IT firms may revise guidance upward in second half of FY24

Most industry experts and analysts expected large-cap IT service providers to report drops in revenue growth, driven mostly by the banking, financial services and insurance (BFSI) sector’s slowdown in the North American market. BFSI accounts for a major chunk of the revenue earned by this sector — for instance, it accounted for 86,127 crore out of Tata Consultancy Services (TCS)’s total revenue of 2.25 trillion, or over 38%.

In a press conference following the announcement of its FY23 annual report on 12 April, Rajesh Gopinathan, managing director and chief executive of TCS, expressed caution for FY24, stating that the uncertainty in North America may reflect across the industry.

TCS is India’s largest IT services firm, and is typically seen as a bellwether for the sector. While the firm doesn’t offer guidance, it missed analyst expectations for both quarterly and annual revenue earlier this month.

Infosys, the second-largest IT services firm, projected revenue growth guidance of between 4-7% for FY24 — a steep fall from its 16-16.5% growth guidance for FY23. While HCL Tech outpaced Infosys with a 6-8% growth guidance for FY24, its overall figure was also lower than its FY23 guidance of 13.5-14.5% revenue growth. Wipro, meanwhile, didn’t offer guidance for the full year, instead projecting a revenue decline of 1-3% for the ongoing (June) quarter. The company will offer further projections on a quarterly basis.

The midcap IT services sector, which accounts for companies with annual revenue of between 5,000 and 20,000 crore, fared considerably better than their larger peers, but still halved their FY24 revenue targets.

On 20 April, Cyient posted a 38.7% constant currency (CC) growth to 5,095.9 crore in consolidated services revenue, but in its post-earnings conference, guided for FY24 revenue growth of between 15-20%. Coforge, which announced its results on 27 April, posted 22.7% revenue growth to 8,014.6 crore for FY23, but guided for growth projection of 13-16% in FY24. Mphasis, which reported a 9.7% CC revenue growth to 13,840 crore in FY23, projected a drop of 186 basis points in earnings before interest and taxes (Ebit) margin for FY24 — down from the reported 17.11% in FY23. It didn’t offer revenue growth guidance.

The slowdown comes after a period of fast-tracked growth for the sector through the years of the pandemic, which saw IT service firms see a surge in demand for digital transformation, cyber security and other related deals from clients around the world.

However, as the pandemic receded, most service providers have seen their surge in revenue slow down to pre-pandemic levels, while additional employee costs and high attrition figures pressured their margins through all of 2022.

This was reflected in the BSE IT index that lists the top IT firms — in FY23, the index fell from a high of over 37,300 points at the start of the year, to around 27,100 points by July last year. The drop of over 27% persisted through the year, with the index closing at 28,479 points on March 31 — an overall consolidation of 23.7%, and only 5% up from its 52-week low. At market closing on April 28, BSE IT gained 1.04% to close at 27,503 points — up due to strong performance from midcaps, but only 4.5% up from its 52-week low of 26,314 points that it registered on April 17.

Industry analysts and stakeholders said that the revenue growth guidance reflects clear weaknesses, but also leaves the scope for revised growth open in the second half of the year. Kumar Rakesh, analyst, IT and auto at brokerage firm BNP Paribas, said, “In the March quarter, we saw most large and midcap companies report 1-2 percentage points below our expected quarterly revenue figures. Going forward, a revenue guidance revision could happen in the second half of this fiscal. Beyond the revenue number, if we look at the rest of the data and commentary, deal wins for most of the companies were quite progressed. Deal pipelines for many companies grew more than last year, which looks strong. If we look at this in context of the weak revenue growth guidance given by most firms, it seems that most of the industry’s clients and customers are cautious, but not in panic.”

Rakesh added that this implies that clients are not canceling their tech spending plans, but postponing them.

“If this holds true, then we’ll see some of these business opportunities return to the service providers as pent-up demand. We’d seen this in the first year of the pandemic as well, where we had two weak quarters leading up to September (in FY21), following which the pent-up demand led to very strong growth and accordingly aligned revisions to revenue growth as well. This year may not be of the same magnitude, but we may see a similar pattern in FY24 as well,” he said.

A senior industry official, who requested anonymity since he works with multiple leading IT service providers, said that boardroom consensus at most of the top IT services firms in India is that of caution largely due to the banking crash in North America in March. He added that the companies remain optimistic, driven by the number of deals that they have in hand, which were record highs for many companies. For instance, Wipro announced the second consecutive quarterly revenue record of $4.1 billion last week.

“We’ve heard consistently about record deal wins through FY23, but what we lack right now is clarity on the execution period of these deals. By virtue of this, it is likely that weakness in the sector will prevail for at least the next two quarters — if these deals were being executed and billed in the short term, they would have resulted in a more positive commentary,” said Akshara Bassi, research analyst, global cloud and servers market at market researcher, Counterpoint India.

Apurva Prasad, vice-president of institutional equity at brokerage firm, HDFC Securities, concurred, adding that the biggest challenge towards adding to revenue growth for most service providers are deal closures, which have gotten “more challenging”.

“Whether we see a better revenue guidance revision in FY24 will be a function of how some of the macroeconomic factors will play out. There is certainly a pent-up demand element within the existing delays in deal executions for the service providers. So, it’s not that all the revenue is lost, and some of it will naturally come back. It’s difficult to say if this demand will return early by the September quarter, or extend into the seasonally weak second half of the year to give scope for improved revenue guidances. But, the potential is there for such market corrections,” Prasad added.

Catch all the Technology News and Updates on Live Mint.
Download The Mint News App to get Daily Market Updates & Live Business News.

More
Less

For all the latest Technology News Click Here 

 For the latest news and updates, follow us on Google News

Read original article here

Denial of responsibility! TheDailyCheck is an automatic aggregator around the global media. All the content are available free on Internet. We have just arranged it in one platform for educational purpose only. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, all materials to their authors. If you are the owner of the content and do not want us to publish your materials on our website, please contact us by email – [email protected] The content will be deleted within 24 hours.