The growth of the IT services industry is expected to remain weak in 2QFY24, as macroeconomic uncertainty continues to weigh on discretionary spending, as per a report by Motilal Oswal Financial Services.

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The softness seen in Q1 should continue across the board with no meaningful signs of recovery or deterioration in Q2. Our IT Services coverage universe should report a median revenue growth of 1.5 per cent QoQ/5.7 per cent YoY in 2QFY24, the report said.

This growth rate is among the slowest observed over the last decade, despite a marginal impact from FX fluctuations. However, a focus on cost-control measures should lead to margin improvement in 2Q. “We continue to prefer Tier-I players (TCS, HCLT, and INFO) over Tier-II, given the former's attractive valuations, payout yield and diversified portfolio”, the report said.

While the industry has witnessed an uptick in order inflow over the past two months with a focus on cost efficiency, the slowdown in project-based business is expected to hamper overall industry growth, even though Q2 is traditionally a robust season for the sector.

We expect Tier 2 IT companies to see further moderation in growth, which can lead to narrowing in the valuation gap (1-year forward P/E) between Tier 1 (median 22x) and Tier 2 (median 27x), the report said.

Margin recovery is anticipated across the board following the completion of wage hikes. A strict emphasis on cost-controlling measures should support margins in Q2.

Additionally, a few select names (under tier-1) have postponed their FY24 wage hike cycles. This strategic decision is expected to support margins in the near-term, the report said.

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