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Business News/ Companies / Company Results/  Q4 results preview: IT sector likely to report muted revenue growth with stable margins; all eyes on FY25 guidance
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Q4 results preview: IT sector likely to report muted revenue growth with stable margins; all eyes on FY25 guidance

Largecap IT services players are expected to report modest revenue growth in Q4FY24 as muted demand trends continue on account of weak discretionary spending and cautious behavior by clients, amid an uncertain global macroeconomic situation.

The Nifty IT index has corrected more than 6% over the last one month, underperforming the benchmark Nifty 50 index, as the market starts factoring in this slower recovery. Premium
The Nifty IT index has corrected more than 6% over the last one month, underperforming the benchmark Nifty 50 index, as the market starts factoring in this slower recovery.

The Indian IT services companies are likely to end the financial year 2023-2024 on a weak footing with the March quarter results estimated to show subdued growth amid unabated headwinds.

Tata Consultancy Services (TCS), the country’s largest software services exporter, will kick start the earnings season for the fourth quarter ended March 2024 on April 12. Infosys will release its Q4 results on April 18, while HCL Technologies will announce its March quarter earnings on April 26.

The largecap IT services players are expected to report modest revenue growth in Q4FY24 as muted demand trends continue on account of weak discretionary spending and cautious behavior by clients, amid an uncertain global macroeconomic situation.

Among verticals, BFSI, Communications, and Hi-Tech are expected to be among the laggards, with continued weakness in North America.

Also Read: Q4 results: TCS, Infosys, HCL Technologies to kick start Q4 earnings season; Check dates here

However, analysts believe margins to remain steady despite weak revenue growth, as companies optimize costs and tighten discretionary spending.

The impact of weak earnings estimates for the IT sector can also be seen in the performance of IT stocks. The Nifty IT index has corrected more than 6% over the last one month, underperforming the benchmark Nifty 50 index, as the market starts factoring in this slower recovery. 

Revenue Growth

According to estimates by Kotak Institutional Equities, Infosys Q4 results are likely to be weak, with a 1.5% sequential revenue decline. Wipro, LTI Mindtree and Tech Mahindra are also expected to report a sequential revenue decline, while HCL Technologies (services) should outperform on growth at 2.9% in constant currency terms. 

TCS and HCL Technologies will outperform on growth at 0.2-1.7% c/c QoQ. USD revenue growth will benefit from modest cross-currency tailwinds of 2-10 bps across larger peers and 5-43 bps at mid-tier companies," Kotak Institutional Equities said.

According to analysts at Emkay Global Financial Services, midcap IT companies are expected to outperform the largecaps in the fourth quarter of FY24. The midcap IT companies are expected to report sequential growth of 1-5% compared to -2% to +2% (USD growth) for largecaps.

Also Read: Weak Accenture earnings kills all hopes of recovery of Indian IT sector in FY25. Details here

The brokerage firm expects Infosys and HCL Tech to guide for 3-6% and 4-7% revenue growth in FY25 and report an EBIT margin guidance of 20-22% and 18-19% in FY25. For Wipro, it expects the company to guide for growth of -1 to +1% in Q1FY25.

Moreover, deal wins for the quarter under review are expected to remain steady. 

Margins

Operating margins of IT companies in Q4FY24 are expected to remain steady as these companies continue to repair their cost structures, given the weak demand and moderating attrition and operating efficiencies. 

Analysts at Kotak Equities expect reasonable margin improvement at TCS, while the reversal of one-off impact from unprofitable contracts should benefit Tech Mahindra. Wipro is likely to report a moderate decline in margins, while HCL Tech’s EBIT margin should be impacted by seasonal weakness in the products business. Margins of LTI Mindtree may be impacted by lower utilization and partly offset by lower pass-through revenues QoQ. 

Also Read: Accenture cuts FY24 earning forecast over uncertain consulting revenues

FY25 Outlook

The financial year 2024-2025 is estimated to be moderately better for the Indian IT sector. The revenue growth outlook for FY25 across IT companies is likely to be marginally better with TCS expected to lead larger peers in growth.

“Large clients, especially banks, have the ability to spend, but the willingness is not there. We have cut our revenue growth forecasts marginally across our coverage universe. We expect a margin improvement in FY2025E as the full benefits of employee cost realignments bear fruit," said Kotak Equities.

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Published: 01 Apr 2024, 12:21 PM IST
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