Sector Update

IT
Muted Q4 amidst deteriorating macros

Summary
Q4FY2023 Results Preview Š For Q4FY2023, we expect a muted quarter owing to softness due to macro-headwinds and weak
seasonality. We expect q-o-q constant currency (cc) revenue growth of -1.2% to 1.1% for Tier-1
Sector: IT companies and -1.1% to 3.5% for Tier-2 companies.
Š Margins are expected to continue to show sequential improvement due to easing of supply-side
Sector View: Neutral pressures, moderating attrition, and higher utilisation.
Š Management commentaries on impact of macro/likely recession in the US and Europe, guidance on
revenue growth and margin for FY24 and trends in hiring would a4be key monitorable.
Š Persisting macro-overhang coupled with spiraling weakness from fallout of the recent developments
in Banking space will continue to weigh on the sector in the near term. We maintain neutral stance on
the sector and advice investors to accumulate stocks in staggered manner.

We expect Indian IT companies to report muted quarter owing to softness due to macro-overhang and
seasonally weak March quarter for some companies. We expect q-o-q constant currency (CC) revenue
growth of -1.2% to 1.1% for Tier-1 and -1.1 to 3.5% for Tier-2 Indian IT service companies. Cross currency
Our coverage universe tailwinds to aide reported USD revenue growth numbers for our covered Indian IT service companies for
Q4FY23. Ebit Margins are expected to improve sequentially led by easing of supply-side pressures, lower
CMP PT attrition and higher utilization. Management interactions and commentaries indicate muted demand outlook
Companies Reco. in the near term with slowdown in discretionary spends and demand softness in Hitech, Communication,
(Rs) (Rs)
Retail and Mortgage verticals. Further, recent developments are accentuating fears of banking crisis, which
can impact tech spending by banks. While Indian IT companies do not have meaningful exposure to the
Birlasoft Limited 267 Buy 320 affected US regional banks, their BFSI vertical spends may get impacted with delay in decision making. We
believe persisting macro headwinds coupled with concerns about recent developments in the banking space
Coforge 3,849 Buy 4,900 have further deteriorated the outlook. We believe macro headwinds would restrict material outperformance
for IT companies despite reasonable valuation. We believe against the current backdrop the Tier 1 IT
Expleo Posi- service companies are better placed due to the strong deal wins, benefit from vendor consolidation and
1,244 1,602 diverse client portfolios Our preferred picks are Infosys, HCL Technologies, Tech Mahindra, TCS, Persistent
Solutions tive
Systems and Coforge. We maintain neutral stance on the sector and advice investors to accumulate stocks
HCL Tech 1,098 Buy 1,205 in staggered manner.

