The start to the US rate easing cycle later this year should aid IT budgets in the primary revenue-generating market for Indian technology, while strong deal wins in recent quarters would translate into revenue growth acceleration in FY25.
“Recovery of furloughs and ramp-up of recently won large deals should aid revenue growth. Accordingly, for most of our coverage companies, we see YoY revenue growth to start recovering from 4QFY24,” BNP Paribas analyst Kumar Rakesh said in a report. “That said, we note that some firms continue to see the impact of project ramp-downs… We think FY25 guidance will be a critical near-term catalyst, along with US macro-economic indicators in the coming months.”
For the likes of TCS, Infosys, HCLTech and Wipro, it expects 4QFY24 constant currency (CC) organic revenue growth at -1% to +1%, while mid- and small-caps could report 1-3% QoQ (quarter on quarter) USD organic revenue growth.
While the industry’s struggle with constrained discretionary demand is likely to continue over the next 3-4 months, rising PMIs, benign inflation prints and a start to the rate easing cycle should allow for a continuation of the Goldilocks phase, BNP Paribas said.
‘Bottomed Out’
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“We think the industry has bottomed out. Signs of improvement in the global economy, macro indicators and strong deal wins in recent quarters should translate into revenue growth acceleration in FY25, in our view,” it added.
PMI is purchasing managers’ index, an economic indicator of trends in the manufacturing and services sector.
To be sure, Q3 and partly Q4 of a fiscal year are seasonally weak quarters. In Q3FY24 ending December, most IT earnings were hit by muted revenues and profit numbers. Infosys trimmed its FY24 revenue guidance, while Wipro had modest estimates.
Among global technology majors, Accenture, Cognizant and Capgemini lowered or slowed their FY24 (ending in August) guidance due to continued pressure on clients’ IT budgets, although Accenture pointed to likely stronger exit driven by higher contribution of acquisitions and large deal wins.
Sumit Pokharna, vice president – fundamental research – IT, Kotak Securities, said dollar revenue growth will benefit from modest cross-currency tailwinds of 2-10 basis points (bps) across larger peers and 5-43 bps at mid-tier companies.
One bp is a hundredth of a percentage point.
“TCS and HCLT will outperform on growth at 0.2-1.7% QoQ in CC terms… Infosys’ March quarter is seasonally weak, with Q4FY24 being no different—we forecast a 1.5% sequential revenue decline. Wipro, LTIMindtree and Tech Mahindra should also report a sequential revenue decline,” Pokharna added.
Size Matters
Meanwhile, a Jefferies report said: “We expect aggregate revenue growth for our coverage to remain subdued at 0.3% QoQ cc in 4QFY24 as continued pressure on discretionary IT spends limit the pace of recovery from furloughs. We expect only two firms in our coverage – TCS (+1.4% QoQcc) and Coforge (+2% QoQcc) – to deliver QoQcc revenue growth, led by deal ramp ups.”
Most analysts expect margins overall to be steady on the back of furlough impact reversal from 3QFY24, pyramid restructuring, higher offshoring, higher utilization and driving efficiencies in discretionary expenses. TCS, Infosys and Tech Mahindra may see improvement while HCLTech, Wipro and LTIMindtree may see modest or weaker margins.
In February, industry body Nasscom said India’s technology industry has surpassed $250 billion in revenue and it is expected to grow at a slower pace of 3.8% to reach $253.9 billion for FY24, from an 8.1% growth of $244.6 billion in FY23.
