Sunday, July 21, 2024

Beyond the FY24 downturn: Indian IT’s roadmap for future growth

Fiscal year 2024 (FY24) marked a cyclical downturn and a transitional period for the IT services industry, characterized by sluggish growth. The three leading Indian IT companies—Tata Consultancy Services (TCS), Infosys, and Wipro—reported modest results. According to their management commentaries, there appears to be no immediate improvement in demand.

Despite these challenges, they achieved improved margins in the fourth quarter of FY24 and scored deal wins. This indicates ongoing client engagement and provides some visibility into future revenues. Such developments also suggest the possibility that the industry may have reached or is nearing the bottom of its business cycle.

Looking ahead, there is expectation that a recovery in the global economy will position these top three firms to deliver stronger growth. Moreover, IT consulting firm Gartner believes that IT expenditure is going to pick up across the world in calendar year 2024 (that is the first nine months of FY25), with IT expenditures in India expected to outpace the global average.

The workforce strategies of these companies have also shifted; between them, TCS, Infosys, and Wipro had a collective headcount of over 1.1 million by the end of March 2024. During FY24, they reduced their total workforce by 63,750 employees, a rare move in the IT services sector.

In terms of financial performance, these three companies generated a combined revenue of $59 billion ( 4.84 trillion) in FY24. TCS led with over $29 billion, followed by Infosys with $18.6 billion and Wipro with $11 billion. Infosys and TCS each reported revenue growth of 4.7% and 6.8% respectively, while Wipro experienced a slight 0.8% decline. Both Infosys and TCS improved their Ebitda (earnings before interest, taxes, depreciation, and amortization) and net profit margins, whereas Wipro maintained its margins.

Collectively, these companies have a broad presence across various industry verticals and global markets, setting trends that are likely reflected across the sector. The management teams from all three companies reported a decline in discretionary spending, with many projects being deferred or cancelled, and no immediate signs of demand recovery. For FY25, Infosys anticipates a revenue growth of 1% to 3% in constant currency terms, whereas Wipro’s forecast ranges from a 1.5% decline to a 0.5% increase.

TCS, which typically does not provide guidance, expressed a cautious optimism for FY25, predicting an improvement over FY24. 

Specific sectors such as banking, financial services, and insurance (BFSI); capital markets; and payment and wealth management are investing in new technologies and showing growth. Both Infosys and Wipro are optimistic about these sectors, especially BFSI and telecom, with Wipro also expecting growth in IT consultancy services.

According to Gartner, the global IT market, valued at $5 trillion, is projected to grow 8% in calendar year 2024, an increase from the 4% growth seen in 2023. The $139 billion Indian IT services and products market is anticipated to grow at an even faster rate of over 13%, indicating significant opportunities for local companies.

Gartner also highlights that increased spending is expected in IT consulting, analytics, and generative artificial intelligence (GenAI). In India, investment is likely to surge in areas such as device and equipment software, as well as data centre and hyperscaler (cloud services) sectors. There is potential for GenAI to enhance efficiency in internal processes. However, the exact timing of these advancements is uncertain, with much of the growth expected to occur in the second half of the year. Investors with substantial stakes in the IT sector should remain patient as the industry navigates this period of adjustment.

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