© 2022 Auctus Advisors

Around mid-Apr 2020, Auctus Advisors had shared a detailed perspective qualifying /
quantifying the impact of ‘Covid-19’ on Technology & Tech-enabled Services businesses -
providing a guide for them to navigate the pandemic in the process.

Over the past 9 quarters (from AMJ 2020 till AMJ 2022), we have closely
tracked the performance of a comprehensive set of 33 IT-ITeS* companies
against the expected impact & transformational trends.

Riding the Tailwinds: These companies straddle the Tech Services universe comprising Top-
Objective look at the tier Firms, Mid-sized Players, Global IT Companies, Global Digital
post-Covid performance Organizations & BPOs.
of IT / ITeS sector

This report summarizes our takeaways around Revenue, Margin

& Inorganic trends from the exercise & touches on select
September 2022
themes that we see playing out going forward.

* - The study comprises the following companies: Top-tier – TCS, Infosys, HCL, TechM, Wipro; Mid-tier – Cigniti, Coforge, Cyient, Happiest Minds, LTI, Mindtree, Mphasis, Persistent, Sonata, Zensar;
Global IT – Accenture, Atos, Capgemini, Cognizant; Global Digital – Endava, EPAM, Globant, Thoughtworks ; BPOs – Concentrix, EXL, Genpact, Telus International, Transcom, TTEC, WNS Global
 Revenue Margin Inorganic Activity

Though on expected lines, both the digital-led rebound in demand (for Technology / Tech-enabled
services) as well as the recent cooling off have been relatively early and sharp.
Revenue Trend (indexed with Q1 2020 = 100)
Less sustained impact & sharper recovery from
Horizon A: Horizon B: Horizon C: 1
Lockdowns and travel restrictions due to Strong economic recovery driven by fiscal High inflation & pandemic
Covid-19 stimulus & low rates macro uncertainty

Horizon A
200
▪ Revenues revive to pre-pandemic levels by Q4’2020 as
demand picks up in HCLS, Insurance & Public Sector
180
▪ Demand for digital services & remote customer
support drives revenues for Digital & BPO providers

160
3
Demand for cloud & data services powers top-line
2 growth
2
140
▪

Horizon B
Need for business resiliency leads to rise in demand
for digital services - cloud, analytics, cybersecurity,
120 DXP & sustainability
1
▪ Digital & Mid-tier outperform on the back of pent-up
demand as well as need for specialized product
100 engineering, cloud / data skills

Macro-uncertainty prematurely decelerates the

80 3
growth momentum
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Horizon C
2020 2021 2022 ▪ Demand softening takes early roots due to global
inflationary risk and geo-political uncertainty in Europe
Segment Top Tier Mid Tier Global Digital BPO ▪ Increase in smaller sized digital deals impacts Mid-tier
revenues & book-to-bill ratio - resulting in their overall
CQGR 2.7% 4.0% 3.3% 7.5% 3.3% outperformance

Q1 (Jan-Mar) Q2 (Apr-Jun) Q3 (Jul-Sep) Q4 (Oct-Dec) © 2022 Auctus Advisors As per Auctus forecast Minor divergence from forecast Significant divergence from forecast
 Revenue Margin Inorganic Activity

Margin improvements that had expectedly accrued on the back of operational focus / spend cuts in the
pandemic year, saw a fast erosion due to sustained tightness in the market for digital talent.
Operating Margin (absolute values)
Spend cuts, operational improvement & talent
30% Horizon A: Horizon B: Horizon C: 1
Lockdowns and travel restrictions Strong economic recovery driven by fiscal High inflation & virtualization drive margin recovery
due to Covid-19 stimulus & low rates macro uncertainty

Horizon A
▪ Margins increase, driven by internal cost control
25% 1 measures & SG&A savings
▪ Attrition spikes in BPOs amidst lower resource
utilization due to delay in securing WFH permission
20%
2

Margins normalise quickly as economies open &

15% 2
demand for tech talent increases

Horizon B
▪ As economy recovers & travel resumes, margins start
10% normalizing from early 2021
3 ▪ Due to aggressive hiring, utilization for Top-tier drops,
resulting in narrower margin spread between Top and
5% Mid-tier

Macro disruptions aggravate demand-supply

0% 3 mismatch leading to higher attrition & retention
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 costs

Horizon C
2020 2021 2022
▪ Even higher talent retention costs pressurizes margins
in early 2022
Segment Top Tier Mid Tier Global Digital BPO
▪ Sharper margin dip for digital players on account of
Avg. OM 21.9% 15.8% 13.3% 13.3% 10.1% supply disruption in Eastern Europe

Q1 (Jan-Mar) Q2 (Apr-Jun) Q3 (Jul-Sep) Q4 (Oct-Dec) © 2022 Auctus Advisors As per Auctus forecast Minor divergence from forecast Significant divergence from forecast
 Revenue Margin Inorganic Activity

Despite valuations holding up, aggressive monetary tightening has brought some normalcy to a red-hot
technology M&A market.
# of M&A Deals announced (absolute values)
Demand for ‘Anything digital’ drives M&A activity
Horizon A: Horizon B: Horizon C: 1
25 Lockdowns and travel restrictions due Strong economic recovery driven by fiscal stimulus & High inflation & macro after initial shock
to Covid-19 low rates uncertainty

Horizon A
▪ Universal need for digitization fuels acquisitions
around CX, analytics, cloud and cyber security
20 ▪ Global players shine with Accenture, Capgemini, Atos
leading the acquisition race

15 Acquisition spree continues with elevated

2
valuations

Horizon B
1
10 ▪ Low-interest rates / high liquidity result in elevated
deal activity with deal multiple (EV/Rev) growing from
2-3X to 4-5X*
3
5 2
Macro uncertainties and tightening of monetary
3 policy slows down M&A

Horizon C
0 ▪ Uncertainty regarding monetary policy depresses deal
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 activity at the start of 2022
2020 2021 2022 ▪ Spurt in Q2 2022 is on the back of search for more
specialized capabilities (i.e. de-carbonization,
Top Tier Mid-Tier Global Digital BPO sustainability, cybersecurity etc.)
*Source: Technology M&A values dive in Q1, S&P Global

Q1 (Jan-Mar) Q2 (Apr-Jun) Q3 (Jul-Sep) Q4 (Oct-Dec) © 2022 Auctus Advisors As per Auctus forecast Minor divergence from forecast Significant divergence from forecast
 While there will be stress over the next few quarters, the medium-term outlook for Technology /
Technology-enabled sector continues to remain bullish.

01. Revenue
➢ Next 6-9 months - The reactionary tightening of discretionary IT expenditure by corporates, amidst inflationary headwinds in US & EU (~ 85% of IT
sector revenues), could lead to short-term blips in top-line performance for Technology services firms

01 ➢ & Beyond - More than 60% of Global Technology Leaders believe cybersecurity and data-related services to have the most disruptive potential over
the next 3 years. This will be followed by Industry 4.0 / next-gen manufacturing / customer experience. All in all, this should ensure reasonable
sustenance of the growth momentum

02. Margins
➢ Next 6-9 months – Bottom-line wise expected to be a really challenging period - even as demand moderates, SG&A spends increase and the

02 ➢
structurally inflated cost base depresses margins further.
& Beyond – Steady improvement in margins can be expected, as Technology sector manages to regain pricing power, streamline talent supply,
accept gig culture & systematically optimize cost / improve efficiency

03. Inorganic Activity

➢
03 Next 6-9 months – Cautious business sentiment / tightening-led funding challenges / imminent valuation corrections – all these will likely dampen
the deal flow / activity over the next few quarters
➢ & Beyond – 25% of Global CEOs see M&A as a critical accelerant to acquire operational capabilities, induce innovation and strengthen ESG footprint
– as investment climate improves, a steep recovery in M&A can be expected (esp. bolt-on / tuck-in acquisitions around Edge-computing, Industry X,
ESG / Sustainability)

Source: Auctus Research, EY 2022 CEO Outlook Survey

© 2022 Auctus Advisors