Indian IT Sector Faces Extended Weak Demand Outlook

Indian IT Sector Faces Extended Weak Demand Outlook
Indian IT Sector Faces Extended Weak Demand Outlook/Pixabay
Indian IT Sector Faces Extended Weak Demand Outlook
Indian IT Sector Faces Extended Weak Demand Outlook/Pixabay

Indian IT Sector Faces Extended Weak Demand Outlook

Indian IT Sector Faces Extended Weak Demand Outlook

Indian IT Sector Faces Extended Weak Demand Outlook

Key Highlights:

  1. Indian IT services companies experienced subdued earnings for Q4 FY24, with muted revenue growth and an extended outlook for weak demand and macro uncertainty.
  2. Recent corrections in IT stocks have made valuations more attractive, particularly for mid-tier companies, according to analysts at Kotak Institutional Equities.
  3. Growth in the IT sector during Q4 FY24 was driven by large and mega deals, but revenue growth guidance for FY2025 fell short of expectations for all companies.

Despite the subdued earnings and weak demand outlook, recent corrections in IT stocks have made valuations more appealing, particularly for mid-tier companies, according to analysts at Kotak Institutional Equities. The extended outlook for weak demand has led to a reset of growth and margin expectations for FY2025, with muted growth guidance and weaker margin outlook for select companies.

Tata Consultancy Services (TCS) and Wipro performed better on the margin front due to strong execution on cost-optimization programs, while mid-tier companies like LTI Mindtree and Persistent Systems saw margin outlook reductions due to aggressive investments to capture market share. Infosys and TCS reported solid bookings powered by large and mega deals, whereas TCV of Wipro and Tech Mahindra was muted. Decision-making slowdown and spending reprioritizations by clients were cited as reasons for muted TCV.

Kotak Equities maintains its top picks in the IT sector, favoring Infosys followed by TCS and HCL Technologies in Tier-1, and Cyient in the mid-tier. Infosys, with reasonable growth visibility in FY2025 aided by large deal wins, is expected to benefit disproportionately compared to Tier-1 peers when discretionary spending picks up. Stocks like LTI Mindtree and Persistent Systems, though trading at expensive valuations, could become more interesting with further correction.

Source: Mint

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