the sector and prefer large caps over mid-caps. Our top
pick is Infosys driven by deep digital positioning, strong growth momentum (13-15% FY23
YoY CC guidance), & attractive valuation (~20% discount to TCS). We are Outperform on TCS
given the strongest Billion Dollar Playbook, resilient margins, however valuations are keeping
risk/reward in the balance.
See the Disclosure Appendix of this report for required disclosures, analyst certifications and other www.bernsteinresearch.com
important information.
First Published: 20 Sep 2022 03:39 UTC Completion Date: 20 Sep 2022 03:39 UTC
Rahul Malhotra +65 6230 2344 rahul.malhotra@bernstein.com 20 September 2022
BERNSTEIN TICKER TABLE

19 Sep TTM Reported EPS Reported P/E (x)
2022
Closing Price Rel.
Ticker Rating Price Target Perf. 2022A 2023E 2024E 2022A 2023E 2024E
TCS.IN O INR 3,028.80 3,890.00 2.8% INR 103.61 115.69 134.08 29.2 26.2 22.6
HCLT.IN M INR 897.80 1,060.00 (6.1)% INR 49.83 52.82 60.03 18.0 17.0 15.0
INFO.IN O INR 1,390.30 1,880.00 6.0% INR 52.53 59.87 69.85 26.5 23.2 19.9
TECHM.IN O INR 1,039.50 1,240.00 (2.0)% INR 63.42 63.97 74.74 16.4 16.2 13.9
WPRO.IN M INR 401.95 450.00 (15.7)% INR 22.34 22.20 25.64 18.0 18.1 15.7
MXAPJ 488.32 41.09 44.59 48.72 11.88 10.95 10.02
O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated
Source: Bloomberg, Bernstein estimates and analysis.
INVESTMENT IMPLICATIONS
We are Outperform on Infosys, TCS & TechM in our coverage. We are Market-Perform on Wipro & HCLT
INDIA TECHNOLOGY, MEDIA & INTERNET BERNSTEIN 2

DETAILS
PLEASE FIND BELOW THE LINKS TO OUR RECENTLY PUBLISHED REPORTS

Indian IT Services: Large-cap vs Mid-cap.....thoughts on risk-reward (Sep 2022)
Indian IT Services: Growth remains resilient. Top Pick - Infosys (Aug 2022)
Indian IT Services - How did the Big 3 - TCS, Infosys, and Accenture - perform during the GFC ? (Jul 2022)
Indian IT Services: Large-cap or mid-cap - better positioned in a recession? (Jun 2022)
Indian IT Services: What is the impact of a recession ? (May 2022)
Indian IT services - How resilient are the margins ? (May 2022)
Weekend Tech Byte: Does it matter in the Global Cloud world where a company comes from ? (Apr 2022)
Indian IT Services - Benchmarking the Big 3 - Accenture, TCS & Infosys (Mar 2022)
Indian IT Services - Defensive against near-term uncertainty? (Mar 2022)
Indian IT Services: Large Cap vs. Mid Cap - Where is the margin of safety on the 'Rule of 40' ? (Mar 2022)
Indian IT Services - Consistency is king. (February 2022)
Indian IT services cost structure - We believe the current scale of the business and flexibility in cost structure allows the
Indian IT companies the margin leverage. We analyze the cost structure for TCS in the exhibit below. Salary costs have the
highest mix within total costs with 50-55% of revenues. Subcontractor costs are 7-8% of revenues (higher for the industry vs
TCS). Travel is 1.5-1.6% of revenue
EXHIBIT 1 : TCS - Direct Costs (As % of Revenue)
58.8% 59.2% 59.8%

57.9% 58.1%
2.6% 2.5%
2.5% 2.7% 0.7%
2.4% 0.9% 0.8%
1.1% 0.9%
2.1% 2.0% 0.8% 1.9% 0.7%
0.6% 0.7% 1.5% 1.9% 0.5%
1.5% 1.6% 1.7% 0.9% 0.6%
1.3% 1.1% 1.2%
2.2% 1.5%
7.7% 8.8%
8.0%
6.8% 7.3%
43.8% 43.9%
40.9% 41.3% 41.8%
FY18 FY19 FY20 FY21 FY22

Employee Cost Fees to Consultants Equip. & Software License Depreciation
Travel Communication Facility Expenses Other Costs
Source: Company Reports, Bernstein Analysis

Above Chart not built to scale
Direct expenses mix - Employee costs remain the largest part the of cost structure (~71-73%). Subcontractor costs are
~13%-15% of the costs of sales. Travel, communication and facility costs have halved from 7.5% of costs to 3.7% of costs.

Other costs are stable at 8-10% of costs.
EXHIBIT 2 : TCS - Direct Costs (% of Cost of Sales)

100.0% 100.0% 100.0% 100.0% 100.0%
10.1% 8.9% 9.6% 9.1% 8.3%
3.8% 3.7%
7.4% 5.8%
7.5%
13.0% 14.7%
12.5% 13.5%
11.8%
74.1% 73.4%
70.6% 71.1% 71.1%
FY18 FY19 FY20 FY21 FY22
Employee Cost Fees to Consultants Travel, Comm. & Facility Others
Indian IT services growth (pre GFC) - Top 4 Indian IT services grew 40% CAGR during 2004-07 before the GFC crisis. Indian
IT services growth accelerated led by increase in outsourcing as clients shifted work offshore. We look back at past cycles in
2001 (Y2K) & how margins panned out. In 2001, industry margin were reset lower but helped drive 40%+ CAGR growth over
2004-08.
EXHIBIT 3 : Growth of Global IT vs Indian IT services vs top 4 Indian IT services firms(pre-GFC)
45.0% 42.0%
38.9% 39.7%
37.8% 38.3%
40.0%
35.7%
34.1% 33.1%
35.0% 32.2%
29.7%
30.0%
25.0%
20.0%
15.6%
15.0%
12.1%
10.0%
10.4%
5.0% 8.4% 8.3%
6.4% 6.7% 6.6%
0.0%
2003 2004 2005 2006 2007 2008
Top 4 IT Services Indian IT Global IT Spend
Source: Gartner, Nasscom, Bernstein analysis and estimates
Indian IT services Growth (post GFC) - Growth declined in 2009 during GFC to low single digits with 2-3 quarters of
declining growth. In 2009 (GFC) the margins were protected in the ~20% EBIT driven by deep cost cuts across variable costs,
fixed salaries and performance based layoffs.

Growth post GFC moderated down due to scale & shift from legacy services to digital services. Growth remained healthy at
10%-15%+ post 2010-2015 with global IT spend growth only in 2-3% average growth rate. Growth declined during Covid in
2020 but accelerated strongly to 15-20% growth in 2021 led by pent up demand in the sector
EXHIBIT 4 : Growth of Global IT vs India IT services vs top 4 India IT services firms(post-GFC)
30.0%
25.2%
25.0%
18.7% 19.3%
20.0% 18.4%
15.0% 13.0% 12.3%

16.7%
10.2% 10.3% 17.9%
10.0% 7.6% 7.8% 8.3% 8.2%
12.5%
5.5%
9.4% 9.2%
5.0% 7.7% 7.5% 7.4% 2.7% 7.5%
7.0% 6.9%
5.2% 4.5% 5.2%
0.0% 3.7% 3.7% 3.7% 3.3%
2.1% 1.7% 1.3%
0.6% 0.7%
-5.0% -1.6%
-10.0% -7.0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Top 4 IT Services Indian IT Global IT Spend
Source: Gartner, Nasscom, Bernstein analysis and estimates
Margin performance (pre & post GFC) - The period of 2004-08 was a period of high growth which led to IT services
companies relaxing hiring & performance norms. Salary costs expanded as companies absorbed the limited talent leading to
margin erosion. During the GFC in 2009, Operating margins remained resilient (on balance, modestly expanded) as most of the
cost base is variable and share buybacks accelerated. Infosys margins expanded by ~100 bps in CY09/FY10. TCS margins
expanded by 200+ bps in CY09/FY10.
EXHIBIT 5 : Historical margin trend (%) from FY05-13
28.8%
26.6% 27.0%
26.3%
25.8%
20.7%
19.2%
18.5%
Infosys TCS Wipro HCL Tech
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Source: Company reports, Bernstein analysis

