Analysts predict mixed prospects for Indian IT companies in quarter one of FY24
The first quarter of FY24 poses challenges for Indian IT companies, deviating from the typically strong seasonal performance. Uncertain macroeconomic factors, reduced spending, and deferred projects contribute to a potentially weak quarter for Wipro and Tech Mahindra. While TCS and HCLTech are projected to achieve flat revenue growth, Infosys may experience modest growth. Margin pressures, wage hikes, and leadership changes further complicate the landscape. Despite these challenges, IT companies are bolstered by their strong deal wins and order pipelines.
The first quarter of FY24 is expected to present a mixed bag of results for Indian IT companies, defying the usual strong seasonality observed during this period, say analysts from various brokerages.
Uncertain macroeconomic factors and reduced discretionary spending have led to deferred projects and potential cancellations, which may result in a decline in revenue for Wipro and Tech Mahindra. While Tata Consultancy Services (TCS) and HCLTech are anticipated to achieve flat revenue growth, Infosys could witness a modest 0.7 percent growth on a quarter-on-quarter (QoQ) basis, the analysts predicted.
Traditionally, the June quarter has been a robust period for IT companies. However, the upcoming quarter is likely to deviate from this trend. Despite growth rates ranging between 2 percent and 5 percent for these companies in the previous year, the current economic climate suggests a weaker performance for quarter one of FY24.
Although supply-side challenges are easing, depressed margins are expected to persist due to weak operating leverage. Tech Mahindra and TCS may experience a significant decline in margins due to wage hikes. However, for other companies, margins are anticipated to remain relatively flat.
Amidst the challenging circumstances, the silver lining for Indian IT companies lies in their strong deal wins and order pipelines. TCS, in particular, has announced several large deal wins, including a $1.8 billion agreement with BSNL, the Standard Life deal, and the Marks & Spencer deal. Infosys has secured a significant nearly $500 million deal with a Nordic bank, Danske Bank. Additionally, midcap IT companies have reported favorable order wins due to the rise in cost optimization projects.
Analysts expect Infosys and TCS to maintain their guidance for FY24, although there may be a slight reduction at the upper end for Infosys. HCLTech's revenue guidance is likely to remain unchanged, and both companies are expected to retain their margin guidance. Investors will also closely monitor the performance of TCS under the leadership of its new CEO, K Kritivasan, who assumed the role on June 1. Meanwhile, concerns have arisen in the market due to recent departures within Infosys.
Analysts have expressed a somber outlook and cautious sentiment regarding Indian IT companies. Kotak Institutional highlights the surprising resilience in many IT stocks, while JPMorgan anticipates the weakest June quarter in a decade, excluding the impact of COVID-19. Jefferies warns of risks to the anticipated second-half recovery, potentially leading to downgrades in earnings forecasts. Morgan Stanley echoes Jefferies' concerns, emphasizing downside risks to earnings expectations. However, they believe that any revisions to consensus earnings forecasts could make stocks within the coverage universe more attractive. UBS acknowledges the sector's relatively favorable valuations but maintains a cautious stance on technology.
Ambit advises investors to exercise selectivity, as valuations for tier-one and tier-two IT companies remain significantly above pre-COVID averages. Currently, IT company valuations are higher than pre-COVID levels but lower than the peak observed during the pandemic. Overall, valuations align closely with the five-year average, taking into account the pre-COVID and COVID periods.
According to Ankur Rudra, ED - Technology & Telecom Research, JPMorgan, the demand environment has worsened in June. “We are expecting a June quarter to be muted as a result of that,” he said.
“The demand uncertainty persists. The sector enjoyed very strong growth momentum in 2021-2022 as we were recovering from post-COVID phase. However, the main thing here is we are seeing a mean reversion,” he added.
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(Edited by : C H Unnikrishnan)
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