Global IT spend bottoming out

Near-term outlook muted; medium-term offers hope

Three big information-technology (IT) software companies — Tata Consultancy Services (TCS), Infosys, and Wipro — have reported weak results in the fourth quarter, January-March (Q4FY24), and full year FY24. All three have also issued cautious advisories and guidance (TCS does not give revenue guidance).
 

However, the management of these three does think although there’s no visible resurgence in demand, the second half of FY24 (October 2023-March 2024) may have seen a bottoming out. They expect a gradual recovery in earnings momentum and in demand, with late FY25 and FY26 seeing better conditions across the globe.  The three have a presence across all geographies and verticals. At end-March 2024, they employed a combined workforce of nearly 1.2 million and reported aggregate FY24 revenues of over Rs 4.8 trillion (around $59 billion). Given their significant size and their presence across all segments and every geography, their projections and assessments of trends in FY25 are likely to hold good for the vast majority of other IT businesses, especially the large ones which don’t operate in small, specific niches.
 

The big three reported muted revenues in Q4FY24. Wipro’s revenues for Q4FY24 were marginally down quarter-on-quarter (Q-o-Q) and lower 6.5 per cent compared to a year ago. Infosys reported a 2.2 per cent decline in revenues Q-o-Q and flat year-on-year (Y-o-Y). TCS did report 2.2 per cent Y-o-Y revenue growth and 1.1 per cent Q-o-Q growth.All three had a declining headcount for Q4FY24 compared to Q3FY24. Compared to a year ago, they trimmed their aggregate workforce by over 63,000 employees. Workforce utilisation is also still below historic levels despite downsizing. The three have also seen attrition rates reducing, to 12 per cent or early teens, which is less than half what it was a couple of years ago. The combination of a lower headcount and lower attrition rates indicates weak demand across the industry.All three firms point to weak discretionary spending being a major area of concern. While they have all won deals, clients across most verticals have shelved, or postponed, discretionary spend. As such, the demand environment remains weak. The advisories indicate this is unlikely to change substantially until there is a global pickup in macroeconomic growth and clients restart discretionary projects. All three are looking for new opportunities in areas like generative artificial intelligence (AI), and in verticals like hyperscalers (Cloud service providers) and data centres.
 

Some investors and analysts say the market has bottomed out and point to the fact that all three businesses have been able to maintain margins even though revenue growth has been poor or non-existent. IT consulting firm Gartner believes global expenditures across the $5 trillion IT market will grow by a significant 8 per cent in calendar 2024 (the first three quarters of FY25). Gartner also thinks the $139 billion Indian market for IT services and products will grow at better than 13 per cent. If this is substantially correct, this could be a demand booster and Indian firms are likely to benefit to a greater degree. Gartner says increased spend could be focused in the IT consulting segment. Chief investment officers are looking at investment in analytics and generative AI. In India, spending on device and equipment software and on data centre systems is likely to see sharp uptrends. Gen AI could also start finding applications in optimising internal processes and delivery models.  While that prognosis offers hope in the medium term, the near-term outlook continues to look muted.