After two quarters of decline in revenues, some of the biggest companies in the Indian IT sector may see a small rise in topline, according to analysts at Jefferies.
The analysts have predicted a 0.5 percent on-quarter growth in revenue for the companies under their coverage in September.
In their latest report on Computer Services and IT Consulting sector, the analysts wrote that the sector’s valuation is rich and that they would be selective in their picks, having 'buy' calls only on Infosys and Coforge. The analysts pointed to the NiftyIT's 7 percent outperformance versus Nifty over the last two months, and stated that the absence of positive commentary from the IT firms during this earnings season could adversely impact the stock performance.
“We note that the growth is still soft, given the challenging demand environment, but expect some stabilization and deal ramp-ups to drive a slight growth uptick. Among large-sized IT firms, we expect revenue growth to range between -1 percent and +1 percent QoQ. We expect Infosys (+1 percent QoQ) to lead on growth, while TechM (-1 percent QoQ) and Wipro (-1 percent QoQ) are likely to lag,” they said in the note.
They added that, among mid-sized firms, they expect Coforge to lead with 2.5 percent QoQ growth, and growth at LTIM to be soft at 1 percent QoQ. “Deal TCV (total contract value) is likely to be strong for TCS/Infosys and HCLTech given multiple large deal announcements, but soft for other firms,” said the report.
They suggest remaining selective, since their recent interactions with IT firms and Accenture’s “tepid guidance” suggest that demand uncertainty persists and a recovery is still not in slight. “Given this, we believe that consensus estimates of 8%+ US$ revenue growth in FY25 (+80bps vs our estimates) are at risk. Our FY25 EPS estimates are up to 10% below consensus estimates. We thus believe that the sector's valuation at 24x PE - a 20 percent premium to 10-year average and 28 percent premium to Nifty - is rich,” they wrote.
In the second quarter, they expect the margins to be flattish for the companies under their coverage “with tepid growth offering limited scope for margin expansion”. While they expect a 20-40bps margin expansion for TCS, Infosys and HCLTech, driven by higher utilization and operational efficiencies, they forecast a “sharp margin contraction” of 170bps for LTIM due to wage hikes and 80bps for TechM due to provision on receivables and revenue decline. They estimate that Wipro's margins will contract by 30bps due to revenue decline.
In the second quarter earnings season, the analysts said that they would be focussed on commentary around demand environment and any signs of improvement or expectations of recovery in the second half of this fiscal. They added that any commentary around generative AI would also be of interest.
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“For TCS, we expect a buyback and focus on strategic direction under new leadership. For Infosys, focus would be on leadership churn and its margin program. For TechM, focus would be on strategy under the new CEO and margin recovery. For Coforge, focus would be on execution post the Barings stake sale,” they wrote.
“We do not expect any change to FY24 guidance for any firm, except for HCLTech, which could hint towards achieving lower end of margin guidance.”
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