Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities and Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities.
The IT sector is expected to post a soft quarter, impacted by Q3 seasonality and worsening macro. The elements of macro volatility is resulting in growth moderating towards pre-COVID even as long-term drivers are unchanged. Recently, HCLT tweaked its FY23E guidance to the lower end, but Accenture maintained its FY23E growth guidance (outsourcing-led). In a seasonally soft quarter with higher impact of furlough, we expect tier[1]1 IT to post within 0.6% to 3.1% QoQ CC revenue growth, margin expansion of ~60bps QoQ and PAT growth of ~5% QoQ. We have factored in revenue growth decelerating from 13.5% CC in FY23E to 8.5% for FY24E and FY25E. Concurrently, the profit trajectory is expected to improve ahead in FY24E (vs. FY23E) as the supply side crunch eases with demand moderating. Prefer Infosys within tier-1 IT and Persistent Systems within mid-tier IT.
Element of uncertainty have increased: The element of uncertainty is being reflected in softness in onsite tech job postings (down 10-20% over the last two months) and deceleration in macro indicators, even as the key drivers of digital look steady. Some positive feed includes (1) cost optimisation deals, increased contracting in public services sector (TCS, Atos, Accenture) and vendor consolidation deals (INFO); (2) enterprise growth outliers in Europe predominantly in the manufacturing vertical (strong manufacturing vertical wins by INFO, WPRO in Q3); (3) positive supply-chain indicators such as unchanged growth guide by Accenture, Salesforce, and Snowflake; (4) deal market share gains by TCS+INFO vs. global peers in CY22; (5) prospects of improving operational performance (the upside risk to margin estimates) supported by normalisation of supply side crunch, bench optimisation and cross-currency starting to turn favourable (stronger impact expected in Q4).
Key expectations: We have factored in revenue growth of 1.3/2.1/3.1/0.6/1.0/2.9% QoQ for TCS, Infosys, HCLT, Wipro, TechM, and LTI-Mindtree. Within mid-tier IT, Persistent will continue to lead growth while Zensar and Mphasis are expected to underperform. Cyient and Mastek's revenue growth is driven largely by acquisitions. We expect INFO, HCLT, and LTTS to keep its revenue guidance unchanged and Wipro to guide 0-2% QoQ CC for Q4. Key monitorables include commentary and progression on client budgets, outlook of key verticals, commentary on pipeline, bookings trajectory, and hiring intensity.
Valuation: The IT index' historical outperformance of 8/8/5pp over benchmark 3/5/10Y CAGR was dragged lower by ~26% underperformance in the past one year. Over the past year, tier-1 IT underperformance was led by both a cut in earnings estimate (largely for WPRO, TECHM) and P/E de-rating (IT index de-rated from >30x in the beginning of the year to <22x currently), while mid-tier IT correction was largely a function of P/E de-rating as earnings estimates have held up (or improved). The multiples will be capped at +1SD due to increasing uncertainty and fewer positive catalysts. |
