IT Services Check - No Immediate Signs Of Recovery, Uncertainty Reigns: Dolat Capital

Dolat Capital Report

Indian IT Services' Q1 FY25 results were broadly in-line with our expectations, but some uncertainty continues to loom upon the sector. Infosys (increased guidance marginally at top end) and LTIMindtree (all set to deliver leading growth among tier-I names) stood out with strong performances. The worst seems to be behind them, and they will likely outperform going forward.

Other tier-I names such as TCS/Tech Mahindra/Wipro had small positives in the quarter, but within the realm of positives already in the estimates, and of course, pretty much generously built in the valuations.

Within mid-tier names such as Persistent/Coforge are far more likely to see their a meaningful lag in profitability vis-a-vis revenue growth, thus adding further risk to valuations that has baked sustained growth traction and improved operating margins.

To get a better grip on the current situation, we have monitored Top 9 IT Services companies across six lead indicators (constant currency growth, total contract value, banking, financial services and insurance vertical, headcount, sub-con cost, utilisation) that can help us form an opinion on the changing growth and margin profile potential.

Also, taking these factors and reviewing current consensus estimates, we see there is still some more risk on both ‘earnings estimates’ as well as ‘current valuations’ that appear unreasonable.

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