Weak macros, rising competition make market challenging for IT companies

HCLTech chief executive C Vijayakumar has said fiscal 2024 could be a “challenging year” for growth, according to a report by brokerage Kotak Institutional Equities.

“A subdued demand environment, which reduces operating leverage through growth, clients getting more aggressive on price, and (there is) heightened competition for large and mega deals constrain margin expansion efforts,” Vijayakumar said at a conference hosted by Kotak.

India’s third largest software company, however, indicated that the addressable growth opportunity is still large as double-digit growth is achievable over the next five years, as per a report by Kotak.

The company has guided for 6.5-8.5% growth in the IT services business, which will be aided by the ramp-up of mega deals signed in FY2023 in the financial services vertical, the Kotak report said, citing Vijayakumar.

Speaking at the same conference held in London, Kedar Shirali, vice president and global head of investor and analyst relations at Tata Consultancy Services (TCS), said the overall demand environment now is similar to March, which was impacted by an uncertain macroeconomic situation and the banking crisis in the US, with clients reprioritising tech spends.

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“While there is uncertainty in demand, things have not gone to the extreme. Order closures so far have been healthy,” the Kotak report quoted Shirali as saying.Clients are still willing to spend on long-term projects as the structural drivers for demand are intact. Clients are in the execution phase of cloud transformation and the leverage of new technologies will continue to power growth beyond the cloud journey, the report said.

There is a slowdown in large deals in the market as clients are reducing their discretionary spends in a high inflation environment that could be worsened due to an impending recession.

ET had earlier reported that India’s top four IT companies see nearly a 40% drop in large net client additions compared to last year as demand slows amid a weak macro environment. Top four IT majors added 80 large clients which are classified as deals in the $10 million to $100 million-plus range in the fiscal ending 2023 versus 132 clients in FY22, according to ET’s internal analysis.

In April, post fourth quarter results, Rajesh Gopinathan, outgoing CEO of TCS, India’s largest software exporter, had said the Q4 numbers were “definitely weaker than anticipated”. “It (North America) has turned out to be more negative or slower than what we had originally expected,” he had said.