IT, Internet, BPO, KPO Q3 Preview - Higher Furloughs, Projects Cancellations To Weigh On Growth: Dolat Capital

Dolat Capital Report

We anticipate another subdued quarter with revenue growth of -2.1% to 4.3% QoQ in constant currency terms amongst our tier-I IT names, and 1% to 5.2% CC growth for tier-II names for Q3 FY24E, amidst delayed revenue conversion and muted demand environment.

Ebit margins too, will be impacted, with higher than expected furloughs in hitech/banking, financial services and insurance putting additional pressure, hence we see QoQ movement of -150 basis points to 200 basis points in Q3 FY24E.

Our interactions with industry participants indicate BFSI and communication, media and technology continue to reflect pain esp. in U.S. led by weak macro environment as pace of mega deal cancellations continues (for example Infosys Ltd. $1.5 billion; after Tata Consultancy Services Ltd. $2 billion with Transamerica in Q1).

Our stance on slowdown in IT services remains intact for near term as deal wins remain muted and delayed revenue conversion to impact growth in Q3/Q4.

However, IT stocks saw sharp up-move on expectations of rate-cuts, which we believe is unwarranted as any revival in demand for discretionary spend would have time-lag of couple of quarters atleast.

Our preference is for large-caps, given lower risk to estimates/price earnings ratio.

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