Information Technology (IT) sector registered a muted performance during the third quarter of FY2023-24 due to higher-than-expected furloughs, continued slowdown in deal closures whereby tier-1 deal TCV declined by 4.5 per cent YoY, said analysts. Also, seasonality, modest delay in conversion and higher Q2FY24 base were key reasons for the sequential decline in bookings. Deepak Jasani, Head of Retail Research, HDFC Securities, said, “Indian tier-1 IT companies witnessed a sequential moderation in deal TCV in Q3FY24, over multi-year mega wins recorded in Q2FY24. This was due to higher-than-expected furloughs and continued slowdown in deal closures whereby tier-1 deal TCV declined by 4.5 per cent YoY.” Despite this, tier-1 and tier-2 companies comfortably maintained the book to bill at 1x mark in the quarter, he added.
However, the outlook for the next quarter looks promising with a surge in investments in AI and other emerging technologies and technological advancement, and rate cuts which is expected to prompt companies to start spending on non-core and tech-enabled services. Per the analysts, IT services spending is likely to continue to grow, nearing double digits. “An estimated $16 billion of global IT services large deals will come up for renewal in the next six months. Most of the IT companies pronounced optimism and expected strong order inflow in next 1-2 quarters. We expect better order inflow in Q4FY24 and H1FY25,” said Deepak Jasani.
Sunny Agrawal, Head of Fundamental Equity Research, SBI Securities Ltd, said, “While management expects reversal of furloughs during Q4FY24, the clarity on client IT budget for CY24 will come post Q4FY24 results. Midcap IT with double digit growth are expected to do better than tier-1 companies. The areas like Gen-AI, cyber security, data security, cloud migration are expected to be growth drivers. Overall, the management are cautiously optimistic on outlook as the global macro environment is still challenging and discretionary projects persistently facing slow decision making or deferment of projects.”
Meanwhile, Abhishek Shindadkr, Research Analyst – IT Services, InCred Capital, said, “Deal commentary was generally encouraging. We expect order booking momentum to continue in Q4FY24F as well. We expect average ~6 per cent revenue growth in tier-1 in FY25F and average ~13 per cent in tier-2.”
IT sector’s performance during Q3
The performance of IT companies were broadly in-line with Street expectations with the quarter being seasonally weak. According to the numbers released in the third-quarter earnings of the top four Indian IT companies, the demand environment continues to look challenging amid some cautious optimism for the future. The continued pause in discretionary deals affected business during the December quarter. However, according to analysts, digital initiatives of clients continue to provide growth opportunities for IT services players.
Sunny Agrawal said, “Top 40 companies by M.cap reported 2.2%/2.1% QoQ growth in rupee revenue and profit to Rs 2.1 tn/ Rs 0.3 tn respectively. Most companies have witnessed sequential improvement in margins driven by lower attrition and better capacity utilisation. The deal wins remained solid (Infy 9MFY24 large deal at $ 13.2 bn is highest, HCL Tech YTD deal pipeline at $ 7.4 bn, Wipro recorded 20% YTD growth in large deals, TCS deal pipeline at $ 8.1 bn). The deal ramp-up though is being pushed by 1 or 2 quarters for some companies. The headcounts, for most companies, have seen decline during Q3FY24 as the focus is now more on converting talents into billable workforce.”
Further, Abhishek Shindadkr maintained, “Infosys’ absolute new total contract value or TCV win was the second largest vs. the previous 11 quarters while HCLT expects 4QFY24F bookings to improve. Wipro’s large deal TCV was down 28.7 per cent qoq and 7.1 per cent yoy while Tata Consultancy Services or TCS was the only company to report a 3.8 per cent yoy increase in bookings. Across tier-2 companies, deal wins of PSYS, Coforge, and Cyient (DET business) were better qoq as well as yoy while they were weak in the case of Mphasis.”
A look at Q3 earnings from major IT firms
Infosys: Infosys posted Q3 profit for FY 24 at Rs 6,106 crore, down 7.3 per cent as against Rs 6,586 during the third quarter of FY23. It posted revenue from operations at Rs 38,821 crore, marginally up by 1.3 per cent on-year. The company EBIT stood at Rs 7,961 crore. “Our performance in Q3 was resilient. Large deal wins were strong at $3.2 billion, with 71 per cent of this as net new, reflecting the relevance and strength of our portfolio of offerings ranging from generative AI, digital and cloud to cost, efficiency and automation,” Salil Parekh, CEO and MD, had said in a regulatory filing. Infosys’ FY24 revenue guidance was revised to 1.5 per cent- 2.0 per cent and operating margin guidance at 20 per cent- 22 per cent.
HCL Tech: HCLTech reported a 13.5 per cent sequential rise in net profit to Rs 4,350 crore for the October-December quarter, while its revenue rose 6.7 per cent quarter-on-quarter to Rs 28,446 crore. However, as the slump in discretionary spending is expected to continue, the company trimmed the upper end of its FY24 revenue growth guidance to 5-5.5% from 5-6%. During the quarter, the company’s new deal wins stood at $1.9 billion, which includes 18 large deals.
Wipro: Wipro posted third quarter profit for FY24 at Rs 2700.60 crore, down 11.9 per cent in comparison to Rs 3065.00 crore during the corresponding quarter of last year. It posted revenue from operations at Rs 22,205.10 crore, down 4.4 per cent on-year. In terms of order booking, Wipro said that the total bookings was at $3.8 billion with 14 large deal wins. “In a seasonally soft quarter, deal booking momentum remained strong. Our large deals recorded a 20 per cent year-to-date growth. Further, we are starting to see early signs of a return to growth in Consulting, as demonstrated by the double-digit growth in order bookings in our Capco business,” Thierry Delaporte, CEO and Managing Director, had stated.
TCS: TCS had posted its third quarter earnings for FY24 with profit at Rs 11,058 crore, up 2 per cent on-year. The IT major recorded revenue from operations for the quarter ended December 31, 2023 at Rs 60,583 crore. K Krithivasan, Chief Executive Officer and Managing Director, had said, “We are seeing strong deal momentum across markets resulting in a solid order book providing visibility into our long-term growth. We are seeing tremendous interest in Generative AI and are leading the innovation and exploratory efforts for our customers in this area.”