IT sector Q3 preview: Expect ‘muted’ revenue growth; Tier 2 cos likely to fare better

IT services sector is set to report "muted growth" in Q3 FY24, primarily on account of a seasonally weak quarter along with deep furloughs, a prolonged deal conversion cycle, compression in discretionary and renewals, and higher deal scrutiny and decision-making delays.

Analysts suggest muted revenue growth is expected for Tier-1 IT service companies but Tier-2 companies could report healthy to robust revenue growth, in a seasonally soft quarter.

IT automation in North America and Europe may show delayed spending or face some spending cuts moving forward, they say, adding that many large enterprises will shift focus on cost optimisations, resulting in higher cost take-out deals, vendor consolidation, and lower discretionary spending.

Verticals such as BFSI, manufacturing, telecom, retail, and hi-tech are expected to be impacted by the slowdown, weakening FY24E growth momentum outlook.

In the Indian IT landscape, three developments are expected: growth divergence in the near term, margin recovery with favourable supply-side factors, and mid-tier IT sustaining its relative outperformance, says brokerage major HDFC Securities.

Axis Securities Equity Research, in its latest report, says management commentary on issues like outlook on client spend, especially on the BFSI vertical, vertical outlook, rising subcontractor costs, and pricing pressure on realisations will be closely watched.

"We expect large-cap IT companies to report a moderated revenue growth of -1% to 6% QoQ. The midcap IT companies are likely to surpass the growth of large caps’ performance, depending on the nature of the business."

BNP Paribas-led brokerage Sharekhan says EBIT margin for the quarter is expected to be "mixed" for the IT companies under coverage. "We anticipate growth momentum to return in FY25, aided by a lower base coupled with easing sector headwinds."

Sharekhan says though the IT sector has already outperformed Nifty in 2023, it expects overall “outperformance” in CY24 as well, driven by receding headwinds and better earnings visibility. "We upgrade our stance from neutral to positive, with selective preferred picks."

Axis Securities says it expects large-cap IT companies to report a moderated revenue growth of -1% to 6% QoQ. "The Midcap IT companies are likely to surpass the growth of Large Caps’ performance depending on the nature of the business."

On the sector leader Tata Consultancy Services (TCS), Axis Securities expects the company to report 1.5% QoQ revenue growth. Sharekhan says TCS is expected to report "flattish growth" for the quarter. HDFC Securities says TCS is expected to post 1% growth.

The second biggest IT services company Infosys should see slight revenue de-growth of 0.1% QoQ, says Axis, adding that it expects the management to retain the company’s revenue growth guidance for FY24E and deliver revenue growth of 1% to 2.5%.

Sharekhan has placed Infosys among the laggards along with Wipro and Tech Mahindra. HDFC Securities also says it expects Infosys to revise FY24E revenue guidance to 1-2% from 1-2.5% earlier.

HCL Tech is expected to lead the growth in the quarter, with estimates suggesting 3-6.5% QoQ growth in rupee terms. Wipro, however, could see sequential revenue de-growth.

(DISCLAIMER: The views and opinions expressed by investment experts on fortuneindia.com are either their own or of their organisations, but not necessarily that of fortuneindia.com and its editorial team. Readers are advised to consult certified experts before taking investment decisions.)