Leading Indian IT companies reported subdued sequential growth in Q2 due to a persistent economic overhang

Market observers anticipate large Indian IT services businesses to post “muted” sequential results in a historically robust second quarter as macroeconomic problems continue to have an impact on global discretionary expenditure.

Tata Consultancy Services (TCS), Infosys, and HCL Technologies are all expected to release their financial results on October 11, making this the big earnings week for software giants. The Q2FY24 results from Wipro will be released the following week, on October 18.

Analysts following the industry are preparing for a muted sequential performance by the big IT-pack, stating that the Q1’s malaise is expected to endure with no appreciable indications of improvement or worse, dispelling any expectations of a rapid turnaround.

ICICI Securities said in a note that they anticipate Q2FY24, although being the seasonally strongest, to continue to show modest sequential growth, with quarter-over-quarter CC (constant currency) growth ranging from -1 (Tech Mahindra) to +1.9 (HCLTech) among the top-five enterprises.

Nevertheless, certain mid-tier IT companies could do better, exhibiting greater growths.

Although there is a general agreement that demand would pick up in the second half of FY24, ICICI Securities anticipates that it will remain subdued owing to challenging macroeconomic conditions and leaky base business countering significant deal ramp-ups, with the exception of HCL due to product business and Verizon deal ramp-up.

Large Indian IT companies have benefited from the current quarter’s stable management, healthy profitability, and effective execution. TCS, Infosys, and HCLTech, the group, have announced many sizable transactions.

We reduced our EPS forecasts for the majority of our firms as a result of… Weaker-than-anticipated Q2FY24 projections, ongoing pressure on discretionary spending due to difficult economy, and… further cost-cutting in the IT sector, particularly cloud optimization,” it said.

In its earnings preview, Motilal Oswal Financial Services said that the IT services sector’s growth is predicted to remain poor in Q2 FY24 as macroeconomic uncertainty continues to have a negative impact on discretionary expenditure.

Even though Q2 is typically a strong season for the sector, the slowdown in project-based business is anticipated to hinder overall industry development, it added. “The industry has witnessed an uptick in order inflow over the past two months with a focus on cost efficiency.”

For the period of July to September, it projected median revenue growth for the IT Services coverage universe of 1.5% quarter-over-quarter and 5.7% year-over-year, adding that this growth rate is “among the slowest observed over the last decade” despite a minimal impact from foreign exchange fluctuations.

“However, a focus on cost-control (led by deferrals in wage hikes) measures should lead to margin improvement in 2Q, and help the industry deliver 3.7 per cent/4.1 per cent QoQ growth in EBIT/PAT (earnings before interest and tax/profit after tax), respectively,” it said.

In the face of rising inflation and decreased consumer spending, industries including banking, financial services and insurance (BFSI), retail, high technology, and communication continue to show symptoms of weakening.

Deal elements focusing on these crucial areas have gained pace as spending patterns change toward cost-cutting and efficiency-focused efforts, boosting overall growth.

However, expenditure on revolutionary efforts and unimportant multi-year projects is being restricted due to the deteriorating macroeconomic circumstances, according to Motilal Oswal.

Sharekhan (by BNP Paribas), which had a similar outlook, said that “We expect q-o-q constant currency revenue growth of 1.5 to 4.4 percent for tier-2 IT companies and -0.4 to 1.1 percent for tier-1 Indian IT service companies.”

Sharekhan claims that strong deal bookings, including many mega and big acquisitions including cost optimization and consolidation, should assist Tier 1 company normalization in H2 and create the stage for a stronger FY2025.