Software & Services share price target

The big four IT firms—Tata Consultancy Services (TCS), Infosys, HCL Technologies (HCL Tech) and Wipro—posted predictably subdued results in Q2FY24. The trend reflects the persistent unfavourable market conditions over the past few quarters. Cutbacks in discretionary spending, project ramp-downs, and decision-making delays have left these IT powerhouses and once-darlings of the stock market facing a challenging landscape.

In Q2FY24, we expect that Tier I companies under our coverage will report modest revenue growth in the range of 2.99% - 11.77% on a QoQ basis, while on a YoY basis it is expected to surge by 11.41% - 19.57%. At the same time, the Tier II companies are expected to witness revenue growth in the range of 3.99%- 7.88% on a QoQ basis and 17.82%- 41.99% on a YoY basis.

The Indian IT sector is expected to deliver modest results at best, in the traditionally strong July-September quarter. As macroeconomic conditions have stayed largely unchanged over the past few months, the sector is seeing cuts in discretionary spending, and delays in deal conversions.

Sector Update: Accenture IT Services

We surveyed 220 restaurants across 40 cities and towns pan-India between 25th Aug’23 – 10th Sept’ 23, to assess various parameters such as take rates charged by food aggregators, restaurant level AOVs, propensity of restaurant partners to advertise on the food aggregator platforms, ad-spend effectiveness for restaurants and usage of Hyperpure (Zomato’s B2B e-commerce offering) by restaurants.

We have analysed the just-concluded quarter results of global SaaS companies with whom Indian IT players have ‘sell-to’ and ‘sell-with’ partnerships and digital engineering companies, which can be considered as a proxy for high-end digital services demand.

1) Retail sales growth was largely resilient as reflected in higher than expected growth for Home Depot and Walmart in the Jun’23 quarter. Walmart has also increased sales and operating income guidance for CY23. 2) Discretionary retail continues to be under pressure. 3) Some retailers have highlighted their ongoing technology investments for improving customer and employee experience across physical and digital channels, speeding up online deliveries and exploring AI and large language models for predictive analytics.

Amid a challenging global economic landscape, Indian software giants have faced a tough climate in FY24. The first quarter was disappointing, with weak revenue growth and a cautious outlook due to macroeconomic uncertainties.

Key takeaways from recent quarterly results of large US banks: 1) Technology spend growth rate has slowed down vs the previous quarter for Bank of America, Goldman Sachs and Morgan Stanley. However, full-year tech spend outlook remains intact for Bank of America and J.P. Morgan (7% YoY in CY23 vs 14.4% YoY in CY22).

Cognizant (CTSH) has retained its guidance of -1 to +1% (-2 to 0% organic) YoY CC growth for CY23, guided for ~0.6% QoQ USD growth in Q3CY23, implying a decline of 1.65% QoQ USD in Q4CY23. Though it reported strong bookings growth of 17% YoY in Q2CY23 driven by large deal wins, there is uncertainty around the timing of ramp up of these large deals.