Motilal Oswal Financial Services

Sector Update | 31 May 2021

Technology

TCS/INFY FY21 AR analysis: A year of Digital acceleration

Structural demand led by Cloud remains a key tailwind



TCS Annual Report 20-21



Infy Annual Report 20-21

Analysis of the FY21 annual reports of TCS and Infosys highlight two big industry

trends: 1) need for across the board Digital transformation as enterprises move

towards contactless business, and 2) rapid adoption of Digital technologies by

companies forcing a re-examination of their cost structures, increase business

resilience, and agility.

These changes will be driven by adoption of Cloud-first solutions to create a

seamless experience across public, private, and hybrid Cloud, and across the

PaaS, SaaS, and IaaS landscapes.

Companies see this technology shift as the start of a multi-year technology

upgradation cycle, which should open up newer opportunities for technology-

driven differentiation.

TCS said it is entering FY22 with a strong growth momentum and much better

visibility of future growth than last fiscal, powered by a strong order book built

up over FY21 and a robust deal pipeline.

While these developments present strong market opportunities for the IT

industry, it is imperative for companies in the IT Services space to transition

from fast-commoditizing of traditional service offerings to attract and retain

quality talent, re-examine cost structures, and leverage Automation for

increased productivity.

Companies will continue to hire talent and operate from their offices. However,

work-from-anywhere model will also allow access to talent in towns and cities

where TCS/INFO may not have offices and delivery centers.

Both TCS and INFO are working towards institutionalizing their hybrid working

model, so as to best serve clients, while getting access to relevant skills in the

market.

By CY25, TCS sees no more than 25% of its employees at its facilities at any point

in time, and no individual would have to spend more than 25% of their time at

its facility to be 100% productive.

INFO has turned carbon neutral 30 years ahead of global guidelines. In its ESG

outlook, it said it would extend its Digital skills to over 10m people, including

employees, clients’ workforce, students, teachers, and communities by FY25.

TCS said it would be carbon neutral by CY50. Total reduction in its carbon

footprint in FY21 was 49%. It has also achieved a power utilization efficiency of

1.6 at its 21 data centers. The management’s focus remains on growing

sustainably, while following all major ESG guidelines set by the group.

ESG remains a key focus area for both TCS and Infosys, with incremental

progress made in FY21.

Enhanced need for relevant skills



Higher focus towards ESG



Mukul Garg – Research analyst

(Mukul.Garg@MotilalOswal.com)

Research analyst : Anmol Garg

(Anmol.Garg@MotilalOswal.com) /

Heenal Gada

(Heenal.Gada@MotilalOswal.com)

31 May 2021

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Technology

Enough levers to maintain margin resilience at FY21 levels



TCS expects demand, revenue, and operating costs to normalize and return to

its long-term comfort zone. That, along with higher quality revenue and greater

operating efficiencies, will help sustain operating margin at current levels.

INFO expects margin to remain resilient despite a 320bp increase in FY21.

This will be majorly driven by better business mix, operating leverage, and

additional cost levers enough to curtail some of the cost reversals (discounts,

travel expenses, etc.) expected in FY22.

Balance sheets remain strong and liquid (with cash at 25-29% of assets/3-5% of

m-cap).

Sub-optimal assets like goodwill/intangibles remained low for TCS and INFO (2-

11% of net worth).

Contingent liabilities continued to be low and stable (4-5% of net worth).

RoE of TCS (~38%) and INFO (~27%) remained among the best across industries.

Working capital cycles of these companies reduced by 3-5 days during FY21,

aiding pre-tax cash conversion.

For both companies, OCF grew in the 20-37% range, while FCF grew 22-45%.

OCF/EBITDA conversion stood ~83%, while FCF/PAT conversion was in the 107-

114% range.

TCS’ payout was 95% of FCF on the back of a 22% increase in FCF, at the higher

end of its guidance level. FCF grew 44% YoY for INFO and payout stood at 94%.

This translates into one of the highest returns of cash in absolute terms by both

companies in any particular year.

Both companies continue to deliver at the higher end of their capital allocation

policy. TCS has a payout policy of 80-100% of FCF, while the same for INFO is

85%. INFO has reported the highest ever payout among its peer group in the

past three years.

