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Muted performance expected from Tier I; Tier II likely to report better numbers - IT Q4 Preview
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What's Buzzing
IT companies' growth for the quarter is expected to be muted on fewer working days, extended furloughs in January and some macroeconomic factors. Margins, except TCS, LTIM and Coforge likely to decline sequentially.
Context
We expect IT companies to post QoQ CC revenue growth between -1% and 2.5% for Q4FY23. Among Tier I IT companies, we expected TCS, Infosys and HCL Tech (IT services) to post a muted QoQ CC revenue growth of 1%, 0.5% & 1% QoQ, respectively, while Wipro is expected to report QoQ revenue decline of 0.5%. Among tier II IT companies, we expect LTIMindtree and Coforge to report a steady QoQ CC revenue growth of 2% & 2.5%, respectively, while Tech Mahindra’s revenue is expected to decline 1%. We expect currency tailwinds of 100 bps for all companies due to GBP & Euro appreciation against the US dollar, which will push dollar revenue growth for the quarter. EBIT margins for the companies except TCS, LTIM and Coforge are likely to decline between 20 and 140 bps QoQ.
Our Perspective
Sequential growth in IT companies in CC terms is expected to be muted on seasonal weakness while some macro issues will likely be an additional headwind for growth. Global IT giant Accenture continued to post strong numbers on outsourcing bookings while, on the other hand, we witnessed fast paced events unfolding in the global BFSI space (30-38% revenue mix for top three IT players). Some IT players have clarified they do not have meaningful exposure to regional US banks, which are in financial trouble. Hence, the impact is expected to be minimal. We do not have the exact break-up of BFSI vertical revenue region wise (i.e. US, Europe, etc), but we do understand that US BFSI contributes ~19-20% of its revenues. We also witnessed consolidation of two large Swiss banks wherein IT deals at the two companies will likely consolidate in the medium term and may shrink further deal sizes of this account, in our view. The macro environment remains challenging in the near term for IT companies as decision making has been on the slower side. This could be an additional headwind for Q4 revenues and beyond. However, we believe long term technology spends are intact, which is also evident from recent Nasscom projections of IT sector revenues, which are likely to touch US$500 bn in FY30 i.e. >10% CAGR over the period.
Disclaimer – I ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is acting as a distributor to solicit bond related products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.
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