The Q1FY24 results season is over. Despite the delay in automation spending, IT companies' deal wins remain strong this quarter. Many of India's IT service companies reported the highest order book despite the lack of near-term visibility. The attrition rate also dropped as there was easing on the supply side.
According to analysts at Axis Securities, IT service companies are likely to improve their operating margins. Meanwhile, subcontractor costs are likely to weaken as demand weakens, which should have a positive impact on operating margins. However, growth visibility is likely to remain under pressure as the slowdown negatively impacts overall business activity.
Delayed decisions have weakened revenue growth momentum, even if the deal wins remain resilient. Higher onsite expenses and rising costs have negatively impacted operating margins. Additionally, lack of visibility caused IT providers to slow down the hiring process, which impacted future revenue growth momentum.
After strong revenue growth momentum in FY22 and FY23, analysts at Axis Securities believe IT services may face challenges on the demand front and margins fueled by the economic slowdown and macroeconomic uncertainties. They have a sceptical near-term outlook for North America. Meanwhile, demand in industries such as retail and manufacturing is expected to regain momentum in the near future.
Demand for newer technology services such as generative AI, machine learning, IoT, and cloud transformations is likely to recover more quickly. "We continue to believe that most IT services companies will regain momentum in the second half of the year as deal wins remain resilient and supply-side challenges ease. Many of the companies that are becoming increasingly system-oriented and unable to escape the costs of automation should have strong long-term demand," said Axis Securities.
"Indian IT services industry is facing near-term challenges due to the economic slowdown and weaker macroeconomic outlook. However, its long-term outlook remains robust with the economy showing signs of recovery. We believe that the said recovery will begin in the second half of the year and FY24 will show strong revenue growth," said Axis Securities in its report. Near-term demand visibility, and challenging macro environment remain key monitorables.
The brokerage has Coforge as one of its top IT picks with a target price of Rs 5,900 per share. "We are encouraged by the improved outlook in the vertical and engagement with clients give us confidence in the company’s future prospects. Given the company’s strong growth potential, supported by solid deal-making and excellent execution capabilities, we recommend BUY on the stock," it said.
Axis Securities has Persistent Systems as another one of its top IT picks with a target price of Rs 5,570 per share. "We believe Persistent is well positioned for encouraging growth given its numerous long-term contracts with the world’s leading brands. Improved revenue visibility gives us confidence in the company's continued growth," it said.
Axis Securities has Indiamart as one of its top IT stock picks with a target price of Rs 3,625 per share. According to the brokerage, the company's key strengths are Strong foothold in the B2B digital platform, High growth opportunities for paid subscribers, Robust platform, 143 million registered users. "Indiamart's conversion factor is higher than other Indian companies. With a higher value proposition for sellers, more and more will be willing to pay for listing services," it said.
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