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Indian IT firms face revenue growth headwinds in Q2

Indian IT firms, set to post Q2 results, are expected to see muted revenue growth in a seasonally strong quarter. EBIT margins, too, will see a marginal decline for the quarter, as delayed execution and subdued discretionary spending play spoilsport.

The earnings season follows a muted quarter marked by a cautious demand environment, with clients delaying decision-making. Major IT firms posted muted results and provided conservative guidance.

“We forecast muted revenue growth of (-)0.6-0.8 per cent for Tier 1 IT in a seasonally strong quarter. EBIT margin will decline marginally y-o-y, with the quarterly movement influenced by the wage revision cycle. The growth rate will moderate down to (-)2.9-3.2 per cent on y-o-y comparison,” said Kotak Institutional Equities in a report.

Continued rationalisation of discretionary programmes, combined with extended timelines of execution of existing ones, are leading to a leakage of revenues and weak trends. Weakness will be broad-based and amplified in the banking, retail, and telecom segments, it further said.

“Post two successive quarters of weak results, we believe Q2 FY24 and Q3 FY24 may see q-o-q growth, but the next couple of quarters will not herald the beginning of a sustained pick up. We see growth discontinuity in 2024,” notes Nirmal Bang.

However, Total Contract Value (TCV) is expected to improve. Kotak notes that deal flow has steadied after the transition from discretionary spending-powered short-tenured programmes to larger programmes, fuelled by cost take-outs, which have longer sales cycles. “We expect the continuation of cost take-out deals in CY2024, along with an improvement in discretionary spending,” it said.

The modest guidance provided previously by companies brace the industry for a weak quarter. Nirmal Bang noted that the downward guidance revisions by multiple players — some despite a robust H1 2023 in the last three months — imply a weak H2 in aggregate. There has not been much commentary on 2024, although a few are hopeful of an upturn, it adds.

Headcount
In terms of headcount addition, the net hiring across top-tier IT companies has been very low since the last two quarters. Going forward, in the second quarter as well, employee addition is expected to be low. The Hindu BusinessLine

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