Information Technology Q4FY23 Preview: Muted Quarter; Macro Uncertainties To Weigh In The Near Term

* We expect IT companies to report muted revenue growth in Q4 owing to slower decision making and increased cautiousness amid macro uncertainties and recent banking turmoil, weaker discretionary spending, and usual March quarter seasonality. We expect revenue growth of -0.5% to 1% CC QoQ for Tier-1 companies and -0.4% to 4.0% for mid-caps.

* Except for HCLT and WPRO, EBITM is expected to expand by 30-50bps QoQ for Tier-1 companies and 10-210bps for mid-cap companies due to flat employee pyramid, optimization in subcontracting costs, operating efficiencies, and cross-currency tailwinds. 

* We expect INFO and HCLT to guide for 5-7% CC YoY revenue growth and 21-23% EBITM, and 5-7% CC revenue growth and 18-20% EBITM for FY24, respectively. Wipro is likely to guide for 0-2% revenue growth in Q1FY24.

* Nifty IT index corrected by ~3.3% in the last one month, reporting a steeper decline than the broader markets owing to worsening macros and banking turmoil in developed markets. Risks of recession and potential cut in FY24 revenue remain; however, margin resilience and weak rupee would limit the earnings cut. Our pecking order is INFO, WPRO, TECHM, HCLT and TCS in tier-1 companies; and ZOMATO, FSOL, ECLX, MPHL, BSOFT and PSYS among mid-cap companies.