In the midst of another seasonally robust quarter, IT services companies are bracing for a slowdown in revenue growth during Q2 due to ongoing macroeconomic uncertainties and a decrease in discretionary spending. Despite significant deal wins within the industry, the Annual Contract Value (ACV) is expected to remain subdued, even though the Total Contract Value (TCV) is high. This is attributed to extended contract durations, pricing dynamics, and transition effects.
Here are the key takeaways:
Revenue Outlook: Growth for Tier-I Indian software exporters is anticipated to be modest, with HCL Technologies being the exception. “Among mid-cap companies, we expect Birlasoft (3% QoQ growth on an adjusted basis) and Newgen (30% YoY growth) to lead the way. However, TechM, Wipro, Cyient, and Zensar are expected to report sluggish figures. In terms of guidance, we anticipate Infosys to maintain its guidance of 1-3.5 percent. Wipro is likely to guide -1 to 1 percent QoQ revenue for Q3FY24E,” according to IDBI Capital’s earnings preview report.
“The slowdown observed in March and April has eased, but a persistently weak spending environment and sporadic project ramp-downs may limit any acceleration in growth,” notes JM Financial.
Margins Outlook: IDBI Capital expects margins to vary among IT companies. The brokerage predicts margin expansion for TCS, HCL Technologies, Infosys, and Coforge. Conversely, Zensar and LTIMindtree are projected to experience margin declines due to wage hikes. Newgen Technologies is expected to report robust margins both on a QoQ and YoY basis, while Birlasoft is likely to maintain flat margins. JM Financial expects the top 4 players to report a (10)–50 basis point (bps) EBIT margin expansion QoQ. For Tech Mahindra, it anticipates flat margins despite the reversal of wage cuts for senior management. On the other hand, LTIMindtree and Persistent Systems are expected to see margin contraction due to wage hikes, while Coforge is expected to achieve a margin improvement of 150 bps.
Deal Wins: JM Financial, in its preview report, noted that large-cap IT services players have secured a significant share of efficiency-driven mega deals. “INFO appears to have taken the lead in 2Q, with at least three mega deals (TCV of c.USD 6bn) already announced. TCS’ deal-win momentum remains strong, exemplified by the USD 1 billion JLR deal. HCL announced a USD 2.1 billion deal with Telecom. TECHM appears to be the only exception. We believe TECHM’s excessive focus on margins is currently hindering its ability to bid aggressively. While this may boost margins in the short term, it could adversely affect FY25 growth as efficiency-led deals seem to dominate the landscape right now,” it adds.
Other Key Considerations: The focus on ramp-up and revenue conversion for mega deals has persisted for some time. Given the expected soft Q2 and only modest improvement in the second half, there is an anticipation of guidance revisions or a moderation in outlook for most players, with the exception of Infosys, as noted by JM Financial.
“Investors should also watch for signs of a potential budget surge and indications of a greater or lesser impact of furloughs in 3Q,” adds the brokerage firm.
Furthermore, the deal trends during Q2 should be monitored, as they will provide insights into the trajectory for H2FY24E and FY25E, according to IDBI Capital.