Infosys 1,411 Buy 1,730 Muted sequential revenue growth: For Q4FY23, Indian IT service companies are expected to report muted
sequential revenue with Tier 1 companies reporting -1.1% to 1.1% revenue growth in constant currency while mid-
Intellect Design 425 Hold 482 Tier companies are expected to report constant currency revenue growth of -1.1% to 3.5%. Appreciation of major
currencies against the dollar are expected to provide currency tailwinds of ~30-150 bps q-o-q. The rupee was
L&T Tech 3,435 Hold 3,535 flat for the quarter versus USD, while EUR and GBP have appreciated by ~5% and~4% respectively. Among Tier-
1 IT companies, TCS to lead the with cc revenue growth of 1.1% q-o-q. Q4FY23 being a seasonal weak quarter
LTIM 4,739 Buy 5,170 for Infosys and HCL Tech, CC revenues are expected to be flat for Infosys while HCL Tech is expected to see a
decline of 1.2% q-o-q. Wipro and Tech Mahindra are expected to continue to report muted CC revenue growth
Mastek Limited 1,534 Hold 1,900 of 0.2%/ -0.2% q-o-q respectively. Under Tier-2 companies, Coforge/Persistent/Tata Elxsi to report CC revenue
Persistent growth of 3.5%/3.0%/2.5% q-o-q respectively.
4,529 Buy 5,010
Systems Margin improvement to continue: Margins are expected to continue to show sequential improvement due to
easing of supply-side pressures, moderating attrition, and lower utilization. However, for most IT companies
Re- under our coverage, margins would continue to trail on a y-o-y basis.
Tata Elxsi 6,015 6,185
duce
Demand Outlook: Management interactions and commentaries indicate muted demand outlook in the near term
TCS 3,199 Buy 3,650 with slowdown in discretionary spends and demand softness in the Hitech, Communication, Retail and Mortgage
verticals. Enterprises affected by macro-overhang are delaying decision making, increasing focus on cost
Tech Mahindra 1,103 Buy 1,220 optimization and vendor consolidation while resilient ones are cautiously pursuing their digital transformational
journeys. While Managements have indicated continuing secular demand in select verticals, they have also
Wipro 368 Hold 420 highlighted some caution by their clients and delays in decision making as macro-overhang persists. Further,
recent developments concerning US regional banks are accentuating fears of banking crisis that can impact tech
spending by banks. While Indian IT companies do not have meaningful exposure to the affected US regional
banks, their BFSI vertical can be impacted by the fallout of the events due to further caution on tech spends. We
believe against the current backdrop the Tier 1 IT service companies are better placed due to the strong deal
wins, benefit from vendor consolidation and diverse client portfolios. We believe persisting macro headwinds
coupled with concerns about recent developments in the banking space have further deteriorated the macro
environment in the near term.
Price chart Valuations
120 Muted Q4 amidst deteriorating macros: IT companies has corrected significantly on a 1-year basis, with Nifty IT
Index (down ~ 22%) underperforming benchmark indices (Nifty down ~4%). While the current underperformance
100
of IT service companies vis-à-vis the broader indices largely factors the prevailing macro-overhang. However,
spiralling weakness from fallout of the recent developments may trigger further underperformance in the near
term. We believe apprehensions on the macro headwinds will continue to weigh on the covered IT service
80
companies in the near term and restrict any material outperformance. We continue to advocate a neutral rating
on the sector and advise investors to accumulate stocks in a staggered manner on a selective basis.
60
Leaders: TCS, Coforge, Persistent
Apr 22

Dec 22

Apr 23
Aug 22

Laggards: HCL Technologies and Birlasoft

Nifty IT Nifty
Preferred picks:
Š Large caps: Pecking order: Infosys, HCL Tech, TCS, Tech Mahindra.
Š Mid-cap: Pecking order: Persistent Systems, Coforge
Key things to watch out for:
Š Commentary on demand environment given deteriorating macros and FY24 Revenue growth guidance and
margin outlook.
Š Demand outlook across verticals and across geographies, spread of weakness especially beyond Hitech,
Communication, Retail and Mortgage. Commentary on BFSI vertical and exposure to US regional banks to
be another important monitorable.
Š Magnitude of spends towards digital and cloud technologies. Commentary on Cloud migration, 5G, digital
transformation, IoT and cybersecurity to be in focus.Commentary on pace of hiring activity for FY24.

April 03, 2023 1

 Sector Update
Q4FY2023 result estimates
Sales OPM (%) Net profit (Rs. cr)
Company Q4FY23E Q4FY22 YoY (%) QoQ (%) Q4FY23E Q4FY22 YoY QoQ Q4FY23E Q4FY22 YoY (%) QoQ (%)
(bps) (bps)
TCS 59,425 50,591 17.5 2.1 27.3 27.4 -4 61 11,662 9,926 17.5 7.5
Infosys 38,598 32,276 19.6 0.7 23.9 24.3 -45 -59 6,494 5,686 14.2 -1.4
HCL Tech 26,575 22,597 17.6 -0.5 22.1 22.4 -29 -177 3,813 3,594 6.1 -6.9
Wipro 23,715 20,968 13.1 1.5 19.8 20.2 -40 768 3,238 3,087 4.9 6.1
Tech M 13,802 12,116 13.9 0.5 16.2 17.2 -107 55 1,377 1,506 -8.5 6.2
LTIM 8,863 7,199 23.1 2.8 18.3 20.2 -191 235 1,165 1,111 4.9 16.4
L&T Tech (LTTS) 2,075 1,756 18.2 1.3 21.3 21.7 -36 -23 318 262 21.3 4.7
Coforge 2,171 1,743 24.6 5.6 19.4 18.9 52 183 273 208 31.6 19.8
Persistent Systems 2,248 1,638 37.3 3.6 18.9 17.2 177 43 271 201 34.9 1.3
Birlasoft Limited 1,210 1,101 9.8 -1.0 11.7 15.8 -415 1,109 91 131 -30.1 -
Tata Elxsi 848 682 24.5 3.8 30.7 32.5 -175 51 194 160 21.5 -0.2
Mastek Limited 675 582 16.0 2.4 17.9 20.8 -284 65 79 80 -0.5 23.8
Intellect Design 563 509 10.6 3.0 18.5 23.7 -517 82 64 95 -32.8 3.3
Soft coverage
Expleo Solutions 139 114 22.3 2.8 22.7 21.9 76 -60 23 19 23.0 -20.7
Source: Company, Sharekhan Research;

