Information Technology (IT) companies came out with mixed quarterly numbers as expected. This was primarily due to the economic slowdown in key geographies like the US and Europe. In recent quarters, the top-line growth for IT companies has come under pressure. And the trend continues in Q4 FY24 as well.
Moreover, even the management commentary expressed challenging times ahead. The commentary from Indian and Global IT Services firms for H1 CY24 has been cautious. This is due to the lack of mega or large deal announcements.
However, industry players expect the demand to turn around by H2 CY24. This is in light of rate cut expectations and upcoming US Elections in November 2024.
Q4 Results Overview
In the Q4 earnings season, the growth-margin tradeoff has been the highlight. The management sounded cautious about discretionary spending by clients in the upcoming quarter. The clients prefer projects with a clear near-term return on investment (ROI) and cost efficiencies.
This is due to the uncertain macroeconomic environment acting as a bottleneck in demand recovery. The attrition rate for large-cap IT firms is likely to trend downwards. This will help them in protecting margins.
As IT services face weak demand and a lack of big deal wins, employees will have fewer job opportunities to switch. Due to macroeconomic and geopolitical uncertainty, BFSI, retail, Hi-tech, and telecom verticles continue to underperform. On the flipside, manufacturing and healthcare verticals did well.
Mid-Cap and Small-Cap IT Players Vs Larger Companies
Large-cap IT companies have diversified revenue streams across various industries and markets with extensive service offerings. However, diversification has made their growth relatively softer.
On the other hand, mid-sized firms focusing on niches witnessed remarkable agility in scaling customer relationships and delivering better growth. However, when it comes to margins, larger players have historically protected their margins better than their smaller counterparts.
This resulted in better cash flow generation and capital allocation (regular buybacks or dividends). Similarly, with growth in electric vehicles (EVs), mid-cap IT companies made significant advances along with profitable business delivery.
This is evident from the strong recent growth of companies like KPIT, Tata Elxsi, etc. It is interesting to see how mid-cap IT companies are adequately investing in relatively newer technologies like generative artificial intelligence (AI). However, we can’t ignore the case where the large-cap IT wins the GenAI race after losing out on EV to mid-cap players.
Deal Wins and Revenue Growth
Large deals that were announced recently carry a longer time horizon. Hence, smaller revenue is realised per year. Moreover, most deals are from the cost optimisation viewpoint. This results in lower profitability for the IT companies.
During the Covid era, these companies received more lucrative smaller and transformational or discretionary deals. This helped companies in quick revenue realisation. In recent times, the pace of such deals has fallen at a much faster rate.
This impacts companies' revenue growth as well as margins. In the upcoming quarters, discretionary spending will gain momentum if management is confident about a better business environment.
Although IT companies will face pressure due to geopolitical tensions and US elections, rate cuts will positively impact them.
Generative AI's Impact on Indian IT Firms
Generative AI is gaining traction among institutions as it promises various cost-saving use cases across industries. All the technological advancements like cloud computing and blockchain have led to good opportunities for Indian IT companies that excel in system integration.
As the world leaps to integrate AI into their existing systems, IT companies would now need highly skilled (results in higher cost) and a larger workforce. Currently, most large-cap IT players are in the investment phase.
However, predicting how much of this initial investment will translate into a profitable business over the mid-term is challenging. These investments continue to put pressure on their margins.
Final Thoughts
The Q4 results of the IT sector showcased mixed performance, primarily characterised by economic uncertainties and a cautious outlook for the upcoming quarters. Despite challenges, mid-cap and small-cap IT players demonstrate their agility in emerging industries like EVs and generative AI.
On the other hand, larger IT companies remain resilient, leveraging diversified revenue streams. As the industry faces macroeconomic and geopolitical pressures, IT companies’ ability to integrate new technologies will determine its trajectory in the H2 FY24.
Frequently Asked Questions (FAQs)
Why IT sector is falling?
The IT sector is witnessing a fall as Accenture delivered weak guidance. Their shares crashed over 9% at the NYSE (New York Stock Exchange). As a result, the ADRs (American Depository Receipt) of Wipro and Infosys also saw a fall. Accenture revised its full-year revenue growth expectation to 1-3%. This is lower than their early estimates of 3-5%. Moreover, due to geopolitical tensions and US elections, discretionary spending from institutions fell. This led to lower large deals, impacting the top line.
Which company is best in the IT sector?
Below is the list of top 5 Indian IT companies by market capitalisation:
IT Company
|
Market Cap (Rs Crores)
|
Tata Consultancy Services
|
13,99,350
|
Infosys
|
5,99,531
|
HCL Technologies
|
4,10,605
|
Wipro
|
2,42,381
|
LTIMindtree
|
1,38,750
|
What are the five biggest IT companies?
Alphabet (Google), Amazon, Apple, Meta, and Microsoft are the five biggest IT companies in the world.
Is TCS a tier 1 company?
Tier 1 companies are referred to as the largest and most successful companies. TCS (Tata Consultancy Services) is one of the largest in the IT sector, hence, is a tier 1 company.