IT Q3 FY24 earnings: Five factors to watch out for

Top five themes to watch out for in the Q3 earnings of IT companies.

India’s top IT firms will kick off December quarter earnings this week, with TCS being the first to report on January 11. The Street expects IT companies’ third quarter (Q3) earnings to remain subdued because of seasonal furloughs and continued cuts in discretionary spending by clients.

Analysts said in brokerage reports that deal announcements too have dried up compared to the September quarter. This would result in a moderation of total contract value (TCV) after record wins in Q2. For deals won, the Street expects IT companies to have won cost-takeout opportunities mostly.

Cost-takeout is a term used by IT companies to describe deals that are placed with them to increase productivity and reduce spending.

In terms of specific verticals, communications, banking, financial services and insurance (BFSI), and retail will likely remain weak, while manufacturing, energy, and travel are relatively better placed.

Here are the top five themes to watch out for in the Q3 earnings of IT companies:

Muted demand

Analysts expect muted demand to continue for IT services companies because of adverse seasonality effects, weak discretionary spending, and project cuts by clients. “Three of the big five IT services companies should report a year-on-year (YoY) and quarter-on-quarter (QoQ) decline in revenues in the December 2023E quarter, while growth for the other two will trickle down to low single digits,” analysts at Kotak Institutional Equities said.

Wipro continues to struggle and is expected to report a fourth consecutive quarter of sequential revenue decline. Midcap IT firms, such as L&T Technology Services and KPIT Technologies, have also witnessed growth moderation, although they continue to hold up better compared to their large-cap peers, according to a note by Axis Capital.

Nomura said the void created by a lower number of small-sized and discretionary projects, along with delays in client decision-making and ramp-up of project wins, will, in certain cases, lead to revenue weakness in the near term. The brokerage further said the impact of the current slowdown might extend until FY25.

Furloughs

Q3 has traditionally been a weak quarter for IT due to seasonal furloughs. This comes at a time when firms have been facing a tough demand environment, resulting in pressure on revenue and profits.

Analysts at Kotak Institutional Equities said high furloughs in the hi-tech and financial services verticals and the pruning of discretionary programmes will lead to muted performance across companies.

Higher-than-usual furloughs, lower working days, and the absence of budget flushes will impact growth across the spectrum of IT companies, analysts at brokerage firm JM Financial said in a research note. The brokerage also said there are a few company-specific factors that would offset, at least partially, the impact of furloughs.

For example, HCL Technologies will benefit from the year-end pick-up in software sales, a two-month incremental contribution from the acquisition of Germany-based automotive engineering services company ASAP, and the ramp-up of the Verizon deal.

Guidance

IT companies have been tinkering with their revenue guidance in the face of deteriorating macroeconomic conditions. This trend is expected to continue for the December quarter as well, according to analysts.

Analysts at Brokerage Kotak expect Infosys to cut its revenue growth guidance to 1-2 percent from 1-2.5 percent for FY24. The brokerage also expects HCL Technologies to retain organic revenue growth guidance of 4-5 percent.

In April, Infosys had sharply trimmed its revenue growth projection for the current financial year to 4-7 percent from the 14-16 percent it had projected in the previous financial year. Since then, the company has revised its revenue guidance twice, and it is currently at 1.0-2.5 percent.

Analysts at Kotak expect Wipro to guide its revenue in the range of -1 percent to 1 percent for the March quarter.

Operating margin guidance is expected to be unchanged by companies.

IT budgets

The Street is not on the same page when it comes to the IT budgets of clients.

Nomura said recent interactions with industry participants suggest there is a continued impact of the macroeconomic slowdown and high inflation in developed markets on tech budget outlooks for most of the industries in 2023.

Analysts at Elara Capital said they will monitor the commentary as the macro-economy in the West takes a positive turn, led by inflation moderation and an indication of a rate cut by the US Federal Reserve.

US Federal Reserve officials projected a lower-than-expected policy rate at the end of 2024.

Analysts at Axis Capital, in a report, said the Street will be focused on qualitative and quantitative commentary on 2024 IT spending trends.

Analysts at brokerage Nomura said IT budgets are likely to be prioritised in areas of automation and cost efficiencies in the near term.

Poaching

The spotlight will also be on the poaching wars that have erupted between top firms such as Cognizant, Wipro, and Infosys in recent weeks.

While Wipro has sued two former executives for joining Cognizant, Moneycontrol reported that Infosys has sent Cognizant a missive asking it to desist from poaching top executives.

Also read: Wipro's non-compete clause: 10 rival firms executives cannot join for 12 months

With reports suggesting that firms are now reworking employment contracts and tightening non-compete clauses, it remains to be seen what the management of top firms will say during earnings announcements.