India’s top technology companies, which together have the second highest weighting on the Nifty just behind the financials and banks, will likely report their slowest quarterly revenue expansion in a decade in the three months to December, although inherent client concentration and domain strength differences indicate a K-shaped growth path for the aggregate industry.
Seasonality and deal ramp-ups are likely to aid sequential constant currency revenue growth at HCLTech (6%), LTIMindtree (1.5%), and Tata Consultancy Services, or TCS, at 1.5%. By contrast, revenue declines are expected at Wipro (-2.5%), TechMahindra (-1.6%), and Infosys (-1.4%), brokerage firm Jefferies said, adding that it expects significant divergence in revenue growth across companies.

The brokerage expects margins for Infosys and Wipro to contract by 120bps and 80bps respectively, affected by wage increases and revenue decline.

One basis point is a hundredth of a percentage point.

Also read | Should Indian IT companies be concerned about Accenture’s Q2 guidance?

The third-quarter results season will begin with TCS and Infosys announcing their results on January 11, followed by HCLTech and Wipro on January 12. The absence of large deal announcements during the quarter could also mean a muted deal total contract value (TCV) metric from the companies, said analysts.
The focus this quarter will be the commentary on the demand environment and 2024 budgets apart from contingency plans to deal with leadership churn in these companies.
“During Q3 FY24, we expect aggregate revenue growth for our coverage universe to remain muted at 0.8% QoQ (constant currency), given the seasonal impact of furloughs (holidays), which are deeper this year. While sequential growth has improved by 40 basis points (bps) compared to Q2, this is the slowest aggregate growth in the third quarter of any year in the past decade,” said the report by Akshat Agarwal and Ankur Pant of Jefferies.

Currency Crosshairs

Aggregate US dollar revenue growth for the companies is expected to be 30bps below constant currency growth. As a result, companies with higher exposure to the UK, Europe, Australia, and Japan are expected to report cross-currency headwinds.

“Despite muted revenue growth, we expect aggregate margins to expand by 30bps QoQ as IT firms focus on preserving margins,” said the report. Coforge and Tech Mahindra are expected to see strong margin expansion of 280-330bps, driven by recovery from one-off revenue hits in Q2 and operational efficiencies.

Also read | After a dry spell, IT sights green shoots with higher budget for 2024

In December, IT consulting major Accenture said it expects sustained pressure in the demand environment for its December-February quarter which overlaps with the fiscal third and fourth quarter of Indian IT majors. Almost 48% of Accenture’s business caters to managed services directly competing with Indian IT service providers like TCS, Infosys, HCLTech, and Tech Mahindra among others.

A Motilal Oswal Securities report expects the earlier theme of reprioritizing cost optimisation and driving efficiency to remain intact during Q3 with collective deal total contract values staying in line.

‘HCLTech Leads Peers’

“HCLTech should outpace others with 2% QoQ CC revenue growth in its service business. LTIMindtree, TCS and Tech Mahindra are expected to report revenue growth/degrowth of 1.2%, -0.4%, and -1.1 %QoQ, respectively,” it said. The brokerage expects a median revenue growth of 0.7% QoQ with tier 1 IT majors likely to report revenue growth in the range of -2.7 to 4.5%.

Analysts will be watching for any change in guidance for the full year. Brokerage Emkay Global expects HCLTech to maintain its revenue growth guidance for FY24 at 5-6% while it expects Infosys to narrow its range further from 1-2.5% to 1-2%. Wipro is expected to guide to Q4 revenue growth of -1 to 1%. Brokerages also expect mid-tier IT companies like Coforge and Cyient to downgrade their revenue guidance for the full year.

Based on Accenture’s performance, brokerages expect banking, financial services, communication, and hi-tech segments to remain under pressure during Q3. Tech Mahindra’s commentary on the demand environment in the communications and media vertical will be closely watched.

TCS and Wipro have called out delays in revenue conversion as well as revenue leakage in recent quarters. The Street will be looking for commentary on the pace of deal wins and related deal conversion timelines, especially since the positive US Federal Reserve commentary on rate cuts. Expectations of easing inflation and rate cuts in the US could encourage large corporations to increase tech budgets and revive mothballed projects, offering higher deal inflows for Indian IT services from their biggest market, said analysts.

Also read | Leadership crisis deepens at Infosys as CFO Nilanjan Roy resigns

During the quarter, companies like Infosys, Wipro, and Tech Mahindra have continued to report senior leadership churn. Analysts will be looking for some signs of stability and contingency plans related to senior leadership during an ongoing tough macroeconomic environment.

