EPAM Systems: Demand stabilising, pickup to be gradual

11 Jan 2024 , 11:58 AM

Analysts of IIFL Capital Services recently interacted with the management of EPAM Systems (EPAM), to understand the demand environment and growth outlook, given their high exposure to discretionary spending and potentially being the leading indicator for the pickup in IT spending. EPAM has started seeing demand stabilisation and lesser conversations about ramp-down and program deferrals. However, focus continues to be cost optimisation, while the exuberance around digital transformation programs remains muted. Overall, EPAM expects the demand to remain uncertain at least for H1CY24. EPAM continues to focus on globalising its delivery ecosystem, with India and LATAM being the key delivery growth regions. EPAM trades at 27x CY24e P/E — a 20% discount to mid-cap Indian IT vs a 55% avg. premium over the last decade. 

Lesser ramp-down/project deferral conversations: 

EPAM highlighted that the current demand environment stays more focused on cost optimisation. However, the conversation of project ramp-downs or deferrals have reduced — leading to stabilisation in the demand environment. Within geographies, North America has started witnessing stability; while Europe could be impacted by planned ramp-downs over the next few quarters. EPAM has guided for revenues to decline 8% YoY in Q4CY23 and 3% YoY in 2023. EPAM continues to prioritise growth in the near term, which could include some degree of discounting. Life Sciences & Healthcare bottomed out: EPAM believes Life Sciences & Healthcare is the first sector to have bottomed out. BFSI and Software & Hi-tech have a quarter or two before bottoming out, while Business Information and Media has the farthest to go before spending picks up. Smaller verticals like Energy and Insurance have also seen higher conversations. Overall demand is likely to remain uncertain, at least till H1CY24; though they are optimistic of a pickup in H2. 

Focus remains on globalisation of delivery ecosystem: 

EPAM has continued to focus on the globalisation of its delivery ecosystem, with India and LatAm being the key delivery growth regions. Increasing emerging-market delivery presence has also helped EPAM hold on to the core work with clients, given the focus on cost optimization.