Q3 likely to be last weak quarter, expect revenue growth for Indian IT firms from Q4: BNP Paribas
Indian IT companies may see faster revenue growth starting from Q4FY24 due to a better overall economy and large deal wins, according to BNP Paribas. The firm believes Q3FY24 will be the last quarter of weakness before growth picks up.
Indian IT companies may see their revenue grow faster starting from the fourth quarter of the current financial year (Q4FY24) due to the better overall economy and the ramp-up of large deal wins, according to BNP Paribas.
The global financial firm believes Q3FY24 will be the last quarter of weakness for Indian IT companies before revenue growth picks up.
Indian IT firms have been struggling due to macroeconomic headwinds and elevated interest rates in its key markets in the West.
Now, BNP Paribas expects a soft landing in 2024, primarily due to benign inflation and falling bond yields. Moreover, it believes resilience in the US economy and the Fed’s indication of three rate cuts in 2024 should spur enterprise confidence.
Also Read: Q3 result preview: IT firms expected to post muted revenue, subdued profit amid weak demand
"We think the industry is close to the trough of this cycle. Signs of improvement in the global economy and strong deal wins in recent quarters give us confidence about the revenue growth acceleration that we forecast for FY25," said BNP Paribas.
The financial firm prefers large-cap firms with strong client relationships, scale to invest in GenAI (Generative AI) and reasonable valuations.
BNP Paribas has an "outperform" view on HCL Technologies (target price: ₹1,610), Infosys (target price: ₹2,000), LTIMindtree (target price: ₹6,700), Persistent Systems (target price: ₹7,600) and Tata Consultancy Services (target price: ₹4,560).
On the flip side, it has an "underperform" view on Redington (target price: ₹135) and Wipro (target price: ₹400).
BNP Paribas has "neutral" views on Mphasis (target price: ₹2,400) and Tech Mahindra (target price: ₹1,250).
"Our sector top pick is Infosys, and we also like TCS and HCL Tech. We prefer LTIMindtree and Persistent Systems for their strong earnings growth potential. We revise our earnings estimates for the firms we cover with the highest increases for Infosys and HCL Tech, as we see them benefitting from discretionary demand recovery in the second half of the next financial year (H2FY25), said BNP Paribas.
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Q3 earnings expectations
BNP Paribas expects Q3FY24 CC organic revenue growth at -2 per cent to +3.6 per cent for its large-cap coverage. Apart from this, it expects mid and small caps to report 0.5-2.7 per cent quarter-on-quarter (QoQ) dollar organic revenue growth.
It also expects some companies to see higher-than-usual furloughs, impacting revenue which may be partially offset by mega deal ramp-ups. It expects EBIT margin to fall QoQ for most of its coverage companies due to wage hikes, furloughs and one-time impacts.
"We would look for signs of a demand pick-up and updates on the timelines of large deals ramping up in management commentary," said BNP Paribas.
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