Margins of the IT services firms will remain under pressure as there is no sign of a revival in discretionary spends, say analysts. The results season kicks off next week.
Analysts at Nomura said the void created by the lower number of small-sized and discretionary projects along with delays in client decision-making and ramp-up of projects won, in certain cases, will lead to both revenue and margin disappointments in near term, given the ‘sticky’ nature of costs.
Jefferies expects aggregate revenues in Q2FY24, for its coverage universe, to grow at 0.5% q-o-q in constant currency — marking a return to growth after two quarters of decline. “We expect some stabilisation and deal ramp ups to drive a slight growth uptick.”
Analysts say TCS could announce a buyback and HCLTech could hint at achieving the lower end of margin guidance in FY24.
Analysts at Kotak Institutional Equities (KIE) said HCLTech’s organic revenue growth guidance of 6-8% could now include the ASAP acquisition, implying an 80 bps cut, adding “The Ebit margin guidance band of 18-19% is a stretch as well.”
HCLTech had given a margin guidance of 18-19% for FY24. In the June quarter, the company reported an Ebit margin of 17%.
Analysts at Nomura said, “We expect the continued weakness of India’s IT services companies (particularly in CMT and discretionary revenue) to weigh on the Q2FY24F and FY24F revenue growth outlook.”
They added that the current slowdown could extend to be an entire FY24F phenomenon rather than just H1FY24, and the impact possibly extending to FY25 discretionary spends.
Jefferies expects Infosys to lead in growth (+1% q-o-q cc), while Tech Mahindra (-1% q-o-q cc) and Wipro (-1% q-o-q cc) are likely to lag. “Among mid-sized firms, we expect Coforge to lead with a 2.5% q-o-q cc growth, while growth at LTIM would be soft at 1% q-o-q cc. Deal TCV (total contract value) is likely to be strong for TCS/Infosys and HCLTech given multiple large deal announcements, but soft for others,” analysts wrote.
Jefferies expects highest margin expansion for Coforge (176 bps) and highest margin contraction for LTIMindtree (172 bps). Aggregate margins (18.9%) to be broadly flattish with weak growth and wage hikes offsetting operational efficiencies.
KIE believes continued rationalisation of discretionary programmes, combined with extended timelines of execution of existing ones, is leading to a leakage of revenues and weak trends. Weakness will be broad based and amplified in the banking, retail and telecom segments.
Motilal Oswal expects “Tech Mahindra and Wipro should see another quarter of q-o-q cc decline in revenues to the tune of 1.1%/1.2%, respectively”. It added that the net headcount addition would be lower across the board, aligning with the demand trend.