Despite rising macroeconomic uncertainty in the United States and weaknesses in key sectors such as lending, high tech, and telecom, the IT sector remains resilient as the industry's cost-supply equation improves, said leading IT analyst Moshe Katri of Wedbush Securities in a note on December 11.
The development comes couple of days after HCLTech during its Investor Day in New York said that it expected revenue growth to come in at the lower end of its revenue guidance band of 13.5-14.5 percent in constant currency (CC) terms. The company is also seeing increased furloughs and pain in segments like Hi-tech and BFSI. HCLTech previously increased its revenue guidance for FY23 from 12-14 percent in CC terms during its Q2FY23 earnings.
Meanwhile, Indian analysts and Credit Suisse estimated that the top four Indian IT companies, including Tata Consultancy Services (TCS), Infosys, Wipro and HCLTech are set to see a slump in growth and a 10-27 percent correction in their public market valuation.
In his note, Katri said, “In this context, we believe HCL Tech’s commentary/guidance revision (late last week) is a function of its exposure to a volatile products/software business as well as to weakening High Tech and Telecom verticals.”
“The general consensus was that despite the macro volatility, and select “pockets of weakness” (High Tech, Telecom, Lending), “the sky isn’t falling” (record deal pipelines, shifting to cost-rationalization), the industry’s cost (wage comp) and supply equation (lateral to junior hires) is improving, a macro-driven, budget cycle slippage is transitory and finally, forward (12-months) estimates are reasonable (“soft landing” scenario),” he added.
According to Wedbush Securities, despite pockets of weakness in multiple verticals, “including High tech (i.e., recent layoffs), Telecom and Equity Capital markets/lending. Banks (BFSI) are in strong financial position, which we view as an important positive.”
No signs of demand slowdown
According to Katri, there are no signs of a slowdown in demand based on his conversations with companies, experts, and insiders, and the worst-case scenario is a one-to-two-month delay in budget cycle decisions.
“While at this point, there are no indications of noticeable demand slowdown, the worst case scenario continues to be macro-driven 1-2 months slippages in CY23 budget cycle decisions, impacting “fresh” funding for new project starts for the March (2023) quarter, resulting in a back-end loaded CY23 year,” Katri said.
How companies fared?
Wedbush Securities gave Infosys a 'outperform' rating, noting, “We see multiple levers in the model: expanding offshore mix (especially for digital work), expanding headcount mix from entry-level employees, reducing subcontractor use (at 10% of revenues to the 7% target level), pricing (value-based, customized deal structure, skill-based, outcome-based), and expanding fixed price work (roughly at 50% of sales).”
Meanwhile, Wipro got an 'underperform' rating, with most of the discussion centred on the ongoing integration of its acquired global management and technology consultancy firm, CapCo, and other operational metrics.
In terms of demand trends, Wipro expects budget cycle “slippage” resulting in moderation in consulting business. High tech (5% of sales), retail and lending/mortgage processing remain the weaknesses, whole BFSI looks in “great shape.”
“In general, we believe 30% of the company’s legacy-based revenues is contracting, reflecting the impact of automation, Saas and Cloud,” Katri said.
TCS remained “non-rated”; the company’s clients are approaching CY23 IT budgets cautiously and but there are no “indications of upcoming budget delays or elongated sale cycles.” “Similar to the September quarter, demand trends have been exceeding expectations,” Katri said in the report.
According to the report, the company continues focusing on expanding wallet share from existing clients by: “aligning customer size/maturity with delivery, with the intention of building confidence while creating cross-selling transformational initiatives; TCS’ business transformational group manages large/mature clients.”
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