IT services companies will report their Q1FY24 financials starting with the country’s largest IT services company Tata Consultancy Services (TCS) next week. It is expected these companies will report softer revenue growth due to weaker discretionary spending, and pockets of weakness in mortgage, retail and telecom.
TCS chairman N Chandrasekaran in the company’s annual general meeting said there will be volatility in different markets on customer spending in the nearby quarters. Despite these challenges, CEOs of IT companies recently said clients are focusing on cloud, Internet of Things (IoT) and generative AI (artificial intelligence).
Though June is a seasonally strong quarter, according to analysts, this time it will be an exception, revenue will decline for Wipro and Tech Mahindra, and it will be flat for TCS. Emkay Global Financial Services expects constant currency revenue growth of -2.3% to 1% for tier-1 companies and -1.6% to 3.4% for mid-cap companies.
It expects Infosys to retain its guidance of 4-7% constant currency revenue growth and 21- 22% EBIT Margin for FY24. HCL Tech is also likely to retain its overall and services guidance of 6-8% and 6.5-8.5% constant currency year-on-year (YoY), respectively, and 18-19% EBIT margin for FY24. Wipro is likely to guide flat (-1 to 1%) in terms of constant currency quarter-on-quarter (QoQ) revenue growth for Q2FY24, Emkay Global said.
According to the report, the salary hike cycle will drag margin sequentially by 100 bps for TCS and 70 bps for Tech Mahindra. Motilal Oswal Financial Services said deteriorating macro and wage hikes will impact IT companies’ earnings. “Margins will see impacts from growth moderation and wage hikes in the range of -140bp to +30bp QoQ. However, easing supply pressure, cooling off attrition, and improving utilisation should help partially offset the impact,” it said.
It further said there is a near-term weakness due to approval delays and heightened deal scrutiny, and these factors may result in project deferrals and temporary pauses in project execution. It does not anticipate a recovery in 2HFY24, and the recovery is expected to be more gradual in nature and should occur only in FY25. Kotak Institutional Equities concurred with the view that it will be a weak quarter for IT companies.