Infy, HCL cut FY24 growth forecast

Infosys Ltd and HCL Technologies Ltd on Thursday said their 2023-24 revenue growth will be weaker than their earlier forecasts as their large foreign clients tighten purse strings amid economic uncertainties.

With India’s largest tech services company, Tata Consultancy Services Ltd, already witnessing a revenue decline in the second quarter, this portends a depressing year for at least three of India’s Big Five tech companies.

Infosys, India’s second-largest technology services provider, on Thursday slashed its growth guidance for a second straight time and now expects it at 1-2.5% in constant currency terms in 2023-24. Constant currency disregards the impact of exchange rate fluctuations.

In April, Infosys signalled 2023-24 revenue growth of 4-7%; in July, this was scaled down to 1-3.5%.

In the April-September period, Infosys added $336 million in incremental revenue, translating to a growth of 3.7%. But management’s expectation of at-best growth of 2.5% in 2023-24 implies a fall in revenue in the third and fourth quarters.

“We are seeing discretionary programmes and large transformation programmes getting reduced significantly. And we are seeing the decision-making continuing to be slow,” Infosys chief executive Salil Parekh explained on the company slashing its growth outlook.

“We don’t have a view on that,” Parekh said when asked if the company expects demand to recover in the second half of the year. Infosys’ American Depositary Receipts (ADRs) were trading 7% lower at $16.38 at 7:50pm.

The company reported quarterly revenue of $4.72 billion, a 2.2% sequential rise and a 3.6% increase from a year earlier, better than what analysts had estimated.

Deploying more engineers in ongoing projects and lowering expenses related to contract workers helped the company improve its operating margin by 40 basis points (bps) sequentially to 21.2%, even though it was still 30bps less than the 21.5% at the end of September last year. One basis point is one-hundredth of a percentage point.

Consequently, net profit improved 3.7% sequentially and 0.3% from the year earlier to $751 million.

A Bloomberg survey of 30 analysts expected Infosys to report a profit of $751 million on net sales of $4.62 billion.

Separately, HCL Technologies, India’s third-largest IT services company, slashed its full-year growth estimate from 6-8% to 5-6%. Revenue inched up 0.8% sequentially and 4.6% from the year-ago period to $3.2 billion. Like TCS and Infosys, HCL saw its operating margin improve 150bps sequentially and 50bps from the year-ago period to 18.5%. Net income improved 7.9% sequentially to $464 million.

HCL’s performance on revenue and profitability beat Street estimates as a Bloomberg poll of 28 analysts had estimated a $450.7 million profit on sales of $3.23 billion.

Unlike TCS, both Infosys and HCL beat analyst’s estimates in the September quarter. However, analysts are worried about the companies’ outlook and management commentary for the second half of the year. “The fear for now is that the current environment is likely to get worse, and this is reflected in the guidance of companies and the management commentary,” said a Mumbai-based analyst at a foreign brokerage on condition of anonymity. “We have projected the current year to be a washout. We’ll only know if the slowdown will be deeper and extend into the next fiscal year (FY25) post the third quarter (October-December).”

Wipro Ltd, the country’s fourth-largest IT services firm, is scheduled to release earnings on 18 October.

Fears of a looming slowdown and geopolitical uncertainty brought in by wars in Eastern Europe and West Asia have caused many Fortune 1000 companies to either hold back on tech spending or defer the start of some of the work.

Homegrown IT firms grew at an even slower pace in FY21, but that was due to businesses worldwide coming to a halt on account of the covid-19 pandemic.

TCS, which saw its revenue slip in the second quarter, does not issue a revenue guidance. But the country’s largest IT services company on Wednesday said the “sentiment remains cautious” and analysts estimate it to grow less than 5%, lower than its slowest growth of 5.3% in 2010. Infosys’s growth in the current financial year will be also slower than the 3% reported in 2010. HCL Technologies’ growth will be slower than the 7.1%, its weakest, in 2016.

To be sure, this reversal in fortunes was in the making as the growth of all of these companies had slowed last year after all of them expanded their revenue at the fastest pace in FY22 -- Dollar revenue growth of TCS, Infosys and HCL came in at 8.6%, 11.6% and 9.6%, respectively.

“Both Infosys and HCL Technologies revising their guidance suggests that deal volume ramp-ups have not played out,” said “Apurva Prasad, vice president of institutional research at brokerage firm HDFC Securities. “Signing of large deals suggests that ramp-up timelines could be longer right now, which is why they are not translating to growth contribution for FY24—although this can play out in FY25.”

Both Infosys and HCL announced their earnings after the end of trading in Mumbai. On Thursday, Infosys shares slipped 1.9% to end at ₹1464.5, while HCL closed 1.7% lower at ₹1224.05. The benchmark Sensex remained largely unchanged at 66,408.4 points.

Varun Sood from Bengaluru contributed to the story.