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  • Writer's pictureChesapeake Group

Indian IT sector witnesses a softening in demand



Overview:


TCS, Infosys and HCL Tech have announced their 2QFY24 results and have shown a slowdown in revenue with improvements in margins and deal wins.


The quarter saw a record-high TCV of deal wins, aided by a strong flow of mega deals, driven mainly by optimization initiatives of clients.


To combat the shift in demand dynamics, companies have flexed a few levers to defend margins. These include raising utilization rates, increasing productivity measures, lowering the average cost of resources, further cutting subcontractor costs.


Key highlights:


TCS’ revenue increased by 7.9% Y-o-Y to $7.1bn and while its net profits increased by 8.7% Y-o-Y to $1.37bn. Sequentially, the revenue growth was muted at 0.5%.


TCS’ order book stood at $11.2bn, the second highest TCV for the company in a quarter. While the newly won deals are converting into revenue, these revenue inflows are getting neutralized by a reduction in the existing revenue base, leading to the company missing its revenue guidance growth of 9%.


Infosys reported a revenue increase of 6.7% Y-o-Y to $4.7bn with net profits increasing by 3% Y-o-Y. Sequentially, the revenue grew by 2.8%. The company won deals worth $7.7bn deals in 2QFY24.


Infosys’ growth was impacted by spend reduction in some large clients, which was partially offset by ramp-ups of large deal wins in areas like cost optimization and vendor consolidation. The company continues to face challenges in BFSI and communication vertical.


HCL Tech’s revenue grew 8.0% Y-o-Y to $3.2bn while net profits grew by 9.8% Y-o-Y. Sequentially, the revenue grew by 1.4%. The company outlined a challenging demand situation due to tough global macro economy and slashed its revenue guidance for the fiscal year to 4-5% from the previously projected 6-8%.


HCL Tech focused on driving efficiencies in its managed service engagements, automation and AI capabilities. It also cut down dependence on subcontractors and reduced discretionary spend on travel.


Key trends and outlook:


Indian IT sector is facing a softer quarter due to the macroeconomic headwinds, with companies adopting diverse strategies to deal with evolving demand trends of the industry.


Europe, especially the United Kingdom (UK), is consistently proving to be among the fastest growing markets. The region registered 10.7%, 5.4% and 10.5% Y-o-Y growth in constant currency terms respectively for TCS, Infosys and HCL Tech.


As per Infosys CEO Salil Parekh, Europe growth has been stronger than U.S as Europe’s manufacturing and life sciences markets have been booming. TCS won quite a few major deals in Europe, largely in the U.K, including $1bn deal with Marks & Spencer, $700mn deal with Phoenix Group and $300mm deal with Teachers’ Pension Scheme. Similarly, Infosys signed deals with Liberty Global, British Petroleum, Danske Bank.


Indian IT majors are likely to see a fall of nearly 50,000 in headcount this financial year, as a bleak environment for technology services globally looks set to worsen amid geopolitical conflicts in West Asia and Europe. Compared to the previous quarter, TCS reported a net fall in headcount of 6,333 while Infosys’ and HCL Tech’ headcount dipped by 7,530 and 2,299 respectively.


Companies have been optimizing the capacity added in the past year and are focused on upskilling their employees. TCS has a 100,000-strong pool of Gen-AI ready consultants while Infosys has trained over 50,000 employees on Gen-AI. HCL Tech too has announced that it is working to train over 60,000 employees on Gen-AI solutions.


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