Margin performance (recent period) - Margins have moderated for the industry as growth slowed. Growth post GFC
moderated down due to scale & shift from legacy services to digital services.
EXHIBIT 6 : EBIT Margin (%) trend from FY14-22
29.1%
25.3%
24.4%
23.0% 23.3%
22.6%
18.9%
18.0%
Infosys TCS Wipro HCL Tech
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
MARGINS DURING GFC

Operating margins remained resilient (on balance, modestly expanded) as most of the cost base is variable and share buybacks
accelerated. In CY09, ACN margins expanded modestly (~35bps/quarter) in CY09, while Cognizant margins remained flat YoY
in CY09. TCS/Infosys continued to expand margins through a mix of higher utilization, productivity enhancements, operational
efficiency (e.g., cost-cutting in travel, SG&A, sub-contractor costs) and lower wage increases. Infosys margins expanded by ~100
bps in CY09/FY10. TCS margins expanded by 200+ bps in CY09/FY10.
EXHIBIT 7 : EBIT margins for TCS EXHIBIT 8 : EBIT margins for Infosys EXHIBIT 9 : EBIT margins for
during the GFC (%) during the GFC (%) Accenture during the GFC (%)
27% 33% 16%

26% 32% 14%
25% 31% 12%
24% 30% 10%
29%
23% 8%
28%
22% 27% 6%
21% 26% 4%
20% 25% 2%
19% 24% 0%
Q4-07
Q1-08
Q2-08
Q3-08
Q4-08
Q1-09
Q2-09
Q3-09
Q4-07
Q1-08
Q2-08
Q3-08
Q4-08
Q4-07
Q1-09
Q2-09
Q3-09
Q1-08
Q2-08
Q3-08
Q4-08
Q1-09
Q2-09
Q3-09
TCS Infosys Accenture
Source: Bloomberg, Company Reports, Bernstein Source: Bloomberg, Company Reports, Bernstein Source: Bloomberg, Company Reports, Bernstein
Analysis Analysis Analysis
MARGINS DURING COVID

Margins expanded in 3Q21 led by travel costs/higher offshoring as most IT services companies were on a WFH (Work from Home)
model. Margins expanded for TCS to 26.6%, for Infosys to 25.4% & 16.1% for Accenture.

EXHIBIT 10 : TCS EBIT margins during EXHIBIT 11 : Infosys EBIT margins EXHIBIT 12 : Accenture EBIT margins
COVID-19 (%) during COVID-19 (%) during COVID-19 (%)
26.5% 26.6%
16.1%
25.4%
23.7% 14.3%
13.3%
20.5%
23.2%
2Q19
3Q19
4Q19
1Q20
2Q20
3Q20
4Q20
1Q21
2Q21
3Q21
2Q19
3Q19
4Q19
1Q20
2Q20
3Q20
4Q20
1Q21
2Q21
3Q21
2Q19
3Q19
4Q19
1Q20
2Q20
3Q20
4Q20
1Q21
2Q21
3Q21
TCS Infosys Accenture
Source: Bloomberg, Company Reports, Bernstein Source: Bloomberg, Company Reports, Bernstein Source: Bloomberg, Company Reports, Bernstein
Analysis Analysis Analysis
MARGINS POST COVID - Margins post covid declined due to high attrition, wage inflation and expansion in travel. Margins for
TCS declined from 25.5% in Q1FY22 to 23% in Q1FY23. Margins for Infosys declined from 23.7% to 20.1% and Accenture
margins were at 13.7% in Q2FY22 (Jun-22)
EXHIBIT 13 : TCS Margins post COVID EXHIBIT 14 : Infosys EBIT margins EXHIBIT 15 : Accenture EBIT post
post COVID COVID
26.6%
25.4%
13.4% 13.7%
21.2% 20.1%
23.1%
23.2%
4Q20
1Q21
2Q21
3Q21
4Q21
1Q22
2Q22
3Q22
4Q22
1Q23
4Q20
1Q21
2Q21
3Q21
4Q21
1Q22
2Q22
3Q22
4Q22
1Q23
4Q20
1Q21
2Q21
3Q21
4Q21
1Q22
2Q22
3Q22
4Q22
1Q23
TCS
Infosys Accenture

Source: Company reports, Bernstein analysis Source: Company reports, Bernstein analysis
Q1FY23 refers to Jun-22 (Q2FY22 Reporting period
for Accenture)
INDIAN IT SERVICES GROWING THROUGH HIGH ATTRITION, STRONG HIRING

Hiring slowed down in the quarter, post the record hiring spree of the last few quarters. But the efforts to rationalize the pyramid
structure and juniorization trend continued, with several additions of freshers. Further, hiring at IT firms is soft during 1Q of a
financial year. Although TCS maintained its FY23 target of hiring 40k additions, it made much lower net hire of ~14K in Q1FY23
compared to Q4FY22. Infosys made a net hire of 21K in Q1FY23 and has indicated to hire ~50K employees over FY23.

EXHIBIT 16 : Highest LTM Attrition (%) witnessed across Indian IT sector
28.4%
23.3% 23.8%
22.2%
19.7%
17.2%
15.5%
13.9%
11.8%
8.6%
TCS Infosys Wipro Tech M HCL Tech
1Q22 2Q22 3Q22 4Q22 1Q23
EXHIBIT 17 : Quarterly Net Hiring Across Tier 1 Indian IT Companies
20,409 21,171
15,446
14,136
12,178
8,334 7,522 6,862
5,209
2,089
TCS Infosys Wipro HCL Tech Tech M
1Q22 2Q22 3Q22 4Q22 1Q23
RECENT MARGIN TRENDS

We look at historical margin walk (quarter on quarter) for (1)TCS, (2)Infosys & (3)HCLT from Q1FY22 to the recent reported quarter
Q1FY23
(1) TCS margin walk

Supply side challenges have been a bigger issue in near term and headwind on margins. TCS has indicated that salary hikes in
FY22 could be in the range of FY23. In FY22, margins were impacted by wage hike, subcontractor costs & cost of attrition which
has an overall impact of 330 bps. EBIT margins for Q1FY23 were a miss at 23.1% (down 190 bps QoQ) driven by annual salary
increment to the tune of 150 bps.

