Q3 results: Top 4 Indian IT companies balance caution and optimism

Compared to its competition, Noida-headquartered HCLTech's performance was the best

The third-quarter earnings of the top four Indian IT companies indicate that the demand environment continues to be challenging amid some cautious optimism for the future.

Thierry Delaporte, chief executive officer (CEO) and managing director (MD), Wipro, said during the earnings: “We are starting to see healthy indicators of growth.”
 

Wipro has forecast a muted sequential revenue growth rate of minus 1.5 per cent to 0.5 per cent in constant currency for the fourth quarter ended March as deal rampups and client decision making are yet to gain pace. It may be noted that Wipro guides for the quarter ahead, as different from Infosys and HCLTech, which do so for the full year.

Infosys has tightened its FY24 revenue growth guidance to 1.5-2 per cent in constant currency from 1-2.5 per cent it had guided earlier. 

HCLTech lowered the upper end of its full-year revenue growth guidance to 5-5.5 per cent in constant currency from 5-6 per cent it had stated earlier.

Compared to its competition, HCLTech’s performance was the best. Its third-quarter showing beat the Bloomberg estimates on both revenue and net profit. Revenue grew 6.5 per cent year-on-year (Y-o-Y) at Rs 28,446 crore and 6.7 per cent quarter-on-quarter (Q-o-Q). This is one of highest rates of revenue growth since the third quarter of FY21. Its consolidated net profit rose 6 per cent Y-o-Y to Rs 4,350 crore.

“We remain positive about our medium-term growth, enabled by our business mix and a laser-sharp focus on delivering innovation and hyper automation to our clients. It’s been a remarkable quarter with all-round performance,” said C Vijayakumar, CEO and MD, HCLTech.

Tata Consultancy Services (TCS), which does not provide guidance, reported better than expected third-quarter results in a seasonally soft three-month period. Net profits for Q3 came in at Rs 11,735 crore, up 8.2 per cent Y-o-Y while revenue stood at Rs 60,583 crore, up 4 per cent Y-o-Y, beating estimates on both. “We are seeing strong deal momentum across markets, resu­lting in a solid order book providing visibility into long-term growth. We are seeing an interest in Generative AI and are leading innovation and exploratory efforts for our customers in this area,” said K Krithivasan, CEO and MD, TCS.

For the fourth straight quarter, the company’s international growth was led by businesses in the UK and other parts of Europe. The UK business grew 8.1 per cent and Europe 0.5 per cent. North America was down 3 per cent. In India, business growth was 23.4 per cent.

Brokerage Motilal Oswal said TCS’s management commentary regarding the spending environment in IT services remained unchanged, with a continued pause in discretionary deals adversely affecting business.
 

“While the company views its deal pipeline and booking as robust, it continues to expect improvement in client sentiment after the positive commentary by the US Fed in December 2023,” it said.

Infosys posted net profits of Rs 6,106 crore in the third quarter, down 7.3 per cent from a year ago and 1.7 per cent lower Q-o-Q, slightly below the estimates. Revenue for the December quarter grew 1.3 per cent from the year-ago period to Rs 38,821 crore, above the estimates.

“The much-anticipated revenue growth slowdown, which Infosys’ successive guidance cuts were indicating, finally arrived. However, it was not as bad as the consensus feared. Also, the margin appears to have remained steady despite material headwinds. With the worst likely behind and cost firmly under control, we expect earnings (of Infosys) to accelerate,” Kumar Rakesh, analyst, IT and auto, BNP Paribas India.

Cross-town competitor Wipro posted net profits of Rs 2,700 crore in the third quarter, down 12 per cent from a year ago but up 1.2 per cent Q-o-Q, above the consensus Bloomberg estimates. Revenue declined 4.4 per cent from the year-ago period to Rs 22,205 crore, slightly below the estimates.

For HCLTech, growth was driven by its software unit, for which the third quarter is seasonally weak. Software growth was up 5 per cent Y-o-Y and 32 per cent Q-o-Q, followed by its engineering and research and development services, which grew 3.6 per cent Y-o-Y and 8.7 per cent sequentially. The firm’s IT and business services grew 1.9 per cent sequentially.

Analysts say digital initiatives of clients continue to provide growth opportunities for IT services players.

“With chief information officers concentrating on multi-year digital transformation projects, a roughly 10 per cent rise in IT services and end-user expenditure is expected, which will likely result in increased growth for Indian IT firms in the upcoming quarters,” said Biswajit Maity, senior principal analyst, Gartner.

One common theme across the India-headquartered IT services firms has been that Generative AI continues to be at a fast-growing but nascent stage, unlike their global competitor Accenture, which reported signed deals worth $450 million in its first quarter.