Earnings Preview: Analysts Expect Indian IT Giants To Report Muted Sequential Growth In Q2 Due To Macro Challenges

ICICI Securities stated that it expects demand to remain weak in the second half of the current fiscal year as difficult macro and leaking base business offset large deal increases.

Motilal Oswal Financial Services predicted that the IT Services coverage universe will hold a median revenue growth of 1.5 per cent quarter-on-quarter and 5.7 per cent year-on-year for Q2FY24.

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Major Indian IT services companies are expected to come out with their second-quarter (Q2) earnings for the current fiscal year in the week. Analysts largely believe that these companies will report dampened sequential show in a traditionally strong Q2 as global discretionary spending continues to be affected by macroeconomic challenges. 

In the week, major tech industry giants like Tata Consultancy Services (TCS), Infosys, HCL Technologies, and Wipro are scheduled to release their Q2 earnings. Market analysts stated that a subdued sequential performance is expected from the sector as the weakness witnessed in Q1 is likely to continue without any meaningful indicators of recovery or deterioration, therefore diminishing any hopes of a quick turnaround, reported PTI.

ICICI Securities said, “We expect Q2FY24, though seasonally strongest, to remain weak from a sequential growth perspective with quarter-on-quarter CC (constant currency) growth varying from -1 per cent (Tech Mahindra) to +1.9 per cent (HCLTech) among the top-five firms.”

The brokerage added that some of the mid-tier IT firms could perform better. However, ICICI Securities stated that despite a general consensus that demand will pick up in the second half of the current fiscal year, the brokerage expects it to remain weak as difficult macro and leaking base business offset large deal increases, with HCL and Verizon being the exception for the former’s product business and the latter’s deal ramp-ups.

“Current quarter has played to the strengths of large-sized Indian IT firms with stable management, margins, and strong execution. The trio – TCS, Infosys, and HCLTech, have announced multiple large deals. We cut our EPS estimates for most of our companies on the back of... weaker-than-expected Q2FY24 estimates, continued pressure in discretionary spends given challenging macro, and... continued rationalisation of tech spending, including cloud optimisation,” the firm further explained. 

Notably, TCS is expected to release its quarterly results on October 11, followed by both Infosys and HCL Technologies, set to announce their Q2 results on October 12. Wipro will declare it’s results for the second quarter of the current fiscal year on October 18. 

In it’s earnings preview, Motilal Oswal Financial Services noted that the growth of the IT services industry is estimated to stay muted in the second quarter in the current fiscal year, as macroeconomic uncertainties continue to dampen discretionary spending. The firm added, “While the industry has witnessed an uptick in order inflow over the past two months with a focus on cost efficiency, the slowdown in project-based business is expected to hamper overall industry growth, even though Q2 is traditionally a robust season for the sector.”

The analytics firm predicted that the IT Services coverage universe will hold a median revenue growth of 1.5 per cent quarter-on-quarter and 5.7 per cent year-on-year for Q2FY24. The firm went on to term this growth rate as the slowest observed over the last ten years, despite a small impact from foreign exchange fluctuations. “However, a focus on cost-control (led by deferrals in wage hikes) measures should lead to margin improvement in 2Q, and help the industry deliver 3.7 per cent/4.1 per cent QoQ growth in EBIT/PAT (earnings before interest and tax/profit after tax), respectively,” it said. 

Motilal Oswal further noted that sectors like banking, financial services and insurance (BFSI), retail, and communication continue to display signs of weakness, as inflation increase and consumer spending dips. “With spending patterns shifting toward cost reduction and efficiency-focused initiatives, deal components targeting these essential areas have experienced increased momentum, supporting overall growth. However, the worsening macroeconomic conditions are tightening spending on transformational initiatives and non-critical multi-year projects,” it stated. 

Sharekhan (by BNP Paribas) voiced agreement with these opinions and added, “We expect q-o-q constant currency revenue growth of -0.4 to 1.1 per cent for tier-1 Indian IT service companies and 1.5 per cent to 4.4 per cent CC revenue growth for tier-2 IT companies. Robust deal bookings with several mega and large deals involving cost optimisation and consolidation could support H2 normalisation for Tier 1 companies and set the tone for improved FY2025.”