Indian IT services companies are expected to report softer revenue growth in Q1 FY 2024 due to weaker discretionary spending, delay in decision-making by clients leading to project deferrals and slower ramp-ups, and pockets of weakness by mortgage, retail, hi-tech, telcos, and increased caution by clients amid macro uncertainties. Though there have been deal activities, particularly in cost takeout and consolidation over the last few weeks valuation of IT stocks, particularly large companies, is not demanding as per the latest report by Emkay Global Financial Services.
As per the report, there has been a pocket of weakness especially, among clients in the banking and financial sector, retail, hi-tech, and telcos and increased caution by clients amid macro uncertainties. The report points out that there would be constant currency revenue growth of 1 to 2.3 per cent for tier-1 IT service companies and 1.6 to 3.4 per cent for mid-tier IT services companies. As per experts from Emkay Global, Infosys will retain its guidance of 4-7 per cent constant currency revenue growth. Similarly, HCL Technologies is also likely to retain its overall and services guidance of 6-8 per cent CC growth. As per Emkay, deal intake is likely to remain healthy for a few large IT services companies due to cost takeout and consolidation deals.
As per another report by Motilal Oswal, IT services companies will deliver a weak median revenue growth in an otherwise seasonally strong quarter. The report points out that the weakness in demand will continue in Q1FY24 with a significant hit on discretionary spending by clients. The report says that the margins of IT services companies will also see impacts from growth moderation and wage hikes. There would also be an easing of supply pressure, a reduction in attrition, and improving utilization, which will partially help offset the impact.
The Motilal report observes that clients continue to focus on cost and efficiency-driven projects while keeping the non-critical projects on hold. Though the deal pipeline for many IT services companies remains healthy, a weak macro environment will continue to impact revenue conversions, thereby creating near-term pressure on revenues. Clients in the BFSI, retail, hi-tech, and manufacturing continue to exhibit sluggish performance. The demand in the US has deteriorated due to increasing inflation and declining consumer spending. On the other hand, demand in Europe remains relatively stable, similar to the levels in 4Q FY23, and deal closures are progressing at a faster pace than in the US.
The Motilal report says that though the demand remains intact for selective verticals and service lines, there is a near-term weakness due to approval delays and heightened deal scrutiny. These factors may result in project deferrals and temporary pauses in project execution. Given the further deterioration in the demand environment in 1QFY24, no immediate recovery is expected and the recovery is expected to be more gradual in nature and should occur only in FY 2025.
The Motilal report further says that tier-1 IT services companies should post margins in the range of -140bp to +30bp. The report further states that considering the near-term softness in demand and elevated hiring last year, there is a possibility of muted hiring in 1Q FY24. At the same time Profit After Tax (PAT) will decline sequentially on muted revenue growth and wage hikes. As per the Motilal report, TCS remains best positioned to benefit from long-term structural tailwinds technology services and should see a relative pick-up in growth, aided by clients’ focus on cost optimization and efficiencies. Similarly, HCL Technologies will be one of the key beneficiaries of Cloud adoption at scale, given its expertise in Information Management Systems (IMS). Infosys is expected to be a key beneficiary due to an acceleration in IT spending in the medium term.
