Weak discretionary spending may bring down revenues of IT firms in Q1

Tremors felt after American IT services firm cut its CY2023 revenue guidance by 2% recently

Kotak Institutional Equities (KIE) has said that software services company EPAM Systems slashing its calendar year 2023 (CY23) revenue guidance to a decline of 2 per cent signals weak discretionary spending — and Indian information technology (IT) companies will not be immune to this trend.

EPAM, an American IT services company, has trimmed its revenue guidance for the current quarter to $1.16-1.17 billion, from $1.19-1.2 billion guidance provided in the first quarter (Q1) CY23 earnings call. The revenue growth outlook is about 5 per cent lower than earlier estimates.

The development has sent tremors through the IT services sector globally. In India, leading IT firms have already warned about the possible impact of economic uncertainties during the March quarter after-results commentary.   

“Delays in client decision-making and pull-backs in discretionary spending have implications for the growth of Indian IT. We expect revenues in Q1FY24E to be weaker than Q4FY23 across companies in our coverage universe. We believe that the demand environment is especially weak in the financial services and technology segments,” says the latest report by KIE.

The brokerage firm said the impact of demand slowdown on EPAM Systems could have been amplified due to its higher exposure to discretionary spending and other company-specific factors.

“Indian IT has a more balanced portfolio between discretionary and maintenance spending. Further, Indian IT will benefit from cost take-out programmes and mega deals. However, these positives are outweighed by the broader caution in spending, especially in the impacted verticals,” the report adds.

A majority of pressure for EPAM has emerged from a slowdown in Cloud data projects.

Arkadiy Dobkin, chief executive officer, EPAM, said the company’s clients had become more cautious with spending since the company’s Q1 earnings call in early May.

“After careful assessment of changes to our May and June forecast data, we have come to understand that pipeline conversions are occurring at slower rates than previously assumed and we are also seeing some reduction in the total pipeline,” Dobkin said in a press note.

KIE further said that a prolonged recovery in client willingness to spend would imply downside risks to 2023-24 revenue growth estimates.

“Noting the weak demand, we are surprised by the rally in stock prices across our coverage in the past month. We believe that upsides do exist in Infosys and HCLTech, but are wary of other names,” says the report.