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Rediff.com  » Business » Indian IT services firms likely to post muted revenue growth in Q4

Indian IT services firms likely to post muted revenue growth in Q4

By Shivani Shinde
April 10, 2023 09:00 IST
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IT services firms’ revenue growth in the fourth quarter will be affected by macro-driven headwinds, lower working-days, and the fact of the three-month period being low season.

IT

Illustration: Dominic Xavier/Rediff.com

Analysts are expecting FY24 growth to be muted. Revenue growth will decline 600-700 basis points to 10-12 per cent for FY24, said a CRISIL Ratings report.

The 10-12 per cent growth rate is a fall from the 18-20 per cent expected in FY23 and around 19 per cent growth in FY22, the highest in eight years, said the CRISIL Ratings report.

However, the silver lining for FY24 seems to be improvement in operational metrics, with normalisation in employee costs.

 

Anuj Sethi, senior director, CRISIL Ratings, said in a note: “Headwinds in key markets, especially the BFSI (banking, financial services, and insurance) segment in the US and Europe, will affect the revenue growth of domestic IT services companies.

"Notably, IT spend by clients is witnessing a shift towards cost optimisation and vendor consolidation away from the discretionary spend by most end-user industries.”

While revenue growth in BFSI is expected to halve to mid-single digits, it would be marginally offset by a 12-14 per cent rise in manufacturing and 9-11 per cent in other segments.

Net-net, there would be moderation in revenue growth, said the CRISIL note.

The markets are awaiting the Infosys numbers because the company will provide guidance for the full year and for Q1 of FY24.

The results season will begin with Tata Consultancy Services (TCS) coming up with its performance report on April 12.

“We cut FY2024-25E revenue growth for our coverage universe by 1-2 per cent, as we bake in additional headwinds from the recent deterioration in BFS outlook.

"We forecast FY2024E revenue growth rate of 7-8 per cent for the Big-3.

"Cut in estimates for Mphasis is higher. We also cut fair values by 2-6 per cent (higher for Mphasis and Wipro) to bake in higher risks from recent events.

"The Big-3 and LTIM are well geared to navigate challenges.

"Infosys and HCLT are our top picks,” said a report from Kotak Institutional Equities.

Analysts are expecting growth in FY24 will be back-ended.

Management commentary can be optimistic on 2HFY24, given the early visibility of conversion of large deals, captive takeover opportunities, and benefits from vendor consolidation, said the Kotak report.

Considering the near-term softness in demand and elevated hiring last year, a Motilal Oswal report said it expected net hiring to take a pause in Q4.

“We also expect sub-contractor expenses to moderate, while reduction in backfilling and retention should support margins.”

CRISIL Ratings expects employee costs to moderate in FY24, with companies taking a cautious approach to fresh hiring (see annexe) as they attempt to normalise the headcount after the hiring peaks of FY22, which saw the employee count for Tier-I firms3 surge 22 per cent.

Attrition has begun to wind down in recent quarters and is expected to moderate further.

Coupled with the levers of an optimum on/offshore employee mix, manpower training/utilisation, and the benefits of rupee depreciation, players are expected to see operating margins improve by 50-60 bps to 23 per cent in FY24, but still below pre-pandemic average of 24 per cent seen during FY2016-20.

Aditya Jhaver, director, CRISIL Ratings, said: “The impact of extraordinary hiring in FY22 was felt in FY23, because of which employee costs are estimated to rise by over 20 per cent.

"Companies are focusing more on utilisation than advance hiring, supported by lower attrition. Larger companies with an agile and large spectrum of capabilities will be able to cater better to the changing needs of clients and, hence, will be insulated from pricing pressure.”

The forecast

  • All eyes on Infosys'  results for guidance
  • FY24 growth to be muted due to BFS pressure
  • FY24 growth could be back-ended, as first half may not give visibility
  • Margins could be positively impacted due to supply side issue easing
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Shivani Shinde in Mumbai
Source: source
 

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