Q4 results preview: Indian IT companies to register modest growth
While expectations are low from leading Indian IT companies with regard to the fourth quarter performance, the focus will be on their guidance for FY25.
The earnings season is all set to begin for the Indian Information Technology (IT) industry starting with Tata Consultancy Services (TCS), the country’s largest IT services exporter, announcing its March quarter (Q4 of FY24) results on Friday. But expectations remain modest for the sector, according to brokerage houses.
The $245 billion Indian IT industry continues to face the challenge of an uncertain macroeconomic environment, especially in its key markets of North America and Europe. This has led to slowness in demand, and companies are now largely growing in single digits.
Given that the fourth quarter results mark the closure of the financial year, the focus of IT companies will be largely on their projections for the next fiscal.
Brokerage house JM Financial, in its note, said, “4QFY24 will likely see continuation of recent (soft) demand trends. Quarterly guidance by global peers already point to a weak start to the year.”
JM Financial observed that the latest financial results from Accenture did not really give any confidence as the company lowered its revenue forecast for FY24 citing uncertain economic environment. Accenture is generally considered as the bellwether for the global IT services industry.
At the same time, top Indian IT companies like TCS, , Wipro, and HCL Tech are expected to register a revenue growth of around one percent for the fourth quarter.
HDFC Securities, another brokerage house, in its note said, “For Q4FY24E, growth divergence continues and is expected to range from -1.3% to +1.3% QoQ (-7% to +6% in YoY terms) for tier-1 IT.”
It further noted that among tier one companies, TCS is expected to lead growth at 1.3% on a quarter-on-quarter basis, followed by Infosys and HCL Tech, and it will be a sequential decline for Wipro. In the mid-tier IT companies, the revenue growth is in the range of 0.3% to 4.2% QoQ.
This actually indicates that the Indian IT industry will record annual revenue growth of below 10% for FY24.
“IT services demand continues to struggle with constrained discretionary demand as enterprises remain uncertain about the macro-economic outlook,” said brokerage house BNP Paribas.
This has been the situation for the Indian IT services industry for little more than a year after witnessing strong digital demand in 2021 during the height of the Covid-19 pandemic. It has since tapered off leading to single digit growth for the industry.
However, leading Indian IT companies are expected to see some marginal improvement in the operating profit margins despite lower revenue growth largely due to better efficiencies.
“We expect EBIT margin to improve q-q for most of our coverage due to operating efficiencies,” BNP Paribas said.
The Indian IT services companies will end the fiscal year 2023-24 on a lowered revenue growth and this will have a bearing on the revenue guidance for FY25.
“A weak exit to FY24 and a still inconducive demand environment could temper initial FY25 guidance for most players,” said JM Financial.
According to HDFC Securities, growth is expected to bottom out in the fourth quarter of FY24 and recover gradually in FY25. “The slowdown in macro is still a baseline scenario, and lower discretionary spending and slower conversion from TCV to revenue is a feature and not a bug—at least in the near term—and deals will be focused on cost optimisation,” it said.
The first six months of FY25 is likely to be a slower period for the Indian IT industry and any positive indicators may most probably start from the second half of the fiscal.
As BNP Paribas said, “We think FY25 guidance will be a critical near-term catalyst, along with US macro-economic indicators in the coming months.”
Edited by Megha Reddy