More misses than hits hint at uncertain times for IT services companies
The first quarter performance of the top players in IT services, as well as mid-cap companies, was weak, reflecting the overall uncertainty.
The company’s top four numbers show many errors, indicating difficult times ahead.
One of the mismatches is the total contract value (TCV) signed by companies and the revenue growth recorded.
The top four players in IT had some of the best TCVs signed in the last quarter of FY23 as well as in the first quarter of FY24. But those aren’t reflected in revenue.
Tata Consultancy Services (TCS) signed TCVs of $10 billion and $10.2 billion in Q4 FY23 and Q1 FY23 respectively. However, revenue growth in the first quarter of fiscal ’24 was flat or saw an increase of just 0.3 percent.
Infosys had the same narrative. The Bengaluru-based company had large TCVs of $2.1 billion in Q4 FY23, but revenue growth for Q1 FY24 was 1.3 percent.
While the numbers do not give a rosy picture, so does the commentary from the departments. Despite being asked repeatedly, K Krithivasan, CEO and Managing Director of TCS, did not give a clear response about when this uncertainty will end.
A report by Nirmal Bang on the order hold after the results analyst was called said: “Delaying projects is a wide-ranging issue and not related to any specific industry. He also indicated that he is not sure of catching 2HFY24 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 weak revenue increases is largely due to the impact on discretionary services. Similarly, Elara Capital’s report on Infosys also highlights the issue, “However, the visibility of such deals moving into revenue is murky, mainly due to lower volumes, decision delays, delayed increase in closed deals, and lower discretionary spending (digital/transfer deals) likely in the second quarter,” Elara Capital reports.
What spooked markets and analysts was the sharp drop in revenue growth guidance by Infosys. The company now expects revenue growth of 1-3.5 percent in FY24 from the 4-7 percent it had said earlier.
Infosys management said it had won major deals but that the revenue from these deals would come in the second half of the year.
“FY24E revenue growth at the midpoint of guidance will be one of the weakest on record for Infosys since FY01 (excluding the years of the global financial crisis). [2008-10] Even worse than covid for fiscal year 21). This despite the absence of a severe recession in any of the major geographies in the US and Europe…”, Sumit Jain and Aditi Patel of ICICI Securities said in their report.
In the case of HCLTech, although management is confident of a turnaround and hasn’t changed its guidance, analysts aren’t optimistic.
“(Management’s) confidence is supported by a standard pipeline that they expect to convert into revenue faster. We believe there is a risk that the company will not be able to deliver revenue growth within the guided range due to a) weaker discretionary spending, b) gains in flexible deals in the first quarter, c) the risk of further declines or project delays due to uncertainty and d) the pipeline to revenue conversion could take longer than expected, according to a report by PhillipCapital.
The other issue worrying the street is the low staffing. Although the market was expecting attrition to decrease and had to be brought down to pre-pandemic levels, the net drop in employee addition was very sharp.