Nomura cautiously eyes IT sector earnings for Q2 amid weak demand and macroeconomic challenges

As the IT sector prepares for the upcoming July-September earnings season, leading brokerage firm Nomura has expressed concerns about the industry's performance due to weak demand and ongoing macroeconomic uncertainties.

According to Nomura's latest report, the IT sector may face challenges stemming from a reduced number of small-sized and discretionary projects, delays in client decision-making, and sluggish project ramp-ups. These factors are expected to impact both revenue and margins in the short term, given the persistent nature of costs in the industry.

Growth Discrepancy Persists

Nomura's analysis indicates that large-cap IT companies are likely to report revenue growth ranging from -1 percent to +2 percent on a quarterly basis. In contrast, midcap IT firms may perform slightly better, with expectations of 0.7 to 3.3 percent sequential growth in constant currency terms.

Among the large-cap players, Nomura predicts that LTIMindtree will exhibit the strongest revenue growth at 2 percent sequentially, while Tech Mahindra may underperform with a 1 percent decline in the September quarter.

Among midcaps, Birlasoft is anticipated to lead the pack with the highest growth expectations of 3.3 percent, while Mphasis may report the weakest growth at 0.7 percent on a quarterly basis.

Margin Pressures for Major Players

Nomura highlights that industry majors such as Infosys, Tech Mahindra, LTIMindtree, Persistent Systems, and L&T Tech will face margin pressures due to salary hikes and weak revenue growth.

In light of the diverse financial performances within the IT sector, market attention will be closely focused on management commentaries regarding deal pipelines and the timely execution of projects. Nomura expects HCL Tech and Infosys to maintain their growth guidance for the current fiscal year.

Discretionary Demand Remains Stagnant

Nomura identifies several headwinds that could hinder the IT sector's growth in the near term. The firm's cautious stance is primarily attributed to the limited visibility of a substantial revival in discretionary demand for IT services.

Furthermore, Nomura predicts that the current slowdown may extend throughout FY24, potentially impacting FY25 discretionary spending as macroeconomic uncertainties persist. The firm notes that although cost pressures and changing customer preferences could encourage greater technology adoption in businesses, current IT budgets are expected to prioritize initiatives centered around automation and cost efficiency in the short term.

In particular, Nomura is closely monitoring deal flows in the Banking, Financial Services, and Insurance (BFSI) and Communications, Media, and Technology (CMT) verticals as key indicators of the IT sector's performance.