IT firms are expected to see sluggish revenue growth in the first quarter of FY24 as intensified macro headwinds have likely impacted the demand from key industry verticals, added with a soft discretionary spending environment.
The earning season follows a lackluster Q4 FY23, where companies called out the softness in various areas, and some even saw postponement and cancellation of deals. Much like that, Q1 FY24, too, will see the same results, despite being a seasonally strong quarter.
Revenue growth
Kotak Institutional Equities in a note said, “June 2023 will see revenue declining for certain companies (Wipro and Tech Mahindra), flat for TCS and marginally growing for some (HCLT at 1 per cent and Infosys at 1 per cent q-o-q).” Weak discretionary spending across many verticals and especially in financial services, telecom and hi-tech, should contribute to weak trends, it added.
Similarly, ICICI Securities noted that due to a soft demand outlook with limited large deal ramp-ups during Q1, it expects the q-o-q revenue growth in constant currency terms for coverage companies to be in the range of -2.4 per cent (TechM) to +4 per cent (Happiest Minds). It also noted, “There is a higher level of scrutiny around each deal due to which, pipeline to conversion is taking longer than usual and in certain cases, order book to revenue conversion is also slow.”
Further, margins will likely decline 20-90 basis points sequentially or remain flat. However, on a y-o-y basis, margins will increase by a bit, according to Kotak. Operating leverage hit resulting from revenue decline and compensation revision for a few companies are the reasons for the decline. Typical levers such as utilisation rate and pyramid are difficult to utilise quickly in a low-growth environment, it noted. In terms of revenue growth guidance, companies would either retain or tighten.
Tech demand
However, in the near term, the situation may improve. Analysts at BNP Paribas noted, “We think technology demand should be resilient as Indian IT services firms prepare for a swift rebound in H2 FY24, helped by a ramp up of large cost optimisation deals and bottoming out of macroeconomic concerns. With a focus on cost takeout and efficiency deals, we think Indian IT firms, with strong value propositions and capabilities, should continue gaining market share.”
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Published on July 4, 2023
