Infosys Technologies Ltd., India’s second-largest IT services company, is likely to report its slowest growth ever based on the current guidance of 1-2.5%, data sourced from brokerage firm BNP Paribas shows.
For the country’s fourth-largest IT services provider Wipro, growth numbers are down to their FY99 levels.
For Tata Consultancy Services (TCS), India’s No.1 software services exporter, and No.3 HCLTech, the growth this year will be the slowest since the pandemic. TCS had reported 0.8% revenue decline (in cc terms) in FY21 while HCLTech had logged just 1.1% growth–the lowest for both companies.
The industry is seeing a freeze on technology spending over concerns of a recession and a tough macroeconomic situation, which is expected to only worsen due to the West Asia conflict.
“Some of the companies do risk posting their worst growth ever in 2024,” Peter Bender-Samuel, CEO of consultancy firm Everest Group, told ET.
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Bender-Samuel said he expects the first half of the year to be tough. This is driven by two factors, he said. The first is that large enterprises need to absorb the huge investments they have made post-Covid in digital technology. “The pullback was going to happen regardless of the economic cycle,” he said.
ETtechThe second, Bender-Samuel said, is that the macroeconomic situation is difficult with a likely recession next year. “If, in fact, this recession does land, it will further increase the pullback that we have been experiencing this year,” he said.
One of the concerns weighing down revenue growth is the nature of deals that are coming through for these companies. For instance, several IT firms have announced deal wins in the last two quarters. However, analysts point to the disconnect between deal wins and revenue, as well as the quality of revenue. A key concern here is that a larger share of “pass through” components in deals, where IT vendors take ownership of customer assets or software, is seen as negative for long-term revenue growth, as there is little value addition from the vendor.
According to a Q2 results analysis by JM financials, normalised growth of Infosys was merely 0.5% during the quarter, if one excluded the higher pass-through revenue (about 1.5%) and one-timers (0.3%). This is despite the company reporting 2.3% constant currency growth sequentially.
Pass-through revenue is one-time revenue booked by the IT companies.
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“These non-recurring revenues possibly explain the guidance cut (upper end lowered by 1 percentage point) despite a seemingly benign ask rate,” said the report.
Ravi Menon, research analyst at Macquarie Capital, said Infosys is the only firm that has a larger share of pass-through revenue as of now, with pass-through being 7.3% of revenue as of 2QFY24 (vs 1.8% of revenue in 2QFY20 and 5.6% of revenue in 2QFY23).
“TCS has just 0.8% of its revenue from pass-through costs, and while this might increase to around 2% of revenue next quarter due to the BSNL deal, we expect that to be temporary,” said Menon. “HCLTech also has a pass-through revenue of just 1.5% as of 2QFY24. We do not expect a big change in the pass-through costs for TCS and HCLTech.”
Bender-Samuel, however, said that the underlying momentum of the move to digital technology will create a modest bounce back in the third and fourth quarters of 2024 (Q2-Q3 of fiscal 2025).
“Tech services industry is likely to grow at 2.5-3.5% next year,” he said. “With much more focus on cost savings over the more profitable new build. The relative cost advantage the large Indian firms have enjoyed for the last 30 years is significantly reduced but not eliminated completely.”
According to Bender-Samuel, the large Indian firms should be able to grow a little faster than the overall market and achieve growth rates of 3-5%, with much of the growth coming in the second half of the year.
