Q1 IT preview: Weak macros signal dull quarter for IT, firms may narrow guidance

Infosys and HCLTech may also trim the upper end of their revenue guidance range for the ongoing fiscal 2024, and the recovery predicted by the IT companies for the second half of the fiscal year is likely to be subdued, they said.

The average of five analyst estimates collected by ET suggests Tata Consultancy Services, Infosys, HCLTech and Wipro to report a 0.35% increase quarter-on-quarter revenue for the quarter ended June 30, excluding changes in currency rates.

The three months ending June 30 is usually considered a strong quarter for the sector. TCS and HCLTech will kick off the quarterly results season for India Inc on July 12.

Overall, the weakness in demand for these companies would have continued in the first quarter of FY24, with clients focusing on cost and efficiency-driven projects while keeping the non-critical projects on hold, said research house Motilal Oswal.

“Though the deal pipeline remains healthy, weak macro will continue to impact revenue conversions, thereby creating near-term pressure on revenues,” analysts Mukul Garg, Pritesh Thakkar and Raj Bhanushali of Motilal Oswal said in a note Monday.

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Most of the analysts expect sentiment in the BFS sector, the biggest contributor to Indian IT’s revenue, to remain weak post the Silicon Valley Bank crisis.

“There is a fair probability that the upper end of revenue guidance provided by Infosys and HCLTech may be scaled back,” said brokerage Nirmal Bang in a report on Monday.

“The upper end of the 4-7% revenue growth guidance given for FY24 is dependent on Infosys winning some mega deals in FY24. While Infosys has won a fair number of deals in the quarter, we cannot classify them as mega deals,” the report said. Similarly, there is a “fair probability” that the 6-8% growth guidance of HCLTech may be revised down either after the first quarter or the first half of FY24, largely driven by lower demand from banking and financial services and also from likely pricing pressure, it said.

Motilal Oswal and Jefferies, too, said there was a risk of guidance moderation by Infosys for FY24.

Wipro is expected to post a revenue decline within the guided range of 1-3% for Q1, and project revenue to expand up to 2% for the September quarter, say analysts.

The $245 billion industry was in for a reality check last quarter. Demand decelerated for the first time in two years, but the companies were hoping for cost-cutting projects to make up for deal ramp-downs and cut in discretionary spending. Most analysts have now opined that the business environment and sentiments have hardly changed since March.

Last month, industry bellwether Accenture announced its March-May period results. The company’s revenue of $16.56 billion, up 3% from a year earlier, beat Street estimates, but it narrowed the revenue guidance for the ongoing fiscal year to 8-9% from 8-10% earlier due to lower-than-expected small-size deal wins.

Margins under pressure

Most companies will report flat or a slight decline in margins on a sequential basis due to impact of annual wage hikes and overall growth slowdown. However, easing supply pressure, cooling attrition and improvements in utilisation should help partially offset the impact.

ICICI Securities said the TCS will report a 90-basis-point (0.9-percentage-point) fall in margin sequentially and 50 bps improvement on year. “Margin headwinds (are due to) full-quarter wage hike impact and lower utilisation due to project cancellations and postponements,” it said. In case of Infosys, it pegged the sequential decline to be around 30 basis points on account of muted revenue growth and increased travel costs because of the leadership connect event done during the quarter.

TCS and Infosys have also called out weakness in their business environment during their annual general meetings last week, with clients focussing more on cost cutting-based deals instead of transformation and discretionary spends.

Fresh strategies under newly appointed heads at TCS and Cognizant, demand scenario of the BFS segment and large deal commentaries will be the other factors to watch out during the results.