In the medium and longer term, both companies are seeing strong structural

growth drivers, triggered by a multi-year technology refresh cycle and increased

focus of customers on growth and transformation (G&T) initiatives.

We remain positive on the industry as we expect the sector to sustain double-

digit topline growth in the medium term, led by: 1) increasing visibility on

double-digit growth, 2) larger deals on a full-scale Digital transformation, and 3)

higher spends on Cloud migration by large corporates.

Both companies delivered strong margin in FY21. While some of the margin

tailwinds are not sustainable, it will be offset by other cost levers and a

structural shift towards offshoring. Therefore, we expect margins to stay within

a narrow band.

Our preference for INFO over TCS is premised on its headroom for increased

growth potential and narrowing of the valuation gap between the stocks.

As INFO has outperformed TCS in FY21, we expect the valuation divergence to

continue to narrow. We retain our Buy on INFO, while maintaining our neutral

stance on TCS on elevated valuations.

Robust balance sheets; improved working capital cycles



Higher payouts on record high FCF



Valuation and view – Prefer INFO



31 May 2021

Technology

Healthy deal wins paves way for strong growth outlook

Both TCS and Infosys reported moderate growth of 0.6% YoY and 6.1% YoY USD

respectively in FY21, as both demand and supply were impacted due to COVID-19

pandemic during H1 FY21.However, both companies delivered all time high deal

wins during the year due to increased spend on technology from large enterprises to

maintain operations. Infosys reported large deal wins of USD 14.1b, up56% YoY

while TCS order book of USD 31.5b increased by 17% YoY.

TCS highlighted that demand in industry is being driven by the confluence of two big

trends. First, with consumers preferring contactless, digital transactions, enterprises

were forced to rely more on their digital channels triggering a lot of investment in

the front and back end transformations.

“We see this technology shift as the start of a multi-year technology upgradation cycle in

which the abundance of native capabilities will constantly expand the art of the possible,

opening up newer opportunities for technology-driven differentiation.”

- Rajesh Gopinathan

CEO and Managing Director, TCS

Infosys also emphasized that cloud centric digital technologies are the key

investment areas of enterprises as they are continuously reimagining there

organization structures.

” There is enormous opportunity ahead of us. Technology, especially digital and cloud

continue to be at the center of change for large enterprises globally.”

- Salil Parekh

CEO and Managing Director, Infosys

This technology shift should be the start of a multi-year technology upgradation

cycle, opening up newer opportunities for technology-driven differentiation.

Exhibit 1:

17% increase in TCS orderbook

Orderbook (USDb)

Exhibit 2:

while Infosys large deals increased by 56% in FY21

Deal wins (USD b)

31.5

21.9

6.3

3.5

3.1

9.0

14.1

FY19

FY20

FY21

Source: Company, MOFSL

*Data available only from FY19

FY17

FY18

FY19

FY20

FY21

Source: Company, MOFSL

31 May 2021

Technology

Robust business metrics lead to increase in margins

While both TCS and Infosys reported a decline in headcount in 1QFY21, a rebound in

demand resulted in cumulative net workforce addition of 57K in FY21 - TCS addition

in FY21 was highest in past 15 years at 40k, while INFO added 17K (highest in last 9

years). Despite the unprecedented employee addition, INFO ended the year with its

highest ever employee utilization (87.7% in Q4 FY21).

Both companies also posted their lowest attrition numbers, which coupled with an

increase in utilization and delay in wage revisions helped profitability. Margins for

both companies were further aided by a reduction in travel expenses, increase in

the offshore mix, and ongoing work from home.

As TCS and Infosys further ramp up hiring (both fresher and lateral), we expect a

gradual dip in employee utilization in FY22. In addition, they should see an increase

in attrition on the back of robust demand, along with normal cycle wage hikes.

While these factors should lead to increase in cost base for both companies, they

expect operating leverage to help stabilize profitability.

Exhibit 3:

TCS margins inched up by 130bp

TCS EBIT margins (%)

27.0

26.5

25.7

24.8

25.6

24.6

25.9

Exhibit 4:

…while Infosys margins inched up by 320bps

Infosys EBIT margins (%)

25.9

25.0

24.7

24.3

22.8

24.5

21.3

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY15

FY16

FY17

FY18

FY19

FY20

FY21

Source: Company, MOFSL

31 May 2021

Technology

Strong balance sheets; impairments unlikely

Balance sheets of the Top-2 IT services companies remain strong and liquid. Even as

these companies stepped up capital return (dividend + buy back) to shareholders

over the previous 3 years, cash and short-term investments continues to account for

an impressive 25-29% of total assets and 3-5% of the market capitalizations.

