How do you know top-tier IT Services companies’ managements are still not sure of when a recovery is likely for the sector?
There are many ways to affirm, and one way is based on their press conferences. When conversations largely meander into general positive talk (without any quantification and inconsequential for now) on AI and long-term prospects for IT services companies with not much of a cheerful commentary on immediate trends (as was the case with Q3 results press conference), that’s one way!
Of course, there is another way as well – headcount. Last year in March, Accenture made headlines for announcing that it will be laying off 19,000 employees representing around 2.5 per cent of its workforce. There were no such announcements by Indian IT services companies then. However, since March 2023 to now, TCS’ headcount has reduced 2 per cent to 6.03 lakh employees and Infosys’ headcount has reduced by a more significant 6 per cent to 3.22 lakh.
Given that only as recently as CY22, demand for talent was so strong that attrition was at multi-year highs and negatively impacting margins, it would be premature to conclude that headcount reductions have more to do with any structural productivity enhancements rather than lacklustre business trends.
During a slowdown, headcount goes down and utilisation trends up for IT services companies. To this extent, results of TCS and Infosys announced on Thursday, did not give anything to cheer about.
However on the positive side, they did not disappoint as well, with results largely coming in line with expectations.
TCS Q3
Revenue was largely inline, with constant currency (CC) revenue growth at 1.7 per cent (y-o-y),while operating profit and operating margins (24.5 per cent) were marginally ahead of expectations. It would be worth recalling that CC revenue growth in Q3 of FY23 was at 13.5 per cent. Growth was muted across most geographies (the US and Europe – 68 per cent of consolidated revenue), with the exception of the UK (15 per cent) and India (5 per cent). Major verticals were weak as well with BFSI (33 per cent of revenue) declining 3 per cent y-o-y.
Infosys’ show
Here too, revenue was inline with consensus estimates, with CC revenue growth declining 1 per cent (in Q3FY23 CC revenue grew 13.7 per cent). Operating profit and operating margin (20.5 per cent) were inline as well. Major geography North America (60 per cent of revenue)was weak with CC revenue declining 5 per cent y-o-y. Both companies saw decline in deal momentum during the quarter, reinforcing something that is already well known by now — clients remain very cautious with their spending.
For investors
Q3 results/outlook did not validate hopes of a turnaround in the near term. Although the US economy surprised many with solid growth in 2023, the risks of a slowdown in 2024 are not insignificant. This may continue to cloud large IT stocks for now. With Infosys trading at trailing PE of 25 times and TCS trading at 30 times, the risk reward is not favourable at all. Investors can wait for better entry points in 2024.
