India’s large technology service companies may see a sequential improvement in their fiscal fourth quarter earnings, but the growth will still be muted, as IT budgets and discretionary spending in the US remain tight. Margins are likely to improve a little for the sector, helped by continued cost-control measures and moderating attrition, barring specific cases such as Infosys, HCL Tech and Wipro.
“We expect Indian IT companies to report weak revenue growth in 4QFY24 as spending continues to remain muted due to macro concerns, especially from the banking, hi-tech, and telecom sectors,” said Antique Stock Broking.
Revenue outlook muted for tier-1, but smaller firms may outperform
“Q4FY24 should mark some sequential improvement in revenue growth for Tier-1 tech companies after the decline in the December 2023 quarter, aided by more working days and reversal of furloughs, even as discretionary spend remains somewhat challenged,” said a note by Axis Capital.
While several brokerages have varying expectations on IT companies’ Q4 revenue growth, with estimates ranging from (-)2 to 5 percent quarter-on-quarter, most analysts believe that strong mid-tier firms will outperform the tier-1 firms.
HDFC Institutional Research notes the expected growth divergence between the top tier and mid tier IT companies. In its estimation, for Q4FY24E, growth divergence continues and is expected to range between (-)1.3% to 1.3% quarter-on-quarter for tier-1 IT firms. Whereas Q4 growth estimates for mid-tier IT companies range from 0.3% to 4.2% quarter-on-quarter, said HDFC Institutional Research.
Indian IT firms’ Q4 margin outlook: Stability eyed, cost controls to help
IT firms may report flat-to-higher margins sequentially in Q4, “supported by continued cost-control, including moderating attrition and headcount rationalisation,” said Axis Securities.
However, that may not be so for all major companies, and they may be under pressure in specific cases. “Residual impact of wage hikes—one month for Infosys, and two months for Wipro; visa cost for Infosys; lower software revenues for HCL Tech, are specific headwinds,” said JM Financial, in a note.
Also, while easing supply-side constraints and lower onsite expenses may take some pressure off the sector margins, the muted growth in the large cap universe will likely continue to weigh.
All eyes on guidance for FY25: Pain likely to continue in new fiscal
The revenue guidance of large IT companies such as Infosys and HCL Tech for FY25 may fail to excite the Street, defying the optimism of a discretionary spend pick-up, said analysts. “Channel checks and peer commentaries do not indicate any immediate pick-up in short-term discretionary projects,” said Axis Capital.
“A weak exit to FY24 and a still inconducive demand environment could temper initial FY25 guidance for most players,” added JM Financial.
HDFC Institutional Research expects Infosys to guide for 3-5 percent growth for FY25E; HCL Tech: 5-7%; Wipro: (-)1-1%; and L&T Tech greater than 10% for fiscal year 2024-25.
On margins, the guidance is likely to be more benign, continuing the trend of improvement from FY24. “We expect the companies to guide for flat-to-higher margins for FY25E, given their continued focus on operational efficiencies even as growth remains in check,” said Axis Capital.
Q4 earnings estimates for Indian IT companies
HDFC Institutional Research expects its IT coverage universe to report a 0.2 percent quarter-on-quarter rise in aggregate net sales for the January-March quarter. Further, it expects the EBIT margin to remain nearly flat (-4 bps). Adjusted Profit After Tax is also estimated to remain flattish, rising just 0.1 percent from the previous quarter.
Most brokerages estimate TCS's Q4 revenue (in rupee terms) to grow 1-3 percent quarter-on-quarter; Infosys' sales, however, may remain flat or even see a mild fall, in their view.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
