Results time: Why IT companies are expected to log muted Q1 numbers
Indian IT services companies are expected to log a muted show in the June quarter amid continuing macro woes, say analysts. The recovery will also be gradual, they predict.
Wage hikes too are keeping margins under pressure, cuts in discretionary spends, and project delays are adding to the muted growth.
Some brokerages, in fact, have cautioned that pain will continue for the tech pack up ahead, as recovery is likely to be more gradual, only around Q4 FY24 or in FY25.
Tech companies to declare their results shortly
As tech companies head into Q1 earnings season this week, experts will also be keeping a close watch on any management commentary on the revision of the growth outlook for FY24, the spread of demand deterioration beyond BFSI (banking, financial services and insurance), hi-tech, telecom and retail verticals, net hiring, project ramp downs and pricing pressures, as key monitorables.
Tata Consultancy Services (TCS) and HCL Tech are scheduled to declare their results on July 12, followed by Wipro’s report card a day later (July 13). Infosys will announce its Q1 numbers on July 20, while LTIMindtree is slated to do so on July 17.
“Overall the weakness in demand should continue in Q1FY24 with a significant hit on discretionary spends. Clients continue to focus on cost and efficiency-driven projects, while keeping the non-critical projects on hold,” Motilal Oswal said in its note.
While the deal pipeline remains healthy, weak macro will continue to impact revenue conversions, creating near-term pressure on revenues.
Weak median revenue growth
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, it said, noting that on the other hand, demand in Europe is relatively stable, similar to the levels in 4QFY23, and deal closures are progressing at a faster pace than in the US.
“Our IT services coverage universe is expected to deliver a weak median revenue growth of 0.4 per cent QoQ and 5.3 per cent YoY in 1QFY24,” the brokerage said.
The demand remains intact for selective verticals and service lines, but 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 demand environment in 1QFY24, we do not anticipate a recovery in 2HFY24,” it said, adding, recovery is expected to be more gradual in nature and should occur only in FY25.
Recovery to be gradual
Analysts are of the view that margins will see an impact from wage hikes growth moderation, though easing attrition, and better utilisation may partially offset the impact.
Sharekhan (by BNP Paribas) expects a tepid Q1 owing to the spillover of a soft demand environment given the continuity of weak macros.
“We expect quarter-on-quarter constant currency (CC) revenue growth of -1.9 per cent to 1.2 per cent for Tier-1 companies and 0.7 -3 per cent (ex LTTS) for Tier-2 companies,” Sharekhan said.
The brokerage too believes recovery would be gradual and is likely to get pushed further into Q4FY24, given the uncertain macro environment and no signs of pick-up in tech spends in the near term.
The depreciation of the dollar against the Euro and pound is expected to provide cross-currency tailwinds and assist in marginally elevating the dollar reported revenues of the IT service companies.
Softer revenue growth in Q1
Emkay Global too sees softer revenue growth in Q1 on account of weaker discretionary spending, delay in decision-making and slower ramp-ups, pockets of weakness (BFS, retail, hi-tech, telcos) and increased caution by clients amid macro headwinds.
Any revision of FY24 revenue growth/margin guidance, demand trends in key verticals, deal intake in Q1 and pipeline, smaller deal flow and discretionary spends, pricing environment and deal mix shift towards cost takeouts and consolidation, will be key monitorables, it said.
The market will also await management take on demand trends cutting across geographies, as well as update on project delay, deferral, or cancellation due to macro uncertainties, hiring plan amid slowing growth and uncertain demand outlook.
(With inputs from agencies)