Q4 IT Results Preview: TCS likely to outshine Tier I players with strong deal wins

IT sector Q4 Preview: IT bellwether Tata Consultancy Services (TCS) is all set to kickstart a new earnings season for India Inc. by reporting its four-quarter results on April 12. The March quarter results season comes days after Ireland-headquartered IT services and consulting firm Accenture slashed its FY24F revenue growth guidance to 1-3 per cent year-on-year (YoY) growth against 2-5 per cent amid challenges such as discretionary spending, delay in decision-making, and a slower pace of spending. Accenture’s performance is largely accepted as a benchmark for the Indian IT services industry.

By and large, growth in the sector is expected to bottom out during the review period, with a gradual recovery in FY25E. Furthermore, concerns around the slowdown in macro, slower conversion from TCV to revenue, and discretionary spending will still be the feature, at least for the near term, said HDFC Securities in its Q4FY24 preview report. It also maintained that even though growth has bottomed out, valuation restricts significant upside in the near term.

Here’s how brokerages see IT services to fare in Q4FY24 on various parameters.

Revenue estimates

Domestic brokerage firm InCred Equities estimates Tier-I IT services to log an average constant currency (CC) revenue growth of 0.1 per cent sequentially during the review period on the back of the reversal of furloughs in the banking and financial services (BFSI) as well as hi-tech and manufacturing verticals, offset by continued softness in discretionary spending. Nevertheless, growth in dollar terms could see an uptick as the US dollar (US$) softened by an average of 2.1 per cent and 0.9 per cent against the GBP and EUR, respectively. 

HDFC Securities, on the other hand, believes that growth divergence will continue and will range from -1.3 per cent  to +1.3 per cent QoQ (-7% to +6% in YoY terms) for Tier-I IT. Q4 growth expectations for mid-tier ranges from 0.3 per cent to 4.2 per cent QoQ. 

“Infosys, Tech Mahindra, and LTIM revenues could decline sequentially, Wipro’s IT services revenue growth could be flat, while Tata Consultancy Services’ (TCS) growth could be aided by the ramp-up of deals,” InCred noted. Keeping a more or less similar view, HDFC Securities said TCS is seen to lead growth at 1.3 per cent QoQ, followed by flat growth for Infosys and HCL Technologies and a sequential decline for Wipro, Tech Mahindra, and LTIMindtree.

For Tier-II companies’, InCred sees revenue growth in dollar terms to be higher at an average 2.5 per cent sequentially, led by L&T Technology Services and Persistent Systems. HDFC Securities also held that growth would be led by L&T Tech at 4.2% QoQ (SWC seasonality benefit) and Persistent Systems at 3.2% QoQ. Q4 growth laggards are expected to be Tata Elxsi, Happiest Minds, and Sonata within the mid-tier, it added.

“Slow revenue trajectory, transition cost of large deals, investments in capabilities, and a partial wage hike in select companies could be key margin headwinds, while growth leverage, optimisation of subcontractor expenses, and the employee pyramid are the tailwinds,” Incred added.

Margin outlook

On the margin front, InCred sees Tier-II companies to log better performance with EBIT margin growth of an average of 40 bps sequentially, as against 10 bps expected for Tier-I companies.

Deal wins

TCS is expected to lead here also on the back of several big deals in Europe (> USD 10bn TCV or total contract value), while it shall be steady for others. 

HDFC Securities also noted that the incremental revenue addition of USD 4.4bn for Tier-1 IT in FY25E is plausible, supported by the ramp-up of mega deals—BSNL, Aviva, Verizon, Liberty Global, and several other large deals—offsetting the impact of leakage in renewals.

Growth guidance for FY25

HDFC Securities estimates Infosys to guide 3 to 5 per cent growth for FY25E, HCL Tech 5 to 7 per cent for FY25E, Wipro -1% to +1% QoQ for Q1 FY25E, and L&T Tech >10% for FY25E. Further, in respect of margin guidance, the brokerage expects an over 50 bps margin uptick in FY25E, supported by disinflationary supply-side factors linked to a soft demand environment. 

All in all, the brokerage sees recovery coming in FY25E, with growth dispersion between companies expected to remain high even in FY25E.

Valuation

IT sector valuations are at 25x, at nearly 10 per cent above the 5Y average (23x) and 35 per cent above the 10Y average (18.5x), ahead of the US election volatility.

Key monitorable

As per InCred, traction in GenAI remains a key focus, as Accenture in Q2 recorded a sharp increase in sales quarter-on-quarter (QoQ).

Top stock picks

HDFC Securities remains selective in the sector and prefers TCS within Tier-I and Persistent Systems from mid-tier IT. Likewise, InCred is also selective and prefers restructuring stories as the Tier-II companies have the building blocks to sustain the growth momentum; nonetheless, the entry valuations are unfavourable. Tier-I companies’ valuations are favourable, but the earnings upgrade is limited. Tech Mahindra continues to be its preferred stock pick.