Global inflation, lower revenue guidance & other factors force IDBI Capital to trim revenue, margins estimate of IT sector

On multiple factors such as global inflation, lower-than-expected revenue guidance, and lower utilization, domestic brokerage firm IDBI Capital not only trims revenue and margins estimates of the IT sector but also revises tier-1 revenues/profit estimates downwards by 3.9/4.7 per cent in FY24E.

The brokerage had pre-empted the concern in revenues mainly due to macroeconomic conditions in the fourth quarter of the financial year 2021-22.

IDBI Capital believes that considering the profit warnings of corporates globally there could be a further tapering of revenues and profitability, going forward, and expects digital to be a multiyear opportunity, macro related issues would keep financials under check.

Therefore, the brokerage remains selective in Buy ratings and is positive on Infosys and Tech Mahindra in large caps and while on Cyient and Zensar among mid-caps.

In terms of margins, IDBI Capital expects headwinds like wage hikes, higher travel and visa cost, and lower utilization to negatively impact margins. It observed that Tech Mahindra, Wipro, LTI, Cyient, Zensar, Newgen, and Firstsource are near their 5 Year average PE & PB.

The brokerage cut dollar revenue estimates for Tier I companies by 2.2/3.9 per cent for FY23 and FY24 respectively. To incubate the headwinds from supply-side challenges, It has revised the EBIT margins downwards by 77 bps (basis points) and 70 bps for FY23 and FY24 respectively.

While with Tier II companies earnings are expected to cool off in the near to mid future and also cut dollar and revenue estimates by 1.9/3.4 per cent respectively for FY23 and FY24, IDBI Cap believes.

Margin headwinds like increased wage costs and travel expenses have prompted the brokerage to reduce average EBIT margin estimates by 25 bps and 53 bps for FY23 and FY24.