Indian IT services firm to report muted sequential growth in Q4, say analysts

Indian IT services companies are expected to report weak sequential revenue growth in the fourth quarter ended March as there is increased cautiousness among clients around decision-making due to heightened uncertainty arising from the recent banking crisis, according to analysts.

“Deal pipelines have not shrunk, but conversion to new deal wins is taking longer time. Also, in certain cases, conversion of orderbook to revenues in terms of deal ramp-ups is taking longer than usual. This, in our view, implies right-shifting or postponement of demand to H2 FY24 or even FY25 as digitalisation agenda of clients remains largely intact, but their near-term focus has shifted to cost optimisation and increasing efficiency,” ICICI Securities said in a report.

The brokerage firm said that, for companies under its coverage, the exposure to US regional banks is in low-mid single digits of overall revenues, but the overall exposure to BFSI vertical is quite significant. “This might lead to a decline in sequential revenue growth this quarter.”

According to analysts at Motilal Oswal, while the BFSI sector has been resilient for the last few quarters, recent industry developments have added to caution on its tech spending. “Though the Indian IT services firms do not have meaningful exposure to the affected US regional banks, fears of a banking crisis could impact near-term IT spending by banks and will be the key monitorable during the Q4 management commentary,” the brokerage firm said.

Apart from BFSI, Hi-Tech, Manufacturing, and Retail may also report muted growth in Q4. “Clients have started to cut discretionary spends while increasing focus on cost efficiency. IT services companies are seeing a shift to cost optimization deals, along with increased vendor consolidation deals in the pipeline,” Motilal Oswal said.

Analysts at ICICI Securities expects HCLTech to report muted sequential revenue growth in the range of -1.9% while LTIMindtree is likely to report a growth of 0.5% in constant currency terms. Tata Consultancy Services (TCS) and Infosys are likely to report a sequential revenue growth of 0.1%.

“Due to delay in decision-making and potential technology budget cuts in the near term, we are lowering our FY24 earnings per share estimates by up to 5% and making limited changes to outer year EPS estimates due to right-shifting of demand. Here we assume no further escalation of banking crisis globally, in terms of bank failures apart from what has been seen up till now,” ICICI Securities said.