New Delhi: Large Indian IT services companies are expected to report “muted” sequential show in a traditionally strong second quarter, as macroeconomic challenges continue to weigh on global discretionary spending, say market watchers.
The big earnings week for tech heavyweights is up ahead, with Tata Consultancy Services (TCS) scheduled to announce its results October 11, and both Infosys and HCL Technologies October 12. Wipro is slated to declare its Q2FY24 results next week, October 18.
Analysts tracking the sector are bracing for a subdued sequential performance by the large IT-pack saying weakness seen in Q1 is likely to persist with no meaningful signs of recovery or deterioration, thus dashing any hopes of a quick turnaround.
“We expect Q2FY24, though seasonally strongest, to remain weak from a sequential growth perspective with quarter-on-quarter CC (constant currency) growth varying from -1 per cent (Tech Mahindra) to +1.9 per cent (HCLTech) among the top-five firms,” ICICI Securities said in a note.
That said, some of the mid-tier IT firms may fare better, delivering better growths.
Despite broad consensus view of demand pick-up in second half of FY24, ICICI Securities expects it to remain muted (except for HCL due to product business and Verizon deal ramp-up) amid tough macro and leaking base business offsetting large deal ramp-ups.
Current quarter has played to the strengths of large-sized Indian IT firms with stable management, margins and strong execution. The trio – TCS, Infosys and HCLTech, have announced multiple large deals.
“We cut our EPS estimates for most of our companies on the back of… Weaker-than-expected Q2FY24 estimates, continued pressure in discretionary spends given challenging macro, and… Continued rationalisation of tech spending, including cloud optimisation,” it explained.
Motilal Oswal Financial Services, in its earnings preview, said the growth of the IT services industry is expected to remain weak in Q2 FY24, as macroeconomic uncertainty continues to weigh on discretionary spending.
“While the industry has witnessed an uptick in order inflow over the past two months with a focus on cost efficiency, the slowdown in project-based business is expected to hamper overall industry growth, even though Q2 is traditionally a robust season for the sector,” it said.
For its IT Services coverage universe, it predicted a median revenue growth of 1.5 per cent quarter-on-quarter and 5.7 per cent year-on-year for July-September period, and added this growth rate is “among the slowest observed over the last decade”, despite a marginal impact from foreign exchange fluctuations.
“However, a focus on cost-control (led by deferrals in wage hikes) measures should lead to margin improvement in 2Q, and help the industry deliver 3.7 per cent/4.1 per cent QoQ growth in EBIT/PAT (earnings before interest and tax/profit after tax), respectively,” it said.
Sectors such as banking, financial services and insurance (BFSI), retail, hi-tech, and communication continue to show signs of softness, in the face of increasing inflation and declining consumer spending.
With spending patterns shifting toward cost reduction and efficiency-focused initiatives, deal components targeting these essential areas have experienced increased momentum, supporting overall growth.
“However, the worsening macroeconomic conditions are tightening spending on transformational initiatives and non-critical multi-year projects,” Motilal Oswal said.
Echoing similar sentiments Sharekhan (by BNP Paribas) said “We expect q-o-q constant currency revenue growth of -0.4 to 1.1 per cent for tier-1 Indian IT service companies and 1.5 per cent to 4.4 per cent CC revenue growth for tier-2 IT companies”.
According to Sharekhan, robust deal bookings with several mega and large deals involving cost optimisation and consolidation could support H2 normalisation for Tier 1 companies and set the tone for improved FY2025.
PTI
