India IT Services - Wielding The Storm And Emerging As A Winner: IDBI Capital

IT companies have multiple levers like lower lateral hiring, utilisation, pyramid and lower sub con.

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IDBI Capital Report

Cloud, generative artificial intelligence and ancillary technologies remain multi decadal opportunity for IT companies. In addition, IT companies are seeing strong deal wins (top five averages up 2.4% QoQ and 3% YoY).

Further, IT companies are indicating large deal wins to drive growth. However, we believe that conversion to revenues might slowdown due to lower shorter cycle deals and longer tenured large deals (leading to lower annual contract value).

We believe, challenging macro conditions will affect the growth in near term (until H1 FY24E) before stabilising. Hence, we remain selective in terms of stocks considering valuation (companies near five-year average price-to-earning) and key client beneficiary.

IT companies have multiple levers like lower lateral hiring, utilisation, pyramid and lower sub con. However, slowdown in revenues, travel and higher onsite cost to keep margin expansion under check.

Anecdotal evidence of correlation of fortune 500 companies with Indian IT companies

On analysing the revenue growth of key Fortune 500 enterprises and Indian IT companies, we found that the revenue growth of Indian IT companies in verticals like banking, financial services and insurance, retail and healthcare showed a strong correlation with the revenue growth of the key Fortune 500 companies present in those industries.

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IDBI Capital IT Sector Update.pdf
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