Indian IT firms may see muted Q4 numbers, outlook remains subdued
Indian IT companies are expected to put in a modest performance for the fourth quarter of FY23 given the macro-economic challenges and outlook for FY24 remains muted.
The Indian Information Technology (IT) sector is expected to register a muted performance for the last quarter of FY 2022-23, and the outlook is expected to be subdued given the tougher macro-economic environment in its key markets of North America and Western Europe.
The earnings season of the Indian IT industry will begin with Tata Consultancy Services (TCS), which will announce its fourth-quarter results on April 12, followed by Infosys on April 13.
According to industry body NASSCOM, the sector, which is projected to close FY23 with export revenue of $194 billion, recording a growth of 9.4% when compared to FY22, is likely to face further headwinds in the current fiscal.
The biggest challenge comes from the financial services sector due to the banking crisis in the US and Europe, which has cast a cloud on the Indian IT industry. The crisis at the Silicon Valley Bank and Credit Suisse has also brought a lot of uncertainty for the Indian IT sector.
The banking and financial services and insurance (BFSI) sector is the largest revenue generator for the Indian IT industry, and any negative news on the sector has its own implications.
Brokerage firm Kotak Institutional Equities, in a note on fourth-quarter results of Indian IT companies, said, “The QoQ revenue growth in Q4 FY23 will likely be muted as macro-driven headwinds add to usual March market seasonality. The FY 2024 estimate revenue growth outlook is likely to be modest.”
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According to Kotak, the growth of the top-tier Indian IT companies will be impacted due to three reasons—the usual seasonality in the March quarter, slowdown in discretionary spends, and deterioration in demand caused by macro uncertainties.
Another brokerage house, Motilal Oswal, in its note said, “While the BFSI sector has been resilient for the last few quarters, recent industry developments have added to caution on its tech spending. Though Indian IT services firms do not have meaningful exposure to the affected US regional banks, fears of a banking crisis could impact near-term IT spending by banks.”
These developments could mean a couple of things for the Indian IT industry where the demand outlook for the first quarter of the current fiscal is expected to be muted as most of the clients have taken a cautious approach to spending. Secondly, this gives rise to the availability of large cost take out deals in the market, i.e., those functions where companies are keen to outsource to lower their costs, and lastly, there is a possibility of a vendor consolidation as companies that provide the contract look to reduce their spending.
However, the present situation has one positive bearing for the Indian IT industry, i.e., on the operating profit margins or EBIT (earnings before interest and taxes) of the companies as the expectation is that there would be no downward slide. This is primarily because of the expected lower attrition rate of employees and the resultant lesser pressure on wages.
As Kotak Institutional Equities said, “Sharp decline in attrition has greatly reduced margin headwinds from war for talent. Higher travel and muted growth are incremental headwinds that can be offset by a range of operational efficiencies.”
Leading Indian IT companies like Tata Consultancy Services (TCS), Infosys, Wipro, and HCL Technologies have been operating on a lowered operating margin band of 25% and below. It is most likely that it will stay in that range.
ICICI Securities, in its note on Infosys, said, “We model 21.5% EBIT margin, flat QoQ in Q4 FY23, and 21.2% in FY23, in line with management commentary of achieving margins near the lower end of guidance of 21-22%.”
According to the brokerage house,' revenue growth will be flattish for the fourth quarter of FY23.
Among the top-tier Indian IT companies, TCS is expected to register 1% QoQ growth in revenue for the fourth quarter of FY23, while others like Infosys, Wipro, and HCL Technologies will see flattish or a marginal decline.
Amidst this subdued outlook for the Indian IT services companies, the future is certainly not so downcast going by the projections of Gartner, which has forecasted worldwide IT spending to grow 5.5% to touch a total of $4.6 trillion in 2023.
“Macroeconomic headwinds are not slowing digital transformation,” said John-David Lovelock, VP Analyst at Gartner. “IT spending will remain strong, even as many countries are projected to have near-flat gross domestic product (GDP) growth and high inflation in 2023. Prioritisation will be critical as CIOs look to optimise spend while using digital technology to transform the company’s value proposition, revenue, and client interactions,” he added.
In particular, the IT services segment is expected to see a 9.1% increase in spending for 2023 at $1.36 trillion as compared to $1.25 trillion in 2022.
Edited by Megha Reddy