India’s top technology companies, which together have the second highest weighting on the Nifty just behind the financials and banks, will likely report their slowest quarterly revenue expansion in a decade in the three months to December, although inherent client concentration and domain strength differences indicate a K-shaped growth path for the aggregate industry.
Seasonality and deal ramp-ups are likely to aid sequential constant currency revenue growth at HCLTech (6%), LTIMindtree (1.5%), and Tata Consultancy Services, or TCS, at 1.5%. By contrast, revenue declines are expected at Wipro (-2.5%), TechMahindra (-1.6%), and Infosys (-1.4%), brokerage firm Jefferies said, adding that it expects significant divergence in revenue growth across companies.

The brokerage expects margins for Infosys and Wipro to contract by 120bps and 80bps respectively, affected by wage increases and revenue decline.

One basis point is a hundredth of a percentage point.

Also read | Should Indian IT companies be concerned about Accenture’s Q2 guidance?

The third-quarter results season will begin with TCS and Infosys announcing their results on January 11, followed by HCLTech and Wipro on January 12. The absence of large deal announcements during the quarter could also mean a muted deal total contract value (TCV) metric from the companies, said analysts.
The focus this quarter will be the commentary on the demand environment and 2024 budgets apart from contingency plans to deal with leadership churn in these companies.
“During Q3 FY24, we expect aggregate revenue growth for our coverage universe to remain muted at 0.8% QoQ (constant currency), given the seasonal impact of furloughs (holidays), which are deeper this year. While sequential growth has improved by 40 basis points (bps) compared to Q2, this is the slowest aggregate growth in the third quarter of any year in the past decade,” said the report by Akshat Agarwal and Ankur Pant of Jefferies.

Currency Crosshairs

Aggregate US dollar revenue growth for the companies is expected to be 30bps below constant currency growth. As a result, companies with higher exposure to the UK, Europe, Australia, and Japan are expected to report cross-currency headwinds.

“Despite muted revenue growth, we expect aggregate margins to expand by 30bps QoQ as IT firms focus on preserving margins,” said the report. Coforge and Tech Mahindra are expected to see strong margin expansion of 280-330bps, driven by recovery from one-off revenue hits in Q2 and operational efficiencies.

Also read | After a dry spell, IT sights green shoots with higher budget for 2024

In December, IT consulting major Accenture said it expects sustained pressure in the demand environment for its December-February quarter which overlaps with the fiscal third and fourth quarter of Indian IT majors. Almost 48% of Accenture’s business caters to managed services directly competing with Indian IT service providers like TCS, Infosys, HCLTech, and Tech Mahindra among others.

A Motilal Oswal Securities report expects the earlier theme of reprioritizing cost optimisation and driving efficiency to remain intact during Q3 with collective deal total contract values staying in line.

‘HCLTech Leads Peers’

“HCLTech should outpace others with 2% QoQ CC revenue growth in its service business. LTIMindtree, TCS and Tech Mahindra are expected to report revenue growth/degrowth of 1.2%, -0.4%, and -1.1 %QoQ, respectively,” it said. The brokerage expects a median revenue growth of 0.7% QoQ with tier 1 IT majors likely to report revenue growth in the range of -2.7 to 4.5%.

Analysts will be watching for any change in guidance for the full year. Brokerage Emkay Global expects HCLTech to maintain its revenue growth guidance for FY24 at 5-6% while it expects Infosys to narrow its range further from 1-2.5% to 1-2%. Wipro is expected to guide to Q4 revenue growth of -1 to 1%. Brokerages also expect mid-tier IT companies like Coforge and Cyient to downgrade their revenue guidance for the full year.

Based on Accenture’s performance, brokerages expect banking, financial services, communication, and hi-tech segments to remain under pressure during Q3. Tech Mahindra’s commentary on the demand environment in the communications and media vertical will be closely watched.

TCS and Wipro have called out delays in revenue conversion as well as revenue leakage in recent quarters. The Street will be looking for commentary on the pace of deal wins and related deal conversion timelines, especially since the positive US Federal Reserve commentary on rate cuts. Expectations of easing inflation and rate cuts in the US could encourage large corporations to increase tech budgets and revive mothballed projects, offering higher deal inflows for Indian IT services from their biggest market, said analysts.

Also read | Leadership crisis deepens at Infosys as CFO Nilanjan Roy resigns

During the quarter, companies like Infosys, Wipro, and Tech Mahindra have continued to report senior leadership churn. Analysts will be looking for some signs of stability and contingency plans related to senior leadership during an ongoing tough macroeconomic environment.