EXHIBIT 18 : TCS EBIT Margin walk-through
25.5% 25.6%
0.6% 0.6% 25.0% 0.7% 0.8% 25.0% 1.5%
0.1%
0.7% 0.1% 0.1%
0.2% 0.7%
23.1%
0.3%
Operational Efficiencies
Tactical Interventions
Higher Sub Cont. Costs
Wage Hike
Operating Efficiencies
Recruitment Expense
Other Cost Pressures

Q2FY22
Currency Impact
Currency Impact
Currency Impact
Q1FY22
Q3FY22
Q4FY22
Q1FY23
Operatinal Efficiencies
Targeted Increments,
Travel, Marketing,
Backfilling Costs
Source: Company Reports, Conference Call, Bernstein Analysis
(2) Infosys margin walk

Infosys margin guidance in FY23 is 21-23%. EBIT margin in Q1FY23 was a miss with margin headwinds from wage hikes (160
bps), lower utilization (40bps) & sub-contractor costs (30 bps).
EXHIBIT 19 : Infosys EBIT Margin walk-through
23.7% 0.5% 23.6% 23.5%

0.8% 0.2% 0.5%
0.2% 0.5%
1.1% 0.8% 0.4%
0.4% 0.6% 21.5%
0.5%
1.0%
20.1%
0.5%
1.6%
0.4% 0.3%
0.3%
Salary Hike
Lower Calendar Days,
Lower Utilization
SG&A Leverage
Lower Utilization
SG&A Leverage
Lower Utilization
Pricing/ Provision
Currency Imapct
Currency Impact
Higher Visa Costs, Other
Currency Impact
Q1FY22
Q2FY22
Q4FY22
Wage Hike
Q3FY22
Q1FY23
Higher Sub-contractor
Higher Sub-contractor
Operating Efficiencies
Targeted Increments,
Operatinal Efficiencies/
Backfilling Costs
Better Utilization
Writeback
Provisions
Costs
Costs
One-offs

In Q4FY22, Impact due to Lower Calendar Working days is a net of 1.6% impact due to lower working days, provisions and savings of 1.1% due to lower employee
expenses due to lesser working days, leave costs and others
(3) HCLT margin walk

HCLT maintained guidance of 18-20% for FY23. Margins decline 90 bps in Q1FY23 led by100 bps of sub con costs & 50 bps
wage hike
EXHIBIT 20 : HCL Tech EBIT Margin walk-through
19.7%
19.0% 19.0%
0.7%
0.1% 0.1% 17.9%
0.7%
0.2% 17.0%
1.8% 0.5%
0.6%
1.0%
0.4%
0.4%
Currency Imapct
Seasonality in P&P
Currency Imapct
Higher Sub-con Costs
Currency Imapct
Retention, backfilling
Q1FY22
Q2FY22
Q3FY22
Operational Efficiency
Q1FY23
Q4FY22
Travel & Visa

P&P Degrowth
Revenue Growth
Lesser Leaves
Wage Hike, Cost of

Vertical
costs
MARGIN EXPANSION POTENTIAL

The margins for Indian IT services companies have depended on following key variables i.e.,
a) efficiencies from offshoring/pyramid, b) pricing power from customers, c) wage levels of employees, d) average currency rates
(1) Higher offshoring

The most fundamental solution to reduce cost to clients & improve margins is to shift delivery from onsite to offshore. Post- COVID,
clients are more receptive to solutions requiring greater offshore delivery. Pricing discussions are moving to blended onsite/
offshore pricing giving the vendors more flexibility. For Infosys onsite mix has come down & offshore mix has improved (76% in
Q4FY22) / onsite mix (24%).

EXHIBIT 21 : Infosys Onsite Effort Mix (%) EXHIBIT 22 : Onsite Revenue Mix (%)
28.0% 65.2%
63.5% 62.7% 63.2% 62.7%
61.1%
26.1%
25.2%
24.3% 24.3%
24.1% 24.0%
23.8%
23.6%
Wipro Tech M
4QFY20 1QFY21 2QFY21 3QFY21

1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23 4QFY21 1QFY22 2QFY22 3QFY22
(2) Higher Utilization levels

Utilization levels have declined in the past few quarters due to higher induction of freshers and will start improving as freshers
start getting billed.
EXHIBIT 23 : Employee Utilization (%) Excluding Trainees
88.0%
87.0%
83.3% 84.1% 82.7% 84.0%

83.1% 82.8%
80.0%
77.6% 77.7% 78.1%
75.6% 75.8%
72.7%
Infosys Wipro Tech M
1Q22 2Q22 3Q22 4Q22 1Q23
(3) Increase in junior mix of employees

Hiring more fresh graduates has been a key component of controlling salary costs at Indian IT services. Staffing of younger
manpower on projects helps manage margins better. By tweaking of pricing and role mix, IT services companies have been able
to devise solutions to staff younger manpower. Fresher hired of overall net additions was 97% for TCS & 156% for Infosys (gross
freshers hire/ Total Net Employee hire)

EXHIBIT 24 : Fresher Hired to Total Net Additions in FY22 EXHIBIT 25 : Net Employee Additions in FY22
156% 103,546
97%
54,396
45,416
58% 39,900
42% 42%
24,013
TCS Infosys Wipro HCL Tech Tech M TCS Infosys Wipro HCL Tech Tech M
Fresher to Net Additions Total Net Employee Adds
Source: Company Reports, Bernstein Analysis Source: Company Reports, Bernstein Analysis
(4) Pricing power

IT services companies are working to improve pricing on digital skills and reduce pricing on legacy skills. Key pricing trends as
follows.
(1) Infosys — Infosys talked about “Better pricing” as a key lever for margins. However, pricing will be staggered and back end
loaded. Digital growth rates are very strong for Infosys (~40% YoY CC) which is driven by volume growth but also stronger pricing
growth.
(2) TCS — Pricing discussions are getting constructive. Renewals include COLA clauses, better pricing in digital work.
EXHIBIT 26 : Infosys Digital Revenue & CC Growth EXHIBIT 27 : Infosys Legacy Revenue & YoY CC Growth
3000 42% 42% 43% 45% 1770 4%

2%
39% 1%
38% 40% 1% 2%
2500 34% 1760
35% -1% 0%
31%
2000 30% 1750 -3% -2%

26% 25%
25% -4%
1500 1740
20% -6%
-8%
1000 15% 1730 -8%
-10%
10% -10%
500 -12% -12%
1720
5% -12%
0 0% 1710 -14%
1Q21
2Q21
3Q21
4Q21
1Q22
2Q22
3Q22
4Q22
1Q23
1Q21
4Q21
1Q22
4Q22
1Q23
2Q21
3Q21
2Q22
3Q22
Digital revenue (US$ mn) YoY CC Growth Legacy revenue (US$ Mn) YoY CC Growth
Source: Corporate Reports, Bernstein Analysis Source: Corporate reports, Bernstein analysis

(5) Currency movement

Rupee denominated costs (wages etc) are about 40-50% of total costs hence exchange rates remains an important margin driver
for Indian IT services business. A 1% depreciation of rupee against the US Dollar adds 30-35 bps to margins and 1.5%-2% to
earnings. However, the recent cross currency movement have impacted margin gains
EXHIBIT 28 : USD INR Forex Movement EXHIBIT 29 : Revenue Mix by Currency (Q1FY23)
82
9%
14%
21% 6% 22%
80
5%
13% 9%
78 79.1 11% 4%
5% 11%
10%
76 13%
10%
74
72 68%
62%
56% 53%
70
68
Feb-20
Feb-22
Feb-21
Aug-19
Nov-19
Aug-20
Nov-20
Aug-21
Nov-21
May-20
May-21
May-22
Aug-22
TCS Infosys Wipro Tech Mahindra
USD GBP Euro AUD Others

USD - INR

Source: Bloomberg, Bernstein Analysis
As of 19 Sep 22
(6) Subcontractor costs - Subcontractor costs continue to peak out to meet the strong demand environment. However,
subcontractor costs are flattening and expected to improve over a medium term as US visa backlogs improve.
EXHIBIT 30 : Subcontractor costs as % of revenue
16.4% 16.3%
15.7%
15.3%
14.8%
13.9% 13.9% 13.7% 13.7%
13.5%
11.0% 11.1% 11.3%

10.3%
9.7%
9.2%
8.6% 9.0% 8.8%
8.3%
TCS Infosys Wipro Tech M
1Q22 2Q22 3Q22 4Q22 1Q23

