Worsening client profitability to hit IT demand, says Jefferies

Profitability outlook worsens in verticals including Communication, Tech, and BFSI, putting additional pressure on IT spending. Estimates for revenue remain unchanged, but profitability pressures persist. Representative image

Indian IT firms, who witnessed a largely disappointing performance for the quarter ending March 2023, are in for some more pain as profitability outlook of clients worsens particularly in verticals including Communication, Tech, and BFSI, wrote foreign brokerage Jefferies in a research note.

“During 4QFY23, Indian IT firms witnessed a 1% QoQ decline in US$ revenues — the first revenue decline in 11 quarters. This was driven by a 3% QoQ decline in US$ revenues from their Top-10 clients,” it said adding that Coforge was the only firm in their coverage to report growth in revenues from its Top-10 clients.

The brokerage highlights that although the revenue estimates have not changed but profitability pressures persist, which is key for IT Spending.

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While aggregate consensus revenue estimates for CY23/24 for top clients of IT firms have remained broadly unchanged, estimates for clients of TechM & Wipro have seen downward revision by 1-5 percent, with the same top clients of Infosys and Coforge seeing upward revisions of 2-4 percent. However, Aggregate CY23/24 PAT margins for top clients of IT firms have been revised downward by 25-40bps YTD.

“Furthermore, barring HCL Tech, aggregate CY23 PAT margin estimates for clients of all firms have seen cuts, with the steepest cuts for Infosys, followed by TechM, Wipro, and TCS,” it said adding, “Revenue decline from top clients in 4Q despite broadly unchanged aggregate revenue expectations indicates that outlook on profitability is a bigger determinant for clients' IT spending outlook in the near term."

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Given the weak positioning of top clients in Communication, Tech, and BFSI verticals, Coforge, TechM, Wipro, LTIM, and TCS have higher exposure, the brokerage heighted.

“Combining the above, TechM and Wipro seem to have the weakest growth outlook. However, a comparison of change in revenue growth expectations for IT firms and their top clients in FY24/CY23 vs FY23/CY22 suggests that Coforge, Wipro, and LTIM are at a greater risk of negative surprises on FY24 growth.,”

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