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September Quarter Results from Five Indian Providers: Generally Positive, but Indian Street Expects More

Last week we looked at Infosys' quarterly results. It has been another busy week of quarterly reports from some of the Indian oriented service providers. How did five of them do?

Syntel (Q3 CY14): Softness in Healthcare Greater than Expected

  • Revenue was $228.3m, up 8.8% y/y, but slightly below consensus
  • Operating margin was 29.8%, down 610 bps y/y, with less benefit from rupee depreciation

Revenues were impacted by a 4% y/y decline in its Healthcare and Life Sciences business (15.7% of total revenues, and Syntel’s highest margin sector).

Syntel has adjusted guidance for CY 2014:

  • Lowering revenue guidance from $920-940m (growth of 12-14%) to $908-915m (growth of 10-11%) because of two factors: exchange rates, and slower spending its healthcare business because of the extension of the ICD 10 deadline to October 2015: Sitel cited this a concern last quarter but the slowdown is greater than it anticipated
  • Increasing operating margin guidance from 27-29% to 28-30%

The company stresses that its healthcare business has over the last three years grown by a CAAGR of 20%, with a lot of activity in projects related to regulatory compliance, especially around ICD 10 migration. Syntel is also being cautious around its TriZetto business; it is not yet seeing signs of Cognizant making changes in the service ecosystem of TriZetto, but is facing the need in the medium-term to partner with a TriZetto competitor and conduct some re-skilling of its personnel.

Syntel’s BFS sector business (50.6% of the total enjoyed 10.7% y/y topline growth, the strongest quarter for several years, with strong y/y growth a Federal Express (its 3rd largest client) but little y/y growth from top two clients AmEx (+2.9%) and State Street (-2.8%).

In contrast, the 14.3% y/y growth in its Retail, Logistics & Telecoms sectors (15.3% of total revenue) was a sharp deceleration from the very strong growth seen in the last few years.

Given its dependence on just three clients in the BFS sector (which collectively account for 93.5% of sector revenues), Syntel needs to look elsewhere (and outside the healthcare sector) for future growth. This may explain the increase in SG&A spending (11.6% of revenue, compared to 10.7% in Q3 2013). The company has net cash of $668m which it could use for M&A activity, though it has not been acquisitive to date.

WNS (Q2 FY15): Positive indicators for FY 2016

An encouraging quarter for WNS:

  • Net revenues (less repair payments) were $126.5m, up 9.7% y/y (up 3.9% in constant currency). Given ~6% revenue headwinds from an OTA contract ramp up and from renegotiated terms with Aviva, the 9.7% growth is impressive
  • EBIT margin was 14.9%, up 550 bps y/y. This was the seventh consecutive quarter of EBIT margin improvement - and further improvement is possible from increasing seat utilization (still at 1.16x, the target is 1.25x, achieved 1.21x in back in FY 2013).

Growth continues to be led by largest geo the U.K. (we estimate $7.5m of the $11.1m incremental growth) and the insurance sector (we estimate $4.5m). WNS appears to have dealt with headwinds in the travel sector.

By service line, the revenue growth engines were F&A and research & analytics ($5m and $3.5m growth respectively).

The company has increased its salesforce by 70% in the last two years. During the quarter it signed its third large deal this year with a large OTA (a new logo which may afford the opportunity to WNS for expansion). WNS is targeting six large wins overall this FY and claims its pipeline is overall healthy. Growth is coming from outside the top 10 clients, which implies new logos.

WNS has updated its net revenue guidance for FY 2015 to $500m - $516m, a growth of 6% to 9.4% (at the bottom end of prior guidance of growth of 6% - 12%, primarily due to GBP/US$ movement). Constant currency growth guidance has been narrowed to 3% - 6% (from 2% - 7%).

WNS' CFO and COO have been in place for about a year. The signs are generally positive that WNS should deliver double digit growth and further margin improvement in FY 2016. Net cash is $91m, up almost $75m y/y: M&A activity is one possibility to boost topline growth.

iGATE (Q3 2014): Margins under pressure; New head of EMEA

iGATE also reported y/y revenue growth of around 10%:

  • Revenues were $322.8m, up 10.0% year-over-year (y/y), and up 3.5% sequentially
  • EBIT margin was 16.9%, up 99 bps y/y
  • Operating income (non GAAP) was $54.7m, a margin of 17.0%, down 554 bps y/y.

But where its insurance sector business was strong for WNS, for iGATE, insurance was the weakest performing sector (down 5.8% y/y). iGATE’s sectorial revenue engines are Manufacturing (28% of revenues, 44% of the growth) and BFS (23.1% of revenues, a third of the growth).

iGATE added just two new clients during the quarter: growth is coming from account mining. Having integrated Patni, the company (which used to generate revenues of ~$250m) is undergoing a major transformation. Its focus is on large deals and the shared service utility model (in particular setting up industry utilities in the insurance and healthcare sectors and for ref. data management in BFSI), but this is requiring a lot of investment for it to be able to execute, including in:

  • What it calls “hiring for growth” in anticipation of servicing new business (headcount this quarter increased by 5.2% q/q), also skills such as solution architects
  • What it admits are “catch up investments” around tools and methodology, having been lagging in this.

