And the start to FY25 hasn’t deviated much from the script, barring only pockets of resilience demonstrated by some of the biggest players, including Tata Consultancy Services (TCS). Mat ters have been fu r t her complicated as the onslaught of generative artificial intelligence (gen AI) further clouds the revenue picture for an industry initially modelled after cost arbitrage in solutions delivery.
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In the past two weeks of the final quarter and full fiscal 2024 earnings announcements, most IT majors failed to meet their revenue growth guidance. Many downward revisions for the year ahead were seen despite most firms bagging large deals and sitting on an arsenal of historic total contract value (TCV) wins.
In this uncertain environment, while companies are seeing green shoots and signs of bottoming out, g uidance and forecast remain hazy and growth is at best anyone’s guess.
Analysts and other industry experts see more deal wins to continue with a focus on execution, yet revenues seem to be muted as digital transformation continues to remain a key focus area of large global businesses.
“We think the latest industry earnings reports reinforced our view that demand is overall muted (with very mixed demand drivers) and that discretionary spending is soft,” said Peter Bendor Samuel, CEO, Everest Group.
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Winds of change
Phil Fersht, CEO and chief analyst at HFS Research, believes growth for IT companies will come back in Q3 of FY25. He expects IT services to grow by seven per cent in FY25, against 10 per cent on FY23 and six per cent in FY24.Along similar lines, Crisil Ratings in a report on Wednesday said, “The IT services sector is likely to see a second consecutive year of sluggish growth in fiscal 2025, with revenue seen rising 5-7 per cent, as continuing global macroeconomic headwinds lead to modest increases in technology spends in key markets of the US and Europe.”
Going by the latest numbers, the world’s largest IT services company Accenture and India’s second largest IT major Infosys have given a muted sales guidance in the range of one to three per cent. Even global peer Cognizant’s full year FY24 (ending December) growth forecast ranges between -2 and 2 per cent.
HCLTech, India’s third-largest IT services player, which was the sole outlier in the past quarters in terms of growth, also bore the brunt of the global demand environment — with its profit dipping sequentially and overall weaker in margins in Q4 with guidance lower at three to five per cent.
On revenues, top IT companies reported numbers in low single-digits, as homegrown bellwether TCS led growth with $29.1 billion revenue, reporting a 3.4 per cent growth in constant currency (cc) terms for the full financing year ending March 2024.
This was followed by Infosys’s $18.5 billion business growing at 1.4 per cent YoY in cc terms. HCLTech’s revenue grew five per cent YoY to $13.27 billion.
During the last and full quarter, both TCS and Infosys posted their highest ever large deal value at $13.2 billion and $4.5 billion respectively. For the full year, their deal wins stood at $42.7 billion and $17.7 billion respectively.
“As we look at the start of FY25, we see the discretionary spending and digital transformation work at the same levels. We see focus on cost efficiency and consolidation continuing. Our large deal wins in the prior financial year will help us in FY25 for our revenue. We also see normal seasonality as we plan this financial year in terms of guidance,” said Infosys CEO Salil Parekh. “And then, as in most years, we have a view of seasonality where the H1 is stronger than the H2 for us at Infosys. Typically, we see that impact with a slower Q3, Q4. So that is how we have attempted to build the guidance that we put in one to three per cent.”
While Infosys is expecting a frontended growth in H1 of FY25 and seasonal slow in H2, many analysts see growth coming back only in Q3.
HCLTech’s chief C Vijayakumar said that with some large deal wins, its move to offshore model could impact revenues in FY25 and yet will have strong momentum in many areas.
Meanwhile, Wipro continues to be the laggard with a decline in revenue and profitability amid a sudden-yet-expected change of new CEO Srinivas Pallia, which brings hopes to boost the company’s prospects with its five key focus areas on building large clients, driving large deal momentum, AIready talent and focus on execution.
Similarly, Mohit Joshi, the new CEO of the fifth-largest IT major Tech Mahindra, which reported a near 41 per cent dip in net profit and six per cent decline in revenues, laid out a three-year strategy to focus on margins and higher deal wins. Joshi, who left Infosys last year to lead Tech Mahindra, is further beefing up the senior leadership roles including COO, CHRO, and most recently, strategic business unit head for India and MEA.
