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September quarter’s performance reflects no marked improvement in the demand environment. Weak discretionary spending and H2 seasonality would weigh on nearterm growth visibility. Deal TCV has remained strong, driven by large deal wins, predominantly in the areas of cost optimization and vendor consolidation. Amid slowing revenue growth and macro uncertainties, IT companies have focused on tightening discretionary spending and traditional margin levers like utilization, optimization of subcontracting costs, pyramid correction, etc. to drive margin expansion. Net headcount addition remained weak across most Tier-1 companies, as they opted not to backfill voluntary attrition, given weak revenue growth and focus on efficiencies amid macro uncertainties. Growing divergence between revenue growth and deal intake reduces revenue growth predictability. Macro stability and improvement in discretionary spending are key to meeting our/consensus revenue growth estimates for FY25. Our pecking order is INFO, WPRO, TECHM, HCLT, LTIM, and TCS, among TierI companies, and ZOMATO, FSOL, and ECLX in mid-caps

Revenue – Deal win disparity persists; leaky bucket issues continue

Q2 marked another quarter of weak revenue growth as leakage in the existing revenue base led to weak revenue conversion, although deal wins remained strong. Aggregate revenue growth was 0.2% QoQ, muted in a seasonally strong quarter, due to weak discretionary spending, slower decision-making, and weakness in a few verticals like communications, BFSI, and hi-tech. Companies continue to witness an elongated sales cycle with increased scrutiny on project approvals. Mid-caps (0.1% to 3.1%) continued to outperform large-caps (-2.8% to 2.2%). Deal wins remained strong, led by cost optimization and vendor consolidation. Most mgmts. have shied away from providing comments on the timeline on anticipated growth acceleration, citing macro uncertainties and slower decision-making. Among geographies, North America remains weak, while Europe is relatively resilient. BFSI, hi-tech, telecom and retail have been laggards, while manufacturing, healthcare, and energy have fared better.

Margin performance remains impressive; attrition moderation continues

While companies struggle to meet revenue growth expectations, margin delivery remains impressive. Coverage IT companies (except TECHM, LTIM and WPRO) reported EBITM expansion of 10-150bps on the back of better utilization, lower sub-contracting costs and tightening discretionary expenses. Attrition moderated further for coverage companies, down 30-380bps, and is now below pre-Covid levels (except TCS).

Discretionary spending recovery remains key for growth acceleration

Management’s commentary continues to suggest no near-term pickup in demand, as clients continue to calibrate their spending in the absence of any macroeconomic certainty. While few companies have suggested a pickup in H2 compared with H1 based on their deal intake and rampups, most managements have shied away from guiding any timeline on recovery. We expect some improvement in discretionary spending by the end of FY24, which remains key to meet our/consensus estimates of high-single digit aggregate revenue growth in large-caps in FY25. We believe valuation is not demanding, particularly for large caps; however, it lacks near-term triggers. Midcaps maintained growth outperformance over large caps; however, their valuation remains rich. Sustainable upside would hinge on revenue acceleration, which in turn depends on macro stability and recovery in discretionary spending, in our view.

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