Growth to remain muted for IT services firms in Q1 amid macro uncertainty


Indian information technology (IT) service providers are expected to deliver low single-digit sequential growth in the first quarter (April-June) of 2025-26 (FY26), even as macroeconomic uncertainties continue to persist due to the volatile geopolitical environment.

Information technology

Illustration: Uttam Ghosh/Rediff

While the road ahead appears far from rosy, IT companies – which depend on the US for a large part of their revenue – point to no material deterioration in the spending environment.

The quarter ended June 30 looks slightly better than what was feared earlier.

 

“This quarter will not be as bad as March but not as good as January either.

“While there has not been a sharp cut in spending, growth in this environment is difficult to come by as clients are still cautious on spending.

“For largecap players, our growth estimate is at sub-2 per cent while at the bottom end it is about a negative 1.5 per cent, at worst, sequentially,” said a senior analyst at an international research firm.

Morgan Stanley expects the revenue outlook for companies like TCS, Infosys, Wipro, and HCL to look better.

But it cautioned that growth would continue to remain sluggish as discretionary spending has not improved.

“Pipelines for most companies remain strong but demand is skewed towards large vendor consolidation/ cost take out deals.

“This implies that growth will be led by wallet share gains as well as slower conversion of order book into revenue,” it wrote in a note earlier this month.

Banking financial services and insurance (BFSI), the main source of revenue for all players, continues to see strong demand, especially in the US.

TCS and Infosys, two of the largest IT companies, have mentioned that the sector is holding up well, especially for large US banks.

That should bode well for the service providers as legacy systems modernisation in those banks due to generative artificial intelligence (Gen AI) becomes an added revenue opportunity.

Accenture’s financial services business grew 13 per cent in its third quarter compared to a year ago.

Other sectors, such as retail, auto, manufacturing and healthcare are expected to see muted spending compared to the previous quarters.

This comes as uncertainties around movement of goods, supply chain issues, and subsequent discretionary demand continue to persist.

Accenture’s third quarter results, which came out last week, could provide a cue on what is in store for its Indian counterparts.

The largest company in the sector said its managed services revenue was up 9 per cent to $8.7 billion and it raised the lower end of its guidance to 6-7 per cent from 5-7 per cent.

While that shows some positive visibility into the revenue pipeline, new bookings were down 6 per cent to $19.7 billion.

Ashutosh Sharma, vice-president, research director at Forrester Research, said he does not expect any of the Indian heritage providers to do significantly better this quarter as volatility and uncertainty exists.

He added, “All of these companies essentially make money with discretionary spends.

“And, if the managed services business continues to happen, probably it will increase a little bit but their margins may not go up as a result of that.”

Analysts will also keep an eye on two more indicators: if Infosys revises its guidance, which was pegged at 0-3 per cent for the full year in April and TCS’s commentary on salary hikes for its employees.

India’s largest IT services provider had  suspended it in April and said hikes will be rolled out at an appropriate time during the financial year when the uncertainty comes down.

Margins, however, will continue to be under pressure.
While the outlook is better than three months ago, it is still weaker than estimates at the start of FY26.

Morgan Stanley has predicted muted earnings before interest and taxes (EBIT) growth at a low-to-mid single digit compound annual growth rate (CAGR) over two years.



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