The good, bad and ugly: Decoding the IT pack’s Q4 show

The Good

Deal wins: One of the astir heartening trends of the Q4 results was that contempt uncertain macroeconomic conditions, companies’ woody wins remained robust.

India’s largest IT services company, Tata Consultancy Services (TCS), logged its highest-ever woody wins astatine $13.2 cardinal (up 32% year-on-year), portion that of Infosys stood astatine a steadfast $4.5 billion—the lone metallic lining successful an different dismal acceptable of numbers. More importantly, the cardinal woody wins came crossed manufacture verticals and geographies.

“IT firms person been reporting grounds woody wins for the past three-four quarters now. It shows that India’s IT assemblage has been maintaining its marketplace stock dominance, not conscionable presently but this has been the communicative implicit the past 20 years. The presumption of the manufacture remains intact, though the planetary situation has turned challenging," Chirag Kachhadiya, pb IT expert astatine Ashika Stock Broking Ltd, told Mint.

“That said, we should look beyond the headlines and spot however and erstwhile these woody wins construe to gross growth. Most companies are witnessing flat-to-negative gross maturation owed to lawsuit caution and a pugnacious operational environment," helium added.

Operational metrics: Reduced subcontracting costs, accrued ratio and amended utilization gave a fillip to companies’ margins, though wage hikes and question costs capped the gains.

TCS posted an net earlier involvement and taxes (EBIT) borderline of 26%—the highest successful the past 12 quarters and wrong the firm’s aspirational set of 26-28%.

Mid-cap IT players excessively posted immoderate encouraging numbers. Persistent Systems logged a steadfast gross maturation of 13%, portion Cyient saw woody wins from marquee clients similar Airbus and Deutsche Bank.

“Mid-cap IT companies are witnessing accrued chances to vie for larger deals. Although verticals similar banking and fiscal services (BFSI) and high-tech are presently facing challenges, determination is important request successful healthcare, beingness sciences, manufacturing, and engineering probe and improvement (ER&D), areas wherever the tier-II companies tin excel," Anil Rego, main enforcement serviceman (CEO) and laminitis of concern advisory and wealthiness absorption steadfast Right Horizons, told Mint.

AI boost: The prevailing sentiment immoderate quarters backmost was that Indian IT firms person been caught unawares by the abrupt emergence of GenAI. Some doomsayers adjacent predicted the extremity of the bundle outsourcing manufacture altogether. However, an ounce of execution trumps tonnes of hyperbole.

As the Q4 show has demonstrated, Indian IT companies are going afloat throttle to reap the benefits of AI, which is besides emerging arsenic the apical precedence for clients.

IT firms person prominently highlighted their AI efforts during their post-result concalls.

GenAI is witnessing monolithic investments with a committedness of assorted cost-saving usage cases. —Mohit Khanna

TCS reported doubling of its GenAI pipeline to $900 cardinal and noted that galore AI deals person moved from impervious of conception signifier to larger, existent contracts. Pharma and life-sciences are immoderate of the segments wherever TCS has garnered respective AI-led projects. Infosys said it has generated implicit 3 cardinal lines of codification utilizing 1 of the GenAI ample connection models successful the nationalist domain. HCL Tech CEO C. Vijayakumar asserted that planetary endeavor exertion walk volition lone turn with adoption of AI.

“GenAI is witnessing monolithic investments with a committedness of assorted cost-saving usage cases crossed industries. We are successful the campy that spot GenAI arsenic a immense accidental alternatively than disruption. This is similar a concern erstwhile unreality computing, blockchain, etc. were introduced. All specified technological advancements person lone led to larger opportunities for the Indian IT companies that excel successful strategy integration," said Mohit Khanna, money manager astatine Purnartha Investment Advisers, an concern advisory and portfolio absorption work firm.

The Bad

Western headwinds: The communal thread moving done the Q4 results was that the request situation remains uncertain amid macroeconomic turbulence successful the mainstay markets of US and Europe.

“Challenges specified arsenic economical slowdown, brushed recession, precocious involvement rates, geopolitical tensions continued to enactment unit connected the user concern radical vertical passim 2023-24," TCS CEO K. Krithivasan said during the company’s net call. Revenue from North America, which accounts for astir fractional of TCS’s topline, slipped 2.3% successful the 4th quarter, portion that for Infosys dropped 2.1%. The inclination was seen successful astir different IT players arsenic well. Wipro’s absorption commentary astir discretionary walk was akin to peers and “indicates continued caution successful the request environment. In the lack of discretionary spend, woody conversion to gross has been mediocre successful the past mates of quarters. Hence, steadfast woody wins autumn abbreviated to enactment beardown maturation visibility," ICICI Securities said successful a note.

The Infosys absorption highlighted that the macroeconomic effects of stubborn ostentation and higher involvement rates are starring to cautious spending, adjacent arsenic clients are actively looking to determination workload to cloud.

Tech Mahindra’s Q4 nett net plunged 41% on-year to ₹661 crore, weighed by tepid request successful its cardinal verticals telecom, communications and media. Its full-year profits plunged 52%—its steepest diminution connected record.

“Q4 marks the debased constituent successful our year-on-year maturation trajectory," the firm’s CEO and MD Mohit Joshi said, adding that determination volition beryllium betterment from the adjacent quarter.

BFSI downtrend: Just similar North America is the astir important geography for home IT firms, BFSI is the biggest vertical for astir companies, accounting for astir a 3rd of the topline. When the BFSI vertical wobbles, it sends alarm bells ringing passim IT services firms.

During Q4, TCS saw BFSI gross driblet 3.2% on-year, portion that of Infosys tumbled 7.1%. Wipro posted a astir 9% fall.

