Information technology companies battle revenue slowdown, margin decline
The Nifty IT Index, the gauge for the performance of information technology (IT) stocks, was the worst performer on the stock exchanges on July 29, a day after Infosys posted lower-than-expected earnings growth for the June quarter and sharply cut its revenue growth guidance for 2023-24 (FY24).
The IT index was down 4.1 per cent, its biggest one-day fall in three months.
The decline was led by Infosys, with its shares plunging nearly 8 per cent, followed by HCLTech (-3.2 per cent), Wipro (-3.0 per cent), and TCS (-2.7 per cent).
The sharp decline in IT stocks also led to a 1.2 per cent fall in the Nifty50 index — its worst performance in four months.
This seems to suggest the end of the rally in the IT pack.
The upmove had started in April and gathered pace after the Q1FY24 results of TCS, Wipro, and HCLTech.
The IT index had rallied nearly 5 per cent after optimistic commentaries by these companies in their result presentations.
After Friday’s fall, however, the IT index has given up most of the gains.
The Nifty IT index is up just 4.4 per cent since the start of 2023 calendar year, as against a 9.1 per cent rise in the Nifty50.
For comparison, the Nifty IT Index had declined 26 per cent in 2022, as against a 4.3 per cent rise in the Nifty50 during the year.
The meltdown in IT stocks on Friday was triggered by the Infosys results and projections announced the previous day.
India’s second-largest IT exporter reported 10.9 per cent year-on-year (YoY) growth in net profit for Q1FY24, much lower than the market expectation of 16 per cent growth.
The relatively muted show by the company was due to a slowdown in revenue growth and renewed pressure on operating margins.
The company also cut the growth guidance – from 4-7 per cent to 1-3.5 per cent – for FY24, signalling a worsening of the demand environment for IT companies.
Most of its industry peers, too, reported a decline in operating margins and a slowdown in revenue growth during the April-June 2023 quarter.
The margin pressure in Indian IT worsened in Q1FY24 as companies’ operating expenses continued to grow faster than their revenues despite a sharp decline in fresh hiring.
The Ebitda margin (excluding other income) of the listed IT companies declined to 22.4 per cent of net sales in Q1FY24 from 23.2 per cent in Q4FY23 and the pandemic high of 27.7 per cent in Q3FY21.
This is the lowest margin for the industry in over a decade with the exception of Q1FY23, when it had dropped to 22.2 per cent of net sales.
The biggest issue for the industry is salary and wage expenses, which continue to outpace net sales growth.
The combined salary and wage expenses were up 14.5 per cent YoY in Q1FY24, as against 10.8 per cent growth in net sales in the quarter.
As a result, salary and wages were equivalent to 58.1 per cent of the industry’s net sales in Q1FY24 — the highest ever.
The industry’s YoY growth in net sales was 22.2 per cent in the year-ago quarter and 18.6 per cent in Q4FY23.
The 10.8 per cent net sales growth in Q1FY24 is the lowest in nine quarters.
The analysis is based on the combined earnings of 13 IT companies that have declared their quarterly results for Q1FY24.
These 13 companies reported a combined net profit of Rs 26,226 crore in Q1FY24 over net sales of around Rs 1.69 trillion.
The companies reported an improvement in net profit that was up 12.1 per cent YoY in Q1FY24, better than 11.5 per cent YoY growth in Q4FY23 and 4 per cent growth in Q1FY23.
However, a large part of this growth came from a faster growth in other income, such as treasury income that was up 21.4 per cent YoY in Q1FY24.
The growth in other income in Q1FY24 was the fastest in at least 29 quarters.
Excluding the gains from other income, the core operating profit was up only 11.6 per cent YoY in Q1FY24 — the lowest in four quarters.
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