Earnings preview: IT firms likely to report tepid Q3 numbers

Bengaluru: After a muted second quarter in FY23-24, Indian IT companies are likely to once again report soft revenue and profit growth numbers for the October-December period as their clientele continues to prioritise resource conservation amid global recessionary pressures.

“We do not expect any change in commentary for discretionary spending and clients’ decision-making to change in Q3, but the deal momentum is expected to continue for these companies,” Nirav Karkera, who heads research at financial services firm Fisdom, said.

The third quarter earnings season for the technology sector kicks off later this week with bellwethers TCS and Infosys slated to report their numbers on January 11. The next two in line amongst the top-five homegrown giants - HCLTech and Wipro - will follow suit on January 12.

HCLTech is expected to outshine the rest of the big-5, while Infosys and TCS may post anywhere between a 1-4 per cent year-on-year growth in revenue. Sectoral experts also anticipate a slight improvement in margins on the back of cost-cutting measures, reduced attrition and improved resource utilisation.

“In 2023 HCLTech was able to secure a mega deal which will be reflected in the December quarter. So we can definitely expect higher growth - between 5 to 10 per cent,” Biswajit Maity, senior principal analyst at research and consulting firm Gartner, said.

Meanwhile, Wipro and Tech Mahindra may report a drop in revenue - both on a sequential and annual basis. Karkera cited demand softness coupled with profitability challenges stemming from key telecom clients and organisational restructuring at Tech Mahindra for his projection.

Historical trends show that the third quarter is a seasonally weak period for IT companies in India on account of lower billable hours and slower decision making amid a long holiday season in key client markets, furloughs and the tendency to defer IT spending decisions to the next fiscal year.

Hiring, skills and attrition

Experts expressed divided opinions on an upswing in hiring during Q3, ranging between a 0 to 6 per cent quarter-on-quarter uptick. “Most companies will show improvement in resource utilisation during the third quarter, rather than hiring,” Kapil Joshi, who is the deputy chief executive at Quess Corp for IT staffing, recruitment & search, said, adding that 2023 was a challenging year for fresh IT graduates.

However, they unanimously agreed on a marginal improvement in attrition levels, which are expected to range between 14-15 per cent. “I don’t think it will ever go down to single digits. 14-15 per cent is the regular run rate, a steady state for the tech sector,” Neeti Sharma, co-founder and president of TeamLease Edtech, underscored.

India’s top three — TCS, Infosys and HCLTech — reported an overall decline of 16,162 employees in their total workforce in the quarter ended September 2023. Industry insiders agreed that it will be at least 2-3 quarters before hiring numbers return to pre-Covid levels in the Indian IT industry.

This crunch in hiring demand by traditional IT services companies is expected to be cushioned to some extent through talent intake by global capability centres of conglomerates and increasing number of tech jobs in sectors such as manufacturing; banking, financial services and insurance, e-commerce and logistics. 

In 2024, expectations tied to interest rate cuts by the US Federal Reserve appear to be the single most significant tailwind for the sector. “Despite lingering near-term challenges, we foresee a gradual acceleration in growth, ultimately bringing the sector back to levels surpassing those observed before the Covid-19 pandemic till the first half of FY26,” Karkera stated.