At its post-earnings concall, the Infosys absorption highlighted that the macroeconomic effects of stubborn ostentation and higher involvement rates are starring to cautious spending, adjacent arsenic clients are actively looking to determination workload to cloud.

The Ugly

Headcount hit: As the archetypal sunrise assemblage of post-liberalization India, the IT manufacture has been the crowning jewel of the home system for decades.

A occupation successful the IT assemblage has been, often literally, the passport to a amended beingness for millions of young graduates and professionals. Any slowdown successful hiring successful this important sector, therefore, should service arsenic a reddish emblem for policymakers.

2023-24 was the archetypal clip successful 20 years that the 3 starring IT organizations—TCS, Infosys, and Wipro—reported a cumulative headcount decline, that excessively by a monolithic 64,000. In the March 4th alone, the 3 firms unneurotic saw their headcount shrink by implicit 13,000.

However, HCL Technologies bucked the inclination by adding 2,725 employees successful the quarter. But with the assemblage grappling with request uncertainties and different challenges, the hiring exemplary is seeing immoderate superior adjustments.

“We nary longer prosecute each the freshers from campus. We prosecute little than fractional of them from field and the remainder we prosecute disconnected campuses. So, we person that agile model. We volition look astatine hiring arsenic the twelvemonth goes through. We bash not person a fig to springiness astatine this constituent successful time," Infosys’ main fiscal serviceman Jayesh Sanghrajka said astatine its net call.

We nary longer prosecute each the freshers from campus. We prosecute little than fractional of them from campus. —Jayesh Sanghrajka

Not conscionable that, experts accidental that with the emergence of AI, instrumentality learning and different new-age technologies, a batch of IT roles successful areas similar testing, regular coding and attraction are astatine the hazard of being automated.

Specific stings: Not conscionable sectoral headwinds, investors besides had to woody with a mates of company-specific issues. Infosys reported a sequential gross diminution of 2.2% (on changeless currency basis) astatine $4.56 cardinal successful Q4. This was partially driven by a one-off deed from re-scoping portion of the enactment the institution does for a ample BFSI client. As a result, its 2023-24 gross maturation stood astatine a measly 1.4%—the lowest successful the company’s implicit 40-year history.

Despite signaling the highest-ever woody full declaration worth of $17.6 cardinal during the year, the institution has fixed retired a muted gross guidance for 2024-25, disappointing analysts.

“Amid persistent weakness successful discretionary spending owed to caution connected macro recovery, Infosys provided an underwhelming USD CC gross maturation guidance of 1%-3% year-on-year (y-o-y) for 2024-25, importantly beneath our estimates," home brokerage location Motilal Oswal said successful a note.

Another institution which disappointed the Street was Wipro. The abrupt resignation of the company’s CEO and managing manager Thierry Delaporte, hardly 2 weeks earlier the Q4 results announcement, had spooked investors and laid bare the enactment tumult and taste clashes hobbling the firm’s turnaround efforts for a agelong clip now.

True to investors’ fears, the institution delivered a grim performance. Its Q4 gross declined 6.4% on-year to $2.6 billion, portion woody wins dropped 14% to $3.6 billion. Barring health, each verticals saw a y-o-y driblet successful topline. Revenue connected a changeless currency ground fell for the 5th consecutive quarter. The management’s gross maturation guidance for the archetypal 4th of 2024-25 of (-)1.5% to +0.5% further dampened sentiment.

The Road Ahead

Multi-billion-dollar woody wins and cutting-edge AI projects mightiness supply investors a much-needed changeable of optimism, but the penning connected the partition is clear—the IT battalion has tally into a maelstrom of challenges.

The Indian IT services assemblage is staring astatine a 2nd consecutive twelvemonth of muted gross maturation owed to humble summation successful tech spends successful Europe and the US, Crisil Ratings said connected 24 April. The standing bureau expects the assemblage to turn astatine 5-7% this year, aft a maturation of 6% successful 2023-24.

The planetary macro signals excessively stay lacklustre.

US gross home merchandise (GDP) accrued astatine a 1.6% annualized complaint successful January-March 2024—the slowest gait successful 2 years arsenic user and authorities spending cooled amid a crisp pickup successful inflation.

Inflation, successful turn, is delaying the much-awaited complaint chopped from the US Federal Reserve. Global markets, which past twelvemonth were assured of 4 complaint cuts successful 2024, person present scaled backmost their expectations to three, astatine best.

Meanwhile successful the home equity market, ‘smart money’ has made its penchant clear.

The IT assemblage witnessed the highest selling by overseas portfolio investors (FPIs) during 1 April-15 April astatine ₹4,658 crore, according to information from the National Securities Depository Ltd (NSDL). This came aft FPIs offloaded IT shares worthy ₹1,659 crore successful March.

FPIs had sold IT stocks worthy ₹7,066 crore successful 2023, the 2nd highest sectoral outflow for the twelvemonth aft lipid and gas.

Which raises the question: with the full assemblage engulfed successful gloom, isn’t this the astir opportune clip to bargain IT stocks?

“No 1 tin foretell the nonstop bottom, but I would accidental we are determination adjacent it, possibly it’s 1 to 3 quarters away. In this context, if you are a semipermanent investor, I urge looking astatine large-cap IT, peculiarly TCS and Infosys owed to their robust woody pipeline and top-class prime of management," Chirag Kachhadiya of Ashika Stock Broking said.

“In the mid-cap space, 1 tin look astatine Persistent connected the backmost of its people to treble its turnover to $2 cardinal successful the adjacent 3 years. That said, investors would bash good to temper their instrumentality expectations successful the near-term," helium added.