sandip agarwal: TCS numbers are good but real worry is attrition: Sandip Agarwal

“I would put TCS in the top bucket in terms of all those things where volatility is concerned, followed by Infosys, Wipro in the second category and HCL in the third category in terms of volatility,” says Sandip Agarwal, Executive Director – IT, Internet and Telecom, Edelweiss Financial.

What is your first view on TCS earnings?
I have seen the numbers. Broadly it is a very good set of numbers to start with. Although I am really disappointed with the LTM attrition number because if it is 17% for TCS, then we can imagine what will be the situation for the industry. But otherwise, the margins are bang in line. The revenue numbers are slightly higher and all the metrics are good. TCV is very strong. But this is what we have been saying in our preview also that this is not a quarter where the problem is the order. The demand is extremely strong and that is the reason the attrition is so high because there is huge demand for manpower also.

The challenge is that in this quarter, the only number which will matter is how, which company is able to manage attrition and to what extent. I do not think margins is something to monitor because most of the companies have started taking price hikes and so margins will be managed well. The challenge is the attrition and the commentary around it.

CC revenue growth is slightly higher. Margins are broadly in line to slightly positive on an absolute basis, maybe slightly lower. Dollar revenue is just marginally ahead. Overall, the despite the concern that the Street had going into Q4 numbers from IT, TCS is saying that at this size also, they can deliver in line numbers. Is that the signal coming in?
Yes I would say so although we did not have any such worry. We are very confident that this quarter is not a quarter to worry about margins or growth; it is a quarter to worry about attrition and that is where we are seeing the numbers and I think the trend will be similar. Every quarter we have 20-25 listed companies and its not necessary that everyone will give similar types of numbers. One or two can be different but broadly, 17-18 companies out of the 20 will see the same trends, in-line numbers, no disappointment on margin and no disappointment on extremely strong TCV. But everyone will be disappointed by attrition trend.

Let us talk about the geographical breakup. India has grown at a pace of 7% and that compares to 16% last quarter; continental Europe has grown by 10% this quarter versus around 16-17% last quarter. Would that be a worrying sign?
No, see this quarter is always very strong for some parts and it is a normal thing. So I do not think there is much to read about it.

What sort of concerns do your clients have going into Q4?
The clients have only one concern – the IT index itself has done extremely well and they think that the outperformance may stall for some time and there could be good time wise correction.

Does TCS continue to hold pole position or would you say that the swing is somewhat tilted in favour of HCL Technologies or perhaps Wipro?
There are different categories of players. TCS is in the low beta category where the numbers are visible. The consistency of management, the consistency of commentary, the lack of volatility is what investors reward. That is not comparable with other names. So I would put TCS in the top bucket in terms of all those things where volatility is concerned, followed by Infosys, Wipro in the second category and HCL in the third category in terms of volatility.

But that has no correlation with the recommendation or my preference because my preference is a combination of value, multiples, valuations, fundamentals, technology – many things. From that perspective, I would still like to have more weightage on HCL from a portfolio perspective.

What would you want to hear from management? Generally after Q4, they tend to give a trend for next year. What to expect there?
I would only look for commentary on attrition because that is my only concern. If poaching from each other continues, the cost of the industry will shoot up and that is not a healthy sign. So what is the solution? The solution is supply should come and I want to understand from the management when the supply will be enough to compensate for the existing attrition.

What would you want to hear? One of course is attrition is going up and second they may have to give salary hikes or may have to acquire from outside.
No. See, this is not the solution. I have worked with the industry for a decade and I can tell you right now what the industry is doing is poaching from one another and that is unnecessarily putting the cost up and the real solution is not that. The real solution is supply. We want to hear what they are doing for supply? Is training being accelerated? For example, if the average training period is 12 weeks, can they cut it down to 7-8? That is the real solution. Supply has to come. You can keep on poaching from one another it will not help you to have supply. What actions are they taking to quicken the supply, that is my question.

Do you think EPS will get upgraded, downgraded or will it be absolutely neutral?
I think this quarter will not result in any upgrade or downgrade. This is a confidence building quarter. It will give a little more confidence to the investors who were worried that demand may be weak going forward. But still the real comfort will come once the companies tell about what will be the supply side situation in the next two to three quarters. That will suit lots of the investors.

What is the big fear when it comes to attrition? Does it seem like this could be a structural issue? Could this head into more of a structural issue for not just TCS but for the entire industry?
No, I do not think it will be a structural issue. The real problem is in the numbers. In the last five years, recruitment was almost negligible and that was because the demand or growth for the industry was low. Now suddenly after Covid, because of work from home, FAANGs are aggressively recruiting and demand has gone through the roof since there is a massive shortage.

Remember that for a fresher to start executing at a good pace, it takes six to nine months of partial and complete training. So that is reason we are stuck and I completely agree that if this Ukraine and Russia had not popped up, probably we would not have seen such attrition even in this quarter.

So, maybe in two quarters, attrition will fall but do not expect it to go below pandemic level because if it goes to pandemic level or pre pandemic level, I will downgrade the whole sector because then it is a negative sign. It means that demand is not good. I want good attrition but not this level of attrition.

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Divyansh Singh

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