Industry
Mint Primer IT services: When will the tide turn?
Summary
- Leaders across companies believe this fiscal will be better than the previous one. However, global IT spending continues to be cautious
With a mixed performance in Q1 FY25, the $250-billion IT services industry is not entirely out of the woods. Discretionary spending is yet to return, and AI is taking time to convert from proof of concept to meaningful large projects. Mint explains the sector’s outlook.
How is Q1 FY25 turning out to be?
The IT services sector continues to navigate an unpredictable path. Q1 for TCS, Wipro, HCLTech, Infosys and LTIMindtree was a mixed bag: key metrics were either flat or saw marginal improvement. For TCS, Ebit margin or the operating margin narrowed to 24.7% from 26% in the previous quarter. Total contract value at $8.3 billion, fell both year-on-year and sequentially. HCLTech and Wipro revenues fell sequentially, though profit grew, while LTIMindtree’s profit fell 1.5% y-o-y. Infosys reported better-than expected numbers with net profit up 7.1% y-o-y and raised revenue guidance for FY25 to 3-4% from 1.5- 2% earlier.
Will FY25 be better than the last fiscal?
Leaders across companies believe this fiscal will be better than the previous one. However, global IT spending continues to be cautious. According to Gartner, worldwide IT spending is expected to total $5.26 trillion in 2024, an increase of 7.5% from 2023. But this is a decrease from the previous quarter’s forecast of 8% growth. Contract backlogs going back to the third quarter of 2023 are being cleared only now, and there will be a larger rush towards the end of the year to make up for the slow start. This means Q2 could also see muted growth, before spending picks up in the second half of this financial year.
Also read: TCS Q1 Results | From net profit to dividend record date - 5 key highlights from TCS earnings
How is the performance across key verticals?
Some verticals are seeing spends being conservative, impacting overall growth as banks are unwilling to open up the purse strings till there’s clarity on interest rate reduction. Banking, financial services and insurance, accounting for 30-40% of TCS’ revenue, declined marginally. Consumer, technology services, and communication and media saw muted growth.
Also read: Infosys Q1 results | Net profit rises 7% YoY to ₹6,368 crore
Is artificial intelligence helping recovery?
Spending on Generative AI (GenAI) is yet to pick up, delaying recovery for the sector. There are a lot of proof of concept (PoC) projects in GenAI, but they are yet to translate into deals for IT services firms. The big spending will come as customers move from PoCs to large projects. Last month, Accenture, the world’s largest technology services firm, reported $2 billion in GenAI deals for the first nine months of the company’s fiscal year. Indian players are still firming up their AI strategies and do not report AI wins separately.
When will growth return then?
The second half may see a turnaround, with the return of spending and AI-led projects. Note, however, that customers are leaning on cost cutting strategies including vendor consolidation. Companies are seeing customers tweaking contracts amid global uncertainty. Interestingly, the last 12 months have seen a rise in global capability centres (GCCs) or in-house IT sourcing centres as well. While this is good for local job creation and the sector, it could impact the work that goes to third party providers.
