IT cos seen logging steady sequential growth in 2nd qtr

New Delhi: Indian IT services companies are expected to log steady sequential revenue growth in September quarter but an overhang of weak global cues tinged with macro risks will put spotlight on management commentary around deal momentum and demand outlook, say analysts.

Brokerage reports and analysts' notes on Q2 earnings preview anticipate reasonably strong growth quarter for Indian IT firms despite challenging macroeconomic scenario in the US and Europe, but there are fair bit of warnings around "incremental pockets of weakness" or "slowdown in coming quarters".

The sunny, all-bullish demand narrative just a few quarters back has made way for more cautious and tempered expectations as storm clouds over global economy prompt economic commentators to flash warnings about recession risks and international market shocks.

Reports suggest that the US-based companies, including many tech firms, have cumulatively laid off thousands of employees in 2022 alone, and slammed brakes on hirings.

Back home, market watchers are divided in their opinion on whether the cost optimisation agendas of the US and European companies will continue to yield significant outsourcing gains in favour of Indian service providers in coming quarters, enough to offset any slowdown or pause on discretionary IT spends by clients under duress.

Tech industry veteran and former director of Infosys, Mohandas Pai asserts that the Indian IT sector is in a "sweetspot". The demand outlook is slightly lower than the last quarter due to global uncertainty, but remains "fairly strong", he says.

"We are seeing many companies in the US lay off people, which means they are trying to cut costs...If they are trying to cut costs they will outsource more. Indian IT is in a sweetspot because if the market grows, the demand for them grows and if the market falters, people cut costs and outsource more although there will be a lag of 2-3 quarters before they see results," Pai said.

The big earnings' week for tech companies is up ahead, with Tata Consultancy Services (TCS) slated to report September-quarter results on October 10, followed by HCL Technologies and Wipro on October 12, and Infosys and Mindtree on October 13.

Emkay Global, in a note last week, said that Q2 growth momentum would remain steady but incremental data-points such as job losses/freeze at client organisations, an elongated sales cycle highlighted by some global software majors, indicate a slowdown in coming quarters.

"We expect revenue growth of 2.5-4.5 per cent (constant currency) quarter-on-quarter for Tier-1 IT services companies and of 0.1-5.3 per cent for Tier-2 firms, in the September-22 quarter," it added.

Further, it expects the usual seasonality in fiscal's second half growth "to be amplified by a potential weak demand".

IIFL Securities has forecast that an average sector revenue will grow 3.8 per cent quarter-on-quarter in Q2FY23 driven by strong order books and IT demand shifting more towards outsourcing from consulting.