IT may log in muted revenue in Q4, analysts see bleak near-term outlook for BFSI

TCS, Infosys, HCLTech, Tech Mahindra and Wipro, all reported top-level appointments and exits this quarter. The biggest shocker was the sudden resignation of TCS CEO and MD Rajesh Gopinathan. K Krithivasan, who was the global head for BFSI, contributing around 38 percent of TCS revenue, was appointed the new CEO.

Amidst the banking crisis, Infosys lost former president Mohit Joshi to Tech Mahindra, where he will be joining as the CEO and MD from December. Joshi was responsible for financial services and insurance segments, among other areas, and led many large deals for the company. This was the second major exit for Infosys in H2FY23, following the exit of president Ravi Kumar S who became the CEO of Cognizant.

“We await to see what happens to the positions vacated by Ravi Kumar (who has become Cognizant CEO) and Mohit Joshi (CEO designate of Tech Mahindra). Would wait to see if the responsibilities are filled internally,” Girish Pai, Head of Research, Nirmal Bang, said in his note.

Similarly, HCL Tech’s Corporate Vice President Sukamal Banerjee who led the $1-billion revenue vertical Engineering and R&D Services (ERS), besides global strategy and investments around emerging technology transformations, too resigned. Rajan Kohli, President of Wipro's Integrated Digital, Engineering and Applications Services Business lines quit as well.

How the commentary around these exits and appointments would shape up and any changes in the business strategies related to these appointments would be important to note.

Impact of banking crisis

“IT companies have mentioned increased cautiousness among clients around decision-making due to heightened uncertainty arising from the recent banking crisis. Deal pipelines have not shrunk, but conversion to new deal wins is taking longer time,” analysts at ICICI Securities said in a note.

Analysts expect near-term demand visibility to be weak, given the macro uncertainties and banking crisis. Among Tier-I IT companies, TCS has the highest exposure to the sector and will be closely watched for its commentary.

Analysts at Kotak Institutional Equities said, “The banking crisis in US regional banks and European banks can induce greater caution and impact overall tech spends by banking clients.”

The collateral damages to the economies due to the banking crisis and the impact on customer health are yet to be seen, Nirmal Bang said in a note.

Hiring trends

Hiring across companies is expected to be muted, as all of the top five companies have continued to slow down on hiring significantly in each quarter of the year. While Q4 hiring is usually in anticipation of the demand in the new financial year, there were no green shoots this quarter.

In fact, pressure on an already subdued quarter was only exacerbated by the banking crisis, with experts now stating that companies will focus on increasing their utilisation and only backfilling attrition in critical roles.
Companies have maintained that the slowdown in hiring is not a factor of demand, but the increased hiring they did in the preceding year. However, another metric to watch out for will be the number of freshers that companies aim to hire in FY24.

Analysts at Emkay Global expect moderation in hiring, with a focus on improving utilisation, deploying freshers post-training and demand moderation. “Better talent availability with significant fresher intake over the past few quarters and lower backfilling costs with reduced churn rate should aid in margin recovery,” the note read.

Onboarding of freshers hired in the previous year has still not been completed in some companies, and companies did go to top colleges they recruit from in the first round of placements. However, the second rung of colleges saw subdued demand from IT companies, which are some of the largest hirers of fresh talent.

“The full impact of the extraordinary hiring of fiscal 2022 was felt in fiscal 2023, because of which employee cost is estimated to rise by over 20 percent. Companies are now focussing on utilisation than advance hiring, supported by lower attrition. This should lead to marginal improvement in operating profitability in fiscal 2024,” said Aditya Jhaver, Director at CRISIL Ratings.

Revenue and PAT estimates

According to Crisil Ratings’ Anuj Sethi, headwinds in the BFSI segment of key markets, such as the US and Europe, will affect revenue growth this quarter.

“While BFSI segment revenue growth is expected to halve to mid-single digit, it would be marginally offset by 12-14 percent growth in the manufacturing segment and 9-11 percent growth in other segments. Net-net, there would be moderation in overall revenue growth,” he said.

Nirmal Bang too, expects revenue growth to be modest, attributing it to decent Total Contract Value (TCV) that companies clocked in the previous quarters.

Motilal Oswal expects most tier-1 companies’ revenues to grow, barring Tech Mahindra at negative 0.7 percent. It expects LTIMindtree to clock revenue growth of 1.6 percent quarter-on-quarter (QoQ) in constant currency terms, followed by TCS at 0.9 percent, Infosys and HCLTech at 0.6 percent, and Wipro at 0.5 percent.

Kotak has forecast a modest revenue growth guidance for FY24, which it says “may not be considered conservative due to elevated risks to growth and likely back-ended growth trajectory”.

On profitability for the quarter, Motilal Oswal expects profit after tax (PAT) to grow at 2.9 percent sequentially and 11.1 percent year-on-year (YoY) for tier-1 players. For tier-2, the note estimates a sequential PAT growth of 5.3 percent and 13 percent from the same period last year.

For fiscal 2023, Crisil expects operating profitability to moderate 150-175 basis points (bps) to a decadal low of 22-22.5 percent, due to higher employee costs. “Crisil Ratings expects these costs to moderate next fiscal, with companies taking a cautious approach to fresh hiring as they attempt to normalise headcount after the hiring peaks of fiscal 2022, which saw the employee count for Tier-I firms surge 22 percent,” it said.

For FY24, Crisil expects the sector to see a decline of 700-900 bps in revenue growth.

Demand outlook and tech trends

Impacted customer sectors will look to optimise existing cloud consumption spends. Vendor consolidation deals will also continue to increase.

Apart from the BFSI sector, analysts at Kotak Institutional Equities said, “the demand outlook of segments such as mortgages, hi-tech, and certain segments of retail and telecom is weak,” as enterprises in impacted segments will prioritise cost efficiencies.

Nirmal Bang’s Pai expects delays in decision-making, focus on cost optmisation and vendor consolidation to be the common themes across company commentaries for 4QFY23. “Seasonally, we think the October-March timeframe tends to be the peak in terms of order inflow for most companies and we expect that to repeat,” he said.

“The management (of IT firms) indicated that the secular demand is still intact in certain verticals and service lines, but suggested near-term caution among clients and some delays in decision-making, which might lead to project deferrals and pause in execution,” said a note from Motilal Oswal.

Moreover, for the customer sectors still open to discretionary tech spending, finding use cases around new technologies, including artificial intelligence (AI), blockchain, and 5G, will take centre-stage.

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