IT firms may revise guidance upwards in second half of FY24

Most industry experts and analysts expected large-cap IT service providers to report a decline in revenue growth due to slowdown in the banking, financial services and insurance (BFSI) sector in the North American market. BFSI accounts for a major portion of the revenue earned by this sector – for example, it accounts for 86,127 crore out of the total revenue of Tata Consultancy Services (TCS) 2.25 trillion, or more than 38%.

At a press conference following the announcement of its FY23 annual report on April 12, TCS Managing Director and Chief Executive Rajesh Gopinathan expressed caution for FY24, saying the uncertainty in North America could be reflected across the industry.

TCS is India’s largest IT services firm, and is generally seen as a pioneer for this sector. While the firm doesn’t offer guidance, it missed analyst expectations for both quarterly and annual revenue earlier this month.

Infosys, the second largest IT services firm, estimated revenue growth guidance of between 4-7% for FY24 – a sharp drop from its 16-16.5% growth guidance for FY23. While HCL Tech outperformed Infosys with 6-8% growth guidance for FY24, its overall figure was also lower than FY23’s guidance of 13.5-14.5% revenue growth. Meanwhile, Wipro did not offer guidance for the full year, instead estimating a revenue decline of 1-3% for the current (June) quarter. The company will present further estimates on a quarterly basis.

Midcap IT services sector, which accounts for companies with annual revenue between 5,000 more 20,000 crore, fared significantly better than its larger peers but still halved its FY24 revenue targets.

On April 20, Cyient posted 38.7% constant currency (CC) growth 5,095.9 crore in consolidated services revenue, but in its post-earnings conference, guided for FY24 revenue growth between 15-20%. Coforge, which announced its results on April 27, reported 22.7% revenue growth 8,014.6 crore for FY23, but guided for a growth projection of 13-16% in FY24. Mphasis, which reported 9.7% cc revenue growth 13,840 crore in FY23, the earnings before interest and taxes (Ebit) margin for FY24 is estimated to decline by 186 basis points – down from 17.11% reported in FY23. It didn’t offer revenue growth guidance.

The slowdown comes after a period of rapid growth for the sector during the pandemic years, which saw IT services firms witness a surge in demand for digital transformation, cyber security and other related deals from clients across the globe.

However, as the pandemic subsides, most service providers have seen their revenue growth slow to pre-pandemic levels, while additional employee costs and higher casualty figures put pressure on their margins throughout 2022.

This was reflected in the BSE IT index, which lists the top IT firms – in FY23, the index fell from a high of over 37,300 points at the beginning of the year to around 27,100 points by July last year. A decline of over 27% was sustained during the year, with the index closing at 28,479 points on 31 March – an overall consolidation of 23.7%, and only 5% above its 52-week low. At market close on April 28, BSE IT ended 1.04% higher at 27,503 points – led by a strong performance by midcaps, but only 4.5% above the 52-week low of 26,314 points that was recorded on April 17 .

Industry analysts and stakeholders said the revenue growth guidance reflected clear weaknesses but also left room for revised growth in the second half of the year. Kumar Rakesh, analyst, IT and auto, with brokerage firm BNP Paribas, said, “In the March quarter, we saw most large and midcap companies miss our expected quarterly revenue figures by 1-2 percentage points. Going forward, the revenue guidance revision could happen in the second half of this fiscal. Beyond the revenue numbers, if we look at the rest of the data and commentary, deal wins were well ahead for most companies. The deal pipeline for many companies has grown over the past year, which is looking strong. If we look at this in the context of the weak revenue growth guidance given by most firms, it seems that most of the industry’s clients and customers are cautious, but not in a panic.”

Rakesh said this means that customers are not canceling their tech spending plans, but postponing them.

“If this is true, we will see some of these business opportunities coming back to service providers as pent-up demand. We saw this in the first year of the pandemic as well, where we had two weak quarters leading up to September (in FY2011), followed by very strong growth due to pent-up demand and revised revenue growth accordingly. Well. This year may not be of the same magnitude, but we can see a similar pattern in FY24 as well,” he added.

A senior industry executive, who requested anonymity since he has worked with several leading IT service providers, said the boardroom consensus at most of India’s top IT services firms is due to the banking crash in North America in March. . He said companies remain optimistic, driven by the number of deals they have in hand, which were a record high for many companies. Wipro, for example, last week announced a record revenue of $4.1 billion for the second consecutive quarter.

“We have consistently heard about record deal wins through FY23, but what we lack right now is clarity on the duration of execution of these deals. Based on this, it is likely that the weakness in the sector will continue for at least the next two quarters – had these deals been executed and billed in the shorter term, they would have commented more positively,” said Akshara Bassi, Research Analyst , Global Cloud and Server Market and Market Researcher, Counterpoint India.

Apoorva Prasad, vice-president, institutional equity at HDFC Securities, a brokerage firm, agreed, saying deal closures, which have become “more challenging” for most service providers, have been the biggest challenge towards adding revenue growth.

“Whether we see better revenue guidance revision in FY24 will be a function of how certain macroeconomic factors play out. There is certainly a pent-up demand element within the current delay in deal execution for service providers. So, it’s not like all the revenue is lost, and some of it will naturally come back. It’s hard to say whether that demand will return early in the September quarter, or pick up in a seasonally weak second half of the year to allow room for improved revenue guidance. But, there is a possibility of such market correction,” Prasad said.