IT giants brace for challenges in third quarter amid macro weakness, layoffs

IT sector Q3 preview: Information technology (IT) companies will kick start December quarter earnings for Nifty 50 companies from January 11. The country’s largest and second largest IT services companies, Tata Consultancy Services (TCS) and Infosys will report their third quarter earnings post market hours on Thursday, January 11.

Meanwhile, Wipro and HCL Technologies will report their numbers on Friday, January 12.

In the upcoming earnings season, major information technology (IT) companies are expected to face headwinds, including weakened macroeconomic conditions, reduced discretionary spending and layoffs impacting revenues, brokerage firm IDBI Capital said in a report authored by analyst Dewang Bhatt. IDBI Capital analyst predicts that delayed decision-making, slower deal conversion and challenges in sectors like hi-tech, retail, and BFSI will be common themes across IT companies.

Image credit: Pixabay

The outlook for FY25 hinges on the anticipation of higher client budgets, traction in generative artificial intelligence (AI) and improving macroeconomic conditions, IDBI Capital said.

For large-cap IT firms, the expected dollar revenue growth in the third quarter of current financial year is estimated to range from -2.5 per cent to 3.9 per cent quarter-on-quarter (QoQ), offset by a cross-currency impact of around 35 basis points (bps). Among mid-cap companies, sequential growth is anticipated to be between -4.3 per cent and 5 per cent. However, margins are expected to dip across most companies, except for Coforge and Newgen.

Revenue outlook

Tier-1 companies are expected to witness muted growth, except for HCL Tech. Mid-cap leaders, including Sonata, Coforge and Newgen are anticipated to lead with positive growth. Infosys may moderate its top-end guidance from 1-2.5 per cent to 1-2 per cent and Wipro might guide -1 per cent to 1 per cent sequential revenue for the fourth quarter of the current fiscal, IDBI Capital said.

Image credit: Pixabay

Coforge is expected to narrow its guidance range from 13-16 per cent to 13%-14 per cent.

Margin outlook

Margins are expected to decline for major IT companies due to factors such as furloughs and wage hikes. Notably, Newgen and Coforge are expected to report margin improvements of 168 bps and 182 bps, respectively.

What to expect from IT companies in Q3

TCS: The company is expected to post flat revenue in constant currency (CC) with a negative impact of cross-currency at 40 bps. EBIT margin is anticipated to decrease by 50 bps sequentially due to subdued revenue growth and furloughs.

Infosys: A decline of 1.2 per cent in CC terms with a cross-currency headwind of 26 bps is anticipated for revenue growth. EBIT margin is expected to decline by 58 bps due to wage hikes and furloughs.

Wipro: IT services revenue is expected to contract by 2.5 per cent in CC terms, with a cross-currency headwind of 35 bps. EBIT margin is likely to shrink by 51 bps sequentially.

HCL Technologies: A robust sequential revenue growth of 3.9 per cent in CC terms is expected. EBIT margin is expected to decline by 67 bps due to the impact of wage hikes.

Tech Mahindra: A 1.1 per cent de-growth in CC terms is expected for sequential revenue. EBIT margin is projected to increase by 338 bps QoQ, driven by a low base.

Image credit: Pixabay

Financial Performance 

The IT sector showcased robust performance in third quarter as the Nifty IT index rose 12 per cent in line with Nifty 50 index which climbed 11.27 per cent. The IT stocks witnessed buying interest on hopes of revival in discretionary spending after US Federal Reserve hinted at rate cut starting 2024 after a spree of rate hikes in over a year.

TCS rose 7.95 per cent, Infosys advanced 7.2 per cent, HCL Technologies surged 18 per cent and Wipro gained 16.23 per cent in third quarter of current financial year.

Market watchers will closely monitor deal trends, budget outlooks, and company-specific strategies for growth and margin sustainability, IDBI Capital added.