IT firms’ Q2 results to stay subdued on low discretionary spend

Indian IT services companies are set to announce the second quarter results from October first week. This quarter will be crucial to gauge the overall demand environment in the technology outsourcing market. During the first quarter, most large and mid-tier firms reported subdued growth numbers with management commentary indicating a slowdown in discretionary spend. Companies like Infosys downgraded their revenue growth projections for the current financial year.

However, things have changed in the last three months with many large deals being bagged by the country’s top four IT firms. For example, Infosys expanded its partnership with global telecom major Liberty Global in a deal valued at $1.6 billion over a five-year period, whereupon Liberty Global will realise an annual savings of $109 million. As part of the deal, over 400 employees of the global giant will report at Infosys. Earlier, Infosys won a $ two billion five-year deal from an existing client to provide AI and automation-led development, modernisation, and maintenance services. Last week, it announced signing a $1.5 billion deal spread over 15 years.

Similarly, market leader Tata Consultancy Services expanded its long-standing partnership with UK’s largest workplace pension firm, Nest through an outsourcing contract worth around $1.1 billion spread over 10 years. Last week, TCS announced another large deal in which it has won a mega deal Jaguar Land Rover (JLR) to develop future-ready digital services for the luxury carmaker and its clients. JLR is a wholly-owned subsidiary of Tata Motors. The five-year deal is valued at $ one billion. Another IT major HCL Tech won two major deals last month after a relatively sluggish first quarter performance in deal win space. In August, HCLTech said that it has signed a $2.1-billion deal with Verizon Business for providing managed network services to its global enterprise customers.

These large deals have raised hopes of better revenue outlook in the coming quarters. Experts, however, opined that the second quarter performance is not likely to look very different from the first quarter and the reasons for this scenario are many. Firstly, the big deals bagged in the second quarter are not likely to translate into revenues soon given the ramp up delays. Secondly, big deals are arising from vendor consolidation. It means some companies are losing existing projects, which are being bagged by some other players. So, it is not a secular win-win situation for all.

Therefore, results of companies are likely to be divergent in the second quarter. While some companies will perform well, others may not do so well in the second quarter. Thirdly, the flow of digital projects remains low. So, both big and mid-tier firms are losing existing business in the digital space. This means many mid-tier IT firms are in a tough spot during the quarter. No doubt, customer sentiment has improved in the US, which is one of the key markets for Indian IT players. This augurs well for the Indian IT industry with a hope of revival in the second half of FY24. Till that happens, status quo remains.