It is likely that margins will continue to be pressured in the short to mid-term by these investments and by transition costs – though we would expect to see utilization in IT services pick up from the current level of 71% fairly quickly.

The company signed the second of the three largest deals it hoped to secure in 2014, and claims the third will be signed soon (of its five largest deals signed this year, three are progressing well, the two smallest have client specific issues). A recently signed deal with a North American client has a TCV of >$150m, taking the overall TCV of deals signed in the last few quarters to $550m. But apart from its largest client, which contributed over half of the $29.2m incremental revenue this quarter, we note that revenues from other recent large deal signings have yet to flow through: the number of $10m+ and $50m+ accounts has not changed this year.

Europe (14.8% of global revenues) was soft q/q. iGATE is investing to expand its presence in the region, where it remains dependent on the U.K. - the ambition is to gain traction in DACHs and the Nordics. Srikanth Iyengar has been recruited (from Infosys) as Head of Europe and Australia. Derek Kemp has moved from head of EMEA to lead a new strategic deals team.

TCS (Q2 FY15): Another quarter of strong and broad based growth, but misses Indian Street expectations

TCS continues to outperform the industry:

  • Revenues were up 17.7% y/y to $3,929m
  • Operating margin was 26.8%, up 55 bps y/y, with utilization (including trainees) now at 81.3%.

Nevertheless, TCS’ topline growth missed Indian Street expectations.

A third of the $592m in incremental revenue came from ADM services (which is where many of its peers are struggling) and a quarter from infrastructure services.

There were a few small pockets of relative weakness, notably:

  • Insurance sector (Diligenta contending with policy runs offs), though BFSI sectors overall delivered over 25% y/y growth to $1,587m
  • Latin America, which for TCS has been soft for three quarters now. In contrast its India business had its strongest quarter for over a year.


  • Europe and U.K. both continue to enjoy strong growth.
  • HC/LS also delivered another quarter of topline growth of ~30%: FY 2015 revenues from the vertical are likely to be around $1bn

TCS won eight large deals this quarter, of which

  • By region, five from the U.S. two from Europe and one from UK.
  • By sector, two from banking, two from manufacturing, one each from utilities, energy, transportation and healthcare.

In terms of the existing client bse, TCS added four more clients generating $50m+ in annual revenue bucket, nine more generating $20m+.

HCL Technologies (Q1 FY15): Similar  to TCS

HCL Technologies also missed Indian Street expectations as revenue growth in its infrastructure services business decelerated significantly, in spite of yet another quarter of double digit topline growth and margin expansion.

  • Revenues were $1,433.5m, up 12.8% year-over-year (y/y), up 12.7% in constant currency.
  • EBIT margin was 23.9%, up 9 bps y/y.

To put this into perspective, its infrastructure services business generated 17.7% y/y growth. To expect a business that is approaching $2bn in annual revenue to continue to deliver y/y growth of 30% plus is arguably naïve. Its relatively small BPO business (~$72m this quarter) has now had four consecutive quarters of strong growth: where HCL is not seeing growth is its application services business. It has reclassified its applications services segments into:

  • Industry Applications Services (IAS):  ADM and testing activity
  • Enterprise Systems Integration (ESI): including SaaS projects.

HCL Technologies signed 15 transformational engagements with a combined TCV of >$1bn in the quarter. The big wins are led by infrastructure services deals in both North America and Europe. Europe (32.3% of total) performed well in the quarter, with an estimated 20.8% growth (to $463m).

All verticals delivered growth apart from healthcare/LS.

HCL Technologies added one more client to its $100m+ in annual revenue group, two more to the $40m+.


We are often asked if a region (e.g. Europe) or a sector (e.g. healthcare) is soft. These five results illustrate that making simple judgements is not helpful. This quarter, for example:

  • Europe is strong for those IOSPS that have scale and been able to invest in developing a local presence in Continental Europe
  • U.S. healthcare may be soft currently for those vendors that have been dependent on ICD 10 migration projects: vendors that have invested in other industry-specific capabilities in LS/HC continue to enjoy strong growth. Similarly, insurance continues to be soft for a number of vendors, but specialists like WNS are benefiting from account mining.

Of the five providers we have discussed (other IOSPs to report in the last week include Mindtree and NIIT Technologies)

  • The largest two saw continuing strong growth, but disappointed the Indian Street
  • The three smaller ones are specializing and strengthening account mining, but at very different points on that journey.

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