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Mid-tier IT companies expected to outperform the big guns

Mid-tier IT companies expected to outperform the big guns
  • Mid-tier companies like L&T Technology Services, Persistent Systems and Coforge are expected to report better growth than IT majors, say analysts.
  • Most of them are largely expected to deliver either a flat or a slight QoQ improvement in margins, with the exception of Cyient.
  • LTTS, which will see the full impact of SWC acquisition this quarter, is expected to deliver double-digit revenue growth but its margins are expected to be impacted.
The Indian IT sector is bracing itself for a tough quarter and a year ahead, as organisations across the world are cutting down their discretionary spends, thanks to an uncertain economic outlook.

Most IT sector companies are expected to present a muted earnings report card for the first quarter of FY24. Within the IT pack, mid-tier companies like L&T Technology Services (LTTS), Persistent Systems and Coforge are expected to show better growth as compared to their larger peers.

Tata Consultancy Services (TCS) and Infosys are expected to show a flat revenue growth in constant currency (CC) terms QoQ, while Wipro is expected to post a decline. The rest of the midcap universe, however, is expected to present fair growth with the exception of Cyient and Mphasis, which are likely to see declines.

“Mid-tier IT growth premium is expected to continue with sequential growth performance led by Persistent Systems. The laggard in mid-tier IT will be Mphasis with an expectation of a sequential decline,” said a report by HDFC Securities.


Q1FY24 projections for QoQ revenue growth in CC terms
Company

Nuvama

IIFL Securities

Axis Cap

LTTS

11.8%

11.1%

12.3%

Cyient

-2.4%

-2.6%

NA

Coforge

2.4%

2.9%

3%

Persistent Systems

2.6%

2.9%

3.5%

Mphasis

NA

-2%

-1%

Source: Research reports

Best amongst equals

Like their larger peers, most of the midcap companies are also expected to see either a flat or a slight de-growth in margins, in spite of tailwinds from rupee depreciation. High wage costs will most likely eat into the margins of most tech companies, including the bigger ones.

Mphasis, which is largely expected to report a revenue decline, is expected to deliver a better performance in terms of margins. “EBIT margin expected to be up slightly, by 10 bps QoQ, due to higher offshore mix and operational efficiencies despite revenue drag,” said IIFL Securities. EBIT refers to earnings before interest and taxes.

LTTS, which will see the full impact of SWC acquisition this quarter, is expected to deliver double-digit revenue growth but its margins are expected to be impacted. The company acquired Smart World & Communication (SWC) Business of L&T in January 2023.

“Organic margin to see strength aided by revenue growth but reported margin to see a dip of around 170 bps QoQ led by the impact of SWC integration,” says a report by Axis Capital.

In spite of a bleak sectoral outlook, most analysts are closely watching how the second half of the year will pan out. They will be paying close attention to the deal commentary, growth that’s to be seen in the top clients, and hiring and attrition trends to hunt for any silver lining in the dark clouds.

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