Title: IT Industry Faces Challenges with Subdued Q3 Growth
The IT industry is expected to face subdued growth in the third quarter (Q3) due to ongoing macroeconomic challenges, which have resulted in sustained low spending patterns and seasonal weakness. Despite these conditions, there is some optimism that this quarter might mark the lowest point before improvement.
The upcoming earnings season, beginning with TCS and Infosys on January 11, follows a lackluster second quarter where many IT players experienced a decline in revenue growth momentum. Conservative spending and delayed deal ramp-ups were observed, with narrowed guidance signaling further challenges ahead.
Brokerage firms predict modest revenue growth. BNP Paribas expects Q3FY24 CC organic revenue growth to range from -2% to +3.6%, while mid/small caps are likely to report 0.5%-2.7% quarter-on-quarter (q-o-q) organic revenue growth. Motilal Oswal anticipates a median revenue growth of 0.7% q-o-q and a 2.5% year-on-year growth rate, with major currency fluctuations expected to further slow down reported growth.
Key Challenges:
According to Vinod TP, a research analyst at Geojit Financial Services, the IT industry is likely to see muted q-o-q growth in Q3 due to short-term challenges such as high inflation, interest rates, delayed discretionary projects, and slower future earnings growth.
Margin improvement in Q3 may be hindered by weak revenue growth, wage hikes, furloughs, and one-time impacts. Brokerages expect Tier-I companies to report margin changes ranging from -100 basis points to +20 basis points q-o-q in Q3. Additionally, due to slow growth and higher furloughs, headcount additions will be minimal.
The slowdown across major verticals and key geographies is expected to persist, with the BFSI, retail, hi-tech, and communications sectors experiencing higher-than-anticipated furloughs in Q3. While BFS and hi-tech industries are likely to be adversely affected, other verticals are expected to deliver muted performance, as noted by Motilal Oswal.
Looking ahead:
Vinod emphasizes the future potential of technologies like generative AI, machine learning, and cloud computing, as well as new deals won by Indian IT companies in 2023. Despite short-term volatility, he doesn’t foresee substantial weakening in the IT sector and advises an accumulation strategy.
BNP Paribas anticipates that the upcoming quarter may be the last weak quarter, as signs of improvement in the global economy and successful deal wins in recent quarters instill confidence in a revenue growth acceleration forecasted for FY25.
In summary, the IT industry faces challenges in Q3 with anticipated subdued growth due to macroeconomic factors and sustained low spending patterns. However, there is hope for improvement in the future, particularly with the emergence of new technologies and favorable deal wins. This quarter may signify a turning point for the industry as it navigates through these challenges.
