Indian IT Sector's Discretionary Demand Problems Could Be Behind It
Discretionary demand is unlikely to worsen further, according to Nomura.
Information technology majors, Tata Consultancy Services Ltd. and HCLTechnologies Ltd., reported first quarter earnings were in-line with estimates, meaning the earnings downgrade is over after a prolonged cycle, according to HSBC. This could also indicate a turnaround in demand softness that the industry has been reeling in.
Uncertain macro environments like rate hikes and geopolitical tensions had created pressure on clients' budgets, putting pressure on discretionary demand by clients, last couple of quarters. Indian information technology companies have been facing deal pauses and even cancellations.
However, the scenario seems to be changing. TCS reported very few deal cancellations, the management told NDTV Profit. While, HCLTechnologies' Managing Director C Vijayakumar sees uptick in discretionary demand, although not enough to be called out for with certainty.
Even a global player like Accenture Plc maintained its revenue growth guidance for FY24, which indicates that discretionary demand is not deteriorating.
Discretionary Spend In Focus
IT sector watchers expect the discretionary demand to recover in financial year 2025. For now, the sector is celebrating the lower revenue leakage on the book, however a bigger recovery is more likely in 2025, Investec said in a report.
"We highlight that discretionary demand is unlikely to worsen further based on our proprietary G2000 database" said Nomura.
TCS Q1 Results Key Highlights: Estimates Met, Margin Guidance Affirmed, Project Pipeline Strong
Annual contract value is lead by rate hikes by central banks, as they usually decline 12-18 months post rate hikes, Investec said.
Large deal activity in the Banking, Financial Services, and Insurance sector is down and the general expectation is that this sector will improve in 2025, according to the brokerage. The easing of policy can stoke spending in a significant manner, it said.
Guidance from other IT majors could shed more light on how the demand is looking for the sector. First quarter results of Infosys Ltd. and Wipro Ltd. are expected on July 18 and 19, respectively.
The Nifty IT has given more than 20% returns since the general election results on June 4. Constituent Tata Consultancy Services Ltd.'s shares have risen 7%, while HCLTechnology Ltd. stock has gained 4% since the first quarter results.
