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IT revenue: Global macro, BFSI risks to weigh on IT revenues

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Global macro-economic and financial sector headwinds are set to severely dent FY24 for the Indian IT sector and revenue growth is expected to nearly halve from a year ago, analysts said. The fourth quarter of FY23 itself is expected to be muted due to longer deal cycles, impact on the banking financial services insurance (BFSI) sector and seasonal headwinds, they said. BFSI contributes around 40% to India’s IT services industry revenue.

“We expect companies to indicate back-ended growth in FY2024. Macro uncertainties will likely impact visibility in H1 of FY24. Management commentary can be optimistic on FY24, given early visibility of conversion of large deals, captive takeover opportunities and benefits from vendor consolidation,” said Kotak Securities.

Credit rating firm CRISIL said in a report it expects revenue growth to decline by 700-900 basis points (bps) to 10-12% in fiscal 2024 compared to 18-20% estimated growth in fiscal 2023.

Among companies that give revenue guidance, ICICI Securities expects Infosys to guide for a conservative 6-8% revenue growth in constant currency for the 2024 fiscal. HCLTech is expected to guide for 5-7% revenue growth for the same duration. Kotak Securities expects Wipro to guide for revenue decline of 1% to growth of 1% for Q1 FY24.

“Headwinds in key markets, especially the BFSI (banking, financial services and insurance) segment in the US and Europe, will affect the revenue growth of domestic IT services companies,” said Anuj Sethi, senior director, CRISIL Ratings.

The report also said that the fiscal 2023 growth was accentuated by a sharp depreciation of 7-8% in the rupee.

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“While BFSI segment revenue growth is expected to halve to mid-single digit, it would be marginally offset by 12-14% growth in the manufacturing segment and 9-11% growth in other segments. Net-net, there would be moderation in overall revenue growth,” said Sethi.

Analysts expect cautious client sentiment to reflect in demand for large cost optimisation type of deals which will benefit the large caps over the midcaps in the sector. Some uptick in European technology spending is also expected.

“Improving commentary on Europe as compared to earlier can be an offset. Some of the mid-tiers that are lower indexed (presence) to Europe are increasing investments in the region,” said a note by HDFC Securities.

The brokerage said there was mixed near-term outlook on increased macro risk, but medium-term drivers for the technology upgrade cycle are intact. “Large strategic client relationships are enablers in vendor consolidation and most tier-1s and large mid-tier IT expect net gains from vendor consolidation,” said the brokerage.

In addition, strong digital solutions, cloud and automation capabilities, and a wide range of offerings will support the demand scenario. While companies can pass on better prices in new deals, incremental lever from pricing may be limited. However, large cost optimisation deals may offer limited margin gains, said HDFC Securities.

Operating profitability for the IT sector is expected to moderate 150-175 bps in fiscal 2023 to a decadal low of 22-22.5% due to higher employee costs, which form almost 70% of the total cost. CRISIL Ratings expects these costs to moderate in the current fiscal which started on April 1, with companies taking a cautious approach to fresh hiring as they attempt to normalise headcount.

Weak Q4 expected

Over the next few quarters, including Q4 of the 2023 fiscal, analysts expect a decline or soft revenue growth from the top tier companies. Some revival of demand is expected from Q3 of the 2024 fiscal.

Indian IT services majors flag off their Q4 results this month starting with Tata Consultancy Services on April 12, Infosys on April 13 and HCL Tech on April 20. ICICI Securities expects sequential revenue growth of IT majors in Q4 to be in the range of -1.9% to 0.5% in constant currency terms due to the larger impact on the global financial services’ health.

Brokerages expect TCS to report flat to 1% sequential CC revenue growth led by deal wins in the cost optimisation and vendor consolidation space. Infosys is expected to report flat to 0.6% sequential CC revenue growth due to seasonality and moderation in BFS demand.

“Though our covered companies’ exposure to US regional banks is at best in low-mid single digits of overall revenues, the overall exposure to BFSI vertical is quite significant (30-40%). This might lead to a decline in sequential revenue growth this quarter,” said the ICICI Securities.

The brokerage expects HCLTech to post the weakest sequential revenue growth at (-1.9%) in constant currency terms due to seasonal impact in its products and platforms business. Kotak Securities expects Wipro to have a 0.4% dip in sequential CC revenue growth due to higher exposure to consulting business.

Last month, IT major Accenture called out weakness in the IT consulting business due to clients’ cautious spending behaviour.

The street will be watching out for IT services commentary on deal pipelines, deal turnaround time, client spending behaviour, BFSI budgets and impact of cost optimisation strategies on margins.

In addition, the top IT majors have all reported top-level churn during the quarter. Guidance will be sought on the reallocation of responsibilities as in the case of TCS CEO designate K Krithivasan’s original BFSI portfolio and the financial services and large deals portfolios of Infosys which were led by Mohit Joshi.

Joshi left the company to join as CEO and MD of Tech Mahindra.

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