As TCS, Infosys miss street estimates, experts predict choppy quarters ahead

0

[ad_1]

The results of top-tier companies TCS and Infosys have tripped on global uncertainties and missed street estimates, setting a subdued tone for Q4 show by the IT pack, and experts see choppy 1-2 quarters for the industry but are hopeful of subsequent recovery.

Infosys' latest report card was a disappointment on several fronts.(Photo credit: LiveMint)
Infosys’ latest report card was a disappointment on several fronts.(Photo credit: LiveMint)

The earnings’ season started on a sombre note with the Q4 scorecards that fell short of expectations, but more importantly the management commentary of India’s top two IT services companies was punctuated with words of caution about prevailing customer sentiments across BFSI, technology services and certain other verticals, particularly in the US.

ALSO READ: TCS smashes Q4 profit view on strong deal momentum: Report

While Infosys top brass spoke of “unplanned project ramp downs and decision making delays by some customers”, Tata Consultancy Services (TCS) talked of some clients deferring newer, non-critical initiatives.

ALSO READ: Infosys Q4 consolidated net profit rises 7.8% year-on-year to 6,128 crore

Industry veteran and former Infosys director T V Mohandas Pai says Q4FY23 will be subdued for IT players but that extent and impact will depend on profile and strategy of individual companies.

He sees “a cautious Q1FY24 with some hope of growth coming back in Q2 of this year”.

Pai believes uncertainties in the US market is likely to come down in April-June quarter, and that new work will take 1-2 quarters to come by, so “October-November will be better time”.

Given that the Indian IT industry is a major force in the global tech arena in terms of its size, scale and strength, it will reflect realities of the market, he contends.

“Five years back, the Indian IT companies were much smaller, they were samples and not the universe…now they have become the universe,” Pai told PTI. The industry is today a greater force with USD 200 billion of exports, and the top 5 Indian IT companies are big players in the global market.

“Whatever happens in the market will impact them…They will reflect how the spending is in the economy because they have huge set of clients and the clients reflect spending in the IT universe,” Pai said.

See also  Why Paytm shares crashed after IPO - CEO explains and gives projection

ICRIER Chairperson and Genpact founder Pramod Bhasin asserted that while the “softness” in earnings from the big IT firms is likely to continue for a few quarters, growth will return thereafter.

“The softness in earnings from the big IT firms is likely to continue for a few quarters more as many industries, specially tech, restructure and cut costs quite dramatically. In recent years, the tech industry has been a huge consumer of IT services as well as outsourcing. Some of that will, and has definitely slowed down,” Bhasin pointed out.

That said, “none of this will last beyond a few quarters and growth will come back for them and for our industry”.

“The US economy remains surprisingly robust post-Covid and the markets, while currently slow, will rebound quite easily from what ultimately is a mild recession. So we will have lower growth rates for a few quarters but certainly next year should be really strong as many customers are signing up pretty big contracts to further reduce costs,” according to Bhasin.

The recent results from JP Morgan and Wells Fargo have been good and solid, and suggest that, at best, the US recession (if there is one) will be mild, he went on to add.

“We still don’t know what the effect of the withdrawal of deposits from the banking system after the collapse of Silicon Valley Bank will do to spending overall,” he says.

IT sector expert and chairman of 5F World (a platform for digital startups, skills and social ventures) Ganesh Natarajan says biggest customers of Indian IT have been BFSI (banking, financial services and insurance), who are also highest on digital maturity curve.

“The slowness in this segment is likely to mute growth for IT over the next three to four quarters,” Natarajan believes.

Infosys’ latest report card was a disappointment on several fronts — the company missed revenue guidance for FY23 hit by unplanned project ramp downs and decision-making delays by some clients. With global macroeconomic uncertainties looming, it has given a subdued 4-7 per cent revenue growth forecast for FY24, with top management cautioning that “the environment remains uncertain”.

See also  Sensex opens in red; tanks over 200 points; Nifty falls over 80 points

Infosys had last given single-digit revenue guidance in FY19. TCS numbers too fell short of street estimates.

TCS’ outgoing CEO Rajesh Gopinathan conceded that the 0.6 per cent growth in the topline over the December quarter has been “weaker than anticipated” because of the setbacks in North America. K Krithivasan, the CEO-designate, who presently heads the BFSI vertical which contributes a third of the overall revenues, said there has been a “greater rush” among clients to conserve cash and delay spends.

The company’s Chief Operating Officer N Ganapathy Subramaniam said there are no big budget cuts but clients have adopted a strategy of “spending wisely” due to the impact on the sentiment, and are deferring spends.

Events like the fall of SVB and fears of contagion have impacted client sentiments in North America and the banking, financial services and insurance sector, in particular, leading to clients deferring spending, the Tata Group company had said.

In its earnings preview earlier this month, JP Morgan had said that Indian IT companies’ Q4FY23 prints should be weaker than Q3 with constant currency sequential organic growth slowing due to a deteriorating macro and flattish to declining margins.

“The deteriorating macros with increasing stress in BFSI and hitech verticals have driven client cautiousness, driving delays in deal ramp-ups and impacting revenue conversion as well as delays in deal decision-making that we believe would be a pain point even on 1Q24 growth expectations,” JP Morgan said in a note early April.

CLSA too had flagged that 4QFY23 numbers would be “modest”.

“We expect a modest 4QFY23 for Indian IT services companies with a likely dent to deal inflow due to recent global banking turmoil. We suspect this could weigh on FY24 guidance as well; management could take a conservative stance while setting initial expectations,” it had said in its sector outlook dated April 2.

[ad_2]

Source link