Indian IT services companies are expected to report moderated growth in Q4FY23 in both revenue and margins, primarily on account of usual seasonality during the quarter and the prevailing macro-overhang, according to analysts and brokerage firms. “IT automations in North America and Europe may show delayed spending or may face some spend cuts going ahead. We believe many of large enterprises will shift their focus on cost optimizations resulting in higher cost take out deals, vendor consolidation & lower discretionary spend,” said Axis Securities.
According to Kotak Institutional Equities, the IT services sector will record a net sales of Rs 1,619 billion with 17 per cent YoY growth, EBITDA of Rs 382 billion up 16 per cent YoY and profit after tax of Rs 264 billion up 11 per cent YoY.
This week, Indian behemoth TCS reported moderate growth in revenue and net profit, marginally missing street estimates. Infosys is due to release its fourth quarter results later today, while Wipro, HCL Technologies, Cyient, L&T Infotech and others are due later in this earnings season.
What is dragging India’s information technology sector?
“Growth will be impacted by (1) usual seasonality in the March quarter, (2) slowdown in discretionary spends as companies focus more on costs and RoI and (3) deterioration in demand caused by macro uncertainties in the impacted verticals of mortgages, hi-tech and parts of retail and telecom,” said Kotak Institutional Equities.
Global macros weigh
“A deteriorating global macroeconomic environment alongside possible recession in the US and Europe has dampened the near-term growth prospects of Indian IT companies. Enterprises have started to prune discretionary spends and shift focus to cost savings,” said BOBCAPS. It added that the recent guidance from global IT services companies points to a weak CY23 fronted by an anaemic Mar’23 quarter. “Q3FY23 (Oct-Dec) earnings commentary from the Indian IT industry also indicates weakness over the next few quarters with a pickup in revenue growth only in H2FY24,” it said. The brokerage firm, while anticipating a subdued year for the sector, expects a healthy recovery in FY25 as structural demand remains intact.
“We expect the IT sector (tier-I IT) revenue growth to moderate from 13 per cent CC in FY23E to 6.5 per cent in FY24E and recover to 8.5 per cent CC in FY25E. Valuations have corrected to below +1SD with earnings trajectory expected to improve in FY24E,” said HDFC Securities.
Impact of US banking sector crisis
Persisting macro-overhang coupled with spiraling weakness from fallout of the recent developments in the banking space will continue to weigh on the sector in the near term, said Sharekhan, as it maintained a ‘neutral stance’ on the sector. “While Indian IT companies do not have meaningful exposure to the affected US regional banks, their BFSI vertical spends may get impacted with delay in decision making. We believe persisting macro headwinds coupled with concerns about recent developments in the banking space have further deteriorated the outlook,” said Sharekhan.
Top picks among Indian IT service companies stocks
According to a few brokerage firms, stocks of Infosys, HCL Technologies, TCS, Persistent Systems and Coforge are the preferred picks. Some preferred Tech Mahindra. “We expect Infosys and HCLT to target 6-8 per cent CC YoY revenue growth in FY24E. We remain cautiously optimistic about the IT services sector based on firms’ commitment toward digital transformation. TECHM is our preferred pick, followed by TCS. We like Coforge and PSYS among mid-cap IT firms,” said Elara Capital. According to Axis Securities, the top result buys are Tech Mahindra, Persistent Systems, Mindtree, Bharti Airtel, Coforge; and top result sells are Cyient, SIS.
What to watch from Indian IT companies’ Q4 results?
The key monitorables for the IT sector this quarter will be management commentary on critical issues such as 1) Outlook on client spend, 2) Vertical outlook, 3) Rising subcontractor costs, and 4) Pricing pressure on realizations. Further, Sharekhan added, “Magnitude of spends towards digital and cloud technologies will be something to watch out for. Commentary on cloud migration, 5G, digital transformation, IoT and cybersecurity to be in focus. Commentary on pace of hiring activity for FY24.”