FY23 MARGIN ESTIMATES

Infosys has guided for 21-23% EBIT margin, while for HCL Tech guidance ranges between 18-20%. Wipro had indicated margins
likely below the guidance band of 17-17.5% over next 2-3 quarters. TCS is expected to maintain margin within a tight band of
~25% (aspirational band of ~26-28%). We expect EBIT Margins to moderate over FY23. Our estimates for margins for Infosys
(Top pick) is 22.5%, 25.2% (TCS), HCLT (19.5%) & Wipro (17.5%).
EXHIBIT 31 : EBIT Margins to moderate in FY23
25.1% 25.3% 24.5% 24.5%

23.0%
21.5% 21.3%
19.9%
18.9%
18.1% 17.7%
16.5%
14.2% 14.6%
12.9%
TCS Infosys HCL Tech Wipro Tech M
FY21 FY22 FY23E
Source: Company Reports, Bernstein Analysis and Estimates
EXHIBIT 32 : EBIT Margins (%) have moderated in the last few quarters, led by elevated attritions and supply side
pressure
25.5% 25.6%25.0% 25.0%

23.7% 23.6% 23.5%
23.1%
21.6%
20.1% 19.6%
18.8% 19.0%19.0%
17.8% 17.6% 18.0%
17.0% 17.0%
15.0% 15.2% 15.2%14.8%
13.2%
11.0%
TCS Infosys Wipro HCL Tech Tech M
1Q22 2Q22 3Q22 4Q22 1Q23

VALUATIONS
We remain positive on the sector and prefer large-caps over mid-caps. Our top pick is Infosys driven by deep digital positioning,
strong growth momentum (13-15% FY23 YoY CC guidance), & attractive valuation (~15% discount to TCS). We are Outperform
on TCS given the strongest Billion dollar playbook, resilient margins, however valuations are keeping risk/reward in the balance.
EXHIBIT 33 : NTM P/E

L&T BSE IT
CY TCS Infosys Wipro HCL Tech Tech M Mindtree Zensar Mphasis LTTS Coforge Nifty
Infotech Index
2017 17.5 14.5 14.7 13.4 12.3 12.8 15.9 12.3 14.3 16.4 11.0 16.3 15.9
2018 22.1 17.0 15.1 13.8 14.9 19.8 21.3 16.1 18.6 22.8 17.4 16.8 15.9
2019 22.6 18.4 15.7 13.3 14.0 17.5 17.2 13.0 14.8 19.9 16.7 17.1 17.3
2020 24.9 20.1 15.3 14.9 14.4 22.0 20.5 10.9 15.4 20.1 21.4 17.7 17.5
2021 30.7 28.0 24.9 20.1 19.2 36.5 33.9 19.4 28.9 38.8 35.0 19.1 25.0
Current 24.8 22.4 17.2 16.3 15.7 26.2 24.8 13.2 20.4 28.6 22.1 19.0 21.6
Source: Bloomberg, Bernstein analysis

As of 19 Sep 22
EXHIBIT 34 : TCS NTM P/E EXHIBIT 35 : Infosys NTM P/E
33
35
31
33
28
31
26
29 3-year Avg. 23.7x
27 23 24.2
3-year Avg. 27.3x
26.5 21
25
23 18
21 16
19 13
Aug-19
Nov-19
Aug-20
Nov-20
Aug-21
Nov-21
Aug-22
Feb-20
Feb-21
Feb-22
May-20
May-21
May-22
Nov-19
Nov-20
Nov-21
Aug-19
Aug-20
Aug-21
Aug-22
Feb-20
Feb-21
Feb-22
May-20
May-21
May-22
NTM PE Average -1SD NTM PE Average -1SD
+1SD +2SD -2SD +1SD +2SD -2SD
Source: Bloomberg, Bernstein Analysis Source: Bloomberg, Bernstein Analysis

EXHIBIT 36 : HCL Tech NTM P/E EXHIBIT 37 : Wipro NTM P/E
25 30
26
22
22
19 3-year Avg. 17.3x 3-year Avg. 19.4x
18
16 17.1 17.8
14
13
10
10 6
Aug-19
Nov-19
Aug-20
Nov-20
Aug-21
Nov-21
Aug-22
May-20
May-21
May-22
Feb-20
Feb-21
Feb-22
Nov-19
Nov-20
Nov-21
Aug-21
Aug-22
Aug-19
Aug-20
Feb-20
May-20
Feb-21
May-21
Feb-22
May-22
NTM PE Average -1SD NTM PE Average -1SD
+1SD +2SD -2SD +1SD +2SD -2SD
Source: Bloomberg, Bernstein Analysis Source: Bloomberg, Bernstein Analysis
EXHIBIT 38 : Valuation Comps Table
FY23/ Cons. Cons. Cons.

Market Cap FY21-24E P/B FY23 FY23 ROE FY24 ROE
Company CCY Price CY22 EBIT 12m Fwd 24m Fwd 36m Fwd
($ Mn) Sales CAGR Ratio P/S Ratio (%) (%)
Margin P/E P/E P/E
India Largecap IT Services

TCS 138,965 INR 3,029 13.8% 24.4% 24.8x 22.2x 20.2x 12.0x 4.6x 44.0% 44.6%
Infosys 73,354 INR 1,390 16.9% 21.2% 22.4x 19.6x 17.4x 7.9x 3.6x 30.7% 32.7%
Wipro 27,645 INR 402 17.1% 15.7% 17.2x 15.3x 13.1x 3.2x 2.2x 17.3% 17.9%
HCL Tech 30,549 INR 898 11.9% 17.8% 16.3x 13.9x 12.7x 4.0x 2.3x 22.2% 24.0%
Tech Mahindra 12,681 INR 1,040 15.4% 15.0% 15.7x 13.7x 12.7x NA 1.7x 19.2% 21.1%
Average 15.0% 18.8% 19.3x 16.9x 15.2x 6.8x 2.9x 26.7% 28.1%
India Midcap IT Services

L&T Infotech 9,572 INR 4,354 21.7% 16.8% 26.2x 22.6x 20.2x 8.6x 3.4x 28.1% 28.0%
Mindtree 6,436 INR 3,112 23.2% 18.4% 24.9x 21.7x 20.0x 8.9x 3.4x 31.2% 29.7%
Mphasis 4,784 INR 2,028 18.8% 15.5% 20.4x 17.5x 14.6x 5.5x 2.3x 23.6% 24.8%
Oracle Fin. 3,248 INR 2,999 9.1% 46.1% 11.7x NA NA 3.6x 4.0x 29.0% 31.0%
Coforge 2,473 INR 3,236 24.9% 14.7% 22.1x 18.7x 16.7x 7.2x 2.2x 26.9% 27.4%
KPIT 1,964 INR 571 19.8% 14.1% 38.7x 32.1x 27.7x 11.8x 4.5x 23.9% 24.8%
Intellect Design 943 INR 556 21.3% 19.1% 17.0x 14.6x 13.1x 4.1x 2.8x 18.2% 19.7%
Birlasoft 1,024 INR 300 15.3% 13.3% 15.3x 12.6x NA 3.3x 1.5x 19.2% 20.9%
Sonata Software 968 INR 551 23.1% 7.2% 16.5x NA NA 6.9x 1.0x 34.6% 34.9%
Mastek 682 INR 1,809 20.7% 17.3% 15.1x 12.8x NA 5.1x 1.8x 27.8% 26.1%
Zensar 631 INR 222 12.9% 8.1% 13.2x 10.4x NA 1.9x 0.9x 11.8% 14.2%
Happiest Minds 1,845 INR 1,002 29.7% 20.9% 54.2x 44.1x NA 21.5x 8.7x 29.2% 27.9%
Average 19.2% 17.3% 20.1x 18.1x 18.7x 6.1x 2.5x 24.9% 25.6%
Indian Engineering IT Services

