Indian IT firms likely to report tepid Q1 performance

The coming week will mark the commencement of Indian IT industry’s earnings season for the first quarter of FY24 with market leader Tata Consultancy Services (TCS) and HCL Tech slated to announce their first quarter results on July 12. Infosys will come up with its performance on July 20. Others will follow in quick succession. According to brokerage firms and industry analysts, the first quarter is likely to be the weakest quarter in the current financial year with IT firms across the board reporting tepid revenue growth with dip in revenue growth numbers not being ruled out. Research firm Jefferies expects the aggregate revenue to fall by 0.3 per cent quarter-on-quarter in constant currency terms with Coforge, HCL Tech leading on growth. It also sees aggregate margins to contract by 75 bps on sequential basis due to a forecast sharp 150-190 bps margin contraction for TCS, Tech Mahindra and Coforge due to wage hikes. Interestingly, Jefferies expects TCS to come up with a buyback programme though the company is yet to announce anything on that front. Overall, revenue growth numbers are likely to look similar to the fourth quarter. This is on the backdrop of little improvement in the demand environment since the January-March quarter.

Enterprises globally continue to take a cautious approach with regard to IT spending. Most of the companies are holding back on any discretionary spend and focus on those projects that give immediate return on investment (RoI). Most of the changes are happening in the deal space. Right now, several large cost takeout deals are coming to the market. Given the scale and portfolio of big firms, such large deals have already been bagged by these companies. Infosys bagged deals from In May and Infosys won a mega five-year deal worth around $1.5 billion from global energy company BP. In June, the company bagged a $454-million deal from Denmark’s Danske Bank. TCS has won four mega deals so far in 2023, including from National Employment Savings Trust, UK’s largest workplace pension scheme worth GBP 840 million (around $1.1 billion). It’s other deals include a $723-million deal from insurer Phoenix Group, the Marks & Spencer deal and the 10-year contract with the Teacher’s Pension Scheme in England and Wales.

Interestingly, such deal wins are also coexisting with deal cancellations and project ramp downs. Despite such wins, little revenue accretion is expected in the first quarter. For mid-tier firms, consolidation as a theme is playing out. Clients are consolidating vendors in the small and medium deal space. Some companies are benefitting from this phenomenon while others are losing out. All-in-all, there are no clear cut winners in the current demand environment. The first quarter performance will further strengthen this argument. Meanwhile, experts are divided over how the demand scenario will play out in the second half of this fiscal year. While some are seeing an uptick, many are not convinced. Overall, an air of unease continues to blow in the global IT industry.