Informist, Tuesday, Jun 6, 2023
By Vivek Kumar
MUMBAI – Earnings expectations of domestic information technology companies took a hit today after the US-based software engineering company EPAM Systems lowered its revenue growth guidance, citing caution among clients with respect to technology spending.
"In the weeks since our Q1 (Jan-Mar) earnings call, we have seen our clients become even more cautious with spending, specifically in the 'build' segment of the global IT services market," EPAM Systems said in a press release. "After careful assessment of changes in our May and June forecast data, we have come to understand that pipeline conversions are occurring at slower rates than previously assumed, and we are also seeing some reduction in the total pipeline."
The company now expects revenue for Apr-Jun to be in the range of $1.16 bln-$1.17 bln, "reflecting a year-on-year decrease of 2.5% at the midpoint of the range". The company has also cut its revenue growth guidance for the current year. It now expects a 2% decline in its revenue for 2023 at the midpoint of its guidance range. Post Jan-Mar earnings, the company had guided for a revenue growth of 2.6-3.6% for 2023, according to ICICI Securities.
The guidance cut and weak outlook for technology spending does not bode well for Indian IT companies. Consequently, the Nifty IT index tumbled over 2% today, with shares of Wipro, HCL Technologies, Tata Consultancy Services, Infosys and Tech Mahindra falling 1.0-2.5%.
Kotak Institutional Equities cited two reasons for the cut in EPAM Systems’ guidance—a broad-based slowdown in client spends on discretionary activity, and the company's inability to derive higher pricing in a price-sensitive market. The brokerage firm said that three-fourths of the guidance cut was due to the impact of cancelled opportunities and deferrals in client spending.
"Delays in client decision-making and pullbacks in discretionary spending have implications for the growth of Indian IT (sector). We expect revenues in Apr-Jun to be weaker than Jan-Mar across companies in our coverage universe," Kotak Institutional Equities said.
Earlier this month, brokerage firm Jefferies had also said in a report that the demand outlook for Indian IT companies has not improved so far this quarter. "There is rising caution among clients in the US, however clients in Europe and UK are faring better at the margin. IT firms continue to witness project ramp-downs or deferments amidst rising profitability pressures," it had said.
"While cloud spends are holding up better than the rest of digital portfolio, there is clear weakness in fresh cloud signings—a trend which appears unlikely to reverse in the near term," Jefferies had said.
Nevertheless, Kotak Institutional Equities said the impact of weak spending has been amplified on EPAM due to its high exposure to discretionary spending, and certain company-specific factors. "Indian IT has a more balanced portfolio between discretionary and maintenance spending," it said.
The larger IT companies also tend to benefit from vendor consolidation deals during a tough macroeconomic environment. This is likely to have shielded the shares of top-tier IT companies from falling as much as smaller companies in the sector. Shares of IT companies like Zensar Technologies, Cyient, Mphasis, Coforge and Persistent Systems were down 2.5-5.0% today.
IT companies also posted weak earnings during the quarter ended March as the crisis in the global banking sector had triggered caution among clients, consequently hitting global technology spending. The commentaries and guidance by some Indian IT companies for 2023-24 (Apr-Mar) indicated that they expect a recovery in the second half of the year.
However, some brokerage firms believe that the current estimates are optimistic. "With the Street still projecting 7% dollar revenue growth in 2023-24 with 75-basis-point improvement in margins, we believe more earnings cuts are in store," Jefferies said.
Kotak Institutional Equities also shared a similar view. "A prolonged recovery in clients' willingness to spend would imply downside risks to FY24 revenue growth estimates. Noting the weak demand, we are surprised by the rally in stock prices across our coverage in the past month," it said.
The Nifty IT index had risen around 6% in May after falling nearly 7% in the previous three months. So far in 2023, the sectoral index is largely unchanged after declining over 2% today. End
US$1 = 82.61 rupees
Edited by Tanima Banerjee
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