IT Companies likely to post subdued earnings in Q4

Indian IT services firms are all set to announce fourth quarter results from next week. Market leader Tata Consultancy Services (TCS) will set the ball rolling on April 12. This is also the quarter when companies will report their annual earnings for FY23. Given the macroeconomic environment, brewing banking crisis and slowdown in IT spending by enterprises are expected to reflect in the overall demand outlook for FY24 of these companies, which will be under focus. Brokerage firms across the board have predicted a subdued earnings season for Q4. ICICI Securities predicts Infosys' revenue growth to be 0.1 per cent quarter-on-quarter (QoQ) on a constant currency (CC) basis given the fact that Q4 is traditionally a weak quarter for India's second-largest IT firm. Similarly, its operating margin is expected to be around 21.5 per cent, flattish as compared to the previous quarter. According to Motilal Oswal Securities, TCS is likely to post better Q4 numbers on the back of several large cost-takeout deals. The company is likely to post 0.9 per cent sequential rise in revenue. For HCL Tech, which is benefitting from more cloud deals, the revenue growth rate is seen at 0.5 per cent. For Wipro, slowdown in consulting revenue is expected to drag down therevenue growth rate. The IT major may see a decline in its revenue growth rate by 0.5 per cent in Q4. Apart from large IT firms, the performance of mid-tier IT firms is likely to be a mixed bag. Industry insiders indicate divergence in performance as the going gets tough.

Apart from the performance of the previous quarter, all eyes will be on the management commentary on key aspects. Firstly, the demand outlook and revenue growth projection for FY24 are the two critical factors on which investors will have a hawkish eye. Given that businesses across the world are spending less on technology, demand outlook will be crucial. The market has already seen less spend on digital deals as companies are adopting austerity measures. However, cost savings deals are coming to the market in regular frequency. Therefore, the number of large deals won in cost takeout space and the deal pipeline will be another set of factors that will be keenly watched. Historically, almost every crisis has benefitted Indian IT industry. Driven by cost-pressure, more technology work tends to be outsourced to offshore centres like India. These will give an indication of the future path of IT firms.

Moreover, operating margin has been receiving favourable support from rupee depreciation all through FY23. Employee attrition is falling while there is an increase in utilisation numbers. These factors should support margin profile of domestic IT industry. Apparently, the margin profile will have immediate reflection on the stock prices of these companies. Hiring is considered as one of the lead indicators of demand outlook. In FY22 and FY23, Indian IT industry has gone for record hiring, including s of freshers and laterals. In FY24, the manpower planning strategy will be of immense significance given the slowdown fears.

As we enter FY24, many moving pieces will determine the performance of Indian IT industry.