Gap between IT sector’s leaders and laggards to widen further in FY24, says Kotak Institutional Equities
Business Insider India
- Economic slowdown will further widen the gap between the leaders and laggards of the
Indian IT sectorin FY24.
- Industry leaders
TCSand Infosys, among others, had underlined in their December-quarter earnings that there were signs of a slowdown, especially in Europe, one of the key markets of the Indian IT sector.
- Large IT companies with a full suite of services, and mid-tier companies are best placed to take advantage of vendor consolidation and cost take-out deals in this environment, according to Kotak Institutional Equities.
AdvertisementThe gap between the leaders and laggards in the Indian
The findings of the brokerage also underline that while slowdown concerns have resulted in a moderation in demand, there are no new pockets of weakness just yet.
Earlier, during the December quarter, Infosys CEO Salil Parekh had noted that there were signs of a slowdown, more so in the European markets than in the US. “While we are encouraged by the immense confidence and trust our clients have in us, the signs around are showing a slowing global economy,” Parekh had said, striking a cautionary note.
Rajesh Gopinathan, CEO of TCS, the industry leader, echoed the sentiments, saying, “Europe is a problem. Everyone went into December being very cautious. But we are positive on the US market.”
Tier 1 companies best placed to take advantage
Analysts at Kotak Institutional Equities suggest that the outlook for industry leaders like TCS and Infosys is not as gloomy as it is for a few smaller players.
“The gap between leaders and laggards will widen in FY2024. Among Tier 1, TCS and Infosys offer a full suite of services, robust delivery and excellence in multiple digital competencies. Both are well-positioned in cost take-out deals and will likely emerge net gainers in vendor-consolidation exercises,” the brokerage said as part of the outcome of its CG2023 conference, which included 15 companies in the IT space.
However, the focus on cost take-out deals also means that while IT companies will have these projects for longer tenures, the revenue conversion will be slower, the brokerage said, adding that a deep
Mid-tier firms with strong domain understanding can outperform Tier-1 cos
While Tier-1 companies like TCS and Infosys that offer a full suite of services are the best placed to weather the slowdown, Kotak expects mid-tier companies with strong domain understanding and capabilities to beat Tier-1 companies in terms of growth.
Advertisement“Quality mid-tier [companies] can deliver double-digit growth in FY2024. Portfolio mix that is tuned to growth with lower legacy drag, quality management team and strong sales focus are aiding healthy growth even in a less friendly environment,” the brokerage said.
Just-in-time hiring to aid margins
While layoffs and delayed onboarding have become hot-button issues in the Indian IT sector, IT companies have maintained a cautious stance as far as hiring is concerned.
Infosys noted that its focus is on being prudent when it comes to hiring, and that its dependence on direct campus hiring has now reduced.
HCL Technologies, on the other hand, said it would onboard over 25,000 freshers in FY24 and that it has significantly cut down its lateral hires.
AdvertisementOverall, the consensus among IT companies is that a decline in the time from offer to joining has aided just-in-time hiring, which will reduce pressures on margins. Hiring will also be calibrated with the demand environment from here on out, the brokerage noted in its report.
Demand negativity has peaked, says Kotak
Kotak Institutional Equities notes that the demand negativity peaked in November 2022 – while this could still impact IT companies’ Q4 FY23 earnings, the brokerage said sentiments are improving. “Current tech upcycle can be a decadal one and will be a rising tide lifting all boats,” it added.
Overall, it outlined that Infosys and HCL Technologies are its top picks amongst Tier 1 companies, while maintaining a positive outlook on TCS and Tech Mahindra. Among mid-tier companies, Mphasis is its top pick.
Airtel’s ARPU improvements to be driven by postpaid subscribers and 5G-powered premiumisation
Adani Enterprises zooms 14% as seven group stocks surge – Adani group’s combined market cap crosses ₹8 lakh crore
Passenger vehicles to continue driving auto sales in February, EVs gain a stronghold
- RBI bars JM Financial Products from financing against shares, debentures
- UP govt approves proposal for formation of Uttar Pradesh State Capital Region on lines of NCR
- Popular Vehicles and Services to float IPO on March 12
- Nothing Phone (2a) smartphone debuts in India, priced starting at ₹23,999
- New variant of H5N1 bird flu spreads to marine mammals, heightening concerns for human transmission