TCS, Infosys, Wipro, HCL Tech, TechM: What Capgemini's soft Q3 suggests for domestic IT firms

Capgemini's September quarter results were soft,  as revenue fell 3.8 per cent sequentially and bookings were muted but in-line with market expectations. Its year-on-year (YoY) growth was also in line with most large Indian IT Services firms. Capgemini retained its YoY revenue growth guidance of 4–7 per cent on constant currency (CC) terms for Calendar 2023, along with margin expectations of 13–13.2 per cent.

"Capgemini is seeing signs of growth deceleration amid weak macros— in line with management outlook and guidance—similar to the environment faced by its global and larger Indian peers," said Nuvama Institutional Equities, adding that Capgemini's Q3 was modest quarter with a soft deal-flow.

It noted that Capgemini has a strong presence in Europe and that it is seeing strength but its exposure to US is primarily in the currently volatile segments of BFSI and Hi-tech, which are driving its weak performance and outlook for the geography.

"Despite a weak outlook for the US, the Capgemini management maintained revenue growth guidance due to resilient demand in Europe. We maintain a positive stance on the Indian IT Services sector," Nuvama said.

Capgemini in its earnings release said its performance in Q3 2023 was a prolongation of the trends observed since the start of the year, extending as expected the gradual slowdown seen in previous quarters.

The group posted revenues of 5,480 million euro in Q3, up 2.3 per cent at constant exchange rates. Organic growth, excluding the impacts of currency fluctuations and changes in group scope, was 2 per cent for the quarter. For the first nine months of the year, growth for Capgemini stood at 4.1 per cent on a reported basis and 6 per cent at constant exchange rates, while organic growth reached 5.5 per cent.

"In a macroeconomic context that remains challenging, clients are holding onto their digital transformation ambitions. They are increasingly focusing on projects with faster payback, such as those boosting operational efficiency, which in turn fuels steady growth of the Group’s innovative offers. The Group’s activities involving Data and Artificial Intelligence and those in Intelligent Industry were the fastest growing in Q3," Capgemini said.

Recently Cognizant cut its organic revenue guidance at the midpoint. The suggested a weaker than anticipated Q4 growth, baking in  a 2-4 per cent QoQ decline in dollar revenues. It talked of incremental discretionary spend weakness.

Nuvama argued sustainable strong demand for transformational and cost-takeout deals would  drive revenue growth for Indian IT firms over the next two–three years.

“Macro stability and improvement in discretionary spending are key to meeting our/consensus revenue growth estimates for FY25. Our pecking order is Infosys Ltd, Wipro Ltd , Tech Mahindra Ltd, HCL Technologies Ltd , LTIMindtree Ltd  and TCS, among Tier I companies,” Emkay Global said this week.

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