Tata Elxsi 6,791 INR 8,696 25.7% 28.6% 72.9x 64.2x 64.1x 33.8x 14.9x 40.5% 37.1%
Persistent 3,031 INR 3,163 30.8% 13.9% 24.8x 20.3x 18.7x 7.2x 2.6x 24.1% 24.7%
L&T Tech Services 4,426 INR 3,343 17.3% 17.9% 28.6x 24.3x 22.4x 8.0x 4.0x 25.1% 24.7%
Cyient 1,145 INR 827 16.9% 12.9% 14.6x 12.4x 11.2x 2.9x 1.4x 17.6% 18.9%
Average 22.7% 18.3% 35.2x 30.3x 29.1x 13.0x 5.7x 26.8% 26.4%
Global IT Services
Accenture 181,373 USD 273 14.5% 15.2% 22.6x 20.4x 18.7x 8.1x 2.7x 32.3% 30.8%
IBM 114,948 USD 127 3.8% 17.0% 13.0x 12.3x 11.2x 5.9x 1.9x 40.5% 36.1%
Cognizant 32,206 USD 62 8.6% 15.6% 12.8x 11.7x 10.7x 2.7x 1.5x 19.1% 19.4%
Capegemini 24,173 CHF 135 13.2% 12.0% 12.3x 11.0x 9.4x NA 1.1x 18.9% 18.7%
EPAM 23,066 USD 402 30.9% 15.5% 33.9x 26.8x 21.7x 8.8x 3.9x 21.7% 22.9%
Globant 8,757 USD 209 39.8% 14.8% 34.9x 26.9x 23.3x 6.4x 3.9x 15.3% 16.2%
Endava 4,383 USD 79 22.7% 20.4% 28.4x NA NA 9.7x 4.7x 28.4% 26.4%
DXC 6,216 USD 27 (6.3%) 6.6% 6.7x 5.5x 4.9x 1.3x 0.4x 16.8% 20.4%
Exlservice Holding 5,837 USD 177 16.8% 15.6% 28.4x 24.9x 22.4x NA 3.8x 27.0% 27.5%
WNS Holdings 3,994 USD 83 12.2% 17.6% 21.1x 18.9x 16.6x 5.7x 3.1x 24.8% 28.4%
ATOS 952 EUR 9 (1.2%) 2.8% 6.0x 3.8x 1.7x 0.2x 0.1x -2.6% -1.6%
Average 9.0% 15.9% 16.1x 14.8x 13.5x 5.6x 2.0x 30.6% 28.8%
Source: Bloomberg, Bernstein Analysis

Market Data as of September 19, 2022

APPENDIX - FINANCIAL FORECASTS
EXHIBIT 39 : TCS Financial Summary

Income Statement FY21A FY22A FY23E FY24E Balance Sheet FY21A FY22A FY23E FY24E
Revenue ($ Mn) 22,174 25,707 27,937 30,907 Cash & Equivalents 68,580 124,880 55,974 65,641
Revenue 1,641,770 1,917,540 2,197,345 2,463,886 Receivables & Unbilled rev 366,620 418,100 481,610 540,030
COGS 971,380 1,010,040 1,327,767 1,472,357 Other current assets 557,600 540,120 594,501 606,410
Gross Profit 670,390 771,330 869,578 991,529 Current assets 992,800 1,083,100 1,132,085 1,212,080
SG&A 257,760 286,800 331,471 369,598 PP&E 120,360 119,790 141,305 172,635
EBITDA 453,280 530,570 588,822 678,600 Other non current assets 194,430 212,250 209,191 212,266
D&A 40,650 46,040 50,715 56,669 Total Assets 1,307,590 1,415,140 1,482,581 1,596,981
EBIT 412,630 484,530 538,107 621,931
Net other income 24,970 32,340 31,483 37,701 Payables 78,600 80,450 103,176 113,269
Pre-tax Income 437,600 516,870 569,590 659,632 Other current liabilities 262,950 343,060 321,801 337,799
Tax 111,980 132,380 144,795 167,546 Current liabilities 341,550 423,510 424,977 451,068
Net Income 324,300 383,270 423,307 490,618 Long term debt - - - -
Other non current liabilities 94,960 93,170 93,060 93,060
Shares O/S 3,740 3,699 3,659 3,659 Total Liabilities 436,510 516,680 518,037 544,128
EPS 86.7 103.6 115.7 134.1 Shareholder equity 864,330 891,390 957,974 1,046,283
Dividend 108,500 133,170 376,174 441,556 Minority Interest 6,750 7,070 6,570 6,570
DPS 29 43 103 121 Total liabilities & equity 1,307,590 1,415,140 1,482,581 1,596,981
Cash Flow Statement FY21A FY22A FY23E FY24E Key Metrics FY21A FY22A FY23E FY24E
Cash from operations 395,250 418,360 441,336 504,518 Revenue growth (INR) 4.6% 16.8% 14.6% 12.1%
Change in NWC 8,660 (27,570) (44,764) (44,237) Revenue growth (CC) -0.8% 15.4% 13.2% 10.0%
Cash used in investments (108,630) (36,030) (75,636) (34,404) EBIT growth 7.0% 17.4% 11.1% 15.6%
Capex (27,190) (24,830) (29,645) (31,329) Net Income growth 0.3% 18.2% 10.4% 15.9%
Cash from financing (320,000) (328,410) (435,056) (460,446) EPS growth 0.6% 19.5% 11.7% 15.9%
Buyback (160,000) (180,000) - - EBIT Margin 25.1% 25.3% 24.5% 25.2%
Dividend (108,500) (133,170) (376,174) (441,556) Net Income margin 19.8% 20.0% 19.3% 19.9%
Net Increase in Cash (33,380) 53,920 (69,356) 9,667 ROCE 45.9% 55.3% 57.4% 58.4%
Receivable days (inc unbilled) 82 80 80 80
FCF 364,500 388,560 411,490 473,189 Payable days 30 29 28 28
FCF/PAT 112% 101% 97% 96% NWC days ex cash 130 102 108 103
Valuations FY21A FY22A FY23E FY24E Performance Shareholding Pattern

Current P/E 38.0x 32.2x 29.1x 25.1x Revenue growth (FY17-22) 10% Promoters 72%
Target price implied P/E 43.9x 37.1x 33.6x 29.0x Net Income growth (FY17-22) 8% FII 16%
EV/EBITDA 26.5x 22.6x 20.4x 17.7x DII 8%
FCF Yield 3.0% 3.2% 3.3% 3.8% Revenue growth (FY12-22) 15% Others 4%
Dividend Yield 0.9% 1.1% 3.1% 3.6% Net Income growth (FY12-22) 14%
Source: Company Reports, Bernstein Analysis & Estimates

