The IT services sector indicated a robust deal win in the March quarter and is showcasing accelerated bookings growth which is a positive sign for the demand environment, said BNP Paribas report. However, it said that the IT services companies have turned cautious in their near-term revenue growth outlook, “given fears of macro slowdown, with most companies expecting a recovery in H2FY24”.
The IT services industry recorded a revenue growth of +7.8 per cent CC YoY and it continued to moderate Q4FY23. However, on a sequential dollar basis, Indian IT services companies underperformed in comparison to their global peers, largely due to sharp decline in Infoys’ revenue, even as on YoY basis, Indian IT service industry market share improved 83 bps.
BNP Paribas, in its report, has analysed the quarterly results of 26 key global companies including 15 large caps and 11 mid caps in order to zero in on the trends in the IT services industry. In the study, the company included 13 companies from India, 9 from the Americas, 3 from Europe and 1 from South Korea.
Trends driving IT services sector
Revenue trends: The overall IT industry revenue in dollar terms increased 0.9 per cent sequentially in the March quarter as against a growth of 2.8 per cent in the December quarter. Further, in dollar terms, revenue growth of Indian IT companies was ahead of their global counterparts. Infosys guided for FY23 CC revenue growth of 4-7 per cent while HCL Tech guided for the same at 6-8 per cent with services expected to grow at 6.5-8.5 per cent, while Wipro’s Q1FY24 CC on-quarter revenue guidance was at -3 per cent to -1 per cent.
Margin trends: In terms of EBIT margin, overall industry saw a decline to 16.4 per cent, “slightly skewed due to the impact of Accenture’s business optimization costs. In terms of margin outlook, BNP Paribas signals further headroom for improvement with revenue growth accelerating, benefits of optimization measures kicking in along with improving utilization, easing supply-side issues, and moderating attrition. For FY24, Infosys’ guidance for EBIT margin is 20-22 per cent, HCL Tech’s guidance is at 18-19 per cent while Wipro is targeting EBIT margin at levels seen in the recent few quarters, the report said.
Demand and deal trends: According to the Q1CY23 ISG deal data, the global combined market for IT and business services declined for the third consecutive quarter, with the dollar-denominated annual contract value (ACV) down 8 per cent YoY. In the March quarter, TCS reported strong deal wins with a total contract value (TCV) of $10 billion and Infosys reported a TCV of $2.1 billion. Accenture, in its Q2FY23 results, reported strong managed services bookings, while consulting bookings were slightly muted.
Top performing verticals: According to the report, revenue of all verticals, except for CMT, improved sequentially in dollar terms. Multiple companies noted strong traction in areas like intelligent industry, digital manufacturing and industrial IoT. In terms of geography, Europe showed strong growth, while Americas and RoW saw muted growth.