Tuesday, October 15, 2024

India IT services biz set to sink to three-year lows in March qtr

Tata Consultancy Services (TCS) and Infosys, the top two IT services firms, are slated to report March quarter earnings this week. This would be followed by HCLTech, Wipro, Tech Mahindra and others during this month.

The March quarter performance could also set the tone for FY24, in which experts expect deferred deals for the industry leading to slower revenue realization and slowdown in new deal bookings. Omkar Tanksale, equity research analyst at Axis Securities, said the March quarter will offer crucial guidance on how long will global tech spending stay weak.

The industry’s woes are chiefly driven by a slowdown in business from the banking, financial services and insurance (BFSI) sector, which contributes nearly 30% of revenues for large-cap firms. Experts said persistent staff costs weighing down on margins is another reason for the slowdown.

For instance, a forecast note by Mukul Garg, research analyst at financial services firm Motilal Oswal pegged four of the top six firms, TCS, Infosys, HCLTech and Wipro, to post less than 1% sequential revenue growth in the March quarter. The recently merged entity of LTIMindtree is the sole firm projected to post revenue growth of 1.6%, while Tech Mahindra is tipped to post revenue decline of 0.7%.

Weak revenue growth at these firms could be further combined with a marginal 1.2% sequential growth in earnings before interest and taxes (Ebit) due to slower pace of deal realization, Garg said in a note to investors. Further, brokerage HDFC Securities’ Institutional Research note to investors on 6 April also painted a similar picture, pegging TCS and Infosys to post marginal revenue growth, and HCLTech, Tech Mahindra and Wipro to post declines. The range of change in revenues of the large-cap IT firms would be within a drop of 2%, to a growth of 1% sequentially from the December quarter.

Apurva Prasad, vice president at HDFC Securities said firms with market caps of over ₹20,000 crore are likely to be the worst hit in Q4FY23 due to cutbacks in billing timelines by long term clients. He added that uncertainty created in the banking sector with the collapse of western banks such as Silvergate Bank, Silicon Valley Bank and Credit Suisse is likely to force firms across industries to consolidate their discretionary tech spends.

“Deal closures may come through this quarter, but if deals are not being realized right now, then they will not make any difference to the financials of the sector in the immediate two quarters of FY24,” Tanksale at Axis said.

Prasad added that the March quarter could offer the sharpest decline the domestic IT services industry is likely to see in CY23, and lead to a consolidation of revenue growth rate in FY24 after three sustained years of double-digit growth.

On 3 April, Mint reported that the domestic IT services industry could see a drop of 700 basis points in revenue growth rate, which could fall to mid-single digit for the first time since the onset of the pandemic.

One basis point is one-hundredth of a percentage.

Furthermore, the slowdown may also lead to midcap IT firms outperforming the top six (TCS, Infosys, HCL, Wipro, Tech Mahindra and LTIMindtree) in terms of revenue growth in this quarter. Motilal Oswal projected that Cyient, Coforge and Persistent Systems will post over 3% sequential revenue growth, while Mphasis and Zensar may report 1.1% sequential revenue decline.

“Midcap companies will have a clear edge over the large companies in terms of surpassing the growth figures, because of their lower revenue and deals base. Their project sizes are also much smaller, and midcap firms are likely to continue with their periodical billings from clients, instead of seeing client spending deferred. They are also not primary vendors for outsourced projects, so project tenders are much smaller. Hence, their deal churn rate is very high,” Axis’ Tanksale said.

To be sure, most IT services firms have seen a consolidation in their share prices in the past one year. At market closing on April 6, the BSE IT index closed at ₹28,670.37 — down 20% from ₹35,955.15 a year ago.

Consolidated market data from all four quarters of FY23 shows that the price-to-earnings (P/E) ratio of the domestic IT services industry has dropped from an average of over 34x in March last year, to around 24x at the end of March this year. A falling P/E ratio typically signifies a bear market.

Catch all the Corporate news and Updates on Live Mint.
Download The Mint News App to get Daily Market Updates & Live Business News.

More
Less

#India #services #biz #set #sink #threeyear #lows #March #qtr

Related Articles

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Latest Articles