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Higher furloughs likely to dampen revenue growth further

? The weakness in IT Services demand has been further intensified by higher-thanexpected furloughs in 3QFY24. The seasonality is likely to hurt revenue growth and margin performances of both tier-1 and tier-2 IT companies. The industry has not witnessed any meaningful change in spending patterns, as discretionary spending continues to take a pause across enterprises. Although sentiment has improved, it has not yet been reflected in actions. Our IT Services Coverage Universe should report a median revenue growth of 0.7% QoQ/2.5% YoY in 3QFY24. The adverse movement of major currencies (EUR/GBP: -1.2%/-2.0%) is anticipated to further slow down the reported growth. The muted revenue growth and revised compensation (selective names) in 3Q are less likely to aid margin improvement. However, the weakening INR (~70bp against USD) should act as a support. We estimate a flat USD revenue YoY, while INR EBIT/INR PAT YoY will decline 4.0%/2.0% in 3QFY24.

? The combination of adverse macros and higher-than-expected number of furloughs has extended the timelines for deal closures and executions across companies, leading to slower revenue conversion in the third quarter. We expect the deal TCVs to moderate from the 2Q high base coupled with furloughs impact in 3Q; otherwise, the earlier theme of reprioritizing cost optimization and driving efficiency remains intact. We expect the collective deal TCV (Tier1 + Tier 2) growth to stay in line or moderate YoY.

? The slowdown across major verticals and key geographies should persist, with BFSI, Retail, Hi-Tech, and Communications likely to experience higher-thananticipated furloughs in 3Q. Although the pace of growth deceleration for the major verticals has slowed in 2QFY24 (BFSI/Retail median declines 0.4%/0.3% QoQ), the same has not yet gained momentum to support the topline. We expect BFS and Hi-Tech to be adversely impacted in 3QFY24, while the other verticals should deliver muted performance. On the other hand, there is no sign of demand recovery in the key geographies (US and Europe), although the situation has not deteriorated materially. The majority of the clients are exercising caution and reprioritizing their spending.

? As 3Q furloughs are higher than anticipated at the beginning of FY24, we expect the selective Tier-2 companies (Coforge, Cyient) to revise their revenue guidance downward. Despite this, we expect the companies to maintain and achieve margins within the guided band by implementing rigorous cost-cutting measures.

? We expect revenue growth of Tier-I companies to be in the range of -2.7% to +4.5% QoQ in CC terms. Revenue of Tier-II players are expected to grow to the tune of -4.4% to +3.0% QoQ in CC terms.

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