‘Uncertain times ahead..’: Jefferies on Indian IT companies

Market


A sharp slowdown in net hiring, muted growth outlook in 4Q and a potentially slower conversion of bookings to revenues points to a sharp growth moderation for Indian IT firms, highlighted Jefferies in a note on Indian IT firms who sees ‘uncertain times ahead’ for the sector. 

However, falling attrition and ongoing improvement in employee pyramid should support margin recovery and Q3 results offer limited reasons to change, the brokerage has cautious view on the IT sector. Infosys remains its only Buy in the sector. 

“After the Q3 results so far, the brokerage house expects aggregate revenue for Indian IT firms to sharply moderate from 14.6% YoY cc in FY23 to 6.8% YoY cc in FY24. Our growth assumptions are lower than the street and as growth expectations moderate, further derating in PE multiples is likely as seen in the past. Moreover, with Nifty IT still trading at an above-average premium of 17% to Nifty, valuations remain rich,” the note stated. The brokerage house has maintained its cautious stance on the sector with Infosys its only stock pick.

During Q3, the top-4 IT firms delivered growth of 2.5% QoQ cc, 110 bps ahead of Jefferies’ expectations. Growth across IT firms was driven by the European region. “Among verticals while E&U, Manufacturing and Life Sciences grew well, growth in BFSI, Retail and Hitech were impacted by furloughs as well as lower discretionary IT spends. Among IT firms, while TCS’ Q3 performance was the strongest, Wipro’s performance was the weakest,” it added.

Even though Q3 growth surprised positively, near term growth outlook looks uncertain with all the 3 IT firms that offer guidance on growth, offering muted growth guidance in 4Q. “We further note that net hiring in 3Q for the top-4 companies has just been 2k – the lowest in 10 quarters, with two out of four IT firms reducing their workforce,” the note stated. The moderation of aggregate average employee growth to 1.1% in Q3 reflects rising uncertainty on demand and a sharp slowdown in growth in the brokerage’s view.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.


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