Information Technology Key Q3 Trends: Revenue Growth Momentum Strong; Supply-Side Challenges Persist

 

* Revenue growth momentum was strong in a seasonally soft quarter, driven by a broad-based secular demand environment. We believe that robust broad-based demand and a healthy deal intake/pipeline provide good near-term revenue visibility.

* Tier-1 companies' margins were flat to lower sequentially and lower on a YoY basis due to supply-side challenges. Barring PSYS, Tier-II IT Services companies reported expansion in their EBITM sequentially amid tight labor markets.

*  Tier-II companies outperformed Tier-I peers in sequential revenue growth and margin. Margin expansion was aided by revenue growth-led operating leverage, offshore shift, and productivity improvement, which offset cost inflation due to tight labor markets.

* We roll forward our target prices to Mar'24 and raise CoE assumptions, considering an uptick in interest rates. We upgrade WPRO to BUY. Our pecking order is INFO, WPRO, TECHM, HCLT and TCS among Tier-1 names, and PSYS, MPHL, ROUTE, BSOFT, ECLX and FSOL in mid-caps.