Near-term demand environment remains soft in IT Sector: IIFL Securities

7 Feb 2024 , 10:54 AM

CTSH’s Q4 revenue declined 2.8% QoQ (-2.4% cc YoY), within the guided range of -4% to -1.2% cc YoY. Large deal momentum continued in Q4, taking TTM bookings to USD26.3bn (+9% YoY), although Q4 bookings were down 6% YoY. Headcount increased by 1.1k sequentially, while TTM voluntary attrition declined to a multi-year low of 13.8%. CTSH continues to invest in building GenAI capabilities and has trained 88k on it thus far. CTSH is currently running over 250 early client engagements to incorporate the use of GenAI, and has another 350 opportunities in the pipeline. CTSH expects revenue growth for CY24 to be -2% to +2% cc YoY and for Q1 to be -3% to -1.5% cc YoY, as it continues to see near-term caution in discretionary spend. Adjusted operating margins in Q4 came in at 16.1% (+190bps YoY), driven by savings from the cost optimization program. 

Communications and BFSI see sharp declines: 

BFSI declined 5.4% QoQ (-6.6% cc YoY), due to continued challenging demand environment. CTSH continues to invest to stimulate growth through consulting and using a sub-industry GTM approach in Americas. Health Sciences declined 0.6% QoQ (-2.7% cc YoY). Products & Resources declined 0.6% QoQ (+0.3% cc YoY) while Comm, Media & Tech declined 5.1% QoQ (+2.6% cc YoY), aided by inorganic contribution. 

Bookings steady driven by large deals momentum: 

Bookings for the quarter declined 6% YoY, as continued momentum in large cost take out deals was offset by muted discretionary spending. TTM bookings came in at USD26.3bn (+9% YoY), implying its TTM book-to-bill being steady at 1.4X. CTSH continues to see momentum in large deal closures. CTSH expects CY24 revenue growth to be -2% to +2% cc YoY and expects Q1 revenue growth to be -3% to -1.5% cc YoY. Margins surprise positively: CTSH’s adjusted operating margins stood at 16.1% (+60ps QoQ/+190bps YoY), as tailwinds from the cost optimization plan and FX were partly offset by increased compensation. TTM voluntary attrition reduced to a multi-year low of 13.8% (-240bps QoQ). CY24 adjusted operating margins are expected to be 15.3-15.5% (+20 to 40bps YoY). 

Near-term outlook remains cautious: 

Analysts of IIFL Securities believe CTSH’s muted CY24 guidance is a reflection of the near-term macro challenges and lower discretionary spending and corroborates with the commentary from the managements of Indian IT service companies. Under the new management and a refreshed strategy, CTSH has started seeing traction on large deals and productivity led initiatives by enterprises, which has resulted in a higher large deal win success rate and increased the competitive intensity in the sector. However, in the near-term analysts of IIFL Securities believe Indian IT peers will continue to gain market share over CTSH, as reflected in muted CY24 and Q1 guidance. Given the stretched valuations. Analysts of IIFL Securities recommend staying selective in picking stocks given the uncertainty of timing of pick up in discretionary spends. Analysts of IIFL Securities continue to prefer stocks with better growth visibility (INFO/PSYS/COFO).