Indian IT services companies set for muted growth in Q3
Indian IT services companies are likely to see subdued numbers in the third quarter of FY24, but the focus will be on the management commentary for future outlook.
Indian IT services companies are expected to see subdued numbers in the third quarter of the current fiscal year due to macroeconomic conditions, but the focus will be on their future projections.
Traditionally, the period between October and December is considered a weak period for the sector due to the holiday season, and the expectation is that the growth rate during this quarter under the current circumstances is likely to be much more muted than usual.
Leading Indian IT services companies like Tata Consultancy Services (), , HCL Tech, and are expected to report under 1% growth on a quarter-on-quarter basis, and in some cases, it might be negative.
Brokerage house Jefferies said, “During 3Q FY24, we expect aggregate revenue growth for our coverage universe to remain muted at 0.8% QoQcc, given the seasonal impact of furloughs, which are deeper this year. While sequential growth has improved by 40bps vs 2Q, this is the slowest aggregate growth in the third quarter of any year in the past decade.”
This means the Indian IT services companies would end the current fiscal year in single digit growth rate. Interestingly, the growth rate for majority of the Indian IT companies are coming down from the level of 11-13% recorded during FY22/23.
Headwinds
Indian IT services companies are facing multiple headwinds, including an uncertain economic environment in key markets like the US and Western Europe, cutting down discretionary IT spending by their clients, rethinking digital investments, etc.
“India IT fundamentals have been weak over the past 12 months, led by the global macro uncertainty that drove cuts in discretionary tech spends, delays in client decision making, and pushed out ramp-ups in several deals. All these hurt the revenue growth of IT companies, and we expect the industry to clock sub 5% growth in FY24E,” said J.P. Morgan in its earnings preview note.
However, one positive factor for the Indian IT services companies has been the weaker rupee, which provides certain relief in terms of their profitability. This could actually mean that some of the companies might be able to hold onto their operating profit margins during the quarter.
At the same time, the stock prices of leading Indian IT companies have risen considerably over the past one year, and this is unlikely to be sustained in the near future.
Brokerage house HSBC noted that IT stocks are likely heading towards a prolonged period of consolidation and range-bound returns.
“This is similar to FY14-18 when the IT index offered mid-single digit CAGR returns,” HSBC said.
In today’s environment, there are very few signs of a demand stimulus for Indian IT companies, especially from key segments like banking, financial services, and insurance (BFSI) and technology, media, and telecommunications (TMT). These segments are holding back on their IT spending, which in turn is impacting the growth prospects of the companies.
This has also led to a lesser number of large deals in the market.
As per JP Morgan, “Over the last year, there has been a realisation among enterprises that they overspent on transformation projects and needed to rationalise. A majority of the deals won by IT companies have been in areas of cost takeouts and optimisation rather than digital transformation.”
Future outlook
Now, the key focus will be on the management commentary of Indian IT services companies when they announce their Q3 numbers. It should provide an indication of how they see their future growth prospects.
According to Jefferies, the primary focus will be on commentary on the demand environment and 2024 IT budgets. Besides, there will also be some company-specific issues such as strategy changes at TCS, and senior-level leadership churn at Infosys and Wipro.
Jefferies noted, “We do not expect changes in FY24 guidance from any of our companies.”
Now, the question remains: how long the present environment is going to persist? The current financial year is likely to end on a subdued note, but there could be some recovery in FY 2024-25.
“We believe FY25e will see a pick-up in growth as some of the excessive tech budget cuts in 2023/FY24 will unwind. We are looking at revenue growth recovering to 6% in FY25,” said HSBC.
However, there is some silver lining going to a survey of CIOs based in the US who have indicated higher IT spending in 2024. Technology investment platform Recognize in its latest survey of CIOs noted that 73% of them foresee an increase in their IT budgets in 2024, while 15% expect no change, and 12% predict a reduction.
The top priorities for the CIOs during this year are cyber/data security, closely followed by artificial intelligence, and lastly cloud migration.
Now, it remains to be seen which way the winds will blow for the Indian IT companies and how they are going to weather the storm.
Edited by Megha Reddy