Brokerage firm Citi believes that Indian IT companies like Tata Consultancy Services (TCS Ltd.), Infosys Ltd., and their peers, will find it tough to meet consensus estimates for the financial year 2024.
It wrote in a note that the companies would have to report operating profit (EBIT) growth ranging from 5% to 78% in order to meet consensus estimates. That, according to Citi, is a tough ask in a slow growth setup, weaker seasonality and with pending wage hikes for a decent part of the coverage.
Traditionally, IT companies have a seasonally weak quarter in December due to the extended holidays, which slows down deal-making. The March quarter also generally contains wage hikes, which impact the companies' margin performance.
Citi mentioned in its note that the consensus operating profit estimates for the financial year 2025 also look tough due to a challenging macro environment.
Indian IT companies, including TCS, Infosys and HCLTech have won some large deals recently, indicating that the deal pipeline is looking to stabilise. Citi expects some of these large deals to start ramping up in the March quarter of the financial year 2024. However, these mega deals are margin dilutive in the initial years, the Citi note said.
"Given that valuations are not cheap in the historical context, earnings trends are still going to be important for the stock performance," according to the analysts at Citi.
TCS will begin reporting earnings for IT companies' September quarter on October 11, followed by Infosys and HCLTech on October 12. Wipro and LTIMindtree will be reporting their quarterly results on October 18.
Within Citi's coverage universe, only Infosys and HCLTech are the two stocks rated "neutral", while the others are rated as "sell".
For the June to September quarter, the Nifty IT index rose 7.5% with all 10 constituents ending with gains. Mphasis was the top gainer on the index during the quarter, rising by nearly 25%, while LTIMindtree ended 0.2 % higher.
(Edited by : Amrita)
First Published: Oct 6, 2023 9:12 AM IST
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