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Muted performance expected from Tier I; Tier II likely to report better numbers - IT Q4 Preview

ICICIdirect Research 06 Apr 2023 DISCLAIMER

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. 


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.

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