Another Quarter of Weak Growth for IT Companies

Q2 proved to be another quarter of anaemic top line growth for IT services companies, JM Financial Institutional Securities said in a note.

Underlying trends were broadly similar to 1Q. North America remains the epicentre of weakness. There are early signs of softness spilling over to continental Europe (Germany, France) as well.

BFS and Telecom are most stressed while Manufacturing is holding up. Volume growth is under pressure. This is reflected in headcount decline even on a TTM basis -- a first. Deal wins -- of efficiency types -- were strong. But slower ramps and pressure on core volumes are negating impact on top line, at least in the near term, the report said.

Most players had flagged off a soft 1H. Full year guidance cuts by Infoys/HCL and a weak 3Q guidance by Wipro has quashed any hopes of a recovery in 2H too. Chances of budget flush in 3Q have waned. Besides, furloughs are likely to be worse. As demand has soured, players have turned their focus inwards, the report said.

This is reflected in better than expected margin performance across most players. That has a partly cushioned impact on earnings.

“Coforge is our preferred mid-cap pick. We see risks to consensus’ 7-9.5 per cent FY25E USD revenue growth est. for large caps. We remain cautious,” the report said.