We see double-digit growth possible in IT sector over next three to five years: Ravi Menon, Macquarie

“We do not think that this is a sector wide issue and we do not see a significant worry for long-term investors. We think that this is a great opportunity with digital transformation,” says Ravi Menon, Macquarie.

If I scan through your latest note, your take on the current view is that the macros are great and this is just a seasonality which is impacting the Indian IT sector. Why is that?
We do not think that this is a sector wide issue and we do not see a significant worry for long-term investors. We think that this is a great opportunity with digital transformation. We see double-digit growth being possible over the next three to five years. Yes, this quarter has come in softer than expected, especially for Infosys, even for TCS. But if you look at TCS, the absolute revenue that they have had, incremental revenue, which is really a function of the pipeline that is a good indicator of the demand. This year, they have added exactly the same in constant currency terms as they did last year, so that tells you the demand environment has not really changed. This is despite the macro worries throughout all of last year in the US. Now, this particular quarter, clients have taken a knee-jerk reaction, we think, because of heightened uncertainty that happened with the SVB collapse and also in Europe we have seen there were concerns that a large bank could fail.So, with all that people have just put a pause on capex. But we think that will return. It is just a matter of time, maybe a few months later, we should see that come back. And structurally, we think we are on good growth trajectory.

I go back to that very basic fact, which is that Indian IT companies, they will continue to grow. But it is the rate what we are discussing and debating. One side I see a huge order book which both TCS and Infosys have reported. I expect the same from HCL Tech and even Wipro. So, my question is that if the order books are strong, then why is there a ramp down? I mean, they both do not coexist. If you are getting order, that means you see visibility. If there is visibility, why is that there no growth?
If you look at TCS, it has grown. Infy has seen a decline. And honestly, we are a bit puzzled by that because typically you see about 95-96% of your existing book of business should just roll over. So, even if there are delayed project starts, it does not really explain a decline. So, you are right there and we do not really have the answers for that.
When there is uncertainty, clients react like that but that has not changed their cost structure one bit. You just put that on hold and you might save cash for the next month.

We see a lot of deals in the market which are structural cost takeout and these mega deals that are out of the market for the first time going into a US recession

Indian IT vendors are strategic vendors who are well-positioned to win these and that is why we are confident that growth momentum will continue.

You might have one more or two more soft quarters at worst, but I think beyond that we should see growth. And we are definitely in the growth phase after we have seen pre-COVID. Post-COVID, growth rates are significantly higher and therefore we believe that a higher multiple is also deserved post-COVID.