Demand likely to slow down for IT companies in H2 | The Financial Express

Demand likely to slow down for IT companies in H2

Nasdaq-listed Cognizant, which follows the calendar year, lowered its full year 2022 revenue growth guidance to 7% in constant currency to about $19.3 billion.

Demand likely to slow down for IT companies in H2
Both Wipro and Cognizant Technology Solutions have lowered their revenue growth guidance for Q3 and 2022, respectively.

Indian IT services companies are likely to see a slowdown in demand in the second half of this fiscal as clients are prioritising spends towards quicker ROI projects and increasing focus on cost optimisation.

“Areas of weak demand widened further in Q2 FY23. Infosys management pointed to emerging weakness in the telecom and hi-tech verticals, especially in discretionary spends, apart from the slowing demand in retail and mortgage called out in the previous quarter (Q1). Additionally, moderation in hiring across the IT pack for second consecutive quarter also implies that companies in the sector are baking in demand slowdown in H2 FY23 and FY24,” analysts at ICICI Securities said.

While growth in Europe was healthy during the September quarter, management commentaries suggest that discretionary IT spending in the region is likely to reduce in H2 FY23 due to the uncertain macro-environment. For example, the management of Tata Consultancy Services (TCS) indicated that while its book-to-bill has improved in Europe on a sequential basis, the timeline to convert to qualified pipeline has elongated, implying potential delay in deal conversions in next few quarters.

Both Wipro and Cognizant Technology Solutions have lowered their revenue growth guidance for Q3 and 2022, respectively. Wipro expects revenue for the third quarter ended December to be in the range of $2.81-2.85 billion which translates to a sequential growth of 0.5-2%, lower than the 3-5% it had guided for the September quarter.

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Nasdaq-listed Cognizant, which follows the calendar year, lowered its full year 2022 revenue growth guidance to 7% in constant currency to about $19.3 billion. “The near-term challenges on revenue are attributable to several factors like an uncertain global macroeconomic environment that impacted bookings and revenue, reduction in US onshore billable resources in recent quarters, a reduction in visa travel, and Covid-induced shift to near and offshore delivery centres. The financial impact of this US headcount reduction is magnified given this is our highest revenue and margin dollar per head population,” said Rajesh Nambiar, chairman and managing director, Cognizant India.

Infosys revised its full-year revenue growth guidance upwards to 15-16% in constant currency from 14-16% earlier. HCLTech also revised the same to 13.5-14.5% from the earlier 12-14% y-o-y. “However, given healthy revenue growth for Infosys and HCLTech in H1 FY23, the guidance implies soft revenue growth in H2 FY23 as companies factor-in furloughs in line with historical trend and slowdown in spending due to the challenging macro,” ICICI Securities said.

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To be sure, the slowdown in demand needs to be viewed in context of the accelerated pace of digitalisation during the pandemic. “In our conversation with the customers, we do not see any concern. The recent decrease in demand needs to be viewed in the context of demand stabilisation rather than a slowdown. The possibility of demand stabilisation cannot be completely ruled out as we have seen exponential growth in demand for digital adoption during the pandemic and post-pandemic period,” said Biswajit Maity, principal analyst, Gartner.

The hiring momentum is also expected to slow down as headcount addition and revenue growth move in tandem. ICICI Securities said in a note that the “pace of headcount addition has further moderated with just 2.2% quarter-on-quarter net headcount growth in tier-1 IT in Q2 FY23, and we expect further slowdown in net headcount addition and thus revenue growth momentum ahead.”

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First published on: 07-11-2022 at 04:10 IST