Revenues of IT services companies for the December 2023 quarter are expected to be weak, since a full-fledged recovery in the IT sector is still some time away.
The third quarter could also reflect pressure on operating margins of software players thanks to the wage hikes and higher-than-expected furloughs. However, some firms may be able to defend their margins by resorting to cost cuts.
Three of the big five IT companies will report a year-on-year and quarter-on-quarter declines in revenues, according to Kotak Institutional Equities (KIE). “The growth for the other two will trickle down to low-single digits,” KIE analysts observed.
Indeed, some IT companies might be compelled to revise down their guidance for the current year. KIE analysts expect Infosys to cut its revenue growth guidance to 1-2% from 1-2.5% for FY2024E. “The Ebit margin guidance should stay unchanged at 20-22%,” they wrote recently.
Analysts at Jefferies expect the aggregate revenue growth for the companies under coverage to remain muted at 0.8% quarter on quarter in constant currency terms, given the seasonal impact of furloughs, which are deeper this year. “While sequential growth has improved by 40 bps vs 2Q, this is the slowest aggregate growth in the third quarter of any year in the past decade,” they said.
With the furloughs turning out to be longer than anticipated at the start of FY24,Tier 2 companies too may revise their revenue guidance downwards. However, analysts at Motilal Oswal said they still expect the companies to maintain and achieve margins within the guided band through rigorous cost-cutting measures.
Analysts at ICICI Securities observed that in the absence of mega deal announcements in Q3, order books are estimated to remain flat y-o-y with a dip sequentially for most companies. The Indian IT industry will likely report a weak TCV (total contract value) from deals in Q3 after a strong Q2, when top tier firms announced several mega billion dollar deals. The quarter was light on deal announcements, especially in North America. Most deal wins have been in Europe. The recent rally in IT stocks might take a break should the results turn out to be disappointing and the commentary cautions.