Analysts said that FY24 revenue growth will be nearly half the rate it was last year due to global macro-economic and financial sector headwinds. They said that the fourth quarter of FY23 will be muted by longer deal cycles, seasonal headwinds and impact on the banking financial service insurance (BFSI), sector. BFSI is responsible for around 40% of India’s IT service industry revenue.
“We expect companies will report back-ended growth for FY2024. Visibility in H1 of FY24 will be affected by macro uncertainties. Kotak Securities stated that management commentary on FY24 can be positive given the early visibility of large deals being converted, captive takeover opportunities, and the benefits of vendor consolidation.”
CRISIL, a credit rating agency, stated in a report that it expects revenue growth of 700-900 basis points to 10-12% in fiscal 20,24, compared to the 18-20% growth estimated for fiscal 2023.
ICICI Securities believes Infosys will guide for a conservative 6-8% growth in constant currency revenue for the 2024 fiscal. HCLTech is expected guide for 5-7% revenue growth over the same period. Kotak Securities believes Wipro will guide revenue growth from 1% to 1% in Q1 FY24.
Anuj Sethi (senior director, CRISIL Ratings) stated that “headwinds in key market segments, particularly the BFSI segment in the US, and Europe, will impact the revenue growth for domestic IT service companies.”
According to the report, the sharp decline of rupee value by 7-8% during fiscal 2023 was also a contributing factor.”BFSI segment revenue growth is likely to fall to the mid-single digits, but it will be offset marginally by 12-14% growth within the manufacturing segment and 9-11% growth elsewhere. Sethi stated that net-net would see moderate revenue growth.
Analysts believe that cautious client sentiment will reflect in large-scale cost optimization type of deals, which will benefit large caps more than the midcaps. A rise in European technology spending is also possible.”Improving the commentary on Europe can offset any negative effects.” According to a note from HDFC Securities, some of the lower-indexed mid-tiers (presence) to Europe are making more investments in the region.”
According to the brokerage, while there is a mixed outlook for increased macro risk in the near term, medium-term drivers of technology upgrade cycles are still intact. According to the brokerage, vendor consolidation is enabled by large strategic client relationships. Large mid-tier IT and tier-1 tiers expect net gains from vendor consolidation.
Strong digital solutions, cloud-based automation capabilities and a broad range of offerings will all support the demand scenario. Although companies may be able to pass on lower prices through new deals, the incremental pricing lever can be limited. According to HDFC Securities, however, large cost optimization deals can offer only limited margin gains.
The IT sector’s operating profitability is expected to decline by 150-175bps in fiscal 2023, to 22-22.5% decadal. This is due to higher employee costs which account for almost 70% of total cost. CRISIL Ratings expects that these costs will moderate in the current fiscal, which began on April 1. Companies are taking a cautious approach when it comes to new hiring to normalise their headcount.