Valuations
Price CMP EPS (Rs.) P/E (x)
Company Reco
target (Rs.) (Rs) FY22 FY23E FY24E FY22 FY23E FY24E
TCS Buy 3,650 3,199 103.6 115.9 123.4 30.9 27.6 25.9
Infosys Buy 1,730 1,411 52.6 58.3 62.2 26.8 24.2 22.7
HCL Tech Buy 1,205 1,098 49.7 51 53.5 22.1 21.5 20.5
Wipro Hold 420 368 22.3 21 22.3 16.5 17.5 16.5
Tech Mahindra Buy 1,220 1,103 62.8 59.6 63.2 17.6 18.5 17.4
LTIM Buy 5,170 4,739 133.5 150.8 178.2 35.5 31.4 26.6
L&T Tech Hold 3,535 3,435 90.7 110.2 116.8 37.9 31.2 29.4
Coforge Buy 4,900 3,849 109 140.1 172.3 35.3 27.5 22.3
Persistent Systems Buy 5,010 4,529 90.3 130.1 136.7 50.1 34.8 33.1
Birlasoft Limited Buy 320 267 16.4 11.3 12.6 16.2 23.6 21.2
Tata Elxsi Reduce 6,185 6,015 88.3 120.1 127.4 68.1 50.1 47.2
Mastek Limited Hold 1,900 1,534 103.4 89.4 110.1 14.8 17.1 13.9
Intellect Design Hold 482 425 25.1 17.7 24.2 16.9 24 17.6
Expleo Solutions Positive 1,602 1,244 44.3 84.2 94.2 28.1 14.8 13.2
Source: Company, Sharekhan Research;

Q4FY2023E: USD revenue and EBIT estimates

Revenue (USD mn) EBIT Margin (%)
Company Q4FY23E Q4FY22 YoY (%) Q3FY23 QoQ (%) CC QoQ Q4FY23E Q4FY22 YoY (bps) Q3FY23 QoQ
(%) (bps)
TCS 7,229 6,696 8.0 7,075 2.2 1.1 25.1 25.0 16 24.5 59
Infosys 4,696 4,280 9.7 4,659 0.8 0.0 21.3 21.6 -29 21.5 -25
HCL Tech 3,233 2,993 8.0 3,244 -0.3 -1.2 18.1 18.0 6 19.6 -152
Wipro 2,841 2,722 4.4 2,804 1.3 0.2 16.3 17.0 -67 16.3 3
Tech M 1,679 1,608 4.4 1,668 0.7 -0.2 11.9 13.2 -138 12.0 -12
LTIM 1,078 945 14.1 1,047 3.0 2.2 16.2 18.0 -173 13.9 235
L&T Tech (LTTS) 252 232 8.8 248 1.8 1.2 18.5 18.6 -14 18.7 -19
Coforge 264 232 13.6 252 4.9 3.5 16.5 15.5 99 14.5 199
Persistent Systems 273 217 25.8 264 3.5 3.0 15.5 14.0 150 15.4 18
Birlasoft Limited 147 146 0.5 148 -0.8 -1.1 9.8 13.8 -407 -1.1 1,089
Tata Elxsi 103 91 14.1 100 3.5 2.5 28.1 30.1 -202 27.6 53
Mastek Limited 82 77 6.3 80 2.5 1.8 14.9 18.7 -375 14.3 63
Intellect Design 69 68 1.2 67 2.7 - 13.0 18.5 -549 12.0 99
Expleo Solutions 17 15 12.1 16 2.6 - 21.1 19.9 124 20.4 77
Source: Company; Sharekhan Research

