Indian IT services companies are bracing for a weak fourth quarter as indicated by their lukewarm guidance and low headcount addition.
HCL Tech reduced its revenue growth guidance for the current financial year to 13.5-14% in constant currency from 13.5-14.5% earlier. The Noida-based company also lowered its operating margin guidance to 18-18.5% from 18-19% earlier.
Although Infosys slightly raised its FY23 revenue growth guidance to 16-16.5% from 15-16% earlier, analysts said it is an indication of a tepid fourth quarter with a sequential growth of -1.1-0.5%. Wipro expects a revenue growth of -0.6-1% sequentially for the fourth quarter ended March as deal wins and client decision-making are slowing down.
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“Infosys‘ management is witnessing pockets of weakness in some key industry verticals owing to global slowdown and there are also growing uncertainties in Europe and the US. We believe uncertain global macro environment will reflect in earnings volatility in FY24 and could restrict material outperformance in near to medium term. Nevertheless, given Infosys’ strong track record and standing in global IT arena, the long-term growth outlook remains intact,” said Sanjeev Hota, head of Research, Sharekhan by BNP Paribas.
For the third quarter, the IT majors reported decent numbers in a seasonally weak quarter. TCS reported a constant currency revenue growth of 2.2% quarter-on-quarter and 13.5% year-on-year, respectively. Similarly, Infosys posted a constant currency revenue growth of 13.7% year-on-year and 2.4% sequentially for the December quarter. The third quarter is considered seasonally weak due to furloughs or lesser number of working days because of the holiday season.
Most of the companies, however, managed to bag large deal wins during the third quarter. HCL Tech won 17 large deals during the quarter, with new deal wins at $2.35 billion, up 10% y-o-y. Infosys won large deals worth a total contract value (TCV) of $3.3 billion, the highest in the last 8 quarters.
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“At Infosys, despite strong TCV, hiring has been lower which suggests that there could be some moderation on revenues in the medium term,” analysts at ICICI Securities said.
The number of people added came down significantly at these companies, indicating lower demand. Growth in net addition of employees is an indicator of strong business outlook.
TCS saw its headcount decline on a q-o-q basis, as it saw a reduction of 2,197 employees amid a cautious demand environment. This is the first time the net addition has declined in 10 quarters. A contraction in the net addition of employees was previously seen during the first quarter of FY21 during the peak of the pandemic.
Wipro also saw a headcount reduction of 435 employees during the third quarter. HCL Tech’s net hiring more than halved as it made a net addition of 2,945 employees in the December quarter, down from 8,359 in the previous quarter.