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Furloughs at play

HCLT to lead tier I; PSYS and MPHL, tier II; KPIT and CYL, ERD

Expect Elara IT universe to post a muted Q3, hit by furloughs (higher in BFSI and Hi-tech), with an average USD/CC growth of 1.4-1.6%.

Among tier I, expect HCL Tech (HCLT IN) to outshine with an estimated 4.8% QoQ CC growth, led by both Services business (buoyed by Verizon deal) and favorable seasonality for its Products business. For other large peers, expect a revenue dip in 1-1.3% QoQ CC range given furlough-led weak seasonality. Expect TCS (TCS IN), Infosys (INFO IN), Wipro (WPRO IN) and TECHM to see 1%, 1%, 1.4% and 1.3% QoQ CC revenue dip. LTIM, the new entrant in tier I, may see growth moderation led by higher furlough-led seasonality, with 1% QoQ CC revenue growth.

Within tier II, PSYS may lead with steady QoQ CC growth of ~2.7%, led by resilient tech spending in Hi-tech (partly to be offset by higher furloughs in Hi-Tech). Meanwhile, MPHL may see the fastest growth, led by integration of the Silverline acquisition in Q3

Within ER&D, KPIT followed by Cyient may lead the pack, led by resilience in Tech spending in Transportation (especially auto and aerospace sub-segments). Strain from communication, semi-conductors and furloughs may somewhat moderate growth.

Furloughs weigh on operating margin

Operating margins for Elara IT universe may be under pressure owing to furloughs, though partly offset by operational efficiencies. Except for Coforge, we anticipate sequentially flat-to-lower operating margin.

CY24 client budgets, the key monitorable

Expect the disconnect between revenue growth and deal wins to continue (weak revenue growth-higher deal wins). As macro in the West takes a positive turn (inflation moderation in the US and indication of a rate cut by the Fed), monitor CY24 technology budgets of clients. Watch for: 1) demand commentary, 2) deal win momentum, 3) BFSI and retail growth, 4) commentary on Hi-tech, 5) genAI engagements and capability creation, 6) margin trajectory and 7) hiring trends. We do not anticipate guidance upgrades from Infosys, HCLT and Coforge.

Prefer TechM, LTIM in large-caps; Persistent and Coforge in mid-tier

Expect CY24 to be a growth year for Indian Technology Services providers, supported by: 1) abating discretionary technology spend cut (supported by improving US macro), 2) building momentum for generative AI engagements and 3) ramp-up in large-cost centric deals in the recent quarter. Prefer Tech M, LTIM in large-caps and Persistent, Coforge in mid-tier. Among ERD players, we favor KPIT and Cyient.

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