IT earnings in Q2 may suffer from weak demand, macro headwinds; Nomura stays cautious

Several companies in the IT space had cut their growth guidance in Q1 and Nomura expects such weakness to continue in Q2 as well.

As information technology companies gear up for the upcoming July-September earnings season, brokerage firm Nomura believes continued weakness in demand and sustained macro uncertainty will adversely impact their financials.

"We believe the void created by the lower number of small-sized and discretionary projects along with delays in client decision-making and ramp-up of won projects in certain cases will lead to both revenue and margin disappointments in the near term, given the ‘sticky’ nature of costs," the firm stated in its report.

Growth divergence to continue

Nomura expects largecap IT players to report revenue growth in the range of -1 percent to +2 percent on-quarter, while midcaps are likely to fare better with expectations of 0.7 to 3.3 percent sequential growth in constant currency terms.

Among largecap players, the brokerage firm forecasts LTIMindtree to deliver the strongest revenue growth at 2 percent sequentially, while Tech Mahindra is likely to emerge as a laggard in the pack, with a de-growth of 1 percent in the September quarter.

Read | Accenture’s results don’t offer much relief for Indian IT’s Q2 numbers

Among midcaps, Birlasoft is likely to emerge as the winner, with the strongest growth expectations of 3.3 percent, while Mphasis may report the weakest growth at 0.7 percent on-quarter.

The EBIT margin for industry majors like  Infosys, Tech Mahindra, LTIMindtree, Persistent Systems and L&T Tech will also remain under pressure with salary hikes and weak revenue growth playing as major
headwinds.

Given the divergence in financial performance across the IT pack, management commentaries on the deal pipelines and timely ramp-up of projects will take the centerstage.

On that front, Nomura expects, HCL Tech and Infosys to retain growth guidance for the current fiscal.

No sign of revival in discretionary demand 

Nomura sees multiple headwinds hampering the growth trajectory for IT companies in the near term, and hence, the firm has rolled out a cautious stance on the sector. It also attributed limited visibility of a significant turnaround in discretionary demand for IT services as the major factor behind the caution.

Read | Accenture forecasts first-quarter revenue below estimates as tough economy weighs in

Nomura also predicts the current slowdown to span across the entire FY24 rather than just the first half, with the possibility of its impact even extending to FY25 discretionary spends as macro uncertainties continue to linger.

"While cost pressure and changing customer preferences continue to increase tech intensity in enterprises’ businesses and could result in increased offshoring work for India’s IT services in the medium term, IT budgets are likely to be prioritised in areas of automation and cost efficiencies in the near term, in our view," Nomura said.

In particular, the brokerage house is watchful of the deal flows in the BFSI (banking, financial services and insurance) and CMT (communications, media and technology) verticals.

Read | Accenture forecasts downbeat year as IT spending stays weak

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