Nomura skeptical about IT companies' growth ahead of Q2 results

Weak Q2 results expected for IT companies: Brokerage firm Nomura is skeptical about the July to September quarter results that the information technology companies are set to announce. It believes that continued weakness in demand and sustained macro uncertainty will adversely impact their financials.

According to Nomura, "the void created by the lower number of small-sized and discretionary projects along with delays in client decision-making and ramp-up of won projects in certain cases will lead to both revenue and margin disappointments in the near term, given the ‘sticky’ nature of costs."

The brokerage firm expects large-cap IT players to report revenue growth in the range of -1 to +2 per cent on-quarter, while midcaps are likely to fare better with expectations of 0.7 to 3.3 per cent sequential growth in constant currency terms.

When it comes to large-cap platers, Nomura expects LTIMindtree to deliver the strongest revenue growth at 2 per cent sequentially, and Tech Mahindra to record a fall in revenue growth by 1 per cent in the September quarter.

The firm believes that Birlasoft could emerge as the winner when it comes to midcap companies, with strong growth of 3.3 per cent.  Nomura expects Mphasis to report the weakest growth at 0.7 per cent on-quarter.

Industry majors such as Infosys, Tech Mahindra, LTIMindtree, Persistent Systems, and L&T Tech will have their earnings before interest tax (EBIT) margin under pressure with salary hikes and weak revenue growth playing as major headwinds.

The divergence in financial performance among the IT companies will lead to management commentaries on the deal pipelines and timely ramp-up of projects to the center stage. Nomura expects HCL Tech and Infosys to retain growth guidance during the current fiscal.

Multiple headwinds ahead

Nomura expects the growth trajectory for IT companies to face multiple hurdles in the near future. Therefore, the firm has taken a cautious stance on the sector. The limited visibility of a significant turnaround in discretionary demand for IT services is the major factor behind the caution, according to Nomura.

The brokerage firm has predicted that the current slowdown in the IT sector will span across the entire financial year rather than just the first half. It also hints that the impact could extend to the next financial year if macro uncertainties continue to linger.

"While cost pressure and changing customer preferences continue to increase tech intensity in enterprises’ businesses and could result in increased offshoring work for India’s IT services in the medium term, IT budgets are likely to be prioritised in areas of automation and cost efficiencies in the near term, in our view," Nomura said.

Nomura also said that it is watchful of the deal flows in the BFSI (banking, financial services and insurance) and CMT (communications, media and technology) verticals.