IT Earnings Preview: Firms To Clock Tepid Growth In Q4FY24, Hiring To Potentially Recover In FY25

Analysts said that the medium to long-term outlook on the IT sector remained ‘constructive’ and the sector is expected to pose a strong recovery in the latter half of the 2024-25 fiscal year

The projections for revenue growth in Infosys stood tepid, with a momentum of 0.3 per cent sequentially

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The week will see the start of the earnings season for Indian companies as they report their results for the January to March quarter of the 2023-24 fiscal year (FY24). This season will be kicked off by Tata Consultancy Services, which will report its Q4FY24 results on Friday. 

The performance of the IT sector will be keenly observed by investors and stakeholders. Analysts at Axis Securities believe that the IT services sector will report a muted growth in the last quarter of the 2023-24 fiscal year, majorly owing to a weaker discretionary spend amidst challenging environment in largest economies in the world. 

Explaining the major obstacles faced by the sector, Neeraj Chadawar, Head of Research, Axis Securities, said, “IT automation in North America may show delayed spending or spending cuts moving forward. We believe many large enterprises will shift their focus on cost optimizations, resulting in higher cost take-out deals, vendor consolidation, and lower discretionary spend. However, easing out supply side constraints along with lower sub-con cost may lead to margin recovery.”

The analyst added that the medium to long term outlook on the IT sector remained ‘constructive’ and the sector is expected to pose a strong recovery in the latter half of the 2024-25 fiscal year (FY25). 

Echoing the sentiments, Balaji Viswanathan, MD & CEO, Expleo Solutions Limited, said that the sector is gearing up to present another ‘quarter of subdued performance’ and experts are projecting a tepid growth in revenue in the quarter under review.

“Ongoing low demand trends, watchful client actions, and uncertain macroeconomic conditions dampen prospects, particularly in the banking, hi-tech, and telecom sectors. Revenue growth estimates for FY25-26 and the April-June quarter are expected to be trimmed due to client delays and slower decision-making processes. Despite challenges, the medium-term outlook remains robust, driven by sustained investments in cloud and digital technologies,” Viswanathan noted. 

Hiring And Revenue

Regarding hiring trends, he said that the recruitment plans ‘remian low-key’ as many graduates from the 2024 batch await offer letters, however, analysts projected a recovery in hiring in FY25. The outlook for revenue growth stood in the range of -2 per cent to -1 per cent on a sequential basis, Axis Securities shared. The expectations for the large IT firms remained moderate, while the analysts said that mid-cap IT firms should be able to surpass growth of the larger ones depending on the business nature. 

Expressing caution against the impact of the upcoming elections, Sreeram Ramdas, Vice President, Green Portfolio added, “The recent deal flow has been encouraging but the pace of realization will have to be watched. Since this is an election year, IT companies may guide for a slowdown in new deals. The main segments from which IT companies derive their revenue, they have already slowed down – BFSI.  We have already seen Accenture forecasting a slowdown in consulting revenue. Hence, it wont be surprising for other major IT players to come down with a tepid tone.”

TCS and Infosys

Chadawar said that TCS is expected to report a revenue growth of 2.3 per cent sequentially. The key attributes to observe would be pricing scenario, the outlook on growth, while the ‘moderation of sub-con cost is likely to result in margin expansions to the tune of 72bps’, he noted. 

Relatively, the projections for revenue growth in Infosys stood tepid, with a momentum of 0.3 per cent sequentially, while the expansion in margins should be slight due to lower operating expenses, Chadwar stated. “We also expect the management to give 4.5% to 6% the company’s revenue growth guidance for FY25E,” he said.