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4QFY23 will likely be a weak quarter. That should not come as a surprise as most available 4Q guidance – both of Indian IT Services players as well as global peers – already pointed towards that. However, recent ructions in global banking space means new project starts and usual year-end flurry of deal closures might have got pushed out. We therefore believe companies could land in the lower half of their guided 4Q band. We expect our large cap coverage universe (top-6) to report (0.6)-1.2% CC QoQ growth. A muted growth is likely to weigh on the margins translating into (80)-20bps margin movement QoQ (except LTIM which benefits from absence of merger related one-offs). Our mid-cap coverage – Coforge/PSYS – should fare better on growth (3.3-3.5%). That said, we see 4Q numbers to be of little relevance as the focus shifts to Infosys’ FY24 guidance. We expect Infosys to guide for 6-8% CC revenue growth for FY24. Given the current market expectation of 8-9% (USD terms), we see this as market neutral. Expect caution in players’ outlook as BFSI weakness flows into decision delays. While contagion in banking remains a risk, we see incremental impact on BFSI’s already slowing growth to be limited right now. Checks suggest spillover of caution from BFS to other sectors is minimal at this stage. Though things could change swiftly. Players are walking a tightrope – protecting existing book of business and gaining wallet share to grow in a low spending environment. Larger players should do better.

* Growth slows, but expectedly so: We expect top-6 IT Services companies to report (0.6%) -1.2% CC QoQ growth. A cross-currency tailwind of 60-130bps will however bump up the reported USD revenue growth print to 0.7%-1.6%. Infosys/HCL/Wipro’s FY23 guidance implied a 4Q CC QoQ revenue growth of (0.1%)-1.6%/ (1.7%)-0.1%/ (0.6%)- 1% respectively. We expect growth to be in the lower half of this guided band. This will be in-line with global peers’ current quarter guidance of sequential decline (Exhibit 16). Mid-cap companies under coverage – Coforge and PSYS – however are likely to maintain their growth outperformance on the back of healthy deals wins in the recent past. be in the lower half of this guided band. This will be in-line with global peers’ current quarter guidance of sequential decline (Exhibit 16). Mid-cap companies under coverage – Coforge and PSYS – however are likely to ma

* Margin recovery stutters: Slower growth and falling attrition, as is the case currently, limit the efficacy of traditional margin levers such as utilisation and pyramid correction. A muted margin performance ((80)-20bps QoQ) for the top-5 players should reflect that. TCS is likely to miss its FY23 exit margin target of 25% while TECHM’s margin recovery will likely get pushed out further. LTIMindtree’s 4Q margins, +150bps, will benefit from lack of one-off merger related cost, but will still be significantly below normalised levels. Coforge should report the highest margin expansion in our coverage universe (+170 bps; adjusted EBITDA) as it pulls up operating levers to achieve its FY23 margin guidance.

* A guide for guidance: Our analysis indicates that Infosys year-beginning guidance over FY16-22 implied a CQGR (over next 4 quarters) ranging from 1-2% (FY19/FY20) to 4-5% (in FY16; they missed the lower end by 3%). Current environment – delayed budget closures, uncertainty among banking clients – suggests Infosys could stick to a conservative 1-2% CQGR assumption. This should translate into FY24 CC guidance of 6- 8%. We see this as market neutral. A similar analysis for HCL suggests they could guide for a 9-11% growth (10-12% growth for Services and flat for IP revenues). A wider band can’t be ruled out for both INFO/HCLT given the uncertainty – a negative though

* BFS – a confidence crisis: Prompt intervention by central banks – Fed’s emergency-lending facility and SNB led UBS-CS merger – appear to have contained the banking contagion for now. But the risk remains. Immediate impact on IT seems more on the elongated decision cycles than actual spending cuts. Besides, BFS growth has already decelerated, limiting incremental impact on growth. Though not our base case, a banking crisis could actually trigger higher IT spending due to integration and compliance related IT work.

* Things to focus on: Quantitative guidance by Infosys/HCL/Coforge should provide visibility into next year’s demand. But investors should gauge companies’ confidence on these numbers. Infosys typically has 80% revenue visibility for 1H and lower for 2H. It would be interesting to see if current visibility is any different. Budget closures, deal wins, pipeline movement and any new area of weakness are other qualitative metrics one should track.

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