News

Published: July 10, 2023
Updated: July 10, 2023

Indian IT Sector Faces Muted Q1 Performance amid Persistent Macroeconomic Challenges

The Indian IT services industry is anticipated to experience a subdued performance in the June quarter. Factors such as wage hikes, margin pressure, weak macroeconomic conditions, cuts in discretionary spending, and project delays are expected to contribute to this muted performance. Analysts suggest that the recovery in the sector may be gradual, likely occurring around Q4 FY24 or in FY25.

Expectations for Q1 Earnings:

As tech companies approach the Q1 earnings season, experts are closely monitoring management commentary regarding the growth outlook for FY24. Additionally, they are observing the spread of demand deterioration beyond BFSI, hi-tech, telecom, and retail sectors, as well as factors such as net hiring, project ramp downs, and pricing pressures.

Upcoming Results:

Tata Consultancy Services (TCS) and HCL Tech are scheduled to announce their results on July 12, followed by Wipro on July 13. Infosys will release its Q1 numbers on July 20, while LTIMindtree's announcement is slated for July 17.

Demand and Revenue Outlook:

Brokerage firm Motilal Oswal predicts continued weakness in demand during Q1FY24, particularly affecting discretionary spends. Clients are focusing on cost and efficiency-driven projects while putting non-critical projects on hold. Although the deal pipeline remains healthy, weak macroeconomic conditions are expected to impact revenue conversions, creating near-term revenue pressure. BFSI, retail, hi-tech, and manufacturing sectors continue to exhibit sluggish performance. Demand in the US has deteriorated due to increasing inflation and declining consumer spending. In contrast, demand in Europe remains relatively stable, and deal closures are progressing at a faster pace.

Expected Revenue Growth and Margins:

Analysts anticipate a weak median revenue growth of 0.4% QoQ and 5.3% YoY for the IT services coverage universe in 1QFY24. While the demand remains intact for selective verticals and service lines, project deferrals and temporary pauses in project execution are expected due to approval delays and heightened deal scrutiny. Margins are likely to be impacted by wage hikes and moderated growth, although easing attrition and better utilization may partially offset the impact.

Tepid Q1 and Gradual Recovery:

Sharekhan (by BNP Paribas) expects a tepid Q1 due to the continuation of weak macroeconomic conditions. Recovery in the sector is expected to be gradual, potentially extending into Q4FY24, as the uncertain macro environment shows no signs of an immediate pick-up in tech spends. Cross-currency tailwinds resulting from the depreciation of the dollar against the Euro and pound are expected to marginally elevate the dollar- reported revenues of IT service companies.

The Indian IT services industry is likely to witness a muted Q1 performance due to wage hikes, margin pressure, macroeconomic challenges, and project delays. Recovery is anticipated to be gradual and may not occur until FY25. The sector's future growth will depend on factors such as demand trends, deal intake, pricing environment, and the ability to navigate macro uncertainties. Management commentary on these aspects will be crucial for monitoring the industry's trajectory.