ER&D firms in tech space set for growth moderation
Further, spending cut in some of key verticals is keeping pressure on revenue growth
image for illustrative purpose
Client specific issues have started coming in, which used to be seen in the IT services industry. Overall growth is coming down. Apart from client specific issues, seasonality in some businesses are also playing out -- Pareekh Jain, founder, Pareekh Consulting, tells Bizz Buzz
Renewed Slowdown
- Most engg services firms posted mixed Q1FY25 results
- Some firms in automotive & aviation verticals witnessing slowdown
- Overall growth in FY25 likely to be in high single digit
- EV cos are struggling, Some other verticals also showing slowdown
Bengaluru: Signs of growth moderation are becoming visible in the engineering services segment as most ER&D (engineering, research & development) firms posted mixed set of performance in the first quarter ended June 2024.
According to analysts, client-specific issues and spending cut in some of the key verticals are pulling down the revenue growth rate. They opined that FY25 may see high single digit growth rate in the top line, which is significantly lower than the last fiscal.
“Client-specific issues have started coming in, which used to be seen in the IT services industry. Overall growth is coming down. Apart from client specific issues, seasonality in some businesses are also playing out,” Pareekh Jain, an IT outsourcing advisor & Founder of Pareekh Consulting, told Bizz Buzz.
He said that this is happening in engineering services segment now, which was earlier seen in IT services space, because of the lag effect in ER&D segment.
“Currently, EV (electric vehicle) companies are struggling. Some other verticals are showing slowdown. That is the reason that the engineering projects are witnessing ramp downs or non-renewals. Against this backdrop, the overall growth rate of Indian engineering services industry is likely to be in high single digit as compared to 12-13 per cent last fiscal,” Jain added.
He, however, pointed out that engineering services would remain one of the fastest growing spaces in IT industry as compared to IT services. “That is the reason, the market has seen a slew of acquisition of engineering services firms in recent quarters,” he added.
In the first quarter of FY25, engineering services companies posted a mixed set of Q1 results after last two years of record growth. While Persistent Systems reported a 5.6 per cent sequential rise in its revenue, Tata Elxsi’s top line grew 2.4 per cent during the first quarter.
Similarly, L&T Technology Services’ sequential revenue declined 3.1 per cent and HCL Tech’s engineering services segment saw a 3.7 per cent decline in its top line. Similarly, Cyient’s revenue declined 5 per cent on sequential basis.
After the announcement of results, share prices of many of these ER&D firms have also corrected as investors have started factoring in the growth moderation seen in results.
Similarly, Capgemini- which announced its results on Friday, cut its annual revenue guidance for 2024 owing to slowdown in automotive and aerospace verticals. Such commentary indicates enterprise spend on key verticals is slowing down, impacting order flow.
