IT Services Q1 Results Preview - Deteriorating Macro, Wage Hikes To Impact Earnings: Motilal Oswal

Revenue growth to remain muted; margin to remain under pressure.

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Motilal Oswal Report

Our IT services coverage universe is expected to deliver a weak median revenue growth of 0.4% QoQ and 5.3% YoY in Q1 FY24. Major currencies have appreciated against U.S. dollar (€ +1.5% and £ +3.0%), providing favorable tailwinds.

However, we expect Ebit/profit after tax to decline 1.8% each QoQ, due to weak topline growth and the impact of wage hikes. For our IT services coverage universe, we estimate USD revenue/ Indian rupee Ebit/ Indian rupee profit after tax to grow at 5.3%/15.2%/16.0% YoY in Q1 FY24.

Overall the weakness in demand should continue in Q1 FY24 with a significant hit on discretionary spends. Clients continue to focus on cost and efficiency-driven projects, while keeping the non-critical projects on hold. Though the deal pipeline remains heathy, weak macro will continue to impact revenue conversions, thereby creating near-term pressure on revenues.

Banking, financial services and insurance, retail, hi-tech, and manufacturing continue to exhibit sluggish performance. The demand in the U.S. has deteriorated due to increasing inflation and declining consumer spending.

On the other hand, demand in Europe remains relatively stable, similar to the levels in Q4 FY23, and deal closures are progressing at a faster pace than in the U.S.

Though the demand remains intact for selective verticals and service lines, there is a near-term weakness due to approval delays and heightened deal scrutiny. These factors may result in project deferrals and temporary pauses in project execution.

Given the further deterioration in demand environment in Q1 FY24, we do not anticipate a recovery in H2 FY24. The recovery is expected to be more gradual in nature and should occur only in FY25. Additionally, we see a risk of guidance moderation for Infosys Ltd. for FY24.

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Motilal Oswal IT Sector Q1FY24 Results Preview.pdf
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Also Read: IT Services Q1 Results Preview - Will ‘Slower For Longer’ Fears Be Validated? Nirmal Bang

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