Moneycontrol Pro Panorama | The paradox in IT earnings

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Investors in IT services stocks are contending with two contrasting facts. Companies are winning new orders and are even seeing a healthy project pipeline. But their near-term revenue outlook continues to remain soft or challenging.

Take the case of LTIMindtree, the latest entrant into the Nifty 50 index. The stock dropped in Tuesday trading after the company backtracked on its double-digit growth guidance for FY24 -- of at least a 10 percent rise in revenue. It reported a modest expansion in June quarter revenues -- up just 0.1 percent. Read our Research Team’s take on LTIMindtree’s results.

Note that LTIMindtree, similar to other frontline IT services companies, has begun the FY24 with a good orderbook. The company, along with Tata Consultancy Services (TCS) and Wipro, has also reported decent order inflows in June quarter. Check out our Chart of the Day on the trend in traditional IT services' contract awards.

However, as subdued June quarter results illustrate, the order book and project pipeline are not converting into revenues at an expected pace. Wipro’s mid-point guidance implies a reduction in constant currency revenues in the September quarter. TCS has indicated near-term volatility and pullback in discretionary projects and customer spends.

Amid the economic uncertainty, clients are reducing discretionary spends, delaying project start dates and ramp-ups, the management of LTIMindtree said in an earnings call. As existing projects reach closure, customers are taking a longer time to decide on incremental spends and investments.

“While the demand is still good, we are winning new deals, but clients are reviewing the projects under way, and wherever the ROI is not very strong, the next phase of the project is getting paused,” K Krithivasan, Chief Executive Officer and Managing Director, TCS, said in a call. ROI is return on investment.

As turmoil in the US banking sector receded, IT companies had expected an improvement in project execution in the June quarter. That did not come through in the said quarter.

With client spending remaining constrained, IT companies are scaling back on hiring and are preparing for a subdued FY24. While that calls for investor caution, thanks to strong inflows into equity markets, the NSE IT index is reflecting no such concern—it is up 8.5 percent so far in FY24.

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Technical Picks: Crude oil, ICICI Prudential Life Insurance Company, Fino Payments and Rallis (These are published every trading day before markets open and can be read on the app).

R Sree Ram
Moneycontrol Pro