With a strong debt free balance sheet and conversion of most of the PAT in free

cash flow, we continue to expect both TCS and Infosys to benefit from industry

consolidation through captive monetization and niche acquisitions while

maintaining their ability to maintain elevated shareholder payout in future.

Exhibit 5:

Balance sheets of the top two IT companies are…

Cash & STI as % of total assets

29%

25%

Exhibit 6:

…robust and liquid

Cash & STI as % of market cap

TCS

Infosys

Source: Company, MOFSL

TCS

Infosys

Source: Company, MOFSL

For both companies, OCF grew in the 20-37% range, while FCF grew 22-45%.

OCF/EBITDA conversion stood ~83%, while FCF/PAT conversion was in the 107-114%

range. Interestingly both TCS and Infosys announced buybacks in FY21 to the tune of

INR 160b and INR 92b respectively. Along with dividend total payout for TCS and

Infosys stood above 100% of PAT for FY21.

Exhibit 7:

Goodwill/intangible assets are relatively low…

TCS - Goodwill (% of Net worth)

Exhibit 8:

…as TCS has not been on an acquisition spree

TCS - Intangible assets (% of Net worth)

FY16

FY17

FY18

FY19

FY20

FY21

FY16

FY17

FY18

FY19

FY20

FY21

Source: Company, MOFSL

31 May 2021

Technology

Exhibit 9:

Share of goodwill/intangible assets increased…

Infosys - Goodwill (% of Net worth)

Exhibit 10:

…over the last couple of years due to acquisitions

Infosys - Intangible assets (% of Net worth)

11%

FY16

FY17

FY18

FY19

FY20

FY21

FY16

FY17

FY18

FY19

FY20

FY21

Source: Company, MOFSL

Exhibit 11:

Contingent liabilities of TCS…

TCS - Contingent liabilities (% of Net worth)

10%

Exhibit 12:

…and INFO remained stable

Infosys - Contingent liabilities (% of Net worth)

10%

FY16

FY17

FY18

FY19

FY20

FY21

FY16

FY17

FY18

FY19

FY20

FY21

Source: Company, MOFSL

Exhibit 13:

TCS Payout

106

112

FY13

FY10

FY11

FY12

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

Source: MOFSL, Company

Exhibit 14:

Infosys Payout

109

107

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

Source: MOFSL, Company

31 May 2021

Technology

Exhibit 15:

Return ratio expansion in TCS and INFO…

TCS - ROE

42%

35%

36%

30%

38%

Exhibit 16:

…was largely driven by a reduction in equity base

Infosys - ROE

23%

25%

27%

37%

22%

FY16

FY17

FY18

FY19

FY20

FY21

FY16

FY17

FY18

FY19

FY20

FY21

Source: Company, MOFSL

Exhibit 17:

Capital return of TCS and…

TCS - Payout as % of FCF

104%

111%

92%

95%

Exhibit 18:

…INFO rose in FY21

Infosys - Payout as % of FCF

131%

88%

94%

49%

50%

47%

58%

52%

FY16

FY17

FY18

FY19

FY20

FY21

FY16

FY17

FY18

FY19

FY20

FY21

Source: Company, MOFSL

Exhibit 19:

Working capital stretch…

TCS - Pre-tax CFO/EBITDA

Exhibit 20:

…Ind AS impact and lower...

TCS - CFO/EBITDA

78% 77%

72% 77%

83%

Exhibit 21:

…tax are the moving parts

TCS - FCF/Adj. PAT

102%

88%

70%

107%

84% 90%

103%

100%

103%

98%

91%

62%

87%

FY16 FY17 FY18 FY19 FY20 FY21

Source: Company, MOFSL. Note: This ratio

should be read in conjunction with Ind AS

116 adoption that led to an EBITDA boost

FY16 FY17 FY18 FY19 FY20 FY21

Source: Company, MOFSL. Note: This ratio

should be read in conjunction with Ind AS

116 adoption that led to an EBITDA boost

FY16 FY17 FY18 FY19 FY20 FY21

Source: Company, MOFSL

31 May 2021

Technology

Exhibit 22:

Billed receivable days decreased, while…

TCS - Receivable days

Exhibit 23:

…unbilled days reported a slight increase

TCS - Unbilled revenue days

FY16

FY17

FY18

FY19

FY20

FY21

FY16

FY17

FY18

FY19

FY20

FY21

Source: Company, MOFSL. Note: Receivable days in INR terms

Source: Company, MOFSL. Note: Unbilled revenue days in INR terms

Exhibit 24:

Decrease in DSO and an…

TCS - DSO

Exhibit 25:

…increase in payable days…

TCS - Creditor days

Exhibit 26:

…led to a decline in WC

TCS - Working capital days

FY16 FY17 FY18 FY19 FY20 FY21

Source: Company, MOFSL. Note: DSO in INR

terms

FY16 FY17 FY18 FY19 FY20 FY21

Source: Company, MOFSL. Note: Creditor

days in INR terms

FY16 FY17 FY18 FY19 FY20 FY21

Source: Company, MOFSL. Note: Working

capital days in INR terms

Exhibit 27:

Pretax OCF/EBITDA at 106%

Infosys - Pre-tax CFO/EBITDA

105%

106%

Exhibit 28:

Highest ever OCF/EBITDA…

Infosys - CFO/EBITDA

76%

83%

Exhibit 29:

..led to a record high

FCF/PAT

Infosys - FCF/PAT

114%

85% 83%

92%

104%

97%

59% 62%

93%

92%

70%

71%

79%

FY16 FY17 FY18 FY19 FY20 FY21

Source: Company, MOFSL. Note: This ratio

should be read in conjunction with Ind AS

116 adoption that led to an EBITDA boost

FY16 FY17 FY18 FY19 FY20 FY21

Source: Company, MOFSL. Note: This ratio

should be read in conjunction with Ind AS

116 adoption that led to an EBITDA boost

FY16 FY17 FY18 FY19 FY20 FY21

Source: Company, MOFSL

31 May 2021

Technology

Exhibit 30:

Decrease in both receivable and…

Infosys - Receivable days

Exhibit 31:

…unbilled revenue days

Infosys - Unbilled revenue days

FY16

FY17

FY18

FY19

FY20

FY21

FY16

FY17

FY18

FY19

FY20

FY21

Source: Company, MOFSL. Note: Receivable days in INR terms

Source: Company, MOFSL. Note: Unbilled revenue days in INR terms

Exhibit 32:

DSO declines…

Infosys - DSO

103

Exhibit 33:

…while stable payables…

Infosys - Creditor days

Exhibit 34:

…resulted in improved WCD

Infosys - Working capital days

FY16 FY17 FY18 FY19 FY20 FY21

Source: Company, MOFSL.

Note: DSO in INR terms

FY16 FY17 FY18 FY19 FY20 FY21

Source: Company, MOFSL.

Note: Creditor days in INR terms

FY16 FY17 FY18 FY19 FY20 FY21

Source: Company, MOFSL.

Note: Working capital days in INR terms

Exhibit 35:

Independent directors

higher in statutory requirements

% of independent directors on the

board

67%

Exhibit 36:

..and so in audit committee

% of independent directors on the

audit committee

100%

Exhibit 37:

…and in remuneration

committee

% of independent directors on the

nominations & remunerations

committee

100%

56%

83%

50%

TCS

Infosys

Source: Company, MOFSL

TCS

Infosys

Source: Company, MOFSL

TCS

Infosys

Source: Company, MOFSL

31 May 2021

Technology

Exhibit 38:

Management remuneration at TCS grew ~56%

(INR m)

CEO

CFO

COO

Total

Mgmt. remuneration as a percentage of adjusted PAT

FY16

257

286

0.1%

FY17

342

449

0.2%

FY18

125

252

0.1%

FY19

160

116

318

0.1%

FY20

134

101

275

0.1%

FY21

204

161

429

0.1%

Source: Company, MOFSL

Exhibit 39:

Management remuneration at INFO grew ~45%

(INR m)

CEO

CFO

COO

Total

Mgmt. remuneration as a percentage of PAT

FY16

484

630

0.5%

FY17

451

118

662

0.5%

FY18

169

331

0.2%

FY19

247

411

0.3%

FY20

343

106

503

0.3%

FY21

497

173

731

0.4%

Source: Company, MOFSL

31 May 2021

Technology

Explanation of Investment Rating

Investment Rating

Expected return (over 12-month)

BUY

>=15%

SELL

< - 10%

NEUTRAL

< - 10 % to 15%

UNDER REVIEW

Rating may undergo a change

NOT RATED

We have forward looking estimates for the stock but we refrain from assigning recommendation

*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within

following 30 days take appropriate measures to make the recommendation consistent with the investment rating legend.

