IT Services, Internet, BPO, KPO Q1 Preview- Seasonality Led Growth; Hike, Visa Costs To Hit OPM: Dolat Capital

Dolat Capital Report

For Q1FY25, we anticipate revenue growth of -2% to +2.7% QoQ in constant currency terms amongst tier-I IT companies and +0.6% to +5.1% CC growth for tier-II companies, primarily driven by a seasonally strong quarter.

Ebit margin is expected to decline sequentially for most IT companies due to wage hike cycle and higher visa costs. Operating profit margin is expected to see QoQ movement of -130 bps to +80 bps in Q1 FY25E as some players may see wage hike hit, along with more than usual seasonal impact of visa fees.

Our interactions with industry participants indicate pain in BFSI and hi-tech verticals seems to be bottoming out. It is worth noting that despite robust deal wins and improving book-to-bill ratio, revenue conversion remains subdued owing to client hesitancy on tech spends amidst macro uncertainties.

Nevertheless, we will carefully watch-out for any uptick in key lead indicators such as-

1. headcount additions (Naukri June-24 Job speak index down 5% QoQ),

2. deal pipeline revenue conversion timeline and

3. meaningful commentary for recovery in discretionary spend.

At present, we maintain a ‘Neutral’ stance for the near term and our preference is for large caps given lower risk to estimates/PER.

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