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Dolat Capital Report
We anticipate another subdued quarter with revenue growth of -1% to +1.8% QoQ in constant currency terms amongst our tier-I IT names, and II-3% CC growth for tier-II names for Q2 FY24E, amid weaker decision making and soft demand environment.
Ebit margins too, will have limited room for expansion despite muted hiring, with net currency headwinds putting additional pressure, hence we see QoQ movement of -150 basis points to +150 bps in Q2 FY24E.
Our interactions with industry participants indicate continued weakness in banking, financial services and insurance across geographies reflecting weak macro environment.
Our stance on slowdown in IT services remains intact for near term as Organisation for Economic Co-operation and Development global forecast continues to see further cuts in gross domestic product growth estimate from 2.9% to 2.7% for CY24 (against average of 3.3% for CY15-19).
Persistent inflation and delayed rate cuts for CY24 imply macro pressures will remain, culminating into uncertain IT spends. Our preference is for large-caps, with relative preference of HCL Technologies Ltd./Tata Consultancy Services Ltd.
Recently, Accenture plc guided 2-5% in CC for year-ender August 2024 (8.2% growth in FY23), slightly better for managed services unit that implies 5-8% growth. In the pre-Covid period (FY16-FY20), Accenture average growth was at par with our coverage of Indian IT services companies.
Consensus growth for CY23- 25E expects ~5% growth for Accenture versus our IT services growth expectations of 6.2% which depicts potential downward risks in revenue growth estimates in Indian companies.
EPAM too, further curtailed its revenue growth guidance from -2% to -3% for CY23. Hence, express caution from these broad cues, and possibility of delay in ramp-up of deals.
For Q2 among Indian IT tier-I companies, TCS/HCLTech/LTIMindree Ltd. should lead the way with 1.8% QoQ in CC followed by Infosys Ltd. (+1.2%) while Wipro Ltd. (-0.3%) and Tech Mahindra Ltd. (- 1%) are expected to see sequential decline.
Among tier-II, Persistent Systems Ltd. should lead the growth with 3% QoQ, followed by Mphasis Ltd. (2.5%), Coforge Ltd. (2%), and L&T Technology Services Ltd. (2%).
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