127517In view of reduced inflation and expenses, will it be right to invest in IT stocks?

Information technology, India’s sunrise sector for many years and the industry that gave Indians a new identity and confidence in the global markets, seems to be heading for yet another lukewarm quarter with experts pointing out that the third-quarter results of India’s top IT businesses failed to inspire confidence. Recovery was not expected before the next financial year, said a report in The Economic Times.

Incidentally, the US central bank said they might go in for multiple interest rate cuts in 2024. Analysts said they anticipate a turnaround based on the uptick in demand and management interpretation of the same.
In its recent results announced last week, TCS, the country’s largest IT firm, managed a 4% rise in revenue and 2% growth in net profit for the October-December 2023 quarter compared to the same period in 2022.

Infosys had a paler quarter (Q3) and reported 7.3% fall in profit and a mere 1% increase in revenue. It also tightened its revenue growth guidance for FY24 to 1.5-2.0%.

Wipro’s reported a 12% drop in profits for the Q3. This was the fourth consecutive quarter with shrinking profits. Wipro suffered a revenue dip of 4.4%.

Among the top four, HCLTech came out with a rise of 6.5% and 6.2% growth in profit.

Experts such as chief of IT industry research firm Everest Group, Peter Bendor-Samuel, told the newspaper that it expected a revival in demand only by the Q2 of FY25 (April-June 2024). His expectation was contingent upon the current guidance from the IT majors.

“We see the next two quarters as difficult with a continued hesitancy to commit to discretionary spending or large new initiatives. It is likely that by the end of the second quarter (first quarter for most Indian tech services firms) that we will see the start of a modest recovery,” said Bendor-Samuel.

HfS Research chief executive Phil Fersht believes that the companies might benefit from a slew of upcoming deals in the market in addition to growth in the United Kingdom. He said several large deals are at the discussion stage and it appears that these might fructify in the next couple of quarters.

“There is also more activity in Europe, most specifically the UK, to get some large engagements over the line. As we look to Q4, the tailwinds are being driven but a generally more positive economic outlook, declining inflation, and a determination from some leading providers will bring more value in selected engagement bids,” said Fersht.

TCS provided a glimmer of hope by reporting margins of 23.4%, the best in the industry, even after making a $125 million one-time provision.

After almost flat revenue since Q1 of FY24, a few strong deals have started driving TCS’ revenue towards growth. Margin expansion is also ahead of expectations, wrote Kumar Rakesh, analyst from BNP Paribas analyst. “We found comfort in its more hopeful stance on a demand recovery as it is seeing pent-up demand for tech spending on new technologies and expects BFSI to recover in the coming quarter.”