Nirmal Bang stated, "Incrementally we do not think Cognizant’s (CTS) 1QCY2024 results and the commentary following it add very much to our understanding of where demand is for the Indian IT services players now that March 2024 results are broadly done for the latter players."
The first guidance was given three months ago by Cognizant for 2024 which the read through from it for the Tier-1 Indian competitors which includes Tata Consultancy Services, HCL Technologies, Wipro, Infosys, and Tech Mahindra. When it concerned FY25, this guidance was on the expectation that one should expect 5-7 percent dollar revenue growth.
That, Nirmal Bang said, has indeed played out in the guidance and commentaries of the Indian players post the 4QFY24 results. That said, the current quarter commentary of CTS does not add incrementally to that demand picture.
The TCV (total contract value) in the quarter was down 6 percent on a YoY basis and the trailing twelve month TCV was up just 1% YoY - which was down from 1.5 percent sequentially) - while Cognizant struct eight large deals of over USD 100 million in the March quarter compared to other four in the year-ago quarter.
Further, the CTS has indicated that the smaller deals which are between USD 0-20 million in size were not that many in the market. Probably, it is also not there in as many numbers as they were in the base quarter YoY.
"This induces uncertainty on any revenue pick up in 2HCY2023. To deliver at the higher end of the guidance, there must be some pick up in discretionary spending and extra business should come through from clients where it is executing well on large deals. Besides, 30-40 bps from incremental M&A and large rebadging type of deals are required where there is a lot of volume, the Nirmal Bang stated,” Nirmal Bang further stated. "We reiterate our 24 month old ‘underweight’ call on the Indian IT Services sector as we believe we are in a ‘slower for longer’ environment," it said.
Nirmal Bang also highlighted that for most of the Indian IT stocks’ valuations its coverage universe is expensive with respect to the relation to their 5-year or 10-year histories. And this showcases no material upside to FY25/FY26 earnings for the coverage for the coming next 12 months.
"We believe that starting valuations are expensive and can at best deliver mid to high single-digit total stock returns (including capital return to shareholders) for TCS/ Infosys, as we believe that structural revenue/earnings growth is being overestimated by the Street," CTS stated.
