BENGALURU: IT firms are expected to report muted growth in the third quarter of this fiscal year on account of higher-than-usual furloughs and macroeconomic headwinds. Third quarter is considered to be a seasonally soft quarter for IT firms and brokerages anticipate growth momentum to return only in FY25.
The top four IT services companies - Tata Consultancy Services, Infosys, HCLTech and Wipro- will report their Q3 results this week. Already some IT companies have cut their revenue guidance for this fiscal. Infosys, HCLTech and Happiest Minds have cut their revenue guidance outlook.
Infosys slashed its FY24 guidance twice. In July, it slashed its FY24 revenue guidance from 4-7% to 1-3.5%, and again in Q2, it slashed to 1-2.5%. Though in the second quarter, Infosys saw its highest large deals value at $7.7 billion, it recently lost a $1.5 billion AI contract from a global company.
Sharekhan expects moderation in deal win Total Contract Value (TCV) for IT companies after a high base in Q2FY24 and due to the impact of furloughs stretching the deal cycle time. “However, the focus on reprioritising, cost optimisation and enhancing operational efficiency is expected to continue as before. We expect ramp up in earlier won large cost take out deals to support growth and recovery for H2FY24 and set the tone for FY25,” it said.
IT companies’ margins are likely to witness some expansions. TCS margins are expected to be flat QoQ. According to ICICI Securities, clients are still in a wait and watch mode with continued scrutiny on discretionary spends, elongated deal closure cycles with a sharp focus on reducing costs. It expects HCLTech to report strong sequential growth of 5% QoQ driven by ramp up in the Verizon deal and also seasonal strength in products business.
“There is still uncertainty around near-term demand (1-2 quarters) for IT companies. Therefore, we believe that even if we start seeing signs of improvement in the macro environment, recovery in client decision making cycles may lag by three to six months,” it added.
Axis Securities expects Wipro to report revenue de-growth of 0.6% QoQ in rupee terms and its operating margins are likely to expand on account of lower onsite expenses. For the last four quarters, Wipro has been underperforming peers in terms of sequential revenue growth. Sequentially, in the second quarter, its net profit was down by 7.8%.
Wipro’s second quarter revenues stood at Rs 22,516 crore, a decline of 0.1% from Rs 22,539.7 crore it reported a year ago. Operating margin for the quarter stood at 16.1%. For the third quarter, Wipro expects its revenue from IT services segment to be in the range of $2,617 million to $2,672 million.
Near-term bumps in IT firms