Demand slowdown to weigh on IT services firms’ Q1 show

Industry analysts and brokerages have forecast revenues of most companies to either stay flat or decline in the first quarter of FY24.

In a note to investors on 29 June, ICICI Securities projected Tata Consultancy Services (TCS), the country’s top IT services company, to post a dollar revenue increase of 0.2% in constant currency on a sequential basis. Infosys, the second-largest, is projected to grow 0.8%. While HCL Technologies’ revenue is forecast to remain flat, Wipro and Tech Mahindra’s quarterly revenues are projected to fall 1.6% and 2.4%, respectively.

TCS and HCL will kick off the June quarter earnings season on 12 July. Wipro is set to declare its results on 13 July, while Infosys will announce its earnings on 20 July.

A second investor note by JP Morgan on 14 June projected TCS and Infosys’ revenue to remain flat in the June quarter, while HCL Technologies will grow 1.1% in constant currency. Revenues at Wipro and Tech Mahindra may fall 2% and 1%, respectively.

Elara Capital, meanwhile, said on 22 June that “softness in consulting revenue” and “small deal sales” are likely to lead Indian IT services firms towards a weak June quarter.

While TCS doesn’t offer any guidance for the year forward, Infosys announced revenue growth guidance of 4-7% in constant currency for FY24.

Wipro, which only gives quarterly guidance, expects June quarter revenue to fall by 1-3%, while HCL Technologies announced revenue growth guidance of 6-8% for the year.

The Indian tech sector, including IT services, was projected to touch $245 billion in revenue in FY23, as per Nasscom’s Strategic Review 2023.

In his investor note, Ankur Rudra, head of APAC telecoms and India TMT research at JP Morgan, said project delays and cancellations are likely to persist in the June and September quarters, thus leading to a weak phase ahead. “Increased competition for a smaller pie could trigger falling win-rates, pricing and deteriorating deal terms. Paused projects may have limited visibility of restarting and signs of demand recovery over the next six to nine months could be low, potentially driving 2H (FY24) growth expectations lower — and FY24 industry growth to sub 5% y-o-y levels from our previous 4-7% post 4Q (FY23) results,” he said.

JP Morgan downgraded the sector to rate every company as ‘underweight’. Rudra said he expects “every IT services firm to disappoint street expectations in 1Q and current 2HFY24 growth expectations.”

Omkar Tanksale, senior research analyst at Axis Securities, also expects weakness in the sector to persist at least until the September quarter. He added that one sign of resilience that investors may note is stability in operating margins.

In terms of companies that are expected to post weak results, Tanksale said, “Wipro and Infosys are likely to post weak figures this quarter. Infosys typically increases its revenue projection as the quarters progress, which may see the company eventually perform better later this year — but, the June quarter is likely to be a struggle.”

He said Tech Mahindra is likely to see a “valuation comfort” or a reduction in its price to earnings (P/E) ratio in the June quarter. However, he projected HCL Technologies, and mid-cap firms such as Coforge and Persistent Systems, to project better revenue growth than the industry average.

Apurva Prasad, vice-president of institutional research at HDFC Securities, said in an investor note on 29 May that issues contributing to weakness in the sector include “cuts in discretionary spending, delay in decision making, slower deal ramp-up, (and) change in the propensity for price increases and volume discounts.”

The first quarter brought growth for three of India’s top four IT firms, barring Wipro, in the past two fiscals. TCS’ Q1FY23 revenue grew 1.3% sequentially to $6.78 billion, while Infosys and HCL’s revenue for the same period grew 5.5% and 2.7% sequentially in constant currency to $4.44 billion and $3.03 billion, respectively. Wipro’s June quarter revenue declined 0.9% sequentially to $2.72 billion.

Senior industry executives have also offered similar projections. At the 28th annual general meeting of TCS on 29 June, company chairman N Chandrasekaran said that he expects a “downside risk” in the global economic outlook of the current calendar year.

“In nearby quarters, there will be volatility in different markets on customer spending — especially in discretionary projects. This will go across sectors — for instance, if consumer consumption is going down in a certain market, the retail industry companies in that market will conserve cash. These will play out in the immediate months,” Chandrasekaran said, while answering shareholder questions.

He further added that the temporary weakness in demand is expected due to companies calibrating their tech spending amid the ongoing global economic uncertainty, and does not necessarily reflect on the company itself.

Debashis Chatterjee, managing director and chief executive of large-cap IT services firm LTIMindtree, told Mint on 22 June that one reason behind the ‘softness’ expected during the quarter is due to a change in the nature of deals being signed in the industry at the moment.

“A year ago, most deals were transformation contracts trying to reimagine business models with digital transformation. However, looking at the pipeline now, the deals are mostly efforts to increase efficiency and save on cost by companies. The shift is evident, and the narrative in tech spending has therefore changed. The impact is because these efficiency-focused deals are typically longer-tenured — of five years or so. While that is good, they also take more time to be closed and billed, since they involve transition of companies and teams, vendor consolidation and more,” he said.

Updated: 03 Jul 2023, 12:01 AM IST