How TCS, Infosys and peers fared amid banking crisis

India’s information technology services industry may have seen muted growth in the January-March quarter as a banking crisis in its largest markets weighed on its biggest revenue stream. Still, dealmaking—though delayed—is robust as long as the digitalisation agenda remains intact.

That, at a time when the industry bellwethers are seeing a churn in the upper echelons of their management.

Revenue of tier 1 IT services firms in India either fell or rose up to 2% sequentially in the fourth quarter of the fiscal ended March 31, analysts indicated ahead of the earnings season that starts on Wednesday. Tata Consultancy Services Ltd. and Infosys Ltd. are likely to deliver sequential growth, while HCL Technologies Ltd., Wipro Ltd. and Tech Mahindra Ltd. post declines.

EBIT margins—a measure of operational performance of a company—are also seen impacted, with tier 1 firms likely to record a quarter-on-quarter growth or decline of up to 100 basis points.

“IT companies have mentioned increased cautiousness among clients around decision-making due to heightened uncertainty arising from the recent banking crisis,” Sumeet Jain and Aditi Patil, research analysts at ICICI Securities, said in an April 1 note. “Deal pipelines have not shrunk, but conversion to new deal wins is taking longer than usual.”

This implies that demand may pick up only in the second half of 2023–24 or get pushed to 2024–25. Digitalisation is here to stay, but clients’ near-term focus has shifted to cost optimisation and increasing efficiency, ICICI Securities stated.

Banking Crisis
The collapse of Silicon Valley Bank in the US and Credit Suisse AG in Europe has yet again convulsed the global banking landscape, so much so that the aftershocks are likely to shake up India’s biggest outsourcing firms, which derive up to 40% of their revenues from banking, financial services, and insurance clients.

North America contributes more than 50% of Indian IT’s BFSI revenue, according to industry body Nasscom. Wipro derives the highest 35% of its revenue from this vertical, followed by TCS (31.5%), Infosys (29.5%), and HCL Technologies (20%).

“We expect a growth slowdown in FY24 to play out in the form of a weak March 2023 quarter, followed by a moderate uptick in Q1 FY24 and normalisation in Q2 FY24,” Kotak Institutional Securities said in a note. “The current woes in the banking sector can impact sequential growth by 1-2% in Q1 FY24. This assumes a quick resolution of the crisis and that problems remain localised. A full-blown recession will have a bigger impact.”

ICICI Securities said as much.

“Although our covered companies’ exposure to US regional banks is at best in the low-to-mid single digits of overall revenues, the overall exposure to the BFSI vertical is quite significant. This might lead to a decline in sequential revenue growth this quarter.”

Still, there are potential winners.

Companies that can capture both discretionary spending and cost take-outs will ultimately benefit and gain share, Kotak Institutional Securities said in the note. TCS and Infosys are better positioned among Tier-I firms, and LTIMindtree Ltd. and Mphasis Ltd. among mid caps. Wipro is seen as the most vulnerable due to its higher consulting exposure.

However, if the crisis deepens, Indian IT firms stand to gain market share due to increased offshoring and outsourcing to reduce costs.

Margins Outlook
EBIT margins are expected to recover to pre-covid levels as headwinds on delivery costs normalise, according to analysts. Easing of supply-side challenges, lower attrition, and cost rationalisations are seen as likely to boost operational profitability, they said. Hiring indicators are flat as compared to previous quarters, despite increased involuntary attrition.

That’s likely to more than make up for the growth moderation in the first half of fiscal 2024.

Tier-I IT firms, except HCL Technologies, are likely to grow their margins by 24-90 basis points in the March quarter, IDBI Capital stated in an April 6 note. The mid caps—except Birlasoft Ltd.—are expected to register sequential margin expansion of 60 to 221 basis points.

Dealmaking
On Wednesday, when TCS kicks off the fourth-quarter earnings season, all eyes will be on Chief Executive Officer designate Krithi Krithivasan for cues on how India’s I.T. bellwether plans to navigate the banking crisis at hand. After all, he is a BFSI veteran of 34 years and perhaps the best-positioned to guide the industry at large.

Infosys, which announces its quarterly results a day later, will be in focus too, especially since its BFSI leader is on its way out to lead a rival firm.

The earnings, then, will be keenly watched.

That Accenture Plc.—the world’s biggest outsourcing firm—clocked record new bookings of $22.1 billion in the December-February quarter augurs well for its Indian peers.

TCS is likely to post a total contract value of $8.5 billion in the March quarter, on the back of deal wins from Telefonica and Bombardier. Among mid-tier companies, Mphasis Ltd. and Persistent Systems Ltd. are expected to announce new deal wins worth $300 million and $400 million, respectively.

“Notwithstanding the deceleration of key partners and large cloud providers, the growth rate and order book remain high,” Apurva Prasad, Amit Chandra, and Vinesh Vala of HDFC Securities wrote in an April 5 note. “We expect Infosys to guide for 5-8% constant currency growth, HCL Technologies to guide for 6-8% for its services business, and Wipro to guide for -1% to +1% QoQ for Q1 FY24.” Bloomberg