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31 May 2021

Technology

********************************************************************************************************************************

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- received compensation from the subject company in the past 12 months for investment banking / merchant banking / brokerage services or from other than said services.

The associates of MOFSL has not received any compensation or other benefits from third party in connection with the research report

Above disclosures include beneficial holdings lying in demat account of MOFSL which are opened for proprietary investments only. While calculating beneficial holdings, It does not

consider demat accounts which are opened in name of MOFSL for other purposes (i.e holding client securities, collaterals, error trades etc.). MOFSL also earns DP income from

clients which are not considered in above disclosures.

Analyst Certification

The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the

research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report.

Terms & Conditions:

This report has been prepared by MOFSL and is meant for sole use by the recipient and not for circulation. The report and information contained herein is strictly confidential and

may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent

of MOFSL. The report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The intent of this report is not recommendatory in

nature. The information is obtained from publicly available media or other sources believed to be reliable. Such information has not been independently verified and no guaranty,

representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. The

report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial

instruments for the clients. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. MOFSL will not treat recipients as

customers by virtue of their receiving this report.

Disclaimer:

The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or

distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent. This report and information herein is solely for

informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing

in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances.

The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment

objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this

document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this

document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views

expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative products as well as non-investment grade

securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of

the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and

should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make

modifications and alternations to this statement as may be required from time to time without any prior approval. MOFSL, its associates, their directors and the employees may from

time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to

perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a

separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of

information that is already available in publicly accessible media or developed through analysis of MOFSL. The views expressed are those of the analyst, and the Company may or

may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on,

directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or

entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law,

regulation or which would subject MOFSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in

all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost

revenue or lost profits that may arise from or in connection with the use of the information.

The person accessing this information specifically agrees to exempt MOFSL or any of its

affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOFSL or any of its affiliates or employees responsible for any such

misuse and further agrees to hold MOFSL or any of its affiliates or employees free and harmless from all losses, costs, damages,

expenses that may be suffered by the person

accessing this information due to any errors and delays.

Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022 71934200/ 022-71934263;

Website

www.motilaloswal.com.CIN

no.: L67190MH2005PLC153397.Correspondence Office Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road,

Malad(West), Mumbai- 400 064. Tel No: 022 7188 1000.

Registration Nos.: Motilal Oswal Financial Services Limited (MOFSL)*: INZ000158836(BSE/NSE/MCX/NCDEX); CDSL and NSDL: IN-DP-16-2015; Research Analyst:

INH000000412. AMFI: ARN - 146822; Investment Adviser: INA000007100; Insurance Corporate Agent: CA0579;PMS:INP000006712. Motilal Oswal Asset Management Company

Ltd. (MOAMC): PMS (Registration No.: INP000000670); PMS and Mutual Funds are offered through MOAMC which is group company of MOFSL. Motilal Oswal Wealth

Management Ltd. (MOWML): PMS (Registration No.: INP000004409) is offered through MOWML, which is a group company of MOFSL. Motilal Oswal Financial Services Limited is

a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs,Insurance Products and IPOs.Real Estate is offered through Motilal Oswal Real Estate Investment Advisors II Pvt.

Ltd. which is a group company of MOFSL. Private Equity is offered through Motilal Oswal Private Equity Investment Advisors Pvt. Ltd which is a group company of MOFSL.

Research & Advisory services is backed by proper research. Please read the Risk Disclosure Document prescribed by the Stock Exchanges carefully before investing. There is no

assurance or guarantee of the returns. Investment in securities market is subject to market risk, read all the related documents carefully before investing. Details of Compliance

Officer: Name: Neeraj Agarwal, Email ID: na@motilaloswal.com, Contact No.:022-71881085.

* MOSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National

Company Law Tribunal, Mumbai Bench.

31 May 2021