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Q3 continues to be a slow quarter for IT sector due to curtailed spending

January 11, 2024 11:28 IST

India’s top technology companies will witness a tepid revenue expansion in the third quarter (October – December) of the current financial year (Q3FY24) – along expected lines – on the back of furloughs and no blockbuster deals, even as the momentum gained from Generative AI (GenAI) is likely to take centre stage.

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IT services and consulting firm Accenture’s first quarter numbers in FY24 showed a significant pick up in GenAI spending.

It signed new bookings to the tune of $450 million in this space, a surge from the $300 million signed in the whole of FY23.

 

The Street is expecting Indian IT players to share the momentum on the GenAI pick-up in this quarter.

“Spending on GenAI may not be a significant growth driver for most services firms and software firms.

"Growth projections for CY2024 by major software vendors can provide an early indication.

"For example, Adobe’s guidance for CY2024 indicated only a modest boost to higher-priced software subscriptions that include GenAI capabilities,” said a Kotak Institutional Equities report on Generative AI.

Analysts predict largecap IT services firms — TCS, Infosys, HCLTech, Wipro and LTIMindtree — to clock revenue growth in the range of negative 1.5 per cent to a positive 4.6 per cent.

The majority of the analyst firms are also expecting midcaps to perform better than their largecap peers in this quarter.

“While the cost pressure and changing customer preferences continue to increase tech intensity in enterprises’ businesses could result in the increased offshoring work for India’s IT services in the medium term.

"IT budgets are likely to be prioritised in areas of automation and cost efficiencies in the near-term, in our view,” said a note from Nomura Global Market Research.

Operating margins will be under pressure due to extended furloughs.

In the case of Infosys, and Wipro margins may be impacted due to salary hikes.

Kumar Rakesh, of BNP Paribas Securities, in his note shares that this quarter would be the last in the trough of an uncertain cycle.

“We also expect some companies to see higher-than-usual furloughs, impacting revenue, but we see it partially being offset by mega deal ramp-ups,” he explained.

What also makes this quarter a relatively softer quarter compared to others is the absence of any mega-deal announcements.

The deal flows continue to be from the UK and Europe rather than the US --- the sector’s largest market.

“An analysis of the publicly announced deal wins in 3QFY24 of the key IT companies reveal a surprising dip in wins from North America compared to the earlier quarters.

"In addition, no mega deals have been announced compared to six in the previous quarter.

"Most deals are from Europe-headquartered clients,” said Kalwaljeet Saluja, Sathiskumar S, and Vamshi Krishnan of Kotak Institutional Equities in their report.

In the case of TCS, its total contract value contribution from the US has dropped by 48.2 per cent as the percentage of overall TCV in Q2 FY24 on a sequential basis.

In the case of Infosys, it has signed 8 large deals in the US in the quarter ended September 30, 2023, and 12 deals from Europe during the same quarter.

HCL Technologies (HCLTech) is the only company in the largecap where broking firms and analysts are expecting a positive momentum, as this quarter is expected to be robust for the firm’s products and platform segment.

The Street is expecting HCLTech to report revenue growth sequentially to be between 4.5 per cent to 4.8 per cent.


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Shivani Shinde
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