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Business News/ Companies / News/  Tech giants struggle while mid tier IT companies lead amid green shoots; outlook cautious for Q3
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Tech giants struggle while mid tier IT companies lead amid green shoots; outlook cautious for Q3

Q2FY24 even saw increased divergence between reported total contract value (TCV) and revenue growth. The tier-I firms’ sluggish growth was a drag on the overall sector while mid-tier performed well.

Q3FY24 revenue growth outlook for IT companies is sanguine, in our view, as the impact will be there from furlough., Elara Capital said.Premium
Q3FY24 revenue growth outlook for IT companies is sanguine, in our view, as the impact will be there from furlough., Elara Capital said.

The July-September quarter of FY24 saw tier-I IT companies, such as Tata Consultancy Services (TCS), Infosys, Wipro, HCL Technologies and Tech Mahindra, post the slowest YoY growth of the past 12 quarters. Sequential growth was flat for tier-I firms, but at a four-quarter high for mid-tier companies.

The slowdown was across verticals. Top client commentary on revenue growth indicates a muted tech demand outlook for the near to medium term. 

Q2FY24 even saw increased divergence between reported total contract value (TCV) and revenue growth. The tier-I firms’ sluggish growth was a drag on the overall sector while mid-tier performed well. 

Major verticals, such as BFSI, retail and manufacturing, remain in a slump. Communications continues to take a hit. However, top telecommunications firms’ Q2FY24 sequential revenue growth saw a pickup, driven by seasonality. 

Also Read: Indian Stock Market hits record high for second straight day. Where do experts see the indices

However, a few green spots were an improvement in utilities, turnaround starting in the hi-tech space, continued momentum in travel and healthcare, and strong margin management, noted Elara Capital. 

Green shoots

“We expect a turnaround in the hi-tech space, driven by AI demand. Hyperscaler demand is likely to see a revamp after several quarters of stabilization. GenAI-led demand is creating a cushion for enterprise cost optimization measures. Green shoots have already started to emerge in the vertical," Elara Capital said.

Moreover, healthcare and travel continue to see positive demand, but the brokerage firm expects the healthcare vertical of India’s IT services firms to moderate as we see moderation commencing on the client side. 

Additionally, the energy and utilities vertical growth has been mixed across coverage whereas increased demand outlook can be seen driven by ESG initiatives and grid modernization. 

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“We see continued momentum in this area. We expect ER&D demand to see stable growth buoyed by transportation (especially auto and aviation) vertical. This has been observed across key clients. Electric Vehicle (EV) commercialization remains a strong demand force," said the brokerage.

Meanwhile, mid-tier firms (including ER&D plays) performed better sequentially. 

A few reasons behind this are - 1) limited exposure to the troubled US BFSI and retail, 2) higher exposure to travel and healthcare verticals, which see continued momentum, 3) robust execution by management, such as Persistent Systems & Coforge, and 4) demand emerging from the shift to electric vehicles and CASE, especially in the transportation vertical, noted Elara Capital.

Outlook

The brokerage believes the outlook for Q3 is cautious. HCL Technologies has reduced FY24 revenue growth target from 6-8% to 5-6%. For LTIMindtree, H2 will be better than H1. 

“Q3FY24 revenue growth outlook is sanguine, in our view, as the impact will be there from furlough. There is no major shift in furlough vs last year. Margin expansion is expected due to absence of wage hikes and improving attrition & utilization rates," said the brokerage in a report.

It expects continued softness in the BFSI, retail and telecom verticals whereas there will be continued momentum in utilities, travel, and healthcare.

Also Read: Stock market today: How to navigate in this bull trend — explained with 5 Warren Buffett quotes

Top picks

Elara Capital’s sectoral view remains cautious for the near to medium term, as demand in major verticals remains muted. Its top picks are LTIMindtree (gen-AI beneficiary - gAI goldrush set in motion), Tech Mahindra (operational turnaround) in the tier-I space, Coforge and Persistent Systems in midtier and KPIT Technologies and Cyient within the ER&D space.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 05 Dec 2023, 12:31 PM IST
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