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Q4FY23 likely to be a weak quarter for IT services

That Q4 FY23 is likely to be a weak quarter was telegraphed by most companies during Q3 FY23 results. We are building in very modest revenue growth in constant currency terms due to the decent total contract value clocked by many in previous quarters and the narrative of ‘delayed/no landing’ that had been building up on the U.S. macro in late CY22 and early CY23 (before banking problems arose in both U.S./Europe in March 2023).

While further deterioration of the banking problems has been stemmed, we need to watch out for any collateral damage to the economies affected by the crisis and impact on customer health (something we highlighted in our recent sector update). Incrementally, we believe that customer health, which had been broadly deteriorating through much of CY22, would have turned weaker post these events.

We continue to hold on to our below consensus 3-5% CC revenue growth for tier-I IT companies for FY24 – a view we have held since July 2022.

We expect margin improvement for most coverage companies QoQ due to pyramid benefits, cross currency tailwinds, higher utilisation (with possible shedding of employees on a net basis), easing of backfilling costs as attrition eases, lower sub-con costs, etc.

This would be somewhat offset by lack of operating leverage, higher travel costs, elevated sales and marketing spends, likely pricing pressure and transition costs for some of the cost optimisation/vendor consolidation deals. Bloomberg

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