Software & Services share price target

We hosted IT sector experts – 1) Mr. Steven Hall President – EMEA & Partner - Digital Advisory Services, ISG and 2) Mr. Stanton Jones – Distinguished Research Analyst, ISG where we discussed key demand and tech trends playing out amidst an uncertain macro environment.

Coforge retained its guidance of 13-16% YoY CC growth for FY24. This guidance looks conservative vs 20% YoY growth in executable orderbook at the start of FY24 because management is building in more uncertain demand environment in FY24E.

We have analysed the just-concluded quarter results of global SaaS companies with whom Indian IT companies have sell-to and sell-with partnerships (Servicenow, Atlassian, Snowflake, Salesforce, Workday, etc.) and digital engineering companies (EPAM, Globant, Endava), which can be considered proxy for high-end digital services demand.

Several US and European retailers have highlighted that they are seeing consumer spending being impacted in discretionary categories. Walmart mentioned headline inflation in food and consumables declined by 400bps QoQ in Apr’23 quarter, but on a 2-year basis, food inflation remains over 20% and continues to put pressure on discretionary wallets.

Over the past year, the Indian software sector was rocked by a global slowdown, worsened by high inflation. The collapse of key US banks and Credit Suisse in March 2023 only exacerbated the situation for IT companies, which rely heavily on banking and finance clients for revenues.

Amid adverse macro environment for IT Services spending with right shifting of demand, as clients want to focus on critical areas of tech spending, we highlight two stocks in Indian IT Services space - Persistent Systems (PSYS) and Happiest Minds (HM) - that are well positioned to deliver industry-leading growth in FY24E and beyond with expectations of mid-high teens organic revenue growth.

CTSH reported revenue growth of 1.5% YoY CC, above the top end of management guidance (-1% to 0% YoY CC) in Q1CY23. This includes 100bps inorganic contribution. Company reported strong bookings growth of 28% YoY in Q1CY23 with the TTM orderbook at US$ 25.6bn and book-to- bill at 1.3x.

CAP’s revenue grew 10.9% (10.7% organic) YoY CC in Q1CY23. It reported healthy bookings of EUR5,867mn (+6.5% YoY CC) in a weak macro environment resulting in a book-to-bill ratio of 1.02x. Headcount addition slowed down with net reduction of 2,600 employees, -0.7% QoQ, +5% YoY (similar to peers).

Large US banks – JP Morgan, Citigroup (Citi), Wells Fargo and PNC Financial
Services, who have reported Q1CY23 results so far – indicate that YoY growth in
technology expenses as reported in their P&L has moderated for Citi and Wells
Fargo.