Deteriorating macro and wage hikes to impact IT companies' earnings

New Delhi, July 3  IT companies are expected 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, Emkay Global Financial Services said in a report.

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, the report said.

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, JM Financial said in a report.

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. Large banks’ IT budgets remain constrained dampening growth prospects, the report said.

IT Services coverage universe is expected to deliver a weak median revenue growth (0.4 per cent QoQ/5.3 per cent YoY) in an otherwise seasonally strong quarter, Motilal Oswal Financial Services said in a report.

The weakness in demand should continue in Q1FY24 with a significant hit on discretionary spends. Given the further deterioration in the demand environment in 1QFY24, we do not anticipate a recovery in 2HFY24.

Margins will see impacts from growth moderation and wage hikes in the range of -140bp to +30bp QoQ. However, easing supply pressure, cooling off attrition, and improving utilisation should help partially offset the impact. We continue to prefer Tier-I players over Tier-II, given the former’s attractive valuations and diversified client portfolios, the report said.

(Sanjeev Sharma can be reached at Sanjeev.s@ians.in)

--IANS

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