Indian IT Services Q1 Results Preview - No Signs Of Demand Improvement Yet: ICICI Securities

ICICI Securities Report

Due to soft demand outlook with limited large deal ramp ups during Q1 FY24, we expect QoQ revenue growth in constant currency terms for our coverage companies to be in the range of -2.4% (Tech Mahindra Ltd.) to +4% (Happiest Minds Technologies Ltd.).

Our 'Buy' rated Tata Consultancy Services Ltd., Infosys Ltd. and Persistent Systems Ltd. are expected to grow at 0.2%, 0.8% and 3% QoQ in CC terms, respectively. On the other hand, our ' Sell' rated Tech Mahindra would have the weakest sequential revenue growth at -2.4% in CC terms due to sharp weakness in communication, media and entertainment verticals along with soft orderbook. 'Reduce' rated Wipro is likely to grow its revenue at -1.6% QoQ CC.

We expect Ebit margins to be largely flat for most IT companies except TCS, which has announced wage hike starting April 1, 2023. We turn cautious on the Indian IT services sector for the near (three-six months) term given there could be downside risks to consensus earnings forecasts for Q1/Q2 FY24E and FY24E with macro headwinds continuing to persist at least for the next few quarters.

In terms of valuations, Nifty IT is currently trading at 21 times one -year forward price/earning multiple compared to its last 15-year average of 18 times and factoring in demand pick up in FY25E given the structural tailwinds around cloud migration and digitalisation for the sector.

For medium- to -long term (one-two years), we believe investors should add high quality names like TCS, Infosys and Persistent Systems that are building strong partnerships with key technology players globally, have consistent strong management execution, ability to win large cost optimisation deals during weak macros and have laser focus to harp on the digital transformation opportunity for its clients.

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