IT companies in India are expected to post a soft revenue growth during the first quarter of FY24 ended June 2023 impacted by a slower deal pipeline conversion leading to an impact on volumes in a seasonally strong quarter. “Due to macroeconomic challenges in the BFSI and hi-tech sectors, delayed discretionary spending, it is likely that revenue growth will soften during this quarter. Still, cloud computing, digitalization, artificial intelligence, and cybersecurity are the key drivers for revenue in the current challenging circumstances,” said Vinod TP, Research Analyst, Geojit Financial Services. In fact, a recent report by ICRA also stated that Indian IT companies will slow down further to mid-single digits amid intensifying headwinds for the nearly $250 billion dollar sector.
While recent data suggests that the US technology sector is expected to witness a slowdown in CY23-24 due to drop in deal conversion rate, analysts feel that IT companies in India, meanwhile, will focus on enhancing margins through cost optimization and resolving supply-side issues.
However, analysts said that the IT companies will show growth in HY FY24E. “We believe that the growth dispersion will increase despite the aggregate slowdown as highlighted in our recent note (IT sector – mixed signals, stay selective). We continue to build growth/demand normalisation in H2FY24E and a flat trajectory of margin in FY24E as compared to FY23,” said Apurva Prasad, Vice-President-Institutional Research, HDFC Securities.
“We think technology demand should be resilient as Indian IT services firms prepare for a swift rebound in 2HFY24, helped by a ramp-up of large cost optimisation deals and bottoming out of macroeconomic concerns. With a focus on cost takeout and efficiency deals, we think Indian IT firms, with strong value propositions and capabilities, should continue gaining market share,” said Kumar Rakesh, Analyst IT & Auto, BNP Paribas India.
Performance in Q1 by Infosys, TCS, HCL Tech, others
According to Kotak Institutional Equities, even as June is a seasonally strong quarter for IT companies, June 2023 will be an exception with revenue declining for companies like Wipro and Tech Mahindra, flat for TCS and marginally growing for HCL Tech and Infosys. “We believe Infosys will report the highest sequential growth among tier-I. Companies that will report revenue declines are Tech Mahindra, Wipro and Mphasis. Infosys is our top pick, followed by HCL Tech,” said Kawaljeet Saluja, Head of Research, Kotak Institutional Equities. He further stated that weak discretionary spending across many verticals, and especially in financial services, telecom and hi-tech, should contribute to weak trends.
Meanwhile, Kumar Rakesh from BNP Paribas India, said, “Expect soft revenue growth for all except HCL Tech (+2.4 per cent) and PSYS (+3.1 per cent). For our large-cap coverage, we expect 1QFY24 revenue growth of 1.3-2.4 per cent q-q cc (except Wipro: -1.2 per cent, Tech Mahindra: -2 per cent) and margin contraction of 8-63 bp q-q (except LTIM: 79 bp expansion), largely on muted revenue growth, wage hikes, visa costs and seasonality. We expect mid/small caps to report -1 per cent to +3.1 per cent q-q USD revenue change.”
In terms of key monitorables, analysts will look at deal wins and management commentary for signs of revenue growth to bottom out and drivers for a 2HFY24 recovery. “Looking ahead, we expect higher deal conversion at the start of H2FY24, which will improve revenue visibility. On the valuation front, over the past 1.5 years, the industry valuations have been corrected by more than a third, limiting the downside risk. Going forward, it presents an opportunity for long-term investors to accumulate in the IT sector,” said Vinod TP from Geojit Financial Services.
Going forward, BNP Paribas stated that the India IT industry growth scenarios imply 12-14 per cent revenue CAGR over CY23-27.