Q2 results preview: Indian IT services companies to show modest revenue growth
The expectations from the Indian IT services companies are not high for the second quarter of the current fiscal as revenue growth will be modest and without much change in profit margins.
The three-month period between July and September is traditionally considered to be the strongest quarter for the Indian information technology (IT) services industry but not this year. Several projections indicate there would be flattish growth in revenues with profit margins just holding steady.
Global macroeconomic conditions leading to an uncertain demand environment from key markets like the US and Europe have resulted in a not-so-bright forecast for the second quarter performance for large Indian IT services companies like TCS, Infosys, HCLTech, and Wipro.
TCS will release its Q2 FY24 results on October 11 followed by and HCLTech on October 12. Wipro’s results will be announced on October 18.
“Our recent interactions with IT firms and Accenture's tepid guidance suggest that demand uncertainty persists and a recovery is still not in sight,” brokerage house Jefferies, in its note on Q2 results preview, said.
Jefferies expects the growth for the Indian IT services companies to be around 0.5% on a quarter-on-quarter basis in constant currency terms.
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Overall the expectation is that companies would grow their revenues between -1% and +1%.
“The big news is that not much has changed in the past few months. Most of the demand indicators are trailing 10-15% below levels at the beginning of the year and only slightly better than the July lows; the supply-side factors remain favourable, supporting operational resilience despite soft growth,” HDFC Securities in its note said.
While the slowdown in revenue growth rate in the second quarter is expected, the duration of this lull is uncertain.
Nomura, a brokerage house in its note said, “We expect the continued weakness of India’s IT services companies to weigh on the sector’s 2QFY24F and FY24F revenue growth outlook.”
The only positive has been some of the large Indian IT companies like TCS and Infosys announcing large deal wins during this period and this should bring a certain amount of confidence for the industry.
As HDFC Securities noted, “deal bookings in the sector have been robust, with several mega deals centring around cost optimisation and consolidation.”
The other big focus during the second quarter results will be on the operating profit margins of the companies. During the second quarter, companies dole out salary hikes—a factor that affects margins.
“We expect margins to be flattish on an aggregate basis for our coverage universe, with tepid growth offering limited scope for margin expansion,” Jefferies noted.
This time, companies have deferred salary hikes, which gives them the cushion of maintaining their margins. In addition, companies are not faced with the pressure of paying higher compensation to new hires as the demand for talent has reduced leading to an increased supply of human capital.
Brokerage houses say that, at the most, there would be a 20-40 basis points increase in margins for many companies driven by higher utilisation and operational efficiencies.
“Some saving graces for the industry will continue, in our view, such as easing supply side challenges through falling attrition and salary hikes returning to usual levels compared to the huge spike seen in FY23,” Nomura noted.
The present environment could also lead to certain divergence in the growth rate of the large or Tier I IT companies and the mid-tier firms. Expectations are that the top-tier companies would grow in the range of -1% to +1% while for the mid-tier, it is likely to be in the range between 0.5% and 2.5%.
Given this backdrop, the markets will be keenly watching the commentary by the Indian IT companies following their performance for the second quarter.
“Focus would be on commentary around the demand environment and any signs of improvement or expectations of recovery in 2HFY24. Also, commentary around generative AI would be of interest,” Jefferies noted.
“Near-term stock performance will be driven by commentary on demand moderation bottoming out. Still, the sector should compound in low teens over the medium term. Given the modest near-term outlook, valuations are a tad rich and are poised for time correction,” IIFL Securities, in its note, said.
It is most likely that the growth rate for Indian companies will end up below 10% for the current fiscal i.e, FY24.
“Given the weak 1HFY24, we see companies narrowing down their FY24 revenue guidance to lower end,” said IIFL Securities.
The only positive is that the industry itself is set for a reset with the change in priority on technology spending and there would be greater thrust on platforms like AI. This is a segment where Indian IT companies have already made their investments and continue to do so.
“We uphold our view that long-term growth rates for the Indian IT sector have reset to a level higher than pre-Covid, as organisations have realised and accelerated the role of technology for survival and growth,” IIFL Securities said.
Edited by Affirunisa Kankudti
