Brokerages believe Q1 will likely remain weak despite the first quarter being a seasonally strong quarter for IT firms. Large caps are expected to report flat dollar Revenue, while midcaps are estimated to see over 2-3% growth on a sequential basis.

However, despite this, the deal wins demand and is expected to stay intact.

The largest IT firm, TCS will announce its Q1 results on July 12 along with HCL Tech. Wipro is lined up to announce its earnings on July 13, followed by LTIMindtree on July 17. While companies like Infosys, Persistent Systems, and Mphasis will present their financial results on July 20. Also, Tech Mahindra will announce Q1 on July 26.

In its note, Motilal Oswal said, “Our IT Services coverage universe is expected to deliver a weak median revenue growth of 0.4% QoQ and 5.3% YoY in 1QFY24. Major currencies have appreciated against USD (EUR +1.5% and GBP +3.0%), providing favorable tailwinds.

However, Motilal’s note added, “We expect EBIT/PAT to decline 1.8% each QoQ, due to weak topline growth and the impact of Wage Hikes. For our IT Services coverage universe, we estimate USD Revenue/ INR EBIT/ INR PAT to grow at 5.3%/15.2%/16.0% YoY in 1QFY24.”

Overall, it said, “the weakness in demand should continue in Q1FY24 with a significant hit on discretionary spends. Clients continue to focus on cost and efficiency-driven projects while keeping the non-critical projects on hold. Though the deal pipeline remains heathy, weak macro will continue to impact revenue conversions, thereby creating near-term pressure on revenues.”

Also, expecting a weak quarter for IT firms, HSBC in its note said, “Amidst an uncertain macro environment, Tech spend in the US remains weak, particularly for sectors such as telecom and hi-tech. Banking has not improved much either in 1Q, in our view. Manufacturing, Healthcare, and Energy stay relatively stronger.”

Consequently, barring a few companies, HSBC’s note added, “growth is likely to be -2 to +1% q-o-q in 1Q, which for a seasonally strong quarter is weak and could potentially put FY24 revenue estimates at risk. 2Q outlook and deal wins in 1Q will be key data to track.”

For the large-cap universe, Kumar Rakesh analyst at BNP Paribas said, “We expect 1QFY24 revenue growth of 1.3-2.4% q-q cc (except WPRO: -1.2%, TECHM: -2%) and margin contraction of 8-63bp q-q (except LTIM: 79bp expansion), largely on muted revenue growth, wage hikes, visa costs, and seasonality.” In the case of mid and small-cap, Kumar expects -1% to +3.1% QoQ USD revenue change.

Meanwhile, IDBI Capital in its note said, “For Q1FY24E we expect large caps to register dollar revenue in the range of flat to -2% QoQ trend aided by 0-60 bps cross currency tailwind. Among mid-caps, we expect -2% to +3% QoQ growth.”

Further, Kumar said, “We expect INFO to maintain its FY24 cc revenue growth guidance of 4-7% and HCLT to retain its 6-8% growth guidance. We expect WPRO to guide for 2QFY24 q-q cc revenue growth of 0-2%. We would be looking at deal wins and management commentary for signs of revenue growth to bottom out and drivers for a 2HFY24 recovery.”

While IDBI Capital said, “We expect Coforge & Zensar to outperform Tier-1 growth. Further, in terms of margins we expect Tier-1 to register a flat to -118 bps decline in margins mainly led by wage hikes and lower revenue growth. Infosys & TCS are our top picks.”

HSBC also does not expect margin trends to be a positive surprise either. It added, “While wage inflation and attrition are down significantly, some of the post-COVID-19 costs are still normalizing (travel, onshore ratio, etc). With weaker demand, we fear heightened pricing pressure as well on renewals and large new deals. Also, INR has been quite stable since the past quarter and hence is not the tailwind it was in past years.”

“We expect our coverage universe to report EBIT margin movement of -270 to 10 bps QoQ. Headwinds include slower growth, seasonal factors e.g. visa cost, wage hikes for a few (TCS/TECHM/Coforge), and increase in travel expenses. Players may find it difficult to pull traditional levers such as utilisation and pyramid correction in the current low growth environment,” JM Financial’s note said.

Additionally, while pricing may be stable, a shift in the mix – from discretionary to efficiency – could impact realization, at least in the near term.

Moreover, HSBC expects demand (deal wins) and revenue growth to improve from 2Q24, though visibility is still low. It believes the 2Q24 outlook will be key to protecting the downside on stocks.

However, despite demands being intact some brokerages believe there is a near-term weakness and hence recovery is not anticipated in the financial year FY24.

Motilal’s note said, “Though the demand remains intact for selective verticals and service lines, there is a near-term weakness due to approval delays and heightened deal scrutiny.

These factors may result in project deferrals and temporary pauses in project execution. Given the further deterioration in the demand environment in 1QFY24, we do not anticipate a recovery in 2HFY24.” The brokerage expects the recovery to be more gradual in nature and should occur only in FY25. Additionally, we see a risk of guidance moderation for INFO for FY24.

Updated: 09 Jul 2023, 06:46 PM IST