The second quarter of the year has proven to be another period of sluggish top-line growth for IT services companies, as highlighted by JM Financial Institutional Securities in a recent note.
The underlying trends observed in Q2 were quite similar to those of the previous quarter, with North America continuing to be the epicenter of weakness. Additionally, there are early indications of this softness spilling over into continental Europe, particularly in countries like Germany and France.
The most affected sectors are BFS (Banking and Financial Services) and Telecom, while Manufacturing appears to be holding up relatively well. IT services companies are grappling with pressure on volume growth, which is also reflected in a decline in headcount, even on a trailing twelve-month (TTM) basis, marking a notable departure from the norm. While there have been strong deal wins, primarily of efficiency types, the slower ramps and volume pressures are offsetting the positive impact on the top-line, at least in the short term.
Many industry players had already forewarned of a soft first half of the year. However, the recent downward revisions in full-year guidance by major companies like Infosys and HCL, along with a weak third-quarter guidance from Wipro, have dashed hopes of a significant recovery in the second half. The possibility of a budget flush in the third quarter has also diminished, and the outlook for furloughs appears bleak. As demand conditions have soured, IT services firms are turning their focus inwards, as indicated in the report.
Despite these challenges, there has been better-than-expected margin performance across most IT services companies, providing some cushioning effect on earnings.
The report expresses a preference for Coforge as a mid-cap pick, while expressing caution regarding the consensus revenue growth estimates for large-cap companies in FY25. The report underscores the ongoing uncertainties and challenges in the industry, highlighting the need for careful consideration and strategic planning in this evolving landscape.
(With Agency Inputs)
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