EXHIBIT 40 : Infosys Financial Summary

Revenue 1,004,730 1,216,410 1,446,065 1,638,115 Receivables & Unbilled rev 268,210 342,660 397,398 453,240
COGS 654,150 819,990 998,024 1,125,686 Other current assets 91,980 154,470 184,224 207,066
Gross Profit 350,580 396,420 448,041 512,429 Current assets 607,330 671,850 741,060 839,487
SG&A 104,360 116,270 136,500 152,345 PP&E 136,230 135,790 126,703 114,675
D&A 32,670 34,760 39,854 45,147 Total Assets 1,083,860 1,178,850 1,266,136 1,380,457
EBIT 246,220 280,150 311,542 360,084
Net Income 193,510 221,110 251,096 292,944 Long term debt - - - -
EPS 45.6 52.5 59.9 69.9 Shareholder equity 763,510 753,500 777,710 845,027
DPS 21 31 54 54 Total liabilities & equity 1,083,860 1,178,850 1,266,136 1,380,457
Cash from operations 241,270 249,640 276,224 306,411 Revenue growth 10.7% 21.1% 18.9% 13.3%
Change in NWC 29,960 35,260 (36) (31,680) Revenue growth CC 5.0% 19.7% 16.0% 11.4%
Cash used in investments (83,590) (74,950) (60,618) (57,408) EBIT growth 27.1% 13.8% 11.2% 15.6%
Cash from financing (97,860) (246,420) (229,998) (229,259) EPS growrth 16.5% 15.2% 14.0% 16.7%
Buyback - (111,250) - - EBIT Margin 24.5% 23.0% 21.5% 22.0%
Net Increase in Cash 59,820 (71,730) (14,392) 19,743 ROCE 36.5% 37.8% 40.0% 44.2%
Receivable days (inc unbilled) 97 103 100 101
FCF 220,200 228,030 249,479 276,925 Payable days 15 18 16 17
FCF/PAT 114% 103% 99% 95% NWC days 44 48 48 49

Current P/E 35.0x 30.7x 27.0x 23.1x Revenue growth (FY17-22) 12% Promoters 13%
Target price implied P/E 40.9x 35.8x 31.5x 27.0x Net Income growth (FY17-22) 9% FII 34%
FCF Yield 3.2% 3.4% 3.7% 4.1% Revenue growth (FY12-22) 14% Others 30%
Dividend Yield 1.3% 1.9% 3.3% 3.3% Net Income growth (FY12-22) 10%
Source: Company Reports, Bernstein Analysis & Estimates

EXHIBIT 41 : Wipro Financial Summary

Revenue 619,430 790,934 894,473 989,605 Receivables & Unbilled rev 121,422 176,028 205,397 221,708
COGS 423,205 555,872 632,560 695,527 Other current assets 231,971 340,888 340,439 371,371
SG&A 76,086 101,317 118,929 129,877 PP&E 85,192 90,898 91,676 92,522
D&A 27,656 30,911 30,929 31,804 Total Assets 831,434 1,079,182 1,187,420 1,286,852
EBIT 123,053 140,286 147,279 168,954
Net Income 107,946 122,191 121,467 140,275 Long term debt 7,458 56,463 58,862 58,862
Dividend 6,419 6,602 65,669 56,110 Minority Interest 1,498 515 415 415
DPS 1.1 6.0 12.0 10.3 Total liabilities & equity 831,434 1,079,182 1,187,420 1,286,852
Cash from operations 147,550 110,797 133,472 167,068 Revenue Growth 1.5% 27.7% 13.1% 10.6%
Change in NWC 22,922 (36,488) (23,901) (5,011) CC Revenue Growth -2.3% 27.3% 11.3% 8.7%
Cash used in investments 7,739 (224,495) (62,308) (59,615) EBIT Growth 16.4% 14.0% 5.0% 14.7%
Capex (19,577) (20,153) (28,053) (32,650) Net Income Growth 11.7% 12.6% -0.7% 15.5%
Cash from financing (128,840) 46,586 (51,697) (56,110) EBIT Margin (%) 19.9% 17.7% 16.5% 17.1%
Buyback (116,644) - - - Net Income Margin (%) 17.4% 15.4% 13.6% 14.2%
Dividend (6,419) (6,602) (65,669) (56,110) ROCE 32.0% 31.5% 23.7% 24.4%
Net Increase in Cash 26,449 (67,112) 19,467 51,343 Receivable days (Inc unbilled) 72 81 84 82
Payable days 66 65 63 62
FCF 127,973 90,644 105,419 134,418 NWC days ex cash 73 96 89 92
FCF/PAT 119% 74% 87% 96% BVPS 98 120 136 151

Current P/E 22.4x 19.7x 19.9x 17.2x Revenue Growth (FY17-22) 8% Promoters 73%
Target price implied P/E 23.7x 21.0x 21.1x 18.3x PAT Growth (FY17-22) 8% FII 9%
FCF Yield 5.3% 3.8% 4.4% 5.6% Revenue Growth (FY12-22) 8% Others 15%
Dividend Yield 0.3% 0.3% 2.7% 2.3% PAT Growth (FY12-22) 8%

EXHIBIT 42 : HCL Tech Financial Summary

Revenue 753,790 856,510 963,818 1,060,867 Receivables & Unbilled rev 175,250 206,710 231,971 261,810
SG&A 107,310 124,350 140,922 153,826 PP&E 59,540 57,410 52,904 44,637
D&A 39,850 38,740 40,552 43,482 Total Assets 861,940 890,330 928,384 995,981
EBIT 160,710 161,670 174,754 199,107
Pre-tax Income 167,280 170,230 188,925 214,705 Other current liabilities - - - -
Dividend 32,207 114,072 118,808 118,435 Minority Interest 1,680 910 -30 -30
DPS 12 44 44 44 Total liabilities & equity 861,940 890,330 928,384 995,981
Change in NWC 31,858 (5,387) (31,491) (31,460) Revenue CC growth 1.1% 12.6% 10.8% 7.8%
Cash used in investments (63,267) 9,584 (25,806) (16,427) EBIT growth 16.0% 0.6% 8.1% 13.9%
Cash from financing (113,069) (137,530) (121,257) (118,435) EBIT Margin 21.3% 18.9% 18.1% 18.8%
Buyback - (8,010) - - Net Income margin 16.5% 15.8% 14.8% 15.3%
Dividend (32,207) (114,072) (118,808) (118,435) ROCE 22.7% 22.6% 22.9% 25.6%
Net Increase in Cash 16,130 38,902 8,483 39,692 Receivable days (inc unbilled) 85 88 88 90
Payable days 136 124 115 118
FCF 165,011 150,417 133,058 158,127 NWC days ex cash 128 128 130 143
FCF/PAT 133% 111% 93% 97%

Current P/E 20.9x 19.2x 18.2x 16.0x Revenue Growth (FY17-22) 13% Promoters 60.7%
Target price implied P/E 22.5x 20.7x 19.5x 17.2x Net Income Growth (FY17-22) 10% FII 19.0%
EV/EBITDA 12.4x 12.4x 11.6x 10.3x DII 14.7%
FCF Yield 6.3% 5.8% 5.1% 6.1% Revenue Growth (FY13-22) 13% Others 5.6%
Dividend Yield 1.2% 4.4% 4.6% 4.6% Net Income Growth (FY13-22) 14%

EXHIBIT 43 : Tech M Financial Summary

Revenue 378,551 446,460 528,454 589,452 Receivables & Unbilled rev 64,970 75,081 82,987 92,130
SG&A 51,525 56,540 69,295 75,736 PP&E 24,632 26,823 17,617 5,444
D&A 14,577 15,204 19,216 21,220 Assets 396,780 448,707 513,257 568,589
EBIT 53,894 64,996 68,366 79,648
Shares O/S (Mn) 874.0 877.6 878.4 878.4 Total Liabilities 132,031 162,592 191,605 213,310
DPS 45 45 26 37 Liabilities & equity 396,780 448,707 513,257 568,589
Change in NWC 15,635 (14,343) (15,254) (10,653) Revenue CC growth -2.5% 16.6% 15.2% 8.9%
Cash used in investments (54,501) 4,815 (19,307) (16,198) EBIT growth 25.9% 20.6% 5.2% 16.5%
Cash from financing (29,869) (46,666) (22,994) (32,827) EPS growth 9.7% 25.2% 0.9% 16.8%
Buyback - - - - EBIT Margin 14.2% 14.6% 12.9% 13.5%
Net Increase in Cash (3,432) 11,002 20,910 27,996 ROCE 25.0% 26.7% 23.4% 26.2%
Receivable days 62 61 57 57
FCF 75,213 44,500 54,971 67,973 Payable days 39 48 26 26
FCF/PAT 170% 80% 98% 104% NWC days ex cash 119 67 65 65
Valuations FY21A FY22A FY23E FY24E Historical Performance Shareholding Pattern

