The boost to Indian IT companies, from the accelerated digital adoption during the Covid-19 pandemic, has been tapering since the last fiscal. The second quarter earnings of the four largest information technology companies — Infosys, TCS, Wipro and HCL Tech — show that the growth environment continues to be challenging. While Infosys reported 3.1 per cent sequential growth in revenue in the second quarter, TCS, Wipro and HCL Tech reported weaker revenue growth numbers at 1.1 per cent, 0.6 per cent and 1.6 per cent, respectively.

Their profitability is also under stress with TCS and HCL Tech reporting a decline in net profits on a sequential basis and all of them struggling to maintain their operating profit margins at current levels. The main issue is slowing orders from the North American region which contributes over 57 per cent to the revenue of Infosys, Wipro and HCL Tech and almost 48 per cent to TCS. The US Federal Reserve’s restrictive monetary policy has made US-based companies focus on cutting down costs, leading to postponement of less-exigent projects. This, coupled with growing political uncertainty due to the US Presidential elections next month, seems to be dampening the demand from the US; top IT players witnessed flat to negative growth in the North American business in the second quarter. The second impediment is the nebulous state of the BFSI (banking, financial services and insurance) business from the US. This segment accounts for almost a third of the IT majors’ revenue. The banking crisis in the US in 2023 appears to have impacted orders in recent quarters. The likely compression of margins of banks with the beginning of the rate-cut cycle, can further slow down IT spends of this segment.

Slack IT revenues do not bode well for the balance of trade. Services exports have helped curtail the trade deficit and support the rupee over the last few years. IT companies will do well to hone their capabilities in emerging technologies such as generative AI, smart manufacturing and cyber security where large orders are still being given. The silver lining in the IT results is the slight improvement seen in hiring. With these companies providing employment to the droves of engineers graduating every year, net reduction in headcount over the last two years had increased unemployment among graduates. But Infosys, TCS and Wipro reported an increase in their net headcount in the second quarter, providing some relief. HCL Tech, however, reported a reduction in net headcount.

IT companies seem to be expecting an improvement in deal flow once the uncertainty around the US elections is resolved. But the lofty valuations at which the IT majors are trading in the stock market have factored in the positive news. If the anticipated business from generative AI and other similar opportunities does not work out, or geopolitical tensions escalate after the US elections, the business of the IT companies can be further impacted. This can roil stock prices further.

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