All of FY2024 is going to be a 'washout'
JP Morgan has predicted tough times are around the corner for India's big IT services outfits.
In a report released Wednesday, based on meetings with 15 players, the firm concluded "the demand environment for IT services has likely weakened further in June."
Author and JP Morgan's head of APAC telecoms and India TMT research Ankur Rudra noted "increased competition for a smaller pie could trigger falling win-rates, pricing and deteriorating deal terms" and projected that deferred project starts, project halts and cancellations are likely to persist.
The firm predicts recovery for the industry isn't likely over the next six to nine months, making all of calendar 2023 – indeed all of financial year 2024 – a "washout."
JP Morgan previously expected that only the first half of 2023 would be tough for India's tech services sector. It's since trimmed its estimates of the industry's revenue by one to three percent for Q1. The report also suggests the sector will not deliver investors' hoped-for revenue figures or growth expectations for around a year.
The report cut JP Morgan's view of Tata Consultancy Services FY24-25 revenues and earnings by one percent, noting that "the unexpected CEO departure could lead to periods of volatility in a time of weaker tech spend and rapidly evolving macro." That's a reference to K Krithivasan taking over from Rajesh Gopinathan as CEO of TCS earlier this month. After 34 years with the firm, Gopinathan stepped down "to pursue his other interests."
JP Morgan also cut its outlook for Infosys by one to two percent over FY24–FY26. Wipro and HCL Technologies predictions went unchanged.
Rudra advised the tough times facing the industry represent a chance for investors to take a short position – potentially profiting from the sector's woes.
India's top outsourcers struggled to hire and retain talent during 2022, when their order books ballooned. In the months since, the industry worried that workers didn't have enough to do and even reneged on job offers.
Tata Consultancy Services (TCS) CFO Samir Seksaria called FY23 "a year of transition" in the firm's Q4 2023 earnings statement. For most Indian IT outfits, that quarter was marked by missed revenue targets and slowed pipelines.
"There is a slowdown, but still, we believe there is a floor level which will be higher than the pre-pandemic cycle. And the time to recover also should be shorter," said HCL CEO C Vijayakumar in his firm's Q4 2023 call.
However, JP Morgan has ruled out any quick recovery, predicting less than five percent year-on-year growth. ®