Updated March 5th, 2024 at 12:55 IST

IT companies to witness gradual recovery in second half of 2024: Report

For IT services firms, the quarter has been characterised by soft revenue figures, driven by sluggish discretionary spending and cautious approach to investment

Reported by: Abhishek Vasudev
Nifty IT index has marginally underperformed the broader market indices. | Image:Freepik
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IT Companies in focus: The latest quarterly results from 24 global companies reveal a persistent lack of material improvement in the demand environment for information technology (IT) companies, signalling ongoing macroeconomic uncertainties, analysts said.

The findings echo the sentiments expressed by Indian IT companies, as weak discretionary spending, slower decision-making processes, and revenue conversion challenges persist amid the uncertain macro environment, brokerage firm Emkay said in a note.

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For IT services firms, the quarter has been characterised by soft revenue figures, driven by sluggish discretionary spending and cautious approach to investment decisions. While some companies have noted the emergence of "green shoots" in certain sectors, the overall near-term outlook remains subdued, hinting at a continued muted growth scenario.

Emkay analysts suggest that calendar year 2024 may witness a gradual recovery, with hopes pinned on the latter half of the year showing signs of improvement over the initial months. The transition of artificial intelligence (AI) from proof of concept to deployment is underway, albeit with ongoing refinement needed.

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Market performance reflects this cautious optimism, with the Nifty IT index marginally underperforming broader markets due to anticipated delays in US rate cuts and expectations of demand recovery shifting towards the second half of the year.

In terms of company valuations, large caps are perceived to have relatively less demanding valuations compared to their mid-cap counterparts.

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Among the top-tier companies, the pecking order includes Infosys, HCL Tech, Tech Mahindra, LTIMindtree, TCS, and WPRO, while mid-sized companies such as Cyient and Zomato are also on investors' radars, Emkay added.

Subdued demand environment

The subdued demand environment has resulted in a leakage of revenues despite strong deal intake in previous quarters, brokerage firm said. Deals have predominantly focused on cost reduction and efficiency programmes, with vendor consolidation being a key theme.

The Banking, Financial Services, and Insurance (BFSI) vertical remains a weak spot, with communication services also lagging. However, European markets exhibit more resilience compared to North America.

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Companies such as Capgemini anticipate a soft landing scenario in 2024, positioning themselves for a robust 2025. Cognizant expects a return to transformational work as uncertainties diminish and companies prioritise cost reduction and modernisation efforts, Emkay noted.

AI progression plans

The progression of AI continues steadily, with demand gathering momentum across various industries. Gen AI, in particular, is set to become mainstream, with major implications for operating models and long-term business strategies.

The commentary on demand from global IT companies aligns closely with that of Indian counterparts, with both sectors bracing for a gradual improvement in growth prospects as macroeconomic uncertainties persist. The focus remains on resilience and adaptability amid evolving market dynamics.
 

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Published March 5th, 2024 at 12:55 IST