The big four IT firms—Tata Consultancy Services (TCS), Infosys, HCL Technologies (HCL Tech) and Wipro—posted predictably subdued results in Q2FY24. The trend reflects the persistent unfavourable market conditions over the past few quarters. Cutbacks in discretionary spending, project ramp-downs, and decision-making delays have left these IT powerhouses and once-darlings of the stock market facing a challenging landscape. 

Salil Parekh, CEO and MD of Infosys, said, “We see an environment where digital transformation programmes and discretionary spends are limited, which is, in turn, affecting our volumes.”

But a highlight of this earnings season is the firms’ strong deal wins. Clients reprioritising their spending to optimise costs has boosted the total contract value (TCV) of these IT firms.  

Still, these companies maintain a cautious outlook for FY24 as they expect soft demand conditions to persist. C Vijayakumar, CEO and MD of HCL Technologies, noted, “While we have won some large deals and have been successful in gaining share through cost-optimisation initiatives, the market is still weak. We had expected some recovery by now, but macroeconomic factors have prevented it.”

Despite caution in their outlook for FY24, the IT firms remain positive about their medium-term prospects due to healthy deal wins. 

HCL Tech beats profit estimates while Wipro disappoints  

Given the tailwinds impacting the IT sector, most Indian software companies don’t have much good news to share in Q2FY24. TCS, Infosys and Wipro have fallen over the past month, while the Nifty IT index declined by 5% and the Nifty 50 by 1.3%. 

Only HCL Tech outperforms the Nifty IT index

Most companies in focus saw moderate revenue and net profit growth. However, Wipro was a significant underperformer - its revenue and profit declined QoQ and missed the Forecaster’s estimates by the biggest margin compared to its peers.  

TCS and Wipro miss Forecaster’s revenue and profit estimates

TCS also missed Forecaster’s revenue and profit estimates, while Infosys beat revenue estimates by 1.7% and HCL Tech exceeded profit estimates by 3.3%.  

Macroeconomic headwinds dampen growth, Wipro underperforms peers

Top-line growth for the IT giants was tepid, as companies were bogged down by persistent cutbacks in discretionary spending and clients reprioritising cost optimisation projects. TCS, Infosys and HCL Tech saw soft growth in Q2.  

On the other hand, Wipro’s revenue fell by 1.4% QoQ, impacted by its high exposure to the global Banking, Financial Services and Insurance (BFSI) segment at 34% in Q2 (the highest among the four companies), and relatively higher exposure to consulting and discretionary projects.

Thierry Delaporte, CEO and MD of Wipro, said, “Lower discretionary spending is a reality today. The conversion of the order book has become slower, and transformation programmes nearing completion are being replaced by new ones, but at a slower pace. All of this has impacted our top-line growth as well.” However, while Delaporte points to industry trends, the top-level exits at Wipro, including the abrupt exit of veteran CFO Jatin Dalal, is a major red flag as deal wins slow down, and clients reportedly complain about project execution.  

Revenue growth moderates as tech spends remain weak

Infosys led the pack with a QoQ revenue growth of 2.8%, driven by the retail, manufacturing and life sciences verticals. HCL Tech’s revenue grew by 1.4% QoQ and TCS’ by 0.5% QoQ. 

The companies expect revenue growth in FY24 to be soft. Infosys cut its revenue growth guidance for FY24 to 1-2.5% YoY CC (constant currency) from 1-3.5% YoY CC, while HCL Tech pared its guidance to 5-6% YoY CC from 6-8% YoY. Wipro lowered its revenue growth guidance to -1.5% to -3.5% QoQ CC for Q3FY24. 

Cost optimisation boosts profitability 

Most of the companies in focus saw net profit growth in Q2, thanks to cost optimisations, lower attrition rates, declining subcontractor costs, and higher utilisation of bench strength. 

HCL Technologies leads in profit on a QoQ basis

HCL Tech outperformed its peers with an 8.4% QoQ increase in net profit. Infosys and TCS’ bottom line grew by 4.5% and 2.4% QoQ, respectively, while Wipro bucked the trend with a decline of 7.8% QoQ.

Cost optimisation orders drive order book growth

Clients reprioritising non-discretionary projects due to uncertain economic conditions have led to strong order inflows for the big four. Across the board, deal momentum was driven by large deal wins in the areas of cost optimisation, vendor consolidation and cloud migration.  

Infosys posted its highest-ever large deal TCV of $7.7 billion in Q2, with 48% of it being net new. HCL Tech also posted its highest-ever net new deal TCV of $4 billion, a leap from its Q1 figure of $1.6 billion. 

TCS recorded its second-highest-ever deal TCV at $11.2 billion, marking a growth of 9.8% QoQ. Wipro’s large deal TCV grew by 8.3% QoQ.  

Infosys sees multifold growth in large deal wins

On deal wins, K Krithivasan, CEO and MD of TCS, said, “Given client caution over the macro-overhang, we see a reprioritisation of spending from discretionary areas to cost optimisation. This is driving significant deal momentum in large outsourcing deals, vendor consolidation and operating model transformations.”

Despite robust deal wins, revenue growth has slowed down due to delayed conversions and the closure of some projects. However, the current streak of strong deal wins could spur a recovery from FY25, as these contracts transition into revenue growth.

Declining attrition and headcount suggest a shifting industry 

The industry-wide trend of declining attrition rates continues, as supply-side constraints have eased up and churn levels have dropped. However, Wipro’s attrition rate remains relatively high, as its attrition fell only by 0.1 percentage points QoQ and remained flat YoY. 

Wipro’s attrition remains high, while peers see a consistent drop

Amid dwindling attrition rates, net employee additions for these firms are in the red. These companies have adjusted their hiring strategies, resulting in a sharp drop in headcount for top-tier firms. Both Infosys and Wipro are skipping campus placements this year, amid an overall hiring slowdown across college campuses.

Net employee additions turn negative across the board

Attrition rates have as a result exceeded replacement rates, leading to a steep fall in headcount.

EBIT margins expand as companies improve efficiency 

The focus on protecting margins during these tough times has paid off, with all IT giants registering growth in EBIT margins. HCL Technologies leads the pack in margin expansion with a 150 bps QoQ rise. 

Margins expand as firms improve utilisation

The companies expect stable margins in FY24 despite a bleak outlook for revenue growth. For instance, Infosys has maintained its EBIT margin guidance at 20-22%, and HCL Tech is optimistic about meeting its guidance of 18-19% for FY24.

However, Motilal Oswal expects Wipro’s margins in Q3FY24 to be impacted by wage hikes and weak revenue growth, followed by a possible rebound in Q4FY24.

Near-term gloom, but brighter FY25 prospects due to robust deal wins

The companies expect the current bleak market conditions to persist in the short term. While the long-term outlook appears brighter, it is uncertain when the recovery will start. With key markets like the US and Europe still reeling under high inflation and economic slowdown, a pick up in discretionary spending seems unlikely. 

According to TCS’ K Krithivasan, “Once they have a definitive sign of recovery, market confidence will be restored. Until then, this trend will continue.”

The strong inflow of large deals is the silver lining for tech companies. It suggests that unless a recession hits in one of the large markets, FY25 may provide a turnaround for Indian tech. Until then, caution reigns.

This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation.