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HDFC Securities Institutional Equities
The big news is that not much has changed in the past few months. Most of the demand indicators are trailing 10-15% below levels at the beginning of the year and only slightly better than the July lows; the supply-side factors remain favorable, supporting operational resilience despite soft growth.
In Q2 FY24, the IT sector is expected to deliver a soft quarter, although Q2 has historically been a seasonally strong quarter.
Growth divergence is expected between companies, with tier-I IT sequential growth ranging from -1.4% to +2.2% and mid-tier IT sequential growth ranging from +0.9% to 3.8%.
Outlook
The IT sector’s recent outperformance has been driven by valuation multiples rising by 10% in the last three months and the valuation gap to Accenture narrowing (highly correlated), despite earnings estimates being cut by ~5%.
We expect the sector’s revenue growth to recover to ~9% in FY25E, following ~4% in FY24E; the margin is expected to improve in FY25E, following a flat trajectory in FY24E.
We increase estimates for HCL Technologies Ltd. and Infosys Ltd. to factor better near–term visibility, supported by the ramp-up of the recent large deals, and roll forward target valuation to September-25E earnings per share.
Maintain our selective stance on the sector; downgrade Sonata Software Ltd., Zensar Technologies Ltd. and Cyient Ltd, to 'Add' ('Buy' earlier), given that the recent stock outperformance and limits the near-term upside potential.
Prefer LTIMindtree Ltd. among large caps and Persistent Systems Ltd. and Birlasoft Ltd. in the mid-tier IT space.
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