The Nifty IT index was the laggard, falling 3% in April. It was also the only index among the major sectoral indices to give negative returns in the last month. Investors seem to have taken note of the lackluster March quarter (Q4FY23) results. Most Tier-1 information technology (IT) companies are dismayed by flat or negative sequential constant currency (CC) revenue growth. Midcap IT firms did relatively better in terms of revenue, but the results were mixed.
The lack of revenue visibility amid weak global macros has been a letdown for the sector. The banking sector crisis in the US and Europe has been a concern on the revenue growth outlook.
“Earlier the pain was limited to a few consumer-oriented sectors, but now it has spread to commercial and banking sectors,” said a May 3 Motilal Oswal Financial Services report. Cuts in the discretionary portion of IT spending, which is hurting the earnings of IT outsourcing vendors.”
In Q4, several IT companies witnessed muted performance in the North American market.
Given this, there is a concern that meeting the FY24 revenue growth guidance could be a tall task. Infosys Ltd guided for 4-7% year-on-year (YoY) CC revenue growth this fiscal, HCL Technologies Ltd sets revenue growth guidance 6-8% and LTIMindtree Ltd eyes double digit revenue growth Buried.
“Companies’ confidence about growth revival is based on a strong deal pipeline and expectation of some macro revival in the second half. Hopes for a quick macro revival will be tested, said Kotak Institutional Equities in a report on May 5. Unless supported by mega deals, the hurdle rate in achieving the top-end of the guidance looks a bit unrealistic, the Kotak report added.
Against this backdrop, expectations from Q1 FY24 earnings are low. The moratorium on demand for digital services is likely to continue. Caution among customers on IT spending is expected, especially in the critical BFSI vertical.
“A deciding factor will be the Q2FY24 performance, which is a seasonally strong quarter for the IT sector,” said an analyst requesting anonymity. Companies stick to their guidance (which is already conservative) or revise it upwards in the second half of FY204, depending on how Q2 pans out,” he said. IT Stock valuations have cooled from recent peaks, but that won’t be comforting until earnings prospects improve.
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