On expected lines, the January-March quarter (Q4FY23) numbers of Indian IT companies came on the softer side with signs of stress due to the economic slowdown in the key markets including the US and Europe. Their numbers were mixed but the management commentary hinted that the road ahead was challenging.
Analysts observed that the fourth quarter revenue performance of tier-I was impacted by not only the moderation in the BFSI vertical but continuing weakness in retail and hi-tech also. Moreover, the delayed ramp-up of projects along with macroeconomic uncertainty were also the major contributors to their weak show.
As brokerage firm Jefferies pointed out, the IT sector's revenue decline in Q4 was due to a decline in revenues from top-10 clients.
"While the aggregate revenue outlook of top clients year-to-date has not changed, the profit outlook has worsened, suggesting that client profitability is the key determinant of IT spending. Among verticals, communications, tech, and BFSI seem to be the worst placed," said Jefferies.
As Mint reported earlier, both Infosys and TCS, which together comprise 11 per cent of the Nifty 50 index weightage, missed analysts' estimates in quarterly profit as companies curtailed spending on tech to prepare for a cooling economy following turmoil in the US banking sector.
However, HCL Technologies beat estimates in terms of profitability for the fourth quarter of FY23. The company garnered a consolidated net profit of ₹3,983 crore in Q4FY23 compared to a profit of ₹3,593 crore a year ago same period, registering a growth of 10.85 per cent. However, sequentially, the PAT (profit after tax) dropped by 2.8 per cent from ₹4,096 crore in Q3 of FY23.
Wipro posted a consolidated net profit of ₹3,074.5 crore in Q4FY23, lower than a profit of ₹3,087.3 crore a year ago same period.
Tech Mahindra missed Street estimates as the company's bottom line recorded a double-digit decline in the fourth quarter of FY23. The company posted a consolidated PAT of ₹1,117.7 crore in Q4FY23, declining by 25.8 per cent YoY (year-on-year) and 13.8 per cent QoQ (quarter-on-quarter).
As Jefferies observed, during Q4FY23, Indian IT firms witnessed a one per cent QoQ decline in dollar revenues, marking the first revenue decline in 11 quarters. This was driven by a three per cent QoQ decline in dollar revenues from their top-10 clients.
"Revenues from clients outside the top-10 were flat QoQ. This is the third-highest sequential fall in revenues from top-10 clients in a decade," said Jefferies. Notably, 20-36 per cent of IT firms' revenues come from the top 10 clients.
The road ahead
The road ahead for the IT sector, at least for the medium term, is bumpy as there are no strong signs of economic recovery in the key markets.
Global brokerage firm Jefferies underscored that among verticals, only the travel and hospitality vertical has seen an improvement in revenue and profit estimates for the year 2023.
While revenue estimates for top clients in life sciences, E&U (energy and utility), and retail verticals have seen upgrades, their profit estimates have been cut, which may impact their IT spending outlook, said Jefferies, adding that the tech, communications, and BFSI verticals seem to be worst placed, as top clients in these verticals have witnessed cuts in revenue and profits.
"Given steep cuts to both revenue and margin estimates for clients of Infosys, Tech Mahindra, and Wipro, the near-term demand outlook for these companies could be under pressure. Given the weak positioning of top clients in communication, tech, and BFSI verticals, Coforge, Tech Mahindra, Wipro, LTIMindtree, and TCS have higher exposure," said Jefferies.
"TechM and Wipro seem to have the weakest growth outlook. However, a comparison of the change in revenue growth expectations for IT firms and their top clients in FY24/CY23 versus FY23/CY22 suggests that Coforge, Wipro, and LTIMindtree are at a greater risk of negative surprises on FY24 growth," Jefferies said.
Brokerage firm HDFC Securities believes that the risk to guidance mid-point of Infosys and HCL Tech is low, based on relative premium to global peers and the enterprise scorecard.
"Our base case is a flat sequential growth trajectory for the sector in Q1FY24E and progressing onto long-term averages over Q2 to Q4FY24E; downside risk is more near-term rather than medium-term," said HDFC Securities.
Should you bet on IT stocks?
Analysts do not appear upbeat about the IT sector as concerns over the US and European economies still persist, casting dark clouds on the Indian IT sector.
Anil Rego, Founder and Fund Manager at Right Horizons PMS pointed out that despite a relatively better quarter in terms of the outlook for the BFSI vertical, healthier pipelines, and new deal wins on a year-on-year basis, the guidance was in single digits for tier-I companies while across tier-II companies, the performance of selective names was better.
Rego expects the companies to grow in the mid-teens and expect the delayed deals in Europe and ramp-up of the existing book could be positive.
"Considering the divergence in performance across the industry, we prefer midcap IT over large caps, being selective and picking structural stories. During this increased competition, the performance of tier-II shows that they are able to defend their market share better. Against the backdrop of an improving environment and with the long-term structural trend intact for the sector, we believe the sector will likely see a relief rally in the medium term, with midcap names doing relatively better," said Rego.
HDFC Securities prefer LTIMindtree within large-cap IT and Persistent Systems within midcap IT.
Disclaimer: The views and recommendations given in this article are those of individual analysts and brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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