Indian IT sector report for Q3 FY23 - By Anand Rathi

Key Highlights:

Slower growth, steady margins: We expect companies to largely maintain their TCVs, but report slower growth in Q3 for various reasons such as more furloughs or client-specific challenges. The sector is likely to report aggregate ~2% q/q dollar growth and 8% y/y on $ basis (~13% CC). Sequentially, dollar growth has returned to pre-pandemic levels. Margins are likely to inch up sequentially on many tailwinds (lower cross-currency headwinds, easing attrition pressure and rupee depreciation). More benefits are likely to follow in Q4. Outliers on the upside are HCLT, Coforge, Persistent, KPIT and Latent View. Outliers on the downside are Mphasis and FSL.

Mid-size IT continues to outgrow larger peers, but the gap narrowed in Q3: Mid-size IT companies (PSYS, Mphasis, Coforge, LTIM and LTTS) continue to grow faster over longer periods. However, Q3 may see a few of them navigating specific challenges, leading to a narrowing of the growth gap with larger peers. Client quality is critical in economic slowdowns to avoid sudden ramp-downs. Expect growth divergence ahead.

Revenue productivity steady, utilisation improved in Q2: Net headcount addition slowed in Q2 FY23, a second consecutive quarter of deceleration. In Q3 FY23, we expect net headcount addition to further decelerate and normalise. On the other hand, utilisation improved in Q2 after having fallen for four straight quarters, leading to steady employee productivity to some extent.

Niche small players retain high growth rates: Smaller but niche companies such as KPIT, Latent View and Happiest Minds continue to maintain high growth rates.

Weaker rupee, lower attrition to help: The rupee depreciated ~3% in Q3 FY23 and is likely to offer margin tailwinds. So is the case with attrition, which impacted smaller IT companies more than the large ones over the last year. As it comes off, talent replacement cost will be lower and smaller companies will benefit more on the margin front.

Source : Equity Bulls

Keywords

AnandRathi India ITSector Report Q3FY23