Smaller rival LTIMindtree, which has also seen large leadership changes and high attrition, continues to defer its margin focus plan by a few quarters amid cancellation of two BFSI contracts given the continued headwinds.
Leadership churn
Over the last year, the software export and enterprise technology space probably witnessed one of its major churns at senior level positions with over 5,000 executive movements (chief executives and two levels below), several jumping ship.
Amid leadership churn across major firms, the sector which is among the largest employers with around 50 lakh direct workforce further showcased a dismal picture on overall employment and hiring trends. Bucking the headcount trend, TCS, HCLTech and Tech Mahindra have plans to hire 40,000, 10,000 and 6,000 freshers respectively in FY25.
Witnessing its historic decline of workforce in the last 12 months cumulatively, the top five firms reported a full-year fall in headcount numbers of around 70,000 from April to March. HCLTech was the only outlier which added employees.
Most firms saw sluggish growth in the largest market of North America, with smaller pockets of business coming from geographies such as Europe, India, Middle East and Africa, and Southeast Asia. Moreover, the largest business vertical BFSI declined across firms along with growth in healthcare and retail among others.
Most firms including Wipro also saw an improvement in the operating margins and yet, TCS led the race posting an operating margin of 26 per cent for Q4, the highest in the last 12 quarters, and at 24.6 per cent for the full year.
While Infosys’s margins had a onetime impact falling in Q4 to 20.1 per cent, and 20.7 per cent for the full year, it maintained its guidance for FY25 between 20-22 per cent. Wipro expects its margins to stay rangebound like in the last few quarters.
Mid-tier growth
Mid-sized firms such as L&T Technology Services, Persistent Systems and Cyient posted healthy profits and revenue numbers, while Mphasis edged down with a dip in profit.
Mid-tier technology firms, which have been growth performers given their size, have also been brushed with the winds of slowdown and expect volatility and slower demand to continue. Coforge, Birlasoft, KPIT Technologies and others will report earnings in the coming week.
The gen AI impact
Global giant Accenture called out its revenue from gen AI at $1.1 billion, while TCS highlighted a $900-million deal pipeline of gen AI projects. Infosys, which had 50 active gen AI client projects in June last year, and Wipro saw strong traction in such deals in Q4, but didn’t call out any numbers.
“We reiterate our view that IT services firms are struggling to derive IT services revenue from gen AI interests, likely compounded by enterprise uncertainty and confusion concerning gen AI,” Samuel said.
Firms are also mass training their employees in gen AI, with TCS already so far having reskilled and upskilled around 350,000 of its employees in AI while Infosys chief said it has trained nearly eight out of 10 of its employees.
“The FY24 has changed the complexion of large deals a bit. In FY 2023, we saw a significant number of vendor consolidation deals which continued in H2 2024. However, now we are seeing that the nature of deals is changing to include more transformative work powered by either AI or some other digital capabilities. That’s a positive sign considering that the overall demand for services is yet to regain the much-delayed momentum,” said Ashutosh Sharma of Forrester Research India.
Sharma continues to expect more transformative deals and that business transformation will be a significant part of the consolidation deal mix in FY25.
Nuvama research in a report said that it expects strong deal-wins of the last few quarters to gradually convert into revenue in coming quarters as US macro turns favourable.
Former CMD of Cognizant India, Ramkumar Ramamoorthy, a partner at growth advisory firm Catalincs, expects a likely divergence in revenue growth among players, creating a new breed of leaders and laggards.
According to him, it will be decided between those who reinvest in business areas of consulting, partnerships, newer solutions development, innovation and talent development will emerge as new leaders, and those that are fixated on margin expansion at the cost of growth will be laggards.
“It’s surprising to see companies report negative to marginal growth but still take their margins up to keep investors happy. Companies first need to keep their clients and employees happy. Investors will naturally follow,” he adds.
Meanwhile, Samuel does not expect the industry to return to the heady days of the Covid boom, but more likely to settle at four to five per cent industry growth.
