JOIN USDemand outlook in focus as IT firms gear up for Q2 results
Indian IT behemoths will have to work harder to reassure investors about the future prospects of the $227 billion sector, when they submit their report cards for the latest second quarter.
Investor worries tied to demand outlook, deal pipeline and margins for the rest of the financial year are understandable as larger uncertainty due to an impending global economic downturn could make IT clients curtail spending.
“Demand concerns continue as the world heads into a recession,” said Siddharth Pai, an IT outsourcing advisor and founder of Venture Capital firm Siana Capital Management. “Uncertainty concerning energy costs, especially in Europe, seems as if this one will be prolonged. IT firms will continue to face margin pressure until they reshape and resize their pyramids.”
Management commentary on these matters will shape the valuation of Tata Consultancy Services (TCS), Infosys, Wipro and other IT firms in coming days, Pai added. TCS will kick off the Indian IT earnings season next week. The sector is a significant job creator and contributor to the GDP of Asia’s third-largest economy.
Not all doom and gloom
While an uncertain global economic environment makes it harder to predict future growth, overseas rival Accenture’s strong performance in the IT services segment and its recent commentary indicate that domestic IT firms could continue to report solid revenue growth in the second quarter of the current financial year.
Operating margins, which had fallen sharply in the previous quarter, may see some respite owing to various cost-cutting measures. The falling rupee could also lend a supporting hand. Nevertheless, pressure on IT margins is likely to persist.
HR experts, who are closely working with various Indian and global IT firms, believe that despite moderating demand for talent amid layoffs by startups, attrition numbers on a LTM (last twelve month) basis are not likely to see much change.
As the IT index of both NSE and BSE saw a sharp correction, some point out that buybacks by some major firms may be on the anvil.
Cautious optimism
As recessionary fears aggravate in the US and many industrialised nations in Europe including the UK, France, and Germany, the top brass of the Indian IT firms are likely to show caution in their outlook for the second half.
“What we are expecting is similar performance to the previous quarter. Revenue growth is likely to be as per the earlier projections. The management discussions with brokerage firms indicate that IT firms are yet to face any delay in decision making or cut in IT spending. Therefore, the revenue growth trajectory will remain intact for FY23,” Pareekh Jain, an IT outsourcing advisor and founder of Pareekh Consulting told DH.
“As far as the operating margin is concerned, the market is expecting a little bit of upward trajectory given the various cost-cutting measures taken up by various IT firms. These companies have also indicated that margins have bottomed out in Q1. So, we should expect some uptick,” he added.
What Accenture said
Accenture, which follows a September to August financial year, recently provided some clues to the industry’s future.
In the latest quarter, Accenture’s outsourcing revenue, which is a proxy to Indian IT services companies, rose 16 per cent to $7.1 billion from the year-ago period. New bookings for its outsourcing business also remained strong at $10 billion, marking an increase of 41 per cent.
The strong deal pipeline and outsourcing revenue raise hope for Indian IT firms.
“What brings in confidence for Indian IT companies is there are no signs of any slowdown on the tech spending so far,” said ICICI Securities. Accenture’s employee attrition numbers, however, painted a grim picture, in a signal that Indian IT firms may not see much respite in employee churn.
“The pace of hiring has certainly come down. But demand for talent in certain skill sets remains strong. Therefore, we don’t expect any substantial change in employee attrition numbers coming from Indian IT firms in the second quarter. Though attrition is coming down, it is not significant enough to move the needle,” said Supaul Chanda, vice-president of technology recruitment firm Experis of Manpower Group.
Most IT firms had reported more than 20 per cent of employee attrition numbers in the first quarter, leading to rising wage costs and falling margins.
More about moonlighting
Investors also expect the management of the top IT firms to comment on contentious issues such as moonlighting, hybrid work and holding back of variable and bonus payout to staffers.
“Currently, joining dates are being deferred by some companies. It will be interesting to hear how IT firms plan to absorb the new hires, especially freshers in the coming quarters. Also, hiring plans for the next year will come under focus against the backdrop of recessionary concerns,” said a HR expert who wished not to be named.