Software & Services share price target

Macro uncertainty inducing cautious IT budget spends and a sharper focus on cost optimisation

Capgemini (CAP) reported strong revenue growth and bookings in Q4CY22 despite macro weakness: CAP’s revenue growth was at 14% (12.8% organic) YoY CC in Q4CY22, resulting in full-year growth of 16.6% YoY CC in CY22 – higher than its guidance of 14-15%. Company won record-high bookings of EUR6,685mn (+11.4% YoY CC) despite macro weakness and slippage of some deals (not material though), leading to a strong book-to-bill ratio at 1.16x.

Based on leading demand indicators such as real GDP growth, company headcount growth, latest commentary from company managements and S&P 500 revenue growth in CY23, it is quite evident that demand for IT Services could remain weak at least during H1CY23E and then pick up in H2CY23E.

According to media reports, unlisted food aggregator Swiggy is letting go of 380 employees as growth in the core food delivery business missed internal projections.

On-the-ground feedback reveals muted consumer spend across discretionary categories such as apparel, consumer durables, paints and QSRs post the strong festive season. Though such a trend is often attributed to consumer fatigue, this time the market commentary is hinting at more structural reasons.

IT Q3FY23 - Earnings Preview

Despite furlough, revenue likely to deliver the pre-covid level but the pressure on existing business continues

We believe ONDC is likely to be a creative disruptor in the e-commerce space in India
over the medium term; however, the ramping up of the network to cover different facets of the e-commerce ecosystem is likely to take 2-3 years.

Our picking order from Large Cap: Infosys, Tech Mahindra, TCS, HCL Tech, and Wipro. Our Picking order from Mid Caps: Persistent Systems, LTI Mindtree, LTTS, Cyient, and Zensar.