India’s IT services business to hit three-year low in March quarter

Tata Consultancy Services (TCS) and Infosys, the top two IT services firms, are set to report March quarter earnings this week. This will be followed by HCLtech, Wipro, Tech Mahindra and other companies during this month.

The March quarter performance could set the tone for FY24 as well, with experts expecting slow revenue recovery for the industry and a slowdown in new deal bookings. Onkar Tanksale, equity research analyst at Axis Securities, said the March quarter will provide important guidance on how long global tech spending will remain subdued.

The industry distress is mainly driven by a slowdown in business from the banking, financial services and insurance (BFSI) sector, which contributes around 30% of revenue for large-cap firms. Experts said continued staff cost, which is putting pressure on margins, is another reason for the slowdown.

For example, a forecast note by Mukul Garg, research analyst at financial services firm Motilal Oswal, pegged four of the top six firms, TCS, Infosys, HCLTech and Wipro, to post less than 1% sequential revenue growth in the March quarter. Is. The recently merged entity LTIMindtree is the only firm to post a revenue growth of 1.6%, while Tech Mahindra is reported to post a revenue decline of 0.7%.

The weaker revenue growth at these firms can be attributed to a modest 1.2% sequential growth in earnings before interest and taxes (Ebit), Garg said in a note to investors. Besides, brokerage HDFC Securities’ Institutional Research note to investors on April 6 also painted a similar picture, with TCS and Infosys to post marginal revenue growth, and HCLTech, Tech Mahindra and Wipro to post declines. The range of change in revenues of large-cap IT firms would be within a 2% decline to a 1% increase sequentially from the December quarter.

HDFC Securities Vice President Apoorva Prasad said that companies with more than market cap Rs 20,000 crore is likely to be the worst hit in Q4FY23 due to cut in billing timelines by long-term customers. He added that the collapse of Western banks such as Silvergate Bank, Silicon Valley Bank and Credit Suisse is likely to create uncertainty in the banking sector, which could force firms across industries to strengthen their discretionary tech spending.

Tanksale of Axis said, “The deal closure could happen in this quarter, but if the deal is not realized now, it will not make any difference to the financial health of the sector in the immediate two quarters of FY24.”

Prasad said the March quarter could offer the sharpest deceleration in the domestic IT services industry in calendar year 2023 and lead to a consolidation of revenue growth rates after three consecutive years of double-digit growth in FY2024.

On 3 April, Mint reported that the domestic IT services industry could see a decline of 700 basis points in revenue growth, falling to mid-single digits for the first time since the start of the pandemic.

A basis point is one hundredth of one percent.

Also, the slowdown could cause midcap IT firms to outperform the top six (TCS, Infosys, HCL, Wipro, Tech Mahindra and LTIMIndtree) in terms of revenue growth in this quarter. Motilal Oswal estimated that Cyient, Koforge and Persistent Systems would post sequential revenue growth of over 3%, while Mphasis and Zensar could post a 1.1% sequential revenue decline.

“Midcap companies will have a clear edge over large companies in terms of reporting growth figures due to their lower revenue and deals base. Their project sizes are also very small, and midcap firms are likely to continue with their periodic bills from clients rather than postponing spends to clients. They are also not the primary vendors of outsourced projects, so project tenders are very small. Hence, their deal churn rate is very high,” said Axis Tanksale.

To be sure, most of the IT services firms have witnessed consolidation in their share prices in the last one year. At market close on April 6, BSE IT index closed on 28,670.37 – down 20% from 35,955.15 a year ago.

Consolidated market data for all four quarters of FY23 shows that the price-to-earnings (P/E) ratio of the domestic IT services industry has fallen from an average of 34x in March last year to around 24x at the end of March. this year. A falling P/E ratio is usually a sign of a bear market.