It is emerging as a consensus view that a slowdown in BFSI-led IT spends in the developed markets may weigh in on domestic IT earnings in FY24. Motilal Oswal believes Tata Consultancy Services (TCS) is best positioned to benefit from such near-term moderation in technology spending, as the industry focus may shift owards
cost efficiency as against transformation in the last two years. Motilal Oswal Securities said TCS’ revenue growth may outperform its peers due to its industry leadership in cost optimisation and strong order book.
"Further, its better operational efficiencies are likely to drive up its profitability, leading to a strong rupee PAT growth in a tough year," it said.
Motilal Oswal said clients are not willing to take big bets until they get more clarity on their growth trajectories. Discretionary spend is under pressure and it expects some signs to emerge in Q4FY23 and become more pronounced in Q1FY24.
Banks, it said, are likely to maintain caution and curtail discretionary tech spending until the situation stabilises, which would hit IT spends in the early part of FY24 and exert further pressure on near-term growth outlook for IT services.
"We remain watchful of the situation and any further weakness in banking eco-system would be viewed negatively. While we are still assessing the impact of weakness in the BFSI space for tier-2 names, we are cutting our estimates for tier-1 companies due to the weakness in BFSI space and based on our discussion with the managements," it said.
That said, while the current macro environment remains weak, the structural demand outlook for the sector remains intact, the brokerage said, as it continues to believe that the macro challenges will ebb by first half of FY24 and the situation will start improving in the later part of the year.
This, Motilal Oswal said, should be followed by healthy recovery in FY25E with improved visibility for clients and catch up in tech spends.
Shares of Infosys plunged 10.31 per cent this calendar so far. Wipro declined 9.44 per cent during the same period. TCS is down 4.33 per cent while Tech Mahindra and HCL Technologies are up 6.90 per cent and up 1.31 per cent, respectively.
"Valuations have significantly corrected from their peaks as we believe that the concerns on macro environment have already been factored into the valuations. We remain selective in the space and view any correction in the preferred names as an opportunity to accumulate further," Motilal Oswal Securities said, as it preferred TCS, HCL Technologies and Infosys within tier-1 space.