Is the glass half full for Tier-1 IT firms?

livemint.com:

Wipro were better than estimates. Expectations were low as Q3 is a seasonally weak quarter due to furloughs coupled with the ongoing demand uncertainty. Notably, management commentary is still cautious with large-caps not seeing a visible pick-up in discretionary IT demand just yet.

Cost optimization projects continue to drive the deal momentum. For instance, Infosys’s management said the number of digital programmes in the deal pipeline is low, whereas the number of cost takeout and vendor consolidation programmes is relatively higher. Clients are focusing on conserving cash, thus leading to a delay in decision-making and project deferrals.

This means that a faster conversion of deals into meaningful revenue growth isn’t on the cards in the near term. Small wonder then Infosys tightened its FY24 CC revenue growth guidance from 1-2.5% year-on-year to 1.5-2%. HCL narrowed its overall FY24 CC growth guidance from 5-6% earlier to 5-5.5%.

Wipro has guided for a -1.5% to 0.5% QoQ CC growth in IT Services for Q4, which is lower than some analysts’ estimates. Despite mixed signals, the sharp up move of IT companies’ shares suggests investors are latching on to the positives of Q3 results, overlooking likely downside risks. On Friday, shares of TCS and Infosys rose nearly 4% and 8%.

In a positive rub-off effect, HCL and Wipro stocks gained almost 4% each ahead of Q3 earnings that were out after market hours. Wide-held expectations of potential interest rate cuts by the US Federal Reserve in 2024 is fuelling hopes of turnaround in discretionary IT spending of the BFSI industry—a crucial demand driver for the IT sector. But note that large-cap IT companies saw a drop in hiring in Q3FY24—a sign of muted demand.