More misses than hits hint at uncertain times for IT services companies

The first-quarter performance of top IT services players, as well as mid-cap firms, has been subdued, reflecting macro uncertainties.

The numbers of the top four firms show several misses, hinting at difficult times ahead.

One mismatch is the total contract value (TCV) signed by the firms and the revenue growth registered.

The top four IT players got some of the best TCVs signed in the fourth quarter of FY23 as well as the first quarter of FY24. But these are not reflected in the revenue.
 
Tata Consultancy Services (TCS) signed TCVs worth $10 billion and $10.2 billion in the Q4FY23 and Q1FY23, respectively.

However, revenue growth in Q1FY24 was flat or saw a mere increase of 0.3 per cent.

Infosys had the same narrative.

The Bengaluru-headquartered firm had large TCVs of $2.1 billion in Q4FY23, but revenue growth for Q1FY24 was 1.3 per cent.

While the numbers do not give a rosy picture, neither does the commentary from the managements.

Despite being repeatedly asked, K Krithivasan, chief executive officer and managing director, TCS, did not give a clear response as to when this uncertainty would go.

A report by Nirmal Bang on the demand commentary after the results analyst call said: “The delay of projects is a broad-based issue and not related to any specific industry.

“It also indicated that it is not sure of a 2HFY24 pick-up at the moment and will be able to comment on this only after 2QFY24.”

According to an HDFC Securities report, the current disconnect between growth in bookings and the soft revenue rise is largely due to the impact on discretionary services.

Similarly, an Elara Capital report on Infosys brings forth the issue as well, “However, visibility on such deals transitioning to revenues seems obscure, mainly led by lower volumes, decision making delays, deferment of ramp-ups in closed deals and spending cut in discretionary (digital/transformational deals) likely continuing in Q2,” said the Elara Capital report.

<

What has spooked the markets and analysts is the drastic reduction in revenue growth guidance by Infosys.

The company now expects revenue to grow 1-3.5 per cent in FY24 from 4-7 per cent it had said earlier.

The Infosys management did say that it had won large deals but revenue from these deals would come towards the second half of the year.

FY24E revenue growth at mid-point of the guidance is going to be one of the weakest ever for Infosys since FY01 (except for the years of global financial crisis [2008-10] and even worse than the Covid year of FY21).

“This is despite there being no hard recession in either of the key geographies of the US and Europe …,” said Sumeet Jain and Aditi Patil of ICICI Securities in their report.

In the case of HCLTech, though the management is confident of a turnaround and did not change its guidance, analysts are not as bullish.

“(Management) confidence is on back of a record pipeline which they expect to convert to revenue quicker.

“We believe there is risk of the company not able to deliver revenue growth within the guided range on account of a) weaker discretionary spend, b) soft deal wins in Q1, c) risk of further ramp downs or deferment of projects given uncertainty and d) pipeline to revenue conversion may take longer than expected,” said a report from PhillipCapital.

The other issue that is worrying the Street is the headcount decline.

Though the market was expecting attrition to come down and it had to be brought down to pre-pandemic levels, the net decline on employee addition has been very sharp.

Source: Read Full Article