IGI Logo

For IT Services players, April-May-June is unlikely to have felt anything like spring. The usual seasonal strength associated with 1Q will mostly be absent this time. Discretionary project cancellations/ramp downs initiated in March will have their full quarter impact in 1Q. AI-led excitement aside, Hi-tech demand has probably seen incremental deterioration through the quarter, as evidenced by ACN and EPAM commentaries. Large banks’ IT budgets remain constrained dampening growth prospects. We expect large-cap IT Services players under coverage to report -1.7% to 0.6% CC QoQ growth. INFO (Another quarter of sequential decline?, 07 June 23) and TECHM could be at the bottom end of the band, per our estimates. Mid-cap companies under coverage (Coforge/PSYS) will likely grow faster (2.4%/3%). The only silver lining would be healthy deal closure/pipeline, albeit coloured by consolidation/efficiency deals. Most providers maintain that these deals are not margin dilutive. Though true over the life cycle of deals, bunching up of such deals could put pressure on margins near-term. Besides, wage hikes by select players (TCS/TECHM/Coforge) would be an added headwind. We expect our coverage universe to report -270 to 10 bps margin movement QoQ. We don’t expect any material improvement in commentary. But any change in players’ prior expectation of a second half recovery should be keenly watched

* No demand blossom yet: We expect our large cap coverage universe to report -1.7%to 0.6% CC QoQ growth. Closure of clients’ annual IT budgets by March typically results in new project starts in AMJ quarter boosting growth. This year however, many players saw spending cuts and project cancellations in March, especially on the discretionary side. We believe incremental two months’ impact of these cancellations will likely offset growth from new project starts driving muted performance. We expect players with higher discretionary exposure to be impacted more e.g INFO (-1.1% CC QoQ), HCLT’s ERS segment (-3.5% CC QoQ). TECHM (-1.7% CC QoQ) will likely suffer from sustained stress in Communications, seasonal weakness in Comviva and discretionary slowdown. LTIM’s Hi-tech revenues could see some sequential growth after two quarters of decline, though off low base. PSYS/Coforge could report better growth – 3%/2.4%.

* Margin pressures – no let-up: We expect our coverage universe to report EBIT margin movement of -270 to 10 bps QoQ. Headwinds include slower growth, seasonal factors e.g visa cost, wage hikes for a few (TCS/TECHM/Coforge) and increase in travel expenses. Players may find it difficult to pull traditional levers such as utilisation and pyramid correction in the current low growth environment. Additionally, while pricing may be stable, a shift in mix – from discretionary to efficiency – could impact realisation, at least in the near term. Players with a higher play on RTB side of the spend e.g HCLT, TCS could be better placed to manage margins, in our view. Besides, relatively higher wage inflation at INFO in FY22/23 versus TCS means cost pressure on INFO is higher, especially now as demand for those higher cost resources (hence higher billing scope) might be coming off.

* Deal wins - a silver lining: If TCS’ GBP 840mn Nest deal (here) and INFO’s USD 450mn Danske Bank deal (here) are anything to go by, deal momentum appears healthy. We expect most players, with a likely exception of TECHM, to report robust deal wins. That said, above are examples of vendor consolidation (TCS-NEST) and cost takeout (INFODanske) deals. We sense even the pipeline has an efficiency bias. Market should therefore focus on net growth in ACV as these seemingly large efficiency deals tend to be of longer tenure. Incremental ACV, net of ACV of discretionary project run-offs might be lower.

* Things to focus on: A possible sequential decline by INFO in 1Q could raise the ask-rate for 2H sharply. We therefore see risk even to the lower end of its full year guidance (4- 7%). Though players may retain guidance for now, some reduction in upper end of guidance by INFO can’t be ruled out, in our view. Most players had indicated a 2H recovery in growth. Now as we get closer, it would be interesting to see if there is any change to that view. It would also be interesting to see if there are early signs of pick-up in discretionary spend or acceleration in cloud adoption because of generative-AI. We don’t expect much clarity to emerge around demand and hence stock trajectory.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361

Above views are of the author and not of the website kindly read disclaimer