Global stability key to pushing revenue growth of Indian IT firms

The first quarter results of Indian IT services providers indicate a status quo with possibilities of a demand uptick in the coming quarters. TCS management has refrained from calling out a full-fledged recovery despite improvement in performance across verticals and geographies. However, its CEO K Krithivasanhas said that FY25 would be better than last fiscal year. Similarly, HCL Tech’s performance has exceeded market expectations. Despite fall in revenue on constant currency term, the company has maintained its revenue growth forecast at 3-5 per cent for FY25. Interpolation of numbers show that HCL Tech is confident of improving its performance towards the second half of ongoing fiscal year. As the Q1 results of other big and mid-tier IT firms are scheduled to be announced this week, analysts expect them to be largely in line of market projections. Despite such optimism, there are many unknowns which can influence the demand projections of global IT industry.

Firstly, the US elections hold the wild card in this regard. As the US is the largest geographical contributor to Indian IT firms in revenue term, stability in the world’s largest economy is essential for enterprises’ technology spending decisions. Currently, events unfolding in the US seem chaotic. Assassination bid on former US President and Republican Party’snominee, Donald Trump has further complicated the matters. In this perspective, all eyes will be on the outcome of the US elections that will determine the demand environment going ahead. Similarly, Europe is no longer providing the support that it had lent in the last fiscal year. One of the key economies, France is going through a political turmoil. Rise of right party-led opposition is believed to influence the spending decisions in the coming quarters. In Europe, the UK is the only island of stability for now. Return of Labour party government with full majority raises hopes of sustaining the good run for IT firms this year.

Amid such volatility, India and other emerging markets provide some support to several Indian IT firms. For instance, the BSNL contract won by TCS has lent a significant support to the company in the first quarter. Therefore, it is likely that Indian IT firms may turn their focus on these emerging markets to accelerate revenue growth.

On the margin front, pricing environment remains almost stable with no big discounts being offered by IT firms to their clients despite a muted demand environment. With reduction of headcount, cost pressure has come down to a great extent. Moreover, domestic IT firms have reduced their dependency on third parties (subcontractors) for project execution work. These levers coupled with improvement in employee utilisation levels provide some breather to operating margins of Indian IT firms. Going ahead, margin stability will be critical for valuations of these firms.

Meanwhile, trend on employee count has shown a mixed trend. While TCS has shown addition of headcount after three quartersof decline, HCL Tech has shown a dip after improving its headcount in the last fiscal. Such divergence shows that addition of headcount will be specific to company dynamics than on overall market trend.