IT firms, set to post their fourth-quarter results, are expected to see muted revenue growth due to macro-driven headwinds. Demand outlook too is likely to be subdued due to cuts in BFSI tech spending and delay in discretionary spending. However, margins are expected to improve as supply pressures ease.
The earnings season follows a rocky quarter marked by worries about the effect of global slowdown. Major IT firms had posted healthy results but remained cautiously optimistic about the macro environment.
Brokerage firm Kotak Institutional Equities forecasts quarter-on-quarter (QoQ) revenue growth, ranging from a 2.1 per cent decline to a 2.3 per cent growth, across its coverage universe. “Growth will be impacted by usual seasonality in the March quarter, slowdown in discretionary spends, as companies focus more on costs and RoI, and deterioration in demand caused by macro uncertainties in impacted verticals of mortgages, hi-tech, and parts of retail and Telecom,” it noted in a report.
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Motilal Oswal expects its IT services coverage universe to deliver a median revenue growth of 0.8 per cent QoQ and 9.2 per cent YoY in constant currency (CC) terms in the fourth quarter. Profit after Tax(PAT) is expected to grow 3 per cent QoQ and EBIT (earnings before interest and taxes) is expected to grow 1.2 per cent, due to weak topline growth.
“Tier-I companies’ revenues should grow, albeit modestly, despite weak macro, with Tech Mahindra being the only exception. LTI Mindtree will lead with revenue growth of 1.6 per cent QoQ CC, followed by TCS at 0.9 per cent. Revenue growth for Infosys, HCL Tech, and Wipro is likely to remain weak at 0.6 per cent, 0.6 per cent, 0.5 per cent QoQ respectively,” it added.
Revenue growth
On revenue growth outlook, brokerages expect it to be modest. “We expect modest revenue growth guidance for FY2024 across companies that may not be considered conservative due to elevated risks to growth and likely back-ended growth trajectory,” Kotak noted.
“We expect Infosys to guide for 5-7 per cent revenue growth. HCL Tech can guide 5-7 per cent growth for services and 4-6 per cent overall. We expect Wipro to guide for revenue decline of 1 per cent to growth of 1 per cent for 1QFY24,” the note read.
Margins, however, are expected to improve in Q4. Emkay Global noted that Q4 margins will see some impact from growth moderation, especially for the Tier-I pack. However, easing supply pressure, cooling attrition, and improvements in utilisation should aid margins in Q4.
“Tier-I companies should post flat margins, with HCLT and LTIM being the exceptions. The Tier-II pack will post a wider range of flat to 200bp QoQ,” it added.
For the fiscal year, Crisil expects deeper falls. It noted that the IT services sector will see revenue growth decline by 700-900 basis points (bps) to 10-12 per cent in fiscal 2024 amid global macroeconomic and financial sector headwinds in key markets. It also predicts for operating profitability to see a modest improvement of 50-60 bps to 23 per cent in fiscal 2024, as IT service firms cut back on new hiring and rein in employee costs.
Demand Outlook
Brokerages expect IT firms’ demand outlook to be toned down due to the banking crisis in US and Kotak in its note said that the banking crisis in US regional banks and European banks can induce greater caution and impact overall tech spending by banking clients.
However, it’s been said that IT firms do not have significant exposure to regional banks. “Though the Indian IT services firms do not have meaningful exposure to the affected US regional banks, fears of a banking crisis is expected to impact near-term IT spending by banks,” Emkay Global said.
Apart from BFSI, demand from other verticals like hi-tech, manufacturing and retail are also muted in Q4. While the discretionary spending cuts will have an effect, opportunities can be seen in vendor consolidation and cost-takeout deals, brokerages noted.
