Revenue leakage a big worrisome factor for IT cos

Reprioritisation

♦ Things likely to see little change in the 2nd half of FY24

♦ Investors assumed FY24 a washout and shifted focus to FY25

♦ Delayed recovery may go well beyond FY24

♦ A large project may get re-prioritized into smaller chunks or maybe slowed down

Bengaluru: Revenue leakage from existing projects has emerged as a big worry for Indian IT services providers as it is leading to dip in revenue of most firms despite winning large number of mega and large outsourcing contracts in the last few months.

Management of most firms highlighted that many existing projects are either witnessing closure or slowdown in workflow. This is such a prevalent phenomenon that revenue addition coming from new projects is not able to compensate for the loss of volume arising from existing projects. As a result, most experts are hoping for a delayed recovery in the IT outsourcing market, that may go well beyond FY24.

“On one hand, our customers continue to trust on building new technology capabilities, and so based on that, we continue to win new deals. But at the same time, given the overall market uncertainty, they are trying to conserve cash and optimize their current spend, particularly on the long-for projects that have been running for long. So, sometimes such projects also end, and we may not have sufficient replacement of those revenue streams. So,this is causing the revenue growth to moderate,” said K Krithivasan, chief executive officer of TCS, had said during the post-results analyst call.

“Reprioritization is also a factor, like a large project may get re-prioritized into smaller chunks or maybe slowed down. All these factors are at play. But how long this will last is not a question that we can answer at this time,” he has added.

Similar sentiment has been echoed among management of other big IT firms. Infosys’ management has said that clients are holding back discretionary spend, leading to fall in deal volume.

“There is a lot of constraints with clients, whether it’s on transformation programmes or discretionary projects, which are significantly reduced or slowed down. So that thinking (of clients) is continuing on. And there’s that attention on cost and efficiency, which also continues as we are seeing in discussion,” Salil Parekh, CEO of Infosys had said during the analyst call.

The Bengaluru-headquartered company has revised its revenue growth guidance downward to1-2.5 per cent for FY24 as compared to 1-3.5 per cent provided earlier.

Not only Infosys, HCL Tech has also revised its revenue growth guidance downward for FY24 to 5-6 per cent from 6-8 per cent earlier.

Such trends have dashed all hopes of a recovery in the second half of current financial year. Some brokerage firms pointed out that FY24 might be a wash-out year for the Indian IT industry.

“Investors have assumed FY24 is a washout and shifted focus to FY25, hoping for a rebound,” JP Morgan has said.