Markets
Tech mood darkens as investors turn sceptical of FY24 guidance
Summary
Most tier-1 information technology (IT) companies disappointed with flat or negative sequential constant currency (CC) revenue growth. Midcap IT firms did relatively better on revenue, but results were a mixed bag.The Nifty IT index was a laggard in April, falling by 3%. It was also the only index to clock negative returns last month among key sectoral indices. Investors seem to have taken note of the dull March quarter (Q4FY23) results. Most tier-1 information technology (IT) companies disappointed with flat or negative sequential constant currency (CC) revenue growth. Midcap IT firms did relatively better on revenue, but results were a mixed bag.
Lack of revenue visibility amid weak global macros has been a sentiment dampener for the sector. Banking sector crisis in US and Europe has been a concern on revenue growth outlook.
“Earlier the pain was limited to some consumer-oriented sectors, but now it has extrapolated to commercial and banking sectors," said a Motilal Oswal Financial Services report on 3 May. “Enterprises in the developed markets have revisited their budgets and taken a spending cut on the discretionary part of the IT spend, which is hurting the earnings of the IT outsourcing vendors," it added.
In Q4, a slew of IT companies saw muted performance in the North American market.
Given this, a worry is that meeting FY24 revenue growth guidance may be a tall task. Infosys Ltd guided for 4-7% year-on-year (y-o-y) CC revenue growth this fiscal, HCL Technologies Ltd set revenue growth guidance at 6-8% and LTIMindtree Ltd is eyeing double-digit revenue growth.
“The confidence of companies about a growth revival is based on a strong deal pipeline and hope of some macro revival in second half. Hope for a quick macro revival will be tested," said Kotak Institutional Equities in a report on 5 May. Unless backed by mega deals, the hurdle rate to achieve top-end of guidance seems a bit unrealistic, added the Kotak report.
In this backdrop, expectations from Q1FY24 earnings are muted. The postponement of demand for digital services is likely to continue. The quarter is expected to be marred by the caution among clients on IT spends, especially in the crucial BFSI vertical.
“A deciding factor would be Q2FY24 performance, which is a seasonally strong quarter for the IT sector," said an analyst requesting anonymity. “So, seasonality plus pent-up demand may aid deal momentum and thus, revenue growth trajectory. Now, whether companies stick to their guidance (which is already conservative) or revise it upwards in second half of FY24 hinges on how Q2 pans out," he added. IT stock valuations have cooled from recent peaks, but that is no comfort unless earnings prospects improve.
