scorecardresearchIT sector outlook: Valuations of companies may take a hit, says Emkay Global

IT sector outlook: Valuations of companies may take a hit, says Emkay Global

Updated: 02 Dec 2022, 06:47 PM IST
TL;DR.
Here are the key takeaways from brokerage Emkay Global Financial Services Ltd's recent meet with the managements of IT companies.
IT Sector: Updates on 2HFY23 performance

IT Sector: Updates on 2HFY23 performance

In order to assess the status of demand, deal intake/pipeline buildup, supply side position, and margin trajectory, brokerage Emkay Global Financial Services Ltd recently met with managements of a few Bengaluru-based IT companies.

Post the meet, brokerage concluded that the valuations of the companies may take a hit due to worries over a recession, high energy prices, rising interest rates, and escalating geopolitical tensions.

Here are the key takeaways for 2HFY23:

1. Furloughs, fewer working days, weakness in some areas, and a delay in decision-making due to macro uncertainties are anticipated to have an adverse effect on the sequential revenue-growth performance in Q3FY23.

According to the report, Mphasis management told the brokerage house that while revenue growth could be weak in Q3, it expects better numbers in Q4.

2. Companies have drawn attention to clients' slower decision-making amid macro uncertainties, which would have an impact on discretionary spending and the closing of significant deals.

As per the brokerage house, Infosys management believes the company's deal pipeline will remain healthy but is cautiously optimistic on the back of macro uncertainties and pockets of weakness for discretionary spending in hi-tech, logistics, communication, media, mortgage and retail.

Additionally, the company is experiencing a elongated sales cycle as a result of the current macro uncertainties, which could have an impact on the direction of Q4 revenue growth, according to the company's management.

3. As a result of moderate growth, increased talent pool due to recent fresher induction and training, and gradual start-up hiring as well as layoffs, attrition has been progressively falling.

In order to align the personnel pyramid, Wipro has boosted the number of fresh hires over the past few quarters.

In H1FY23, the firm hired over 14,000 new employees, and it expects to hire twice as many new employees in FY23 as it did in FY22.

Tata Elxsi plans to hire around 3,000 freshers in FY23.

4. Earnings before interest, taxes, corporate overhead, and management fees, or EBITM, are expected to hold steady or even increase in H2FY23 on the back of lower attrition rates, higher utilisation rates, cost-effective subcontracting practices, a flattening of the employee pyramid, gradual price increases, and rupee depreciation.

However, the brokerage believes that the growth moderation, and uptick in travel costs would restrict the upside.

According to the brokerage report, Infosys management has retained its EBITM guidance of 21-22 percent for FY23 and expects it to clock at the lower-end of the guided range.

Happiest Minds' EBITDAM or earnings before interest, income taxes, depreciation, amortisation, and management fees is expected to be in the 22-24 percent range, in the medium-to-long term.

 

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First Published: 02 Dec 2022, 06:47 PM IST