Indian IT services players are likely to deliver medium revenue growth of 1.9 per cent QoQ (Quarter on Quarter) and 9.1 per cent YoY (Year on Year) in constant currency (CC) terms for the Q3 of FY 2023. As per a recent report by Motilal Oswal, the weakening macroeconomic environment and recessionary fears have had a lesser adverse impact on the overall demand environment for the IT services players than it was anticipated at the beginning of the Q3.
However, there are a few pockets of weakness that remain in the consumer-facing verticals, where the decisions have been delayed and the technology spending has been cut on the discretionary activities. As per the Motilal report, there can be softness in demand in specific verticals (mortgage, retail, telecom, and hi-tech) and geography, especially in Europe.
The Motilal report highlights that in the Tier-I IT space, HCL Technologies will lead the charge by clocking a revenue growth of 5 per cent QoQ in CC, followed by LTIMindtree, TCS and Infosys. It is also expected that WPRO and Tech Mahindra would see a muted quarter with flattish 0.8 per cent and 0.3 per cent QoQ CC growth.
The Motilal report points out that the margins of the Indian IT services companies are expected to see some improvement in Q3 FY 2023. Though improved utilization and freshers becoming billable may affect their margins a little bit, it is expected that most of the Tier-I IT services companies should post margin expansion between 10bp and 60bp.
Interestingly, as per the report, salary expectations of employees have come down and attrition is likely to moderate this quarter with easing supply situation. Though supply-side pressure is receding, the benefit should flow into margins with a lag of one to two quarters, the report mentions.
Another report by Emkay Global highlights that the revenue growth momentum of Indian IT services companies is likely to moderate in Q3 due to furloughs ( when employees are given a leave of absence from work for which the employee is not paid), lower number of working days, deferred spending by few clients, and increased cautiousness among clients amid macro uncertainties. The Emkay report points out that seasonal factors and macro uncertainties will weigh on growth of the IT services companies and there would be moderate growth in Q3. The Emkay report further observes that there will be challenges due to macro uncertainties, high inflation, and supply-chain disruptions.
A research report from Kotak Institutional Equities notes that revenue growth of IT services companies will moderate to high-single digits to low-teens on YoY comparison. It says that IT service players such as TCS and HCL Technologies are expected to report relatively a better quarter, while Tech Mahindra and Mphasis may lag. The report points out that furloughs have been higher than usual, especially in the hi-tech segment, and certain segments of the market may slowdown including non-essential retail, segments of telecom and financial services. The report states that the IT services industry escaped the furlough impact in the last two years due to compressed digital transformation journey as well as a large-deal ramp-up.
The Kotak report further states that there could be moderation in IT spending growth after two years of aggressive spending. While budgets will be a focus area, IT services management may not have full visibility. It is also plausible that there may be a delay in the conversion of budgets into spends and projects.
The report also interestingly notes that the ROI focus of clients has increased and IT services companies that have a full-service model, strong execution engine and address digital transformation agenda are best-positioned to gain. As per the Kotak report, in the next quarter Q4 FY 2023, IT services companies are expected to give cautious guidance or implied guidance given the risk to IT spends due to adverse macro in select segments such as non-essential retail, telecom, hi-tech and Europe.