The IT industry is expected to record subdued growth in Q3 due to the persisting macroeconomic challenges, resulting in sustained low spending patterns, along with seasonal weakness. Despite this, there’s an optimistic viewpoint that this quarter might mark the nadir of these conditions.
The upcoming earnings season being kicked off by TCS and Infosys on January 11, follows a lackluster second quarter, which saw revenue growth momentum dive for majority IT players. While spending remained conservative and deal ramp ups were pushed, guidance too were narrowed signaling more pain to come.
Brokerage firms expect revenue growth to be modest. BNP Paribas expects 3QFY24 CC organic revenue growth at -2 to +3.6 per cent and mid/small caps reporting 0.5-2.7 per cent q-o-q organic revenue growth. Motilal Oswal expects a median revenue growth of 0.7 per cent q-o-q and 2.5 per cent y-o-y growth rate, with adverse movement of major currencies expected to further slow down the reported growth.
Major challenges
Vinod TP, Research analyst, Geojit Financial Services, said, “The IT industry is likely to showcase muted q-o-q growth in Q3 due to near-term challenges such as prolonged higher inflation and interest rate, delaying discretionary projects and slowing down future earnings growth.”
Margin improvement this quarter will likely be marred by weak revenue growth, wage hikes, furloughs and one-time impacts. Brokerage expects Tier-I companies to report a margin change (+/-) of -100bp to +20bp QoQ in Q3. In terms of talent addition, in tandem with slow growth combined with higher furloughs, headcount addition will also be low.
The slowdown across major verticals and key geographies should persist, with BFSI, Retail, Hi-Tech and Communications likely to experience higher-than anticipated furloughs in 3Q. We expect BFS and Hi-Tech to be adversely impacted in 3QFY24, while the other verticals should deliver muted performance, Motilal Oswal notes.
“Future attention is on new demand emerging from technologies like generative AI, machine learning and cloud computing, as well as new deals won by Indian IT companies during 2023. In context to the recent rally of the sector, IT may endeavor volatility in the short-term, however don’t foresee substantial weakening, offering accumulation strategy,” Vinod said.
Signs of bottoming
BNP Paribas anticipates the upcoming quarter will hopefully be the last weak quarter as it is noticing signs of bottoming. “We think the industry is close to the trough of this cycle. Signs of improvement in the global economy and strong deal wins in recent quarters give us confidence about the revenue growth acceleration that we forecast for FY25,” its report said.
