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We expect IT companies to report softer revenue growth in Q1, owing to weaker discretionary spending, delay in decision-making leading to project deferrals and slower ramp-ups, and pockets of weakness – mortgage, retail, hi-tech, telcos, and increased caution by clients amid macro uncertainties. Sequential EBITM performance will largely reflect the wage hike cycle, while moderation in attrition, pyramid rationalization, operating efficiencies, freshers getting billed and favorable cross-currency would support improvement in underlying margin performance, largely negating operating leverage hit from muted growth. Deal activities, particularly in cost takeout and consolidation, have seen some uptick in last few weeks, although company-specific so far, augurs well for growth recovery. Valuation of IT stocks, particularly large caps, is not demanding; however, rerating would hinge on confidence in revenue recovery in our view. Considering the limited upside after the recent outperformance, we downgrade PSYS and BSOFT to HOLD. Our pecking order is INFO, WPRO, TECHM, HCLT and TCS in tier-1 companies; and ZOMATO, MPHL, ECLX and FSOL among mid-cap companies.

* Macro uncertainties to weigh on QoQ growth: We expect softer revenue growth in Q1 due to i) Weaker discretionary spending, ii) Delay in decision-making leading to project deferrals and slower ramp-ups, and iii) Pockets of weakness – BFS, retail, hi-tech, telcos and increased caution by clients amid macro uncertainties. Within our coverage, we expect CC revenue growth of -2.3% to 1% for tier-1 companies (cross- currency tailwinds of 10-50bps on reported USD revenue) and -1.6% to 3.4% for mid-cap companies (cross-currency tailwinds of 10-100bps on reported USD revenue). We expect INFO to retain its guidance of 4-7% CC revenue growth and 21- 22% EBITM for FY24. HCLT is also likely to retain its overall and services guidance of 6-8% and 6.5-8.5% CC YoY, respectively, and 18-19% EBITM for FY24. Wipro is likely to guide flat (-1 to 1%) CC QoQ revenue growth for Q2FY24. Deal intake is likely to remain healthy for a few large caps due to cost takeout and consolidation deals.

* Salary hike cycle and muted growth would weigh on margin: The salary hike cycle and muted growth are expected to weigh on Q1 margins. The salary hike cycle will drag margin sequentially by 100bps, 70bps, 230bps, and 230bps for TCS, TechM, Coforge, and eClerx, respectively. Moderation in attrition, pyramid rationalization, improved operating efficiencies, billable freshers, and cross-currency tailwinds would largely offset the operating leverage hit from muted growth in the remaining companies, driving -10bps to 50bps swing for Tier-1 companies and -30bps to 40bps swing for mid-cap companies.

* Key monitorables: i) Revision of FY24 revenue growth/margin guidance; ii) Demand trends in key verticals like BFSI, Retail, Manufacturing and Communications; iii) Deal intake in Q1 and deal pipeline; iv) Flow of smaller deals and discretionary spending; v) Revenue leakage due to lack of backfill of discretionary projects; vi) Pricing environment considering macro uncertainties and deal mix shift towards cost takeouts and consolidation; vii) Variable compensation; viii) Management commentary on demand trends across geographies and update on project delay/deferral/cancellation due to macro uncertainties, and ix) Hiring plan amid slowing growth and uncertain demand outlook.

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