The December quarter earnings of frontline information technology companies were a mixed bag, but the good news is that analysts are finally seeing some green shoots and this has led to expectations of growth coming back on track in the next few quarters.

That recovery may be on cards was indicative from the commentaries of the companies.

While sector bellwether Tata Consultancy Services (TCS) pointed to pent-up demand and the mainstay banking and financial services vertical returning to growth in the current quarter, Infosys indicated that deal ramp-ups were running on schedule.

HCLTech said it was seeing green shoots in the ER&D space and expects strong deal bookings in the current quarter, while Wipro talked about demand stabilisation and a slight pick-up in discretionary spending.

The December quarter is usually seasonally weak for the sector, but higher-than-usual furloughs this time affected companies across the board.

Sector bellwether TCS reported a 1.7% YoY growth in constant currency revenue, whereas Infosys saw it declining by 1% and Wipro even deeper by nearly 7%. Bucking its peers, HCLTech reported an over 4% growth in revenue as the December quarter is one of the strongest for the company.

While Infosys and HCLTech tightened their guidance for FY24, and Wipro forecasted a largely flat growth in the current quarter, the outlook was less worse than feared.

“We believe the deal momentum should be strong in FY25 and Infosys’ revenue growth should improve to high single digits in CC terms,” Antique Stock Broking said in its report.

In the case of Wipro, notwithstanding the flat revenue guidance for the March quarter, HDFC Securities believes that the trajectory is ‘recovering’ after a 6% drop in the quarterly revenue rate over the past three quarters.

Moreover, the margin trajectory for most companies has improved and this trend is expected to continue, going forward.

As a result, most companies did not see steeper cuts in earnings growth estimates for the next year.

In fact, to one’s surprise, companies like TCS and Infosys have seen earnings upgrades on the back of an improved outlook on profitability.

Antique Stock Broking has raised earnings estimates for both Infosys and TCS on higher margin assumptions.

Re-rating on Cards?

Most analysts expect earnings to recover in FY25 with signs of a bottom in FY24.

However, discretionary spending remains critical for the IT sector and that’s yet to show visible signs of recovery.

Early indications by global enterprises on technology spends suggest that clients remain focused on cost take-out, and this limits optimism on the uptick in discretionary spending at least in the first half of 2024.

A strong recovery on this front is critical for a re-rating of the sector, believe analysts.

Stock Talk

Even before the December quarter results announcement, Dalal Street had already put its green stamp on the sector, as both mutual funds and foreign institutional investors raised their holdings in most of the largecap names.

The strong rally that IT stocks saw in the last few months is a validation that this sector remains a critical part of investors’ portfolio for the long term.

Global investment bank JPMorgan believes that acceleration in growth will help in expanding valuation multiples of IT stocks and not contract in 2024.

“Another factor that we believe could support stocks and PE is dividend/buyback yields. In a falling interest rate environment, dividend stocks become attractive for investors and hence stocks that have high dividend yields should find more support,” JP Morgan said.

From a valuation perspective, analysts are still not comfortable with TCS but are positive on Infosys. After the recent rally, valuations of HCLTech too, have entered the uncomfortable zone.

“We believe HCLT should trade at a discount to Infosys given its slow-growth software business which is likely to limit any further re-rating,” Jefferies India said.

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(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)


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