Infosys To L&T Tech: Why IT Giants Are Cutting Their FY24 Guidance, And What Could It Mean Ahead?

Despite winning billions of dollars worth of big deals, IT companies are struggling to witness meaningful growth in their financial books. Whether be dollar revenues or performance in the banking and financials segment, Indian IT firms were seen on a tightrope in Q2 of FY24. The September quarter even signalled for more troubling days ahead, and it was evident when one-by-one biggies like Infosys, Wipro, and HCL Tech chalked down their revenue guidance for the current fiscal.

Infosys was the first to revise its FY24 revenue guidance to 1.0%-2.5%. The cut was steep as against the guidance of 4-7% earlier. Nevertheless, its operating margin guidance at 20%-22% was retained.

HCL Tech followed soon after by trimming its FY24 revenue growth guidance in constant currency terms to 5-6% from earlier 6-8%, while also maintaining EBIT margin guidance in the range of 18% to 19%.

Then came Larsen & Toubro-backed L&T Technology Service which also revised down its USD revenue growth guidance for FY24 to 17.5%-18.5% in constant currency from 20% earlier. Amit Chadha, CEO & Managing Director warned about short-term hiccups. He said, "While longer-term trends for ER&D remain strong, in the short term we are seeing longer decision cycles and incremental headwinds from the macro-economic stress in various geographies."

Meanwhile, the Azim Premji-backed Wipro squeezed down the revenue guidance of its IT Services business segment to be in the range of $2,617 million to $2,672 million in the Q3FY24 compared to the earlier prediction of $2,753-2,811 million. This latest sequential guidance translates -3.5% to -1.5% in constant currency terms.

Happiest Minds was the latest to join the bandwagon by lowering its FY24 guidance to 12%, sharply from 25%.

These companies lowered their FY24 guidance despite registering strong deal wins. It was safe to say, deal wins were the only positive factor that supported IT companies in Q2FY24.

In Q2FY24, Infosys recorded the highest large and mega deal wins with TCV of 7.7 billion dollars, while HCL Tech won 16 large deals and its new bookings stood at an all-time high of $3.969 billion in the quarter. Wipro also witnessed a strong bookings of $3.8 billion and large deal bookings of $1.3 billion in Q2 of the current fiscal.

Similarly, in Q2FY24, LTTS won a total of seven $10 million plus TCV deals across all industry segments including six deals of USD 15 million each.

Then why are these IT firms cutting their FY24 guidance? It needs to be noted that the FY24 revenue guidance cut from Indian tech players was on the expected lines, especially after Irish-American professional services company, Accenture warned about weaker IT spending in the coming quarters while expecting revenue growth below the street's estimates for FY24.

Accenture who has a huge presence Indian market, expects revenues to be in the range of $15.85 billion to $16.45 billion for the first quarter of 2024, or -2% to 2% in local currency, reflecting the company's assumption of a positive 2.5% foreign-exchange impact compared with the first quarter of fiscal 2023. This is below the forecast of $16.43 billion revenue by analysts poll led by LSEG.

And not just that the cracks in Indian IT firms have been happening since Russia invaded Ukraine which led to fear of recession amidst severe market conditions and inflationary pressure, pushing an intense rate hike cycle. But the worst took place when Western banks in the United States were strangled with a liquidity crunch, eventually leading to a shutdown of three banks and bringing many other American regional banks under pressure. These crumbs led to full-scale uncertainties for tech firms and they're finally playing out in these companies' financial books.

Here's why IT firms are cutting their FY24 guidance:

Dhruv Mudaraddi, Research Analyst, Stoxbox said, "IT sector companies including Infosys, HCLTech, Wipro, and L&T Tech, have revised their FY24 guidance downwards. This downward revision is primarily attributed to a challenging demand environment leading to sputtering growth within the industry."

Mudaraddi pointed out that the specific reasons behind the downward revisions vary slightly for each company, but common themes can be narrated in five points. These are:

1. Tech Spend Freeze and Decision-Making Delays: A freeze on tech spending and delays in decision-making have significantly affected the IT sector's revenue projections. This has led to a reduction in revenue guidance for the upcoming quarter and the full fiscal year.

2. Reduction in Existing Clientele and Slowdown in New Client Addition: Companies such as Wipro have experienced a reduction in their existing clientele and a significant slowdown in new client additions, impacting their revenue expectations for the fiscal year.

3. Delays in Acquisition and Anticipation of Future Ramp Downs: L&T Tech's lowered guidance is attributed to delays in acquisitions and the anticipation of future ramp-downs, along with cuts in the discretionary spending portfolio.

4. Delays in Program Kickoffs and Extended Deal Closures: Infosys cited delays in large program kickoffs and extended deal closures as primary reasons for the reduction in their revenue guidance. Discretionary spending reduction and slower progression of transformation programs have also contributed to this decision.

5. Unachieved sequential growth targets: HCLTech's decision to trim their revenue growth guidance was due to the weak performance in the first half, which made it challenging to achieve the previously set higher guidance. The company is now aiming for a more realistic growth target.

Also, Vaibhav Shah, Fund Manager at Torus Oro said, "Most of the IT companies have revised their guidance on a cautious mainly on account of global uncertainty. With rising rates, the expectation of recession-like scenarios are getting factored in which may lead to some pushback on new deals. Secondly, with the ongoing conflict, it may lead to slower than expected project execution and announcements. So taking into account the global factors, IT companies have lowered their guidance on a cautious note."

Looking ahead, Mudaraddi said, "This downward revision in guidance indicates a challenging period for the IT sector, characterized by a cautious approach towards spending and a need to reevaluate growth strategies. Companies are likely to focus on cost management, increased employee productivity, and margin improvement in the short term. The reduced attrition rates and the presence of a significant bench of employees from previous years could aid in achieving better margins despite the current slowdown. However, it is essential for these companies to closely monitor market dynamics and adapt their strategies to navigate through the uncertain and challenging demand environment in the near future."

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