Indian IT Firms Anticipate Subdued Q4 Performance, But Profit Outcomes Remain Uncertain
Indian IT Firms Expected to Report Lacklustre Quarter
Top Indian information technology firms are set to report another lacklustre quarter, with revenue and profit seen rising around 10% year-on-year largely on a weaker rupee rather than underlying growth, according to seven brokerages. The firms, including Tata Consultancy Services and Infosys, are due to report fourth quarter results starting April 9.
Uncertainties due to wars, weak discretionary spending, and concerns around artificial intelligence will continue to weigh on client budgets, making the revenue forecast for the next fiscal year a key focus for investors. The Indian rupee fell 4% against the U.S. dollar during the March quarter, and slid to record low levels. This has benefited software services companies, which typically bill in foreign currencies while incurring most costs in rupees, inflating profits when dollar revenues are converted.
The $315 billion sector, employing about 5.9 million people, last reported double-digit revenue growth in the March 2023 quarter. Since then, demand has softened as clients cut discretionary spending, deal cycles lengthened, and spending shifted towards cost optimisation and AI-led projects. Revenue for the top six firms - Tata Consultancy Services, Infosys, HCLTech, Wipro, Tech Mahindra, and LTM - is expected to grow about 10.9% year-on-year in the March quarter, with net profit rising 10.3%.
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| Company | Revenue Growth (YoY) |
|---|---|
| Tata Consultancy Services | 10.9% |
| Infosys | 10.9% |
| HCLTech | 10.9% |
| Wipro | 10.9% |
| Tech Mahindra | 10.9% |
| LTM | 10.9% |
On a constant currency basis, or stripping out exchange-rate effects, the top four IT firms are more likely to see revenue rise only 1.8% for the year, Ambit said. Analysts at Yes Securities said performance was likely to be uneven, with relative resilience in banking and financial services, while retail, healthcare, and hi-tech segments could face pressure due to higher exposure to discretionary spending.
"Our recent interactions suggest that overall client budgets have not increased materially and discretionary spending remains at bay," analysts at Jefferies said in a preview note. However, even a modest revenue forecast could support stock prices, HSBC analysts said, noting valuations currently reflect only low-single-digit growth.
While the fears around the impact due to AI are "difficult to validate or falsify, the burden of proof now sits with IT companies. Re-rating, thus, depends on proof of surviving and thriving," said analysts at Motilal Oswal. Shares of IT companies are down 20% so far this year, on investor worries that advanced AI tools launched by Anthropic and Palantir could disrupt IT's traditional business models and cannibalise business. The Nifty 50 is down 13%.
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Investor Takeaway
Investors should focus on the revenue forecast for the next fiscal year due to uncertainties in client budgets.
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