April 03, 2023 2

 Sector Update
Q4FY2023 IT earnings preview
Company wise key expectations
Company Comment
TCS TCS is expected to report 1.1% q-o-q revenue growth in CC terms due to strong growth across digital service
and cloud with a likely 110 bps cross currency tailwind to result in reported USD revenue growth of 2.2% q-o-q.
Growth to be led by digital, cloud programs.
EBIT margins are likely to improve by ~60 bps q-o-q due to easing supply, lower attrition and benefits of
lower subcon.
Infosys The company is likely to post flat CC revenue growth with a likely 80 bps cross currency tailwind to result in
reported USD revenue growth of 0.8% q-o-q. Seasonally weak quarter with weakness in operating margin.
We expect EBIT margins to fall by ~25 bps q-o-q in the seasonally weak quarter for the company.
HCL Technologies HCL Tech expected to report a decline of 1.2% q-o-q in CC terms with a likely 90 bps cross-currency tailwind
that would result in reported USD revenue decline of 0.3% q-o-q. Seasonally weak March quarter due to
weakness in HCL software
EBIT margin is expected to decline by ~ 150 bps q-o-q
Wipro Wipro is expected to post a muted 0.2% q-o-q CC revenue growth with a likely 110 bps cross currency tailwind
to result in reported USD revenue growth of 1.3% q-o-q. Muted growth due to exposure to Hi-tech and consumer
verticals and slowdown in discretionary spends.
EBIT margins are expected to be flat.
Tech Mahindra The company is expected to report a decline in CC revenue of 0.2% q-o-q with a likely 90 bps cross currency
tailwind resulting in reported USD revenue growth of 0.7% q-o-q. Decline due weakness in telecom and Hi-
tech verticals and moderation in BPO after strong previous quarter.
We expect EBIT margins to remain flat.
LTIM LTIMindtree is expected to report CC revenue growth of 2.2% q-o-q with a likely 80 bps cross currency tailwind
resulting in reported USD revenue growth of 3.0% q-o-q. Growth due to absence of furloughs and BFSI vertical.
EBIT margins to improve by ~240 bps QoQ due to the absence of one-time integration costs and furloughs
apart from easing supply side pressures and improving utilization.
L&T Tech The company is expected to report CC revenue growth of 1.2% q-o-q with a likely 60 bps cross currency tailwind
resulting in reported USD revenue growth of 1.8% q-o-q. Growth from industrial products and transportation.
We expect EBIT margins to fall slightly by~20 bps QoQ .
Coforge Coforge is expected to report decent CC revenue growth of 3.5% q-o-q among Tier-2 IT companies with a likely
140 bps cross currency tailwind resulting in reported USD revenue growth of 4.9% q-o-q. Growth led by TTH
and Insurance.
EBIT margins to improve by 200 bps q-o-q given benefit of easing supply side pressure, moderating attrition,
lower subcon and higher utilization.
Persistent Systems Persistent is expected to report decent CC revenue growth of 3.0% q-o-q with a likely 50 bps cross currency
tailwind resulting in reported USD revenue growth of 3.5% q-o-q.
EBIT margin to improve by ~20bps q-o-q led by easing supply side pressure
Birlasoft The company is expected to report 1.1% CC revenue decline partially with a likely 30 bps cross currency
tailwind resulting in reported USD revenue decline of 0.8% q-o-q. Decline in revenue as no revenue to come
from Invacare.
Company is expected to report EBIT margin at 9.8%.
Tata Elxsi Tata Elxsi is expected to report 2.5% CC revenue growth with a 100 bps cross currency tailwind resulting in
reported USD revenue growth of 3.5% q-o-q. Growth to be led by transportation vertical while softness to
continue in Media and Broadcasting.
EBIT margin to improve by 50 bps q-o-q led by easing supply side pressure and higher utilization.
Mastek Limited The company is expected to report 1.8% q-o-q CC revenue growth with a likely 70 bps cross currency tailwind
resulting in reported USD revenue growth of 2.5% q-o-q
EBIT margins to improve by ~60 bps q-o-q led by easing supply side pressure and higher utilisation
Intellect Design The company is expected to report 2.7% q-o-q USD revenue growth led by revenue growth in License and
Platform revenues.
EBIT margins show improvement of 100 bps q-o-q led by improvement in operational efficiencies.
Expleo Solutions Expleo to report 2.6% q-o-q USD revenue growth led by muted growth across its verticals.
We expect EBIT margins to improve by 77 bps q-o-q.
Source: Sharekhan Research

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

April 03, 2023 3

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