Current P/E 23.4x 18.6x 18.4x 15.8x Revenue Growth (FY17-22) 9% Promoters 35%
Target price implied P/E 24.3x 19.3x 19.1x 16.4x PAT Growth (FY17-22) 15% FII 34%
FCF Yield 7.3% 4.3% 5.3% 6.6% Revenue Growth (FY14-22) 11% Others 12%
Dividend Yield 4.2% 4.3% 2.4% 3.5% PAT Growth (FY14-22) 8%

DISCLOSURE APPENDIX
I. REQUIRED DISCLOSURES
Autonomous Research US is a unit within Sanford C. Bernstein & Co., LLC , a broker-dealer registered with the U.S. Securities
and Exchange Commission and a member of the Financial Industry Regulatory Authority (www.finra.org) and the Securities
Investor Protection Corporation (see www.sipc.org). When this report contains an analysis of debt securities, such report is
intended for institutional investors and is not subject to all the independence and disclosure standards applicable to debt
research for retail investors under the FINRA rules.
VALUATION METHODOLOGY
The India technology services business has multiple coverage companies with different characteristics. Large sized players
with a complete portfolio. Mid-sized players with focus on certain segments like engineering services. We also include media
and internet companies in this sector. To arrive at our price targets, we use a combination of discounted cash flow and price to
earnings multiples and benchmark P/E to historical averages.
Tata Consultancy Services Ltd
We value Tata Consultancy Services on a NTM P/E basis with a valuation of 28x on FY24 EPS
HCL Technologies Ltd
We value HCL Technologies on an NTM P/E basis with a P/E multiple of 17x on FY24 EPS
Infosys Ltd
We value Infosys on a NTM P/E basis with a P/E multiple of 26x on FY24 EPS
Tech Mahindra Ltd
We value Tech Mahindra on a NTM P/E basis with a valuation of 22x on FY24 EPS.
Wipro Ltd
7We value Wipro on a NTM P/E basis with a valuation of 17x on FY24 EPS
RISKS
The downside risks to India Technology Services sector include any macroeconomic downturn that could impact demand
environment. Currency headwinds from rupee appreciation could impact margins. Immigration related issues or protectionist
measures in US or Europe could significantly increase operational complexities.
Tata Consultancy Services Ltd
Downside: slowdown in large deals momentum, growth slowdown in digital segment, significant wage increases or rise in sub-
contracting costs.
HCL Technologies Ltd
Upside: Stronger than expected revenue growth from IBM IP products, recovery in IMS segment, led by rebound in demand.
Downside: Growth slowdown in Mode 2 and Mode 3 revenue.

Infosys Ltd
Downside: softer growth in digital revenues
Tech Mahindra Ltd
Downside risks: Growth slowdown in enterprise segment, significant delay in telecom 5G deals, higher than expected large deal
ramp up costs, fall in margins at subsidiaries.
Wipro Ltd
Upside: recovery in legacy segment, faster than expected growth in digital segment. Downside Risks: softer revenue growth,
significant increase in wages or subcontractor cost affecting margins
RATINGS DEFINITIONS, BENCHMARKS AND DISTRIBUTION
Bernstein brand
The Bernstein brand rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for
stocks listed on the U.S. and Canadian exchanges, versus the MSCI Europe Index (MSDLE15) for stocks listed on the European
exchanges (except for Russian companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed
on emerging markets exchanges outside of the Asia Pacific region, versus the MSCI Japan (MXJP) for stocks listed on the
Japanese exchanges, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges -
unless otherwise specified.
The Bernstein brand has three categories of ratings:
• Outperform: Stock will outpace the market index by more than 15 pp
• Market-Perform: Stock will perform in line with the market index to within +/-15 pp
• Underperform: Stock will trail the performance of the market index by more than 15 pp
Not Rated: The stock Rating, Target Price and/or estimates (if any) have been suspended temporarily.
Autonomous brand
The Autonomous brand rates stocks as indicated below. As our benchmarks we use the SX7P and SXFP index for European
banks, the SXIP for European insurers, the S&P 500 and S&P Financials for US banks coverage, S5LIFE for US Insurance, the
SPSIINS for US Non-Life Insurers coverage, and IBOV for Brazil and H-FIN index for China banks and insurers. Ratings are
stated relative to the sector (not the market).
The Autonomous brand has three categories of ratings:
• Outperform (OP): Stock will outpace the relevant index by more than 10 pp
• Neutral (N): Stock will perform in line with the market index to within +/-10 pp
• Underperform (UP): Stock will trail the performance of the relevant index by more than 10 pp
• Coverage Suspended (CS) applies when coverage of a company under the Autonomous research brand has been
suspended. Ratings and price targets are suspended temporarily. Previously issued ratings and price targets are no longer
current and should therefore not be relied upon.
Not Rated: The stock Rating, Target Price and/or estimates (if any) have been suspended temporarily.
Those denoted as ‘Feature’ (e.g., Feature Outperform FOP, Feature Under Outperform FUP) are our core ideas. Not Rated (NR)
is applied to companies that are not under formal coverage.
For both brands, recommendations are based on a 12-month time horizon.

DISTRIBUTION OF RATINGS/INVESTMENT BANKING SERVICES

Rating Market Abuse Regulation (MAR) and Count Percent Count* Percent*
FINRA Rule 2241 classification
Outperform BUY 392 49.87% 0 0.00%
Market-Perform (Bernstein Brand)

HOLD 267 33.97% 1 0.37%
Neutral (Autonomous Brand)
Underperform SELL 125 15.90% 0 0.00%
Not Rated (Bernstein Brand)

NOT RATED 2 0.25% 0 0.00%
Coverage Suspended (Autonomous Brand)
* These figures represent the number and percentage of companies in each category to whom Bernstein and Autonomous
provided investment banking services.
As of Sep 19 2022. All figures are updated quarterly and represent the cumulative ratings over the previous 12 months.
PRICE CHARTS/ RATINGS AND PRICE TARGET HISTORY
Tata Consultancy Services Ltd (TCS.IN) Rating History for Bernstein as of 09/19/2022
O:INR2,445.00 O:INR2,290.00 O:INR2,480.00 O:INR2,770.00 O:INR3,100.00 O:INR3,360.00 O:INR3,450.00 O:INR3,760.00
09/27/2019 03/18/2020 07/29/2020 10/05/2020 10/08/2020 01/07/2021 01/08/2021 04/13/2021
INR4,500
INR4,000
INR3,500
INR3,000
INR2,500
INR2,000
INR1,500
Oct 19 Jan 20 Apr 20 Jul 20 Oct 20 Jan 21 Apr 21 Jul 21 Oct 21 Jan 22 Apr 22 Jul 22
07/08/2021 08/17/2021 10/11/2021 01/06/2022 01/13/2022 02/17/2022 03/07/2022 04/11/2022
O:INR3,860.00 O:INR3,840.00 O:INR3,890.00
05/24/2022 07/08/2022 08/08/2022
Closing Price Price Target
Outperform (O); Market-Perform (M); Underperform (U); Not rated (N)
HCL Technologies Ltd (HCLT.IN) Rating History for Bernstein as of 09/19/2022

