Indian IT companies are expected to report a « weak » third quarter, with higher-than-usual holidays weighing on revenue growth, industry watchers said, warning that commentary on the demand outlook is likely to remain unchanged then that customers continue to scrutinize discretionary spending and prioritize cost optimization.
The big earnings week for the tech heavyweights is fast approaching, with major IT companies set to announce their December quarter figures this week. Tata Consultancy Services (TCS) and Infosys will release their third quarter FY24 report on January 11 (Thursday) and Wipro and HCL Technologies on January 12 (Friday).
All eyes will be on the IT management’s comments on the prevailing customer sentiments within BFSI and technology services, as well as the demand scenario that will unfold in the key markets of the US and India. ‘Europe.
“We expect IT companies to report weak quarterly constant currency revenue growth in Q3FY24 due to higher than usual layoffs for most companies in our universe. blanket. by Infy, Wipro, HCLT),” ICICI Securities said in its third quarter FY24 results preview.
Signs of improvement in IT spending in the near term remain elusive, with continued monitoring of discretionary spending and focus on cost optimization, ICICI Securities added.
“While the US Fed’s recent comment dispels macroeconomic uncertainty, an improvement in IT spending in FY25 is already priced into our estimates. We are now modeling a slower pace of recovery than previously anticipated, and thus reducing revenue growth estimates for FY25/26 by 2-4%. hundred for the covered companies,” he wrote.
It forecasts quarterly growth for Tier 1 IT services of between -2.6 percent and 5 percent, while projecting sequential growth of 1 to 3 percent for Tier 2 players.
“We expect sequential revenue growth to be lower in Q3FY24 than in Q2 due to higher than expected holiday-related headwinds, particularly in the BFSI and of high technology, as well as the continued reduction in discretionary spending,” he said.
It also expects the revenue growth gap between large- and mid-cap IT companies to narrow in Q3FY24 as a larger portion of mid-cap IT is more exposed BFSI (banking, financial services and insurance) and high technology, which are affected. by higher than usual holidays in December 2023.
As customers continue to review discretionary spending and focus on cost optimization, demand feedback from IT companies is likely to remain unchanged, he believes.
“Given the absence of mega-deal announcements in the December 23 quarter, we see stagnation in order books on a year-over-year basis with a sequential decline for most of the companies in our coverage,” said ICICI Securities.
Echoing the prognosis of a subdued third quarter, Motilal Oswal Financial Services, in its earnings preview, said weak demand for IT services was « further intensified » by higher than expected furloughs in third quarter FY24. Seasonality is likely to hurt revenue growth and margin performance of tier 1 and tier 2 IT companies.
“The industry has not seen a significant change in spending habits as discretionary spending continues to take a pause across businesses. Although sentiment has improved, this has not yet been reflected in actions.
“Our IT services coverage universe is expected to record a median revenue growth of 0.7 per cent qoq/2.5 per cent yoy (y-o-y) in 3QFY24,” it said. The banking and financial services and high-tech sectors are expected to be negatively affected in Q3 2024, while other verticals show moderate performance.
As such, he says, there are no signs of demand recovery in key geographies of the US and Europe, although the situation has not materially deteriorated per se. The majority of customers are exercising caution and reprioritizing their spending.
Motilal Oswal highlighted that the combination of unfavorable macroeconomic conditions and higher-than-expected furloughs extended deal closing and execution times at businesses, leading to a slowdown in revenue conversion in the third quarter.
“We expect revenue growth for Tier I companies to be between -2.7% and +4.5% quarter-on-quarter in CC (constant currency) terms. Revenues of Tier II players are expected to grow by -4.4%. percent to +3.0 percent QoQ in terms of CC,” Motilal Oswal said in the report.
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