Wipro, Coforge, LTIMindtree at high risk, warns Jefferies. Here's why

Foreign brokerage Jefferies said consensus estimates for top clients of Indian IT firms continue to be revised downward with concerns spilling into CY24, despite improving macro expectations. This, it said, could drive pressure on growth for domestic IT firms.

At a company level, Calendar 2023 revenue estimates for top clients of TechM, Wipro Ltd & L&TMindtree have been downgraded by 1-2 per cent, but that for Infosys, Coforge and HCL Technologies have been revised upwards by 2 per cent each, it said.

At an aggregate level, 2023 revenue estimates for top clients of IT firms have not seen any meaningful changes YTD, with only a 20 bps moderation to CY23 revenue growth, Jefferies said. That said, it noted that concerns around profitability have persisted and aggregate margin and PAT estimates for 2023 have been downgraded by 50 basis points and 4 per cent, respectively.

To be sure, the top-10 clients constitute 19-36 per cent of revenues for Indian IT firms, and have been an important growth driver for Indian IT firms during 9MFY23.

The aggregate revenue growth of top clients has a strong 84 per cent correlation with aggregate revenue growth of Jefferies' covered IT firms, the brokerage said.

 

Jefferies said while macro expectations for 2023 seem to have improved year-to-date, evident from upward revision in GDP estimates of the US, EU and the UK, the corresponding impact does not seem to have reflected into the 2023 outlook of top clients of Indian IT firms.

"Unless the improvement in macro expectations flows into improvement in expectations of revenues of top-clients, IT firms could see pressures on growth in FY24," it said.

Jefferies said  Wipro and LTIMindtree are at a greater risk of negative surprises on FY24 growth,

as consensus expects limited deceleration in their revenue growth, but expects a larger deceleration in the growth of their top clients.

"Infosys and TCS appear better placed on this front & the outlook of their clients seems to be improving as well. HCL Tech also looks well positioned as consensus expects HCL Tech's clients to see growth acceleration in FY24. TechM's expectations of growth moderation seem to be in sync with those of its clients, suggesting limited risk to FY24 growth," Jefferies said.

Meanwhile, Jefferies said there could some risks to Coforge's consensus expectations as its expected

revenue growth moderation in FY24 is lower than the growth moderation expected for its top clients.

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