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Tech companies brace for disappointing Q3 results as demand slowdown looms

BusinessTech companies brace for disappointing Q3 results as demand slowdown looms
The tech industry has been grappling with challenges over the past few quarters due to a slowdown in key markets in the West, influenced by factors such as inflation, economic uncertainty, and rate hikes. As a result of these obstacles, numerous IT companies have experienced delays in the closure of deals during the third quarter, predominantly attributed to a higher-than-anticipated number of furloughs. This delay has likely resulted in subdued revenue for Indian IT firms in Q3.

Market Analysis and Projections

According to insights from Motilal Oswal Financial Services, seasonality is expected to adversely affect the revenue growth and margin performances of both tier-1 and tier-2 IT companies. The firm’s analysis suggests that the IT industry has not witnessed substantial changes in spending patterns, with discretionary spending by enterprises continuing to remain stagnant despite improvements in sentiment. Motilal Oswal anticipates a median revenue growth of 0.7 per cent quarter-on-quarter (QoQ) and 2.5 per cent year-on-year (YoY) for its IT services coverage universe in Q3FY24. Furthermore, they project a range of revenue growth for tier-1 and tier-2 companies, with the impact of adverse currency movements likely to further impede reported growth. The brokerage firm posits that the muted revenue growth and revised compensations in Q3 are unlikely to contribute to margin improvement. However, the depreciation of the Indian rupee (INR) is expected to provide support. They estimate a flat dollar revenue YoY, with a decline in INR EBIT and INR PAT in Q3FY24. Additionally, Motilal Oswal anticipates a moderation in total contract values (TCVs) compared to the previous quarter, along with the influence of furloughs on Q3 performance.
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Preference and Expectations

In terms of company preferences, Motilal Oswal favors tier-1 over tier-2 companies, with HCL Tech being their top pick. They also express a preference for Cyient among tier-2 companies. Choice Equity Broking’s Equity Analyst, CA Vatsal Vinchhi, foresees subdued performance in Q3 for IT companies despite a strong order book. Vinchhi attributes this projected performance to the uncertain environment, a slowdown in discretionary spending, challenges in the Banking, Financial Services, and Insurance (BFSI) segment, and difficulties in North America. Vinchhi highlights the persistence of uncertainty, consequently leading to limited revenue visibility. He emphasizes the ongoing focus on cost optimization initiatives, and he anticipates that transformational large deals will begin to materialize from FY25. Furthermore, he speculates that the decisions of the US Federal Reserve to maintain a steady interest rate and the expectation of significant rate cuts might stimulate the IT sector in FY25. Abhishek Jain, Head of Research at Arihant Capital, also recognizes the impact of increased furloughs on the demand for information technology services. Jain shares the view that the industry is experiencing a pause in discretionary spending, with no substantial changes in patterns despite improved sentiment. Additionally, Jain anticipates that adverse currency movements may hinder the growth of IT companies on a reported basis.

Industry Preferences and Picks

Jain’s preferences for tier-1 companies includef TCS, while he favors Coforge, Persistent Systems, and Route Mobile among tier-2 companies. His pick among tier-3 companies is Allied Digital Services.

Conclusion

The projections and analyses showcased above paint a picture of the challenges faced by tech companies and the anticipated impact on their Q3 results. With a careful understanding of the market dynamics and the projections made by expert analysts, it is evident that the tech industry is navigating through a labyrinth of challenges that are likely to influence its performance in the near future. As we delve deeper into the sector, it becomes increasingly clear that strategic decisions will be crucial for companies to combat these obstacles and carve a path toward sustainable growth and resilience.
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