M:INR630.00 M:INR593.00 M:INR609.00 M:INR730.00 M:INR890.00 M:INR900.00 M:INR1,060.00 M:INR1,110.00
11/12/2019 03/18/2020 05/12/2020 07/29/2020 10/05/2020 10/16/2020 01/07/2021 01/15/2021
INR1,600
INR1,400
INR1,200
INR1,000
INR800
INR600
INR400
M:INR1,100.00 M:INR1,120.00 M:INR1,100.00 M:INR1,180.00 M:INR1,190.00 M:INR1,390.00 M:INR1,540.00 M:INR1,350.00
04/23/2021 05/25/2021 07/19/2021 08/26/2021 10/14/2021 01/06/2022 01/14/2022 02/17/2022
M:INR1,310.00 M:INR1,300.00 M:INR1,110.00 M:INR1,040.00 M:INR1,060.00
03/07/2022 04/21/2022 05/24/2022 07/13/2022 08/08/2022

Infosys Ltd (INFO.IN) Rating History for Bernstein as of 09/19/2022

M:INR791.00 M:INR737.00 M:INR740.00 M:INR970.00 M:INR1,100.00 M:INR1,200.00 M:INR1,400.00 M:INR1,520.00
11/12/2019 03/18/2020 05/12/2020 07/29/2020 10/05/2020 10/14/2020 01/07/2021 01/13/2021
INR2,500
INR2,000
INR1,500
INR1,000
INR500
03/24/2021 05/25/2021 07/14/2021 08/26/2021 10/13/2021 01/06/2022 01/12/2022 02/17/2022
O:INR2,090.00 O:INR2,010.00 O:INR1,820.00 O:INR1,800.00 O:INR1,880.00
03/07/2022 04/13/2022 05/24/2022 07/25/2022 08/08/2022
Tech Mahindra Ltd (TECHM.IN) Rating History for Bernstein as of 09/19/2022

M:INR828.00 O:INR940.00 O:INR910.00 O:INR700.00 O:INR770.00 O:INR910.00 O:INR975.00 O:INR1,100.00 O:INR1,140.00
11/12/2019 02/04/2020 03/18/2020 05/12/2020 07/29/2020 10/05/2020 10/23/2020 01/07/2021 01/29/2021
INR2,500
INR2,000
INR1,500
INR1,000
INR500
INR0
04/26/2021 05/25/2021 07/29/2021 08/26/2021 10/25/2021 01/06/2022 02/17/2022 03/07/2022
O:INR1,660.00 O:INR1,410.00 O:INR1,210.00 O:INR1,240.00
05/16/2022 05/24/2022 07/26/2022 08/08/2022
Wipro Ltd (WPRO.IN) Rating History for Bernstein as of 09/19/2022

U:INR218.00 U:INR205.00 U:INR192.00 U:INR230.00 U:INR270.00 U:INR300.00 U:INR330.00 U:INR370.00 U:INR380.00
11/12/2019 03/18/2020 05/12/2020 07/29/2020 10/05/2020 10/13/2020 01/07/2021 01/14/2021 04/15/2021
INR800
INR700
INR600
INR500
INR400
INR300
INR200
INR100
M:INR480.00 M:INR580.00 M:INR620.00 M:INR670.00 M:INR720.00 M:INR710.00 M:INR640.00 M:INR630.00 M:INR620.00
05/25/2021 07/15/2021 08/26/2021 10/13/2021 01/06/2022 01/12/2022 02/17/2022 03/07/2022 04/29/2022
M:INR500.00 M:INR470.00 M:INR450.00
05/24/2022 07/21/2022 08/08/2022
CONFLICTS OF INTEREST

An associate contributing to this report maintains a long position in Infosys Ltd.

Rahul Malhotra maintains a long position in Tata Consultancy Services Ltd (TCS.IN).
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Bernstein - Indian IT Services - Have Margins Bottomed

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Bernstein - Indian IT Services - Have Margins Bottomed

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20 September 2022

India Technology, Media & Internet

BERNSTEIN TICKER TABLE

INDIA TECHNOLOGY, MEDIA & INTERNET BERNSTEIN 2

PLEASE FIND BELOW THE LINKS TO OUR RECENTLY PUBLISHED REPORTS

Indian IT Services: Large-cap or mid-cap - better positioned in a recession? (Jun 2022)

Indian IT Services: What is the impact of a recession ? (May 2022)

Indian IT services - How resilient are the margins ? (May 2022)

Indian IT Services - Defensive against near-term uncertainty? (Mar 2022)

Indian IT Services - Consistency is king. (February 2022)

EXHIBIT 1 : TCS - Direct Costs (As % of Revenue)

58.8% 59.2% 59.8%

FY18 FY19 FY20 FY21 FY22

Source: Company Reports, Bernstein Analysis

INDIA TECHNOLOGY, MEDIA & INTERNET BERNSTEIN 3

Other costs are stable at 8-10% of costs.

EXHIBIT 2 : TCS - Direct Costs (% of Cost of Sales)

10.1% 8.9% 9.6% 9.1% 8.3%

FY18 FY19 FY20 FY21 FY22

Employee Cost Fees to Consultants Travel, Comm. & Facility Others

Source: Company Reports, Bernstein Analysis

EXHIBIT 3 : Growth of Global IT vs Indian IT services vs top 4 Indian IT services firms(pre-GFC)

Top 4 IT Services Indian IT Global IT Spend

Source: Gartner, Nasscom, Bernstein analysis and estimates

INDIA TECHNOLOGY, MEDIA & INTERNET BERNSTEIN 4

EXHIBIT 4 : Growth of Global IT vs India IT services vs top 4 India IT services firms(post-GFC)

15.0% 13.0% 12.3%

Top 4 IT Services Indian IT Global IT Spend

Source: Gartner, Nasscom, Bernstein analysis and estimates

EXHIBIT 5 : Historical margin trend (%) from FY05-13

Infosys TCS Wipro HCL Tech

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

Source: Company reports, Bernstein analysis

INDIA TECHNOLOGY, MEDIA & INTERNET BERNSTEIN 5

EXHIBIT 6 : EBIT Margin (%) trend from FY14-22

Infosys TCS Wipro HCL Tech

FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22

Source: Company reports, Bernstein analysis

MARGINS DURING GFC

27% 33% 16%

TCS Infosys Accenture

MARGINS DURING COVID

INDIA TECHNOLOGY, MEDIA & INTERNET BERNSTEIN 6

Source: Company reports, Bernstein analysis

INDIAN IT SERVICES GROWING THROUGH HIGH ATTRITION, STRONG HIRING

INDIA TECHNOLOGY, MEDIA & INTERNET BERNSTEIN 7

EXHIBIT 16 : Highest LTM Attrition (%) witnessed across Indian IT sector

TCS Infosys Wipro Tech M HCL Tech

1Q22 2Q22 3Q22 4Q22 1Q23

Source: Company Reports, Bernstein Analysis

EXHIBIT 17 : Quarterly Net Hiring Across Tier 1 Indian IT Companies

TCS Infosys Wipro HCL Tech Tech M

1Q22 2Q22 3Q22 4Q22 1Q23

Source: Company Reports, Bernstein Analysis

RECENT MARGIN TRENDS

(1) TCS margin walk

INDIA TECHNOLOGY, MEDIA & INTERNET BERNSTEIN 8

EXHIBIT 18 : TCS EBIT Margin walk-through

Higher Sub Cont. Costs

Other Cost Pressures

Source: Company Reports, Conference Call, Bernstein Analysis

(2) Infosys margin walk

EXHIBIT 19 : Infosys EBIT Margin walk-through