Why IT services firms don’t offer full-year guidance but set lofty revenue goals

LTI Mindtree, Reliance, Tata Elxsi, Sheela Foam, Amara Raja are among stocks to watch today. (Mint) (MINT_PRINT)
LTI Mindtree, Reliance, Tata Elxsi, Sheela Foam, Amara Raja are among stocks to watch today. (Mint) (MINT_PRINT)

Summary

LTIMindtree aims for $10 billion in revenue by 2032, joining peers like Coforge and Sonata in setting lofty goals. But shares decline, raising doubts about investor confidence in such aspirations amid uncertainties.

Information technology services companies including LTIMindtree Ltd, Coforge Ltd, Sonata Software Ltd, and Happiest Minds Technologies Ltd do not traditionally provide full-year revenue guidance, but that has not stopped them from setting aspirational revenue goals. Analysts say such targets are aimed at investors.

LTIMindtree on Tuesday outlined one such aspiration in its interaction with analysts and investors: to more than double its revenue to $10-billion in next eight years through March 2032.

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However, investors remain unenthused. LTIMindtree shares closed 1.05% lower two days after the announcement was made, ending Thursday at 6,158 a piece. The BSE Sensex dropped 1.2% in during this period, end Thursday at 79,044 points.

India’s sixth largest information technology (IT) services provider ended March 2024 with $4.3 billion in yearly revenue, up 4.4% from the previous fiscal.

LTIMindtree is not the only one to outline such goals. Three other mid-cap IT services companies have also done so. Such revenue aspirations come amid uncertainty caused by generative artificial intelligence (Gen AI). And while most IT services companies have not laid out a roadmap on their Gen AI strategies, that has not stopped them from setting lofty goals.

In an interview with Mint in May this year, Coforge chief executive Sudhir Singh said the company plans to get $2 billion in revenue most likely by FY27.

Noida-headquartered Coforge reported $1.12 billion in revenue for the year ended March 2024, up 11.7% from the year ago.

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In an investor presentation in the same month, Bengaluru-based Sonata Software announced its goal to hit a revenue of $1.5 billion by the next four years. It reported a revenue of 8,613 crore ($1 billion) in FY24, 9.9% more than the year-ago period in US dollar terms.

While Sonata touched a billion dollars in FY24, Happiest Minds in August 2023 announced its goal of touching $1 billion in revenue by 2031, shifting its deadline by a year.

“We are growing into existing accounts, new accounts, acquisitions, and deeper penetration in existing and newer markets," said Venkatraman Narayanan, managing director and chief financial officer at Happiest Minds, in an emailed response to Mint’s queries on Thursday. “We are also expanding our scale of offerings covering newer technologies, etc."

Happiest Minds reported a revenue of $196 million for the year ended March 2024, up 10.3% on a yearly basis.

The only one

To be sure, Happiest Minds is the only company among the four that has spelled out a full-year revenue growth forecast of 30-35% in constant currency terms at the end of the last fiscal.

Some analysts believe these goals are targeted at investors.

“When IT services companies give long-term targets and big aspirational goals, it is to make the company look good in front of investors," said a Mumbai-based analyst at a domestic brokerage on the condition of anonymity. “It does not make sense to set such lofty aspirations but then investors might get optimistic of the company thinking those companies have long-term plans. These numbers don’t mean anything otherwise."

According to Karan Kamdar, senior research analyst at Deven Choksey, a Mumbai-based research and wealth advisory firm, aspirational targets give the investors a peek into the vision of the management.

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“Investors take these goals seriously solely based on the management’s pedigree," said Kamdar. “If the company’s management has a good track record, not just in terms of delivering good financial performances, but also in terms of corporate governance, investors take these aspirational goals seriously."

Coforge and Happiest minds would need to log a compound annual growth rate 21.32% and 26.21%, respectively, faster than what they did in the last three years.

While Coforge managed a CAGR of 21.26% from 1 April 2021 to 31 March 2024, Happiest minds has been logging at a compounded growth of 23.34%.

Singh said in a mailed response to Mint’s queries, “We believe that the $2 billion growth target we have shared with investors will be met within or earlier than the timeframe we have shared, given the very significant growth that we continue to experience despite weak macros."

However, LTIMindtree and Sonata Software can manage to reach their goals even if they grow at a slower pace.

Dependent target

LTIMindtree needs a compounded growth of 11.1% in the next eight years to reach $10-billion revenue to target by FY32. According to the company's investor presentation filed to the stock exchanges on 26 September, it clocked a a CAGR of 13.2% between 1 April 2020 and 31 March 2024.

Sonata Software needs to grow at10.67%, about half the pace of 20.51% CAGR it managed in the last three years, to meet its revenue aspirations by March 2028.

LTIMindtree hasn’t set such a target for the first time. Larsen and Toubro Ltd (L&T), the parent of erstwhile L&T Infotech Ltd. and L&T Technology Services Ltd, set lofty goals for its software services business. But it never achieved it.

In May 2022, L&T, whose IT business cumulatively generated a revenue of $4.4 billion in the year through March 2022, set a target double its top line to $9 billion by FY26.

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To be sure, LTIMindtree started operating as a single company after the merger of L&T and Mindtree Ltd was completed in November 2022.

LTIMindtree and L&T Technology Services reported a combined revenue of $1.33 billion for the July-September 2024 period respectively, implying a revenue run rate of about $7.98 billion by the end of March 2026.

“As a practice, we do not provide guidance in the short term. The long-term revenue goals are meant to be aspirational and not guidance. We’re building on a strong foundation to navigate tech disruptions and doubling down on AI to accelerate growth across key verticals," said a spokesperson for LTIMindtree in a response to Mint’s queries. “With a turbocharged portfolio and an eye on strategic M&A to enhance capabilities, we’re positioning ourselves for sustained success."

Emailed queries to Sonata Software on Thursday went unanswered.

Not a limited trend

The trend of announcing aspirational revenue goals is not limited to the small- and mid-cap IT services companies. Even their larger peers announced lofty goals in the past but failed to achieve these targets. However, the CEOs who set the targets had to depart.

Vivek Paul, chief executive of Wipro Ltd in 2000, was amongst the first to announce an aspirational revenue. For its technology arm, he set a target of $4 billion in revenue by 2004. The company missed the goal and Paul quit five years later, with Wipro generating a revenue of $1.35 billion in the year through March 2005.

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Former Infosys Ltd chief executive Vishal Sikka, former Wipro CEO Abidali Neemuchwala, and former TCS CEO Rajesh Gopinathan had also announced revenue targets. Each of the companies failed to meet those targets, and their bosses quit, citing various reasons, even before the companies could meet the targets.

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