15 Jan 2024 , 11:28 AM
The ‘Big Four’ chose to commence 2024 by all reporting within 24 hours, probably to collectively suggest that the near-term growth is a lesser challenge than feared, though still sounding cautious for 2024. HCLT and WPRO results were better than expected, but internals and commentary didn’t suggest demand acceleration. Analysts of IIFL Capital Services stand by their view that 2024 could potentially be a year where the pace of recovery will be gradual and valuations are stretched unjustifiably (2024 Outlook). Key takeaways from Q3FY24 are: (1) Near-term demand is muted, budgets are flat at best and discretionary is yet to pick up. Key verticals of BFSI, Retail and TMT remain weak while Manufacturing, Healthcare and E&U are healthy. (2) Mega deals dried up with TCVs declining QoQ and moderating YoY; potentially due to seasonality. (3) Aggregate headcount declined for the fourth-straight quarter — a sign of muted near-term outlook; LTM attrition came off further to low teens now. (4) Margins surprised on easing supply side and costsaving programs, and may see continuous improvement through 2024. While the worst may be behind, analysts of IIFL Capital Services believe that these results also reaffirm muted growth outlook for the sector irrespective of the relief rally in stocks. Valuations are 30% above 10yr averages and broader markets, fully pricing in a rebound in demand. Analysts of IIFL Capital Services prefer INFO on a relative basis, given better growth visibility for FY25, followed by HCLT/TCS among large caps.
HCLT: Making case for further re-rating:
HCLT’s Services revenues grew 3.1% CC QoQ, boosted by ramp-up of the Verizon deal and ASAP acquisition. Margins (+120bps QoQ) were above IIFLe, due to more efficient execution. Growth was strong in Telecom (+25.9% QoQ), due to the ramp-up of the Verizon mega deal; while Retail and Manufacturing also saw healthy growth. BFSI and Healthcare declined QoQ. Management narrowed down the FY24 revenue growth guidance to 5- 5.5% (from 5-6%), implying 0.3-2.3% QoQ in Q4 — better than peers. New deal TCV at US$1.9bn was down QoQ and YoY (+5% TTM YoY) and management said that discretionary spending has not seen any pickup yet. LTM attrition dropped further to 12.8% (-140bps QoQ), on continued easing of supply.
WPRO: Not a bottomless pit:
WPRO’s Q3 revenues (-1.7% CC QoQ) declined at a rate lower than IIFLe (guidance at -1.5% to -3.5%); primarily due to 7.5% growth in Healthcare, while all other verticals saw sharp declines. At 16%, IT Services Ebit margins were in-line due to continued reduction in headcount and tighter cost controls. WPRO guided for Q4 revenue growth of -1.5% to 0.5% QoQ, despite sounding positive on Consulting and BFSI. Margins to remain range-bound in the near term. At US$3.8bn (+5% TTM YoY), deal TCV was flat QoQ while large deal TCV was down QoQ and YoY. Attrition dropped further to 14.2% (-130bps QoQ), while headcount continued to decline by 7% YoY.
IT spending: Bottomed out, but not up:
Analysts of IIFL Capital Services continue to believe that the pace of IT spending recovery will be gradual in FY25, given the macro uncertainty. Hence, analysts of IIFL Capital Services forecast sector revenues to grow at 6.7%/10% CC in FY25/26 vs the pre-Covid 10yr average at 9%. Supply side should face deflationary pressures even as hiring picks up post a headcount fall in 2023. At 26X FY25 P/E, the IT sector is trading at 30% above 10yr average; which they believe is unsustainable as the sector is already pricing in a sooner-than-expected recovery in IT demand. Analysts of IIFL Capital Services change FY24-26 EPS for large caps by -1% to 2% and TPs by 0-9%.
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