Results preview: IT companies brace for Q2 setback on muted growth

The July-September quarter, the second in the financial year, is always a strong one for Indian IT services.

However, the second quarter of FY24 is expected to be muted, and, with that, the hope of double-digit growth is now being pushed to FY25.

However, analysts are expecting the momentum in the closure of record total contract values (TCVs) will continue, as has been the case over the last two quarters.

Both in Q4FY23 and Q1FY24, the TCVs signed by most of the large and midcap IT services firms have been at the higher end, but that has not resulted in revenue growth.

For Q2FY24, Kotak Institutional Equities expects revenue growth to decelerate to -2.9 to -3.2 per cent on a year-on-year comparison for Tier-I players.

“We expect a -0.6 to -0.8 per cent sequential constant currency revenue growth rate for Tier-I IT— weak for a seasonally strong quarter,” said Kawaljeet Saluja, Sathiskumar S, and Vamshi Krishna in their report.

Some of the reasons for this slow momentum are the slowdown in discretionary programmes, delay in the execution of deals signed, and slow growth in the BFSI (banking, financial services, and insurance) vertical.

The shift towards more cost takeaway deals was evident in Accenture’s results too, where it said that growth was led by outsourcing (up 9.8 per cent) and consulting contracted 1.6 per cent year-on-year on lower discretionary spend.

With the first half of the financial year reporting muted growth, the chances of companies achieving double-digit growth for the full financial year would become dim. The TCS management had warned of such a scenario after the first-quarter results of FY24.

“Given where we are at the end of April-June, achieving double-digit full-year growth is a tall order.

“But, as management, we are always focused on opportunities; we will grow,” said chief operating officer and executive director N Ganapathy Subramaniam in the media briefing after the results.

With slow revenue growth, the much-awaited increase in margins is also expected to be muted for the quarter.

“We believe the biggest lever for margin improvement has to be employee and subcontract costs.

“These costs have bloated compared to (pre-Covid-19) levels owing to supply challenges in the industry and rising attrition rates.

“We note that these costs are sticky in nature and don’t come down immediately even when attrition rates come off.

“There is a lag with which costs will come down.

“Further, it will need support of operating leverage in the form of revenue growth. In the absence of revenue growth, the usual levers to bring down employee costs do not work, due to which we expect the reduction in employee costs will be gradual,” said a JP Morgan report on the growth for the IT sector.

The street is not expecting that the recent large deal wins announced by companies will be accretive in this financial year.

“We expect strong order booking by companies, especially TCS, HCLT, and Infosys, in Q2FY24.

“Even after the deal closes, commentary on the pipeline is strong, and hence we believe the strong order booking momentum will continue in the second half of FY24.

“These deals provide visibility of revenues for Q3/Q4 and to a certain extent even FY25,” said the JP Morgan report.

Growth will be driven by inherent strengths that companies are able to bring to the table, especially with verticals such as BFSI, along with telecom and retail, continuing to be slow.

However, if one looks at Accenture’s recent numbers, not all is gloomy.

The company was the first to share that it touched $300 million in generative AI bookings in the past six months.

The street will look for commentary from Infosys on guidance.

The majority are hoping the guidance will be unchanged.

From TCS, analysts are hoping to hear more clarity on BFSI and how the new chief executive officer is handling these challenges.

Source: Read Full Article